Today, HOOPP issued a press release on a new paper from the National Institute on Ageing (NIA) considers the physical and psychological factors influencing when Canadians claim their CPP/QPP:

HOOPP has been a long-standing advocate for improved retirement security in Canada and we conduct research to help inform the national dialogue on this important issue. We are pleased to find like-minded thinkers who contribute their perspectives to this dialogue. Today, the NIA has released the first paper in a new eight-part series about how financial services and policy makers can help Canadians make informed decisions to maximize their Canada/Quebec Pension Plan (CPP/QPP) income. The paper, Introduction: Opportunities and Obstacles to Shifting the Paradigm, gives an overview on why most Canadians start their CPP/QPP at 65 and the areas of opportunity to help shift their thinking about retirement planning.

Could some Canadians be better positioned for retirement by waiting to claim their CPP/QPP?

The paper notes that starting CPP/QPP after the age of 65 can increase payments significantly, especially if they wait until 70 years old when their monthly pension could more than double what it would have been if they began collecting at 60. These higher payments are for life and indexed to inflation. So, why do most Canadians take it at 65?

Retiring late and delaying CPP/QPP may not be an option for everyone depending on their specific personal and professional circumstances. However, for those who are able to do so, the paper makes an intriguing argument in favour of using informed decision-making, catering to human psychology and behaviour, and placing emphasis on long-term financial planning to shift the current paradigm.

This shift is especially important in the context of the Canadian retirement system which is based on three important pillars working together to secure Canadians’ retirement incomes: personal savings, workplace retirement savings arrangements, like HOOPP, and government programs, like CPP/QPP.

However, not all Canadians are able to access all three pillars. In the latest Canadian Retirement Survey, almost half (44%) of non-retired Canadians aged 55-64 reported having less than $5,000 in savings. Coupled with the fact that the majority of Canadian workers do not have a registered pension plan through their employer, the importance of government programs become all the more critical. In fact, according to NIA’s paper, 90% of recipients say their CPP/QPP pension is an important source of their retirement income with 60% saying they can’t live without it.

We believe the paper’s ideas provide an interesting perspective to the national retirement security dialogue. We are pleased to share the series, 7 Steps Toward Better CPP/QPP Claiming Decisions: Shifting the paradigm on how we help Canadians, as new papers are released throughout the rest of the year.

Take the time to download and read the report here. 

It is written by Dr. Bonnie-Jeanne MacDonald and this is what it's about:

More than a thousand Canadian baby boomers are making the CPP/QPP claiming decision every day. An overwhelming majority (9 in 10) choose to claim benefits by age 65, whether due to natural human bias, general lack of awareness of how CPP/QPP programs work or common financial planning practices.

The financial incentives to delay claiming are substantial, and their choice will affect them for the rest of their lives.

In the first release of this series, Dr. Bonnie-Jeanne MacDonald, Director of Financial Security Research for the NIA, explains why people claim these benefits earlier than they should, why better claiming behaviour is important, the obstacles to progress and what a paradigm shift would look like. 

Let me repeat this because it's extremely important:

Benefit levels are adjusted according to the recipient’s age when payments start, and the financial incentives to delay claiming are lifelong and substantial. By waiting until age 70 to claim benefits, Canadians can receive more than double (2.2 times) the monthly pension than if they had claimed them at age 60. These higher payments last for life and are also indexed to inflation.

That’s why, for most people who are looking to maximize their lifetime retirement income and can afford to wait – either by drawing on personal savings or working longer – choosing to delay claiming CPP/QPP benefits for as long as possible is one of the safest, most inexpensive ways of increasing lifetime pension income, bringing with it greater protection against low investment returns, high inflation, and the anxiety of potentially outliving their savings.

But despite these advantages, an overwhelming majority (9 in 10) choose to take their CPP/QPP benefits by age 65, reducing the lifetime income security they say they want and will most likely need. This disconnect between the needs and wants of retiring Canadians and their behaviour points to the importance of shifting the paradigm within which this high-stakes, complex decision is made.

The report highlights one of the key steps to delay CPP/QPP benefits to increase lifetime pension income is to draw on personal savings in early retirement as an income bridge to a higher delayed CPP/QPP benefit:

This strategy offers higher returns (how much money can be expected) and better protection against financial risk (the chance that the future will not work out as expected) than holding onto Registered Retirement Savings Plan (RRSP) or Registered Retirement Income Fund (RRIF) savings if the intent is to use those savings to increase retirement income. For example, MacDonald et al. (2020) found that nearly 4 out of 5 Canadians with RRSPs/RRIFs would get more lifetime income from using a portion of those savings as an income bridge rather than stretching out their RRSP/RRIF withdrawals over the span of their retirement. Even for individuals motivated by the prospect of a large savings account and not concerned about protecting themselves against future financial risks, deferring CPP/QPP is attractive when understanding the long- term view. For example, MacDonald (2020) found that a Canadian with the median CPP income and average life expectancy is losing out on over $100,000 worth of secure lifetime income, in current dollars, by taking CPP benefits at age 60 rather than age 70. In this scenario, delaying benefits amounted to a 50% increase in their total lifetime CPP/QPP income.

That's a huge difference in secure lifetime pension benefit income!

Of course, to draw on personal savings in early retirement as an income bridge to higher delayed CPP/QPP benefits, you need to have significant savings, a decent cushion.

The report goes on to state most Canadians can afford to bridge the income gap by working longer and/or drawing on personal savings:

Building on Statistics Canada’s sophisticated Lifepaths Population Microsimulation model, MacDonald (2020) retrospectively looked back a decade, and found that most recipients (53%) could have afforded to delay claiming their CPP/QPP benefits using only a portion of their registered retirement savings plan (RRSP) or registered retirement income fund (RRIF) to bridge the income gap. Canadians who are motivated to increase their secure lifetime income can also delay taking CPP/QPP without affecting their living standards by drawing on other savings outside of RRSPs/RRIFs and/or working longer, which increases the proportion of those who can afford to delay. A survey conducted by Retraite Québec in 2021 examined this question directly: approximately 4 out of 5 QPP recipients who claimed benefits at age 60 said they could have afforded to delay (Retraite Québec, 2022).

Delaying your retirement however really varies on your circumstances.

My father fully retired as a clinical psychiatrist at the age of 90 (partially at 85) after 50 years of working hard and is still in relatively good health at 92 so he is enjoying the maximum QPP/QPP. 

But he's the exception, most people retire a lot earlier for a whole host of reasons, health and wellbeing often being the number one reason.

So, I agree, if delaying retirement by 5 to 10 years is feasible, you should absolutely do it, but you will need savings no matter what to delay collecting CPP/QPP benefits till 70 to maximize your benefit payments.

And note this passage in HOOPP's press release:

However, not all Canadians are able to access all three pillars. In the latest Canadian Retirement Survey, almost half (44%) of non-retired Canadians aged 55-64 reported having less than $5,000 in savings. Coupled with the fact that the majority of Canadian workers do not have a registered pension plan through their employer, the importance of government programs become all the more critical. In fact, according to NIA’s paper, 90% of recipients say their CPP/QPP pension is an important source of their retirement income with 60% saying they can’t live without it.

Sadly, most retired Canadians relying solely on CPP/QPP as their only source of income are not getting by, and many are turning to food banks:

‘Why am I getting so little pension?’ Quebec woman turns to food bank, can’t make ends meet | https://t.co/l3OctQRAoX https://t.co/n7QipdRuE4

— Leo Kolivakis (@PensionPulse) April 3, 2024

Yes, she probably also collects Guaranteed Income Supplement (GIS) but it's still not enough to make ends meet.

This is the harsh reality of pension poverty and the truth is we simply cannot expect Canadians struggling with high inflation to a) save adequately and b) properly invest their retirement savings.

Hell, I have smart friends working in finance and other fields and we have debates every day on markets and whether (for example) now is a good time to buy Bell Canada (BCE) and collect a big fat 9% dividend as the stock keeps sinking to a new 10-year low:

One friend thinks "it's a no-brainer" to add here as immigration is booming in Canada and these new immigrants need new cell phones. Moreover, the company has cut costs significantly after laying off thousands of workers and to boot, alongside Rogers, it owns a 75% stake in Maple Leaf Sports & Entertainment (MLSE), a cash cow (that OMERS also owns a 5% stake in).

These are all great arguments to own the stock but a stock that keeps making new 10-year low is making it for a reason and if inflation expectations pick up and rates soar even higher in the second half of the year, all dividend stocks including Canadian banks will feel the pain.

So, sitting on BCE shares collecting a 9% dividend sounds great but if the stock keeps losing capital, your savings will dwindle and you'll be hoping it comes roaring back in time.

I'm being a bit too quick here covering the pros and cons of owning Bell and other dividend stocks but my point is even experts have sound disagreements.

And investing in these markets is NOT easy. 

This afternoon, all of a sudden, I noticed shares of a US insurer Globe Life getting clobbered after a short seller Fuzzy Panda Research disclosed a short position in the company, alleging multiple instances of insurance fraud:

This is an insurance company for Pete's sake! I can guarantee you at 3 p.m. this afternoon, elite hedge funds were snapping up shares as other investors panicked and dumped them.

After the close, the company issued a statement to refute the short seller's allegations but by then, the damage was done.

Now, don't go out to buy this stock tomorrow without understanding the risks as I expect more volatility, but my point is these are crazy markets, things can shift on a dime and we expect unsophisticated investors to make informed decisions?

It's literally like sending sheep out to the slaughter!

Trust me, I know, I trade biotech shares most people never heard of and see crazy volatility every week and even day!

And wait till this whole AI bubble bursts and sends the entire market tumbling hard, then the panic will really set in.

Anyways, my point in all this is that now more than ever, Canadians need to be better educated on retirement decisions and if possible, we need to cover more of them with a well-governed defined-benefit plan that pools investment and longevity risks. 

If we don't, pension poverty will accelerate over the next decade, I guarantee it just like I guarantee more homelessness in Canada if our policymakers at all levels of government don't cut regulations and significantly boost the supply of homes (not just condos but single family homes).

Alright enough of my doomsayer opinions, I leave you with the report's conclusions:

Once again, take the time to download and read the report here. 

Also, take the time to read all of HOOPP's advocacy research here, it's well worth it.

Lastly, Rick Hansen, founder of the Rick Hansen Foundation, posted an article on Linkedin yesterday on how a survey finds 'overwhelming support' for disability benefit complicated by slow implementation. 

That prompted me to reply with another article I had read last year about a retired nurse in Ontario, Una Ferguson, giving her disabled son Scott between $500 and $600 a month for essentials such as food and clothing.

Scott receives $1,197 a month from the Ontario Disability Support Program (ODSP) which isn't indexed to inflation, with $497 of that supposed to go to rent.

Una worked until she was 73 to maximize her own retirement benefits so she could continue to help him out. 

And she is lucky her pension is managed by HOOPP and she can count on it as long as she's alive, others with disabled children they are looking after aren't as fortunate so I do hope the federal government stops dithering and implements Bill C-22 and all parties stand behind it to lift thousands of disabled Canadians out of poverty for good.

No wonder, a coalition of over 40 organizations is calling for a fully funded Canada Disability Benefit (CDB) that addresses the needs of Canadians:

"Our country is in a pivotal moment," said Neil Hetherington, CEO, Daily Bread Food Bank. "They can choose to let this bleak reality continue, or they can pivot towards a better future. Canadians have clearly articulated the answer to that question. The Canada Disability Benefit has the potential to be one of Canada's most important programs and could lift nearly one million Canadians out of poverty if fully funded."

The dismal state of disability benefits is another important issue policymakers need to take care of but I doubt it will be in the federal budget next week (don't get me started).

Below, Tony Clement recently welcomed back Stephen Poloz former Governor of the Bank of Canada, for a Prescient & Pressing Finance and Economic discussion on his Boom and Bust show.

Take the time to listen to Steve's insights on the age of uncertainty and what it means for policymakers implementing retirement and other policies and also see a previous comment of mine in why it's time to expand the CPP again where I share more of Steve's wise insights on retirement security.

Today, CDPQ published its Sustainable Investing Report for the fiscal year ending December 31, 2023:

CDPQ actively contributes to advancing sustainable finance, and once again this year the report presents concrete actions taken to drive the organization’s impact. Following are some highlights.

Environment 

CDPQ is well on track to achieve the targets underpinning the climate strategy it adopted in 2021, including its goal of reaching a net-zero portfolio by 2050 with:

• $53 billion in low-carbon assets, including $15 billion in Québec, representing an overall increase of $35 billion in low-carbon assets since 2017.
• Over $330 billion in assets with a low-carbon footprint, representing nearly 80% of its total portfolio.
• A 59% reduction in the carbon intensity of the portfolio since 2017.
• $5 billion in transitional assets to decarbonize the highest emitting sectors.
• Completion of its exit from oil production and thermal coal mining.

Social

CDPQ acts on several fronts to build strong communities by focusing on inclusion and the integration of social factors in all its activities:

• Women represent 46% of CDPQ’s personnel, and it has a goal of reaching 47% by 2025.
• 26% of its Québec employees identify as members of one of the following groups: visible minorities, ethnic minorities or Indigenous peoples, reaching the target it set.
• 57% of its actively managed public companies count at least 30% women on their Boards, an increase of more than 39% in three years, and 30% of its nominee directors are women, thereby meeting the target it set.
• CDPQ is one of the only investors in the world to have made a commitment to encourage tax best practices at its portfolio companies, including compliance with a minimum tax rate of at least 15%, as recommended by the OECD and supported by the G20.

Governance

CDPQ employs solid governance practices. This is why it uses different levers of influence to promote the adoption of best practices by:

• Assisting several portfolio companies in integrating ESG factors into their processes, including 10 Québec companies.
• Holding 308 discussions to raise awareness on ESG factors among 129 of its portfolio companies and 81 of its external managers.
• Using its voting rights on 37,536 resolutions at 3,635 shareholder meetings to express its sustainability convictions.
• 278 technology risk analyses carried out by its teams to strengthen the resilience of its portfolio companies.

“At CDPQ, we remain steadfast in our conviction that sustainability goes hand in hand with long-term returns. And I am proud to see how far we’ve come and everything our organization has achieved. Now, once a target has been reached, there’s only one good option: to raise it even higher. Further evolve our approach. Determine what we can do differently, and even better. This involves taking the full measure of what we can do, and leveraging that to improve our overall portfolio’s sustainability. Our leadership is recognized at home and abroad, and this is due to the work of our people, their diverse talents and expertise propel us forward,” said Charles Emond, President and Chief Executive Officer of CDPQ.

“Today’s challenges are tremendous levers for value creation. This is why we have an optimistic approach, both here in Québec and internationally. We support our portfolio companies on a day-to-day basis to ensure that they implement solid transition plans and view this journey as a promising business opportunity. We believe that this is the path that leads to achieving our common goals,” said Marc André Blanchard, Executive Vice-President and Head of CDPQ Global and Global Head 
of Sustainability.

The 2023 Sustainable Investing Report is available online.

ABOUT CDPQ

At CDPQ, we invest constructively to generate sustainable returns over the long term. As a global investment group managing funds for public pension and insurance plans, we work alongside our partners to build enterprises that drive performance and progress. We are active in the major financial markets, private equity, infrastructure, real estate and private debt. As at December 31, 2023, CDPQ’s net assets totalled CAD 434 billion. For more information, visit cdpq.com, consult our LinkedIn or Instagram pages, or follow us on X.

CDPQ is a registered trademark owned by Caisse de dépôt et placement du Québec and licensed for use by its subsidiaries.

Take the time to go over CDPQ's 2023 Sustainable Investing Report here.

You can also download a PDF file of the report here.

Let's begin with CEO Charles Emond's message:

I note the following:

Sustainability criteria are crucial as a tool for measuring companies’ long-term performance and risks. We should take full advantage of them. 

Now, once a target has been reached, there’s only one good option: to raise it even higher. Further evolve our approach. Determine what we can do differently, and even better. Where we can have an impact. Social issues, in particular, are one of our top priorities.

Constructive capital, which aims to combine performance and progress, is our investment philosophy. So it’s important to look at our portfolio from every angle. Do our portfolio companies have positive, neutral or even negative impacts? One of our roles is to work with them on identifying the best ways to integrate ESG factors. This involves taking the full measure of what we can do, and leveraging that to improve our totalportfolio’s sustainability.

Next, let's read the message from Marc-André Blanchard, Executive Vice-President and Head of CDPQ Global and Global Head of Sustainability:

I note the following:

Today’s challenges are tremendous levers for value creation. This is why we have an optimistic approach, both here in Québec and internationally. We support our portfolio companies on a day-to-day basis to ensure that they implement solid transition plans and view this journey as a promising business opportunity. We believe that this is the path that leads to achieving our shared goals.

We see the financial ecosystem playing an essential role in advancing sustainability issues. This is why, once again this year, innovative partnerships have been central to our success. A case in point is our collaboration on major global initiatives. Together, we are moving forward on mobilizing private capital around concrete solutions to accelerate the transition. At major international forums and high-level gatherings such as the G20 and COP28, CDPQ’s leadership on these themes shines through.

To continue on this path, we can rely on our diversified teams, which continue to propose innovative solutions for meeting the challenges that lay ahead. Their wide-ranging expertise, openness to others and in-depth knowledge of the markets make me proud to be at their side, and give me confidence for the future.

I will also refer my readers to an interesting discussion I had with Marc-André Blanchard late last year which you can read here.

CDPQ has taken a leadership role on mobilizing capital to accelerate transition and on promoting uniform disclosure standards:

Now, I am going to recommend you read the entire report carefully here for the simple reason that it's comprehensive and CDPQ is known to be a global leader in sustainable investing.

Just a few of the things that caught my attention:

I also noted how CDPQ takes the social aspect of ESG within its organization very seriously:

CDPQ has done a wonderful job attracting, retaining and promoting women at all levels of the organization and it takes all aspects of diversity, equity and inclusion seriously.

I'm always pushing large Canadian Crown corporations (not just pensions) to do more to hire people with disabilities because they are by far the most disadvantaged group in our society and it's not only the right thing to do on moral grounds, it's the right thing to do on all grounds, period.

As far as ageism, it's a form of discrimination, and if you notice on the second chart above, almost 30% of the employees are 45-years-old or over (8% over 55).

You simply cannot put a price on experience and wisdom, especially at organizations entrusted to manage billions on pension assets.

It shocks and disgusts me when friends of mine over 50 say their expiration date has arrived and their organization prefers to fire them to replace them with cheaper, younger workers (you get what you pay for...and who is going to mentor these young leaders of tomorrow and what happens when a crisis hits and your organization lacks the experience to deal with it?).

My message to all pension fund managers is simple, you are managing billions of pension assets, make sure you lead by example as you represent millions of hard-working citizens from all backgrounds.

It is incumbent upon you to facilitate the work environment for everyone and make it truly inclusive so that everyone no matter their age, gender, colour of their skin, religion, ethnic background, sexual orientation and disability can fully participate and contribute to enrich your organization in many ways.

I emphasize this because I have seen way too much discrimination (all forms) at financial institutions and it really, really irks me.

Also, equally important to note that old white European males aren't all bad, some of us can offer diversity of thought which is sorely lacking.

Alright, enough rambling, once again take the time to go over CDPQ's 2023 Sustainable Investing Report here and download a PDF file of the report here.

I know other pension funds have also put out their Sustainable Investing Report and I do not spend time covering all of them not because they're not worth it, it's just time consuming and the field has exploded and many of these reports are way too long (in my humble opinion).

Like I said, I covered CDPQ's SIR today because they are considered leaders in this space and I know there are other excellent reports too at other Canadian pension funds (AIMCO, BCI, CPP Investments, OTPP and OMERS)

Below, Marc-André Blanchard, B20 Co-Chair, ECRE TF, EVP Head of CDPQ Global and Global Head of Sustainability, discusses why it's important to bring as many stakeholders together to tackle climate change.

Update: On Thursday, CDPQ released its Annual Report for the year ended December 31, 2023, titled Driving performance and progress (in French only - English available soon).

In addition to the financial results published on February 22, CDPQ presents an overview of its activities over the last year, which include:

• A presentation of CDPQ’s depositors and their respective net assets as at 
  December 31, 2023
• A detailed analysis of the overall return and different asset classes
• A risk management report
• A portrait of CDPQ’s activities in Québec, including its main achievement to support the growth of Québec’s economy, companies and entrepreneurship, as well as a summary of its investments in Québec
• A section on compliance activities
• Reports from the Board of Directors and its committees covering strategic orientations, audit, governance and ethics, investment and risk management, as well as human resources management and compensation for senior management and employees
• The Sustainable Development Report
• Our financial report and the organization’s consolidated financial statements
• Report on compliance with the Global Investment Performance Standards (GIPS).

The Annual Report Additional Information (in French only - English available soon) for the year ended December 31, 2023, is also published today.

The English version isn't available yet but it will soon be made available here.

Michael Cole of Mintiandi reports APG, Ivanhoe Cambridge back Scape in $658M student housing JV in Australia:

Australia’s largest owner and operator of student housing is about to move up a grade with Scape announcing today that it has formed a fresh A$1 billion ($658 million) joint venture with the Netherlands’ APG Asset Management and Canadian pension fund manager Ivanhoe Cambridge to add to its portfolio of 17,200 operational apartments.

With Scape having already set a target of 22,000 student beds by the end of this year, the joint venture is seeded with a 1,000-unit project at Melbourne’s Queen Victoria Market, near the University of Melbourne, as the company maintains its focus on creating purpose-built student accommodation (PBSA) in urban locations close to Australia’s top universities.

“The strategy to develop and operate PBSA properties in key gateway cities in Australia is entirely in line with the urbanisation megatrend, which also aligns with our sustainability aspirations,” APG head of Asia Pacific real estate, Graeme Torre said in a release. “The PBSA sector is often considered the entry level for young renters in the residential sector and as a consequence helps address important issue such as housing affordability and availability.”

APG had backed Scape’s earlier development joint ventures, which were established in 2015 and 2018, with Ivanhoe Cambridge having committed $649 million to the company’s core strategy in 2022.

Record Student Enrollments

“This investment allows us to participate in the institutionalization of the living sector in APAC and support the provision of well-managed, high-quality housing for students,” said George Agethen, head of Asia Pacific for Ivanhoe Cambridge. “The exposure to this development JV complements our recent investment in Scape Core Program and will further diversify our APAC portfolio with defensive cashflows that are driven by the favourable demographics in the region and the demand for quality education in Australia.”

In January, international student enrollments in Australia reached a record 582,636, according to government figures, at the same time that vacancy for rental housing in the country’s core cities hovers at around 1 percent.

Scape sees development of purpose-built student accommodation under the new joint venture as helping to relieve pressure on the rental housing market, and providing safe and designed-for-purpose homes.

The company’s Queen Victoria Market project is part of an A$1.7 billion development which received formal planning approval from the Victorian state government in late March, just one week after Scape, Lendlease and the City of Melbourne signed off on the urban regeneration effort. Construction is expected to begin in the coming months with completion set for the 2028 fiscal year.

Returning Partners

Founded by Stephen Gaitanos and Craig Carracher in 2014, Scape predicts that the explosion in students flocking to the Australia’s major cities over the past ten years is set to continue over the next decade which, alongside a structural undersupply of rental housing and affordability constraints, presents an opportunity for the joint venture.

“We are excited to have high calibre global investors APG and Ivanhoe Cambridge partner with us again in the PBSA sector, for our third develop-to-core JV, following the successful journey we have been on for purpose-built student housing over the past 10 years,” Gaitanos said. “This comes at a very exciting time with our current portfolio at full occupancy and a clear need for more well designed and located rental accommodation in Australia.”

With 10 purpose-built student housing and urban living assets under development set to add to its 36 operational properties, Scape has acquired 22 major project sites since establishing its first development joint venture in 2015.

Having built a team of more than 700 staff, including in-house development, design and operations teams, the company promotes its ability to invest in systems, technology, and security which provide an institutional grade living setting for its tenants and reliable returns for investors.

“Our ambition is to democratise the rental market for students and other renters alike by leveraging our operational scale and delivering inspired intelligent design experiences at value,” Scape’s Carracher said. He added that, “Built on decades of developing and creating living design experiences, our Rent-to-Live model leverages efficiencies of scale and a proven track record of successful place-making and built environments purpose built for the leasing consumer.”

Earlier today, Ivanhoé Cambridge issued a press release stating Scape Australia closed its third PBSA development JV at AUD1.0bn alongside it and APG:

Sydney, Australia, April 9, 2024 – Scape Australia has formed a partnership with Dutch pension investor APG Asset Management N.V. (‘APG’) and Ivanhoé Cambridge, a global real estate investor, to develop Purpose-Built-Student Accommodation (‘PBSA’) assets in Australia’s thriving student housing sector.

The new joint venture, which is subject to regulatory approval, is the third in a series of development JV vehicles (previous JV ventures were established in 2015 and 2018). It will continue Scape’s strategic focus on urban locations close to Australia’s world class Universities, whilst incorporating the next level of design from Scape’s in-house development, design and operational teams. The venture will leverage the significant operational scale (17,200 operational apartments) and an internal team that already manages Australia’s largest privately owned residential-for-rent portfolio.

The joint venture is seeded with a prime development opportunity of circa 1,000 PBSA apartments at Queen Victoria Market in Melbourne This is in partnership with Lendlease, who will develop two separate buildings, and the City of Melbourne, as announced last week.

The strong recovery in international and domestic students and a shortage of student accommodation in Australia has resulted in low vacancy levels and strong rental growth. The development of further purpose-built student accommodation will continue to release pressure from the rental housing market, by providing a safe and purpose-built living solution for students with intelligent design and a low barrier of entry.

Australia’s strong urban student population growth over the past ten years is set to continue over the next decade which, in addition to a structural undersupply of rental housing, strong rental demand and affordability constraints presents a compelling opportunity for the joint venture and will help alleviate the pressure on housing supply in urban city locations.

Stephen Gaitanos and Craig Carracher founded Scape Australia in 2014 and are now the largest residential-for-rent owner and operator in Australia, managing more than 36 operational assets (17,200 apartments) with 10 purpose-built student housing and urban living assets under development. The private group is a fully integrated, end-to-end specialist residential accommodation platform with over 700 staff and has acquired 22 major development sites since 2015. The platform’s scale is unmatched in Australia’s residential living sector and allows for superior investment in systems, technology, safety, security and the entire rental experience.

APG Head of Asia Pacific Real Estate, Graeme Torre, said: “The strategy to develop and operate PBSA properties in key gateway cities in Australia is entirely in line with the urbanisation megatrend, which also aligns with our sustainability aspirations. The PBSA sector is often considered the entry level for young renters in the residential sector and as a consequence helps address important issue such as housing affordability and availability. Professionally managed student accommodation buildings with improved energy efficiency and carbon footprint support our goals around responsible impact investing. We have had a very successful partnership with the Scape team who have proven themselves to be capable of developing and managing first class student accommodation assets

Ivanhoé Cambridge Head of Asia Pacific, George Agethen, said: “We are pleased to enter into this new strategic development partnership with Scape in the Australian student housing sector. This investment allows us to participate in the institutionalization of the living sector in APAC and support the provision of well-managed, high-quality housing for students. The exposure to this development JV complements our recent investment in Scape Core Program and will further diversify our APAC portfolio with defensive cashflows that are driven by the favourable demographics in the region and the demand for quality education in Australia.”

Stephen Gaitanos said: “We are excited to have high calibre global investors APG and Ivanhoé Cambridge partner with us again in the PBSA sector, for our third develop-to-core JV, following the successful journey we have been on for purpose-built student housing over the past 10 years. This comes at a very exciting time with our current portfolio at full occupancy and a clear need for more well designed and located rental accommodation in Australia. We look forward to continuing to grow this new venture and development pipeline on our pathway as Australia’s largest end-to-end specialist residential rental and operating accommodation platform.”

“Through our vertically integrated platform we manage every aspect of the asset creation process and ongoing operations – a platform designed to ensure the communities we create and manage provide exceptional outcomes for both our (student) residents and investors.”

Craig Carracher said: “Our ambition is to democratise the rental market for students and other renters alike by leveraging our operational scale and delivering inspired intelligent design experiences at value. As the leading local operator in the residential for rent sector, we have a clear and scalable value proposition for PBSA and rental housing in Australia and are proud to partner with APG and Ivanhoé Cambridge – both global leading investors in the Living sector, for our third PBSA development JV in Australia.”

“Built on decades of developing and creating living design experiences, our Rent-to-Live model leverages efficiencies of scale and a proven track record of successful place-making and built environments purpose built for the leasing consumer.”

Alright, so Ivanhoé Cambridge and APG have partnered up with Scape on a third joint venture to build more purpose-built student accommodation (PBSA) in urban locations close to Australia’s top universities.

 Scape is obviously an excellent partner to have in such a joint venture as it has experience buying the land to be developed, building and operating these units:

With 10 purpose-built student housing and urban living assets under development set to add to its 36 operational properties, Scape has acquired 22 major project sites since establishing its first development joint venture in 2015.

Having built a team of more than 700 staff, including in-house development, design and operations teams, the company promotes its ability to invest in systems, technology, and security which provide an institutional grade living setting for its tenants and reliable returns for investors.

I'd like to hone in on what Ivanhoé Cambridge Head of Asia Pacific, George Agethen, said on his deal: 

We are pleased to enter into this new strategic development partnership with Scape in the Australian student housing sector. This investment allows us to participate in the institutionalization of the living sector in APAC and support the provision of well-managed, high-quality housing for students. The exposure to this development JV complements our recent investment in Scape Core Program and will further diversify our APAC portfolio with defensive cashflows that are driven by the favourable demographics in the region and the demand for quality education in Australia.

Big pension funds invest in big student housing programs because they're recession-proof businesses that add defensive cashflows to their portfolio.

This is critically important, it's not just about demographics or international student enrollments in Australia reaching a record 582,636 in January. 

That's obviously important, but there's a defensive component to purpose-built student accommodation that pension funds find very attractive.

What about Canada? Canada's immigration Minister Marc Miller recently set a limit of 606,000 study permit applications for international students for 2024. Originally targeting 485,000 new students, adjustments were made for extensions and exemptions, leading to a revised target of 364,000 approved study permits.

The problem here is the student housing market is very fragmented, I had covered the market back in 2018 when Jonathan Turnbull, former Managing Partner at Alignvest Student Housing, sent me a guest comment on institutional grade student housing investment opportunities in Canada (read it here).

Apart from Alignvest, nobody is really tackling this market in Canada the same way Scape in Australia or other operators in the UK or US are doing (Alignvest is small potatoes in Canada).

Canada has great universities and specialized student housing has only recently taken off, we are in the Dark Ages relative to the US, UK and Australia.

Just go around Montreal, Toronto, London, Kingston, Vancouver etc and show me purpose-built student accommodations that compares to anything in other countries I cited.

Interestingly, last summer, the Government of Quebec and CDPQ announced the conclusion of an agreement in principle to conduct a feasibility study on converting a portion of the old Royal Victoria Hospital site into a world-class inter-university campus:

Through this pubic-private partnership, the proposed project will involve creating an inter-university campus that will consist mainly of student housing, as well as a research incubator, local shops and offices. This initiative is in line with the spirit of discussions held during hearings on the site redevelopment project led by the Office de consultation publique de Montréal. This project will contribute to strengthening Montréal’s role as a leading university city and significantly expand student housing, which is in short supply.

Located in the heart of the Mount Royal heritage site, the project will be developed with due regard to the built and natural heritage and in consultation with the community and stakeholders.

Following the feasibility study, which will be conducted by Ivanhoé Cambridge, CDPQ’s real estate subsidiary, the government will decide if it will award the project to CDPQ for execution. If applicable, a development agreement will be concluded at that time. CDPQ aims to present the government with a solution in 12 to 18 months.

In my opinion, that project can't come soon enough and will ease the affordability crisis in the city of Montreal. 

Like I said, in Canada, we are behind the student housing curve, we need a private company like Scape to set up operations here.

It's also worth noting that student housing isn't new, most, if not all of Canada's large pension funds have been investing in this space and continue to do so.

For example, last week, CPP Investments announced it has established a new real estate investment and operating platform focused on purpose-built student accommodation (PBSA) in continental Europe:

CPP Investments is forming this platform through its acquisition of Round Hill Capital’s minority stake in Round Hill European Student Accommodation Partnership (our existing joint venture), and the full acquisition of Nido Living, a leading European PBSA operator and manager. Through these combined transactions, CPP Investments is investing up to C$40 million in the platform.

Operating as Nido, the platform will be backed by CPP Investments’ real estate investment strategy and will be a wholly owned, but independently operated portfolio company with pan-European exposure. Going forward, the company will be focused on investing in and expanding the existing CPP Investments owned portfolio of over 5,000 beds, the majority of which has been operated by Nido since acquisition.

“CPP Investments and Nido together are well placed to meet the increasing demand across Europe for high-quality PBSA,” said Tom Jackson, Managing Director, Head of Real Estate Europe at CPP Investments. “Premium quality and affordable student housing is in high demand due to increased student mobility and growing participation in higher education. In Europe, student populations are increasing as labour markets upskill, resulting in growing pressure for accommodation, positioning this platform well to deliver strong risk-adjusted returns for the CPP Fund.”

In addition to managing the existing CPP Investments portfolio, Nido will continue to manage high-quality PBSA assets for other international investors. Nido will continue to provide a best-in-class service to customers during this transition. Nido, established in 2007, is a European market leader and was recently awarded ‘International Operator of the Year’ at the 2023 Property Week Student Accommodation Awards and ‘Best Private Housing, Europe’ by the 2023 Global Student Living Index. Nido’s focus on driving value for both investors and residents fits well with CPP Investments’ approach to the sector. Initially, core target growth markets will be Germany, Italy and Spain, focusing on acquiring and developing additional assets to continue to build a diversified pan-European portfolio.

Back in November of last year, BCI's Quadreal Property Group announced it has acquired CA Student Living, the student housing division of Chicago-based CA Ventures:

QuadReal Property Group, a global real estate investment, operating and development company headquartered in Vancouver, British Columbia, announced it has recently acquired the U.S. student housing business of CA Ventures. Under QuadReal’s ownership CA Student Living (“CASL”) will operate as a new brand, Article Student Living.  

The acquisition of the U.S. student housing business supports QuadReal’s long term investment strategy in the sector where it continues to have high conviction. QuadReal first became a real estate partner of CASL in 2017 and has held an indirect passive stake in the business since September 2020.  

“We are thrilled to launch Article Student Living, which represents a key part of QuadReal’s long-term investment strategy in the U.S. Article’s 500 employees are passionate about elevating student living and delivering operational excellence, and we will continue to build on their existing momentum and commitment to bring a best-in-class experience to our residents and partners,” said Dennis Lopez, Chief Executive Officer, QuadReal Property Group. 

The full acquisition will enable QuadReal to combine capabilities, resources, and best practices and create the leading real estate investment manager dedicated to U.S. student housing.  Its aim will be to meticulously craft living spaces that inspire growth and foster learning and connection.  

“We have witnessed firsthand QuadReal’s unwavering commitment to the success of our team since we first partnered,” said Thierry Keable, President, Article Student Living. “Today marks an important milestone in our journey together. Our new brand represents our commitment to deliver quality and strong performance. At Article Student Living, we strive to offer students more than a place to stay. We build and provide vibrant hubs of learning and connection.” 

To learn more about Article Student Living including services, properties and career opportunities, visit www.articlestudentliving.com.

As you can see, student housing is a high conviction area for the real estate groups at all of Canada's large pension funds.

Lastly. since I am talking about real estate, last week, Ivanhoé Cambridge, PSP Investments and Greystar announced the final completion and grand opening of, 13-story, 230-unit residential complex located at 600 Park Ave W in Denver’s historic Five Points neighborhood:

“We’re excited to be celebrating the grand opening of The Dorsey alongside Greystar, PSP and the numerous additional collaborators that played an integral role in bringing this sustainable project to its successful completion,” said Eric Desjardins, Senior Director, Investments, U.S. Residential at Ivanhoé Cambridge. “Denver is an attractive city with a balance of live, work and play and we’re thrilled to deliver a new green residential offering with dedicated co-working spaces that meets the continuously evolving demand in the Mile High City, while simultaneously aligning with our inherent commitment to sustainable investment.”

“We’re thrilled to announce the completion of The Dorsey,” said Hailey Vergatos, Senior Director for Development Services at Greystar. “The Dorsey’s strategic location offers residents ease of transportation and proximity to Downtown Denver. Greystar is committed to providing exceptional living experiences for our residents, and we look forward to welcoming a new community to the Five Points neighborhood.”

The Dorsey is comprised of 230 units, a mix of 40 studios, 143 one-bedroom, and 47 two-bedroom residences, featuring a wide range of in-unit features including the choice of two modern color themes, quartz countertops and backsplashes, stainless steel appliances, in-unit washers and dryers, wood flooring, smart locks and thermostats and a complimentary Wi-Fi offering in each apartment.

Building and shared resident amenity spaces include a sun deck and pool, a state-of-the-art fitness center and wellness studio, an entertainment kitchen, a lounge, co-working and private office spaces. Additionally, The Dorsey includes a pet wash station with grooming services available to residents by Wag N’Wash, a ski and bike repair area, and on-site parking equipped with EV charging stations.

Located in the heart of Downtown within the Five Point’s region, The Dorsey is situated within close walking distance to a variety of dining, shopping and entertainment offerings, earning a strong walk score of 95. The Dorsey has additionally received a bike score of 99 and transit score of 76 due to its central location and ease of access to multiple regional light rail, bus stations and major area roadways inclusive of I-25.

For more information on The Dorsey and to contact the team, please visit here.

This is obviously more upscale living than student housing and plays on another recession-proof theme, the continuation of income inequality in the US and around the world.

Below, international students give you a tour of Scape student accommodations in Melbourne, Australia. 

You'll notice it's no frills, nice, clean and safe, with safety being the primary factor as to why students choose to rent there. We can easily create similar purpose-built student accommodation in Montreal and other Canadian cities lacking such accommodations (governments at all levels, pay attention).

James Bradshaw of the Globe and Mail reports unrest in commercial real estate that detracted from otherwise solid performance has settled, hopes IMCO CEO:

The CEO of Investment Management Corporation of Ontario says he is hopeful that the turmoil in commercial real estate has bottomed out after losses on investments in the sector dragged down otherwise solid performance from the pension-fund manager last year.

IMCO reported an average return of 5.6 per cent in 2023, but missed its benchmark of 6.6 per cent, as its $9.8-billion real estate portfolio lost 13 per cent for the year, against a benchmark loss of 12.1 per cent. The pension-fund manager’s real estate investments suffered from the fact that 53 per cent of the portfolio is in office and real estate holdings, which have been hardest hit by changing habits such as remote working and online shopping.

IMCO has been gradually trimming its exposure to office and retail, redeploying the proceeds into multi-residential and logistics properties that are performing better. But with real estate deal-making at a low ebb, it is hard to revamp the portfolio quickly.

“We’re hopeful that the worst is behind us,” said Bert Clark, the chief executive officer, in an interview Thursday. “It’s still going to be an area that requires some heavy lifting on our part.”

In 2023, investing markets were volatile, as high interest rates and inflation put pressure on asset values and drove up borrowing costs, while economic and geopolitical uncertainty loomed over public markets. But the overall investing outcome was much better than in 2022, when IMCO’s investments lost an average of 8.1 per cent.

The pension-fund manager’s total assets increased to $77.4-billion, from $73.3-billion a year earlier, and IMCO also added four new clients. Its investments in public stocks and bonds returned 18 per cent and 5.8 per cent.

In 2023, IMCO “had very solid results” that are “in the range” of the pension fund’s long-term targets, Mr. Clark said. The returns better reflect the mix of assets and the investing strategy that the pension-fund manager has been building since it launched in 2017, by gradually replacing some of the investments it inherited when its clients joined with a more modern, lower-cost portfolio that takes advantage of IMCO’s larger size.

IMCO was created to consolidate investing for several public-sector pension funds and now has eight clients, the largest of which are the Workplace Safety and Insurance Board and the Ontario Pension Board. Last year, it set up new global credit and private equity pools, allowing it to combine funds contributed by different clients to make more concentrated investments in private companies and loans at a larger scale.

“We don’t have all of our clients in the asset mix that we would recommend, but we’re getting close and by the end of this year, we will be a lot closer,” Mr. Clark said.

About 31 per cent of IMCO’s assets are invested in Canada, slightly above the average for the country’s largest pension funds, which collectively manage trillions of dollars and are embroiled in a public debate about whether they should be incentivized or directed to invest more domestically.

Ottawa has said it intends to work with pension funds to encourage more investment in Canada, and Mr. Clark said it is “entirely appropriate” for government to convene a conversation about how to boost the range of investment opportunities in Canada.

“Creating more investment opportunities in Canada is a good thing for us, it’s a good thing for the country,” he said. “Having more investment in Canada in the same number of investment opportunities isn’t good for us, and I don’t know that it does anything from a public policy perspective either.”

Steve Randall of Wealth Professional also reports Ontario pensions' investment manager posts 5.6% one-year return:

The investment manager responsible for generating returns for several Ontario pension funds has reported a one-year weighted average net return of its clients' portfolios of 5.6% for 2023.

The Investment Management Company of Ontario (IMCO) has seen AUM rise to $77.4 billion in the last year, up from $73.3 billion in 2022.

The year was not as easy one with volatility in the markets and ongoing inflation, but IMCO managed to navigate the choppy waters and deliver positive returns for every asset class (led by 18% for public equities) with the exception of real estate which posted negative 13%, more than its -12.1% benchmark.

The positive tone of its latest annual report includes an additional four clients that have chosen it to manage their assets, which will add $2.6 billion in new portfolio assets.

With the important focus on a greener economy, IMCO invested over $1 billion in clean energy transition assets in 2023. This marks significant progress towards its Climate Action Plan and goal of committing $5 billion towards energy transition investments by 2027.

Private equity

It also launched its Global Credit and Private Equity Pools and its Private Equity team invested $988 million of capital across 11 direct and co-investment deals in a variety of different sectors and geographies.

"Our long-term investment approach has enabled IMCO to navigate market volatility effectively, particularly in private markets such as Global Credit, Infrastructure and Private Equity – which have shown positive performance and value add since we began investing on behalf of our clients four years ago," said Rossitsa Stoyanova, Chief Investment Officer of IMCO. "2023 was marked by significant transactions and investments in energy transition, which further diversified our investment portfolio while evolving asset class strategies in areas of competitive advantage."

The organization operates under an independent, not-for-profit, cost recovery structure, and is one of Canada’s largest institutional investors.

"We are very pleased with the overall results we achieved for our clients in 2023," said Bert Clark, President and CEO of IMCO. "In a year marked by persistent inflation and market volatility, our results reflect the success of the strategic changes we have made to clients' asset mix and our new strategies at the asset class levels."

Layan Odeh of Bloomberg also reports Ontario pension fund preaches patience in private equity's long winter:

Private equity firms have been slow to cash out of holdings and hand money back to their investors. Executives at Investment Management Corp. of Ontario say they’re ready if that trend continues.

“Most of our partners will probably say that the worst is over. We are just patient,” said Rossitsa Stoyanova, chief investment officer of the $77.4 billion (US$57 billion) Canadian pension manager. “We are prepared that we are not going to have exits for a while.” 

Private equity firms have seen a dramatic change in the investment climate since interest rates began their rapid climb in 2022. The high cost of borrowing has made it harder for them to finance new acquisitions, or find buyers for the assets they already hold at valuations they’ll find attractive. 

Still, there have been signs of a thaw in deal activity so far in 2024 now that it appears the Federal Reserve and other central banks are poised to start lowering interest rates. 

Overall, IMCO posted a 5.6 per cent return last year, underperforming the benchmark of 6.6 per cent, according to a statement Friday. The fund had positive returns in every major asset class except real estate, where it lost 13 per cent. It outperformed the benchmark in public stocks and fixed income, but undershot on private equity.

“It’s not that we saw something happening in 2023, or we were contrarians, Chief Executive Officer Bert Clark said in an interview. “We held to our long-term strategies and it worked.”

IMCO is a relative young organization, launched less than a decade ago to consolidate the management of a number of retirement funds for government workers in Ontario, Canada’s most populous province. As such, it’s still building up some of its investing programs, including private equity and private credit. 

Last year, the Toronto-based manager allocated $509 million to three new private equity partners, including European buyout funds managed by Cinven Capital and IK Investment Partners, and did nearly $1 billion in direct and co-investment PE deals. 

The fund has also been growing its credit business, investing in everything from investment grade credit to structured private credit through external fund managers and co-investments — including allocations to funds run by Ares Management, Carlyle Group and Blackstone. 

IMCO boosted its activity in private credit last year, raising it to nearly 50 per cent of the global credit portfolio as of December. Management plans to increase that to 70 per cent, according to the fund’s annual report. 

IMCO is also look for exposure exposure to the infrastructure that supports the energy transition and artificial intelligence, according to Stoyanova. Last year, the fund committed $400 million in Northvolt AB, a Swedish sustainable battery company, via convertible notes. And it invested $150 million in CoreWeave, a cloud-computing firm. 

IMCO sold some of its stakes in infrastructure funds in the secondary market and may do the same in private equity funds in the future “to make room for direct investments or to commit to the fund manager’s next vintage,” Stoyanova said.     

Office buildings and retail assets were 53 per cent of Imco’s property holdings as of Dec. 31, with a heavy tilt toward Canada. 

IMCO, which inherited a big chunk of its property portfolio from the pension funds it assumed control of years ago, has been diversifying into European and U.S. real estate, according to Stoyanova. Last year, the pension fund disposed of around $1 billion in Canadian real estate assets. “Obviously in order to transform it, we need to dispose assets to get dry powder to buy new ones,” she said. 

On Friday, IMCO issued a press release stating it posted a one-year return of 5.6% in 2023:

TORONTO (April 5, 2024) – The Investment Management Corporation of Ontario (IMCO) today announced that the weighted average net return of its clients' portfolios was 5.6% for the year that ended December 31, 2023, while assets under management rose to $77.4 billion.

Despite facing heightened volatility and ongoing inflation, all asset classes, except for Real Estate, generated positive returns. The strong investment performance for the year established a solid foundation for IMCO to execute its ambitious five-year strategy, with 2023 marking the inaugural year of this plan.

2023 HIGHLIGHTS

• Delivered strong investment performance, achieving a one-year weighted average net return of 5.6%.
• Increased assets under management to $77.4 billion, up from $73.3 billion a year earlier.
• Selected by four new clients to provide investment management services, which will add $2.6 billion in new portfolio assets.
• Invested over $1 billion in clean energy transition assets, marking significant progress towards IMCO’s Climate Action Plan and goal of committing $5 billion towards energy transition investments by 2027.
• Achieved a Greater Toronto Top Employer for 2024 recognition by Canada's Top 100 Employers.
• Launched IMCO's Global Credit and Private Equity Pools, securing benefits for clients including lower fees, better asset diversification, and lower risk concentrations.

QUOTES

Bert Clark, President and CEO
"We are very pleased with the overall results we achieved for our clients in 2023," said Bert Clark, President and CEO of IMCO. "In a year marked by persistent inflation and market volatility, our results reflect the success of the strategic changes we have made to clients' asset mix and our new strategies at the asset class levels."

"Last year, IMCO was also chosen by four new clients, a testament to our fundamental approach to identifying differentiated, global investment opportunities, our sophisticated risk management approach and our leading sustainable investing practices," added Clark.

Rossitsa Stoyanova, Chief Investment Officer
"Our long-term investment approach has enabled IMCO to navigate market volatility effectively, particularly in private markets such as Global Credit, Infrastructure and Private Equity - which have shown positive performance and value add since we began investing on behalf of our clients four years ago," said Rossitsa Stoyanova, Chief Investment Officer of IMCO. "2023 was marked by significant transactions and investments in energy transition, which further diversified our investment portfolio while evolving asset class strategies in areas of competitive advantage."

"Looking ahead, we’re committed to taking the long view by providing customized strategic asset allocation advice, leveraging our internalized investment management expertise, and fostering deep strategic partnerships ensuring we can deliver long-term, sustainable growth for our clients," said Stoyanova.

2023 SELECT TRANSACTIONS

• IMCO committed US$400 million to Northvolt, a leading integrated battery platform focused on the research and development, manufacturing, and recycling of sustainable battery cells and systems. This investment marked IMCO's first cross-asset-class transaction, made jointly by our Fundamental Equities and Infrastructure teams, reflecting a shared priority to manage climate change while creating long-term value and enabling the global transition to a net zero emissions economy.
• IMCO's Global Infrastructure team committed US$750 million, together with strategic partners Sandbrook and PSP Investments, to acquire and grow NeXtWind Capital Ltd, a German-based renewable firm specializing in the repowering of European wind farms coming to the end of their useful life.
• IMCO’s Global Infrastructure team also invested in Cellnex Nordics, a leading Scandinavian tower operator, bolstering IMCO's presence in the digital infrastructure space.
• IMCO's Private Equity team invested $988 million of capital across 11 direct and co-investment deals in a variety of different sectors and geographies, including a co-investment alongside Kohlberg in Worldwide Clinical Trials, and a co-investment alongside EagleTree Capital in MMGY Global.
• IMCO Fundamental Equities' team invested US$150 million in CoreWeave, a leading specialized GPU cloud provider. The company provides cloud infrastructure for generative AI, and adds risk-managed, high-growth exposure to the rapid adoption of artificial intelligence applications.
• IMCO committed to its first direct real estate investment outside North America in Trinity House, a state-of-the-art life science laboratory project located in Oxford, England, alongside strategic partner Breakthrough Properties.

Take the time to download and read IMCO's 2023 Annual Report here, I will be referring to it.

On Friday, I reached out to IMCO to chat with CEO Bert Clark and CIO Rossitsa Stoyanova and was told by Neil Murphy: "I looked into your request. Unfortunately, and with apologies, Bert and Rossitsa are both tied up today and Monday."

That didn't sit well with me for the simple reason that I have better things to do with my time than cover IMCO's 2023 results and would have appreciated a detailed discussion on their results (if other CEOs and CIOs make time to chat with me, surely Bert or Rossitsa can).

Anyway, saves me time talking and transcribing things but just remember this, reporters are not trained investment professionals, they are not trained to analyze results in-depth, nor do they know the right way to look at things and place in proper context.

Let me begin by stating IMCO's 2023 results were decent even if they underperformed their benchmark by 100 basis points, and in line with what large Canadian peers delivered who had similar exposure to public markets (CDPQ, HOOPP).

The story remains consistent, weakness in private markets, especially real estate (where IMCO has legacy issues) and decent returns in public markets. 

And once again, the asset mix explains 99% of the returns.

Next, let's read Chair Brian Gibson's report:

It's worth noting this part:

Positioning its clients to achieve long-term growth and minimize potential losses is the cornerstone of IMCO’s approach. Over the last four years we witnessed a global pandemic, major geopolitical events, and dramatic increases in inflation. IMCO’s focus on risk management and working with clients to advise them on their strategic asset allocations have never been more important.

Next, let's read President and CEO Bert Clark's report:

I note the following:

The weighted average net return of all client portfolios was 5.6 per cent in 2023. Despite a backdrop of volatility and ongoing inflation, IMCO performed well. All asset classes, except for Real Estate, generated positive returns. 

Our results are beginning to reflect the long-term work we’ve done with most clients to adjust their asset mix and reposition our asset class strategies. We expect to see continued improvement in results over the coming years as we help all clients optimize their asset mixes and fully dispose of off-strategy legacy assets.

Now, let's look at 4-year returns by asset class and for total fund:

As shown, over the last four years, IMCO has returned 2.9% edging its benchmark return of 2.8%.

Four-year returns matter because that's what determines value add and compensation which I'll discuss below.

Needless to say, four-year results are average at best and mostly owing to IMCO's public market exposure, not to its new strategies which it fully implemented last year.

Next, let's read the Q&A with IMCO's CIO Rossitsa Stoyanova:

 

 Again, note the focus on long-term performance:

Taking a long-term view is essential for two reasons. First, this approach avoids the pitfalls of a short-sighted or ‘yo-yo’ strategy, which can be detrimental in a fluctuating market environment. If you consider the market volatility in the past 18 months alone, we went from public markets being depressed due to rising interest rates in 2022, to a dramatic upswing in public markets in the third quarter of 2023—a year that defied recession expectations. 

We do not time the markets or react to market events. We believe that maintaining conviction in the long-term investment strategy and asset mix, and staying disciplined in our execution is the best approach to delivering strong, sustainable, risk-adjusted returns. Second, our ability to invest for the long-term is a competitive advantage. The ability to hold illiquid assets and withstand short-term noise necessitates taking the long view. In particular, our private investments need time to mature and demonstrate results. 

We assess our investment strategies’ effectiveness over a minimum of five years. Our patient, long-term focus, beyond immediate market reactions, enables our clients to meet their financial obligations decades into the future.

I have nothing against her response, pretty much standard pension fund verbiage in Canada, everyone wants to focus on long-term especially during rough years to smooth returns and justify their compensation, but just keep in mind that IMCO only fully implemented its new strategy last year (2023) so we will only see the real effectiveness of this strategy in 2028 and beyond if we truly focus on long-term performance and value add.

What are some of the bright spots? Rossitsa notes:

Several of our private market strategies, including Global Credit, Infrastructure, and Private Equity, are generating substantially positive net value add, on an inception-to- date basis. They are on the right track to benefitting from the significant progress we’ve made in internalizing our investment activities and have yet to reach their full potential. Internalization enables us to achieve outsized returns and manage risks, which we will begin to see through the multiple direct and co-investments we’ve made this year.

Note that IMCO is still ramping up its Private Equity co-investment program and as Rossitsa stated in the Bloomberg article above, they are diversifying vintage year risk and going more direct (through co-investments) to lower fee drag.

As far as performance, from table above, over the last four years, Global Infrastructure returned 6.5% vs benchmark of 2%, Global Credit 3.3% vs 0.5% for its benchmark, and Private Equity 17.3% vs 6.9% for its benchmark.

No doubt, there is outpeformance there but the first thing that came to mind is what exactly are IMCO's benchmarks for each asset class and how are they determined?

From page 27 of the Annual Report:

I note:

The IMCO investment policy statement (IPS) for each asset class contains one market-based or custom benchmark. A benchmark is a standard against which performance can be measured. Typically, a relevant market index or a combination of market indexes is used. This allows investment managers to compare the results of active management to the results that could have been achieved passively by investing in an index. A benchmark can be used to calculate how much value an active manager has provided, and what strategies or assets affected relative performance. 

NVA is the difference between investment returns of an asset class, net of all direct and indirect costs, and its respective IPS benchmark. When NVA is positive, the strategy is said to have outperformed its benchmark. When NVA is negative, the strategy underperformed its benchmark. IMCO has a benchmark policy that governs the process of recommending and establishing benchmarks. Our Risk function is responsible for the research, analysis, and review of benchmarks. The Management Investment Committee reviews and recommends benchmarks and any changes in benchmarks to the Board, which is responsible for approving the IMCO benchmarks.

I wonder if the Board also uses independent third party experts to thoroughly review IMCO's benchmarks for each asset class, all part of what I've been discussing lately on the importance of third party independent performance audit reviews at Canada's large pension funds.

Anyway, the benchmark for Real Estate is a custom benchmark which is probably the cost of capital, the benchmark for Global Infrastructure is the Dow Jones Brookfield Global Infrastructure Index which is designed to measure the performance of pure-play infrastructure companies domiciled globally (these are listed infrastructure companies, lots of beta in this index). 

The benchmark for Global Credit is 40% ICE Bank of America Global Corporate Index and 60% ICE Bank of America Global High Yield Index, which is fine and for Private Equity it's a custom benchmark again, so no details on that benchmark.

Importantly, benchmark transparency is the hallmark of excellent pension governance. Without knowing what the benchmarks are for each asset class, how do you properly determine the net value add and whether it reflects the right risks being taken to achieve it?

Admittedly, this isn't just an IMCO issue, it's widespread at Canada's large pension funds but I would say some funds (like AIMCo and OTPP) are better than others are explaining their benchmarks.

And yes, there are no perfect benchmarks for private markets but there is a way to effectively communicate what they're trying to do and to do this properly, you need benchmark transparency.

What else is missing from IMCO's annual report?

Curiously, there's no mention whatsoever of foreign exchange gains or losses for 2023.

As shown below, IMCO primarily invests in Canada and the United States:

So what exactly are the currency gains or losses for last year? All they show is net investment returns by asset class:

Again, I found that strange as every major Canadian pension fund typically has a page or box discussing the impact of currencies on total portfolio (maybe I missed it but looked carefully and searched PDF file).

Alright, let me wrap it up with the executive compensation table and some tidbits:

First, there is a detailed discussion on compensation starting on page 74 of the annual report.

Second, it's important to note that IMCO is a relatively new fund in that it started its operations only a few years ago and it needs to attract and retain top talent to properly implement its strategy.

Having said this, Bert Clark was paid in line with his larger peers for what I deem as average four-year returns which basically matched the benchmark and unlike his CEO peers, he's still very much the new kid on the block and hasn't reached their experience yet.

As far as CIO Rossitsa Stoyanova, she's not only the highest paid female CIO in the world, her total compensation put her among the top paid CIOs in Canada and the world, period, and for average performance (she's a great CIO but let's not exaggerate these long-term results).

To be fair, IMCO is just rolling out its strategy and we will only know in 2028 after five full years of implementing this strategy its true long-term effectiveness, but man, when I see these figures for average four-year results, just doesn't sit well with me at all and I'd love to have been a fly on the wall when IMCO's compensation committee approved these payouts.

And let me be clear despite what Bert Clark, Rossitsa Stoyanova, Gordon Fyfe or anyone else thinks, I have absolutely nothing personal against anyone in Canada's pension world, I just call it like I see it. Sometimes I may ruffle some feathers along the way but I stick to facts, nothing personal.

In my world of brutal capitalism, there are no multi-million-dollar bonuses based on beating custom benchmarks over a four-year period. All there is is risking personal capital to make returns and pay the mounting bills for my growing family, so when I see these hefty payouts and then (some) pension fund managers hesitate to support my valuable contributions, it really irks me.

"Leo, you should be a CEO/ CIO of a Maple Eight Fund."

Maybe in another life but to be truthful, at my age and with what I've lived through, I have zero interest and zero patience for doing what they do, answering to Board members, tied up in dreadfully boring meetings all day which would take away time from analyzing markets and doing other things I enjoy.

So, no thank you, from that vantage point, they deserve millions because I couldn't do it and talk up sustainable investing and other agendas of the day, my focus is just making money anywhere I see fit.

I'll never win the Order of Canada, Quebec or British Columbia and I'm fine with that, I'll just focus on delivering great content on my blog day in and day out (like I said, I'll do this as long as I enjoy it).

Below,  Lawrence H. Summers, former US Treasury Secretary and Wall Street Week contributor, says the evidence is overwhelming that the neutral rate is higher than the US Federal Reserve supposes and says it would be a policy mistake for the Fed to cut rates in June. Summers speaks to David Westin.

Take the time to really listen carefully to Summers as we await the Bank of Canada decision mid-week and the Fed's decision in June and think carefully of all the risks out there, inflationary and deflationary.

Jennifer Sor of Business Insider reports a multi-trillion-dollar bull market is coming for assets that benefit from higher inflation, top macro strategist says:

There's an enormous bull market coming for assets that will benefit from stubbornly high inflation, according to top strategist Larry McDonald.

The "Bear Traps Report" author and former head of US macro strategy at Société Générale cast a warning over high prices in the economy, predicting that inflation would remain consistently above the Fed's 2% target for years to come. Prices will likely range between 3%-4% over the next decade, he predicted in a recent interview on Blockwork's Forward Guidance podcast.

"You've got all these sources of sustained inflation coming at us," McDonald said, pointing to price pressures stemming from reshoring, government stimulus, and a strong labor market.

Those pressures are exacerbated by the fact that geopolitical conflict is on the rise. War itself is inflationary, McDonald said, pointing to the stagflationary crisis in the 70s that coincided with the Vietnam War. 

"So we're coming into this more sustained inflationary regime," he warned.

But that could actually be good news for "inflation beneficiaries" — or areas of the market that will actually soar as prices remain elevated. Those beneficiaries include assets like nickel, aluminum, uranium, copper, gold, oil, and gas, McDonald said, estimating that the energy grid alone was likely worth around $2 trillion.

The shift will pull a tremendous amount of money from popular growth stocks, like the Magnificent Seven, to hard assets and commodities, he added. Some of those assets are already seeing an uptick in interest, with gold prices surging to a record high this week. 

"We're talking about a multi-trillion dollar migration of capital and nobody's prepared for it," McDonald said.

Investors, though, are largely expecting inflation to return to back to its long-run target over the next year. 1-year inflation expectations dropped to 2.07% in March, according to the Federal Reserve Bank of Cleveland. Prices have already cooled dramatically from their highs of 2022, with consumer prices rising just 3.2% in February.

McDonald is among Wall Street's most bearish prognosticators at the moment, repeatedly sounding the alarm on stocks and the path of inflation. In March, he predicted the stock market could crash as much as 30% over the next two months, thanks to the impact of higher interest rates on the economy. He made the same prediction in 2023, the year stocks actually soared 25% higher.

Alright, Friday afternoon and time to talk markets and focus our attention on an important macro theme, namely, are we on the cusp of another 1970s style inflation boomerang?

If you've been paying attention to commodity markets lately, that seems to be what the market is hinting at (source: Trading Economics):

Many commodities are making a record high including gold prices surging to record levels (source: Trading Economics):

And long bond yields keep creeping higher as the economic data comes in better than expected and the federal deficit swells:

So what is going on? Is this just all about geopolitical tensions or is the market sniffing out a new, more sustained inflation regime that Larry McDonald is warning of?

Well, that's an important question because if we are indeed on the heels of another 1970s-style inflation episode, it means inflation expectations will creep up along with rates and that has implications for pensions managing assets and liabilities.

On the positive front, an increase in rates means a better funded status for corporate and state pensions.

On the negative side, a sustained higher inflation regime will usher in higher rates for longer which means some assets like nominal bonds and real estate will continue to struggle.

I discussed some of this in a recent comment here.

In public equities, higher rates will hurt high yielding stocks which many retirees count on to make extra income during retirement (stocks decline, yields go up but capital losses swamp that extra yield).

So where are pensions to hide in a higher for longer environment?

Well, commodities (including agriculture), infrastructure where contracts are indexed to inflation, natural resources, private equity (selectively) and private credit where rates are floating.

Are there any structural deflationary forces out there?

Yes, there are plenty. Global debt levels are at record levels, aging demographics, there's a looming retirement crisis in China and around the world, artificial intelligence is on the rise and quite frankly, we are one financial crisis away from the next deflationary episode.

The Fed has a lot of challenges to navigate here and I fear those challenges will become more evident in the second half of the year.

Given the better than expected economic data, it's not surprising that some Fed officials are dialing back rate cut expectations:

March jobs report expected to show slower pace of hiring, lower unemployment rate https://t.co/gJgF3c4nNE via @YahooFinance

— Leo Kolivakis (@PensionPulse) April 5, 2024

Fed's Kashkari says 2024 rate cuts under threat if inflation continues to stall https://t.co/dPC37psnYB via @YahooFinance

— Leo Kolivakis (@PensionPulse) April 4, 2024

But if you sratch beneath the surface, you'll see the US economy is slowing:

It is a bull market in (i) part-time jobs, (ii) self-employment and (iii) multiple job holders. Outside of these areas, employment actually contracted more than -500k in March and by -2 million in the past year. What an economy!!

— David Rosenberg (@EconguyRosie) April 5, 2024

We are in the most recessionary no recession. Both temps and full time jobs are falling in line with recession prints, only part-time jobs people need to take to cope with rising cost of living are keeping monthly NFP prints positive. pic.twitter.com/oleIgEqP7V

— Michael A. Arouet (@MichaelAArouet) April 5, 2024

And even in gold, miners aren't confirming a breakout here:

Miners are not confirming gold.

And as we see, they were the last sector to peak before the market fully imploded in 2022. pic.twitter.com/364R6quTqG

— Mac10 (@SuburbanDrone) April 5, 2024

All this to say, take all inflationary or deflationary macro calls with a grain of salt here, we simply don't know how events will transpire in the second half of the year.

Betting on a multi-trillion dollar migration of capital into inflation assets might pan out, but if it doesn't, those investors will suffer steep losses.

Below, James Bullard, Purdue University's Business School Dean and former St. Louis Fed President, joins 'Squawk Box' to discuss the March jobs report, the impact on the Fed's interest rate path, state of the economy, and more.

Second, Lawrence H. Summers, former US Treasury Secretary and Wall Street Week contributor, says the evidence is overwhelming that the neutral rate is higher than the US Federal Reserve supposes and says it would be a policy mistake for the Fed to cut rates in June. Summers speaks to David Westin.

Third, Jeremy Siegel, professor of finance at the Wharton School, joins CNBC's 'Closing Bell' to share his reaction to the March jobs report, potential rate cuts, and earnings expectations.

Fourth, Ralph Schlosstein, Evercore chair emeritus, discusses the state of the US economy, wealth disparity and geopolitical risks with Alix Steel and Romaine Bostick on Bloomberg Television.

Fifth, Seth Harris, senior fellow at the Burnes Center for Social Change, joins CNBC's 'Power Lunch' to breakdown the March labor data, economic outlook, and more.

Sixth, Diane Swonk, chief economist at KPMG, and CNBC's Steve Liesman discuss Friday's higher-than-expected jobs report and what it means for the Fed and markets.

Seventh, Tiffany Wilding, Pimco's chief US economist, says the US economy is running hot and the Federal Reserve can wait on rate cuts.

Eighth, Federal Reserve Bank of Minneapolis President Neel Kashkari says interest-rate cuts may not be needed this year if progress on inflation stalls during a virtual event with LinkedIn.

Ninth, Federal Reserve Chair Jerome Powell reiterated Wednesday that the central bank expects the need to cut interest rates this year, despite the recent stronger-than-expected economic activity. Photo: Loren Elliott/Bloomberg News.

Lastly, take the time to listen to Larry McDonald, founder of The Bear Traps Report and author of the book “How To Listen When Markets Speak: Risks, Myths, and Investment Opportunities in a Radically Reshaped Economy,” as he speaks with Julia La Roche to discuss why he thinks trillions are misallocated.