Colorado lawmakers are debating legislation (HB 1208) that would lower the subminimum wage for tipped workers in places like Denver and Boulder County. Such action would be a reversal of the progress Colorado has made recently to tackle one of the largest challenges in the economy: low wages for working people.

While the federal minimum wage continues to stagnate, states like Colorado have set higher standards for their workers. In 2016, voters passed an initiative that increased the minimum wage to $12 an hour and required annual inflation adjustments. As a result, Colorado’s minimum wage in 2025 is $14.81. In 2019, Colorado lawmakers repealed a ban on local wage-setting, allowing cities and counties to set higher minimum wages to respond to local economic factors—like the high cost of living in urban areas. Following this decision, a handful of localities have passed higher minimum wages, demonstrating the popularity of and need for stronger wage floors in the state (see Table 1).

Table 1

One problem, however, that Colorado has not addressed is the persistence of a lower minimum wage for tipped workers like restaurant servers and bartenders. Under state law, employers are allowed to pay tipped workers $3.02 per hour less than the regular minimum wage, effectively creating a state “tipped minimum wage” of $11.79. (This $3.02 is called the “tip credit”—i.e., the credit that employers may take against their obligation to pay at least the minimum wage with the expectation that tips will make up the difference.) Although local governments can set higher minimum wages, state law still preempts them from eliminating or reducing the tip credit.

Subjecting tipped workers to a separate and lower minimum wage creates a host of problems, including making them more vulnerable to wage theft, sexual harassment, and racial discrimination. In seven states and several cities, lawmakers and voters have eliminated the tip credit so that all workers receive the regular minimum wage regardless of any tip income. In these states, tipped workers have lower poverty rates and higher take-home pay.

Instead of following the lead of these states, HB 1028 would make matters worse for Colorado’s tipped workers by lowering their minimum wage even further. The bill would increase the tip credit in localities that have passed a higher minimum wage by the same amount that the local minimum wage exceeds the state minimum—effectively reinstating a single statewide tipped minimum wage. For instance, in Denver where the local minimum wage is $18.81, the tipped minimum wage currently stands at $15.79 an hour ($18.81 minus $3.02). If HB 1028 is enacted, policymakers would cut Denver’s tipped minimum wage by 25% to $11.79 (equivalent to Colorado’s state tipped minimum wage).

Deepening this harmful carveout is a step backwards that jeopardizes economic security for 70,000 tipped workers in the state. It also tramples on the democratic will of the cities and localities that chose to set stronger wage standards for their workforces. State lawmakers are interfering in local decision-making at the expense of working people.

Table 2

Most tipped workers are low-wage workers who struggle to make ends meet, especially with rising costs in recent years. As shown in Figure A, the median tipped worker in Colorado earns $19.95 an hour from wages, tips, and overtime. For context, EPI’s Family Budget Calculator estimates that even in Colorado’s least expensive county (Mesa County), a single adult must earn at least $19.85 an hour working full time for their wages to cover the cost of necessities like food, housing, and health care. In many regions of the state, costs are much higher. In Denver, a similar living wage standard is $27.75 an hour, while in Boulder it is $28.83. Faced with this steep cost of living, a strong minimum wage policy is vital for working families.

Figure A

Increasing or eliminating the tipped minimum wage does not jeopardize the restaurant industry or the economy overall. Seven states of various sizes and economic makeups (Alaska, California, Minnesota, Montana, Nevada, Oregon, and Washington) have long treated tipped workers the same as all other workers, providing them the same minimum wage regardless of their tips. In these states, restaurants still flourish and tipping is still widespread. The difference is that workers are less likely to require their customers’ good will to secure a livable wage. Further, the highest quality minimum wage research continues to show that increasing the minimum wage boosts workers’ wages with no meaningful impact on employment or business growth, including in the restaurant industry.

Both workers and businesses have had to adapt to large price increases in recent years. However, in Denver, where the tipped minimum wage is higher than the state’s, the restaurant industry remains resilient. Denver had more restaurants in 2024 than it did in 2019, and the county’s restaurant industry has grown more quickly over that period than the U.S. average.

The question of whether economic conditions demand changes to the tipped minimum wage in places such as Denver should be left up to local policymakers who are accountable to local constituents, including workers and business owners. HB 1028 would backtrack on Colorado’s commitment to local democracy and take away more of localities’ already limited ability to decrease the harm of the tipped minimum wage.

If passed, HB 1028 would be one of dozens of examples across the country of state lawmakers suppressing the will of localities that want to set higher standards for their workers. Previous EPI research has documented how state preemption in the South and the Midwest prevents cities from taking a variety of steps to improve economic security for local workers, including increasing the minimum wage above the state level. It is notable that this abusive state preemption of local lawmaking often follows a pattern where a mostly white state legislature undermines local policymaking that would benefit large shares of workers of color, entrenching racial disparities in economic outcomes.

The evidence is clear: A strong minimum wage benefits workers without harming businesses. Instead of rolling back progress, Colorado should continue moving toward ensuring all workers receive a fair and livable wage without exception.

The U.S. statutory debt ceiling is an absurd, arbitrary, and worthless political institution, yet it also poses a profound danger of throwing the economy into a full-blown crisis whenever it looms. Elon Musk’s behavior over the past month is eerily similar—including the exact mechanisms through which this behavior could cause a crisis. If the statutory debt ceiling is a potential economic crisis looking to leap off paper legislation, Musk and his Department of Government Efficiency (DOGE) team are a potential crisis blundering through the physical (and virtual) halls of government.

Let’s start with a quick recap about the debt ceiling and how it could cause a crisis. The U.S. Treasury draws on banking accounts at the Federal Reserve to fund federal governmental activities—remitting paychecks to federal government employees, sending Social Security checks to beneficiaries, reimbursing doctors for treating Medicare-covered patients, paying defense contractors and interest to bondholders, and so on. These accounts are fed on an ongoing basis by both tax revenues and the proceeds from selling bonds (debt). But because the United States has a statutorily imposed limit of how much outstanding debt is allowed, in theory the debt ceiling means that when it’s hit that Treasury would no longer be allowed to sell bonds and deposit these proceeds. In this scenario, accounts at the Federal Reserve would dwindle as they are now only fed by ongoing taxes, which are insufficient to cover all spending. It’s worth noting that this would be such a disastrous outcome that policymakers should feel obligated to engage in any possible workaround.

The U.S. is currently running a federal budget deficit of just over 6% of gross domestic product (GDP). If the debt ceiling was allowed to bind spending at levels that could be financed only by taxes, federal spending would have to be cut instantly by over $1.5 trillion (on an annualized basis—equal to roughly $130 billion per month). This $1.5 trillion is people’s incomes throughout the economy (whether they are federal employees or contractors or Social Security recipients or doctors and hospitals reimbursed by federal health programs). As incomes were slashed, these households would pull back on spending. Businesses losing customers would pull back investment. A vicious spiral leading to recession would begin with shocking speed.

Further, throughout U.S. economic history the downward spirals of economic crises were ended entirely because the federal government’s taxes and spending have acted as “automatic stabilizers”—taxes fell and spending rose as unemployment soared and the economy entered recession. But in a crisis driven by the debt ceiling, as taxes fall spending would have to fall further. Instead of acting as an automatic stabilizer, the federal government would act as a crisis amplifier.

This extremely grim set of totally predictable outcomes is why we’re so strident that the debt ceiling should be abolished. It serves no useful purpose and only provides a means through which extremists in Congress can do profound damage to working people. It also needs to be raised soon to avoid this kind of potential crisis.

But for now, another threat of political zealots and the crises they could cause looms even larger.

Elon Musk’s recent spate of illegal impoundments and firings can be seen as an attempt to mimic what a debt ceiling crisis would look like. Instead of spending being bound by a legal bar against issuing new debt, spending is currently being bound by the whims of a billionaire who bullied his way into accessing the Treasury accounts that distribute spending where it is legally obligated to go and shutting it down. But in terms of pushing the economy closer to crisis, how spending is suddenly constricted is less important than the result—sharp spending reductions can throttle economic activity and push the economy closer to recession and crisis. And because these spending reductions would only relent or reverse at the whim of Musk’s team, the automatic stabilizer function of the federal government could not be relied upon to kick into gear.

At this point, the illegal impoundments have not added up to a scale that would be comparable to a debt ceiling scenario, but, again, this is entirely because the Musk team has so far decided to not impound that much spending. If they decide that it would be fun to impound more and cause a crisis, what’s to stop them? Having one person in charge of whether or not the U.S. government actually spends the money that’s been legally obligated by Congress is not just a democratic disaster, it is absolutely a recipe for economic crisis.

To date, the real damage done by the illegal impoundments and firings is the valuable work of federal employees that is not being performed and the hollowing out of key state capacity. Our federal workforce was too small and too poorly paid even before the Trump administration allowed Musk’s teams to start arbitrarily hacking at it. Further constricting it will lead to a profoundly less functional government—and that matters a lot to people’s lives, cheap cynicism aside. But if the DOGE team isn’t stopped, their cuts won’t just sap the long-run productivity of the economy, it could easily cause a full-blown crisis in the near term.

In the first month of his new administration, President Trump has taken drastic steps to reduce the size of the federal workforce, from offering nearly all federal employees a “deferred resignation” buyout to illegally firing senior officials at several agencies. While many of these efforts are being challenged in court, the strategy behind them is clear: Villainize public servants, fire or push them out of their jobs, and then dismantle the federal services they were faithfully executing. By sowing public distrust in those who provide government services, the public’s faith in the goods provided by the government is at risk of eroding too, making it easier for the administration to eliminate core government functions that hundreds of millions of Americans rely on.

The public goods provided by federal agencies are so commonplace that we may not even recognize how prevalent they are in our lives. When we walk into the grocery store, we purchase our food knowing that it won’t make us sick because of the efforts of the Food and Drug Administration. When we travel in a car, we have confidence in reaching our destination safely because of the standards set and enforced by the Department of Transportation. We can evacuate areas in advance of life-threatening natural disasters because of the efforts of the National Weather Service and other federal agencies. These and countless other services provided by the federal government are possible because of the dedication and expertise of federal employees who are now under attack.

The impact of these attacks will be felt throughout the country. Every congressional district has federal workers. Below, we provide a snapshot from FedScope of the federal workforce and the actions the Trump administration has taken to undermine them.

Who are federal workers?

The federal workforce consists of roughly 3 million employees and represents the diversity of the country (see Tables 1 and 2). Individuals holding these jobs are hired and discharged based on their merit and are protected from undue political influence or reprisal. The last time Congress made comprehensive reforms to the civil service system was in 1978, following the Watergate era of abuse of powers, overt politicalization of the civil service system, and increased distrust in government. In many ways, the civil service system was designed with the express purpose of guarding against the very objectives the current administration seems to be pursuing.

Table 1 Table 2

While a significant focus has been on agencies headquartered in Washington, D.C., the vast majority of federal employees (93%) live and work outside of the nation’s capital (see Table 3).

Table 3

Nearly 50% of federal employees have been in federal service for more than a decade, acquiring deep expertise and knowledge. Tables 4 and 5 below highlight the educational attainment of the federal workforce and the top 10 most common occupational categories, accounting for more than 70% of all employees. 

Table 4 Table 5 Trump administration’s attacks on the federal workforce

The Trump administration has moved at a rapid pace to cut the federal workforce. Among others, these actions include:  

• Issuing a Schedule F executive order to make it easier to fire federal workers in jobs that are normally apolitical.
• Issuing an executive order that eliminates telework and remote work options for federal employees.
• Issuing an executive order that places a freeze on all hiring of federal civilian employees.
• Placing employees in Diversity, Equity, Inclusion, and Accessibility offices on administrative leave.
• Requiring all agencies to identify and review retention needs of all probationary federal employees and firing those workers at several agencies.
• Sending a mass email to all federal employees providing them with a “deferred resignation” option.
• Firing or ordering to retire senior officials at a number of agencies, including the Equal Employment Opportunity Commission (EEOC), National Labor Relations Board (NLRB), FBI, U.S. Coast Guard, and others.
• Firing Inspectors General at 17 agencies.
• Placing U.S. Agency for International Development (USAID) employees on indefinite administrative leave, firing contract workers, and recalling employees who are abroad.
• Revoking an executive order that protected the collective bargaining rights of federal workers.
• Revoking an executive order that protected workers’ job security on federal service contracts.

In the coming weeks and months, we will no doubt continue to see more attacks on the federal workforce. You can find a comprehensive catalogue of all policies relevant to working people and the economy at Federal Policy Watch, an EPI online tool documenting actions by the Trump administration, Congress, federal agencies, and the courts. You can subscribe to daily Federal Policy Watch updates here.

The clearest legislative priority of the Trump administration and the Republican-led Congress is to keep taxes low for the richest households and corporations. Last week, House Republicans submitted a budget resolution that calls for $880 billion in cuts to Medicaid—the program that provides health insurance for low-income Americans—to help pay for extending the 2017 Tax Cuts and Jobs Act (TCJA), which primarily benefits the highest earners. President Trump endorsed the House plan earlier this morning, despite vowing yesterday to not cut Medicaid.

Besides being unfair, the cost of this overall tax cut would be large enough to put huge stress on other parts of the economy, no matter how it is paid for. But the costliest way to pay for this would be to enact large cuts in spending programs like Medicaid that provide benefits to economically vulnerable families. These cuts would equal almost 11% of all Medicaid spending over the proposed time period.

In a forthcoming report, we highlight just how damaging these Medicaid cuts would be for typical families. Health coverage is expensive in the U.S., and the value of Medicaid’s coverage is equal to a huge share of the total income of poorer families. In fact, a family health insurance plan in private markets can cost more than what the bottom 20% of families earns in an entire year.

Figure 1 below shows the House budget resolution’s average cut to Medicaid benefits for the bottom 40% of the income distribution, expressed as a share of average income. It also shows how much extending the TCJA’s expiring provisions would boost incomes for these groups and the top 1%. The upshot is that the bottom 40% would be unequivocally worse off: Proposed cuts to Medicaid would reduce incomes for the bottom 40% more than extending the TCJA would boost them—and the lowest-income households would fare the worst. Strikingly, this is true even as the full $880 billion in Medicaid cuts would only pay for about 20% of the total cost of the TCJA—other cuts and economic damage falling on non-rich families stemming from tax cuts for the rich would still be forthcoming. Meanwhile, the TCJA boosts the incomes of the top 1% significantly, while these households do not rely in any way on Medicaid.

Figure 1

A table from our forthcoming report is reproduced below—it shows the cuts to Medicaid expressed as a share of total money income for the bottom 40% of the income distribution for each state. States with more generous Medicaid coverage will see larger cuts, while states that have been stingier to date with Medicaid will see smaller cuts. But in every single state, the proposed cuts are a disaster for the incomes of the bottom 40%. This policy trade-off of thousands of dollars in cuts for the bottom 40% in exchange for tens or even hundreds of thousands of dollars in tax cuts for rich families crystallizes the Republican priorities.

Table 1

Lisa Johnson of the Canadian Press reports on a how Alberta is setting up a new Crown corporation to oversee Alberta’s Heritage Savings rainy day fund: 

Alberta Premier Danielle Smith announced a new Crown corporation Wednesday to oversee the province’s rainy day fund.

The Heritage Fund Opportunities Corporation is to direct policy for the Heritage Savings Trust Fund, which will still be managed by the Alberta Investment Management Corp., or AIMCo.

The new Crown corporation is also mandated to independently manage the investment of new deposits.

Smith said she aims to grow the fund to at least $250 billion by 2050 in order to wean the province off the resource revenue roller-coaster.

“No matter how far into the future, there will come a time that we may be unable to rely on those revenues, and we cannot hide from that reality now,” the premier said in Calgary.

The fund’s assets were valued at $23.4 billion as of September, and the government pledged another $2 billion that is now earmarked for the new corporation’s investments.

Finance Minister Nate Horner said its board can invest that seed funding in a different way than AIMCo, the province’s public pension fund manager.

“That’s beyond AIMCo’s mandate, more in a sovereign wealth (fund) style,” said Horner.

The new Crown corporation will operate at an arm’s length and publicly report results, Smith said.

Horner told The Canadian Press in an earlier interview the goal is not to “de-risk” pet projects that have difficulty getting financing, as Smith has previously mused.

“This will be return-focused,” he said.

The finance minister said the new corporation will create global investment opportunities that wouldn’t have been offered to a manager like AIMCo.

When asked Wednesday whether the new corporation’s goal to support “areas that matter to Albertans” means investing in more Alberta-based assets, Horner said “not necessarily.”

“It’s about leveraging opportunities where those partnerships could provide great opportunity for the province down the road, but that isn’t necessarily the goal,” he said, pointing to the province’s advantages, like its knowledge base in artificial intelligence and water infrastructure.

He said the plan represents a return to the original vision of the heritage fund.

It was created in 1976 by former premier Peter Lougheed to set aside a portion of resource revenues, but subsequent governments have dipped into the piggy bank as needed, particularly when the price of oil crashed.

The Heritage Fund Opportunities Corp. will be chaired by Lougheed’s son Joe, board chair of Calgary Economic Development and a partner at Dentons law firm in Calgary.

Smith’s United Conservative Party government has committed to not skimming interest earnings from the fund to prop up the province’s general revenue.

It estimates that if all the Heritage Fund’s income had been reinvested from the start, it would be worth upwards of $250 billion today, generating more than $20 billion annually.

Opposition NDP finance critic Court Ellingson told reporters in Calgary he supports the government’s efforts to grow the long-neglected savings fund, but the province already has a body in place to do that work.

“We didn’t need a new corporation,” he said.

Wednesday’s announcement comes after Horner sacked the chief executive officer and entire board of directors of AIMCo in November.

Less than two weeks later, the province hired former prime minister Stephen Harper as the new chairman of AIMCo.

In addition to the Heritage Fund, AIMCo also handles about $118 billion in investments for public sector pension plans representing thousands of Albertans, including teachers, police officers and municipal workers.

Barbara Shecter of the National Post also reports Alberta unveils new investment entity with aim to boost Heritage Fund to $250 billion:

The Alberta government is seeding a new investment vehicle with $2 billion as part of a plan to boost the province’s resource investment fund tenfold to at least $250 billion by 2050.

The money to be invested and managed by the new Heritage Fund Opportunities Corporation was previously earmarked for the Alberta Heritage Savings Trust Fund, which was started in 1976 to invest a share of the province’s resource revenue for the future and diversify the economy.

For now, the rest of the nearly $24 billion in the Heritage Fund will continue to be managed by Alberta Investment Management Corp. (AIMCo), a Crown corporation that also manages the pensions of public servants across the province, under the direction of the new corporation. 

“As the investment model is proven, more funds could potentially be moved from AIMCo,” a government spokesperson said.

At a news conference Wednesday, Premier Danielle Smith said the new investment vehicle is necessary, in part, to ensure returns generated by the Heritage Fund are reinvested over a long horizon, allowing the fund to grow larger and faster than it has in the past when this wasn’t always the case. 

Her plan, laid out alongside Finance Minister Nate Horner, is that the fund will have a strong focus on maximizing growth “while supporting areas that matter to Albertans, such as technology, energy, and infrastructure.”

Horner added that some of the investments will be “beyond AIMCo’s mandate,” adding that they will be “more in a sovereign-wealth style,” which could lead to joint investments with other long-term sovereign wealth funds.

However, Smith stressed that the fund will operate at arm’s-length from government.

“It is critical that the Heritage Fund Opportunities Corporation be free to make the right decisions for long-term growth without interference from government, which is why we’ve set it up as an arm’s-length agency,” she said. “A broad group of directors will bring deep financial experience so that it can focus on improving long-term Heritage Fund investment growth outcomes.”

Smith said the new Heritage Fund Opportunities Corporation will be chaired by Joe Loughheed, a Calgary lawyer and son of the former premier who created the Heritage Fund. The goal, she said, is to ultimately create a wealth fund that can forge global partnerships, and will supplement and potentially ultimately replace unpredictable resource revenue.

A document laying out the plans further suggests that a retail investment product could be developed “to allow Albertans to invest directly in the Heritage Fund, subject to public interest and feasibility.”

Sources say Smith’s idea to boost the returns of the Heritage Fund, which she has been speaking about publicly for months, were discussed with AIMCo before her government took the unusual step in November of ousting the entire board and the investment manager’s chief executive, Evan Siddall.

Reasons cited by the government included that rising costs of AIMCo were not commensurate with returns, though this was disputed in a letter sent to Horner by ousted chair Kenneth Kroner.

According to sources familiar with the proposals, AIMCo’s game plan included taking in more money and increasing returns through additional investments in private assets such as infrastructure. 

Following the November purge, Horner installed former prime minister Stephen Harper as AIMCo’s chair and senior civil servant Ray Gilmour was named interim CEO.

A new unpaid position was established on the board for the deputy minister of treasury board and finance as a way “to ensure more consistent communications between AIMCo and Alberta’s government.”

In addition to discussing a Heritage Fund overhaul with AIMCo before the shakeup, Smith’s government was also working with outside consultants, according to news reports.

In May, the Calgary Herald reported that the government had retained a firm called BERG Capital Management, an investment consultant for pensions and sovereign wealth funds that changed its name to PNYX Group, to do a “deep dive” on the Heritage Fund.

Then, in November, after the UCP government passed an order-in-council approving the incorporation of a provincial corporation for the purpose of managing and investing all or a portion of Crown assets, Smith told the Herald that “a hybrid investment strategy” was possible, with pension funds invested in a very conservative way while Heritage funds would be invested in a manner that would allow them to grow tenfold by 2050.

Chris Varcoe of the Calgary Herald also reports Alberta drafts blueprint to grow Heritage Fund to at least $250B by 2050, establish Crown corporation:

It’s never too late to start saving for the future and the Alberta government aims to follow that advice, setting out a blueprint to grow the Heritage Savings Trust Fund to at least $250 billion by 2050.

As part of its strategy, the UCP announced Wednesday the creation of a new Crown corporation that will govern and guide the rainy-day account.

The province wants to grow the fund’s value 10-fold in the coming decades from more than $24 billion today, largely by leaving income inside the account, instead of tapping it once the rain begins to fall and oil prices drop.

However, once the province hits the $250-billion target, a portion of the fund’s annual interest could be used to offset future resource revenue volatility or to invest in infrastructure.

“The best time to plant a tree was 20 years ago, and the second-best time is today,” said Finance Minister Nate Horner, comparing it to the province’s investment goals.

“If we are diligent, and we grow this to $250 (billion) or more, by 2050 we’ll be able to take off $10 billion annually, while continuing to grow the fund and replace at least half of the royalties we receive now.”

The new Heritage Fund Opportunities Corp. (HFOC) will be chaired by Calgary lawyer Joe Lougheed. It will operate at arm’s-length from government to ensure independent decision-making, according to a provincial document.

The Crown corporation will be seeded with $2 billion — money the government previously earmarked during the budget to the Heritage Fund — and will have its own investment objectives and a small management team, Horner said.

Existing Heritage Fund assets currently managed by the Alberta Investment Management Corp. (AIMCo) will remain under its oversight. AIMCo was recently overhauled by the province.

The province says the new corporation will make strategic investments “that maximize growth, while supporting areas that matter to Albertans, such as technology, energy and infrastructure.”

It will also work with other institutional investors and sovereign wealth funds “to access premier investments.”

The corporation’s benchmark return will be the same as AIMCo’s objective — at 9.3 per cent annually — “but my expectations are higher,” Horner said in an interview.

“The $2 billion will be invested by HFOC in a sovereign wealth-style investment — with its own board, with its own governance . . . It’s a different type of investing,” he said, noting it will have longer-term horizons than a pension fund.

 “We’re not going to be involved in any way in making actual investment decisions.”

However, the idea of establishing HFOC and supporting specific sectors has raised Opposition questions.

“We didn’t need this new corporation,” said NDP MLA Court Ellingson.

“We have real concerns about the Heritage Fund being used to invest in projects that otherwise can’t secure financing.”

The Heritage Fund was worth $24.3 billion at the end of September. It was created in the mid-1970s by the Progressive Conservative government of Peter Lougheed — Joe Lougheed’s father — to save growing resource revenue.

However, initial goals that the fund would receive up to 30 per cent of non-renewable resource revenues were dropped by ensuing Alberta governments, often during economic downturns.

Since its creation, more than $45 billion of investment income from the fund has been transferred into the government’s general revenue account for day-to-day spending.

“Fundamentally, the government is going back to the main principle that my father’s government set up in 1976 when they established the Heritage Fund,” Joe Lougheed said in an interview.

“The vision was to grow those assets for future generations of Albertans, such that it would grow to a large pool of assets, which, over time, could reduce the roller-coaster of resource revenue dependency that Alberta, quite frankly, still has.”

The job of the HFOC board will be focused around governance, establishing a new statement of investment policies and goals, such as asset allocation and oversight of risk.

“The next 10, 15, 20 years in Alberta are going to be very, very strong,” added Lougheed.

“When you’re doing well, that’s the time to save money.”

A graphic in the road map document shows that if the current fund expands over time, with a projected annual net return of nine per cent, compounded yearly, it could be worth more than $50 billion by 2032, and top $100 billion by 2040.

Horner says it’s vital for the fund to retain its income, which will let it continue to grow over time.

“I think it’s conservative,” Horner said of the $250-billion target.

“All that it requires — other than diligence — is our government and the governments that follow (to) have the diligence to leave the retained earnings in the fund and be patient.”

University of Calgary economist Trevor Tombe said he’s encouraged to see the province think about its long-term fiscal future and indicate it won’t withdraw earnings from the fund for government spending.

However, he wonders about the language surrounding the HFOC goals of strategic investments being made in areas such as technology, energy or infrastructure, and what that will practically mean.

“The $250-billion goal is reasonable and achievable, but it’s all contingent on returns being sufficiently high,” Tombe said.

“And that makes the decisions that the government takes around the mandate to this new entity, around what its objective is, more important than anything.”

You can read more on Alberta's Heritage Savings Trust Fund here.

Alberta's government put out a publication, "Renewing the Alberta Heritage Savings Trust Fund : a roadmap to securing Alberta’s future" which is available here.

Alright, on Tuesday I discussed AIMCo's latest DEI shakeup and today I am trying to figure out this latest move by the Alberta government and how it will impact AIMCo.

First, before I begin, I posted an update to that comment which I will post below:

Janet French of the CBC reports AIMCo job cuts raise questions about commitment to inclusion, critics say:

Helen Ofosu, a human resources consultant and adjunct psychology professor at Ottawa's Carleton University, says removing leaders in charge of inclusion and diversity sends the message those principles don't matter to the organization.

"That's basically telling people who may be dealing with a disability, being a visibly racialized person, a religious minority — any of those people all of a sudden start to feel like, 'Hmm, what is my place here? Do I matter?' "

 It definitely doesn't send the right signal. Read more here.

Also, someone made a good point on LinkedIn, namely, AIMCo is a large fiduciary that needs to keep track of many companies and use its proxy votes to raise concerns. DEI is a serious concern with any investment, public or private, so why get rid of the Head of DEI?

In other news, AIMCo was named one of Canada’s top employers for young people as well as one of Alberta’s top 85 employers:

Edmonton – The Alberta Investment Management Corporation (AIMCo) is pleased to announce it has been named one of Canada’s Top Employers for Young People as well as one of Alberta’s Top 85 Employers, both distinctions awarded by the Canada’s Top 100 Employers project.

AIMCo was recognized for its fulsome programs to support the professional development of its employees. These include entry-level programs that allow new graduates to gain experience in multiple departments across the organization, and support for all employees to enroll in skills development courses related to their roles. Initiatives such as these reinforce a culture that prioritizes professional development, which in turn drives AIMCo’s overall success. The Canada’s Top 100 Employers project is the largest Canadian editorial endeavour to recognize top-performing workplaces across the country. The project has been running for 25 years and now includes 19 national, regional and special-interest competitions.

For more information about AIMCo’s recognition as a top employer, please click here. 

Well, I think we know who deserves the credit for this but he's gone now.

Now, on to the new Heritage Fund Opportunities Corporation which will be chaired by Joe Lougheed, the son of Alberta's former premier Peter Lougheed who created the Alberta Heritage Savings Fund back in 1976.

I don't know Joe Lougheed (featured above), thought very highly of his father Peter Lougheed and I'm sure he's a smart lawyer and will make an excellent chair of this newly established Crown corporation.

They are going about it the right way, naming a chair first and nominating a board of directors who will then hire a CEO to ramp operations up.

My comments are the same as the NDP finance critic Court Ellingson who said why do they need to create a new Crown corporation?

And God knows I'm no NDPer or Liberal for that matter!

It's common sense, AIMCo is doing a great job at managing the savings of the Alberta Heritage Fund so why create a new and separate Crown corporation to take over?

Apart from being costly, you need to pay new board members and staff which admittedly is negligible over the long run, but is it really necessary?

Don't forget, AIMCo has all the strategic relationships with peers and top funds, it has staff covering every asset class and risk managers and has the same return target as the Heritage Fund. 

So why create a new Crown corporation to take over the Alberta Heritage Savings Fund? 

One person I talked with said "if you look at how Alberta's government is acting, they're gutting AIMCo slowly, firing people, taking away assets, it's awful."

But that doesn't make sense either, why would they want to gut or get rid of AIMCo? 

The problem is they are weakening the organization and the long-term effects are going to to hurt active and retired members.

Of course, I could be wrong, maybe AIMCo will come out of this stronger and this new Crown corporation will be a long-term success but it certainly seems very strange to do all this unless it's part of a master plan to intervene in both these funds (they say they will continue to operate at arm's length but let's see).

I'm curious to see who AIMCo's next CEO will be as well as the new CEO of the new Heritage Fund Opportunities Corporation.

All I know is Alberta and the rest of Canada have much bigger fish to fry, we better brace for impact because February 1st is right around the corner.

Below, Alberta Premier Danielle Smith and Finance Minster Nate Horner announce a new plan forward for the Alberta Heritage Fund.

Next, Canada can work with US President Donald Trump’s administration to reshape global trade and weaken China’s dominance of supply chains, according to Chrystia Freeland, the Canadian politician who’s vying to replace Justin Trudeau as prime minister. 

She spoke with Bloomberg's David Gura about Canada's role in global trade, and reacted to Trump's administration -- including his Treasury Secretary pick Scott Bessent.

Needless to say, I agree with Premier Smith's approach on how to negotiate with the Trump administration to avoid tariffs and worry when I hear our federal government preparing for a protracted trade war and calling for a "pandemic-like relief program" for Canadians which will be impacted by tariffs.

Lastly, Denis Girouard and Stéfane Marion of the National Bank of Canada, take a closer look at Canada's trade balance in the context of the US deficit, to clarify Canada's marginal role in this dynamic, and explain that these uncertainties are not just negative. Current economic and trade tensions offer a unique opportunity for Canada to reassess its industrial policies, notably by strengthening its manufacturing sector and tackling provincial trade barriers, which represent the equivalent of a 21% tariff. 

Great discussion, take the time to watch it.

Sarah Rundell of Top1000Funds reports on why CPP Investments CIO Ed Cass says they are cutting back on emerging markets:

CPP Investments, the C$675.1 billion asset manager for the Canada Pension Plan, has already hit its reduced long-term strategic exposure to emerging markets of 16 per cent in a quick paring back of the allocation from 2023 levels when emerging markets accounted for 22 per cent of assets under management. 

Edwin Cass, chief investment officer at CPP Investments tells Top1000funds.com that although the investor still believes there is both an opportunity to diversify and generate alpha in emerging markets because of inefficiencies, that window of opportunity is narrowing.

“This is changing over time due to a number of factors, including geopolitical risk and improving market efficiency,” he says.

On one hand, deglobalisation can be positive for emerging market investors because it adds to diversification by decoupling relationships between various trading blocs, he explains. However, geopolitical risk is the “flip side” to deglobalisation and brings real complexity.

“We need to understand the impact that deglobalisation and regional trading blocs will have on sectors and specific assets within the countries we invest in. Due diligence and appropriate investor protections become even more important.”

Successful emerging market securities selection during the past several years has been a source of alpha, and he says CPP Investments has found the strongest returns in emerging market infrastructure, notably through investments in toll roads. For example, the asset manager owns toll roads in Mexico, Chile, Indonesia and India that Cass says “are performing well.”

The energy transition also continues to present opportunities. Investments include renewable energy providers, such as Renew Power in India, and Auren Energia, one of Brazil’s largest platforms for renewable energy and energy trading.

However, more expensive active management in emerging markets is important because these markets are less efficient. And successfully navigating the risks is an intense process that relies on an in-country presence resting heavily on “boots on the ground” to stay close to political and regulatory developments and monitor any impact to existing assets.

CPP Investments has opened emerging market offices in Mumbai and São Paulo to allow it to “do its homework,” better understand the businesses it invests in; the environment in which they operate and sensitivity to local risks. Cass explains that offices in emerging markets also allows CPP Investments which manages assets both internally and with external partners to position itself to partner with the best regional and national firms.

“We also spend time building relationships with governments to understand the regulatory environment in the countries where we invest. These local and regional factors are incorporated into our organisation-wide integrated risk framework, which covers a wider variety of investment risks and includes various types of stress tests on our portfolios.”

“Our presence in the regions where we invest combined with our company-wide focus on building relationships with governments and monitoring regulatory changes also enables us to mitigate issues as they arise.”

CPP invests across 56 countries with more than 320 investment partners. Just over 50 per cent of investments are in North America.

If I read this right, CPP Investments is going to start trimming its massive exposure to emerging markets which stood at 16% for base CPP (bulk of assets) and 11% for enhanced CPP (all figures from F2024 Annual Report):

Most of the exposure in emerging markets is in passive global equity indexes which you can find here and below (click to enlarge):

CPP Investments also has made meaningful investments in infrastructure in India but the bulk of the assets are passive exposures to emerging market equity indexes.

Ed Cass cites two reasons for cutting back exposure: geopolitical risk and increased market efficiency (ie security selection is becoming tougher there).

He doesn't get into details on how much they plan to cut, we will have to monitor that in every subsequent annual report.

He does state that these markets provided meaningful alpha for the Fund over the last several years but provides very little detail on how much alpha was produced there:

Successful emerging market securities selection during the past several years has been a source of alpha, and he says CPP Investments has found the strongest returns in emerging market infrastructure, notably through investments in toll roads. For example, the asset manager owns toll roads in Mexico, Chile, Indonesia and India that Cass says “are performing well.”

He states they need to understand deglobalization and the risks and opportunities that brings and they have boots on the ground in key areas to build relationships and monitor government regulations.

My thinking? It all comes down to US interest rates, the lower they go, the more exposure you want to risk assets including emerging markets.

Conversely, the higher they go, the less exposure you want to emerging markets and other riskier assets.

Interestingly, as US rates normalize, the trend in emerging market equities is lower:

 

Of course, I'm oversimplifying but that's how these funds think in terms of Risk On/ Risk Off and it makes a lot of sense because higher US rates go, less risk you need to take (just buy more long-dated US Treasuries and hold to maturity).

There's another risk in emerging markets and we saw it last year as CDPQ got embroiled in a large bribing scandal in India where three former executives there were accused of taking part in bribing scheme to bribe Indian government officials by US regulators. 

I can assure you that this rattled the boards of the Maple Eight and many board members raised concerns about investments in India and other emerging markets.

At the end of the day, governance, rule of law and a stable regulatory framework are critical to making large investments in private markets and some countries are a lot more advanced than others in that regard.

In my opinion, this might require a rethink in emerging markets on whether you want to be a direct owner of a platform there or indirect owner of assets through funds even if you pay fees.

On a related topic, CPP Investments and  and MGRV, a leading Korean rental housing provider, recently announced a KRW 500 billion (C$500 million) joint venture to develop rental housing projects in Korea:

CPP Investments will hold 95% of the venture and MGRV will own the remaining 5%.

The joint venture, CPP Investments’ first direct investment in the residential sector in Korea, aims to develop properties in key corridors of Seoul, close to major business districts and leading universities. CPP Investments has committed up to KRW 133 billion (C$133 million) to the joint venture’s seed projects located within Seoul.

“This joint venture offers an excellent opportunity to enter the residential sector in Korea and meet the strong demand for high-quality rental housing in the greater Seoul area where half of Korea’s population resides,” said Sophie van Oosterom, Managing Director, Head of Real Estate at CPP Investments. “We are pleased to work alongside an experienced local partner like MGRV to enter this market segment, which we believe can generate attractive long-term returns for the CPP Fund.”

MGRV CEO Cho Kang-tae said, “this strategic partnership marks a significant step in demonstrating the high growth potential of the Korean rental housing market and MGRV’s competitive operational capabilities on a global scale,” adding, “we will continue to drive the ecosystem innovation in the market by expanding community-centered properties.”

Rental housing market is huge everywhere nowadays, including in Korea. This is a smart long-term investment.

Below, Bloomberg Daybreak Asia podcast explores where opportunities lie in emerging markets with Rahul Chadha, Founder and Chief Investment Officer at Shikhara Investment Management. Plus, a look at how the week's US eco data will play into the Fed's policy path with Rob Haworth, Senior Investment Strategist at US Bank Wealth Management.

Next, Commerce secretary nominee Howard Lutnick was asked about the potential impacts of tariffs at a hearing on Wednesday. Lutnick, who appeared to suggest tariffs could come in phases, pointed to border issues with Canada and Mexico as a ‘short term’ issue. Lutnick cited both fentanyl and undocumented migrants as areas of concern for the Trump administration but did not provide details about his assertions beyond calling for an end of movement of fentanyl into the US.

Lastly, watch FOMC Chair Jerome Powell's presser from earlier today after the Fed kept rates unchanged.

Layan Odeh of Bloomberg reports AIMCo cuts DEI role and 18 other jobs in further shakeup:

Alberta Investment Management Corp. eliminated 19 jobs in non-investment areas, months after the government of the province ordered changes at the pension fund manager and fired its chief executive and the board.

The employee responsible for AIMCo’s diversity, equity and inclusion program is one of the 19, according to people familiar with the matter.

A spokesperson for the firm confirmed the job cuts and said the move hasn’t lessened AIMCo’s commitment to “an equitable and inclusive workplace.”

“All AIMCo colleagues will continue to share the responsibility and accountability for ensuring AIMCo remains diverse, inclusive, innovative and motivating, in keeping with our corporate objectives and core values,” spokeswoman Carolyn Quick said by email.

Alberta Finance Minister Nate Horner stunned AIMCo executives on Nov. 7 by firing chief executive Evan Siddall, other senior executives and the entire board of directors, saying they had allowed expenses to soar to unacceptable levels. The government named Ray Gilmour as interim CEO and installed Stephen Harper, the former Canadian prime minister, as chair.

AIMCo’s investment team, which manages about $169 billion, wasn’t affected by the 19 job cuts.

Jack Farrell of the Canadian Press also reports Alberta pension manager fires 19 employees, including DEI program lead:

Alberta’s public pension manager has laid off 19 employees and cut their positions, including the role of running its diversity, equity and inclusion program.

The Alberta Investment Management Corporation says the company remains committed to an equitable and inclusive workplace.

A company spokesperson declined to say what other specific jobs were cut but says the 19 positions were in non-investment roles.

The company’s board of directors and chief executive officer were fired in November by Alberta Finance Minister Nate Horner, who appointed former prime minister Stephen Harper as board chair.

Horner said at the time that AIMCo’s rising costs, including its number of employees, were unacceptable when compared with its annual investment performance.

AIMCo has about 600 employees with offices in Canada, the United States, Europe and Singapore.

Alright, it's Tuesday, bear with me as I dissect this "big news" out of AIMCo.

It shows you how pathetic things have gotten at AIMCo that such trivial news leaks out and reporters run with it.

The Head of DEI and 18 other employees in non-investment roles were fired and this makes national headlines?

Let me back up and give you my unbridled thoughts.

When the Government of Alberta named Ray Gilmour, a career bureaucrat as interim CEO, they probably quietly told him to cut some fat while he's there. 

So they're starting with the low-hanging fruit, non-investment professionals (for now) and chopping off anything that smells of woke politics.

Am I impressed? Not really. Firing people is easy, trust me, I've seen my fair share of restructuring at banks and pension funds in my short career and experienced the sting of being fired.

The way it typically works however is a bit different.

Typically, the Board hires a CEO who then starts firing senior managers to place his or her people in there and then gives the new managers marching orders to cut a percentage of their workforce.

And they typically hire McKinsey, BCG or some other consultants to produce a report to justify these actions and appease their Board.

Here, we have a bureaucrat who is interim CEO, he doesn't really know what each investment department is doing, who are the outperformers and who are the underperformers and how to properly gauge their value add, so what he does is go after easy "soft" targets, non-investment professionals.

Because you know, the Head of DEI at AIMCo was making big bucks (insert roll eyes here).

I'm being facetious, of course, but the whole thing is so stupid and trivial, it makes AIMCo look bad for no reason.

Don't get me wrong, there might be legitimate reasons to cut the Head of DEI and those 18 other non-investment roles, but the way they are going about this is so wrong on so many levels.

The first order of business at AIMCo should be to appoint the new CEO.

Everything else takes a back seat until they name someone to replace Evan Siddall.

That new CEO is then responsible to hire senior managers or work with existing ones and it's up to them to determine where they need to cut first and where to focus their attention.

And the new CEO will report to AIMCo's Board and will be held accountable for results.

Importantly, you want someone competent at the helm making right decisions and not the Government of Alberta making decisions via their interim CEO.

That's just ridiculous.

From a moral standpoint, I think DEI is extremely important and I'd give most of Canada's large pension investment managers a decent grade on DEI initiatives, but there's no question in my mind that AIMCo was way ahead of the pack in this regard.

That was due to the former CEO, Evan Siddall, who took DEI and all it encompassed very seriously.

The fact that he has Parkinson's Disease and is an advocate for research and awareness undoubtedly shaped his vision of DEI at AIMCo.

Under Evan, DEI was sown into the moral fabric at AIMCo and all senior managers took it seriously.

Will this continue now that he's gone and his Head of DEI was fired? 

My honest answer is I certainly hope so but I'm skeptical and that will hurt morale of employees even more.

Now, I realize DEI isn't everyone's cup of tea and there can definitely be a case made that things went too far to the Left over the last decade, just like responsible investing and some extreme views on the environment.

But at the end of the day, we live in a country called Canada made up of people from different backgrounds and we need to recognize some groups are more vulnerable to discrimination than others.

More importantly, I firmly believe that gender and other diversity is a source of strength for any organization and those that don't take it seriously will lose out because they will be unable to attract the best talent to their workplace.

Now, do we need a Head of DEI at each of our large pension investment managers? I'm not sure, it all depends on whether these people truly add value. If they do, then they are earning their keep.

The same goes for all roles, investment and non-investment.

In my brutal world, either I make money or die, it's that simple, no big fat bonus awaits me at the end of the year if I beat some benchmark.

Every day I wake up, help mommy take care of my child and then start reading furiously, first macro news, then micro and company specific news and chat with friends who are equally keen on markets.

I love it, don't answer to anyone except Miss Market and sometimes she's nice to me, most of the times she's not and I have to figure out ways to beat her at her own game.

But in the world of large pensions and other Crown corporations it's not like that, these organizations have a social responsibility to have a diverse workplace, one that reflects the composition of our country.

Sure, they can ignore DEI completely but to their detriment.

I'm not saying AIMCo is doing this, they are on record stating they will continue taking diversity, equity and inclusion seriously, and I hope they will.

But this wasn't the first order of business at AIMCo and I'm disappointed that their focus is on trivial matters.

Get the right CEO in there, hold them accountable to make tough decisions and add value over the long run.

Reading these articles just annoys me because I feel like AIMCo has no time to waste.

The focus has to be on finding a highly qualified CEO who will build an investment strategy around his or her team and get on with it already.

I know what Trump is doing with DEI in the US. That's politics, we don't need to politicize our pensions. 

Let's focus on making money and taking intelligent risks, and enjoying coming into work, the rest is immaterial.

Alright, let me stop there and feed my toddler his milk, something I enjoy doing after a long day.

Below, Paul Hickey, Bespoke Investment Group co-founder, and Kevin Gordon, Charles Schwab senior investment strategist, joins 'Closing Bell Overtime' to talk the day's market action. 

Update: Janet French of the CBC reports AIMCo job cuts raise questions about commitment to inclusion, critics say:

Helen Ofosu, a human resources consultant and adjunct psychology professor at Ottawa's Carleton University, says removing leaders in charge of inclusion and diversity sends the message those principles don't matter to the organization.

"That's basically telling people who may be dealing with a disability, being a visibly racialized person, a religious minority — any of those people all of a sudden start to feel like, 'Hmm, what is my place here? Do I matter?' "

 It definitely doesn't send the right signal. Read more here. 

Also, someone made a good point on LinkedIn, namely, AIMCo is a large fiduciary that needs to keep track of many companies and use its proxy votes to raise concerns. DEI is a serious concern with any investment, public or private, so why get rid of the Head of DEI?

In other news, AIMCo was named one of Canada’s top employers for young people as well as one of Alberta’s top 85 employers:

Edmonton – The Alberta Investment Management Corporation (AIMCo) is pleased to announce it has been named one of Canada’s Top Employers for Young People as well as one of Alberta’s Top 85 Employers, both distinctions awarded by the Canada’s Top 100 Employers project.

AIMCo was recognized for its fulsome programs to support the professional development of its employees. These include entry-level programs that allow new graduates to gain experience in multiple departments across the organization, and support for all employees to enroll in skills development courses related to their roles. Initiatives such as these reinforce a culture that prioritizes professional development, which in turn drives AIMCo’s overall success. The Canada’s Top 100 Employers project is the largest Canadian editorial endeavour to recognize top-performing workplaces across the country. The project has been running for 25 years and now includes 19 national, regional and special-interest competitions.

For more information about AIMCo’s recognition as a top employer, please click here. 

Well, I think we know who deserves the credit for this but he's gone now.

Layan Odeh of Bloomberg reports Ontario Teachers’ CEO sees chance to snap up cheap European assets:

Ontario Teachers’ Pension Plan is turning more attention to European markets as other investors remain fixated on the U.S., its chief executive officer said.

“A lot of the Americans at the moment are actually saying, ‘I only want to be in the US,’” Jo Taylor said in an interview with Bloomberg Television on the sidelines of the World Economic Forum in Davos, Switzerland. “To me, that’s great news — I’ll just fill my boots in Europe.”

His bullish remarks on Europe come as the $255.8 billion (US$178 billion) fund searches for new ways to protect capital after pouring significant money into the US. Taylor also sees opportunity in “active private markets” such as infrastructure, private equity and credit. 

“I’m a great believer in going to hunt where the others don’t want to tread,” he said.

The Toronto-based pension fund had 17% of its investments in Europe, including the UK, as of the end of 2023. That compares with 35% in the US and 35% in Canada.

Freschia Gonzales of Benefits and Pensions Monitor also reports OTPP shifts focus to Europe as CEO notes US investors' local preference:

Ontario Teachers’ Pension Plan (OTPP) is increasing its focus on European markets as other investors concentrate on the US, according to its Chief Executive Officer Jo Taylor.  

Speaking with Bloomberg Television during the World Economic Forum in Davos, Taylor said, “A lot of the Americans at the moment are actually saying, ‘I only want to be in the US.’ To me, that’s great news — I’ll just fill my boots in Europe.”   

The Toronto-based pension fund, valued at $255.8bn, is seeking new ways to protect its capital after significant investments in the US.  

Taylor highlighted opportunities in ‘active private markets,’ including infrastructure, private equity, and credit. He remarked, “I’m a great believer in going to hunt where the others don’t want to tread.”   

In November, OTPP was reportedly considering selling its stakes in five European airports. These include London City, Birmingham, Bristol, Copenhagen, and Brussels.  

The Times estimated the assets to be worth more than £10bn. 

OTPP's ownership stakes range from 25 percent to 70 percent, making its share potentially worth over £3.5bn.    

The prospective sale has prompted minority shareholders to assess their positions, with some considering divestment. 

I listened to the entire Bloomberg interview which was short and to the point.

While the title says he's looking at "snapping up European assets," you need to listen carefully to his comments because they are looking to invest in private equity deals where there's scale so they can co-invest in larger transactions.

Nothing earth-shattering or new there, OTPP has been investing in private equity for a long time with top strategic partners, especially in Europe where Jo notes the regulatory framework and currency relative to the loonie are stable (although the CAD-euro cross rate has weakened recently).

More interestingly, he notes that Davos was focused on AI and data centers but at OTPP they remain focused on climate change and are investing in climate transition assets like electricity transmission (last mile delivery where you need power and new types of power). 

He also notes beyond that they are moving into "disruptive technology" where they are moving into areas beyond AI like alternative fuels (like hydrogen and other fuels). 

They are also very active in venture capital looking at disruptive companies. "We really like technologies that enable other sectors like in healthcare and financial services. We can provide long-term patient capital and in some ways we can be the alternative to an IPO, we can be there for ten years and really help the business to scale."

He ends with some interesting remarks in credit which he thinks is cyclical ("spreads tighten up when everyone is chasing same deals). "In private credit, you really have to be careful you're not putting the same product in the same business, so I wouldn't do private credit with an equity strip in the same company."

He said they look to achieve a balanced portfolio and it's their 35th anniversary this year and he has 340,000 teachers in Ontario and he needs to make sure they're not anxious about their retirement.

Below, this year’s World Economic Forum, OTPP President & CEO, Jo Taylor, sat down with Bloomberg to discuss his outlook for the year ahead, what’s happening across markets, and themes they’re focusing on in their active private markets strategies. These include continuing to invest around the climate transition and embracing disruptive technology, looking beyond AI to transformative technologies that drive change across sectors like financial services and healthcare.

In addition to their significant US investment footprint, diversification is crucial for sustainable growth and balancing their return on risk. Jo highlighted Europe as a strong complement to our North American portfolio, as a region with some good pockets that provide great companies, strong management teams, and the right sort of investment climate. His advice? “Go and hunt where others don’t tread.”

Jo also participated in a panel discussion on the theme of companies staying private for longer, particularly given the growth of private markets globally. He shared his experience from 30 years of investing and how OTPP approaches this, stating: “From our point of view, the question is not just where you see value, but how you create more. A good investment for us means going beyond the original vision when we first got together with the company's management team.”

Third, Tom Lee, Fundstrat managing partner, joins 'Closing Bell' to discuss the market sell-off, his top sector ideas and why he's remaining bullish.

Fourth, the Investment Committee from the Halftime Report debate the risk of the DeepSeek AI news out of China.

Lastly, Chinese AI startup DeepSeek is sending tech stocks plunging as the market digests what its cheaper and more efficient model means for the AI trade. DeepSeek claims it spent only $5.6 million to train its V3 model, compared to the billions spent a year in capital expenditures by the likes of Microsoft and Alphabet. CNBC's Deirdre Bosa sits down with Benchmark General Partner Chetan Puttagunta to discuss how China acheived its AI breakthrough.

Rita Nazareth of Bloomberg reports the S&P 500 sees best start for a President since 1985: 

A relentless rally in stocks took a breather near all-time highs, but the market still notched its best start to a presidential term since Ronald Reagan was sworn in to power in 1985.

While a rout in chipmakers weighed on trading Friday, the S&P 500 still climbed 1.7% this week. That was after President Donald Trump talked up policies to boost the economy and lower taxes, while appearing to soften his stance toward tariffs on China — even as he continued to threaten sweeping action. The dollar saw its biggest weekly drop since November 2023. The MOVE Index of expected Treasury volatility hit the lowest since about mid-December.

“It is early days, but nothing that President Donald Trump has said or done has caused a bad reaction in financial markets,” said Chris Iggo at AXA Investment Managers. “Quite the contrary. It is paying to stay invested.”

A test to that risk-on mode will be next week’s start of the big-tech earnings season. Investors are eager to see whether demand for artificial intelligence will live up to sky-high expectations. The industry was buoyed earlier in the week, with SoftBank Group Corp., OpenAI, and Oracle Corp. forming a $100 billion joint venture to fund AI infrastructure, an effort unveiled with President Trump.

The S&P 500 fell 0.3% Friday. The Nasdaq 100 slid 0.6%. The Dow Jones Industrial Average slipped 0.3%. A Bloomberg gauge of the “Magnificent Seven” megacaps dropped 0.4%. The Russell 2000 retreated 0.3%.

Among corporate highlights, Meta Platforms Inc. climbed on plans to invest as much as $65 billion on AI projects in 2025. Cryptocurrency-linked firms rallied following Trump’s executive order favoring the industry. Nvidia Corp. led losses in big tech. A disappointing forecast from Texas Instruments Inc. sent the shares down 7.5%.

In the run-up to next week’s Federal Reserve decision, bonds rose amid data showing a drop in US consumer sentiment and a slight pullback in the growth pace of business activity — though companies remained upbeat about the outlook. The yield on 10-year Treasuries declined two basis points to 4.62%. The Bloomberg Dollar Spot Index fell 0.5%.

Oil saw its first weekly drop this year, with Trump calling for lower prices, which tends to ease concerns about inflation. Russian President Vladimir Putin said he’s ready to discuss energy issues with the US president.

To David Lefkowitz at UBS Global Wealth Management, while US equities will likely be more volatile this year due to periodic concerns about the return on AI investment spending, tariffs and interest rates, any dip will likely be a buying opportunity.

“In our base case, we expect higher tariffs, but we don’t think they will rise to a level that alters the economic growth trajectory,” he noted.

Wall Street also waded through a slew of economic data on Friday, with the highlight being a drop in US consumer sentiment for the first time in six months. Consumers expect prices will climb at an annual rate of 3.2% over the next five to 10 years. They see costs rising 3.3% over the next year, the highest since May.

After cutting rates three times in late 2024, Fed Chair Jerome Powell and his colleagues are expected to hold rates steady until they see inflation make more downward progress toward their 2% target.

“Given our expectation for a somewhat uneventful Fed pause, we look for a modest Treasury market reaction unless Chair Powell surprises with a dovish press conference,” said Oscar Munoz and Gennadiy Goldberg at TD securities. “We remain long duration and expect the curve to steepen in 2025, but to remain flatter in the near-term.”

To James Egelhof at BNP Paribas Securities Corp., Powell will probably be asked about the tail risk of rate hikes at the press conference.

“We expect him to reply cautiously by indicating they are less likely, but could come into view if needed to secure a soft landing for inflation and growth,” he noted.

With uncertainty swirling around the outlook for inflation and interest rates, there’s been one dependable catalyst keeping Wall Street’s spirits lifted: Corporate America’s bottom line.

The stocks of S&P 500 members that have reported stronger-than-expected profits in the most recent quarter have outperformed the benchmark by an average of 1.5% within a day of the results, according to data compiled by Bloomberg Intelligence.

Only those that account for about one-fifth of the S&P 500’s market capitalization have so far reported. But if the trend holds, it would mark the best post-earnings reaction since 2018, the BI data show.

Corporate Highlights:

• Texas Instruments Inc. shares declined the most in nearly five years after the chipmaker gave a disappointing earnings forecast for the current period, hurt by still-sluggish demand and higher manufacturing costs.

• Tobacco stocks gained as a proposed ban on menthol cigarettes and flavored cigars was withdrawn by the Trump administration.

• Verizon Communications Inc. reported fourth-quarter financial results that beat analysts’ estimates, including gains in new mobile-phone and broadband customers.

• American Express Co. profits increased 12% as well-heeled consumers spent more than analysts expected on their credit cards over the holidays, a tailwind the firm said it expects will continue.

• Boeing Co. suffered another quarter of fresh charges and losses, highlighting the long road ahead for Chief Executive Officer Kelly Ortberg as he tries to stabilize the US aircraft manufacturer.

• Novo Nordisk A/S’s experimental shot delivered as much as 22% weight loss in an early-stage trial, boosting investors’ hopes for the drugmaker’s pipeline.

Alright, apart from President Trump's speech at Davos on Thursday, there wasn't anything major on the geopolitical front.

As expected, the Bank of Japan raised rates 25 basis points on Friday to its highest level in 17 years after consumer price rises accelerated in December:

The move by the Bank of Japan (BOJ) to raise its short-term policy rate to "around 0.5 per cent" comes just hours after the latest economic data showed prices rose last month at the fastest pace in 16 months.

The BOJ's last interest rate hike in July, along with a weak jobs report from the US, caught investors around the world by surprise, which triggered a stock market selloff.

The bank's governor, Kazuo Ueda, signalled this latest rate hike in advance in a bid to avoid another market shock.

According to official figures released on Friday, core consumer prices in Japan increased by 3% in December from a year earlier.

The decision marks the BOJ's first rate hike since July and came just days after Donald Trump returned to the White House.

During the election campaign Trump threatened to impose tariffs on all imports into the US, which could have an impact on exporting countries like Japan.

By raising rates now the bank will have more scope to cut rates in the future if it needs to boost the economy.

The move highlights the central bank's plans to steadily increase rates to around 1% - a level seen as neither boosting or slowing the economy.

The BOJ signalled that interest rates will continue to rise from ultra-low levels.

Neil Newman, the head of strategy at Astris Advisory Japan said: "rates will continue to rise as wages increase, inflation remains above 2% and there is some growth in the economy."

"We look for another 25-basis point hike in six months," said Stefan Angrick, a Japan economist at Moody's Analytics.

Last year, the BOJ raised the cost of borrowing for the first time since 2007 after rates had been kept down for years as the country struggled with stagnant price growth.

That hike meant that there were no longer any countries left with negative interest rates.

When negative rates are in force people have to pay to deposit money in a bank. They have been used by several countries as a way of encouraging people to spend their money rather than putting it in a bank.

Following are excerpts from BOJ Governor Kazuo Ueda's comments at his post-meeting news conference, which was conducted in Japanese, as translated by Reuters:

WAGE HIKE"Many firms are saying they will continue to raise wages ... Various data shows the U.S. economy is in firm shape. Markets have been stable as the broad direction of Trump's policies become clearer. While import price growth is subdued on a year-on-year basis, the weak yen is pushing up import costs."
POLICY RATE"There's no change to our view of raising our policy rate and adjusting the degree of monetary support if the economy and prices move in line with our forecasts." "The timing and pace of adjusting monetary support will depend on economic and price developments at the time. We don't have any preset idea. We will make a decision at each policy meeting by looking at economic and price developments as well as risks." SHARP UPGRADE IN INFLATION FORECASTS"The rise in underlying inflation is moderate. I don't think we are seriously behind the curve in dealing with inflation."IMPACT OF TRUMP'S TARIFF POLICIES"There's very high uncertainty on the scale of tariffs. Once there is more clarity, we will take that into our forecasts and reflect them in deciding policy."

"It's necessary to raise interest rates in accordance with developments in the economy and prices. We also need to see how our rate hikes affect the economy. It's therefore appropriate to gradually raise interest rates in several stages, while carefully examining the impact of our moves."TERMINAL RATE"There's no change to our view on the neutral rate, which in our estimate is spread in a wide band. The estimated band hasn't changed much. In terms of the distance to the neutral rate, it's true it has shortened after raising rates to 0.5%. But there's still quite some distance."

"The BOJ's estimate shows the neutral rate, in nominal terms, is in a range of 1%-2.5%. There's still some distance to that range, given the short-term rate is 0.5%. Of course, we need to deepen analyses on where the neutral rate is as this could be affected by demographics and structural changes in the economy. We'll try our best. But it's hard to know this real time."ON WHETHER JAPAN IS STILL IN DEFLATION"The government has a slightly different definition of deflation compared with ours, as we focus on sustainably achieving our 2% inflation target... In terms of the common definition of deflation, which is for an economy to avert falling prices, it seems like Japan has moved away from this quite a bit. Of course, the risk of Japan returning to deflation again in the long run is not zero. But the chance seems quite low." "The sharp rise in inflation during fiscal 2025 is mostly due to cost-push pressures expected in the first half of that year, which is likely to dissipate in the latter half. As such, if wages rise steadily, we can expect real wages to turn positive."DOWNGRADE IN POTENTIAL GROWTH ESTIMATE"Simply put, it's because of labour shortages... The downgrade is small and so the impact, if any, on our neutral rate estimate will be minimal."ON WHETHER THE BOJ SEES 0.75% AS A BARRIER IN RAISING RATES"We don't have any sense of a 'barrier' in mind. But when rates approach neutral or slightly exceed that level, there will be some kind of reaction to the economy such as declines in housing investment. We'll try to respond before the impact becomes very large. But we will be gradually testing the waters in finding out."

 While I do not see runaway inflation in Japan, it's important to keep an eye on developments there because higher yields in Japan mean higher yields in the rest of the world and that doesn't bode well for risk assets.

Right now, the BoJ is behind the inflation curve as real yields are deeply negative.

Higher yields in Japan are lending support to the yen which gained some ground this week but remains very weak relative to the USD which is why inflation is picking up:

Are we going to get another unwinding of the yen carry trade which clobbers risk assets? I doubt it since the Bank of Japan is carefully telegraphing its moves to avoid any financial crisis but I sure hope they get ahead of the inflation curve there and I'm not convinced they have.

This upcoming week the Fed and Bank of Canada are announcing the next policy rate move on Wednesday.

The Fed will likely hold rates steady at an unsteady moment and the Bank of Canada is widely expected to cut by 25 basis points as tariff threat looms.

Central banks add noise to the equation but it's critically important to track their latest moves and policy changes.

In the US stock market this week, the big moves I tracked were Netflix earlier this week and Twilio today following stellar earnings reports:

Both these charts are in "beast mode" and have been ripping higher, quite incredible (you buy any dip that goes to 10-week moving average).

In fact, I track a lot of stocks across the risk spectrum and so far January is all RISK ON.

What can derail this market? Higher rates and/ or a severe recession which is why you need to pay attention to central banks and any potential fallout if a trade war develops.

But to be truthful, potential higher rates worry me more than a trade war right now.

And before I forget, have a look at this chart showing US home buying conditions have collapsed to levels never seen in 65 years:

SHOCKING: Home buying conditions have collapsed to levels NEVER seen in 65 years pic.twitter.com/KfcG97eqSS

— Bravos Research (@bravosresearch) January 23, 2025

This doesn't bode well for the US economy!

Anyways, next week we get more mega cap tech earnings from Microsoft, Meta and Apple later in the week.

Below, Masahiko Loo, senior fixed income strategist at State Street Global Advisors, says there could be an interest rate hike in September.

Also, The Bank of Japan (BOJ) raised interest rates on Friday (Jan 24) to their highest since the 2008 global financial crisis and revised up its inflation forecasts, underscoring its confidence that rising wages will keep inflation stable. Economics professor Sayuri Shirai from Keio University, who is also a former BOJ board member, tells CNA’s East Asia Tonight Japan is facing a dilemma as domestic consumption is stagnant and inflation is high.

PSP Investments just announced Patrick Charbonneau will be the next CIO and Yannick Beaudoin will replace him as President and CEO of the Canada Growth Fund Investment Management:

Montréal, Québec (January 23, 2025) – The Public Sector Pension Investment Board (PSP Investments) today announced the appointment of Patrick Charbonneau to the role of Chief Investment Officer (CIO) of PSP Investments and Yannick Beaudoin as President and Chief Executive Officer (CEO) of Canada Growth Fund Investment Management (CGFIM), effective February 3, 2025.  

“The appointment of Patrick Charbonneau as CIO reflects our ongoing commitment to strategic leadership and investment acumen. Patrick is an exceptional leader with a deep understanding of our mission and priorities. His expertise and vision will strengthen PSP’s ability to deliver long-term value for our beneficiaries and advance our strategic objectives in the years ahead.” said Deborah K. Orida, President and Chief Executive Officer, PSP Investments.  

With 18 years at PSP Investments, including six years as a founding senior member of the London office, Patrick brings deep expertise in private markets and a global perspective to his new role. He has over 20 years of experience in the infrastructure sector and was instrumental in building the organization’s infrastructure portfolio and team since inception of the infrastructure asset class in 2006. In his role as CIO, Patrick will oversee PSP Investments’ portfolio design and beta management activities, the fund’s overall investment strategy and the treasury function.

“Yannick’s experience and successful track-record—building direct investment platforms, working with entrepreneurs, and managing a diversity of stakeholders—positions him well to lead CGFIM. Since CGFIM’s inception, Patrick has been instrumental in quickly setting up CGFIM and ensuring it was active quickly, operates at arm’s length from government, and committing capital through fiscally prudent investment decisions. Patrick and the team have since closed nine market-leading investments across Canada that represent more than C$2B of capital committed to date. Yannick and the CGFIM team will continue to build on this momentum and lead the organization into the next stage of its maturity and impact.” added Ms. Orida.  

Yannick joined PSP Investments’ Natural Resources team in Montreal in 2012. Throughout this tenure, he has demonstrated exceptional leadership in building investment portfolios from the ground up and in cultivating strong stakeholder relationships. As Head of Asia Pacific and Europe, Yannick oversaw a growing Natural Resources portfolio of over $8 billion and global transaction opportunities that included controlling direct investments alongside local operating partners. Yannick led a diverse team of investment professionals and has significant experience in asset management and investment oversight, having participated on multiple Boards of Directors since 2013. As President and CEO of CGFIM, Yannick will be responsible for CGF’s investment strategy and execution, in accordance with CGF’s independent and arm’s length investment mandate.  

About PSP Investments 
The Public Sector Pension Investment Board (PSP Investments) is one of Canada’s largest pension investors with $264.9 billion of net assets under management as of March 31, 2024. It manages a diversified global portfolio composed of investments in capital markets, private equity, real estate, infrastructure, natural resources, and credit investments. Established in 1999, PSP Investments manages and invests amounts transferred to it by the Government of Canada for the pension plans of the federal public service, the Canadian Forces, the Royal Canadian Mounted Police and the Reserve Force. Headquartered in Ottawa, PSP Investments has its principal business office in Montréal and offices in New York, London and Hong Kong. For more information, visit investpsp.com or follow us on LinkedIn. 

About Canada Growth Fund (CGF) 
CGF is a $15 billion arm’s length investment vehicle that helps attract private capital to build Canada’s economy by using investment instruments that absorb certain risks, in order to encourage private investment in low carbon projects, technologies, businesses, and supply chains. Further information on CGF’s mandate, strategic objectives, investment selection criteria, scope of investment activities, and range of investment instruments can be found on www.cgf-fcc.ca.  

About Canada Growth Fund Investment Management (CGFIM) 
In Budget 2023, the Government of Canada announced that PSP Investments, through a wholly owned subsidiary, would act as investment manager for CGF. Canada Growth Fund Investment Management has been incorporated to act as the independent and exclusive investment manager of CGF.

Alright, big news coming out of PSP Investments today so let me get right to it.

It was barely a year and a half ago that Patrick Charboneau was named the Head of the Canada Growth Fund and now he's replacing Eduard van Gelderen as CIO of PSP Investments.

Am I surprised? Yes and no. I sort of knew Patrick was in the running and was likely going to be named next CIO before the holidays but until you see it in print, anything can happen.

Now it's official so I can share with you my thoughts.

First, congratulations to Patrick, this is a huge vote of confidence for him from Deb Orida and he earned it.

Was I surprised he was named CIO? A bit from the standpoint that I always saw him as an infrastructure expert and thought he would make a great leader of Real Assets, replacing  Patrick Samson.

The position of CIO is very different, he needs to think total portfolio, not just transactions and really oversee all the teams across public and private markets.

From that standpoint, he definitely lacks the experience of an Eduard van Gelderen.

He also lacks the experience of Marlene Puffer, Ziad Hindo, Nicole Musicco or Geoffrey Rubin, all names that were being thrown around.

But you know what Patrick Charbonneau has that all these people don't have?

He has Deb Orida's trust and ultimately that's what counts more than anything else.

Deb is someone who thinks 20 times before making a critical decision and she needs to trust her CIO implicitly.

For whatever reason, and this admittedly is my perception, she didn't trust Eduard van Gelderen, perceived him as a threat, maybe was intimidated by his knowledge, experience and board relationships, so she needed to place someone in this important role she trusts.

Patrick has delivered for her, he successfully launched the Canada Growth Fund and was doing a great job heading it, so much so that I heard Chrystia Freeland loved him and wasn't pleased when news broke out he was going to be moved to CIO role.

But Ms. Freeland is no longer our finance minister so she has no say now and the Government of Canada will change in the coming months.

So, Patrick Charbonneau is PSP's new CIO and while he lacks CIO experience, he's a top professional and a great leader who is well respected among peers and colleagues (including the former CIO).

He knows his strengths and weaknesses so he will surround himself with people he trusts to help him navigate that role and really champion the total portfolio approach.

Again, the role of a CIO is very different from role of Head of Canada Growth Fund or even Head of Infrastructure, you really need to think, live, eat and breathe total portfolio 24/7.

Patrick knows this, he's been around long enough, he can navigate the terrain.

I don't know him well but people I know and trust tell me he's a very nice guy and consummate professional. One person told me "he will do well in that role."

He will also play a critical role with PSP's members and the Government of Canada (Treasury Board) and there I have no doubt he will be superb (another reason why Deb trusts him in that role).

Alright, let me wrap it up but before I do, I also want to congratulate Yannick Beaudoin for being named President and Chief Executive Officer (CEO) of Canada Growth Fund Investment Management (CGFIM).

I don't know him well but he has done a great job at the Natural Resources team and is taking on a very important role.

No doubt in my mind that Deb Orida trusts him implicitly as well for this important role.

Only thing that irks me a bit is whether the Conservatives will support this initiative if they gain power but I don't see any reason as to why not, especially if the mandate is being fulfilled properly.

Still, the Canada Growth Fund does have a political dimension so you never know.

Alright, quick comments today on this important announcement.

Feel free to agree or disagree with me and email me if you have anything to add.

Below, President Donald Trump virtually addresses participants at the World Economic Forum's Annual Meeting in Davos on Thursday. 

Take the time to watch this and you might want to fast forward to minute 41 where he torpedoes Canada.

Bert Clark, president and CEO of IMCO, wrote a comment on LinkedIn on whether beating the market be the primary focus of most investors:

2024 was a tough year for investors trying to “beat the market.”

US indexes have come to be dominated by a small number of stocks – the so-called “Magnificent 7” (Alphabet, Amazon, Apple, Meta Platforms, Microsoft, NVIDIA, and Tesla). At the start of 2024, these stocks made up around 28% of the S&P 500, already reflecting a high level of concentration that made the decision of whether to market weight, underweight or overweight these stocks critical for US public equity investors. Overweighting stocks that already dominate the index would have felt odd from a concentration risk perspective. But by the end of 2024, the Magnificent 7 represented 34% of the value of the S&P 500. This is the highest level of concentration in the largest names since 1963. Investors who did not choose to overweight the Magnificent 7 would have struggled to beat the index because these dominant stocks outperformed the index by 23%!

Investors in private assets with public market benchmarks would also have struggled with net value add in 2024. The S&P 500 was up 25% in 2024. The S&P Mid Cap index was up 13.9%. And the S&P Utilities index was up 23.4%. Most private assets don't tend to rise that much in a single year, due to appraisal-based lagged valuations.

In years like this, it is good to remember that the primary objective of most investors is not “beating the market.” Most investors are looking to generate total returns at a level of risk that they are comfortable with. Total returns pay the bills. And risk can lead to stress, regret or worse, the requirement to increase contributions or delay withdrawals. Net value add is rarely the main game. It is a bonus.

The good news is, while it is hard for most investors to reliably generate net value add, there are investment strategies that have tended to reliably generate better risk adjusted long-term total returns. And many larger institutional investors are well placed to pursue these strategies. They include focusing on asset mix and diversification, reducing costs, and staying invested for the long-term. At IMCO, these are the things we focus on.

The challenge of generating net value add

Net value add (outperforming the markets) is really challenging to generate on a consistent basis. So, 2024 wasn't that odd a year in this regard.

The S&P SPIVA semi-annual report tracks the performance of many retail funds across multiple geographies and market segments. It has consistently found that most actively managed funds have underperformed their benchmarks over short- and long-term periods, and across geographies. Institutional public equity funds have tended to have a better track record than retail funds (in part, because of lower fees), although most of them have also struggled to generate net value add in certain market segments (especially US large cap public equities).

Even the biggest pensions that have long investment time horizons and the benefits of scale have only tended to generate modest total portfolio net value add over the long term. A study by CEM Benchmarking found that the average annual net value add of the largest pension funds was 26bps over 20 years. This is certainly a modest amount, especially relative to the kinds of total returns those funds were seeking to meet their liabilities. (It’s worth noting that the study also found that larger funds were able to generate better risk adjusted returns than smaller funds. This is especially important for most funds whose purpose is to generate long-term, stable returns to meet liabilities).

Net value add is difficult to achieve in public markets and challenging to measure in private markets. For most investors it contributes only a small amount to total returns – which is (or ought to be) their primary concern. This doesn't mean that net value add isn’t worth pursuing. But it does suggest that it should only be pursued in a focused way, in areas where investors have a real advantage. And investors should be careful to ensure that the pursuit of net value add does not distract from or undercut the strategies discussed below that can reliably impact total portfolio returns and risk.

Where to focus if total returns and risk are the priorities

Asset Mix and Portfolio Diversification

Asset mix has been estimated to drive as much as 90% of overall portfolio risks and returns. This is why it's important investors spend time ensuring they are invested in the right asset mix, before trying to outperform within individual asset classes. It's almost impossible to outrun a bad asset mix with outperformance at the asset class level.

The right asset mix for most large institutional investors is a diversified portfolio which includes asset classes like bonds, credit, public and private equity, and real assets (like infrastructure and real estate). US Dollar exposure can also be an important part of a diversified asset mix.

Diversification was described by the inventor of modern portfolio theory, Harry Markowitz, as “the only free lunch in investing.” There is no catch, no downside. By combining asset classes that are uncorrelated (whose returns do not move up and down in unison), investors can build portfolios that have better risk return characteristics than portfolios that are concentrated in fewer, correlated assets classes.

The risk mitigating benefits of diversification are especially important for investors (such as pension plans) who may need to increase contributions or delay or reduce withdrawals when returns are insufficient to keep up with liabilities. For these investors, their goal is both to generate long-term returns and avoid disruptive periods of underperformance.

Diversification is also important for investors with net outflows (almost all investors have or will have outflows at some point). Diversifying their asset mix helps reduce the chance that they will be forced to sell assets at depressed prices to meet outflow requirements. Selling when things are down crystallizes losses and can completely undermine strategies like investing more in riskier assets, such as equities, to benefit from their tendency to generate higher returns over the long-term (notwithstanding their near-term volatility).

A key aspect of diversification involves avoiding "big bets” – large allocations to single asset classes, market segments, individual investments or strategies (e.g., borrowing on short term basis to enhance returns) – because surprises are all too common in investing.

Entire segments of the market have endured prolonged downturns. The Japanese market peaked in 1989 and then took 34 years to reach that level again. The Nasdaq peaked in 2000 and then took 15 years to reach this level after the dot com crash. Oil hit a high of US$146 per barrel in 2009 and is still nowhere near that level. The European bank index is still 70% below its 2007 pre-GFC peak. The S&P metals and mining industry index is still below its peak at the height of the 2000s so-called “commodity supercycle.” US office real estate has generated returns of -4.6%, on average, over the last 5 years. Even the relatively safer US 30-year Treasuries have generated -7.25% returns over the last 5 years. Big bets on any of these market segments would have been a good reminder of why diversification is important.

Big bets on individual companies are also inadvisable for most investors. There is regular turnover of winners in competitive economies, like the US. For example, only one (Microsoft) of the biggest 10 companies in the S&P 500 25 years ago is in the top 10 today; only one (Bank of America) of the biggest 10 banks in the world 25 years ago is in the top 10 today; three (Tesla, BYD and Xiaomi) of the 5 biggest car companies in the world did not exist 25 years ago. Unless long term investors can reliably identity when dominant companies will be replaced by the next generation of winners, they should avoid big bets on individual companies.

Too much focus on generating net value add can draw investors into making big bets that put total returns at risk. Big bets can lead to big regrets. Focusing on asset mix and diversification are the keys to better risk adjusted long term returns.

Costs

Costs are something investors can control – to larger and smaller degrees – and they directly impact net returns.

There are many things that directly impact returns and risk that investors cannot control: interest rates, equity market returns, the relative performance of individual companies and market segments, exchange rates, geopolitics and asset class correlations. All investors can do in relation to these things is take a view on them, arrange their portfolios accordingly, monitor them and adjust as necessary. The ability to directly impact net returns through cost measures is something that can be controlled, so every investor needs to consider and act on costs, to the extent that they can.

One of the most powerful ways for institutional investors to drive down costs is through consolidation to achieve scale, which is exactly why IMCO was created.

Data from CEM Benchmarking has established that reducing costs through scale has the same ability to improve pension fund returns as active management. Large investors can use their size to negotiate preferential terms with external partners, internalize some investment activities, spread costs over a larger base and identify where to pursue active and passive strategies.

CEM’s findings are extremely powerful. It means that smaller pensions would be much better served by pursuing consolidation than seeking to generate net value add. Reducing costs has guaranteed benefits. Seeking returns through outperformance has no guarantees.

Staying invested for the long-term

Staying invested is one of the more powerful investment strategies. Staying invested allows the power of compounding to work its magic. $1,000 invested in the S&P 500 25 years ago would be worth about $6,800 today. But these results would only have been possible if the investor stayed invested that entire time. $1,000 invested over that same timeframe would have only grown to about $1,450 if an investor missed the 25 best days in the market.

To stay invested, investors need to avoid the temptation of trying to time the markets. Things that seem obvious often don’t turn out as one might expect. One might have thought a global pandemic and the highest inflation in years would make for challenging investment conditions. And yet the total returns of the S&P 500 have been 90.38% in the four years since February 2020.

Morningstar has documented the challenge and consequences of the market timing efforts of many retail investors. Their 2024 Mind the Gap report documents how most investors earn less than the funds in which they invest because they contribute and withdraw funds at the wrong times. They effectively buy high and sell low in their efforts to time things right.

In addition to avoiding temptation, sound liquidity management is critical to staying invested. Investors need to understand their liquidity requirements and have reliable sources to meet demands, including during stressed markets. Being forced to sell when assets are at depressed values crystallizes losses.

Focus on the main game

2024 was a tough year for active investors. But this is nothing new. Net value add is difficult to generate and should only be pursued where investors have a real advantage, and never to the extent that it puts overall returns at risk.

Fortunately, net value add is not the main game for most investors. Total returns and risks are the things that matter most. And some investors – particularly large investors with stable outflows – are really well placed to pursue strategies that have reliably contributed to better total returns and risk over the long term. They are focusing on asset mix and diversification, controlling costs and staying invested.

Recall, I started my Outlook 2025 with Bert Clark's article in the National Post on how the S&P 500’s performance in 2024 made investing look easy.

Here he delves deeper on the challenge of net value add and goes over the advantages of large institutional investors like IMCO.

I suspect IMCO trailed its benchmark last year and it will not be the only one as public equities roared led by the stellar performance of the S&P 500.

But the point of a pension fund isn't to beat the S&P 500 consistently every year --a feat even the best hedge funds cannot do -- but to make sure they have more than enough assets to meet long-dated liabilities by achieving the highest possible risk-adjusted return every year without huge swings (jeopardizing the stability of the contribution rate).

Have there been years where large pension funds are down 20% or more?

Yes, the 2008 crisis comes to mind, it wasn't an easy time.

But these years are rare, most of the time stocks and bonds are up and so are pension funds.

What can make the next few years more challenging is persistent, sticky inflation which rebounds and drives rates higher, forcing the Fed to hike again.

This was something I discussed in my Outlook 2025 and the macro environment is harder than ever to forecast.

Markets are never easy to forecast but this year especially will be challenging.

Earlier today, I reposted this comment from Jean Boivin, Head of BlackRock's Investment Institute and Global Head of Research there where he discusses potential risks:

 He states:

We’re starting 2025 with a pro-risk stance but keep an eye on three key investment risks to our view.

The first trigger: whether or not the incoming U.S. administration takes a market-friendly approach to achieve goals like improving growth and reducing budget deficits. We look through noisy headlines around policy and focus on how policy changes take shape this year.

The second trigger: deteriorating investor sentiment due to earnings misses or lofty tech valuations. The “magnificent seven” of mostly tech companies are still expected to drive earnings this year as they lead the AI buildout. Their lead should narrow as resilient consumer spending and potential deregulation support earnings beyond tech. Any misses could renew investor concern over whether big AI capital spending will pay off and if high valuations are justified

The third trigger: elevated vulnerabilities in financial markets, like a sudden jump in bond yields. The unusual yield jump since the Federal Reserve started cutting rates underscores this is a very different environment. See the chart below. The refinancing of corporate debt at higher interest rates is another risk.

Read more in our weekly market commentary here.

I must admit, it's the third trigger which makes me very nervous because if the 10-year US Treasury yield pops above 5% and keeps heading higher, I expect risk assets to get clobbered.

Hopefully this will not happen but what Bert Clark should have also told you is what happens to returns when investors miss the carnage, not just when they participate in the best days (they do significantly better).

Honestly, what worries me is the bubble in everything keeps going, deregulation will benefit big banks but also incite them to take more risk and that never ends well.

Also, a young generation that bets everything on crypto, Tesla, Nvidia, quantum computing stocks or the latest fad and has literally never lived or experienced a severe and prolonged bear market.

"In a bull market, everyone is a financial genius" the late economist John Kenneth Galbraith used to say.

Investing has never looked so easy, momentum strategies and taking concentrated bets are still the way to go but this will all end in tears. 

More proof that this is coming to an end?

Clients of Seth Klarman’s Baupost Group pulled roughly $7 billion from the hedge fund in the past three years, losing patience with the famed value investor after a decade of lackluster returns. 

When large investors pull money from Seth Klarman -- aka Mr Margin of Safety -- you know we are reaching an inflection point in markets.

Or maybe not, maybe the S&P 500 will be up another 26% this year driven by Mag 7, 8, 9 if you add Broadcom and Netflix to the mix.

We shall see but remember this, no matter what the stock market does, your pension fund managing your retirement better be highly diversified and well managed. 

The rest is irrelevant.

Below, JPMorgan Chase chairman and CEO Jamie Dimon joins 'Squawk Box' to discuss the second Trump administration, why he's 'cautiously pessimistic' about the U.S. economy, impact of Trump's tariff proposals and EOs, state of the global markets, impact of the strong dollar, his relationship with Elon Musk, investing landscape, future of DEI in corporate America, his thoughts on the crypto industry, succession plans at JPMorgan, and more.

And Goldman Sachs chairman and CEO David Solomon joins 'Squawk Box' to discuss the state of the economy, latest market trends, regulatory landscape under the new Trump administration, impact of Trump's tariff proposals, his thoughts on crypto, future of DEI in corporate America, and more.

Barbara Shecter of the National Post wrote a comment asking whether the Canadian pension model can survive a new era of politicization:

Rachel Reeves, the U.K.’s new chancellor of the exchequer, had a goal in mind when she flew to Toronto last August to meet with the heads of some of Canada’s largest pension funds.

“I want British schemes to learn lessons from the Canadian model and fire up the U.K. economy, which would deliver better returns for savers and unlock billions of pounds of investment,” Reeves told U.S. investors in New York on the first leg of her trip, according to the Financial Times.

Reeves had at least half of the equation right. The informal group of large institutional investors known as the Maple 8, which includes the Ontario Teachers’ Pension Plan and the Canada Pension Plan Investment Board, has been envied globally over the past decade-plus for their ability to earn world-class returns through a diverse blend of investment strategies. But the group’s unique achievement has been a model that shelters the funds from government influence when it comes to investment decisions.

In other words, the funds aren’t there to fire up the economy or pursue the political cause of the day — they are there to invest for their beneficiaries, full-stop.

That fundamental advantage came under pressure at home like never before in 2024, raising concerns that it’s only a matter of time before Canada’s biggest funds are forced to make concessions to government. It’s a threat pension veterans aren’t taking lightly.

“Governments need cash. They are turning over every stone to look for it, but the (pension) money is not theirs for the taking,” Mark Wiseman, the former chief executive of the CPPIB, said in a recent interview with the Financial Post. “It’s the retirement savings of millions of Canadians — no different than the monies in their bank accounts and RRSPs.”

Developments over the past couple of years have prompted pioneers of the Canadian pension model, including Wiseman and Claude Lamoureux, the first CEO of the Ontario Teachers’ Pension Plan, to pen articles sounding the alarm and warning that the survival of vaunted model was at risk.

Ottawa triggered the concerns when it stated explicitly in the fall economic statement in 2023 that it wanted major pensions to invest more in Canada, a longstanding ambition of Justin Trudeau’s Liberal government. That prompted dozens of business leaders from industries ranging from telecom to transportation to sign an open letter in 2024 calling on the government to create new rules and incentives to reverse a decline in domestic investment. Last year, the government pushed ahead to try to meet its objectives while assuaging some of the concerns in the pensions industry, creating a task force led by former Bank of Canada governor Stephen Poloz to shepherd the process.

But Lamoureux and others argued the approach is the wrong way to improve the country’s economic prospects.

“The federal government should ask itself how we (can) create champions, not where our champion pension plans should invest,” he said.

Proponents of the Canadian pension model were already on high alert when, in November, Alberta’s government — which was already contemplating pulling out of the Canada Pension Plan — reached into Alberta Investment Management Corp. (AIMCo), the province’s main public asset manager, and fired the entire board and chief executive before installing former Prime Minister Stephen Harper as chairman and putting a government bureaucrat permanently on the board of directors.

The shakeup stoked fears that the Alberta government wants a more direct hand in how AIMCo invests.

Months before that overhaul unfolded, the Global Risk Institute published a paper with a blunt warning: directing pension funds to invest more at home would “undermine careful risk-return calibrations, compromise existing governance functions, and expose pension plan members to potential financial losses.”

Wiseman, meanwhile, had warned at a summer conference that pulling pensions away from their core mission could be a slippery slope, even if it begins with the gentle ask from governments facing down deficits and sluggish economic outlooks.

By the end of the year, there were signs the federal government was getting the message. Lost amid the drama surrounding the resignation of finance minister Chrystia Freeland in December, the Liberals’ fall economic statement tabled the same day tempered some concerns that Ottawa will tell pensions where to invest their money.

Instead, it promised to examine raising a 10 per cent ownership cap on municipal utilities and potentially re-thinking airport land lease agreements to allow pensions to invest in the development of surrounding vacant land. In addition, it pledged that pensions would no longer be subject to a cap of 30 per cent control of companies they invest in.

Those small steps, combined with the upheaval and a potential change in government in Ottawa, have tamped down concern for some about the immediate threats to the Canadian pension model. But the fear is not gone.

“Nothing is ever totally out of the woods,” said Keith Ambachtscheer, a veteran pension expert and one of the authors of the June GRI paper. “(But) Ottawa has bigger things to worry about than pension fund investing.”

While Ambachtscheer was willing to declare the Canadian pension model “alive and well,” for now, Lamoureux said the political chaos has just introduced another level of uncertainty.

One of the major concerns that arose last year was that established fund managers such as the Canada Pension Plan Investment Board and AIMCo could be made to carry dual mandates like the Caisse de dépôt et placement du Québec. A rarity among the Maple 8, the Caisse’s investment decisions must consider both maximizing risk-adjusted returns for beneficiaries and contributions to Quebec’s economic development.

There are worries some kind of dual mandate could be coming to AIMCo soon, based on comments Alberta Premier Danielle Smith has made and the November leadership purge.

Speaking at a Calgary Chamber of Commerce event in the fall of 2023, for example, Smith said the province’s Heritage Savings Trust Fund, managed by AIMCo, could become more like a sovereign wealth fund and invest in projects that are having difficulty securing financing elsewhere.

That didn’t sit well with Gil McGowan, president of Alberta’s Federation of Labour, who said thousands of AFL members are concerned their retirement money, managed by AIMCo, could end up being used to support the government-favoured projects, such as in the oil and gas sector, that might not be in retirees’ best interests economically.

“Risking the retirement security of that many people with a Quebec-style dual mandate would be bad enough — but what the UCP (United Conservative Party) government in Alberta has in mind is actually worse,” McGowan said via email in December. “They’re not just talking about using pension funds to promote Alberta-based economic growth and job creation (a la Quebec), they’re talking about using the money (other people’s money!) to prop up oil and gas businesses that are finding it more difficult to raise cash from international investors and capital markets.”

Lamoureux, too, said it would be a mistake for governments to demand a dual mandate, adding that institutional investors subject to such mandates, like the Caisse, tend to underperform those that aren’t — even when both beat their established benchmarks.

The Caisse ranked last among the Maple 8, for example, in a global pension fund ranking by data platform Global SWF that measured the compound annual growth rates of single-year investment returns between 2013 and 2022.

Lamoureux said the benefits of the Canadian pension model are in the data. Teachers’, the pension plan he was instrumental in creating in its current form, had an $8 billion deficit when it was run by the province of Ontario. Both returns and funding status across Canada’s largest funds including Teachers’ have much improved since governments opened up globetrotting investment potential by removing rules that limited foreign investment first to 20 per cent and then 30 per cent.

“Canada, according to UBS, represents 2.5 per cent of the world capitalization, the U.S. 60 per cent. Where you should invest is easy to answer,” Lamoureux said. “Would the Teachers’ pension fund be 100-per-cent-plus funded if we had not been allowed to invest (or use derivatives) more outside Canada?”

But even some critics of the perceived interference with Canada’s successful pensions say it’s not entirely unfounded for the government to question why the multi-billion funds aren’t investing more at home.

Domestic allocation has been declining for years, said Alex Beath, a former senior research associate at CEM Benchmarking, an independent provider of comparative performance data for institutional investors including pensions.

In public markets, Canadian pension funds reduced their holdings in domestic companies to less than four per cent of their total assets at the end of 2023 from 28 per cent in 2000, according to the open letter signed by 90 business leaders in March. The letter also said the country’s eight largest pensions have invested some $88 billion in China, more than the roughly $81 billion they had in Canadian public and private companies combined.

This trend is not unique to Canada; shrinking domestic allocations have also been the reality in the United Kingdom. Nevertheless, there are arguments governments can make as a result, according to Beath.

“Big DB (defined benefit) pension funds are tax exempt investors, (so) the Canadian government and population is in some sense spending an extraordinary amount of money helping subsidize them,” he said. “(Perhaps) that investment comes with a quid pro quo, left unsaid, that some of that expense should be invested back domestically.”

The pensions could find a reprieve from such questioning if Trudeau’s minority government falls this year. Opposition parties have pledged to bring down the government as soon as a prorogued Parliament resumes in March. And if Conservative Party of Canada leader Pierre Poilievre comes to power, the trend toward more government involvement in pensions could even be reversed, said a former senior pension executive who spoke on condition of anonymity in order to discuss the delicate situation in Ottawa. 

“The federal Conservatives seem to have a better grasp of the principle (of independence),” the former executive said.

Indeed, senior pension officials have privately complained for years that Trudeau’s government has failed to heed what they were told about how public-private investment vehicles such as the Canada Infrastructure Bank should be structured and governed to encourage investments by institutional investors. Even more frustratingly for the pensions was that the lack of investment by institutional investors led to the government taking a heavier hand.

The Global Risk Institute’s paper from last summer touched on this theme, suggesting a way to create the conditions to entice large-scale investment without government interference in pension fund allocation — a strategy that could deliver the kind of economic boost the U.K.’s chancellor of the exchequer described during in her summer visit to North America.

If Canadian governments want more investment dollars from large institutional investors like pensions, including Canadian ones, the paper said, an easy way to make that happen would be to make available the types of assets they shop around the world to buy: large-scale infrastructure projects from airports and toll roads to ports and railroads, to utilities and transmission grids.

“Government initiatives that reduce the barriers to domestic investing by facilitating access to strategic asset classes will not only retain and attract capital from Canadian pension funds but also bring in additional capital from the much larger pool of foreign investors,” the authors concluded.

It would be an elegant solution for Canada because it would fulfill the government’s objectives of boosting domestic investment without fiddling with the Canadian pension model or spooking institutional investors in Canada or abroad.

“Canada lacks infrastructure investment opportunities relative to other countries,” said Ambachtscheer, one of the report’s authors. “Canadian funds would be happy to invest in Canadian investment opportunities if they existed.”

Great article by Barbara Shecter who gathered insights from the usual suspects -- Wiseman, Lamoureux and Ambachtscheer -- but left out the most important commentator, Mr. Pension Pulse.

Sometimes I feel like Jack Nicholson in "A Few Good Men": You want the truth on Canada's Maple Eight? You can't handle the truth!

In all seriousness, this is a good article but there are passages in here where I would vehemently disagree with Wiseman, Lamoureux and Ambachtscheer and other passages where I agree with them.

First, stop putting down CDPQ and its dual mandate and stop comparing pension fund returns when you're comparing apples to oranges.

AIMCo, BCI and CDPQ do not have the same asset mix as OTPP and CPP Investments or OMERS which allocate more to privates and it's simply not right comparing their returns over the long run (Lamoureux knows better).

Moreover, the true measure of success of any pension plan/ fund is the funded status of the plans they serve and by this measure all of them are doing great.

And if you really want to pick a winner over the last 20 years, I'd argue that HOOPP which only recently started investing in infrastructure performed the best in terms of long-term return and funded status (blew the competition away).

But again, they are all winners in my book, even CDPQ with its dual mandate.

Would Quebecers have been better off if we had invested our pension savings in the Canada Pension Plan managed by CPP Investments?

No doubt returns would have been better since inception of CPP Investments in 1999 (CDPQ goes back to the 60s) because asset mix was different. But CDPQ also contributes directly to Quebec's economy so there are other things you need to take into consideration and run a proper cost benefit analysis.

In other words, while I'm not a huge proponent of CDPQ's dual mandate, especially for AIMCo and other funds, I understand its purpose and if done properly with proper governance and full transparency, it can indeed be a useful tool.

What are some of the other things that caught my attention above?

Mark Wiseman is right, it's not the government's money, it belongs to members, retired and active, but he forgets that these funds are backstopped by governments and they indeed have a lot of say in the way they manage their activities.

I've said it before, while political storms may be gathering on the Maple Eight, the real issue is as these funds become bigger, more powerful and pay their senior members hefty compensation by any standard, they will attract attention from governments.

In my humble opinion, it's up to Canada's Maple Eight to manage these relationships very carefully and if they think for one second that they can tell governments to buzz off and claim they are independent from all demands, well, they're sorely mistaken.

I might not like what Alberta did to AIMCo but let's call a spade a spade here, the government there basically showed the CEO and most board members the door and there was nothing AIMCo's members can do about it.

In fact, some of AIMCo's members brought this on so now they have to live with the consequences.

My point is this can happen in Ontario, Quebec and British Columbia and while it's highly unlikely, never say never.

At the end of the day, the so-called "independence" Canada's Maple Eight enjoy is illusory, the governments -- provincial and federal -- can step in at any time to rip that governance model down as they did in Alberta.

Is it the right thing to do? Of course not but it doesn't mean it can't be done.

Also, note while the federal government listened to Stephen Poloz and implemented some much needed recommendations to help Canada's large pension funds invest more domestically, it also told them they need to provide more transparency on geographic and sector allocations to OSFI, the federal banking, insurance and pensions regulator.

I would also like to remind my readers that while fiscal profligacy shouldn't give governments a pass to raid our asset rich pensions, if we ever experience a Greece type crisis, the bond vigilantes will have their say (at a minimum, pension benefits will get slashed).

What else? Alex Beath is right that our large DB pensions are tax-exempt investors so there is an argument to be made to invest more domestically but I prefer the insights from PSP's former CEO Neil Cunningham on what we can do with the  $9 billion PSPP surplus to help invest more in Canada.

In other words, we have a lot of smart people out there above and beyond Wiseman, Lamoureux and Ambachtscheer and we need to listen to all their views.

Alright, now that I got all this off my chest, I still like Barbara Shecter and she wrote a great comment above but next time, come to Mr. Pension Pulse and I'll share the truth and nothing but the truth.

Time to enjoy my evening, it looks like President Trump wasted no time handing out goodies to his powerful buddies (see here and here and a lot more embedded in the 200+ executive orders he signed over the last 24 hours). 

I guess that's all part of Making America Great Again. -:)

Below, earlier today, Alberta Premier Danielle Smith spoke with reporters from Washington, D.C., the day after the inauguration of US President Donald Trump. She emphasizes diplomacy rather than retaliatory tariffs as the best path forward.

I might not like her pension policy toward AIMCo but let me be clear, she is by far the best politician in Canada and knows how to negotiate properly and secure the best interests of Albertans and Canadians. 

Also, Lee Munson, president and chief investment officer of Portfolio Wealth Advisors, joins Yahoo Morning Brief to share his insight on Trump's tariff plans, predicting they’re likely a "bluff."

"I think the idea that we're going to slap on these big horrible tariffs that are going to push inflation higher — I don't think I buy it," Munson says. Among other reasons for his skepticism, Munson notes that the Trump administration doesn't have enough of a plan for China to carry out the tariff plan successfully.

Munson also shares his top trade picks, including aerospace and cybersecurity defense.