An insider's perspective on the illegitimate $100 million dollar wealth transfer from Canadian tax-payers to CPP execs and employees, and exactly how they covered it up.
Former MF industry insider here. Insiders are always going to use the benchmark that makes them look better. It’s not concerning to if CPP made their BM more reflective of the actual strategy. It makes sense for the “global bond” sleeve to be BM’d against the Bbg Global Agg etc. But the fact that they back-dated the BM is concerning. Doesn’t sound like much oversight is needed there it doesn’t even look like they needed to disclose specific benchmarks (I didn’t see that they did in the 2024 report at least).
When we changed the BM we needed to clearly state what it was, when it was changed, and what the new one is.
The custom benchmark is NOT reflective of a lower risk strategy so it IS VERY concerning. While oversight may not be required, it is certainly NEEDED. The benchmark has been engineered for optics and compensation. period.
They went from 5/95 to 85/15, there is most certainly more risk in CPP, which has added value over time. The question is what is the best way to benchmark the components, and the more accurate way is to benchmark the each asset subclass.
Well you can’t invest in a benchmark, so that’s a nope. In general, if you start adding new asset classes to CPP, like “US leveraged loans” then using a Canadian bond benchmark makes no sense. It’s apples to oranges. The right BM should accurately represent the risk of the asset class. That’s industry practice and prescribed by the regulators.
hard disagree- benchmarks must be transparent, investable, and not subject to manipulation. CPP 5 year returns were less than a 50/50 benchmark of global equities and Canadian bonds. We have created public proxies for all of the Canadian maples mapped to their Asset Allocations and they are way riskier than what is being represented.
This is an interesting conversation. My two cents is that there's a trade off between transparency and tracking accurately to the asset class. Perhaps we should add in some additional indices to more accurately track real assets or even PE? But those indexes will also be flawed in certain ways because... what are they?? Non-controlling shares in a dam? A bar of gold in a vault, and in that case is it real or Sprott or his Mgmt Co? Lots of questions.... but everyone must agree at the end of the day that the current methodology is needlessly complex, no?
Agreed. I do think both 1) holdings (especially private), and 2) the benchmark should be made known to the public. After all, we tax payers are paying for this. You bring up a good point, how do you benchmark the exposure to a dam or bridge toll. Unfortunately right now the best option is to use a public index as a proxy, but as you pointed out there are inherent flaws in this approach and it’s far from perfect. But I would be more willing to accept that methodology over adding more and more indices if they made a simple disclosure that its a proxy and only and expectation of what is believed to be the true risk, and not the actual risk. And btw, this is true even if you benchmark an arbitrary Canadian stock portfolio to the SP/TSX composite. Are the benchmarks reasonable is the main question. To your original analysis: you could find more than one benchmarks for Canadian stocks for instance, and BTW, it’s really easy to make an argument for choosing one over another. And if CPP is coming up with reasons to change amongst the benchmarks for the purposes of reducing the relative performance, then that’s a big problem.
Canada has more CFA charter holders than most countries, with the Toronto chapter the largest in the world. One step CPPIB could make to improve transparency would be to adopt/comply with Global Investment Performance Standards (GIPS),voluntary ethical guidelines by the CFA Institute ensuring transparent performance reporting. I understand that CPPIB is not currently GIPS compliant. This would be a rational move to build trust and improve transparency.
As the chasm between buy-side and sell-side comp has narrowed most would argue the skill level at the "Maple 8" *C$2.45tln AUM) has improved. Every extended period under which indexing (passive investing) outperforms an active strategy (in-house investment teams), questions will be raised as to the "best" model. Underperformance vs. an appropriate benchmark will lead to calls for "off with their heads" and full indexing.
Especially in light of a sovereign wealth fund "Canada Strong Fund" (sovereign debt with a better marketing budget) in the works, such governance issues will take on even more importance! My latest SubStack delves into some of these matters in greater depth, including Maple 8 asset allocation matters (foreign vs. domestic). Where will Carney and the head of this newly minted Crown Corporation find the portfolio managers and market risk subject matter experts to manage the C$25bln (inception, funded over 3 years with debt)? How will these individuals be compensated? With a 100% domestic asset allocation, how will the benchmark for variable compensation be set? How will the Board of Directors be selected? We must avoid it being a clone of others due to a puddle deep pool of qualified Directors.
Excellent and insightful post, thank you for writing it! JCG
I am not too shocked by its underperformance, given that the negative returns have outperformed the benchmark. I understand that could happen when costs go up, and when strategy can also dampen upside potential. In the outside world, though, these money managers would have been fired and seen AUM outflows. But CPP managed to increase compensation and continue to have assets funnelled in. It's all the money managers’ dream. Now I understand why they initiated a CE webinar at FP Canada so urgently. It has been CFPs doing all the promotions on CPP deferral and maximizing participation. Not that I have an issue with that, but I think we need to explain to Canafians the risks involving the CPP program.
Former MF industry insider here. Insiders are always going to use the benchmark that makes them look better. It’s not concerning to if CPP made their BM more reflective of the actual strategy. It makes sense for the “global bond” sleeve to be BM’d against the Bbg Global Agg etc. But the fact that they back-dated the BM is concerning. Doesn’t sound like much oversight is needed there it doesn’t even look like they needed to disclose specific benchmarks (I didn’t see that they did in the 2024 report at least).
When we changed the BM we needed to clearly state what it was, when it was changed, and what the new one is.
Anyways. Great read keep up the good work.
The custom benchmark is NOT reflective of a lower risk strategy so it IS VERY concerning. While oversight may not be required, it is certainly NEEDED. The benchmark has been engineered for optics and compensation. period.
They went from 5/95 to 85/15, there is most certainly more risk in CPP, which has added value over time. The question is what is the best way to benchmark the components, and the more accurate way is to benchmark the each asset subclass.
Well you can’t invest in a benchmark, so that’s a nope. In general, if you start adding new asset classes to CPP, like “US leveraged loans” then using a Canadian bond benchmark makes no sense. It’s apples to oranges. The right BM should accurately represent the risk of the asset class. That’s industry practice and prescribed by the regulators.
hard disagree- benchmarks must be transparent, investable, and not subject to manipulation. CPP 5 year returns were less than a 50/50 benchmark of global equities and Canadian bonds. We have created public proxies for all of the Canadian maples mapped to their Asset Allocations and they are way riskier than what is being represented.
This is an interesting conversation. My two cents is that there's a trade off between transparency and tracking accurately to the asset class. Perhaps we should add in some additional indices to more accurately track real assets or even PE? But those indexes will also be flawed in certain ways because... what are they?? Non-controlling shares in a dam? A bar of gold in a vault, and in that case is it real or Sprott or his Mgmt Co? Lots of questions.... but everyone must agree at the end of the day that the current methodology is needlessly complex, no?
Agreed. I do think both 1) holdings (especially private), and 2) the benchmark should be made known to the public. After all, we tax payers are paying for this. You bring up a good point, how do you benchmark the exposure to a dam or bridge toll. Unfortunately right now the best option is to use a public index as a proxy, but as you pointed out there are inherent flaws in this approach and it’s far from perfect. But I would be more willing to accept that methodology over adding more and more indices if they made a simple disclosure that its a proxy and only and expectation of what is believed to be the true risk, and not the actual risk. And btw, this is true even if you benchmark an arbitrary Canadian stock portfolio to the SP/TSX composite. Are the benchmarks reasonable is the main question. To your original analysis: you could find more than one benchmarks for Canadian stocks for instance, and BTW, it’s really easy to make an argument for choosing one over another. And if CPP is coming up with reasons to change amongst the benchmarks for the purposes of reducing the relative performance, then that’s a big problem.
Canada has more CFA charter holders than most countries, with the Toronto chapter the largest in the world. One step CPPIB could make to improve transparency would be to adopt/comply with Global Investment Performance Standards (GIPS),voluntary ethical guidelines by the CFA Institute ensuring transparent performance reporting. I understand that CPPIB is not currently GIPS compliant. This would be a rational move to build trust and improve transparency.
As the chasm between buy-side and sell-side comp has narrowed most would argue the skill level at the "Maple 8" *C$2.45tln AUM) has improved. Every extended period under which indexing (passive investing) outperforms an active strategy (in-house investment teams), questions will be raised as to the "best" model. Underperformance vs. an appropriate benchmark will lead to calls for "off with their heads" and full indexing.
Especially in light of a sovereign wealth fund "Canada Strong Fund" (sovereign debt with a better marketing budget) in the works, such governance issues will take on even more importance! My latest SubStack delves into some of these matters in greater depth, including Maple 8 asset allocation matters (foreign vs. domestic). Where will Carney and the head of this newly minted Crown Corporation find the portfolio managers and market risk subject matter experts to manage the C$25bln (inception, funded over 3 years with debt)? How will these individuals be compensated? With a 100% domestic asset allocation, how will the benchmark for variable compensation be set? How will the Board of Directors be selected? We must avoid it being a clone of others due to a puddle deep pool of qualified Directors.
Excellent and insightful post, thank you for writing it! JCG
Great work Matt. Expose the truth!
I am not too shocked by its underperformance, given that the negative returns have outperformed the benchmark. I understand that could happen when costs go up, and when strategy can also dampen upside potential. In the outside world, though, these money managers would have been fired and seen AUM outflows. But CPP managed to increase compensation and continue to have assets funnelled in. It's all the money managers’ dream. Now I understand why they initiated a CE webinar at FP Canada so urgently. It has been CFPs doing all the promotions on CPP deferral and maximizing participation. Not that I have an issue with that, but I think we need to explain to Canafians the risks involving the CPP program.