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Q&A with Bruce Cundick, CIO of Utah Retirement Systems

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Bruce Cundick

Bruce Cundick

This interview will appear in the 2Q Y2012 issue of the Sovereign Wealth Quarterly.

This is a Q&A with Bruce Cundick, Chief Investment Officer of the Utah Retirement Systems. He is responsible for directing the overall operations of the Investment Department. He manages all aspects of investment functions for all plans. This Q&A will be focused on hedge fund transparency and Open Protocol Enabling Risk Aggregation.

To learn more about Open Protocol Enabling Risk Aggregation, please visit: www.theopenprotocol.org

1. As a public investor, what is your long-term view on the future of the hedge fund industry?

I am positive on the future of the hedge fund industry. However, if assets continue to pour into the industry at the current rate, returns will undoubtedly decrease and some investors will exit the space. If a number of institutional investors exit, especially those with large amounts to invest, there will be some managers who will suffer.

2. What is the current state of hedge fund reporting and transparency? Is it adequate enough for institutional investors?

The transparency has improved significantly; however, it can still be much better. Managers that refuse to be transparent will miss out on significant opportunities to procure capital. The public plans are the late comers to this space and they have large amounts of capital. They also demand the most transparency given that they are public institutions.

3. Bruce, can you explain Open Protocol Enabling Risk Aggregation (OPERA) standards?

OPERA standards are a way for all those in the hedge fund industry whether they be investors, managers, administrators, prime brokers, regulators, etc. to collect and disseminate information in a standardized format.

This becomes an enormous advantage to all parties to have information that can be aggregated and all metrics are calculated using the same methodology.

4. What are some of the key benefits of adopting OPERA standards for hedge fund institutional investors?

Investors can aggregate all their exposures across any manager and see the concentration levels they have by geography, sector, industry, strategy, etc. It becomes a significant risk tool. Because all the risk metrics calculated by the manager are calculated using the same methodology, the risk metrics are comparable across the same concentration levels. Also, the data are generated using the managers own positions. Thus the data are positions based data and not returns based data. Thus the data by each manager can be loaded into the investor’s own risk system. The statistics generated by position level data are more accurate than returns based data.

5. Currently, what types of hedge funds will the OPERA reports apply to?

The reports will apply to pretty much all hedge funds. However, arguably OPERA reports for stat-arb or high frequency managers will provide less utility given the number and frequency of the positions. Any private equity or real estate investments the hedge fund manager might have will get covered in more detail under later phases of OPERA.

6. How will OPERA reports work?

The investor and manager will determine the granularity of the reports. Those managers that are more transparent will be able to provide greater detail. The manager fills out a standardized template that will be given to the investor. The template allows managers to report exposures at three different levels of granularity. These levels are called grades 1, 2 and 3, where grade 3 is the most granular. The manager will have to at least comply with grade 1 detail. Further levels of detail will be negotiated between the investor and the manager. OPERA does not preclude the investor receiving their current customized risk reports if they so desire. In addition, OPERA is not a replacement of the risk reporting of the manager. The manager also benefits from only having to produce one report for each of his/her clients and/or regulators.

7. Are there plans to have OPERA extend to other asset classes such as private equity and real estate?

OPERA has released phase one which only applies to hedge funds. Although phase one would also apply to any long only managers the investor currently has as well. These managers are typically in the public equity and public fixed income space. At a later date, it is envisioned that OPERA will release other phases that will address the other alternative asset classes of private equity and real estate. Thus the investor will eventually be able to look at his/her whole portfolio, all asset classes, in an aggregated way using OPERA data.

8. Anything you would like to add?

The first letter of the acronym OPERA stands for open. It is an open protocol. This means that anyone can submit suggestions to the committee for changes in the data, additions or deletions. If the recommendations have merit, the reports will be changed to reflect the improvements.

One final note: OPERA is FREE to all participants. There is no charge to the investor, manager or anyone else connected with the reporting standards. We encourage every investor to ask their managers to produce OPERA reports for them.

About Bruce H. Cundick

Bruce H. Cundick is the Utah Retirement Systems Chief Investment Officer. He is responsible for directing the overall operations of the Investment Department. He manages all aspects of investment functions for all plans. The Utah Retirement Systems is a $20 billion state pension fund.

Mr. Cundick graduated Magna cum laude from the University of Utah with a Bachelor of Arts degree in Accounting and Master of Business Administration Degree. Bruce is a Chartered Financial Analyst (CFA) and a Certified Public Accountant (CPA).

Apple’s Ginormous Corporate Cash Pile Plans to Come Home

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The positive economic effects of U.S. President Donald Trump’s tax reform have already altered the financial behaviors of major U.S. companies such as Wal-Mart Stores, Apple Inc. and AT&T.

In response to the tax law reform, many American businesses, large-to-small in annual revenues, have issued bonuses, granted awards and signaled plans to increase capital expenditures in the United States. For example, Apple announced plans to give its employees US$ 2,500 each in stock awards. A key section of the new U.S. tax reform law includes a provision for firms to take advantage of a one-time payment of 15.5% on repatriated funds down from the 35% rate.

Initial Plans

With the Dow Jones Industrial Average (DJIA) reaching new highs and the tax reform deal signed into law, Apple revealed they would invest US$ 350 billion into the United States economy over a period of five years, as they repatriate massive piles of money from overseas. The iPhone maker estimates they will payout roughly US$ 38 billion in tax payments from the overseas repatriation – thus shifting back some US$ 245 billion out of the US$ 252.3 billion it has held offshore. Apple also plans to spend an estimated US$ 30 billion in capital expenditures over the next five years, with roughly US$ 10 billion in U.S. data centers, according to the company. Apple has plans for 20,000 more jobs to create. The company that was once led by Steve Jobs had faced substantial criticism in the press over outsourcing its manufacturing to China to avoid paying U.S. taxes and lower manufacturing costs. Many of those facilities in China had labor issues such as environmental concerns, slave-like wages and extremely long work hours.

“We believe deeply in the power of American ingenuity, and we are focusing our investments in areas where we can have a direct impact on job creation and job preparedness,” said Apple CEO Tim Cook in a statement on January 17, 2017. He added, “We have a deep sense of responsibility to give back to our country and the people who help make our success possible.”

Liquid Financials and Fixed Income Changes

The sales growth of the iPhone has been a major factor in the growth in Apple’s cash pile. In 2006, Apple moved to act, forming a subsidiary in Nevada to manage investments, initially starting with around US$ 13 billion to manage. Nevada has no corporate income tax and no capital gains tax. Apple manages its investments through an outfit in Reno, Nevada called Braeburn Capital Inc. (Braeburn is a type of Apple), a subsidiary of Apple. Apple also employs some 40 to 50 external fund managers to handle the massive portfolio, according to sources. Braeburn has tried to reduce money management costs by using more separate accounts, while reducing dependence on money market funds.

As of September 30, 2017, Apple has a large investment portfolio worth an excess of US$ 300 billion, with US$ 194.714 billion in long-term marketable securities. Some US$ 128.645 billion are in current assets, with US$ 20.289 billion in cash and cash equivalents.

Focusing on the investment portfolio, some US$ 152.724 billion is held in corporate securities, with US$ 55.245 billion in U.S. Treasuries. Most of the portfolio is held in fixed income investments, including mortgage-backed securities – generally mandating investments be investment-grade and the avoidance of losing principal. Since 2012, Apple has been hoarding more corporate debt, rivaling some bond funds. Only about US$ 799 million are held in mutual funds (non-money market). Apple is also a major buyer of commercial paper across the globe. For example, the company participated in a US$ 500 million issue of 3-year floating notes from Hyundai Capital Services. The tech giant even uses derivatives to hedge against currency and interest rate movements.

The Old Scheme Ends

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CPPIB Partners with Lendlease on £1.5 Billion U.K. Build-to-Rent Venture

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The Canada Pension Plan Investment Board (CPPIB) has announced the launch of a £1.5 billion venture with Australian listed construction giant Lendlease Group centered around the development of build-to-rent private housing in the United Kingdom. The new infusion of capital will bolster the £800 million already committed to various projects in the Britain’s housing sector by Lendlease, which will develop, construct, and manage homes built through the partnership.

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Mubadala-Owned Falcon Bank to Begin Accepting Blockchain

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Zurich-based Falcon Private Bank Limited, which is owned by Abu Dhabi-based Mubadala Investment Company, has announced that it will now be accepting wealth originating from new and existing clients’ blockchain assets, reaffirming its position in the private banking industry as a first-mover in adopting distributed ledger technology. Assets will be accepted provided that they pass required due diligence to ensure full compliance with anti-money laundering (AML) and know-your-client (KYC) regulations and laws. The Swiss bank’s auditor PricewaterhouseCoopers (PwC) has reviewed the process, according to a press release.

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