Pension funds suffer largest investment losses since 2008 financial crisis
Canadian defined-benefit pension plans collectively suffered their largest losses since the 2008 financial crisis in 2022, recording a median decline in assets of 10.3 per cent despite a partial recovery in the final months of the year, according to a survey from Royal Bank of Canada RY-T.
Pension assets suffered heavy losses in the first two quarters of 2022 before starting to recover in the back half of the year. In the final quarter, pension assets returned 3.8 per cent, as measured by the RBC Investor and Treasury Services All Plan Universe, which serves as a benchmark for performance.
Pension plan investors were battered by unusually volatile markets driven by high inflation and rapidly rising interest rates, as both stocks and bonds returned losses, instead of helping offset each other as has often been the case in past market downturns. And although plans earned positive returns to finish the year, they are facing many of the same pressures in 2023.
“In the next few months, plan sponsors will need to be attentive to risk factors such as the economic impact of the central banks’ actions, ongoing geopolitical tensions and ongoing efforts to contain the COVID virus outbreak in certain emerging markets,” Niki Zaphiratos, managing director for asset owners at RBC I&TS, said in a news release.
Canadian pension plans’ bond portfolios had median losses of 16.8 per cent in 2022 – the largest annual decline in more than 30 years – and also trailed the benchmark FTSE Canada Bond Index. The losses were driven by the drastic action central banks took to tame inflation by raising interest rates, with longer-duration bonds that are most sensitive to inflation accounting for some of the largest declines.
Yet for pension plans, there was a silver lining to rapid interest-rate increases, which caused future liabilities to fall. As a result, more pension plans finished 2022 in surplus, meaning their assets were greater than their liabilities. And higher yields from fixed-income securities could also give pension plan investment managers more options to reduce risk-taking in their portfolios over the coming year.
Stocks also suffered, rather than acting as a counterweight to falling bond prices. Foreign equities returned 9.7 per cent in the fourth quarter, but closed the year down 11.3 per cent, according to RBC I&TS. And Canadian equities returned 6.3 per cent in the final quarter of the year, bringing their annual loss to a comparatively modest 3.6 per cent. In general, value stocks performed better than higher-risk growth stocks in the quarter.
The last time pension assets declined so sharply was in 2008, when Canadian defined-benefit pension assets posted a median loss of 15.9 per cent.
Defined-benefit pension plans pay fixed benefits for as long as a beneficiary lives based on their contributions and years of service.
Spain clean energy case shakes confidence in EU investment
MADRID (AP) — Renewable energy investors who lost subsidies promised by Spain are heading to a London court to try to claw back $125 million from the government — a decadelong dispute with ramifications for clean energy financing across the European Union.
The outcome will be closely watched by investors after the U.S. passed a new law offering incentives for homegrown green technology. Experts say the Inflation Reduction Act is already drawing clean energy investment away from EU countries like Spain, leaving the 27-nation bloc much less competitive globally.
The European Commission, the EU’s executive arm, has proposed its own rules on allowing state aid and incentives for green investment. But those changes would not affect court cases already underway.
The lawsuit in London’s Commercial Court this week involves investors from the Netherlands and Luxembourg who poured millions into a solar plant in southern Spain in 2011. The Spanish government offered subsidies to encourage growth in renewable energy production, then controversially slashed the payments without notice as it cut costs after the 2008 financial crisis.
Spain has been sued internationally more than 50 times over the retroactive changes. It has not paid out despite losing more than 20 cases so far, according to U.N. data on international investment disputes. The EU backs Spain’s position.
“Those renewable investors — multibillion-dollar companies — are very concerned about the attitude of Spain and Europe looking forward,” said Nick Cherryman, one of the lawyers leading the case against Spain. “Why should they take risks investing in Europe given the track record?”
Spain now ranks alongside Venezuela and Russia as countries with the most unpaid debts over commercial treaty violations, according to a recent ranking compiled by Nikos Lavranos, a Netherlands-based expert in investment arbitration and EU law.
Most of the cases allege that Spain broke agreements it agreed to honor under the international Energy Charter Treaty, a legally binding agreement between 50 countries to protect companies from unfair government interference in the energy sector.
Environmental campaigners have criticised the treaty for protecting fossil fuel investment because financiers can also sue over policy changes aimed at scaling back polluting projects. However, for Spain, almost all cases relate to renewable energy.
“If you take the bigger picture, the EU is shooting itself in the foot by supporting Spain in this,” Lavranos said. “You cannot trust that they can follow through with their agreements, so I think you do shake investors’ confidence.”
He also questioned how leaving investors in the lurch over initiatives to ramp up renewable energy production aligned with recent EU initiatives like the Green New Deal, a goal for carbon neutrality by 2050 and relaxation of subsidy rules.
“It’s very contradictory,” Lavranos said.
In 2013, the investors in Spain brought a case before the World Bank-backed International Centre for Settlement of Investment Disputes, an arbitration body between governments and investors.
Spain in 2018 was ordered to compensate investors over its subsidy changes. Despite being told to pay out more than $1 billion by the international body, Spain has refused, citing EU rules.
Spain’s Ecological Transition Ministry said the payments “may be contrary to EU law and constitute illegal state aid.” When the government is told to make a payout, it says it notifies Brussels but that “Spain cannot pay before the commission’s decision, so it is faithfully complying with its legal obligations.”
The European Commission said the Energy Charter Treaty does not apply in disputes between member states like the Netherlands, Luxembourg and Spain, arguing EU law takes precedence. The commission says the decision to compensate investors over lost Spanish subsidies is still being studied and “the preliminary view is that the arbitration award would constitute state aid.”
Cherryman, the investors’ lawyer, said the EU thinks it “should be superior to international treaty law.” After waiting for payment for a decade and given the EU position, his team is trying to seize part of a $1 billion settlement awarded to Spain over a 2002 oil spill.
Starting Wednesday, the London court will hear Spain’s arguments that the investors should not be allowed to seize those assets in lieu of compensation they have yet to be paid.
José Ángel Rueda, a Spanish international arbitration lawyer who has represented several renewable energy investors against Spain, said the country’s reputation is at stake. Other EU members like Germany and Hungary have paid out after international disputes, opting to maintain a positive image, he said.
“Spain is not like Russia or Venezuela. It was expected to be a serious country. But the awards remain unpaid,” Rueda said. “Investors can see that Spain might not be a reliable state in terms of the rule of law.”
Following years of legal wrangling, the EU is now considering a coordinated withdrawal from the energy treaty, though that would not affect pending disputes.
“It is not possible to modernize the treaty to make it compatible with the objectives of the Paris agreement and the European Green Deal,” Spain’s Ecological Transition Ministry said.
The European Commission agreed, saying a withdrawal was “the most pragmatic way forward.”
That might simply nudge investors to look across the Atlantic, Cherryman said.
“America has been nimble, and it introduced very favorable legislation to encourage renewable investment,” he said. “They will respect my investment. Or I can take risk and go into Europe, go into Spain.”
The risk was the loss of more money for renewables, which are “a win for everybody,” Cherryman said. “We all want to see renewables being invested in and we all want a greener environment that is a safer future for our children.”
Tax-loss harvesting – an investment tactic that has gone too far
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Goldman Sachs Group Inc. says it aims to provide “best-in-class investment advice to clients, consistent with both the letter and the spirit of all applicable tax laws and regulations.”
So, the bank was quick to say that it would change its trading practices after a media organization claimed it had helped former Microsoft Corp. boss Steve Ballmer subvert at least the spirit of U.S. laws against so-called “wash sales.”
Investors will be familiar with the idea of tax-loss harvesting: selling an underperforming stock to crystallize a loss that can be offset against capital gains elsewhere, to lower your overall tax bill. It’s common practice to prune a few losers before the end of the tax year.
But you can’t simply buy the same stock back and still claim the deduction. It really has to be kicked out of your portfolio.
However, in February, Pro Publica Inc. reported that Mr. Ballmer, through his trading account at Goldman Sachs, had sold shares in the dual-listed natural resources giants Shell PLC RYDAF and BHP Group Ltd. BHPLF, then replaced them on the same day with identical amounts of the other class of the companies’ shares, and claimed a chunky deduction.
Under U.S. law, a wash sale is defined as one in which the investor makes a “substantially identical” purchase within 30 days. Goldman Sachs told the Financial Times it would halt repurchase transactions involving dual-class shares and had alerted clients to the mistake. A spokesperson says the affected trades were very small in number. Mr. Ballmer told Pro Publica that he would amend his tax filings.
But the biggest impact from Pro Publica’s investigation may not be the tweaks to Goldman Sachs clients’ tax filings. It may instead be the spotlight it shines on the explosive growth of tax-loss harvesting strategies. The use of dual-class share replacements was a tiny part of what Goldman’s traders achieved for Mr. Ballmer, who netted an extraordinary US$579-million in tax-loss harvesting over five years, according to Pro Publica’s calculations.
And this is not a billionaires’ only game. Far from it. Tax-loss harvesting has been mechanized thanks to the collapse in trading costs and the rise of so-called direct indexing.
Investors can acquire algorithmically-controlled portfolios of hundreds of stocks that are built to track a broad stock market index but are also programmed to sell lossmaking shares throughout the year to crystallize tax losses and replace them with alternative investments to keep the portfolio on track.
A pioneer of the strategy, Parametric Portfolio Associates LLC, was purchased by Morgan Stanley after a bidding war in 2020. Rival JPMorgan Chase & Co. eventually bought another platform called 55ip, and the two wealth managers have put their tax-loss harvesting products at the centre of a fierce price war. Market research sponsored by Parametric suggests direct indexing could account for US$800-billion in assets by 2026.
Academic studies show the strategy can add 1 to 2 per cent a year in after-tax returns to a diversified equity portfolio, and can even be used to give a boost to fixed-income portfolios.
Marketing materials from the investment manager Northern Trust Corp. (NT) demonstrate how sophisticated the products have become. It says the tax losses can be dialled up or down depending on how much deviation from the underlying index an investor is willing to risk. NT did not respond to a request for comment.
There’s no suggestion any of these platforms engage in illegal wash sales by using substantially identical replacements. That’s the point. They don’t have to. But algorithms can be programmed to go more or less close to the line.
So, it wouldn’t be surprising if authorities were tempted to move the line and toughen the rules. The word “substantially” could be made to do a lot of work.
The Internal Revenue Service (IRS) hasn’t provided much in the way of guidance about what “substantially identical” means in modern markets, with the result that different advisors take more or less conservative positions.
In a piece on the “silver lining” of tax-loss harvesting opportunities in the down market of 2022, Morningstar Inc. warned investors against replacing an exchange-traded fund (ETF) with another that tracked the same index, even if it was run by a different asset manager.
“It’s probably safest to replace fund holdings with a vehicle that tracks a different index,” Morningstar strategist Amy Arnott wrote. “For example, an investor selling Vanguard 500 Index Fund, which tracks the S&P 500, could replace it with Vanguard Total Stock Market Index Fund, which tracks the broader CRSP Total Market Index.”
Tax authorities could also squeeze investors in a variety of other ways that raise the costs or risks of the strategy – by making investment advisors liable for the violations of their clients, or just by subjecting more users of tax-loss harvesting strategies to gruelling audits. The IRS has just had US$80-billion added to its budget and is itching to spend it.
The nuclear option would be for the U.S. Congress to step in. David Schizer, tax professor at Columbia Law School, told Pro Publica that the law should be rewritten to change “substantially identical” to “substantially similar.”
Individual investors obviously don’t want to lose the better after-tax returns they can enjoy thanks to the mechanization of tax-loss harvesting. But if it substantially erodes the tax base, politicians will only be encouraged to find new taxes elsewhere to crimp investors’ returns by other means – like the new U.S. tax on share buybacks, for example. That really would be a wash.
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2X Receives Strategic Growth Equity Investment from Recognize
Investment Enables B2B Marketing-as-a-Service Category Pioneer to Expand Capabilities that Transform Revenue Operating Models for Clients
NEW YORK — 2X, a pioneer of the marketing-as-a-service (MaaS) solution for the business-to-business (“B2B”) sector, announced today that Recognize, a technology investment platform, made a significant strategic investment to continue catalyzing growth in the company. This is the first institutional investment in 2X and accelerates its roadmap of evolving marketing for leading organizations in the B2B space.
B2B marketing is at an inflection point. Recent transformation in the space has been driven predominantly by software tools and technology platforms. Despite a US market size of over $850 billion in 2022, the marketing services sector has seen limited disruption. With Recognize’s support, 2X is redefining the B2B marketing services landscape.
“Our partnership with Recognize allows 2X to level up our capabilities and build things our clients need and want,” said Domenic Colasante, CEO and co-founder of 2X. “Working with Recognize will elevate our infrastructure to better service our clients with on-shore account management, expanded time-zone coverage, global delivery centers, and consulting services. The investment expands our capabilities around technology implementation and management and will increase our value to both enterprise-sized and PE-portfolio clients.”
Recognize was founded in 2020 by a visionary trio including former Oracle President and Infor CEO, Charles Phillips, co-founder and former CEO of Cognizant Technology Solutions, Frank D’Souza, and private equity veteran David Wasserman. Recognize’s core mission is to find the next generation of technology services companies and help them unlock tremendous growth potential.
“2X is the kind of company we were looking for when we created Recognize,” said Mike Grady, partner of Recognize. “We see hundreds of service companies every year and found a truly differentiated business in 2X. 2X’s innovative MaaS model packages the new-age revenue marketer with global delivery economics to allow increased impact at a fraction of current costs.”
B2B marketing is critical to driving business growth in today’s market conditions. Yet the B2B industry has suffered severely from a technology skills shortage. 2X has embraced the future of work to thrive in today’s “do-more-with-less” environment. These transformative capabilities have fueled 2X’s organic growth and 95% CAGR since its 2017 founding.
“The 2X team has cracked the code in high quality, offshore B2B marketing and is solving revenue growth problems for clients when they need it most,” said Recognize co-founder and managing partner, Charles Phillips. “2X has grown impressively since launching and has displayed multiple horizons of exciting growth potential. Our partnership with Domenic and his team will help cement 2X as the preeminent leader of this emerging market.”
2X’s leadership team, including CEO Domenic Colasante, will remain in place.
Multinational law firm Morgan, Lewis & Bockius LLP and global investment bank Canaccord Genuity advised 2X on the transaction.
2X was founded in 2017 by three former B2B CMOs who pioneered marketing as a service (MaaS), a new operating model designed to bring scale to revenue and marketing leaders. The MaaS model covers a full range of offerings, including marketing operations, MarTech management, demand creation programs, digital marketing, account-based marketing (ABM), analytics, and creative services.
The client roster includes enterprise and large organizations that need execution support, as well as private equity portfolio companies that require both growth and efficiency in their marketing.
2X is a certified partner of many of the leading RevTech platforms, including 6sense, Salesforce, Adobe Marketo Engage, Drift, HubSpot, Bombora, and Google, among others.
The company is ranked in the top 20% of the Inc. 5000 list of fastest-growing companies in the U.S., and in the top 100 of Financial Times’ list of The Americas’ Fastest Growing Companies.
More information can be found at www.2X.marketing.
About Recognize Partners LLP
Recognize is a technology investment platform exclusively focused on the technology services industry. The firm provides operational expertise, industry insights, and strategic capital to innovative companies in this sector. Recognize is led by industry veterans Frank D’Souza, Raj Mehta, Charles Phillips, and David Wasserman. To learn more, visit www.recognize.com.
View source version on businesswire.com: https://www.businesswire.com/news/home/20230329005413/en/
Jennifer Wang, 2X
Jack Berney, Recognize
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