Home Capital Markets CPP Investment Board has produced $1.8 billion of negative value-add over a four year period

CPP Investment Board has produced $1.8 billion of negative value-add over a four year period

As I begin to dig into the 2013 CPP Investment Board annual report, I keep coming across evidence that our team’s active investment management strategy has yet to bear fruit. Yesterday I advised that the CPPIB had underperformed its benchmark for fiscal 2013 (see prior post “CPP Investment Board underperformed its own benchmark in FY2013” May 19-13). But last year wasn’t the only one where the results were underwater. Over the past four years, the CPPIB team is lagging its own benchmark by a total of $1.8 billion.

According to page 38, the CPPIB team has underperformed the CPPIB’s Reference Portfolio to the tune of $300 million on a cumulative basis over the past four fiscal years. That’s on a gross (i.e. pre-costs) basis. When you add in the $1.494B cost of managing the portfolio over that time period, which cannot be ignored, the negative value add jumps to $1.8 billion over these four fiscal years.

Which means if our hundreds of investment staff had taken an unpaid sabbatical for 1,460 consecutive days, and our money had been invested in the CPPIB Reference Portfolio instead, our pensions would be $1.8 billion richer while CPPIB’s team made bird houses or worked on their golf games (which is unfair to the CPPIB public markets team, as you’ll see below). Each Canadian worker could have received an $103 rebate on his/her 2012 CPP contribution if not for this $1.8B drag. Legions of smart, experienced CPP staff toiling away, day and night; producing no Alpha over a four year stretch. Seems unfathomable, does it?

CPP’s CEO, Mark Wiseman, sees these same lagging figures, and went to some length to explain them away in last week’s press release:

“We have strong conviction that our private market assets will outperform the public markets equivalents of the CPP Reference Portfolio over the long term,” said Mr. Wiseman. “This result will, however, not necessarily be demonstrated in the short term. Particularly when public markets have rapid moves up or down, our active private market strategies may show short-term underperformance or overperformance vis-à-vis the CPP Reference Portfolio, which does not accurately reflect our long- term value-add expectations for these strategies.”

Indeed, according to the CPPIB’s annual report, it is Mr. Wiseman’s former private equity division that’s currently dragging down the entire fund’s investment performance. Over four years, CPPIB’s Private Equity investments have produced $2.3 billion of cumulative negative value add, before CPP’s own overhead (pg. 47). That’s a $1.3 billion jump in the four year rolling cumulative negative value add as compared to last year’s financial statements. Which must really annoy the CPPIB’s active public markets investing team, who have contributed $2 billion in positive value added during this same window (pre $1.5B of cumulative CPPIB internal overhead, of which more than half would be attributed to the public markets team), and may explain why André Bourbonnais, the Senior Vice-President for CPPIB’s Private Investments division doesn’t make it into the compensation list of top 5 CPPIB execs (pg. 75), despite managing $47.9 billion of assets, plus another $12 billion or so of additional external PE fund commitments.

Of note, in the three fiscal years beginning April 2006, the CPPIB PE investments made largely under former CPPIB CEO John MacNaughton (which was prior to the arrival of the current senior management team) saw far better performance. Almost $5 billion of value add in fact (pg. 47).

All of which may explain why the current CPPIB team refuses to divulge the internal rates of return for our 179 different private equity funds (see representative prior posts “CPP Investment Board earning less than 6% return on more than $8 billion of Private Equity commitments” Mar. 23-13 and “12 questions CPP Investment Board won’t be answering on BNN today” Jan. 17-13), unlike similar public plans, including CalPERS, CalSTRS, New Mexico Educational Retirement Board, the State of Oregon, Washington State Investment Board….

I wrote to the CPPIB Board of Directors on January 9th on the matter, asking why they claimed to be leaders in transparency when I could find out more about Oregon’s PE returns than our own. They wrote back to generically advise that these kinds of disclosure issues were always under review. Now that the 2013 financial statements are out, and this basic IRR information continues to be suppressed, despite being available at so many other comparable North American public funds, one can only assume that we aren’t soon going to be get to the bottom of what’s driving the $2.3 billion of cumulative negative value add.


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