CPPIB’s 10 year results exceed median
With the long weekend out of the way, we can all turn our minds again to how the CPP Investment Board is managing our money (see prior post “CPPIB’s 2010 results put pension fund in bottom decile” May 21-10). According to RBC Dexia data for “Large Pension Plans with more than $1 billion under management”, the results are decent when compared to the 28 funds in their index:
Nine years as at March 2010 (RBC Dexia)
5th percentile: +6.63%
25th percentile: +5.90%
Median: +5.51%
CPPIB: +5.50% (10 year results data)
75th percentile: +5.10%
95th percentile: +3.78%
Ten years as at March 2010 (Policy Mix, which assumes CPPIB’s asset mix is 60/40 equity/fixed income)
CPPIB: +5.50%
5th percentile: +4.43%
25th percentile: +4.26%
Median: +3.94%
75th percentile: +3.44%
95th percentile: +2.74%
If the Policy Mix results truly reflect the global universe of Large Pension plans, then it would appear that the management team at CPPIB (MacNaughton era plus Dennison era) added about 100 – 150 basis points of value over the past decade. If accurate, that’s a positive sign indeed. Although it’s not enough to cover the required 6.2% annual return once inflation is taken into account, it is still better than the lion’s share of their comparable pension plans over the 10 year horizon.
MRM
At bit of hostory, CPPIB was 100% equities at inception, and only over time chose to layer in fixed income, to smooth volatility as an all equity plan was on reflection too volatile for a public relations team to handle. The whole point of CPPIB was to gain equity exposure to help fund pensions, it is not a pension plan, nor conceived to be a balanced fund, it is a crown corporation, and does not create or pay benefits. It is not a 60-40 plan, and its fixed income portion is only recently significant. Therfore, the comparison in your assessment is not appropriate. Unfortunately, they have yet to “add value” in the normal industry parlance, and the timing to broadly expose Canada’s citizens/taxpayers to equity risk is, by CPPIB’s own acknowledgement, the worst ten year period in history to be exposed to equities. Also probably the worst period to invest in unhedged Canadian dollars. Clearly, the CPPIB management and Board still believe (and most certainly their actuarial advisors believe) in the long term equity risk premium and purchasing power parity ideas, and continue to focus on execution. But the question arises – when will CPPIB be brought to account, for both its very existence and execution success, or lack therefof. You can’t cite the long term forever, and since they have been in business (including pe) for 10 years , with very favourable winds at their back at inception, and then terrible massive scaling up decisions thereafter, surely a harsher view of how they are doing is not out of order.
Thanks for the helpful clarifications. Your insight is much appreciated.
MRM
MK – a few corrections if I may. CPPIB was originally a fixed income plan (like most other Canadian pension plans until the end of the 20th century). According to their 2010 Annual Report in 2000 their tactical asset allocation was 95% fixed income and 5% equities. Currently their TAA is 56% equity, 31% fixed income, and 13% inflation sensitive (i.e. real return bonds, infrastructure, etc.). CPPIB’s is measured (or benchmarked) to their Reference Portfolio (or Policy Asset Mix) which is currently 65% equity and 35% fixed income (that is what many in the biz would refer to, very ruffly, as a 60/40 portfolio).
Looking at Mr. McQueen’s analysis, and given that the CPPIB’s actual 10 year results are greater than the 5th percentile of the Policy Mix performance of the largest pension plans in Canada, it would in fact appear that the CPPIB staff has "added value" over a 10 year period. And as you have rightly pointed out, in a very difficult period to be investing in public equity.
Correcting your corrections: The CPPIB was formed to invest in equities, 100%. It never was a fixed income plan. It is separate from the CPP itself, which managed a bond portfolio, and administers the payment of benefits. On CPPIB inception, maturing bonds funded an increasing investment in equities – this is solely what CPPIB was formed to do. Extract from 2000 anual report:
"Our portfolio was invested solely in equities, which out-performed other
investment classes, such as bonds. (The Canada Pension Plan itself holds
$30.3 billion in bonds that are not part of our assets…").
Only in 2001 when equity returns were seriously negative did CPPIB start to allude to "combined performance" of itself and bonds held by the government, in order to display a more appealing picture to the public, and subsequently referred to performance of the "CPP Reserve fund" which included both CPPIB equities and other assets held by the governement, obviously a weird hybrid to describe. But all performance metrics around value add for CPPIB itself remained soley against the equities activities they were actually running. Only in 2006 was the concept of a reference portfolio introduced, which embedded a fixed income component directly into CPPIB. CPPIB has simply evolved to configure itself into appearing like a balanced fund.
To restate CPPIB’s performance in the early years as if they were mainly in bonds might accurately describe the intentions of policy makers and an integrated view of CPPIB’s role. But until recently (and maybe even now, its not actually that clear), they were an equities manager by madate, funded by maturing fixed income instruments.
Over ten years, based on the assets actually managed, and the returns generated against relevant benchmarks, it appears CPPIB added no active value add. And even if you give active credit for beta choices, the beta calls have not been successful. Lets call it the way it is – Canadian’s are not, as yet, better off for the creation of CPPIB. They might be someday, but they are not as of today. This doesn’t mean shut it down, or actually do anything necessarily. Just DON’T declare victory, its not appropriate.
I stand corrected as I was simply referring to the CPPIB / CPP as one pool of capital, which it ultimately is. I am also definately not declaring victory, as they most probably would have been better off sticking with bonds.