March 31, 2009

Wouldn’t you know it! No sooner do I award plaudits to HOOPP and point out the wonderful thing about being an independent fund manager with a captive clientele (March 25) than the Ontario government comes up with a thoroughly lunatic scheme to make Teachers’ compete for clients:

The government is introducing legislation that, if passed, would expand the mandate of the Ontario Teachers’ Pension Plan (OTPP) Board if the government and the Ontario Teachers’ Federation (as Partners of the Plan) agree. The amendment would permit the OTPP Board to provide pension administration and investment services to other pension plans and institutional investors in the public sector.
  • Benefits would include higher revenues for the OTPP Board, lower administrative costs and enhanced investment opportunities for future OTPP clients.
  • This change is consistent with recommendations of the Expert Commission on Pensions that large pension plans be permitted to offer their services to smaller pension plans to improve investment returns for Ontario pension plans and others

The empire builders and salesmen-wannabes at Teachers’ are thrilled:

“The Ontario government’s proposed amendment to the Teachers’ Pension Act represents an encouraging step forward towards pension reform for thousands of Ontarians,” said Jim Leech, President and CEO of the Ontario Teachers’ Pension Plan (Teachers’). The amendment was introduced as part of the Ontario government’s 2009 budget.

“This move would allow us to help smaller pension plans and other institutions meet their beneficiaries’ needs,” he said. “We could pool significantly large amounts of capital and make our resources, such as our direct investing expertise, available to manage their funds. Their beneficiaries would benefit in gaining expertise, scope and scale.”

You can tell he’s been booking up for this opportunity. He’s using the same words every single investment manager that has ever existed in the history of the entire universe has used to flog his funds.

The report itself completely misses the point:

However, lower investment fees are but one of the many advantages enjoyed by large plans over smaller ones and over individual savers. In terms of income generation, large plans are in a position to hire expert staff to initiate and execute their investment strategies, to make attractive private placements of their investment funds, and to spread the investment risk by acquiring a wider range of investment vehicles. In terms of administrative expense, large plans are able to reduce their unit costs of administration by spreading them across a large plan membership, and they are typically able to offer members enhanced levels of information, education and service. Finally, large plans are more likely to survive than smaller ones, if only because the enterprises (or groups of enterprises) that sponsor them are likely to be more stable or resilient than those that sponsor small plans.

The cumulative effect of all of these advantages is extremely significant. It is so significant, in fact, that plan size may be a greater determinant of a member’s pension than plan design. Or, to make a more modest claim — holding plan design constant — large plans will generally perform better than small ones.

Modest claim, eh? There’s a very easy way to test this: look at the performance of investment managers by AUM and come up with a correlation between size and performance. After all, a large manager has the same ability to “hire expert staff”, “make attractive private placements” and “spread investment risk”. Sadly, the so-called expert commission does not appear to have thought of such a real-world test of their hypothesis.

Incredibly, there are still some people who believe that markets are efficient, notwithstanding the immense profitability of dealers’ proprietary trading and evidence that mutual fund investors have real difficulties getting their timing right. Correct me if I’m wrong, but shouldn’t it be true that if one clearly identifiable group is underperforming the market (pre-fees), then their should be another clearly identifiable group that is outperforming? Just wondering. Somebody has to, the Expert Commission isn’t.

In the investment business, sales isn’t simply a slight extra cost stuck on to the firm’s expenses. Sales is pervasive throughout the organization; from coming up with an interesting story to tell, through avoiding ‘fessing up to mistakes and all the way through to hiring good talkers in preference to good doers until, in the end, investment management is viewed as just another irritating expense rather than the organization’s raison d’etre. And that, ladies and gentlemen, is what costs the money; not piddly little management fees. Not transaction fees either, although transaction costs might.

Teachers can only hope that the proportion of external assets attracted by their manager will remain at less than 10% of the total – say another $10-billion. At that level, sales really will be simply an addendum to the real business of investment management. Any higher though, and there’s a real risk that investment management will become an addendum to the real business of sales.

March came in a lion and left like a lamb, with the PerpetualDiscount market having a great day on decent volume to close with a yield of 7.29%, equivalent to 10.21% at the standard equivalency factor of 1.4x. Long corporates continue to yield a BORING 7.5% (maybe just a hair under), having returned +2.74% over the month, so the pre-tax interest-equivalent spread is ending the quarter at 271bp … still elevated by all but recent standards.

Happy birthday, Malachite Aggressive Preferred Fund!

HIMIPref™ Preferred Indices
These values reflect the December 2008 revision of the HIMIPref™ Indices

Values are provisional and are finalized monthly
Index Mean
Current
Yield
(at bid)
Median
YTW
Median
Average
Trading
Value
Median
Mod Dur
(YTW)
Issues Day’s Perf. Index Value
Ratchet 0.00 % 0.00 % 0 0.00 0 0.8383 % 870.3
FixedFloater 0.00 % 0.00 % 0 0.00 0 0.8383 % 1,407.4
Floater 4.55 % 5.49 % 63,344 14.68 3 0.8383 % 1,087.2
OpRet 5.23 % 4.75 % 130,600 3.87 15 0.3859 % 2,073.3
SplitShare 6.77 % 9.63 % 47,467 4.78 6 2.7153 % 1,644.0
Interest-Bearing 6.19 % 9.96 % 32,922 0.72 1 0.1032 % 1,927.6
Perpetual-Premium 0.00 % 0.00 % 0 0.00 0 1.0363 % 1,516.3
Perpetual-Discount 7.16 % 7.29 % 154,090 12.21 71 1.0363 % 1,396.5
FixedReset 6.12 % 5.91 % 796,648 13.68 33 0.4436 % 1,824.9
Performance Highlights
Issue Index Change Notes
BNA.PR.B SplitShare -1.82 % Asset coverage of 1.7-:1 as of February 28, according to the company. This should increase somewhat for 3/31, as BAM.A closed at 16.86 on Feb. 28 and 17.57 on Mar. 31.
YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2016-03-25
Maturity Price : 25.00
Evaluated at bid price : 20.53
Bid-YTW : 8.51 %
BAM.PR.O OpRet -1.70 % YTW SCENARIO
Maturity Type : Option Certainty
Maturity Date : 2013-06-30
Maturity Price : 25.00
Evaluated at bid price : 21.38
Bid-YTW : 9.25 %
RY.PR.H Perpetual-Discount -1.38 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2039-03-31
Maturity Price : 21.45
Evaluated at bid price : 21.45
Bid-YTW : 6.69 %
RY.PR.R FixedReset -1.17 % YTW SCENARIO
Maturity Type : Call
Maturity Date : 2014-03-26
Maturity Price : 25.00
Evaluated at bid price : 25.45
Bid-YTW : 6.11 %
BMO.PR.H Perpetual-Discount -1.02 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2039-03-31
Maturity Price : 19.50
Evaluated at bid price : 19.50
Bid-YTW : 6.91 %
BNA.PR.C SplitShare 1.00 % Asset coverage of 1.7-:1 as of February 28, according to the company. This should increase somewhat for 3/31, as BAM.A closed at 16.86 on Feb. 28 and 17.57 on Mar. 31.
YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2019-01-10
Maturity Price : 25.00
Evaluated at bid price : 11.11
Bid-YTW : 15.86 %
ELF.PR.G Perpetual-Discount 1.02 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2039-03-31
Maturity Price : 13.25
Evaluated at bid price : 13.25
Bid-YTW : 9.02 %
HSB.PR.C Perpetual-Discount 1.04 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2039-03-31
Maturity Price : 17.50
Evaluated at bid price : 17.50
Bid-YTW : 7.35 %
GWO.PR.G Perpetual-Discount 1.04 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2039-03-31
Maturity Price : 17.43
Evaluated at bid price : 17.43
Bid-YTW : 7.53 %
TD.PR.A FixedReset 1.07 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2039-03-31
Maturity Price : 22.71
Evaluated at bid price : 22.75
Bid-YTW : 4.49 %
BNS.PR.K Perpetual-Discount 1.14 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2039-03-31
Maturity Price : 17.70
Evaluated at bid price : 17.70
Bid-YTW : 6.93 %
BNS.PR.M Perpetual-Discount 1.15 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2039-03-31
Maturity Price : 16.66
Evaluated at bid price : 16.66
Bid-YTW : 6.90 %
RY.PR.F Perpetual-Discount 1.22 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2039-03-31
Maturity Price : 16.55
Evaluated at bid price : 16.55
Bid-YTW : 6.84 %
TD.PR.Y FixedReset 1.26 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2039-03-31
Maturity Price : 21.66
Evaluated at bid price : 21.70
Bid-YTW : 4.48 %
BMO.PR.J Perpetual-Discount 1.27 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2039-03-31
Maturity Price : 16.70
Evaluated at bid price : 16.70
Bid-YTW : 6.85 %
NA.PR.L Perpetual-Discount 1.28 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2039-03-31
Maturity Price : 17.46
Evaluated at bid price : 17.46
Bid-YTW : 7.08 %
NA.PR.N FixedReset 1.30 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2039-03-31
Maturity Price : 23.22
Evaluated at bid price : 23.30
Bid-YTW : 4.49 %
NA.PR.M Perpetual-Discount 1.31 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2039-03-31
Maturity Price : 20.81
Evaluated at bid price : 20.81
Bid-YTW : 7.35 %
CM.PR.I Perpetual-Discount 1.34 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2039-03-31
Maturity Price : 15.88
Evaluated at bid price : 15.88
Bid-YTW : 7.42 %
GWO.PR.I Perpetual-Discount 1.36 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2039-03-31
Maturity Price : 14.90
Evaluated at bid price : 14.90
Bid-YTW : 7.62 %
CM.PR.E Perpetual-Discount 1.56 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2039-03-31
Maturity Price : 18.85
Evaluated at bid price : 18.85
Bid-YTW : 7.45 %
CM.PR.G Perpetual-Discount 1.61 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2039-03-31
Maturity Price : 18.26
Evaluated at bid price : 18.26
Bid-YTW : 7.41 %
BNS.PR.R FixedReset 1.62 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2039-03-31
Maturity Price : 21.96
Evaluated at bid price : 22.00
Bid-YTW : 4.56 %
PWF.PR.M FixedReset 1.63 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2039-03-31
Maturity Price : 24.95
Evaluated at bid price : 25.00
Bid-YTW : 5.38 %
RY.PR.I FixedReset 1.72 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2039-03-31
Maturity Price : 22.96
Evaluated at bid price : 23.00
Bid-YTW : 4.37 %
PWF.PR.L Perpetual-Discount 1.73 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2039-03-31
Maturity Price : 16.42
Evaluated at bid price : 16.42
Bid-YTW : 7.95 %
DFN.PR.A SplitShare 1.75 % Asset coverage of 1.5+:1 as of March 13, according to the company. Since then, XFN has improved from 14.17 to 14.70.
YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2014-12-01
Maturity Price : 10.00
Evaluated at bid price : 8.15
Bid-YTW : 9.63 %
RY.PR.A Perpetual-Discount 1.77 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2039-03-31
Maturity Price : 17.22
Evaluated at bid price : 17.22
Bid-YTW : 6.57 %
SLF.PR.D Perpetual-Discount 1.81 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2039-03-31
Maturity Price : 14.61
Evaluated at bid price : 14.61
Bid-YTW : 7.69 %
GWO.PR.H Perpetual-Discount 1.83 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2039-03-31
Maturity Price : 16.13
Evaluated at bid price : 16.13
Bid-YTW : 7.59 %
TD.PR.S FixedReset 1.85 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2039-03-31
Maturity Price : 21.50
Evaluated at bid price : 21.50
Bid-YTW : 4.39 %
BAM.PR.K Floater 1.87 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2039-03-31
Maturity Price : 7.61
Evaluated at bid price : 7.61
Bid-YTW : 5.77 %
ELF.PR.F Perpetual-Discount 1.89 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2039-03-31
Maturity Price : 14.80
Evaluated at bid price : 14.80
Bid-YTW : 9.01 %
CM.PR.H Perpetual-Discount 1.93 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2039-03-31
Maturity Price : 16.38
Evaluated at bid price : 16.38
Bid-YTW : 7.34 %
SLF.PR.A Perpetual-Discount 2.09 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2039-03-31
Maturity Price : 15.62
Evaluated at bid price : 15.62
Bid-YTW : 7.67 %
RY.PR.W Perpetual-Discount 2.13 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2039-03-31
Maturity Price : 18.69
Evaluated at bid price : 18.69
Bid-YTW : 6.66 %
PWF.PR.F Perpetual-Discount 2.21 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2039-03-31
Maturity Price : 18.00
Evaluated at bid price : 18.00
Bid-YTW : 7.46 %
BNS.PR.N Perpetual-Discount 2.31 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2039-03-31
Maturity Price : 19.50
Evaluated at bid price : 19.50
Bid-YTW : 6.88 %
CM.PR.J Perpetual-Discount 2.33 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2039-03-31
Maturity Price : 15.36
Evaluated at bid price : 15.36
Bid-YTW : 7.34 %
PWF.PR.G Perpetual-Discount 2.51 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2039-03-31
Maturity Price : 19.64
Evaluated at bid price : 19.64
Bid-YTW : 7.69 %
MFC.PR.C Perpetual-Discount 2.67 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2039-03-31
Maturity Price : 15.01
Evaluated at bid price : 15.01
Bid-YTW : 7.59 %
SLF.PR.B Perpetual-Discount 2.86 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2039-03-31
Maturity Price : 15.84
Evaluated at bid price : 15.84
Bid-YTW : 7.65 %
PWF.PR.E Perpetual-Discount 2.95 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2039-03-31
Maturity Price : 18.85
Evaluated at bid price : 18.85
Bid-YTW : 7.46 %
ENB.PR.A Perpetual-Discount 3.25 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2039-03-31
Maturity Price : 23.58
Evaluated at bid price : 23.85
Bid-YTW : 5.83 %
CM.PR.D Perpetual-Discount 3.27 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2039-03-31
Maturity Price : 19.90
Evaluated at bid price : 19.90
Bid-YTW : 7.24 %
BAM.PR.J OpRet 3.49 % YTW SCENARIO
Maturity Type : Soft Maturity
Maturity Date : 2018-03-30
Maturity Price : 25.00
Evaluated at bid price : 18.11
Bid-YTW : 10.22 %
MFC.PR.B Perpetual-Discount 3.72 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2039-03-31
Maturity Price : 15.61
Evaluated at bid price : 15.61
Bid-YTW : 7.54 %
PWF.PR.H Perpetual-Discount 3.73 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2039-03-31
Maturity Price : 18.63
Evaluated at bid price : 18.63
Bid-YTW : 7.90 %
PWF.PR.K Perpetual-Discount 3.75 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2039-03-31
Maturity Price : 16.60
Evaluated at bid price : 16.60
Bid-YTW : 7.63 %
BNA.PR.A SplitShare 3.96 % Asset coverage of 1.7-:1 as of February 28, according to the company. This should increase somewhat for 3/31, as BAM.A closed at 16.86 on Feb. 28 and 17.57 on Mar. 31.
YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2010-09-30
Maturity Price : 25.00
Evaluated at bid price : 23.65
Bid-YTW : 10.61 %
SBN.PR.A SplitShare 4.36 % Asset coverage of 1.6+:1 as of March 26 according to the company. Since then, BNS has declined from 31.72 to 31.07.
YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2014-12-01
Maturity Price : 10.00
Evaluated at bid price : 8.86
Bid-YTW : 7.86 %
LFE.PR.A SplitShare 6.93 % Repairing most of the damage from yesterday, when it was down 7.78%. It’s doing this on little volume, trading 2,100 shares today in a range of 7.08-30 before closing at 7.10-47, 34×13. Asset coverage of 1.1-:1 as of March 13 according to the company. Since then, XFN has increased from 14.17 to 14.70.
YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2012-12-01
Maturity Price : 10.00
Evaluated at bid price : 7.10
Bid-YTW : 16.14 %
Volume Highlights
Issue Index Shares
Traded
Notes
TD.PR.I FixedReset 64,720 Recent new issue.
YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2039-03-31
Maturity Price : 25.06
Evaluated at bid price : 25.11
Bid-YTW : 6.03 %
RY.PR.T FixedReset 49,806 Recent new issue.
YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2039-03-31
Maturity Price : 23.17
Evaluated at bid price : 25.11
Bid-YTW : 5.86 %
TD.PR.G FixedReset 48,688 YTW SCENARIO
Maturity Type : Call
Maturity Date : 2014-05-30
Maturity Price : 25.00
Evaluated at bid price : 25.60
Bid-YTW : 5.98 %
PWF.PR.K Perpetual-Discount 48,455 YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2039-03-31
Maturity Price : 16.60
Evaluated at bid price : 16.60
Bid-YTW : 7.63 %
RY.PR.R FixedReset 48,035 YTW SCENARIO
Maturity Type : Call
Maturity Date : 2014-03-26
Maturity Price : 25.00
Evaluated at bid price : 25.45
Bid-YTW : 6.11 %
BMO.PR.O FixedReset 42,935 Recent new issue.
YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2039-03-31
Maturity Price : 25.02
Evaluated at bid price : 25.07
Bid-YTW : 6.39 %
There were 33 other index-included issues trading in excess of 10,000 shares.

4 Responses to “March 31, 2009”

  1. prefhound says:

    I agree with much of what you have to say about OTPP and I note that the Canadian Medical Association opened up (to non-medical investors) MD Growth Fund (which had a stellar long term record) along with other CMA managed funds several years back. Now we have MD Growth having rather tepid long term returns (10 years is negative, I believe). There was no apparent benefit to the original fund holders that I can detect AND I believe bigger funds eventually run into DISeconomies of scale.

    However, I’ve just done a bunch of research on corporate DB pension plans, and compared them with OTPP. Many of the corporate plans are in huge trouble (perhaps 70% funded on a going concern basis, but 55-60% on a solvency basis in lots of cases). This means the sponsor companies have to put in 20-90% of annual revenue to catch up (Currently over 5 years, but proposed to be 10 years — in one of those great government fudges that reminds me so much of Fannie & Freddie: insurance with no capital and forced lending to weak credits).

    In a world where lots of DB pension plans are or will soon collapse (the Ontario Pension Genefit Guarantee Fund also has (you guessed it) negative capital), OTPP stands out for using the most conservative discount rate assumptions (as well as for outperforming its benchmark). Would that the corporate world were that forthright.

    The announcement you cite seems limited to other government plans (so maybe even the government sees the clouds on the horizon), but the folks who need OTPP standards and performance the most are in corporate DB plans.

    It would be great if private DB and DC plans could be run by a small number of competitive low cost players like OTPP (0.2% MER + TER, including some pretty big bonuses). Hard to say if the province is taking a step in this direction or not, but the pension landscape will be changing a lot in the next few years — though maybe not for the better if Fannie & Freddie is the model.

  2. jiHymas says:

    It would be great if private DB and DC plans could be run by a small number of competitive low cost players like OTPP (0.2% MER + TER, including some pretty big bonuses).

    It would be great if it rained lemonade, too.

    In order for this to happen, the trustees of the private plans would have to be sold on the advantages of the OTPP approach, as opposed to the approach of their existing manager, Dingleberry Investment Management. This will, I suggest, inevitably lead to OTPP becoming a sales company rather than an investment company, and result in an approach and returns equivalent to any other firm.

    I will reiterate my disdain for TER. Direct fees such as commissions, which are the only things measured by TER, are a very small fraction of transaction costs. Market impact and spreads are much more important.

  3. […] the bureaucratization of the Ontario Teachers’ Pension Plan (OTPP) and OMERS, as discussed on March 31, without either mentioning the proposal or providing any of the supporting arguments that were also […]

  4. […] of bringing in the Assets Under Management. As best as I can recall, I last discussed this on March 31, 2009. Janet McFarland has written a feature for the Globe, Canada’s Pension Funds: stronger […]

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