Sunday 22 September 2013

CalPERS provides superb reading list database on Corporate Sustainability research

Kudos to pension fund giant CalPERS for making available a fantastic resource for investors wanting to find out how long term company success and stock returns can be influenced by paying attention to sustainability factors like governance, social responsibility and environmental performance, especially climate change effects. CalPERS has compiled a searchable database of 700+ papers on the subject and it has produced a review report with concise summaries of the most relevant / cited papers.

I have not had time to go through it all yet, but one interesting tidbit is that three years ago it decided to stop "naming and shaming" companies on its Focus List and instead undertake direct confidential private engagement. The new tactic pays off much better in the stock returns of target companies. (I bet CalPERS is the organization Dimson et al used in their study, which we noted in this post a few days ago.)

Thursday 19 September 2013

Evolution beyond traditional investment principles at pension fund CalPERS

The California Public Employees' Retirement System (CalPERS, 6th largest pension fund in the world, a lot bigger than Canada's national CPPIB), new guiding investment beliefs, includes some thought-provoking elements:
  • Liabilities must influence the asset structure - CalPERS has a large and growing cash requirement and inflation-sensitive liabilities; assets that generate cash and hedge inflation should be an important part of the CalPERS investment strategy
  • CalPERS is willing to be activist, preferably by direct engagement, where it can make a material difference to portfolio return or risk (like governance especially, plus social and environmental factors that affect long-term sustainability) and where it has a chance of success
  • Strategic asset allocation is the dominant determinant of portfolio risk and return ... but Risk to CalPERS is multi-faceted and not fully captured by volatility or tracking error e.g. climate change and natural resource availability are considered long term risk factors; the path of returns matters
  • Costs matter and need to be effectively managed, including alignment of compensation between fund interests and those of staff or external managers
These principles would seem pertinent, partly for my own retirement investing. But they also would apply, I believe, to assessing the characteristics of proposed pension reform options in Canada - which of PRPPs, DC pension funds, CPPIB conforms best?

Wednesday 18 September 2013

Active ownership pushing Corporate Social Responsibility pays off

When companies are pushed by institutional investors to improve their governance practices and to do something about climate change, they tend to actually do something. And shareholders benefit with better operating performance by the company and stock price gains. So conclude Elroy Dimson, Oğuzhan Karakaş, and Xi Li in Active Ownership.

There is now quite a lot of research showing a positive association between Corporate Social Responsibility action and better accounting performance and stock gains (see literature reviews within the paper) but Dimson et al making a convincing claim that the link is causal i.e. action can produce results. They accessed the records of a big activist institutional investor and linked specific interventions or engagements with subsequent acceptance or refusal by the target corporations and then with the accounting/stock data. Accounting measures they used included return on assets, gross profit margin, asset turnover and sales per employee.

A few types of action matter most ...
There is a whole slew of CSR actions they list but only a few seem to have the most beneficial impact for shareholders.
  1. Successful engagements, where the company ends up making a change, garner 4.4% cumulative abnormal positive returns, vs no returns for unsuccessful engagements
  2. Corporate governance (+7.1% abnormal return) and climate change (+10.6%!!) successful engagements have the most impact
  3. Large, mature, poorly performing firms with poor existing governance who are image sensitive are the best targets
  4. Direct engagement like telephone calls and letters do the job. In contrast, traditional shareholder activism like voting on resolutions at annual meetings doesn't.
Today's news in the Globe that Barrick Gold (TSX: ABX) will be making changes to board composition and executive compensation after a group of pension funds complained seems to be a perfect example of what the Dimson study found. There hasn't been a big turnaround in Barrick's stock price yet, so maybe this is the time to buy into ABX. Tangible accounting improvements happen typically within 12 months or so according to the study. Probably the pension funds will be adding to their stakes since the study found that an effect of successful engagements was an increase in activist institutional ownership.

The causal mechanism ... evidence though not proof
How does company performance and share price improve, the authors ask? As they cautiously note, their findings are "consistent" with:
  • increased customer loyalty, which gives the company pricing power
  • virtuous companies attract a clientele amongst CSR-activist investors
  • increased employee satisfaction / loyalty, which helps efficiency 
A challenge to passive index ETF investing and traditional active funds too
Correct me if I'm wrong but passive index ETFs are, um, passive. They don't do this kind of active intervention. Note who approached Barrick - Canada Pension Plan Investment Board, the Ontario Teachers’ Pension Plan and Caisse de dépôt et placement du Québec, as well as Alberta Investment Management Corp; British Columbia Investment Management Corp; Hermes Equity Ownership Services; Ontario Municipal Employees Retirement System; and Public Sector Pension Investment Board (from Toronto Star April 19, 2013). ETFs just vote their shares following the recommendations of an advisory service or its own policy, such as BlackRock's (provider of iShares) in its Prospectus. But voting is all BlackRock does. And though it voted against (link through to voting records here) Barrick's excessive executive compensation package, it was not part of the group that publicly engaged Barrick. As Dimson et al note, mere voting doesn't work for shareholders.

Actively managed mutual funds seem to follow the same tack, of voting and resolutions only (proxy voting policies here). They vote, but when unhappy they sell instead of engaging the company. Update: This Gilson & Gordon paper on SSRN says this: "The business model of key investment intermediaries like mutual funds, which focus on increasing assets under management through superior relative performance, undermines their incentive and competence to engage in active monitoring of portfolio company performance."

Hedge funds are a different animal, whose high-profile activism most often aims at mergers, acquisitions and divestitures. Hedge fund Hershing Square is the one who took on Canadian Pacific, with CPPIB's support. Individual retail investors don't have access to hedge funds anyway.

Pension reform implications?
I think I'd rather have my money in CPPIB than iShares' XIU. It's better for the companies and for me.

Tuesday 17 September 2013

The 2008 Financial Crisis - why Canada Got Off Lightly

For those who like their explanations brief, this quote from Gordon Nixon, Royal Bank CEO: "But in my judgment the single most relevant and most important differentiator for Canada was the structure of our residential mortgage market." i.e. no toxic assets (from the Globe and Mail's excellent oral history of the financial crisis)

The world of giant money managers and the advance of passive index ETF investing

The Royal Bank may be the biggest company by market cap in Canada but Manulife is a far bigger money manager according to the 2012 P&I / Towers Watson World 500 list. (Access to most stuff on the Pension & Investments website requires free registration) The year-end 2011 data published last October puts Manulife in 34th spot worldwide with $490 billion vs only #53 Royal's mere $308 billion. Others insurers Sun Life (#37, $456 billion) and Great West (#48, $357 billion) also come ahead of the Royal.

The slide deck also highlights other interesting facts:
  • Canada has progressed strongly since 2001 and now looks to be about 6th largest in assets managed by country
  • Manulife and Great West have been among the fastest growing asset managers
  • passive managers have been picking up share, growing faster than the overall average for years, as shown by the chart below, led by #1 behemoth Blackrock, #3 State Street and #4 Vanguard

  • the shift to passive index investing is also remarked in this September 16th article based on 2013 6-months data; both Blackrock and State Street folk note the surge in their index funds amongst the overall market 18.4% rise in index assets
  • and another article notes that it is ETFs where the growth is occurring

The above rankings do not include big pension funds, which are in a separate list, the P&I/Towers Watson World 300. In that list, published September 2nd this year with data to end of 2012, the Canada Pension Plan Investment Board (CPPIB) comes #9 in the world with a mere $184 billion, with Ontario Teachers #17 at $130 billion, OMERS #46 with $61 billion. There are various other public service plans in the list before one reaches the largest private company pension plan in Canada - Bell Canada #216 in the world with $17.8 billion in assets. The amounts are relatively puny compared to the assets managed by private managers. Manulife and Sun Life alone manage more assets than all the 19 big Canadian pension funds amongst the world's top 300 put together.

Now we know who controls the money but they mostly don't actually manage it since their method is dominantly passive index investing. It would be more accurate to say they administer the money. The pension funds on the other hand are more a mix of active investing, as we have observed at the CPPIB (and increasingly activist too i.e. trending towards responsible investing). So maybe the pension funds do set the direction of markets.

Monday 16 September 2013

Excellent Primer on Canadian Health Care Stocks

Interested in the investing idea that the ageing baby boomers will create a boom in health care stocks? Want to self-insure by buying shares in a retirement residence company? Read the 2012 Canadian Healthcare Annual Review of January 2013 from TMX Equicom for a good view of the reality and the companies out there, grouped in helpful categories. The paper is a useful primer on healthcare and biotech companies in Canada. Life is not easy for the sector, what with difficulties finding successful products, public healthcare budget restrictions limiting chances even for good new products, generic drug competition, and even competition for required development capital from junior resource companies.

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