The Canada Pension Plan Fund had a bad year last year. You’d never know it to read the latest annual report from the fund’s managers, the CPP Investment Board, which spends much of its nearly 80,000 words boasting how, thanks to the herculean efforts of its employees and the sophisticated investment stratagems of its managers, it eked out an 8-per-cent return on investment for the CPP’s beneficiaries.
But of course it did: asset markets generally were up wildly last year. As an investment manager, you’d have to have gone pretty far out of your way not to have earned a sizable return. Indeed, the fund’s benchmark “reference portfolio,” a composite of global equity and bond indexes, gained 19.9 per cent on the year.
What does that mean? It means that if the fund’s managers had stopped trying to pick stocks and just bought index-linked ETFs like the rest of us – a strategy, known as passive management, that could be executed by your average high-school student – they would have earned more than twice as much on their investments last year as they in fact did.
That’s not the news, however. The news is not that the fund trailed its benchmark in its most recent fiscal year. The news is that it is now trailing it, on average, over the entire 18-year period since the fund, until then a small, low-cost outfit that mostly just bought the indexes, went all in on active management.
The fund acknowledges as much, though not until page 39 of the report, where it confesses to having earned “negative 0.1% annualized or negative $42.7-billion since inception of active management in 2006,” relative to the reference portfolio. Indeed: while the fund has earned 7.7 per cent annually since then, the reference portfolio has earned 7.8 per cent. (All figures here are based on CPPIB annual reports, 1999 to 2024.)
This is a staggering, if predictable, result. I say predictable, because most actively managed funds – two-thirds in any given year, nearly all of them over longer periods – underperform the market, especially after fees are included. That’s not because their managers are stupid. It’s because, in order to beat the average, even the smartest manager has to somehow beat all the other smart managers out there. Generally speaking, it’s a wash.
But then, “active management” doesn’t quite capture the transformation in the CPPIB after 2006. Essentially it turned itself into a giant hedge fund, picking stocks, taking seats on boards, and plunging heavily into an increasingly esoteric mix of assets: real estate, private equity, infrastructure, and God knows what else.
The fund’s staffing levels, consequently, exploded: from roughly 150 employees in 2006 to more than 2,100 today. So did its costs, particularly the fees paid to external investment managers: from $36-million in 2006 to $3.5-billion in 2024, a near hundredfold increase.
Over all, combining management fees, operating expenses and transaction costs, the fund’s expenses now exceed $5.5-billion annually – more than $46-billion in total since 2006. And yet, for as long as the fund’s returns after expenses exceeded what it could have earned had it stuck to the passive management strategy – measured by the reference portfolio – it could claim it was all worth it.
But now even that has been blown to bits. All that has been achieved in the course of that 18-year, $46-billion spending orgy has been to lose $42.7-billion for the nation’s pensioners.
Well, that, and to enrich the fund’s managers. The fund’s five highest-paid executives now receive compensation averaging nearly $4-million a year, almost five times as much as in 2006. Compensation across its entire staff averages more than $500,000.
All of this may in fact understate matters. For one thing, it assumes the fund’s self-chosen benchmark, the reference portfolio, with its mix of 85-per-cent equity and 15-per-cent bonds, carries the same risk as the fund’s actual portfolio. If not – if the fund is in fact riskier than that – then it should not merely be matching the reference portfolio, but beating it handily (since riskier investments tend to earn more).
Well, who can say? When an asset is publicly traded, we have a pretty good idea of what it is worth, how much it is earning, and with what degree of volatility or risk. But much of the fund’s portfolio is now invested in assets, such as bridges and shopping centres, that are rarely if ever traded.
The CPPIB likes to tout this as an advantage: Rather than chase short-term returns, it can, by virtue of its “unique mandate,” invest for the long haul. Maybe so. But if it turns out, years from now, that these assets are not worth anything like what the fund was claiming, it will be too late, won’t it?