CPPIB: Where a "single" really isn't a single
I love baseball metaphors. All metaphors, actually. But they have to be suitable and well delivered to avoid mockery by the recipient.
So, when CPP Investment Board CEO Mark Wiseman told the Globe and Mail’s Tim Kiladze yesterday that the CPP “put up a single on the board”, as a beneficiary I was delighted. Until I saw the actual results: the CPPIB earned a gross return of 1.1% in the quarter ended June 30th. That’s no “single”, for a couple of key reasons.
First, CPPIB should not be talking in “gross return” numbers. What we need to know is the fund’s performance AFTER the costs and expenses that go into managing the fund. CPPIB knows full well that it’s not competing with AGF, CI Mutual Funds, Gluskin Sheff or Letko Brosseau, for example — and there’s no need to report results on a gross basis so as to be in-line with the standard practices of the mutual fund or private wealth management industry. It’s not as though we can take our money out and move it down the street because we like someone else’s performance numbers.
The impact of management costs is particularly important in the case of CPPIB, which is all the more reason they should report in “net” figures. CPPIB’s Board of Directors spent $490 million last year to manage our internal asset pool, plus another $782 million (pg. 60) to compensate external managers. As is well understood by Joe and Jill Retail, fees and expenses have a big impact on the performance of our fund, just as you’d see with your mutual funds or wrap account. I can’t explain why we aren’t yet seeing economies of scale (see prior post “Why is CPPIB’s MER higher than its peers?” Jan. 9-13), but what I do know is that CPPIB has no reason to report quarterly financial results gross of the costs to manage the plan. At least 5% of our so-called $1.9 billion “profit” in Q1 didn’t hit the real bottom line. And yet the Globe and Mail is given a 1.1% “performance return” Gainsburger, and swallows it whole.
The second reason why CPPIB’s last quarter was no “single” was simply that despite putting a “1” on the board, Canadians need more than that just to tread water:
CPPIB “put up a single on the board,” [Wiseman] said, making a baseball analogy. The quarter wasn’t a home run, but a runner got on base. “To me that feels like a pretty good outcome.”
As we highlighted before, the CPPIB fund needs to earn the rate of inflation plus 4% per year just to tread water — ie., stay solvent. Anything below that annual return figure, for an extended period of time, requires major increases in the bi-weekly CPP deductions that come off your paycheque and out of your employer’s coffers. When we tread water, we’re not making progress. We are static, despite all of the movement in our arms and legs. Which is the same thing as not scoring a run in an inning, and why Mr. Wiseman’s “single” metaphor is misleading in my mind.
To be clear, as is outlined in the CPPIB Chief Actuary’s Report, we need our manager to earn 6% per annum net, that’s after management expenses, just to break even (assuming that realized inflation is 2%). If a 6% annual return keeps us even, how, then, is a quarterly return of 1.1%, before management expenses, a single?
When the Toronto Blue Jays put a runner on base, they are that much closer to scoring a run. If CPPIB thinks 1.1% gross is a “single”, then in theory four of those quarters in a row counts as a “run” on the board. But four quarters of a 1.1% gross returns works out to be ~4.1% per annum net (taking off the CPPIB’s $490 million of annual internal management fees, and assuming they’ve already taken off the $782 million of annual external management fees before reporting their gross financial results). That 4.1% implied annual return is about 2% below what we need to avoid increases to our paycheque deductions.
That’s a big gap. Which puts us in a small hole. Like when the first Blue Jay batter in an inning strikes out. That’s called a hole in the world of baseball parlance. Missing our annual return requirement on an annualized basis by 2% doesn’t qualify as a “single”.
We’re not even on base yet. And this isn’t the first bad patch we’ve hit, either. According to my analysis of the financial stamements, CPP Investment Board has produced $1.8 billion of negative value-add over a four year period.
The Globe article goes on to tell us that we shouldn’t worry about a single quarter, which is true. But there was no discussion of the $1.4 billion of negative value add in the four prior years:
Mr. Wiseman stressed that there shouldn’t be too much emphasis placed on one short-time period. “A quarter for us is 25 years, not 90 days,” he said, adding that everything the fund does is with a long-term approach.
I definitely agree that CPPIB isn’t the kind of vehicle that is built for quarterly performance. But let’s not kid around with metaphors that aren’t accurate; particularly when they mislead Canadians about the performance of the fund.
One other part of that article also didn’t ring true. Not “everything the fund does is with a long term approach”, since they pay long term performance bonuses to CPPIB executives based upon four year performance figures. Not 25 year ones. That seems too short for a CEO who professes that “a quarter is 25 years, not 90 days.”
If you want us to believe that, then management should eat its own cooking.
Mark, I agree with the vast majority of your previous comments with regards to the CPPIB, as well as that returns should be reported net of costs. However, we diverge a little on the topic of last quarter’s return; I think your dislike for their polices may be clouding the issue a wee bit. As a portfolio manager, I can say 90-day returns can’t be used to suggest that a manager isn’t doing a fine job just because the quarter isn’t tracking their annual “target” (6% let’s call it in this case). Portfolios with market-traded risk assets don’t move in a linear manner; they move in fits and starts. We both know that the only value that can be derived from short term numbers (if there is any value at all) is a relative comparison with a legitimate benchmark; I blame this confusion on the CPPIB, as well as the industry as a whole. The CPPIB should release the numbers, net of costs, along with how the “benchmark” did to give its members a realistic comparison on how it did in any given time period. This provides the absolute number as well as a comparison to a passive approach; informing clients (us) how the managers are doing compared to what happened in the quarter in the markets in general (as it’s not fair to suggest, for example, that a 1.1% isn’t a good quarter if the benchmark was down 4%!). Just my two-cents…keep up the good work.
Thanks for stopping by Jim. I appreciate the perspective.
What if those quarterly return figures were entirely due to a negative swing in the Canadian dollar?
Just to clarify Mark, I wasn’t suggesting that it was a good quarter, only that without a benchmark comparison we can’t say if it were good or not. I took a quick look at Russell Asset Management’s global balanced mandate and it looks like it had a slight negative return during the quarter (they would have had a tailwind from the currency change as well, so it’s a pretty good benchmark). It that’s the case, perhaps CPPIB did have a single for the quarter. The only way to know for sure is to look at a reasonable “peer” group and see where CPPIB ranks; a small group of global balanced “wrap” funds would suffice to see how they did relative to the markets, and therefore be able to objectively determine if they did indeed have a single, or an in-field fly…IMHO.
What’s the Russell peer group’s 5 year gross and net return figure?
According to CPPIB’s own financial report, even they think the team has produced $1.8 billion of negative value-add over a four year period as compared to their own benchmark.