CPP Investments monitoring governments’ response to meme-stock volatility

While the Reddit-fuelled stock-market frenzy of recent weeks draws scrutiny from regulators and lawmakers, the managers of Canada’s largest pension fund are also watching closely to see what the so-called “meme stock” craze says about governments’ ability to support the economy through pandemic shocks without overheating it.

“Policymakers have been able to intervene with real significant force without having excessive negative impacts on economies,” said Geoffrey Rubin, the chief investment strategist at the Canada Pension Plan Investment Board, in an interview with The Logic. 

“But I also believe when we see issues like this crop up, these are the kinds of risks that can accompany the kind of significant policy intervention that we’re seeing.”

What started with a speculative run-up in shares of video-game retailer GameStop, driven by Reddit’s WallStreetBets day-trading community—and GameStop’s subsequent crash—has spread to other companies, most recently Canadian cannabis companies like Tilray, Canopy Growth and Aphria, which saw their shares surge last week. 

As a pension fund with more than $100 billion in equities in its portfolio, CPP Investments oversees small stakes in some of the stocks caught up in the recent volatility, including Canopy and U.S. theatre chain AMC Entertainment.

With its long-term horizon, however, “the short-lived spikes and falls in the price of a handful of meme stocks is not going to have any impact on our portfolio,” said Rubin.

The concern Rubin does have is the extent to which stimulus efforts may have unintended consequences for the economy if they’re not carefully withdrawn once the crisis passes.

“What’s certainly caught our attention is what these kinds of episodes say about the use of stimulus payments … and how excess liquidity is being spent and invested, particularly by younger generations,” said Rubin. 

“It’s going to have an impact on how people save, how they spend and how they invest and could ultimately have an impact on the broader rate of inflation in economies. These elements of the story are more important for a large, longer-horizon investor.”

The impact of social media-fuelled market mania on pension funds has drawn scrutiny from legislators. Last month, Dale MacMaster, chief investment officer of the government-owned Alberta Investment Management Corporation, which manages public pension funds in the province, faced questions during a meeting of the Standing Committee on the Alberta Heritage Savings Trust Fund about its exposure to meme stocks.

He linked the market volatility to a combination of retail investors being stuck at home during lockdowns, easy access to low-cost investment trading websites and “excess froth and excitement in the market,” according to a transcript of the meeting.

“Not only are we seeing that in GameStop and BlackBerry, but look at Bitcoin,” he said, pointing to the cryptocurrency that has risen nearly 900 per cent since last March. “This is all evidence of froth, excess speculative activity, and we stay quite clear of that.”

With so many stocks caught up in the Reddit rush, though, pension funds haven’t been sitting still. In late January, the Ontario Teachers’ Pension Plan unloaded its 24.6 million shares of struggling U.S. mall owner Macerich after the company’s stock price briefly surged when Reddit users began touting it as “GameStop’s landlord.” The sale generated roughly US$500 million in proceeds for the fund, though as recently as 2018, its stake was worth more than US$1 billion.

Since the meme-stock saga began, many Reddit users have presented it as a populist movement that pits retail investors against Wall Street hedge funds. Several hedge funds that had shorted the stocks—or wagered their price would fall—suffered significant losses when the shares instead surged in price.

Yet many pension funds hold hedge funds in their portfolios, and some observers have warned that in taking aim at Wall Street, the retirement savings of regular middle-class workers might be caught in the crossfire.

That is more of an issue south of the border.

“It’s true that pension funds do invest some of their assets through hedge funds, but in Canada it’s much smaller than in the U.S.,” said Mikhail Simutin, an associate professor of finance at the University of Toronto’s Rotman School of Management.

According to the Pension Investment Association of Canada, which represents more than 130 of the largest pension funds in Canada, as of Dec. 31, 2019, hedge funds accounted for 1.08 per cent of its members’ $2.3 trillion in total assets. By comparison, state and local pension funds in the U.S. had on average seven per cent of their US$4.5 trillion in assets in hedge funds in 2019, according to Public Plans Data. It’s not uncommon for hedge funds to account for 15 to 30 per cent of some U.S. pension plan assets. 

Still, Simutin said the meme stock craze has been a wake-up call for pension funds. “If I were a pension-fund manager I’d double check that my hedge funds I’m invested in are not engaged in heavily shorting smaller-sized stocks,” he said.

CPP Investments’ Rubin said the types of hedge funds caught flat-footed by Reddit day traders are a small part of the total hedge-fund universe and are not part of its asset mix.

“We already do quite a bit of work to understand what the investment thesis is of those funds in which we invest, and single-name short investing is not an investment thesis that is typically in our roster,” he said.