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Whatever the board’s discontent with Wiseman, it was the board that put him there. And whatever the president’s personal contribution to the public pension fund’s escalating costs, they are a tiny part of the overall problem — as Thursday’s annual report will doubtless show.
In all likelihood, it will confirm a trend that has been gathering momentum for the past decade: more staff, higher pay, rising operating expenses, and all for no appreciable payoff for the fund’s 18 million “members,” the Canadian workers who are required to kick into it every year.
So whatever Wiseman’s deficiencies, the board can hardly escape its own share of the blame for the fund’s conspicuously bloated state. The near 25-fold increase in costs over the past 10 years is not, after all, the result of a mere absence of effective spending controls, but reflects a fundamental shift in the fund’s investment strategy, undertaken with the board’s approval in 2006.
Before then, the fund’s mandate had been to invest surplus revenues “passively,” that is in a broad range of stocks and bonds designed to track the relevant indexes. (This was after the reforms of the late 1990s released the CPP from its original obligation to lend any surplus to the provinces.) Now, it would try to beat the market, via so-called active management.
All they are obliged to do is to issue another unreadable annual report, to the bafflement of the media and the indifference of the public.
In pursuit of higher returns, the fund has plunged into an increasingly esoteric, and risky, range of private investments, from shopping malls to drug patents to toll roads. Offices have been opened not only in London and New York, but Hong Kong, Luxembourg, Sao Paolo and Mumbai.
The results of this experiment are clear, at least to anyone who wades through the board’s opaque, ever-lengthening annual reports. The number of employees, from just five at the fund’s inception in 1999, has grown to roughly 1,200. Where total compensation for the CPPIB’s founding president, John McNaughton, was limited to just over $300,000, Wiseman pulled in 12 times as much last year. Indeed, the fund’s top five executives received an average of more than $3.4 million apiece.
Overall, operating costs have risen from $3 million in 2000 to $54 million in 2006 to $803 million in 2015. The growth in external management fees has been even more explosive: from $36 million in 2006 to $1.25 billion in 2015. Throw in commissions and transactions, and total costs added up to more than $2.3 billion in 2015. It would not be surprising to find they exceeded $3 billion in the year just ended, or roughly one per cent of the fund’s assets. By comparison, the management expense ratio on a large, passively-managed exchange-traded fund (ETF) can be less than 0.1 per cent.
And the results? From fiscal 2000 through 2006, the fund earned an average return net of expenses of 7.5 per cent. Since 2007 its average net return has been 7.2 per cent. Of course, markets have been much rockier in recent years, so that’s arguably not a fair comparison.
Compare, rather, the fund’s actual return to its chosen “reference portfolio,” measuring how it might have performed had it simply invested in the indexes. In the nine years since the active-management strategy was adopted, the fund beat its benchmark five times, losing to it in four. On average, net returns have exceeded those of the reference portfolio by just three-tenths of a percentage point.
The benchmark, what is more, is a fraud. The reference portfolio the fund so narrowly outperformed is made up of just 65 per cent equities, versus 72 per cent for the actual portfolio. Moreover, it consists entirely of publicly traded stocks and bonds, whereas 41 per cent of the fund’s actual portfolio is now invested privately, in highly illiquid assets like real estate and infrastructure.
The CPP’s actual portfolio, in other words, is significantly riskier than its benchmark. To justify that risk, the fund should be earning a considerably higher return than the reference portfolio. Instead, it has barely kept pace with it. (In belated recognition of this, the board has since altered the reference portfolio to 85 per cent global equities, as a proxy for the extra risk of investing in private markets.)