Investment funds usually grow more efficient as they get bigger. The Canada Pension Plan Investment Board, though, is showing a disturbing tendency to head in the opposite direction.
Five years ago, the investment arm of the Canada Pension Plan had total costs of $665-million, according to a new report from the Fraser Institute. In the CPPIB's most recent fiscal year, overhead had ballooned to $1.4-billion.
To be sure, part of that increase reflected the swelling size of the fund, which is constantly taking in new money, thanks to pension contributions from millions of Canadian workers. But even against the backdrop of its surging assets, the CPPIB is not showing any tendency to rein in its spending. Its costs amounted to 0.58 per cent of its assets back in 2008-09; in the most recent fiscal year, they stood at 0.84 per cent.
Canadians have every right to ask whether they're getting value for the increasing amounts that the CPPIB is lavishing on the care and feeding of its portfolio. The fund was designed to help ensure that Canadian workers enjoy decent retirements. It's not yet clear that its constantly increasing expenditures will result in better payoffs for the ordinary people it is designed to serve.
As the Fraser Institute report explains, the CPPIB's carefully burnished reputation for frugality is open to question. The fund likes to focus attention on its relatively modest operating expenses. A more realistic accounting, though, has to encompass other costs, such as hiring external investment managers and the expenses involved in actually implementing the fund's strategies.
Those costs are now nearly twice as large as the fund's operating expenses, according to the report's authors, Philip Cross and Joel Emes. Much of the additional outlay reflects payments to external money managers, which have soared from $25-million six years ago to $782-million last year.
What's driving those huge fees? The CPPIB was originally set up to bolster the Canada Pension Plan by investing the pension plan's surplus funds in assets that held out the promise of greater returns than government bonds could provide.
At first, that largely meant publicly traded stocks. But in recent years, the CPPIB has become more aggressive in pursuit of higher returns and has turned its attention to everything from real estate to infrastructure to private equity. Its increasingly active approach to investing requires the use of outside managers.
That makes perfect sense if outside managers can produce higher returns in areas such as private equity. The problem is that it's difficult to assess the performance of private deals in the short term. Without any public market to value the assets, valuation is in the eyes of the beholder until the assets are sold – which might not be for years.
The CPPIB is quick to point to its 16.5-per-cent return in its most recent fiscal year as evidence that it's doing just fine. But that big gain came at a time when stock markets everywhere were zooming higher. After deducting operating expenses, the CPPIB's performance actually lagged the return that would have been produced by passively investing in a set of market benchmarks.
Of course, one year's return means little by itself. Investing is a long-term game, especially with an organization like CPPIB, which is designed to serve generations of workers. But the trend to higher costs doesn't bode well for the future.
As our colleague Tim Kiladze noted earlier this year, the CPPIB still has to prove that Canadians will be adequately compensated for the extra risk involved in the fund's more aggressive approach to investing. One good place to start would be by delivering a clearer picture of all the costs involved in its pursuit of profit.