Do alternative assets make sense?

Even stodgy old Canadian pension funds have taken a bath on cryptocurrency investments

Princeton Economist Bill Dudley had this to say about cryptocurrencies, comparing the FTX meltdown to the 2008 global financial crisis triggered by a belief (i.e., a mania) that home prices would only rise.

How has that worked out in recent months?

Bloomberg reports 60% of Bitcoin’s “value” has been wiped away this year. Reality is that Bitcoin is devoid of value and the wipeout is a descent into reality rather than a loss of value. People put real money into the cryptocurrency space and have lost billions. They will lose more before this mania end.

It is not just unsophisticated investors in cryptocurrencies that have taken a bath this year. The Ontario Teachers’ Pension Plan (or OTPP, one of Canada’s largest pension funds) lost $95 million on the FTX collapse and the Caisse de Depot et Placement, Quebec’s largest pension fund, lost $150 million on the collapse of Celsius, a self-described Crytocurrency Lending Platform.

Management of the OTPP has been pretty good over the years, with Claude Lamoureux earning nationwide respect during his tenure and his successor, Jim Leech (a classmate of mine from Royal Military College) similarly held in high regard. Jim today is Chancellor of Queen’s University where he earned his MBA post RMC. The head of OTPP’s Global Funds, Tanya Carmichael (nee Baranowski) is another extremely talented person who I have known since she was in grade school - her father Russell Baranowski, a close friend, was a contemporary of mine at GE Canada where we both served as Vice Presidents and who I later hired as CEO of Federal Pioneer Limited. Federal Pioneer Limited was a 1986 acquisition I had made for The Enfield Corporation Limited (Enfield) when I served as that company’s CEO from when I founded Enfield in 1984 until it was taken over (and I was tossed out) in 1989.

My question is what happened to the once thorough due diligence processes of Caisse de Depot and OTPP? Surely the warning signs were everywhere since the receiver appointed CEO who replaced Sam Bankman-Fried in FTX as that entity melted down said the internal control and financial reporting were the worst he had ever seen, and he had seen a few since he was also the receiver for Enron when it famously failed and Jeff Skilling, an ex-McKinsey consultant (as I am) went to jail for his role in Enron’s failure. The answer is that they were as vulnerable to a popular mania as the man on the street and could not resist the temptation to invest other people’s money in the latest fad. That is the sad state of “fiduciary duty” in Canada today.

Another dangerous mania spreadwing worldwide is the ESG fad, a concept that corporations created to host businesses in a way that permitted investors to participate with risk limited to the amount invested (called limited liability) should have social and environmental objectives in addition and in some cases in priority to earning enough money to be viable and capable of creating a stream of dividends for investors generally and pension funds in particular. Canada Pension Plan, Caisse de Depot et Placement and OTPP have all signed on to the ESG parade and those decisions will punish the beneficiaries of the funds they manage by putting their retirement income at risk to what is little more than outright nonsense. Famed market expert Aswath Damodaran pans ESG in a few articles, the most recent of which takes no prisoners.

Damodaran writes: ““I believe that ESG is, at its core, a feel-good scam that is enriching consultants, measurement services and fund managers, while doing close to nothing for the businesses and investors it claims to help, and even less for society. . .I am convinced that there will soon be room for only two types of people in the ESG space. The first will be the useful idiots, well-meaning individuals who believe that they are advancing the cause of goodness, as they toil in the trenches of ESG measurement services, ESG arms of consulting firms and ESG investment funds. The second will be the feckless knaves, who know fully well the void behind the concept, but see an opportunity to make money.”

A third mania gripping world leaders is “climate change” based on the specious theory that harmless CO2 causes global warming and will lead to human extinction if CO2 emissions are not curbed with NetZero a buzzword for their goal. They ignore the physical reality that NetZero, if achieved, would see atmospheric CO2 levels fall a few ppm every year and within less than a century reach a level low enough to imperil plant life and human life along with it. Reality is that atmospheric CO2 concentrations are dangerously low.

Cryptocurrencies, climate change and ESG investors seem driven by Fear of Missing Out (FOMO). FOMO leads to investment decisions that are outright stupid. “Crypto” and “ESG” are not the only manias prevalent and affecting investment decisions today - climate change is an even larger and more dangerous obsession. That mania is so widepsread today that major economies worldwide at COP27 have agreed to give billions to underdeveloped countries as some sort of “atonement” for their CO2 emissions which, while harmless and essential to life on Earth, are vilified as “pollution” by many world leaders including Canadian Prime Minister Justin Trudeau.

Sooner or later, one or more of these manias will bring down the world economy and it is a race to see which will be first. My bet is on “climate change” since climate policies catastrophic effect on global energy prices is already crippling the United Kingdom and European economies who bought into the climate change theory holus bolus and stifled production of oil & gas contributing to a deepening global shortage that will not end well without a supply response. World leaders are doubling down on “climate policies” and the hole in fossil fuel supply is getting larger. Millions will be impoverished and major economies will be crippled by this stupidity, and it is happening in real time.

Canada has 16,608 pension funds with combined assets of $2.8 trillion. Canada’s securities regulators are about to mandate ESG and climate change reporting which is likely to cost issuers on the order of $1 million each to comply. The argument for ESG and climate change reporting used by regulators to justify the added cost is “lower cost of capital”. Lower cost of capital is identical to lower returns on investment since the cost to the corporation is the return to the investor. This disgraceful and useless charade will cost pensioners returns on which they depend to retire.

Last year, the best performing fund in Canada was Ninepoint Energy Fund (fully invested in energy stocks that do not qualify for a high ESG rating) with a return of about 160% while Canada Pension Plan which embraces ESG investments had a return of 8.9%. Give that some thought as you plan your retirement.

When you have world leaders and once competent managers of the world’s largest funds (including Abigail Johnsons’ Fidelity, Larry Fink’s Blackrock, in addition to CPP, OTPP and the Caisse) embracing ESG and eschewing investments in fossil fuels, the outlook is grim. The tide may be turning a bit, however, with Larry Schwartzman’s Blackstone Group (who employs my daughter in law by the way) dumping ESG stocks and some state governors like Florida’s Ron De Santis passing legislation barring ESG manager from running state pension funds.

Insanity is not an infectious disease and the manias will run their course, just like the Dutch tulip mania, the South Sea Bubble, and the dot.com bubble. Saner heads will ultimately prevail but not before serious damage is done if voters don’t wake up and toss the left wing nutcases now in Washington, Whitehall and Ottawa out of office and elect some leaders who prefer common sense to what today’s leaders pretend is “science”. I can’t wait.