CPP Investment Board underperformed its own benchmark in FY2013

The thing about benchmarks, for a fund manager at least, is that they’re all your investors really have to go on. Once you’ve settled on what the appropriate benchmark is, of course. But, after that, you can’t stop staring at your personal Mendoza Line. As much as top drawer advisory firms such as Russell Investments might tell clients to ignore underperformance provided that the team and strategy you bought into haven’t changed course, institutional clients have a really hard time ignoring negative value add. The sentiment is: if a passive approach earns a higher return, why do I pay your fees?

In 2006, the CPP Investment Board created its own benchmark so that we beneficiaries can know how our CPPIB management team is doing. According to the CPPIB, this is what the Reference Portfolio is meant to accomplish:

- “It serves as a performance benchmark against which the CPP Investment Board’s value-added activities are measured.”
- “The Reference Portfolio represents a low-cost strategic alternative to the actual CPP Fund that would earn sufficient returns over the long term to help sustain the current CPP contribution rate at 9.9 per cent.”
- “The objective of the CPP Investment Board is to create value-added investment returns above and beyond those that the Reference Portfolio would generate. We achieve this by investing in asset classes that diversify risk and enhance returns and by utilizing investment strategies not represented in the Reference Portfolio. As always, in the challenge to add value, the CPP Investment Board adheres strictly to its mandate to maximize returns without undue risk of loss.”
- “The current composition of the Reference Portfolio benchmark is 10 per cent Canadian equities, 55 per cent global equities, 30 per cent Canadian nominal bonds and 5 per cent foreign sovereign bonds.”
-”The composition of the actual CPP Fund will invariably differ from the Reference Portfolio. In the actual portfolio there are no specific allocations to asset classes. Instead, in the pursuit of value-added returns we make investment choices guided by the underlying risk/return characteristics of individual investments rather than by which asset class they represent.”
- “This provides the board of directors, management and CPP stakeholders with an understandable and demanding investment benchmark to evaluate the investment performance of the CPP Investment Board.”

Last Thursday, the CPPIB team released our results for the 2013 fiscal year. The uninquisitive mainstream media appear to have read no further than the first three pages of the six page press release (see prior post “Why so uninquisitive about the CPP Investment Board, ROBers?” Mar. 3-13), and breathlessly reported on an annual return “topping” 10%. Indeed, it was 10.1% on a gross basis before being dragged down by $490 million of internal management costs.

If you read a bit further into the release, you’ll come to the part where CPPIB admits that it failed to hit the return threshold of its own passive reference portfolio. In fact, once you include the cost of all of ever-growing internal team managing our money (see prior post “Why is CPPIB’s MER higher than its peers?” Jan. 9-13), the CPPIB Reference Portfolio outperformed our money by $286 million.

Yep. A 2006-vintage well-structured basket of passive indices and bonds outperformed our active investment leadership at CPPIB for fiscal 2013. In its release, CPPIB went on to say that on a cumulative, long term basis this underperformance is not sustained, and that the active side of the portfolio has added $3.1 billion of value since fiscal 2007. I’d point out that most of the “gains” in our $30 billion plus of private equity investments over the past five years have been and remain merely estimated gains, since the CPPIB’s 140 plus different external PE Managers themselves are called upon to estimate the values of their underlying illiquid private companies.

This underperformance is all the more stark as we started the 2013 fiscal year with just 45% of our capital invested actively. In essence, 2012′s $286 million of negative value add by our investment team arose due to the performance of less than 50% of our invested capital.

This isn’t the first time the CPPIB media team has had to break bad news to us, reticent as they are to disclose anything negative whatsoever. Our private equity portfolio contributed $1 billion of negative value add over the four years ending in 2102 (see pg. 52). Also in fiscal 2012, the CPP annual report advised that the CPPIB Reference Portfolio earned a 4 year return of 3.1% (pg. 41), exceeding the CPP’s actual 5 year return of 2.2% (pg. 39). Why they don’t match the time horizons so that we can perfectly compare the figures I cannot explain.

I’ll add that to the list of questions I’m trying to get answered for you (see prior post “12 questions CPP Investment Board won’t be answering on BNN today” Jan. 17-13).

MRM

 
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Halogen IPO a true blowout

My investment advisor called yesterday with some good news and some bad news.

The good news was that Halogen Software had finished its roadshow marketing (see prior post “Halogen IPO filing gives Canadians their first chance to taste tech in far too long” Apr 2-13). The bad news was that the IPO had been so well received that I was only going to get a 25% fill on my RRSP order. And zero on my margin account.

The tale is incredibly affirming for Canada’s tech investment banking community, who’ve had to weather a particularly difficult period. Since, like, forever. The Halogen deal was marketed as a $45 million treasury and $5 million secondary offering (from star VC JMI Equity), and was upsized to $50 million treasury to help satisfy a bit of the $200 million of demand in the book. Retail investors got just 10% of the $55 million of stock sold, versus the 15-20% that you often see. And the hedge fund community got equally modest allocations, so there’s not much chance that flipping will get in the way of a good TSX opening. Halogen will start trading under the symbol HGN on the 17th, and I’ll have to get the balance of my order in the aftermarket like the rest of you.

The roadshow saw Halogen’s management team market trundle across Canada, with a week in the US and a couple of days in the United Kingdom; 80 PM meetings in total. Institutional orders came from all three markets, which you rarely see for a small cap deal. Canaccord Genuity took care of Canada and the UK, while co-lead Stifel Nicolas set up the US sessions. Despite the international interest, the backbone of the book was sourced in Canada, which is a great tribute to the Canadian PMs who haven’t had much new tech product to look at for a long time (see prior post “Belair / Ericsson deal a wake-up call for every Institutional Sales Desk” Feb. 22-12), and for ignoring the fact that Canada’s last small cap tech IPO hasn’t yet worked out as planned (see prior post “What impact will NexJ have on the next crop of Canadian tech IPOs?” Mar. 9-13).

To finance their own orders, some Canadian PMs are moving money from their resource allocation to the tech side, which must be the first time since 2004 or 2005 that anyone can say that with a straight face. The fact that Halogen achieved a 5x revenue multiple tells me that the entire team (both management and i-banks) was able to successfully position Halogen in the right group of U.S. software comps, rather than Canadian small cap land. Without having to rely solely on the recent success of the Workday IPO.

This might bode well for Descartes’ valuation, for example. And the success of the ViXS $50 million IPO earlier this week by GMP Securities and Stifel is another positive sign (see prior post “ViXS is next in line for Tech IPO parade” Apr 13-13)

Although the Halogen deal could have been priced at the top of the $10-12 IPO range, and most PM’s would have stayed in the book at that price, the company’s Board was very wise to take their dealer’s advice and go with $11.50/share. The Canadian tradition of leaving a cheeky “quarter on the table” turned out to be a sincere fifty cents here, and everyone will be better for it.

Hearty congrats to all involved. This might just get other Boards of quality private tech companies to sit up and take notice.

MRM
(disclosure: this is an Opinion Piece; as I say from time to time, I’m not licenced to give investment advice and this should not be taken as such)

 
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Crafty social media campaign afoot to stop #PorterPlans

If you’ve never read “Both My Houses” by Father Sean O’Sullivan (with Rod McQueen), I recommend you get out to the local library and give it a read. It is a wonderful read, with many a hilarious political war tale. Father Sean told some great stories about how John Diefenbaker dealt with the raft of written correspondence he received each day on Parliament Hill. Dief took true pride in this part of his role, particularly following his time as Leader of the P.C. Party. He would spend part of most days reading aloud many of the supportive letters, and ensuring that most got a meaningful response whether they were from fans or foes. And a photo, although who actually signed the black & whites depended upon the day.

In 2013, things are different. The public has many new ways to communicate on matters of public policy. Snail mail still works, but the ease of email and social media have created an entirely new way of interacting with politicians. What would Dief have done — as a man who loved well chosen words — with just 140 characters?

Like many of you (although I’ve got no opinion on the matter), I’ve been watching the dialogue around the April announcement from Porter Airlines. Although this issue is between Bob Deluce’s team and Toronto City Council, about five fierce opponents of the plan have sought me out on Twitter. Most go by fake names associated with animals or marine life: Goats, Sharks and Fish to name three. I asked one why he didn’t use his real name while he was browbeating me, and he said it had something to do with his work; and that I’d understand (as in he works for Adam Vaughan?). He feels very strongly about Porter’s Plans and the Toronto Port Authority’s unrelated May 2012 plans to improve the Toronto Harbour’s Marine Exclusion Zone, and wants his views acted upon despite the anonymous veil.

It made me wonder how John Diefenbaker dealt with a letter from a constituent who wanted his views heard on an important issue but signed the letter “anonymous” and didn’t include a return address. If Father Sean was still alive, he’d know the answer.

The first tweet I came across this morning about Porter’s Plans was written by “Amelia Solesbee”, using the catchy Twitter handle of @Gabrielaqflr, even though @ameliasolesbee hasn’t yet been taken by anyone. Here’s what Amelia had to say:

No Jets #TO hoping council will ground the staff study of Porter airlines expansion next week #TOpoli

Amelia is supporting something called NoJetsTO, which appears to be the new “campaign name” of CommunityAir (or at least they overlap in their particular venn diagram), the group that’s been trying to close the Billy Bishop Toronto City Airport over the past few years (see prior representative post “The “horror” of urban noise” Nov. 10-09). No JetsTo has 98 followers, which in the world of Twitter is a start. They include City Hall journalists, local anti-airport politicians (such as Councillor Gord Perks), the Parkdale High Park NDP (see previous), Derek Vanstone (Air Canada exec), and a municipal lawyer who writes and edits the blog over at Community Air (see prior post “Anti-airport lobbyist: ‘I was spectacular’” Dec. 3-10). Interestingly, 3 of the group’s first 6 Twitters followers are part of the core group of five who’ve been sharing their strongly-held anti-Porter Plan views with me directly as Chairman of the Toronto Port Authority, the owner/operator of the profitable and popular Billy Bishop Toronto City Airport.

A proposal to study Porter’s Plans will be discussed by Toronto City Council this week, which is likely why “Amelia Solesbee” started off her day on the “No Jets” topic. Her first Tweet ever! I’m sure Twitter founders Jack Dorsey, Biz Stone and Evan Williams would be delighted that an issue of public policy got Amelia to finally sign up to the Twitterverse, which many of us have been toiling away within since early 2009. Driving the private valuation over $10 billion all the while.

Unfortunately, “Amelia” may not actually exist. As in, it’s not clear that she’s a real Toronto voter herself, despite being able to type the “#TOPoli” handle in her tweet to ensure that reporters, such as Natalie Alcoba, Don Peat and Vanessa Lu see the anti-Porter groundswell, not to mention the City Councillors who track such things. Despite her timely choice for a first topic, she’s only got 5 followers so far, who go by the Twitter handles of: @Teressagous, @Kaleygbdh, @Lorrettarra, @Mikaelaffnst, and @Patricasts. This crowd as a group have generated an aggregate total of 8 Tweets in their collective lifetimes, and appear to be the creation of a website that generates Twitter followers (@Patricasts provides a helpful web link), called Followers Delivery. Followers Delivery has an Upstate New York call centre, and for prices as low as US$20, you too can get some Twitter help in behind your political lobbying campaign.

Now, Amelia needs to improve her algorithm, since “No Jets #TO” won’t work in the Twittersphere. It has to be #NoJetsTo” with the hashtag at the front and no spaces between the characters for it to get picked-up in online Twitter searches. In an effort to be polite, I retweeted her post this morning. Now that I’ve welcomed Amelia to Twitter, let’s see if I can help her get a Twitter follower who isn’t a TwitterBot.

The issues under discussion are important and deserve thoughtful reflection, and there are certainly more myths (often fed to and by elected officials) out there than facts. It’s up to Porter Airlines to make the case, or not. But I’m sure of one thing. For all the buzz and attention that Twitter generates, politicians are far smarter and more saavy than falling for computer-generated Twitter handles spitting out Tweets on any given subject.

MRM
(disclosure: this post, like all blogs, is an Opinion Piece, and as a personal view should not be taken to represent the views of the TPA board, management or the Federal government)

 
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Job Posting: Business Development Manager

Published on May 2, 2013 by in General

With the recently announced Fourth Fund and new $600 million lending program, the team at Wellington Financial is looking to add someone in a Business Development Role. Think sales as much as financial or company analysis. If you love numbers but are shy, for example, this is not the job for you.

Attributes we are looking for:

- Minimum 2 years relevant prior work experience
- Exceptional written and verbal communication skills using English language
- Ability to maintain upbeat and positive attitude at all times
- Ability to meet business development targets
- Ability to use Microsoft Powerpoint, Word and Excel
- Ability to establish and develop networks for the purpose of building new
business relationships in order to generate deal flow.
- Self starter
- Strong analytical skills to assess opportunities

Role, responsibilities and duties:

- Responsible for assisting the firm win new business in target markets through
research and direct contact with potential customers
- Attend conferences and trade shows throughout Canada and the continental USA
- Promote Wellington Financial LP at industry events, conferences and trade shows
- Promote Wellington Financial LP’s products via direct telephone call and email
solicitation of potential clients and their venture capital fund sponsors
- Participate in the development of marketing collateral
- Identify relevant opportunities for venture debt transactions
- Utilize Salesforce.com to increase the firm’s database of potential clients
- Work within previously-approved business development budget
- Will involve regular overnight travel away from Toronto headquarters; up to 50% of any given month
- Role may involve occasional evenings at out-of-town conferences, trade shows
and other business development venues as part of new business development
- Ability to work efficiently under tight timelines

If this sounds good to you, please send your resume and cover letter to Lyndsey Fisk-Calhoun @ lfisk-calhoun@wellingtonfund.com.

MRM

 
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Mark McQueen co-hosts BNN

Published on April 30, 2013 by in BNN

For those of you who missed it, Mark McQueen was a guest co-host on BNN yesterday at 3pm to discuss the top stories of the day.  Click here to watch the first clip.

LFC

 
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