CPPIB strategy change and costs

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Bylo Selhi
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CPPIB strategy change and costs

Post by Bylo Selhi »

Split from CPPIB Asset Allocation, related but different enough to warrant separate discussion - Administrator

Coyne: Costs skyrocketing at Canada Pension Plan Investment Board
To be sure, the fiscal 2007 reference point is well chosen. That was the year the CPPIB shifted decisively into its “active management” investing strategy — that is, one in which managers make bets on individual stocks and other assets in hopes of earning above-average returns — after several years in which it had largely stuck to its original “passive” investing mandate, where the objective is simply to track the broad averages. (Though as early as 2000 this constraint was being loosened, to the evident delight of the CPPIB’s managers.)

Equally, there’s no doubt that that is the primary reason for the fund’s soaring costs. As the CPPIB says in its 2007 annual report, the shift in strategy meant “the need for investment professionals with the requisite active management skills and experience has increased markedly,” forcing the board into a global bidding war for the sort of “specialized investment talent” this implied...

It is simply a reflection of what is by now also widely recognized, among those without a vested interest in denying it: Active management is a crock. To consistently beat the market within a given asset class, a fund manager must not only be smart and well-informed, he must be consistently smarter and better-informed than all the other smart and well-informed managers out there, all of whom are trying to do the same. That’s vanishingly unlikely...
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Re: CPPIB Asset Allocation

Post by adrian2 »

James' views are a bit more opinionated:
PrefBlog wrote:The Fraser Institute’s news release links to the study, titled Accounting for the True Cost of the Canada Pension Plan, which notes that the CPPIB’s assets under management are about $183-billion.

The CPPIB is making a horrible mistake in going to outside managers. Assiduous Readers will remember that I believe that it is possible to outperform benchmarks – any benchmark – over the long term, and that the reason for this is that most investors – including most professionals – are idiots. At least when it comes to actual investing, they’re idiots. They’re really, really good at sales!

In order to outperform, you need a dedicated staff and this staff has to be completely focussed on the nitty-gritty of investment analysis. The organization must have no sales exposure at all if it is to be successfule – which means that the organization must run its own money and only its own money. This necessarily means that consistent outperformance is restricted to organizations with huge amounts of assets, but that’s life. The moronic proposals for an Ontario superfund (discussed on April 21, 2009 and elsewhere on PrefBlog) will lead to a change of culture in the superfund management, from a culture of returns, returns returns! to a culture of clients, clients clients! which are polar opposites with respect to the personalities of the individuals concerned and with respect to the effect on investment performance.

CalPERS is run on the hub and spoke model. Its performance is a disaster. The UofT retirement fund is hub-and-spoke – and it’s a disaster. When you run an investment organization according this model, you are paying for salesmen to have lunch with each other. We are going to pay dearly for the CPPIB’s increasing appetite for good investment stories.
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Re: CPPIB Asset Allocation

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Bylo Selhi wrote:Coyne: Costs skyrocketing at Canada Pension Plan Investment Board
To be sure, the fiscal 2007 reference point is well chosen. That was the year the CPPIB shifted decisively into its “active management” investing strategy — that is, one in which managers make bets on individual stocks and other assets in hopes of earning above-average returns — after several years in which it had largely stuck to its original “passive” investing mandate, where the objective is simply to track the broad averages. (Though as early as 2000 this constraint was being loosened, to the evident delight of the CPPIB’s managers.)

Equally, there’s no doubt that that is the primary reason for the fund’s soaring costs. As the CPPIB says in its 2007 annual report, the shift in strategy meant “the need for investment professionals with the requisite active management skills and experience has increased markedly,” forcing the board into a global bidding war for the sort of “specialized investment talent” this implied...

It is simply a reflection of what is by now also widely recognized, among those without a vested interest in denying it: Active management is a crock. To consistently beat the market within a given asset class, a fund manager must not only be smart and well-informed, he must be consistently smarter and better-informed than all the other smart and well-informed managers out there, all of whom are trying to do the same. That’s vanishingly unlikely...
yikes

2000: 5 employees, average senior management annual compensation $220,000

2014: 1,000+ employees, avg sr mgmt ann comp $3,300,000
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Re: CPPIB Asset Allocation

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Bylo Selhi wrote:Coyne: Costs skyrocketing at Canada Pension Plan Investment Board
To be sure, the fiscal 2007 reference point is well chosen. That was the year the CPPIB shifted decisively into its “active management” investing strategy — that is, one in which managers make bets on individual stocks and other assets in hopes of earning above-average returns — after several years in which it had largely stuck to its original “passive” investing mandate, where the objective is simply to track the broad averages. (Though as early as 2000 this constraint was being loosened, to the evident delight of the CPPIB’s managers.)

Equally, there’s no doubt that that is the primary reason for the fund’s soaring costs. As the CPPIB says in its 2007 annual report, the shift in strategy meant “the need for investment professionals with the requisite active management skills and experience has increased markedly,” forcing the board into a global bidding war for the sort of “specialized investment talent” this implied...

It is simply a reflection of what is by now also widely recognized, among those without a vested interest in denying it: Active management is a crock. To consistently beat the market within a given asset class, a fund manager must not only be smart and well-informed, he must be consistently smarter and better-informed than all the other smart and well-informed managers out there, all of whom are trying to do the same. That’s vanishingly unlikely...
I am in total agreement on this topic. If there ever was a case for low cost passive investing this is it. Clean house and out source to Vanguard.
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Re: CPPIB Asset Allocation

Post by Bylo Selhi »

trf1066ca wrote:yikes

2000: 5 employees, average senior management annual compensation $220,000

2014: 1,000+ employees, avg sr mgmt ann comp $3,300,000
It seems that large captive pools of capital attract parasites the way rotting corpses attract maggots :evil:
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Re: CPPIB strategy change and costs

Post by trf1066ca »

I was speaking to a CIBC director last night, and the topic of compensation came up. I mentioned the CPPIB and the Fraser Institute report. He was going apesh*t.

I said I would send the links today, and I glanced at the report again.

2012-2013 total employee compensation was $313 million. Total employees is exactly 1,000.

So the average compensation is $313,000???? WTF?
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Re: CPPIB strategy change and costs

Post by kcowan »

I guess all the dire forecasts for CPP are coming true faster than we imagined. Better collect what we can before our children are asked to make up for this mismanagement!
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Re: CPPIB strategy change and costs

Post by ghariton »

And remember the proposed Ontario Retirement Pension Plan is supposed to be modeled on the CPP.

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Re: CPPIB strategy change and costs

Post by Insomniac »

The guys at BCIMC will be looking at the CPPIB and thinking they need a raise.

BCIMC has 199 employees. Staff compensation is 46.1 million - Highest paid was CEO at 1.8 million. (From 2013-2014 annual report and fact sheet)

Staff compensation in the previous year was 40.6 million.

http://www.bcimc.com/publications/default.asp
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Re: CPPIB Asset Allocation

Post by brucecohen »

trf1066ca wrote: 2000: 5 employees, average senior management annual compensation $220,000

2014: 1,000+ employees, avg sr mgmt ann comp $3,300,000
2000 was CPPIB's first year of operation. Total AUM was $44.5 billion of which 95% was the non-marketable provincial bonds in which the reserve was previously invested.

2014 annual report says senior mgmt salaries ranged from $340,000-$505,000. The rest is hefty bonus for meeting/exceeding personal objectives and, to a greater, extent performance bonus for beating the indexed benchmark. Performance bonus is based on "dollar value added" over past 4 years. DVA is the extent to which fund return minus all costs beat the indexed reference portfolio which is cost-free.
zinfit wrote: I am in total agreement on this topic. If there ever was a case for low cost passive investing this is it. Clean house and out source to Vanguard.
In its annual report, CPPIB says it went active to capitalize on these advantages:
Long horizon – by its multi-generational nature, the CPP has an exceptionally long investment horizon. CPPIB can, and indeed
must, assess its opportunities, returns and risks over decades, not years or months. Many other market participants must take short-term actions forced on them by business imperatives or legislated requirements. CPPIB can benefit from short-term market dynamics, but is not driven by them.
> Certainty of assets – there is a high degree of certainty and stability to the Fund’s asset base. We are not subject to external directions, nor to any requirement to liquidate investments to pay benefits, as CPP contributions are projected to exceed benefit payments until 2023. Nevertheless, we always keep sufficient liquidity to make major new investments when we identify good opportunities and to adjust the total portfolio mix at any time as needed.
> Scale – as one of the 10 largest retirement funds in the world, we are able to make sizeable investments in private markets and access proprietary public market strategies around the globe. Likewise, we can undertake large transactions for which few others can compete. Scale also makes it feasible to build highly skilled in-house investment teams, superior investment technology and robust operational capabilities. Internalizing these activities wherever appropriate makes for the most cost-effective global
investing platform.

If it were only indexed, the CPP Fund could not directly own long-life assets such as office buildings, warehouses, electric systems, ports, toll roads and airports. Note: all of these assets have income streams that are closely or directly aligned with inflation. The benefits CPP pays are, of course, inflation-indexed.
trf1066ca wrote: 2012-2013 total employee compensation was $313 million. Total employees is exactly 1,000.

So the average compensation is $313,000???? WTF?
No, that's not average compensation. The $313 million comes from note 8 and reflects total "personnel costs." I think that's the total HR budget and includes the cost of establishing offices in New York and Sao Paolo while expending other foreign offices. FWIW, CIBC's annual report shows average comp -- salary + bonus + benefits -- for its 43,000 workforce at $98,906 and, of course, a large portion of its workforce consists of low-paid tellers while most of CPPIB's employees are high-dollar investment and computer personnel.
kcowan wrote:I guess all the dire forecasts for CPP are coming true faster than we imagined. Better collect what we can before our children are asked to make up for this mismanagement!
Even with seemingly high and mounting costs, CPPIB's active program has thus far actually made CPP more sustainable. The Chief Actuary's projections indicate that to maintain current benefits and contribution rate, CPPIB has to average a real return after all expenses of 4%. Thus far they've averaged 9.7% over the 5 years ending April 1, 2014 and 5.1% over 10 years. After all costs, they've generated $3 billion more than the indexed benchmark since going active on April 1, 2006. They also say the portfolio -- which is 50.7% passive and 49.3% active -- was 30% less volatile than the benchmark indexed portfolio during that time. Note: they don't attribute any costs to the benchmark indexed portfolio.
Insomniac wrote: BCIMC has 199 employees.
Their annual report says 41% of their asset base is run by external managers. As far as I can see, their AR does not report the amount of external mgmt fees paid.* CPPIB does most of its investing in-house following the model created by Ontario Teachers'. In-house is much cheaper than external. IIRC, CPPIB says the cost of running its infrastructure portfolio is just 10% of what it would cost to out-source.

* I believe the Fraser report criticized CPPIB for reporting transaction costs and external mgmt fees separately from its operating costs. T-costs and external fees are included in each investment's ACB and thus reflected in the calculation of its return. AFAIK, all institutional investors follow that practice and its why mutual funds report a separate "trading expense ratio."
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Re: CPPIB strategy change and costs

Post by Bylo Selhi »

Andrew Coyne: CPP board can’t escape blame for fund’s bloated state
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...

The near 25-fold increase in costs over the past 10 years... 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,”... Now, it would try to beat the market, via so-called active management...

That’s not a criticism of the fund’s managers, or their particular choice of investments. It’s an indictment of the whole strategy. The inability of active managers to consistently beat the market is one of the most well-established principles of modern portfolio theory. That doesn’t stop lots of private investment managers from trying. But private managers are not responsible for the savings of 18 million captive beneficiaries.

The board, then, is at least as much a part of the problem as management. The CEO may be accountable to the board. But the board is effectively accountable to no one. Indeed, that is more or less by design: to protect the CPP from political interference. The CPP is a creature not of the federal or provincial governments, but of both; board members are appointed, not by one government, but 11.

The CPP has the same guaranteed inflow of funds from CPP levies, in excess of $4.5 billion annually, whatever its performance. Its fantastically compensated managers and directors need not fear that investors will cash in their shares if they are dissatisfied. Neither are they at any risk of being turfed in a takeover, or of seeing their share price plummet.

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.
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Re: CPPIB strategy change and costs

Post by ig17 »

This sets a nice example for CPPIB:

World’s biggest pension scheme overhauls fee structure

Japan’s Government Pension Investment Fund has accused active asset managers of being too focused on gathering new assets rather than generating returns for clients, as the world’s largest retirement pot gears up to overhaul how it pays investment houses.

Under plans due to come into place in April, the $1.4tn pension fund will pay its active asset managers a fee that is based on the excess returns — or alpha — they generate. “Without excess returns, their fee must be equal to that of passive managers with the same amount of asset size,” GPIF said. The new regime will apply to new and existing managers.

The move by the pension fund comes at a time of growing questions over the value stockpickers add. Active fund managers have repeatedly been accused of charging high fees for disappointing performance in recent years.

GPIF said its current fee structure, where investment houses were paid higher flat fees, did “not motivate asset managers to achieve alignment of interest between GPIF and external asset managers”.

The fund added: “Our external asset managers have tended to focus on getting more [assets] from GPIF and to avoid taking appropriate risks required to achieve their target alpha.

“By introducing the new fee structure, we would like to build a win-win relationship between GPIF and external asset managers.”

According to GPIF’s own data, its actively managed Japanese bonds and equities holdings, as well as its foreign equities funds, generated negative alpha — the returns above benchmark — over 10 years.

Andrew McNally, chief executive of Equitile, an asset manager that charges a fee related to returns, said the fund industry is being forced to reconsider how it charges investors.

“It seems unrealistic for the financial outcome for the fund management industry to be unrelated to the financial outcome for investors, especially pension funds as large as GPIF,” he added. “We think this [move by GPIF] is the start of a long trend which will see fees for active managers increasingly dependent on performance.”
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Re: CPPIB strategy change and costs

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Canada Pension Plan Investment Board Issues Euro Green Bonds
Inaugural issue in Euros builds on Canadian Green Bond issuance

Toronto, Canada - January 30, 2019 - Canada Pension Plan Investment Board (CPPIB) issued its first Euro denominated Green Bond. The sale of €1 billion in 10-year fixed-rate notes will enable CPPIB to invest further in eligible assets such as renewables, water and real estate projects, as well as diversify the Fund’s investor base.
http://www.cppib.com/en/public-media/he ... een-bonds/

This is more active-management craziness. The CPPIB should not be borrowing money at all let alone for leverage.

I can't believe that an email to morneau is worth while but i don't know what other approach we've got.
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Re: CPPIB strategy change and costs

Post by Norbert Schlenker »

What could possibly go wrong? I'm reminded of ...
Wikipedia re the Halifax NS bridges wrote: In 1970, a decision was made to finance the construction of the bridge with low-interest loans denominated in foreign currencies. That decision saved money in the short term and allowed the tolls to be kept low. However, the subsequent decline in the value of the Canadian dollar against the German Mark and the Swiss franc wiped out the interest cost advantage, then added massively to annual debt servicing costs. At its peak, the Commission's debt amounted to nearly $125,000,000, nearly triple the total cost of construction for both harbour bridges of about $42,000,000.
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Re: CPPIB strategy change and costs

Post by DenisD »

BNN Bloomberg (Amanda Lang) speaks with Mark Machin, president and chief executive officer at Canada Pension Plan Investment Board.
https://www.bnnbloomberg.ca/video/how-c ... es~1758288
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Re: CPPIB strategy change and costs

Post by bill2009 »

In a globe and mail article today they quote the cppib returns over 10 years as 11% and assert that they have done 39B better than passive investments.

Eyeballing their charts it looks like growth from 110-ish billion to 375-ish. Ignoring inflows and outflows I make that 13% cagr.
capture.jpg
capture.jpg (38.54 KiB) Viewed 7758 times
If I take 39B out of the final figure I get 11.8%.
cppib..jpg
cppib..jpg (10.05 KiB) Viewed 7758 times
Given the imprecision of the calculation and the non-transparent valuations I'd happily take the 12% alternative.

That said, my returns over the period are probably nowhere near 12% so...
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Re: CPPIB strategy change and costs

Post by brucecohen »

bill2009 wrote: 08 Sep 2019 07:44 In a globe and mail article today they quote the cppib returns over 10 years as 11% and assert that they have done 39B better than passive investments.

Eyeballing their charts it looks like growth from 110-ish billion to 375-ish. Ignoring inflows and outflows I make that 13% cagr.
capture.jpg

If I take 39B out of the final figure I get 11.8%.
The article said $29 billion over 12-13 years:
The CPPIB has earned an average annual return of 11.1 per cent over the past decade. By the board’s calculations, even after including all the new costs, it has earned $29.2-billion more on its portfolio since 2006 than it would have by following a cheaper, passive investing approach, which would focus on investing in vehicles that mimic stock and bond indexes.
Note: CPPIB measures its performance against the CPP Reference Portfolio, a basket of indexes that are investible. A notable point in the discussion of costs is that CPPIB reports its returns after deducting all expenses while the benchmark indexes have no expenses. CPPIB execs and investment staff are bonused only on gains beyond those of the Reference Portfolio using, IIRC, a rolling a three-year average.
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Re: CPPIB strategy change and costs

Post by bill2009 »

brucecohen wrote: 08 Sep 2019 09:10
bill2009 wrote: 08 Sep 2019 07:44 In a globe and mail article today they quote the cppib returns over 10 years as 11% and assert that they have done 39B better than passive investments.

Eyeballing their charts it looks like growth from 110-ish billion to 375-ish. Ignoring inflows and outflows I make that 13% cagr.
capture.jpg

If I take 39B out of the final figure I get 11.8%.
The article said $29 billion over 12-13 years:
The CPPIB has earned an average annual return of 11.1 per cent over the past decade. By the board’s calculations, even after including all the new costs, it has earned $29.2-billion more on its portfolio since 2006 than it would have by following a cheaper, passive investing approach, which would focus on investing in vehicles that mimic stock and bond indexes.
oops. I stand by my point that the "improvement" is noise though.
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Re: CPPIB strategy change and costs

Post by DenisD »

Reading the G&M article, I was surprised to find out that part of the CPP portfolio is managed by organizations like Bridgewater and AQR.
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Re: CPPIB strategy change and costs

Post by Thegipper »

Something tells me that Onex manages a portion of CPPIB assets.
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Re: CPPIB strategy change and costs

Post by Clason »

Onex and over 50 outsourced private equity partners. Pretty much every well known private equity firm, and likely some names none of us have heard of.

http://www.cppib.com/en/what-we-do/priv ... r-partners
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Re: CPPIB strategy change and costs

Post by RBull »

Norbert Schlenker wrote: 30 Jan 2019 12:27 What could possibly go wrong? I'm reminded of ...
Wikipedia re the Halifax NS bridges wrote: In 1970, a decision was made to finance the construction of the bridge with low-interest loans denominated in foreign currencies. That decision saved money in the short term and allowed the tolls to be kept low. However, the subsequent decline in the value of the Canadian dollar against the German Mark and the Swiss franc wiped out the interest cost advantage, then added massively to annual debt servicing costs. At its peak, the Commission's debt amounted to nearly $125,000,000, nearly triple the total cost of construction for both harbour bridges of about $42,000,000.
I missed this post until now. Indeed, what could go wrong?

I am reminded every time I drive over over these bridges with the endless rising tolls, and reduced likelihood of a needed 3rd bridge.
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Re: CPPIB strategy change and costs

Post by Clason »

RBull wrote: 09 Sep 2019 07:52 I missed this post until now. Indeed, what could go wrong?

I am reminded every time I drive over over these bridges with the endless rising tolls, and reduced likelihood of a needed 3rd bridge.
I missed it too and wasn't sure I should reopen the topic, but seeing we're reopening it :wink:

The problem with the Halifax bridge was that the government blatantly entered into the speculative forex market under the guise of funding an infrastructure project. Its revenues were in CAD and it should have matched liabilities in CAD. There were 2 different decisions to be made:

1) Do we borrow (CAD) to fund the building of a bridge?
2) Do we "invest" a few tens of millions of dollars in the forex markets to prop up public coffers?

The government took advantage of public desire for the first decision to slip-in their 2nd decision, and they lost their gambling bet.

The difference with CPPIB is that they make investments in foreign currencies and there is absolutely nothing wrong with funding European projects that yield Euro-denominated revenues with Euro-denominated liabilities. It is actually very smart, very desirable and with no "What can go wrong?" risks at all.

The question that remains, as Bill2009 postured, is whether CPPIB should use any leverage at all. It's not that straightforward. Most companies in which CPPIB, you and I invest use some leverage. I'm inclined to say that the European companies in which it invests should raise their own debt. However, their cost may exceed CPPIB's, so there are savings to be had for CPPIB to invest in unleveraged companies/projects using its own cheap leverage. As long as it doesn't use leverage to invest in already leveraged companies, it's an optimal strategy. It's also a slippery slope and I hope there are good and firm rules in place.
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Re: CPPIB strategy change and costs

Post by Hammerer »

Clason wrote: 08 Sep 2019 17:05 Onex and over 50 outsourced private equity partners. Pretty much every well known private equity firm, and likely some names none of us have heard of.

http://www.cppib.com/en/what-we-do/priv ... r-partners
And that's just the PE partners that they list on that page.

Then there's the ones they list under PE Asia Partners:
http://www.cppib.com/en/what-we-do/priv ... r-partners

Then GPs and LPs or "Secondaries":
http://www.cppib.com/en/what-we-do/priv ... r-partners

Here's a full list of the PEs invested. I guess someone could do some straight-line estimates (which would be favourable to the fund as they usually close, no?) and figure out if we're beating the market or not:
http://www.cppib.com/documents/2057/PE_ ... _F20Q1.htm

I can understand a state pension plan investing in non-Canadian assets, but it's always a laugh when they pay a money manager to buy into Canadian assets that generate revenue. Wouldn't increasing corporate income tax make more sense? Why build a private apparatus to get that revenue through a limited number of purchases/buyouts?

I guess it's fine if a convincing case could be made for above-market returns, but what are the money manager's penalty if they don't? Could I just create 4 funds, take a bunch of gambles and get paid well as long as some win?
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Re: CPPIB strategy change and costs

Post by RBull »

Clason wrote: 09 Sep 2019 08:33
RBull wrote: 09 Sep 2019 07:52 I missed this post until now. Indeed, what could go wrong?

I am reminded every time I drive over over these bridges with the endless rising tolls, and reduced likelihood of a needed 3rd bridge.
I missed it too and wasn't sure I should reopen the topic, but seeing we're reopening it :wink:

The problem with the Halifax bridge was that the government blatantly entered into the speculative forex market under the guise of funding an infrastructure project. Its revenues were in CAD and it should have matched liabilities in CAD. There were 2 different decisions to be made:

1) Do we borrow (CAD) to fund the building of a bridge?
2) Do we "invest" a few tens of millions of dollars in the forex markets to prop up public coffers?

The government took advantage of public desire for the first decision to slip-in their 2nd decision, and they lost their gambling bet.

The difference with CPPIB is that they make investments in foreign currencies and there is absolutely nothing wrong with funding European projects that yield Euro-denominated revenues with Euro-denominated liabilities. It is actually very smart, very desirable and with no "What can go wrong?" risks at all.

The question that remains, as Bill2009 postured, is whether CPPIB should use any leverage at all. It's not that straightforward. Most companies in which CPPIB, you and I invest use some leverage. I'm inclined to say that the European companies in which it invests should raise their own debt. However, their cost may exceed CPPIB's, so there are savings to be had for CPPIB to invest in unleveraged companies/projects using its own cheap leverage. As long as it doesn't use leverage to invest in already leveraged companies, it's an optimal strategy. It's also a slippery slope and I hope there are good and firm rules in place.
Thanks for the explanation. The slippery slope, leveraged companies and rules part you mentioned seems to be the critical pieces.It seems to me it's hard to find out these answers and pretty sure its hard to do anything about it anyhow. In CPPIB we trust?
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