> Please go to my blog:

http://pensionpulse.blogspot.com/

Then type CPPIB in the custom Google search on the upper right-hand corner. There, you will find my latest comments on CPPIB.

It is important to remember that CPP Investment Board (CPPIB) and the Public Sector Pension Plan Investment Board (PSPIB) are two federal Crown corporations whose fiscal year ends on March 31st.

The good news for them is that they benefited from the strong rally in equities in the month of March. This means their returns will not be as bad the Caisse, Ontario Teachers' and most other funds whose fiscal year ended on December 31st.

But again, the devil is in the details. In particular, I want to compare CPPIB with PSPIB, looking at their private markets relative to their benchmarks. CPPIB is far more transparent than PSPIB, but it is far from perfect. Their annual results will be coming out in a couple of months with the valuations of the private markets.

>>Anon wrote: "Damn Leo, You left some pretty big bootprints on a lot of booties. Keep it coming."

I got fed up with the big "Pension Club" who was boasting about how they promote corporate governance but neglect to mention how they do not follow governance best standards in their own funds.

Any major regulatory overhaul of the financial system must overhaul the governance of major pension funds to promote full transparency, better accountability, independent performance, operational and fraud audits and better communication.

There is simply too much at stake to leave these giant funds going on with their "business as usual" approach.

Of course, the senior executives do not want stakeholders to know what is really going on at these funds. They keep things hush as long as it benefits their compensation.

Then there are other things we will never know. For example, someone in the pension industry was telling me that $1 billion of the $2.26 billion CDS loss at Ontario Teachers' was due to one position. One position!?!?! If that's true, then they were sleeping on the risk management switch.

When pension funds start taking highly leveraged bets in complex derivatives, it's a disaster waiting to happen.

Derivatives in the hands of arrogant idiots scare me. Then again, if pension funds followed some easy option strategies more intelligently, they would have been able to mitigate some of those losses in equities.

I am fighting a lonely battle, but it's important that people understand what's going on in the murky world of pensions.

cheers,

Leo

“If they have a 4 year cumulative bonus pool from which they pay annual bonuses on a 25% declining balance basis, then they have a stricter compensation policy for themselves than most hedge funds have.”

Most hedge funds have high-water marks, meaning if they lose money, they have to recoup those losses before they can charge performance fees again.

Moreover, hedge fund managers have skin in the game. If their fund experiences material losses, they feel it.

These pension fund managers tend to take out the four year cumulative returns when they get clobbered in a bad year, but I still would never allow them to collect any bonuses after a disastrous year like 2008.

Nobody at the Caisse de Dépôt got a bonus in 2008 and rightfully so. Of course, they do not have high water marks either because it’s going to take them a long time to recoup their 26% loss in 2008.

It’s easy to take huge risks with other people’s money, but that is not what you are paid for when you are managing pension monies.

The focus should be on risk-adjusted returns and risk minimization, not risk proliferation which exposes a large public pension fund to a derivatives meltdown when disaster strikes.

Sortino had it right, when investing or trading, focus on capping your downside risk.

cheers,

Leo

The bad news is, with talk of new reserve currency or isolated trading between agreeing countries, that there is no telling what the fund is really worth.

I’d be rotating further out of equities and into commodities. Inflation is going to rip holding government paper a new one.

Of course there is always the taxpayer backing which makes managers so smug.

One thing I was never quite clear on was this: If they’d gone through with the deal, would Teachers have had to take a writedown on BCE immediately on the deal’s closing? (The Caisse and the CPP, both of whom held decent-sized stakes of BCE, but who weren’t in the buyout consortium, would have loved this, but Teachers, not so much…

BCE’s still a cash cow, it just wasn’t worth the C$42.75 they bid for it, and KPMG managed to find a clever interpretation of insolvency that saved both OTPP from having to buy it at that price, and Citi (whom KMPG also audits) from having to fund the deal.

On insolvency, sure, OTPP didnt intend to shut down the phone company and sell the buildings, fiber, and copper, but if it did, they wouldn’t have had enough money to pay the bondholders, so technically, you could claim the privatized entity met at least one definition of insolvency.

I also wonder if the real issue with the solvency report was that if the transaction had gone through, OTPP might have saddled itself with BCE’s own pension funding issues, which would be a much more plausible solvency issue.

Hey, I was just a shareholder. All I got was a two missed dividend payments and the stock cut in half while Sabia gets to run the Caisse, and Teachers’ appointee Cope still gets to run BCE. Cope’ll do a better job with BCE than Sabia did, but I’m still bitter about it. The deal struck in July 2008 was a DOW/ROH style “no way to back out of your commitments” arrangement. Then again, they don’t call it risk arbitrage for nothing. Some days you’re ROH, some days you’re BCE.

Disclosure: No positions in securities mentioned.

You say:
“But I would like to see him freeze his bonuses until the fund recoups its losses.”
And:
“If Teachers’ imposes high water marks on those hedge funds it invests with, then they can set one up for themselves and set a good example for the rest of their peers.”

If they have a 4 year cumulative bonus pool from which they pay annual bonuses on a 25% declining balance basis, then they have a stricter compensation policy for themselves than most hedge funds have.