OMERS

Drama. OMERS, the Ontario Municipal Employees Retirement System, has total assets of $60 billion at the fair market value, and actuarial liabilities of $70 billion (in round numbers); last year, it had member contributions of $3.1 billion and net investment income of $5.2 billion, and paid retirement benefits of $2.7 billion, for a net inflow of $5.6 billion, on which it does not pay taxes, and moderate administration expenses of $60 million, or 0.1% of the assets, which is a number unheard of in the “investment industry” populated by mutual funds and hedge funds, let alone the investment banks who are used to more like 8% on the cheap.

In our view, OMERS is rich but doesn’t know how to manage its money and has implemented a plan (effective two years ago) to increase member contributions by 5.8% a year; 2.9% from its employee members, matched by 2.9% from their employers, which would pro forma increase member contributions from $3.1 billion to $3.3 billion this year. The plan has 430,000 employee members so that the average member contribution (including the employer portion) will increase by $400 per year from $7,200 to $7,600 per year, and for the employee members themselves, from $3,600 per year to $3,800 per year, for which they will also receive a deduction from their taxable income.

If their recent undertakings are any indication, all the pension plans and all the insurance companies will be complaining that interest rates are too low, and that there is, therefore, a lot of pressure on them to earn income from investments and/or increase member contributions or premiums (which is unlikely for the insurance companies because of competitive pressures), or raise money in some other way, such as selling their stock into a gullible investment market. Please see our recent Post, (B)(N) MFC Manulife Financial Corporation, May 2013.

There is, of course, a problem in investing $60 billion. Size matters and, in our view, all investments need to be provably “as good as cash” and “better than money”; and in the Canadian market there are only $830 billion of those at the present time, and spread over 80 companies; but, on the plus side, they have returned, in aggregate, $160 billion of capital gains since December, and another +2% to +3% of dividends, and a simple program of “risk management” will assure that the return is no less than that for the rest of the year (please see our recent Post, The S&P TSX “Hangdog” Market, May 2013).

Had OMERS just bought 1% of those for $8 billion in December, they could already have $1.6 billion in their cash account, which is eight times the extra $200 million that the members will give them this year, and they would still have $8 billion in the same investments.

But, $8 billion is still far from $60 billion and $1.6 billion is still far from the $3 billion in benefits that they are expected to pay this year.

In that case, they might have spread around another $10 billion in the 200 companies of the S&P 500 companies that qualified for the Perpetual Bond™ in December, representing only a negligible fraction of their market value of $7,000 billion, and earned another $1.3 billion for their trouble, and still have a portfolio worth $10 billion in these same companies.

That means that for just “investing” $18 billion of their $60 billion, somewhat carefully, but likely to be repeated going forward, they would already have earned enough money to pay all the member benefits this year, and it’s only May – we could already be working on next year, and the year after, and not only catch up to the deficit but erase it – and the balance, $40 billion, say, can be used to buy Real Return Bonds (RRBs) which pay a small rate of return above the rate of inflation for a “rainy day”.

Please see our Post, The Wall Street Put, April 2013, for these and other “different  investments” that are not just “alternatives” as might be suggested by The Yale Method, May 2013.

The Price of Risk

The calculated Risk Price (SF) is a provably effective estimate of the “price of risk” which is “the least stock price at which the company is likeable” (Goetze 2009) and “likeability” is determined by the demonstrated factors of “risk aversion” – we want to keep our money and obtain a hopeful return above the rate of inflation – and the properties of portfolios of such stocks.

Stock prices that are less than the price of risk can be said to be “bargain prices” but with the risk attached that the company might never get a higher price other than that due to ambient volatility or “surprise”; on the other hand, investors who are willing to pay the “full price” above the price of risk, and buy and hold the stock at those prices, must also be confident, and have reason to believe, that the company will produce those values, absent new information.

Please see our Posts, The Price of Risk, August 2012 and The Nash Equilibrium & Its Stock Price, October 2012, for more information on the theory.

To see what else “risk averse” investing can do for us, please see our recent Posts, The Wall Street Put, April 2013, and earlier Posts such as The Dow Transports, March 2013, or The Risk Adjusted Dow, March 2013, or The Canada Pension Bond, February 2013, and for a more colorful description of investment risk and the application of the “price of risk” to mergers & acquisitions, please see our Post, Bystanders & Collateral Damage, April 2013.

Postscript

We are The RiskWerk Company and care not a jot for mutual funds, hedge funds, “alternative investments”, the “risk/reward equation” and every other unprovable artifact of investment lore. We have just one product

The Perpetual Bond™
“Alpha-smart with 100% Capital Safety and 100% Liquidity”
Guaranteed
With No Fees and No Loads on Capital

For more information on RiskWerk, please follow the Tags or Categories attached to this Letter or simply enter Search for additional references to any term that we have used. Related data may be obtained from us for free in a machine readable format by request to RiskWerk@gmail.com.

Disclaimer

Investing in the bond and stock markets has become a highly regulated and litigious industry but despite that, there remains only one effective rule and that is caveat emptor or “buyer beware”. Nothing that we say should be construed by any person as advice or a recommendation to buy, sell, hold or avoid the common stock or bonds of any public company at any time for any purpose. That is the law and we fully support and respect that law and regulation in every jurisdiction without exception and without qualification to the best of our knowledge and ability. We can only tell you what we do and why we do it or have done it and we know nothing at all about the future or the future of stock prices of any company nor why they are what they are, now. The author retains all copyrights to his works in this blog and on this website. The Perpetual Bond®™ is a registered trademark and patented technology of The RiskWerk Company and RiskWerk Limited (“Company”) . The Canada Pension Bond®™ and The Medina Bond®™ are registered trademarks or trademarks of the Company as are the words and phrases “Alpha-smart”, “100% Capital Safety”, “100% Liquidity”, ”price of risk”, “risk price”, and the symbols “(B)”, “(N)” and N*.