Janet McFarland of the Globe and Mail reports, CPP fund returns top 10 per cent:

The Canada Pension Plan fund rode a wave of strong gains in foreign stock markets to push its investments up by 10.1 per cent last year and boost its assets to $183-billion.

While bonds and Canadian equity holdings posted slower growth in the year ended March 31, the Canada Pension Plan Investment Board, which manages the CPP’s assets, said its $64-billion portfolio of foreign equities had a stellar year.

Private equity holdings in foreign countries earned 17 per cent for the year, while publicly traded stocks in foreign countries posted 13-per-cent growth.

“That strength in global equity markets was the primary factor driving our solid returns for the year,” said Eric Wetlaufer, CPPIB’s head of public market investments.

The CPPIB’s overall returns were typical for a Canadian pension plan last year. A survey by RBC Investors Services Ltd. found that pension plans earned an average of 9.4 per cent on their investments in 2012, with the giant Caisse de dépôt et placement du Québec earning 9.6 per cent for the year ended Dec. 31, and the Ontario Municipal Employees Retirement System earning 10 per cent.

Over the past year, CPPIB has been threatening the Caisse’s long-held title as Canada’s largest investment fund. It has been difficult to directly compare the two fund managers, however, because they have different year ends, with the Caisse reporting assets of $176-billion as of Dec. 31, and CPPIB disclosing its assets hit $183-billion as of March 31, up from $162-billion a year earlier.

CPPIB said $5.5-billion of its asset growth in the past year came from net CPP contributions by employers and plan members, while $16.2-billion came from investment gains.

Chief executive officer Mark Wiseman told reporters Thursday the fund had “an excellent” year, but said his focus is not on annual returns but on an extremely long-term investment strategy to cover CPPIB’s long funding obligations.

Mr. Wiseman said CPPIB plans to become a public advocate for long-term investing around the globe, saying funds like CPPIB with a “natural multi-generational nature” don’t get enough credit for their beneficial impact on the economies.

By investing in companies for decades and funding innovation and growth, long-term investment funds spur long-term economic development, he said. Pension funds also act as a “shock absorber” during times of down markets when they become big buyers of stocks to maintain their investment weightings, he argued.

“You’re going to see us becoming increasingly vocal in encouraging market participants to adopt a more long-term lens, actually looking at value of stocks and not just looking at a stock as something that goes up and down on an individual day,” he said.

Mr. Wiseman said his proudest achievement in his first year as CEO of the fund is the 87 deals in 11 countries that CPPIB completed last year, including 36 that were worth more than $200-million each.

But André Bourbonnais, head of private investments, said deals appear poised to taper off this year as many more competitors are looking for bargains with plenty of available cash and cheap credit to fund their investments.

“If the environment remains as it is today, we’re going to be very selective,” he said.

The chief actuary of Canada has affirmed that the CPPIB is sustainable over the next 75 years if it earns an average of 4 per cent real annual returns after inflation. CPPIB said Thursday its 10-year real rate of return after inflation is 5.5 per cent, while it’s five-year rate of return is just 2.4 per cent, due mostly to large losses in fiscal 2009 when financial markets collapsed and CPPIB posted a 19-per-cent loss for the year.

CPPIB put out a press release going over their fiscal 2013 results, providing fiscal year highlights of investment activity in public and private markets. You should also take the time to carefully read the Annual Report 2013 as it contains a lot more details.

The portfolio returns by asset class are available below (click on image):


The returns of every invest portfolio were positive. The big returns came from foreign public and private equities, up 13.2% and 16.8% respectively, but real estate and infrastructure also delivered solid results, up 9.2% and 8.8% respectively. Other debt, which I think is private debt, was up 15.1%.

The total Fund return in fiscal 2013 includes a loss of $348 million from currency hedging activities and a $1,414 million gain from absolute return strategies, which are not attributed to an asset class.

During fiscal 2013, CPPIB completed 36 transactions of over $200 million each in 11 countries around the world. This alone blew me away. The due diligence on these huge deals and presenting them to investment committees and the Board for approval takes an enormous amount of work. These deals are complex, costly and have to be analyzed in detail to understand all the risks involved.

CPPIB's turnaround time to complete these deals is incredible, proving to me they run a very tight operation and are properly staffed to keep up such a breakneck pace. However, André Bourbonnais, head of private investments, is right, if the environment remains as it is today, they will have to be a lot more selective.

One thing I know is that CPPIB has relationships with the very best private and public funds throughout the world and it is opening up offices in Asia and Latin America to capitalize on new opportunities.

As far as Mark Wiseman, CPPIB's President and CEO, he is right to extol the benefits of the long-term view:

Whether they like it or not, investors and company boards globally are going to hear a lot more from Canada’s biggest pension fund on the benefits of long-term thinking.

CPP Investment Board has a mandate to identify investments that earn returns over many years to help cover the future retirement benefits of Canadians, so the fact that it takes a long-term investment view isn’t surprising. But Mark Wiseman, chief executive of the 183.3 billion Canadian dollar ($180.2 billion) fund, had a broader message Thursday for corporate boards and investors–that a pervasive focus on short-term returns could jeopardize the global economic outlook.

Mr. Wiseman likely isn’t about to become Canada’s version of Bill Ackman, the brash U.S. activist investor who last year successfully agitated to replace much of Canadian Pacific Railway Ltd.'s board and install a new chief executive. But he’s speaking out publicly about the merits of a long-term investment horizon.

Currently, “you will see” companies decide against an investment despite its merits to ensure they meet quarterly profit numbers, Mr. Wiseman told Canada Real Time.

But that can be a “terrible decision for shareholders and a terrible decision for the overall economy,” if jobs that could have been created are not, he said.

Last month, CPPIB was part of a group of big institutional investors that opposed a $17 million pay package for Barrick Gold Corp.'s new co-chairman, John Thornton. Shareholders ultimately voted against the miner’s executive-compensation proposals, but that vote was non-binding.

Next week, Mr. Wiseman will speak to Canada’s Institute of Corporate Directors and he said he plans to discuss the importance of long-term thinking for boards.

The executive believes CPPIB and other multigenerational pension funds can make a particular difference beyond their own returns, through investments in infrastructure, private equity and real estate.

These types of investments over time help generate jobs, innovation and overall growth, Mr. Wiseman said. But many investors don’t have the capital that these asset classes often require, or are unwilling to risk an investment that can’t quickly be sold if necessary. In addition, the complexity of arranging and financing these projects is often a deterrent.

CPPIB’s large size, significant resources and long-term investment horizon allow it to overcome these hurdles. And those same qualities allow CPPIB, and funds like it, to act as “shock absorber(s)” for the global economy, Mr. Wiseman said. That was the case during the global credit crisis, when they were able to buy assets other investors were forced to sell, he said.

Mark is right, pension funds have a much longer investment horizon and their results can't solely be judged on any given year. Why is it important to understand the long-term view? Look at  CPPIB's performance against benchmarks in the press release:

CPPIB measures its performance against a market-based benchmark, the CPP Reference Portfolio, representing a passive portfolio of public market investments that can reasonably be expected to generate the long-term returns needed to help sustain the CPP at the current contribution rate.

In fiscal 2013, total portfolio returns closely corresponded to the CPP Reference Portfolio with $204 million in gross dollar value-added. Net of all operating costs, the investment portfolio returned negative $286 million in dollar value-added.

“We have strong conviction that our private market assets will outperform the public markets equivalents of the CPP Reference Portfolio over the long term,” said Mr. Wiseman.“ This result will, however, not necessarily be demonstrated in the short term. Particularly when public markets have rapid moves up or down, our active private market strategies may show short-term underperformance or overperformance vis-à-vis the CPP Reference Portfolio, which does not accurately reflect our long-term value-add expectations for these strategies.”

Given our long-term view, we track cumulative dollar value-added performance since the inception of our active management strategy in fiscal 2007. The cumulative outperformance added $3.1 billion to the CPP Fund net of all operating costs.

Again, 36 transactions of over $200 million each in 11 countries costs a lot of money to set up in the short-run, but once these deals start realizing significant gains over the long-run, these costs will be recuperated and the CPP Fund will benefit from these transactions. That is why you can't just look at the negative $286 million in dollar value-added for fiscal year 2013 and jump to any conclusions.

Ultimately, the only thing that counts is the cumulative dollar value-added performance since inception and that is how you should properly judge any pension fund. The short-term comparisons to benchmarks is detrimental and just silly for these large pension funds, and I must confess, I've fallen into this trap in the past listening to my buddies in public markets.

Below, you can view the long-term results of the CPP Fund (click on image):


A 7.4% return over the last ten years is solidly above their actuarial target. And if Mark Wiseman and senior managers at CPPIB are right in their conviction that private market assets will outperform public market equivalents of their CPP Reference Portfolio, they will add a lot of value over their benchmark, significantly bolstering the Canada Pension Plan.

Let me end by congratulating Mark Wiseman, the senior managers, and all the employees at CPPIB for their outstanding work and delivering another year of solid results. When you hear about reasons to go slow on expanding C/QPP or how C/QPP expansion is bad news for Canada, you should be very weary and concerned. If we want to improve our retirement system, we need to realize the enormous benefits these large public pension funds have over mutual funds and get on to expanding the CPP and QPP.

Below, Mark Wiseman speaks with Reuters' Chrystia Freeland from the World Economic Forum in Davos, January 24, 2013. Just like his former colleague Ron Mock, who was just named OTPP's next leader, Mark is brilliant and genuinely nice. Canadians are very lucky to have him at the helm of the CPP Fund and this will be seen over the next ten years as the Fund realizes material gains in private assets.

Barry Critchley of the National Post reports, After 20 years, real estate as part of pension funds still solid:

Two decades on, Stan Hamilton and Robert Heinkel, both from the University of British Columbia, are working on a revised edition of what can be considered to have been a game changing book about pension fund management.

In 1993, the two finance professors and trustees of the faculty pension fund, penned a 165-page book, The Role of Real Estate in a Pension Portfolio. One of the key conclusions: “Having considered the liquidity and management issues relating to real estate, we conclude that real estate should compose between 5% and 15% of the pension portfolio.”

The two – Heinkel is still at it while Hamilton has retired – argued real estate ”is the only asset class that reacts significantly and positively to expected inflation changes.”

Reached Tuesday, the day after a column about the Canadian arm of LaSalle Investment management launching its fourth institutional real estate fund since 2003, Hamilton, said in the early 1990s it wasn’t that common for pension funds to give an allocation to real estate.

By his estimates, about 4% of the industry’s $250-billion in assets was in real estate — or about $10-billion in total.

“In the main it was really insignificant. The vehicles were not always as convenient as they might be,” said Hamilton. By 2011, according to Canada’s Pension Landscape Report, pension funds had doubled their allocation to real estate to 8.9% — or almost $100-billion.

Consulting firm API Asset Performance Inc. said its clients average an overall weight of 5.4% for real estate but it rises to 11.6% when only those with a dedicated real estate portfolio are considered.

Hamilton, as with Heinkel, is too modest to take credit.

“Maybe we were lucky with our timing,” said Hamilton, noting the growth of REITs, the rise of institutional pools of capital dedicated to real estate, the expansion of new ways to invest, and the further development of specialist real estate managers, has meant “the share of pension funds that has gone into real estate has changed quite significantly.

“It has changed dramatically,” said Hamilton, noting that some of the larger pension funds have more than 10% of their assets invested in real estate. A short while after the book, the UBC Pension Plan gave a major allocation to real estate.

The two made the argument for real estate largely on the grounds of portfolio diversification. “It was a great diversifier and fits into a portfolio. We never tried to sell it on rates of return because we thought that was a fool’s game, said Hamilton. “We said ‘if you approach it properly and not going for the hype on rates of return, it is a valuable tool.’ That message resonated,” said Hamilton, now chair of the B.C. Arts Council.

But real estate is different: it has to be considered as a long term investment. While owing REITs wasn’t similar to owning real estate directly, Hamilton said “we saw reasons to go up to 15% in real estate, but because of liquidity we recommended that mid-and large sized pension funds consider going to 10%.”

And 10% is an allocation that Hamilton feels is suitable today. “That story rings true [but] if you have any liquidity concerns, going much above 10% is probably uncomfortable.”

Along the way real estate has enjoyed a change in status: once considered an alternative asset, “it is now more like a mainstream investment,” said Hamilton.

Every pension fund should have an allocation to real estate. This is arguably the best asset class in terms of risk-adjusted returns over the last 20 years.

But professor Hamilton is right, pension plans with liquidity concerns have to gauge their liquidity risk and adjust their weightings accordingly. The same can be said of private equity and infrastructure, two other popular illiquid asset classes.

There is a debate going on right now on illiquidity premiums. Some very sharp pension fund managers feel that pensions are taking on too much illiquidity risk and market valuations do not compensate them for taking on this risk. Many pensions learned the hard way all about liquidity risk during the 2008 financial crisis. When they needed it the most, it wasn't there, forcing them to sell public market assets at distressed levels.

Still, pension funds remain undeterred. They're picking up their real estate activity and even taking on more opportunistic risk. Craig Karmin of the Wall Street Journal recently reported, Funds See Opportunity in Real Estate:

A glitzy Manhattan real-estate crowd gathered in March to join Barry Sternlicht, chief executive of Starwood Capital Group, at a party celebrating the launch of condo sales at the Baccarat Hotel & Residences, a new development across from the Museum of Modern Art.

The 50-story glass tower, expected to open in 2014 and feature a five-star hotel and Baccarat chandeliers in each condo, is the sort of development rarely seen in the years after the financial crisis. But riskier projects are starting to move forward again, thanks in part to a resurgence of so-called opportunity real-estate funds.

These private-equity funds invest in riskier real estate, such as half-empty office buildings, distressed properties weighed down with debt, or pricey new construction that must find well-heeled buyers to profit. The Baccarat, which is being developed by Starwood and Tribeca Associates for $400 million, is counting on selling condos for as much as $60 million each.

For most of the downturn, these real-estate funds struggled to raise money because their main source, big pension funds, were risk-averse and still licking their wounds from when these bets went wrong. The California Public Employees' Retirement System, the largest U.S. public fund with $263 billion, lost nearly half the value of its real-estate portfolio between July 2008 and June 2009—more than $10 billion.

But these days, many pension funds are reconsidering—or trying for the first time—riskier real estate in an effort to boost returns at a time of low interest rates. These funds project up annual returns as much as 20%.

A pension fund has to "take more risk to get double-digit returns," says Bob Jacksha, chief investment officer of the New Mexico Educational Retirement Board. His $10 billion fund recently committed $50 million to Crow Holdings, which manages opportunity funds.

Pension funds also have been emboldened by the steady rise of commercial-property values since 2009 and a winnowing of some of the worst-performing funds. The economy shows signs of stabilizing after a rough period, and borrowing for real estate is cheap with rates so low.

"Many prices have fallen quite a bit, so there's now a lot of opportunity," says Edward Schwartz, a principal at real-estate consultant ORG Portfolio Management. But some pension funds, he adds, "also have short memories."

In recent months, a public-employees fund in Texas, Kentucky's main public fund and an Oklahoma City police fund all have made commitments to opportunity funds.

Such funds raised about $25 billion in 2012, nearly double the amount in 2009, according to research firm Preqin. Nearly half of pension funds and other large investors allocating to real estate expect to make commitments to opportunity funds in the next 12 months, Preqin said.

Private-equity giants KKR & Co. and TPG Capital also are in the early stages of raising their first real-estate funds, which will focus on riskier investments, say people familiar with the matter. Starwood last month closed a $4.2 billion fund, well ahead of its initial $2 billion to $3 billion target, say people familiar with the fund. Brookfield Asset Management has raised about $2.8 billion for an opportunity fund that is targeting $3.5 billion.

During the downturn, many pension funds largely spurned risk and focused their real-estate investments on the safest, well-leased properties in the healthiest markets. But now they are straining to make these strategies work as high demand for these properties drives up prices.

Calpers acknowledged last month that the shift it started in 2011 from risk and toward more-stable property investments is proving tougher than it expected. It is becoming "hard for Calpers managers to make [real-estate] investments in which they can reasonably expect to generate returns in excess of" liabilities, the pension's real-estate consultant wrote the Calpers board.

While some opportunity funds aim for gold with new projects, others try to profit by turning around troubled buildings. Blackstone Group, which recently raised a record $13.3 billion opportunity fund, last month bought London's Adelphi Building for about £265 million ($412 million). That is a 19% discount from what the building fetched in 2007, but with a tenant occupying half the building departing, Blackstone will have to find a replacement.

Pension-fund investors embracing opportunity funds say they know it isn't a risk-free bet.

"The biggest risk, of course, is the downturn in the economy," says Steven Snyder, chief investment officer for the Oklahoma City Police Pension & Retirement System, who made two recent commitments to opportunity funds. "That could be a negative for our investment."

Mr. Schwartz of ORG says he has put clients such as the Texas Municipal Retirement System and state funds in Maine, Indiana and Kentucky in opportunity funds in part because these funds responded to investor complaints that went beyond poor performance.

I recently covered why the Caisse is betting on multi-family real estate. The Caisse's real estate division, Ivanhoé Cambridge, is one the best institutional real estate investors in the world, which is why it's well worth tracking their activity. They manage over $25 billion, have the internal expertise to go direct, co-invest with top funds as well as do deals with other large funds throughout the world.

I've also covered the pickup in real estate distressed debt investing, part of the reason behind the return of private equity giants. Why are some of the best funds ramping up their activity in this sector? It's obvious they see tremendous opportunities and are actively looking to capitalize on distressed properties, work them to sell them at much higher multiples.

CPPIB has been very active in real estate deals, partnering up with GE Capital Real Estate (GECRE) to invest in central Tokyo office properties and forming a a new 50%/50% joint venture with Hammerson to acquire a 33.3% stake in Bullring Shopping Centre for £307 million from the Future Fund.

Finally, while real estate is a stable asset class, Canadian pension funds are increasing their direct investments in infrastructure, an asset class with a much longer investment horizon than real estate and private equity. This is all part of the asset-liability matching, finding assets with long durations which can deliver the targeted actuarial rate of return.

PSP Investments recently bet big on airports in a deal that was attractively priced and will likely pay off nicely for their members as the global recovery takes hold. It also owns timberland stakes throughout the world, including New Zealand, where they own properties with Harvard Management Company and the New Zealand Superannuation Fund.

Below, Walker & Dunlop CEO Will Walker discusses commercial real estate on Bloomberg Television's "Market Makers." And Chaim Katzman, chairman of Gazit-Globe Ltd., talks about their success formula in commercial real-estate market.

Janet McFarland of the Globe and Mail reports, Ron Mock ascends to the top of Ontario Teachers' Pension Plan:

Ron Mock has completed his rise from the ashes of collapsed hedge fund firm Phoenix Research and Trading Corp., putting a controversial failure behind him to become the new chief executive officer of the Ontario Teachers’ Pension Plan.

Mr. Mock, 60, was named Tuesday as the successor to Teachers CEO Jim Leech, who is retiring at the end of the year. Mr. Mock is currently Teachers’ senior vice-president of fixed income and hedge funds, heading the largest of the pension plan’s six major asset management groups.

The appointment makes Mr. Mock just the third CEO to lead the $130-billion fund since its creation in 1990 to manage pension assets for 303,000 current and retired Ontario teachers. The fund was initially headed by Claude Lamoureux, who was succeeded in 2007 by Mr. Leech.

“I am very excited, because it’s not every day that someone gets to lead an organization like this,” Mr. Mock said in an interview. “Teachers is a leader in this field, and to be the one chosen to lead it, I’m thrilled.”

Before joining Teachers in 2001, Mr. Mock was CEO and co-founder of Phoenix Research and Trading, a hedge fund management company that collapsed in 2000 with losses of over $125-million (U.S.).

The failure came after Mr. Mock discovered bond trader Stephen Duthie had secretly taken a massive and unapproved $3.3-billion position in U.S. benchmark Treasuries in 1999.

Mr. Mock notified the Ontario Securities Commission about the discovery and reached a settlement agreement with the regulator in 2003, accepting a six-year prohibition from acting as a director or officer of a public company, and a reprimand after acknowledging he did not do enough to supervise Mr. Duthie’s trading. The OSC settlement said Mr. Mock’s supervision was “wholly inadequate” and the trading scheme could have been detected with scrutiny.

Mr. Duthie, meanwhile, received a 20-year ban from trading securities or acting as a director or officer of a company after an OSC hearing panel ruled he mispriced and hid a huge volume of unauthorized trading. The panel ruled his conduct was “duplicitous.”

Mr. Leech said in an interview the Teachers board considered Mr. Mock’s role at Phoenix, but felt he had broken no laws and had been a highly respected leader in his 12 years at Teachers.

“Anybody who has been in the securities business for 25-plus years is going to have some scars – Lord knows, I’ve got mine,” Mr. Leech said. “The name of the game is to make sure you learn, and he learned that the buck stops at the top.”

One of the victims of the firm’s collapse was Teachers itself, which lost $10-million on investments, Mr. Lamoureux said.

Mr. Lamoureux, who was Teachers’ CEO at the time, said he was initially astonished when another Teachers executive suggested the pension plan hire Mr. Mock in its hedge fund division.

But after conducting an investigation, Mr. Lamoureux said he became convinced the failure was the fault of the bond trader and Mr. Mock was not to blame.

“I think he had a rough time for a couple of years after he was hired because the OSC was all over him, when in fact he went to them of his own free will – and many people don’t do that,” Mr. Lamoureux said. “But we kept him, and I knew that the board of Teachers was very pleased with him when I was there. He did a great job on fixed income when he took that over.”

Mr. Lamoureux said fixed income had not been generating high enough returns when Mr. Mock joined Teachers, and he helped turn around its performance.

Mr. Mock is one of five senior vice-presidents at Teachers who run different portions of the fund’s investment portfolio.

“He did a fabulous job. I’ve been at many meetings with him with these hedge funds and you can see that Ron knew more than a lot of people who came to visit us and were trying to sell their stuff.”

Mr. Mock said Tuesday he is ready to oversee a far broader portfolio of assets. But with Mr. Leech still in the top job for another seven months, Mr. Mock said it is too soon to talk about his vision for Teachers or any changes he would foresee.

Katia Dimitrieva of Bloomberg also reports, Ron Mock Succeeds Jim Leech as CEO of Ontario Teachers:

Ron Mock, senior vice president of fixed income and alternative investments at Ontario Teachers’ Pension Plan, will succeed Jim Leech as chief executive officer and president next year.

Mock, 60, takes over Jan. 1 when Leech retires after 12 years with the plan and six years as CEO, the Toronto-based fund said today in a statement.

“I want to stay focused on ensuring we are the leader” in the pension plan industry, Mock said in a phone interview. “The world’s a changing place so you have to navigate the organization along the way. I’m comfortable with the team that’s here that we’ll be able to do it.” He declined to comment on his strategies or plans for Ontario Teachers.

Mock joined Teachers’ in 2001 as director of alternative investments and in 2008 was promoted to senior vice president, overseeing all fixed-income assets and hedge funds. He’s also a board member of Cadillac Fairview, which manages Teachers’ C$21 billion ($21 billion) commercial and retail real estate portfolio.

Mock was previously CEO of Phoenix Research and Trading Corp. and was responsible for all of Phoenix Canada’s fixed income business, including the Phoenix Fixed Income Arbitrage LP, a hedge fund. The hedge fund collapsed in 2000 when it lost $125 million in the U.S. bond market, according to an Ontario Securities Commission settlement document from 2003.
Probe Costs

The OSC ordered Mock to pay C$45,000 for investigation costs and banned him from being an officer or director for six years. The regulator said Mock failed to adequately supervise Stephen Duthie, a former Phoenix employee whose trading of U.S. government bonds was “directional, unhedged, and contravened” the company’s investment parameters. Mock’s failure to supervise Duthie was “material to the collapse” of the company, the OSC said.

“We were 100 percent aware of the OSC case and we are fully confident in his abilities and integrity,” Deborah Allan, spokeswoman for the pension fund said in an e-mailed statement. “What the OSC found was an oversight issue, however many years ago. We’re going into this with eyes wide open.”

Leech, 65, was chief executive of the pension fund during the financial crisis, raising net assets to C$130 billion. The fund manages money for 303,000 retired and active teachers in Canada’s most-populous province.

A committee made up of board members has been preparing for the succession since 2011.

Ontario Teachers' put out this press release announcing that Ron Mock will be succeeding Jim Leech on January 1st, 2014.

You will read a lot of news articles on Ontario Teachers' soon to be new chief but let me share with you why I believe Ron Mock is an incredible individual and why he will be an outstanding leader, continuing the organization's tradition of excellence, placing them among the best pension plans in the world.

I first met Ron back in 2002 when I was working as a portfolio analyst for Mario Therrien at the Caisse, covering directional hedge funds and a few fund of funds. That first meeting left a lasting impression on me. In fact, I was so blown away and kept thinking how I wish I worked for him.

I remember taking a lot of notes in that meeting. I was a junior asking an industry veteran a lot of questions. I was fascinated by hedge funds and didn't want to squander the opportunity to learn as much as possible from one of the world's best hedge fund investors.

Ron started the meeting by stating: "Beta is cheap but true alpha is worth paying for." What he meant was you can swap into any index for a few basis points and use the money for overlay alpha strategies (portable alpha strategies). His job back then was to find the very best hedge fund managers who can consistently deliver T-bills + 500 basis points in any market environment. "If we can consistently add 50 basis points of added value to overall results every year, we're doing our job."

He explained to me how he constructed the portfolio to generate the highest possible portfolio Sharpe ratio. Back then, his focus was mainly on market neutral funds and multi-strategy funds but they also invested in all sorts of other strategies that most pension funds were too scared to invest in (strategies that fall between private equity and public markets; that changed after the 2008 crisis). He wanted to find managers that consistently add alpha - not leveraged beta - using strategies that are unique and hard to replicate in-house.

At one point I asked him why is he was invested in over 130 hedge funds. That is when he brought up his experience at Phoenix Research and Trading Corp., the fixed income arbitrage fund he co- founded, and how a rogue trader led to its downfall. Ron took the fall for that blow-up, accepted full responsibility, and it cost him a lot on a personal and professional level.

But his experience at Phoenix also taught him the importance of covering operational risk. He was obsessed with operational risk and told me one reason of investing with so many funds was to diversify operational risk and mitigate blow-up risk. Till this day, the alternatives team at Teachers' along with the finance department conduct one of the most comprehensive due diligence on operational risk management (they even perform due diligence on administrators). They also make sure alignment of interests are there and not paying huge fees to large asset gatherers who fail to perform or deliver leveraged beta.

Ever since that first meeting, we kept in touch. I remember another meeting at the Caisse afterward where he spoke in front of Henri-Paul Rousseau, Gordon Fyfe and other senior managers. He wooed them all with his expert knowledge. Funny thing is he forgot a paper with his strategic plan on a piece of paper and came back to retrieve it before heading back to Toronto.

When I moved over to PSP Investments in 2003, I remember meeting him again with Gordon Fyfe, PSP's CEO and CIO.  He repeated a lot of the same stuff and took his time to explain to us their investment approach and process. Gordon and I came away from that meeting very impressed. "Nice guy and he really knows his stuff," Gordon told me after that meeting.

Yes, Ron Mock really knows his stuff, more than some of the hedge fund gurus I've invested with in the past. He has extensive experience and a network of contacts most pension fund managers and fund of hedge fund managers can only dream of. He's also one of the nicest guys I've ever met in this industry. He has been through hell and back but this is what makes him an incredible individual and an outstanding leader.

In my last conversation with him last week, we went through hedge fund strategies and alignment of interests. He told me that the "sweet spot" they find lies with funds managing between $500M and $2B. "Those funds are generally performance hungry and they are not focusing on marketing like some of the larger funds which have become large asset gatherers."he told me the hedge fund landscape is changing but he's dismayed at the amount of money indiscriminately flowing into the sector. "Lots of pension funds are in for a rude awakening."

I also told Ron that I'm going though a very rough patch struggling to find work. He took the time to listen to me, asked me how my health is, told me to stay positive and he will keep me in mind and help me in any way he can. It's that human side of Ron Mock that I really appreciate most and what I believe makes him a truly outstanding leader. He cares deeply about his team and the members of Ontario Teachers' Pension Plan.

On behalf of all those who know him well, I congratulate Ron Mock for this appointment. There is no doubt in mind he will continue the tradition of excellence that this organization is well known for. He has an outstanding team to back him up and I'm sure they feel the same way I do about him on a professional and personal level. Ontario Teachers' members are extremely lucky to have Ron Mock as their next leader.

Also want to congratulate Mario Therrien, my former boss at the Caisse, for being nominated Senior VP, External Portfolio Management in Public Markets. I hooked up with Mario for a coffee recently and told him that he offered me one of the best jobs in my life because I got to meet all sorts of interesting hedge fund managers. If it wasn't for that job, would have never met Ron Mock. I think highly of Mario too on a personal and professional level and know he will do a great job in his new role as a senior VP.

Let me end this comment by publicly asking Ron Mock, Mario Therrien, Gordon Fyfe, Michael Sabia, Mark Wiseman, Leo de Bever,  Jim Leech, Jim Keohane, and others that know my situation for their help. I have made my mistakes in the past, learned from them, and would like to move on and work at doing what I love doing most, researching and contributing positively to an organization. Now more than ever, if there is anything you can do to help me, it will be greatly appreciated.

Below,  Guggenheim Investment Advisors CIO Charles Stucke discusses hedge fund strategies with Deirdre Bolton on Bloomberg Television's "Money Moves." Wish it was Ron Mock being interviewed telling us where he thinks money is to be made in hedge funds and other strategies. I guarantee you he's busy working hard on his four-year strategic plan, always worried about the risks that lie ahead.

Alec MacFarlane of Financial News reports, Canadians continue UK push with Civica buyout:

The private equity arm of one of Canada’s largest pension funds has fended off bids from two of Europe’s largest buyout houses to buy UK software provider Civica from 3i Group, amid an increasing drive by Canada’s main pension funds to invest directly in the UK.

Omers Private Equity, the private equity arm of the Ontario Municipal Employees Retirement System, saw off the rival bids to buy Civica from 3i for an enterprise value of £390m.

3i, which bought Civica in 2008 in a £109m public to private transaction and has since completed 10 add-on acquisitions for the company, has generated total proceeds of £228m and a 2.1-times money multiple from the deal, according to a statement from 3i.

The business provides software systems, cloud-based IT services and technical outsourcing, primarily to public sector organisations such as local government, education, social housing, healthcare, and emergency services in the UK and around the world.

Private Equity News, a sister publication of Financial News, reported last week that Civica had also attracted bids from buyout firms Cinven and Apax Partners. Bain Capital, which expressed an early interest in Civica, earlier dropped out of the running, according to two people familiar with the matter.

Omers Private Equity said it will support the management team as they seek to capitalise on organic growth opportunities and make selective acquisitions. Civica’s management team will also reinvest and continue leading the business.

The deal represents Omers Private Equity’s fourth direct investment completed by its European private equity team since it set up its London office in September 2009.

The fund has since built up a London-based team of nine professionals led by senior managing director and former 3i dealmaker Mark Redman.

The team has completed deals including last year's acquisition of Lifeways from August Equity, the 2011 buyout of ship management firm V Group from Exponent Private Equity and a 2009 investment in Haymarket Financial, a provider of credit financing to mid-market businesses.

The Civica deal comes amid an increasing push by Canadian pension funds to invest directly in the UK.

Alberta Investment Management Corporation, the Canadian sovereign wealth fund which made headlines in 2010 with its attempt to buy Candover Investments, is in the process of finalising a move to London within the next six months.

Aimco intends to do all of its private equity investing directly and has previously said it is looking for deals with an enterprise value of between $200m and $500m.

Last year Teachers Private Capital, the private equity arm of Ontario Teachers’ Pension Plan, appointed the former head of venture capital at 3i, Jo Taylor, to head its London office.

The deal also highlights the increasing push by Canada's pension funds away from private equity fund investments and into direct investing. Canadian pension funds completed 27 deals worth $13.1bn globally last year, representing the most acquisitions ever completed, according to data provider Dealogic.

You read articles like this and come away thinking that Canadian pension funds are increasingly going direct, shunning private equity funds, and succeeding on their own without needing to invest in top funds.

Unfortunately, all this hoopla of going direct in private equity is just a lot of hot air. Had a chat with a senior US pension fund manager yesterday who set the record straight. He told me "funds and co-investments still make up the bulk of private equity activity at the largest Canadian pension funds and they increasingly need these fund relationships to deliver their target performance."

The numbers he provided me proved his point. Unfortunately, Canadian public pension funds do not provide a detailed breakdown of their direct investments in private equity so we don't know what percentage is direct and what percentage is fund and co-investments. We also don't know the performance of direct investments, net of all costs, so it's hard to gauge the success of these programs.

What I can tell you is that a senior pension fund officer at CPPIB told me that their private equity investments are done through co-investments with funds. CPPIB provides us with a complete list of their private equity fund partners, many of which are brand name funds well known to pension funds throughout the world.

This senior officer at CPPIB also confirmed that the media exaggerates claims of direct investing in private equity at Canadian pension funds. "At CPPIB, we co-invest with funds because this is how we believe we can add value in private equity. We do direct investments in infrastructure and real estate but not in private equity. We just can't compete with top private equity funds and neither can other Canadian pension funds."

The problem is that even top private equity funds are not delivering in this environment. In my comment on the return of private equity giants, I discussed how KKR is beating its rivals Carlyle and TPG Capital in terms of outperformance in their Asian funds, stating this from a Bloomberg article:

KKR has had a more stable Asia team than its peers since it came to Asia in 2005, with no departures among its partners, and has made fewer mistakes in its investment decisions, according to two investors considering participating in the firm’s second fund who asked not to be identified. KKR is also good at managing client relationships by keeping investors posted on its portfolios, they said.

The senior US pension fund manager told me their group is increasingly looking at the governance of their private equity funds. "If the decision-making is concentrated in a few hands, we won't invest. We want to see stable teams and all the partners taking decisions at the top, not just one or two people. Also, transparency is a must for us."

He also told me that they're increasingly looking at deal terms and negotiating hard on fees no matter which fund they invest with. "There are some excellent new private equity funds but if the terms aren't right, we won't invest, even if other large pension funds have invested with them."

The point I'm trying to make in this comment is that going direct makes sense in some investments but in private equity, it's a tough slug. Yes, there are direct investments in private equity, and very talented individuals at the large Canadian pension funds who are striking excellent deals. But let's not exaggerate their direct investment capabilities or distort the reality which is that large Canadian public pension funds still rely on top funds to deliver results in private equity.

Finally, had a chance to speak with Bill Hatanaka, president and CEO of the OPSEU Pension Trust (OPTrust). I recently covered their results along with those of CAAT. He told me that OPTrust has a large allocation to alternatives, almost all through external funds. The numbers he provided me are 11% in Infrastructure, 15% in Real Estate and 5% in Private Equity, which they're looking to increase. They also invest in external hedge funds and public market funds.

Mr. Hatanaka is relatively new to this position (6 months) and gave full credit to his internal team for an "outstanding job" at selecting and monitoring external managers. He told me the push into alternatives is a direct consequence of the historic low bond yields which makes it harder to achieve actuarial targets.

You might wonder whether the fees paid to external managers are worth it but if OPTrust is delivering the results their plan requires, remaining fully-funded, then what is wrong with using external managers? Julie Cays, CIO at CAAT told me they invest in external managers  including a few hedge funds because "it diversifies risk, operations, people, processes and philosophies. There are many benefits to investing with some of the sharpest minds in the industry."

The point is that while large Canadian pension funds have the internal resources and governance to go direct, most funds prefer investing through external funds and some are are delivering excellent results. There is a lot of misinformation on direct investing and while there are risks and costs associated with investing through funds, there are enormous benefits too. Keep this in mind the next time you hear about the benefits of the "Canadian model" of investing directly.

Those of you who want to understand why direct investing is more complicated than it sounds can go to this Privcap video featuring Drew Guff, Managing Director at Siguler Guff and head of their direct investing business (subscription required).

Also, Bob Rice, author of The Alternative Answer, explains why institutions have an advantage over individuals investing in absolute return, private equity, water rights, farm land and timberland. Keep this in mind the next time someone tells you C/QPP expansion is bad news for Canadians.

Below, there are several bright spots for private equity, including opportunities overseas. Hamilton Lane chief investment officer Erik Hirsch joins the WSJ's MoneyBeat to discuss trends in private equity. Indeed, the landscape for private equity looks good, benefiting PE giants. Hopefully, echoes of a  bond bubble won't rain on their parade.

Richard Barley of the Wall Street Journal reports, Bonds Hear Bubble Echoes:

The squeeze is on. Persistently low yields on safe-haven government bonds and ultra-loose central-bank policy are pushing money into European credit markets. Portugal is the latest beneficiary, selling its first 10-year bond since its bailout in 2011, but it isn’t alone. Investors are increasingly buying riskier corporate bonds. The problem is that the underlying economic fundamentals look as poor as ever.

Portugal’s €3 billion ($3.92 billion) bond attracted orders of €10.2 billion, despite offering little premium to the government’s outstanding paper. Yields on 10- year Portuguese bonds are less than 5.5%, down about 6.5 percentage points in the past year or so.

For Portugal, the benefit is clear: It has covered its 2013 funding needs and is regaining market access. For investors, it isn’t so clear-cut. They are betting that if Portugal is to run into trouble, it is a ways off yet. For now, Europe won’t risk a disruptive debtrestructuring exercise, even if many worry that Portugal’s poor track record of growth means it is ill- equipped to cope with debt that hit 123.6% of GDP at the end of 2012.

Meanwhile, the European “junk” bond market is seeing bumper issuance even as yields have fallen to record lows, with the Barclays nonfinancial high-yield index now yielding just 5.17%. The cost of insuring blue- chip corporate debt via the Markit iTraxx Europe index has fallen to its lowest since April 2010— before Greece’s first bailout. Investors are snapping up complex hybrid bonds that blend features of debt and equity.

True, corporate balance sheets are in better shape than those of many sovereigns. But the growth outlook for Europe remains poor, and there are continuing worries about the U.S. and China. The banking system in Europe remains a brake on economic growth. Even companies able to borrow cash virtually free aren’t using that to boost investment: Apple’s $ 17 billion record- breaking corporate bond was issued simply to return cash to shareholders.

Many investors acknowledge the dangers here: Too much money chasing too little paper, a throwback to the pre-crisis bubble days, except at far lower yields. But, in another echo of the bubble, they also say they can’t identify a near- term catalyst for the merry-go-round to stop. Without a real recovery or a renewed slump, expect cash to continue to flow into risky bonds.

What is going on? Why are European and US junk bonds rallying so hard? Is this a massive bubble which risks imploding, sending the world into another great depression or is this a sign that the worst is behind us and the global recovery is well underway?

Niels Jensen of Absolute Return Partners wrote another excellent monthly letter, In the long run we are all in trouble. Jensen begins his comment by recalling the misfortunes of Tony Dye, one of Britain’s best known fund managers in the 1990s:

As equity markets became more and more expensive towards the end of the decade, he became increasingly adamant that markets were overvalued and began to reduce his equity exposure. In 1999 his firm was 66th out of 67 in the UK equity league tables and in February 2000 he was sacked for poor performance. Within a few weeks of his dismissal, the FTSE peaked and one of the largest bear markets of all times began, all of which taught me a very important lesson – poor timing can ruin even the best investment decisions.

He goes on to explain why inflation remains subdued, why quantitative easing hasn't spurred bank lending, how the long-run outlook for equities is bleak and how France is the real zombie of Europe. And yet despite this, he ends the May letter by stating:

Now, you may well deduct from all of this that I am as bearish as I have ever been, but nothing could be further from the truth. The issues I have discussed in this month’s letter are clouds on the horizon which are likely to take years to play out and, in the meantime, investors will continue to be preoccupied with far more mundane issues. All I know is that financial markets cannot stay disconnected from economic fundamentals forever so, ultimately, the Tony Dyes of the world will be proven right. Unless they lost their jobs beforehand, that is.

In his latest quarterly economic outlook, Lacy Hunt of Hoisington Investment Management also echoes similar concerns, discussing the continuing risk of deflation and what this means for asset prices. He ends his comment discussing "irrationality" in markets:

Credible academic research indicates that economic growth deteriorates when debt to GDP reaches critical levels - a condition that has now been met in countries that represent 75% of global GDP. When this reality is coupled with the Fed’s inability to create money growth or inflation, the result will invariably be slow nominal GDP growth.

The financial and other markets do not seem to reflect this reality of subdued growth. Stock prices are high, or at least back to levels reached more than a decade ago, and bond yields contain a significant inflationary expectations premium. Stock and commodity prices have risen in concert with the announcement of QE1, QE2 and QE3. Theoretically, as well as from a long-term historical perspective, a mechanical link between an expansion of the Fed’s balance sheet and these markets is lacking. It is possible to conclude, therefore, that psychology typical of irrational market behavior is at play. This suggests that when expectations shift from inflation to deflation, irrational behavior might adjust risk asset prices significantly.

Such signs that a shift is beginning can be viewed in the commodity markets. The CRB Commodity Index peaked about two years ago at 691, but now stands at 551, a 20% decline despite massive Fed balance sheet expansion. The ability of the Fed to arrest a downside irrational move in risk assets may be limited. Non-risk assets, such as long dated U.S. treasuries, should benefit from this shift in perception.

Money manager Dan Arbess, a partner at Perella Weinberg and chief investment officer at PWP Xerion Funds, startled participants at the Milken Institute Global Conference, stating deflation is a 'persistent risk':

We've been wrong to assume that the economic crisis is over, Arbess said. We stopped the crisis from reaching Great Depression levels through drastic fiscal actions such as TARP and the Obama administration's fiscal stimulus. But almost as suddenly as we started, we stopped these efforts, which Arbess says has resulted in us being "mired down" for the past four years.

What's kept us afloat has been monetary policy, but that's now reaching its limits, according to Arbess. The threat of deflation is once again rearing its head.

"The persistent risk in our economy is deflation not inflation," Arbess said.

His proposed solution is that we start directly funding government expenditures through the central bank. That is, we should stop relying on taxes or further debt issuances to finance government—or at least reduce our reliance on taxes and bonds. Just let the Federal Reserve pay the government's bills by exercising its money creation powers.

If deflation is a persistent risk, it suggests risk assets are grossly overvalued and that a rude awakening is on the horizon. It also suggests that investors are better off buying bonds, even at these record low yields and the facade of strength in the stock market is a chimera.

Another possible catalyst for global deflation is the seismic shift going on in Japan. Michael Casey, managing editor for the Americas at DJ FX Trader, wrote an interesting comment for MarketWatch on how deflation risks being Japan's biggest export, noting the following:

For now, investors in foreign markets are celebrating. With the dollar higher across the board and gold and other commodities lower, the disinflationary forces unleashed by Japan are giving other central banks room to follow its lead, exemplified by the European Central Bank’s and the Reserve Bank of Australia’s rate cuts this past week. In response, the Dow Jones Industrial Average has punctured 15,000 and the once alarmingly high bond yields of peripheral euro-zone countries are down at levels not seen since the pre-crisis bubble years.

But this virtuous circle can yet turn vicious. Together, the U.S. Federal Reserve and the Bank of Japan will print the equivalent of $155 billion every month for an indefinite period. With yield opportunities getting ever slimmer in the developed world, that flood of money will inevitably slosh into whatever currencies still offer a modicum of interest rate “spread.” (Even at a record low 2.75%, benchmark Aussie rates pay markedly more than the near-zero returns on the dollar or yen.) And this week, governments and central banks in various countries have taken action against currency appreciation. The term “currency war” has fallen out of vogue, but the forces that stirred those fighting words two years ago are alive and well.

As I've stated before, talk of a global currency war is way overblown but there is no doubt that the weaker yen is raising hope and fear. So far, the G7 indicated they will tolerate a sliding yen for now as they intensify their focus on Japan's recovery strategy. Still, Soros is reportedly shorting the Aussie dollar and others are worried that Canada is heading for a fall.

Global asset allocators have to understand the macro environment and how central banks are influencing asset prices across the world. For example, Japanese pension funds and insurance companies shifting out of JGBs into global bonds will drive down yields of Treasuries, European sovereign debt and high-yield bonds in the US and Europe even lower. This will propel global equity markets even higher.

Is this a time to be taking on more or less risk? It's a tough environment from a valuation standpoint but if you look at the return of private equity giants, you would conclude they are not too worried of a global collapse anytime soon. Quite the opposite, they see opportunities across the world and are feverishly competing for allocations to capitalize on these opportunities.

Similarly, hedge funds' bullish bets on commodities is at a 6-week high, signalling a global recovery is in the offing. Another story that caught my attention is how top hedge funds like Farallon Capital, York Capital Management, QVT Financial, CQS and Third Point are set to participate in the recapitalization of Greek banks.

Why are these hedge funds willing to take such huge risks? The biggest reason is that they have been lured to participate because of the potential returns they can make through special warrants attached, for free, to the new issue of bank shares.  As one money manager said: “It is free leverage with limited downside. A 50 per cent move in the share price would result in a 400 per cent increase in the warrant value.”

But another reason is that the word's best and brightest hedge fund managers are not buying the gloom and doom in Europe and elsewhere. They're clearly taking intelligent risks with asymmetric payoffs but the point I'm making is that they are taking risk, not focusing on all the noise in the markets.

Let me end this comment by plugging an excellent fund here in Montreal, Hexavest, an investment firm that specializes in equities and tactical asset allocation for institutional clients. I recently met Vital Proulx, their president and chief investment officer, and came away thoroughly impressed with their process and their values. Vital is extremely nice and very sharp, explaining to me their process, performance and risk management.

Hexavest recently announced a strategic partnership with Eaton Vance to help them with distribution around the world. Vital told me they are very happy because it allows them to focus on performance and Eaton Vance is an excellent partner with global reach. If you're looking for a top long-only global equities fund that understands the macro environment, I highly suggest you take a close look at Hexavest, one of the best funds in Canada and one of the few Montreal success stories (sad how the city's financial industry is shrinking).

Below, Gary Shilling, Bloomberg View Columnist, discusses inflation, deflation, and central bank actions. He spoke on Bloomberg Television's "Bloomberg Surveillance," explaining why inflation alarmists are wrong and why deflation and deleveraging will depress asset prices.

On the other side of the trade, Jeremy Siegel, professor of finance at the University of Pennsylvania's Wharton School, talks about the U.S. economy and stock and bond markets. He speaks with Trish Regan and Adam Johnson on Bloomberg Television's "Street Smart." Steve Forbes, chief executive officer of Forbes Inc., also speaks.