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Comparing CPPIB and PSPIB FY 2010 Results
Given that PSP Investments reported its FY 2010 results, I think it would be useful to compare their results to those of CPPIB who reported back in May (fiscal year for both funds ended on March 31st, 2010).
First,
let me apologize, as I just noticed I never covered CPPIB's FY 2010
results, only some quarterly results. Let's go back to the May 20th press release:
The
CPP Fund ended its fiscal year on March 31, 2010 with net assets of
$127.6 billion, an increase of $22.1 billion from the prior year end.
The increase in assets essentially put the Fund back to its previous
highest level reported on June 30, 2008, prior to the onset of the
financial crisis. The Fund rose due to increases of $16.2 billion in
investment income and $6.1 billion in CPP contributions, minus
operating expenses. The portfolio returned 14.9 per cent for fiscal
2010 compared with a prior year decline of 18.6 per cent.“The
CPP Fund delivered one of its highest-ever annual returns, driven
largely by strong public equity markets,” said David Denison, President
and CEO, CPP Investment Board.One of CPPIB’s goals for
fiscal 2010 was to capitalize on investment opportunities arising in
the aftermath of the financial crisis. During the year we were able to
put our comparative advantages as an investor to good use, acquiring
assets in private equity, real estate, infrastructure and private debt.
Our long time horizon, distinct investment approach, available capital
and specialized investment expertise allowed us to make significant
investments last year that were beyond the reach of many investors.“We
have the benefit of being able to look beyond short-term market
cycles, and to deal with volatility better than the majority of market
participants,” Mr. Denison said. “Unlike many other investors, we did
not suffer from capital or liquidity constraints last year. In fact, our
experienced investment teams completed a number of significant
transactions during the year.”
These included the
acquisition of Macquarie Communications Infrastructure Group, as well
as our partnerships with other investors to acquire IMS Health and
Skype, investments which are expected to generate strong returns over
the long term.
Five and 10-year Returns
For
the five-year period ending March 31, 2010, the CPP Fund generated an
annualized rate of return of 4.0 per cent, or $18.5 billion of
cumulative investment income. For the 10-year period, the Fund had an
annualized rate of return of 5.5 per cent, or $39.3 billion of
cumulative investment income.
Canada’s Chief Actuary has
estimated that an annualized 4.2 per cent real rate of return, or
approximately a 6.2 per cent equivalent nominal rate over the last 10
years, will be needed to sustain the CPP at its current contribution
rate.
This 4.2 per cent real rate of return is an annual
average over the 75-year time frame used for the CPP projection, and
while returns are expected to vary in individual years, CPPIB is
confident it will be able to meet and exceed this rate of return over
longer periods of time.
“Our five and 10-year results
should be viewed in the context of the performance of major global
financial markets over the same period. The past 10 years of investing
have taken place during the worst calendar decade of performance for
equity markets in the nearly 200 years of recorded stock market
history,” said Mr. Denison. “If we look back over the span of the last
25 years the CPP Reference Portfolio, which serves as the market-based
benchmark for the CPP Fund, substantially outperformed the 4.2 per cent
real rate of return on a rolling 10-year basis in all periods except
calendar 2008 and 2009. We are confident that with the Fund’s current
portfolio composition and reasonable levels of capital market returns,
we will be able to generate the returns required to sustain the CPP at
its current contribution rate over the longer term.”
Performance Against Benchmarks
As
noted above, CPPIB measures performance against a market-based
benchmark, the CPP Reference Portfolio. It seeks to generate value-added
returns above this benchmark over the long-term. For purposes of
accountability CPPIB looks at performance over rolling four-year
periods.
While absolute returns for fiscal 2010 were
strong, value-added returns for the four-year period ended March 31,
2010, underperformed the benchmark. For the four-year period ending
March 31, 2010, the annual total portfolio return underperformed the
CPP Reference Portfolio by 0.34 per cent. The annual total portfolio
return for fiscal 2010 was 5.87 per cent below that of the CPP
Reference Portfolio, and offset the value-added performance recorded in
each of the previous three years.
“The
nature of the Fund’s private investments in real estate,
infrastructure, private debt and private equity means their value
typically lags that of the public market indices that comprise the CPP
Reference Portfolio,” Mr. Denison said. “It can take additional time for
appraised values of private assets to reflect public market levels,
particularly in the face of a significant rally such as that experienced
in global public equity markets in the past 12 months.”
“Private investment returns are expected to play out over the long-term
and cannot be captured within just a 12-month snapshot. For example,
we believe there is considerable value embedded in our real estate and
infrastructure investments that will be realized over time,” Mr.
Denison added.
You can download CPPIB's FY 2010 Annual Report by clicking here. On page 7, CPPIB's President & CEO, David Denison, discussed the key factor influencing the Fund's performance:
One
key factor influencing both overall Fund returns for fiscal 2010 and
the calculation of the value-added return over that same time period is
an inherent valuation lag between our public and private market
holdings. We now have over 25% of the
CPP Fund’s holdings invested in private assets including private equity,
real estate, infrastructure and private debt.In
contrast to public market holdings, which are of course valued in
accordance with daily observable market prices, our private holdings are
typically valued comprehensively only once a year using independently
verified appraisal practices.In our experience,
especially during a period where public equity markets have increased as
rapidly as they have over these past 12 months, it takes additional
time for appraised values to catch up to these public market levels. We
recognize that investing in private market assets has had a negative
near-term impact on value-add returns, but believe without qualification
that this is the right strategy for delivering the kinds of returns
needed to help sustain the plan over the longer term. We are confident
that our private holdings will perform very well over the coming years
and provide considerable value to the CPP Fund consistent with our long
investment horizon.
You can click on the image above to
see a breakdown of the performance by asset class. As mentioned above,
Private real estate (-11.8%), Private foreign developed market equities
(-9.4%), Private emerging market equities (-4.3%), and Infrastructure
(-6.4%) all had a negative impact on the CPP Fund's portfolio in FY
2010.
As shown below (click on image to enlarge), the
underperformance of Private Markets relative to the Policy Benchmark had
a material impact on CPPIB's value added, as the 1-year value added
fell by 587 basis points, and the cumulative 4-year value added fell by
34 basis points (whereas it was up 487 basis points in FY 2009).
By
contrast, Private Equity and Infrastructure, up 28.8% and 7.2%
respectively, were the main asset classes that allowed PSPIB to
outperform its Policy Benchmark in FY 2010. Real Estate was marginally
up (+0.6%), but it certainly didn't get hit as hard as CPPIB's Real
Estate portfolio, primarily because the portfolio was concentrated in
Canada and much more defensive as it is invested in residential,
retirement and long-term-care facilities.
The significant
outperformance of Private Markets at PSPIB relative to CPPIB is a little
perplexing, but the portfolios differ in terms of geography, risk
profile and maturity. Still, I wonder if there is something else going
on in the appraisal of these investments because I am much more
comfortable with the explanation CPPIB provided in its annual report.
Importantly, it does take time for appraised values to catch up to
public market levels, which means CPPIB will realize gains on those
private market investments next year if all continues to go well in
public markets.
As far as Public Markets, CPPIB outperformed
PSPIB in Canadian public equities (43.7% vs. 40.4%) and public foreign
developed equities (24.7% vs. 24.5%), but underperformed in public
emerging market equities (45.9% vs 47.4%).
In my opinion, PSPIB
has to further develop its Canadian public equities department. It was a
huge mistake to let go of two seasoned Canadian portfolio managers back
when I was there. Moreover, there should be more internal teams focused
on global equities, developing long-only strategies and long-short
strategies.
Finally, it is worth noting that CPPIB doled out huge
compensation to its senior officers, much more than what PSP's senior
officers received. The summary compensation table below can be found on
page 73 of their 2010 Annual Report.
But CPPIB did add this note on compensation:
Consistent
with our compensation framework, which measures investment performance
over rolling four-year periods, fiscal 2010’s negative value-added will
affect short- and long-term incentive compensation for the next three
fiscal years as well. This impact is demonstrated in Table 6; the total
estimated LTIP payout value as at March 31, 2010, for the named
executive officers, excluding the CFO, is $2,360,400. This
represents a 61% decline from the value of $6,053,822 as at the end of
the previous fiscal year reflecting the impact of the negative
value-added investment performance for fiscal 2010.
This
business of compensation gets very messy. I will be the first to admit
that it's not easy to find a proper framework of compensating senior
officers who deal in private markets, especially when they are ramping up operations. Public markets is another story,
either you outperform your index or you don't.
I invite you to read through CPPIB's 2010 Annual Report as well as PSPIB's 2010 Annual Report.
There are similarities between these two funds, but there are also
important important differences. CPP is partially funded plan whereas
the plans PSPIB manages on behalf of are fully funded plans.
The
annual reports contain a lot more information on these two large
Canadian Crown corporations. CPPIB even lists its investment partners on
page 54 of its annual report. A few funds in there caught my attention
for good (and bad) reasons.
Let me end by telling you that
comparing two pension funds isn't as simple as it sounds. Some
comparisons are straightforward, but others aren't. This is especially
true when comparing performances in private markets, which by their very
nature, are much more complex and don't lend themselves easily to
simple comparisons.
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What is far more interesting to me is that the average ten year Canadian Government bond yield for the whole of the 2000 year was 5.9% (semi annual or over 6% nominal per annum). This is a risk free return, i,e, the risk was zero of not achieving this return over ten years (ok buy a zero ten year if you want to be pedantic). It compares with the actual 10 year return achieved of just 5.5%. The numbers for the CPPIB and PSPIB might be gross or net of fees, but the absolute howler is that the complicated wheeling and dealing, governance structures, meetings, huge administration have all ended up reducing the value of investments by 1% per annum for ten years. Hows that for a FUBAR? Now if we could only borrow at this rate of incompetence and lend at the risk free rate would that make us all rich?
1% less return for c.10% more risk that is!
neat website by the way! http://www.bankofcanada.ca/cgi-bin/famecgi_fdps
CPP never has to buy a meal when eating out in NYC, London etc. e.g. lead investor in the equity of TXU, (largest LBO in history). How's that little gem looking? Needs some "additional time for appraised values to catch up"?
Hello Leo. Why are you still alive?
Sorry to disappoint you, but I'm alive and kicking!
DOW/SP500 daily chart is bullish for now ...
http://stockmarket618.wordpress.com
As Warren Buffett once said "I realized technical analysis didn't work when I turned the charts upside down and didn't get a different answer."