Investment lessons from the Canada Pension Plan

Over the holidays, a Globe and Mail article written by Rob Carrick entitled, investing lessons for 2019 and beyond from the country’s biggest pension plan, caught our eye.

We thought to share some of the highlights – sound principles for investment success regardless of the portfolio size. Followers of this blog and clients of Newport may recognize some parallels!

Performance is reviewed in the proper time context
Like most investment managers, the Canada Pension Plan Investment Board (CPPIB) reports its results quarterly (results for the three-month period ending December 31, 2018 not yet released). Regardless, the Board pays little attention to the short-term gyrations of the quarter or even a year or two.

“We look very closely at five and 10-year returns” said Geoffrey Rubin, senior managing director and chief investment strategist at the CPPIB. “That’s what we put particular prominence on when we think about our performance.”

This is because, as Carrick writes, “you can’t properly assess your investment holdings and the strategy that binds them together until a block of years pass.” We agree. At Newport, our stated aim is to meet or beat the benchmark for our portfolios over a full market cycle, after fees, with less risk and volatility than the benchmark. That’s typically 5-6 years. Short-termism is what leads many investors to disappointing results i.e. letting the events of a single year or quarter drive your investment decisions leading to reactionary rather than responsive investment behaviour.

Asset mix includes private as well as public securities
As of its last reporting, the CPPIB held 48.4% of its assets in publicly-traded securities and 51.6% in private investments including actual holdings in real estate, infrastructure and other alternatives. Admittedly, this weighting is likely inappropriate for individual investors, who need liquidity and do not have the extended time horizons of the CPPIB. But the principle remains sound – diversification by asset class is an effective way to reduce risk in a portfolio and enhance return. At Newport, we’re managing about 20% in private alternatives for a typical client portfolio.

Emerging markets are an area of growing focus
As Carrick reports, “aging populations and weak increases in economic productivity have led to a growing sense that investment returns from both stocks and bonds will be modest in the years ahead.” To boost growth in its portfolios, the CPPIB has been steadily adding securities from emerging markets to its portfolios. According to the article, the CPP has about 17% of its assets in emerging markets and could go as high as one third over the next decade!

Given the risk profile and recent sell-off, we’ve been a little more cautious at Newport – about 2% of our assets are in emerging markets – but it has been an area we’ve added to in 2018 on pricing weakness.

Fees are viewed in context of overall return
Keeping in mind that the size and negotiating power of the CPPIB give it pricing breaks the average investor can’t attain, its fees still come to almost 1% of assets (0.91% to be exact). One reason is that the private assets in which the CPPIB invests are more complicated and have a higher fee structure. These assets are critical to the portfolio’s overall function and performance. The CPPIB measures fees in the context of performance, again over the longer term. As Rubin explains in the article, “we very carefully trace the net investment returns of our investment portfolio, inclusive of all fees that we pay externally and internally.” This is the approach we take as well for our portfolios – looking at total return and risk profile net of fees. Sometimes investors can get hung up on fees – or tax advantages – when making an investment decision – letting the tail wag the dog.

No one knows what 2019 will bring, but with the right outlook, the proper strategy and prudent decision-making, investors will be able to easily ride whatever gyrations markets have in store.