CPPIB's 2010 results put pension fund in bottom decile

News item: “CPPIB posts strong rebound”

I know that I take my life into my hands every time I dare write about the topic of the CPP Investment Board, but the stark difference in today’s media coverage will confuse just about everyone, which leaves it to the blogosphere to get to the bottom of the matter. Once again.

I see in my DTM this morning that our national pension plan returned 14.9% for the 12 months ending March 2010. According to the Globe and Mail headline writer, that is what’s called a “strong rebound”:

Chief executive officer David Denison said the CPPIB was able to take advantage of the aftermath of the financial crisis last year to acquire assets in private equity, real estate and infrastructure at good valuations.

“Unlike many other investors, we did not suffer from capital or liquidity constraints last year,” Mr. Denison said in a statement. “In fact, our experience investment teams completed a number of significant transactions during the year.”

Despite the improved returns, however, the CPPIB’s 10-year annual average return of 5.5 per cent is below the estimated levels needed over the next 75 years to ensure the CPP is sustainable over the long term at its current contribution rate.

What’s remarkable about these so-called “strong” results is that no one in the media appears to have asked the CPP Investment Board how their 2010 FYE results compared to other large pension funds. According to RBC Dexia data for “Large Pension Plans with more than $1 billion under management”, the results are incredibly poor, in fact, when compared to the 28 funds in their index:

As at March 2010

5th percentile: +27.24%

25th percentile: +23.11%

Median: +20.92%

75th percentile: +18.10%

CPPIB: +14.9%

95th percentile: +13.97%

According to RBC Dexia, the CPPIB’s March fiscal year end results aren’t quite in the bottom 5% of the 28 “large” pension plans they track, but they’re awfully close.

To confuse matters more, the experienced business writer at the Toronto Star figured out all was not well at CPPIB, and covered the exact same press release in a far different fashion. James Daw did the natural thing and compared the CPPIB’s results to the stock market, and noticed that our pension plan underperformed the index by about 6%, and he also noticed there was a reason for this performance. CPPIB’s love for global buyout funds. A topic we’ve painstakingly analyzed here for years:

The gain was also 5.9 percentage points short of what public markets would have delivered without the 534-strong management team having to add any value, the annual report discloses.

Two strategic decisions pulled down returns: A massive shift of money in recent years from public markets to private investments, with no insurance to protect foreign investments against a decline in the value of local currencies relative to a rising Canadian dollar.

“Private investment returns are expected to play out over the long-term and cannot be captured within just a 12-month snapshot,” Denison said in a news release.

For those of you who have been following our backwater blog over the years, you’ll be well-versed in the Supersized allocations that CPPIB has made to global buyout funds (see indicative prior posts “Supersized private equity allocations at CDP and CPPIB?” Feb 10-09, “Doubling Down on Private Equity at CPP Investment Board” Feb 20-09, “PE consumed 61% of CPPIB quarterly payroll contributions in Q4” May 24-09, “CPPIB up 4.2% on external private equity investments” Sept 1-09, “Hey Canada, can you spare $15.7 billion?” Nov 17-09, “CPPIB’s 25% Private Equity concentration” Feb 21-10).

Bottom 10 percentile results for 2010, and three losing years for the decade. Blamed on supersized concentrations made to global buyout funds. No one saw that coming, did they? 😉

One year, or ten for that matter, doesn’t necessarily predict which way a massive pension fund is going. But those who paid attention to the Caisse de Depot’s returns back in 2005 or 2007 would disagree with that view.

What we know is this: CPPIB returned 5.5% per annum for the past 10 years. We need 6.2% based upon current inflation figures. The whys and the whos and the hows of the underperformance are irrelevant. Pension fund limited partners don’t accept excuses when proffered by their general partners, however valid, and nor should the beneficiaries of pension plans.

Let’s just hope it turns around, before the CPP’s payroll contributions are raised again to “fix” the growing hole.

MRM