CPPIB draws more critical attention, but to what end?

I hate to be the one to break it to the very influential pairing of The Fraser Institute and Andrew Coyne, but they are wasting their time on the CPP Investment Board. As someone who has been blogging about the agency’s activities since July 2007, at some personal cost, I dearly understand why the topic gets their attention. It is our $200+ billion, after all.

After years of playful prodding (see prior representative post “Why so uninquisitive about the CPP Investment Board, ROBers?” Mar. 3-13), the mainstream media’s critical interest in CPP’s performance and inner workings finally came to a head thanks to Tim Kiladze last summer. Over the past month, the CPPIB has drawn further high profile criticism; and not from the Left. The Fraser Institute released a well-researched report pointing out that the relative cost of managing CPPIB has grown dramatically over the past decade. As I wrote over 18 months ago, the CPPIB’s management expense ratio is out of line with other large Canadian pension plans (see prior post “Why is CPPIB’s MER higher than its peers?” Jan. 9-13):

Last time I checked (see prior post “Does Ontario really need five Pension Plans?” Nov 24-11), Ontario Teachers’ MER was a modest 0.20%-0.21%, and the HOOPP was getting by with 0.18%-0.22% of their gross assets under management. On a gross asset basis, CPPIB’s MER drops to about 0.25% from 0.28%, which means it still would cost the CPPIB $60-70 million more internally than the Teachers to manage the same asset pool.

The new Fraser Report includes all of CPPIB’s external management fees in its analysis, along with the federal government costs of collecting the payroll tax. I never went so far as to include Ottawa’s piece of the equation, but I understand The Fraser’s position:

The CPPIB needs to be more transparent about the expense of designing and implementing its investment strategy; every dollar spent on behalf of the CPP is one less dollar available to beneficiaries. As well, a full accounting of all CPP costs, including those incurred by the Government of Canada, is necessary.

On the transparency front, I sympathize with The Fraser team. After my years of back-and-forth with the CPPIB Board and management, one can only conclude that true transparency isn’t the goal. If it were, CPPIB would follow the steps taken by such pension plans as Oregon, WSIB, CalSTRS, CalPERS and so forth to mirror their clarity around IRRs within the CPP $35 billion externally-managed private equity allocation (see prior post “CPPIB’s new website fails to improve opaque disclosure” Aug. 8-13). Nor would the agency have an unpublished “Broadcast Policy” that apparently shields its managers from appearing on Canada’s Business News Network when tough questions arise (see prior post “12 questions CPP Investment Board won’t be answering on BNN today” Jan. 17-13).

For Mr. Coyne, he is also focused on the cost of managing our money, with a particular affinity for CPPIB’s executive compensation and its relationship with CPP’s performance:

More striking still has been the growth in compensation for senior managers: from $220,000, on average, in 2000, to $1.56-million in 2007, to $3.3-million in 2014.

Has this extraordinary executive bounty been associated with a similar increase in returns to the fund? Hardly. Even looking at the simple rate of return (net of costs), the fund earned slightly less on average after 2007 than before.

Maybe the fund’s bet on private equity, and the high-priced investment talent that goes with it, will pay off. As the board likes to explain, interminably (another measure of bloat: the CPPIB’s annual reports are now five times longer than they were a decade ago), as a public pension fund it can afford to invest on much longer time horizons than other investors; the returns to private equity are hard to measure in the short term; etc., etc. So it’s always possible we’ll find, decades from now, that it was all worth it. Or perhaps we won’t. But by then the managers will have made off with their millions, either way.

I get it. Trust me, I do. But I can assure these new CPPIB hawks that after seven years of tracking MER, IRR, net versus published gross returns, and so forth, the effort amounts to little more than, perhaps, career suicide for any Bay Street money manager. A journalist the likes of Mr. Coyne will surely agree that the following topics are each worthy of answers from the CPPIB Board:

– CPP owned $21 million of Sino-Forest shares as of March 31/11, This investment exceeded the CPPIB’s stakes in several other more established Canadian companies, including BCE, Bombardier, Brookfield, CIBC, Canadian Tire, Imperial Oil, National Bank, Onex, Power Corp., Shoppers Drug Mark, SNC, Telus, Thomson Reuters, TMX and TransCanada. What independent due diligence did CPPIB conduct to give it the confidence to go very over-weight into what the OSC says turned out to be a corporate fraud?

– According to the CPPIB 2012 “Report on Responsible Investing”, the agency says that it “adheres to the highest standards of transparency and accountability”. The CPP refuses to disclose the individual IRRs of our 135+ private equity fund investments, while the state pensions of such places as California, Oregon, Texas and Washington all disclose the individual internal rates of returns on their entire private equity, debt and venture capital funds, such as Apollo, Blackstone, Carlyle, KKR, Silver Lake, etc. The “IRR” calculation is a widely-recognized metric to determine the true performance of an investment over time. CPPIB has invested in dozens of these same funds, and yet refuses to disclose the IRR calculation, preferring to report nominal performance based upon dollars in and dollars out in the home currency of the fund in questions (CAD, Euros, USD, etc.).

– Over the past 10 years, the Canadian dollar has strengthened appreciably. The CPPIB has substantial investments in assets that are denominated in foreign currencies, and has a policy of not hedging our risk to changes in the relative valuation of these currencies against the Canadian dollar. What is the true individual performance of our 135 private equity fund investments when you take into account the huge swings in the currencies we’ve invested in? CalPERS, CalSTRS, Oregon, WSIB and UTIMCO all report the individual fund level return data on the basis of their own invested currency (being U.S. dollars), rather than the currency of the private equity vehicle in question (whether it be denominated in Canadian dollars, Euros or Renminbi, for example).

– CPPIB has committed over $30 billion to external private funds over the past decade. What IRR has CPPIB earned on its investment via the entire asset class of its external LBO managers, since the inception? Weighted by dollar invested / realized.

– CPPIB has disclosed to the media that it made hundreds of millions via its co-investment in Skype when it was acquired by Microsoft in 2011. At the same time, CPPIB refuses to disclose to the media how much we’ve lost on other mega private equity LBO co-investment deals that went south, such as EMI (went bankrupt in 2011), Freescale, SunGuard, TXU…. Why does CPPIB only disclose the details of the PE wins and not the losses?

– When I last checked, CPPIB owned $233 million of stock in four U.S. tobacco companies. As a founding signatory to the United Nations’ Principles for Responsible Investing, CPPIB has agreed to define responsible investing as “excluding companies from the investment universe on the basis of criteria relating to their products, activities, policies, or performance. This includes sector-based screening (where entire sectors are excluded)….” According to the CBC, CPPIB advises that “The CPPIB is mandated by law to evaluate companies only by their investment potential; morals and politics generally don’t enter the picture.” How does the CPPIB explain investing in tobacco firms, unlike CalPERS for example, while at the same time adhering to its duties to the United Nations?

– One of CPPIB’s stated PRI tests is “anti-corruption practices”. As of its most recent financial statements, CPPIB owned $175 million of HSBC stock and $74 million of UBS shares. Together, these banks recently paid US$3.5 billion in fines after admitting they were engaged in illegal activity over an extended period of time. In HSBC’s case, the fine was for multi-billion dollar drug money laundering. These firms have broken the “anti-corruption” requirement of the CPPIB’s Policy for Responsible Investing. Did CPPIB sell these shares once the banks have plead guilty? If not, why not?

– In February 2010, CPPIB announced that it was making a new $400 million allocation to Canadian venture capital and private equity managers via an external manager (Northleaf). At the time, CPPIB CEO Mark Weisman told the Globe and Mail’s Boyd Erman that he was excited about the opportunity presented by the Canadian venture landscape. As of Dec. 2103, $135 million of the $400 million had been drawn by fund managers. And yet, a raft of Canadian innovation-related funds have closed, including Vanedge, Georgian, iNovia, Lumira, Merck Lumira, Rho, Celtic, TVM and Wellington Financial. According to industry sources, none of the CPPIB’s $400 million was committed to these nine funds. Is this true? If not, how much of CPPIB’s 2010 $400 million vehicle has been committed to date to Canadian-based venture funds, in keeping with Mr. Wiseman’s excitement?

– In October 2012, CPPIB announced that it had loaned $400 million to the company that puts on the Formula One car races. CPPIB exec Andre Bourbonnais told the Globe and Mail that the CPPIB’s analysis was simple: “For us is was really an analysis of who was the counter-party, and in F1 if your counter-party is the principality of Monaco you’re pretty sure they’re going to be good on their commitment”. Since the Formula One is owned by CVC Capital Partners, Waddell & Reed Financial and Bernie Ecclestone (who recently paid $100M to settle bribery charges in Germany), what role does Monaco have in guaranteeing our $400 million 7-year loan?

You see, Andrew. There’s plenty of gruel to go around the Press Gallery. You’d think Canadians could get to the bottom of these topics, but we can’t. Unlike a public company, CPPIB has no real shareholders; the agency doesn’t even hold its “Annual General Meeting” annually. Unlike a traditional pension plan, we beneficiaries have no direct nominations to the Board overseeing our retirement savings. Unlike the Abu Dhabi Investment Authority, there is no supreme stakeholder who can weigh in if he/she is unhappy.

What we have is an agency which is a force entirely onto itself. If the plan delivers on the “75 year promise”, our grandchildren will be grateful and the unusually high MER and wall of silence will have been worth it. If the plan does poorly — have no fear — they’ll just increase your payroll taxes, as CPPIB CEO Mark Wiseman told ROB’s Doug Steiner two years ago:

And what happens if the CPPIB team turn out to be the worst investors the world has ever seen, and lose most or all of the money? Notwithstanding all of the checks and balances in place, Wiseman cracks a smile and says, “If they raise the amount taken off your paycheque by 50%, in less than five years we’re right back where we are now.”

That’s why your efforts are pointless. It’s a case of “Heads they win, tails you lose.” Do the smart thing and throw the towel in now; you’ll thank me seven years hence.

MRM
(disclosure: this post, like all blogs, is an Opinion Piece)