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Quebec pension giant Caisse takes $33.6 billion investment hit in worst markets in 50 years – Financial Post

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Pension fund writes off $150-million investment in bankrupt Celsius

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The Caisse de dépôt et placement du Québec posted a negative return of 7.9 per cent for the first six months of the year, in what chief executive Charles Emond noted was the worst period for stock and bond markets over the past 50 years.

As of June 30, the Caisse had net assets of $392 billion, with the $28.2-billion decrease due to investment losses of $33.6 billion offset by $5.4 billion in net deposits. The losses included a full write off of the fund’s US$150 million investment in crypto lender Celsius Network LLC, which is now in Chapter 11 bankruptcy proceedings in the United States.

“The first six months of the year were very challenging,” Emond said in a statement. “The mix of factors we faced had not been witnessed in several decades: spiking inflation that triggered rapid and sharp interest rate hikes, rare simultaneous corrections in both stock and bond markets, fears of an economic downturn and the war in Ukraine with its many collateral effects.”

Over the same period, the Ontario Teachers’ Pension Plan Board reported a positive return of 1.2 per cent on Monday.

During a news conference Wednesday to discuss the Caisse results, Emond said the Quebec pension fund wrote off the Celsius crypto investment even though it is considering its legal options and intends to preserve its rights in the court-monitored U.S. bankruptcy proceedings.

“We decided to take it now” out of prudence, Emond said of the writeoff. “The last chapter hasn’t been written.”

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He said his team conducted extensive due diligence with outside experts and consultants. They were aware of management and regulatory issues at Celsius and underestimated the time it would take to resolve them, he said, adding the Caisse was keen on “seizing the potential of block chain technology” and perhaps the investment in Celsius had been made “too soon” in the company’s development.

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He noted that the investment was a very small part of a large venture portfolio that has produced 35 per cent returns over the past five years.

“In these disruptive technologies, there’s ups and downs…. Some big winners and many losers,” Emond said.

Although the Caisse posted an overall return in negative territory for the first six months of the year, the performance exceeded that of its benchmark portfolio — which posted a negative return of 10.5 per cent.

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“Over five and 10 years, annualized returns were 6.1 per cent and 8.3 per cent respectively, also outpacing benchmark portfolio returns,” the pension manager noted.

Emond said the Caisse is managing the “turbulence” with a combination of asset diversification and strategic adjustments made since the COVID-19 pandemic began.

“For the past two years, we’ve been working in an environment of extremes characterized by particularly fast and pronounced changes. These unusual and unstable conditions will persist for some time,” he said.

“In the short term, we’ll be watching what central banks do to contain inflation and how that impacts the economy.”

  1. The Ontario Teachers’ Pension Plan board eked out a 1.2 per cent return in the first half of the year.

    Ontario Teachers’ Pension Plan Board ekes out small return in ‘difficult’ markets

  2. The Canada Pension Plan Investment Board reported a 4.2 per cent loss, equivalent to $23 billion, for the three months ending June 30.

    CPPIB breaks winning streak with $23-billion loss amid ‘market turbulence’

  3. In July, crypto lender Celsius Network filed for Chapter 11 bankruptcy protection and owes users about US$4.7 billion.

    Canadian watchdogs join probe of Celsius’ multi-billion-dollar collapse, sources say

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During the first six months of the year, negative returns in equities and fixed income were partially offset by gains in the Caisse’s investments in real assets including infrastructure and real estate.

The pension giant posted a negative return of 13.1 per cent in fixed income, which beat the negative 15.1 per cent return for its benchmark portfolio. This represented nearly $3 billion in “value added” attributable to all credit activities, the Caisse said.

A negative return of 16 per cent in equities beat the negative 17.2 per cent return in the benchmark portfolio.

The Caisse’s real estate and infrastructure portfolios, meanwhile, generated a 7.9 per cent six-month return, “demonstrating their diversifying role which contributes to limiting inflation’s impact on the total portfolio.”

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The real asset class performance also beat the benchmark portfolio’s return, which was 2.4 per cent.

“So that asset class played its role. The two portfolios are doing well,” Emond said.

He said it is challenging to compare the short-term performance of Canadian pension funds because they have e different mandates and investment models. The Ontario Teachers’ Pension Plan, for example, has less exposure to equity markets than the Caisse and more exposure to natural resources and commodities, which performed well in the first half of the year.

• Email: bshecter@postmedia.com | Twitter:

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Tiger Global slows pace of investment with scaled-down fund – Financial Times

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Tiger Global is raising a private equity fund that will target $6bn in investment, less than half the amount raised for a prior fund, as the prominent technology investor slows its once-breakneck pace.

The fundraising began on Thursday, according to a letter sent to limited partners and obtained by the Financial Times. Chase Coleman, Tiger’s billionaire founder, has been seeking investors willing to buy into the technology downturn that has battered his group’s portfolio.

Tiger’s preceding private equity fund of $12.3bn closed in February. The $6bn private fund is below early targets of about $8bn, according to a person familiar with the situation.

People close to Tiger believe the new fund’s smaller scale of investments will match lower valuations after the market rout this year.

The group has promised it will invest less than half the fund in its first year, a more measured pace than the prior fund, which is already mostly invested. The size of Tiger’s typical investment has also been nearly halved to about $30mn.

The letter said Tiger would attempt to take advantage of opportunities such as secondary sales of private technology companies whose values have fallen in the financial market downturn.

The diminished fundraising and defensive approach come as the $63bn-in-assets Tiger confronts upheaval. Its flagship fund fell about 50 per cent this year to July, according to documents sent to limited partners, while it has marked down its more than $45bn portfolio of private technology investments each month this year, it recently told investors.

The fund group has also experienced turnover among investment staff. On Monday, Tiger announced that former partner John Curtius, who headed the firm’s software and business services private equity investments, would be leaving.

Curtius had been expected to temporarily stay on following the announcement to ensure an orderly handoff of his portfolio to others inside Tiger. “John will work closely with other investment team members over the coming months to transition his responsibilities,” Tiger said on Monday.

However, as of Thursday he was no longer an employee, said three people familiar with the situation. Curtius is planning to launch an investment firm called Cedar Investment Management, people with knowledge of the matter said.

Curtius had been one of Tiger’s most prolific investors, leading more than 100 venture capital investments, according to PitchBook data, including investments made as recently as September 27.

This week, Tiger Global fielded questions at meetings with limited partners who sought to get a better understanding of Curtius’s sudden departure, said two people directly involved with the matter.

Coleman and Scott Shleifer, head of Tiger’s private investment business, decided this summer that Curtius would leave the firm amid concerns over the autonomy he was seeking in managing an increasingly large portfolio, people close to Tiger said.

Internally and in discussions with limited partners, Tiger has described itself as a collaborative firm, with investors overseeing public and private investments in the US, Brazil, India and China working closely together to identify investments.

People close to Curtius painted a different picture. In recent months, he had been looking for the opportunity to start his own firm to capitalise on a dramatic reset in valuations across the industry, they said.

Tiger Global and Curtius declined to comment.

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South Korea’s Growing Investment Overseas Adding to Won’s Pain – BNN Bloomberg

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(Bloomberg) — South Korea’s growing direct overseas investment is among the factors piling pressure on the won amid its slide to its lowest levels since the aftermath of the global financial crisis.

While the Federal Reserve’s rapid policy tightening is the most obvious reason strengthening the dollar against a whole host of currencies across the globe, Korea’s foreign direct investment is a lesser-known long-term factor weighing on the won.

Foreign outflows are likely to keep increasing as Korean firms look to expand overseas given the slowing domestic market and pressure from the US to invest more in operations there.  

The nation plowed a net $89 billion into economies overseas via direct foreign investment and purchases of stocks and bonds in the 12 months to August, a nine-fold increase from a decade ago, according to the country’s balance of payments data. 

That has contributed to a depreciation in the South Korean currency. The won recently hit its weakest since March 2009, despite the Bank of Korea stepping in to help curb losses through repeated interventions. The won has been Asia’s worst performer after the yen this year.

The possibility of more outflows poses a challenge for a central bank that is increasingly concerned about a weaker won raising import prices and fueling inflation. The BOK meets next week and may need to return to larger rate increases to help support the currency by closing the gap with US rates.

“We used to be worried only about foreigners leaving, but now there’s a lot we have invested abroad and we plan to make the case that bringing it back is good for both investors and the national economy,” BOK Governor Rhee Chang-yong told lawmakers. “If our overseas investment is repatriated, it gives us more room to not raise rates.”

Rhee didn’t propose steps to encourage repatriation of investment during his comments. The Finance Ministry on Monday denied a Yonhap news agency report that the government was looking into tax breaks for investors who bring back money after selling shares abroad.

“If overseas investment increases continuously over the long term, excess demand for dollars piles up and eventually serves as a factor raising the currency rate,” said Min Kyunghee, a researcher at the Korea Chamber of Commerce and Industry in Seoul. “It seems unlikely the rate will drop sharply even if the Fed eases tightening later depending on economic situations.”

Outward Bound

While the more volatile swings of the larger portfolio investment flows typically gain more attention among market watchers, the steadier building up of FDI presents more of a structural weakening factor. 

Korea is investing more money overseas compared with many other nations. The country’s annual outward FDI as a proportion of gross domestic product is the highest among Asia-Pacific countries tracked by the Organization for Economic Co-operation and Development. Among the Group of 20 nations, it trails only the UK, Germany, Russia and Canada.

In an indication of the increase in operations abroad, sales by Korea’s overseas corporate units rose 71% to $368 billion in 2019 from $215 billion in 2010, with key products such as semiconductors, smartphones and cars accounting for almost two thirds of the gain, BOK researchers said.

The growing competition between the US and China is another factor pushing Korean firms to invest overseas, with companies such as Samsung Electronics Co. particularly vulnerable to US pressure because they rely heavily on American technology and equipment to produce semiconductors, batteries and other goods. 

Korea’s direct investment in the US amounted to a net $28.4 billion in the past year, a near five-fold increase from a decade ago, according to data from the Export-Import Bank of Korea. In the same period, investment in China rose two-fold to $7 billion, the data showed.

Even more Korean money may flow to the US as the administration of President Joe Biden expands efforts to reshore manufacturing. Korea’s high-tech firms are pivotal to the American effort to realign Asian supply chains to reduce reliance on China. 

In May, Biden visited a Samsung chipmaking plant in Korea and touted Hyundai Motor Co.’s pledge to invest more than $10 billion in the US. Last month when Korean President Yoon Suk Yeol visited the US, the chairman of SK Inc. Chey Tae-won said in Washington that his conglomerate plans to raise investment in the US to more than $50 billion by 2025.

“Direct investment has long-term, structural influence over capital flows,” said Choi Don-Seung, an economics professor at Andong National University in Korea. “How the US-China competition plays out will matter to the status of the dollar and how Korea positions itself will be important.”

©2022 Bloomberg L.P.

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Help clients navigate emotions when making investment decisions

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“We can’t say, ‘If you weren’t acting so emotionally, you would be able to make better financial decisions,’” she told attendees at the Investments and Wealth Forum in Toronto on Monday. “Everything we do, including financial decisions, requires emotions as an impetus. So we can’t ignore what’s going on in this deep region of our brain.”

This makes the role of an advisor — someone who can provide an objective, third-party perspective — that much more important. Similar to advisors managing a client’s risk, they may need to manage their emotions, Kramer said.

WallStreet Forex Robot 3.0

 

One example of emotions governing investment decisions is the correlations between seasonal affective disorder, investor behaviour and market performance — a phenomenon Kramer and her colleagues have studied for more than 20 years.

Kramer highlighted that traditionally, September and October are poorer-performing months for the market. The S&P 500 has seen a September decline of 7% or more 11 times going back to 1928, according to MarketWatch. While Octobers have performed better than Septembers, significant market crashes, like in 2008, 1987 and 1929, have occurred in October.

Both months are when days begin to shorten in the northern hemisphere, which can dampen moods among the general population. “We all just feel a little more despondent,” Kramer said. “The more depressed a person is, the more averse they are to risk, including financial risk.”

Kramer said her research has found that the riskiest categories of U.S. mutual funds tend to see large outflows during the fall and winter, when many investors experience increased risk aversion.

Conversely, she has found there tend to be large flows into the safest categories during these times.

Advisors who know about this tendency can educate their clients and help them avoid it.

“If investors act according to their emotions, if they sell risky assets in the fall and buy them back in the spring, they’re going to end up worse off. They’re leaving a lot of money on the table,” she said. “[You] don’t want people making investment decisions that is responsive to strong emotional urges.”

John Nersesian, head of advisor education with PIMCO, said during another session at the forum that advisors can help manage clients’ emotions by presenting them with historical data and evidence about how tumultuous markets in the past occurred and how investors who stayed invested rode the recovery wave.

Advisors should also show empathy to their clients, he said. As an example, advisors should consider revisiting the common phrase “stay the course.”

While advisors mean clients should remain invested and take a long-term approach, clients may interpret the phrase differently, Nersesian said.

After hearing the phrase, they may think: “I’m telling my advisor I’m in real pain right now. My portfolio is getting killed. Everything I’m reading suggests this may continue. My advisor doesn’t hear me; my advisor is hearing me, but they don’t care; [or] my advisor doesn’t have anything better to offer me.”

Nersesian suggested that instead of telling clients to “stay the course,” advisors can reiterate and clarify their clients’ concerns, tell the client they will examine potential options and reconnect with them in a week to discuss the best action plan. 

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