Millennial Moron on the Problem With CPP Investments
Before I get to that below, end of week I usually go over moves in the US stock market and it was a hell of a week.
Rita Nazareth of Bloomberg reports the S&P 500 stages a rebound after $5 trillion plunge:
A bounce in stocks calmed nerves among equity investors, but the fallout from Donald Trump’s political maneuvering continued to shake global markets and rattle US consumers. Yields on German bonds surged as government leaders agreed on a massive defense spending package, while the ultimate haven asset — gold — topped $3,000 for the first time.
The S&P 500’s 2.1% advance was the biggest since the aftermath of the November presidential election. Not even data showing a slide in consumer confidence prevented the market rebound, following a selloff that culminated in a 10% plunge of the US equity benchmark from its peak. As the safety bid waned, Treasuries joined their German counterparts lower. Bullion erased gains after climbing as much as 0.5% to $3,004.94 an ounce.
The moves capped a week of drama that included Trump’s on-and-off-again tariffs, recession calls, geopolitical talks and concerns over a US government shutdown. Combined with all the questioning around lofty tech valuations, global equity funds saw their biggest redemption this year while sentiment indicators turned bearish - a bullish signal from a contrarian perspective.
“Scared-cat bounce?” said Ed Yardeni, founder of his namesake research firm. “Any day without a Trump tariff comment is a good day for the market. The market is also rallying on relief that there won’t be a government shutdown. We will be more inclined to call a bottom when we see the stock market move higher on a day or days when Trump blusters about tariffs again.”
Despite Friday’s advance, the S&P 500 still saw a fourth straight week of losses — the longest such streak since August. Tech megacaps led gains on Friday, with Nvidia Corp. and Tesla Inc. up at least 3.8%. The Nasdaq 100 climbed 2.5%. The Dow Jones Industrial Average added 1.7%.
The yield on 10-year Treasuries advanced five basis points to 4.31%. A dollar gauge fell 0.2%.
At Piper Sandler, Craig Johnson noted that while negative headlines and sentiment have weighed on equities, markets could experience a 3% to 6% relief rally in the coming months/weeks.
“We are seeing some oversold rally efforts once again,” said Dan Wantrobski at Janney Montgomery Scott. “But we caution folks looking to dive back in at the first sign of stability here: nearly everyone is looking for a bottom and to ‘buy the dip’ at some point, but the current condition of the markets has not implied any real improvement on a technical basis - the tape is simply very oversold at this stage.”
Andrew Brenner at NatAlliance Securities says he gets asked multiple times a day: “Is the worst over?”
“We don’t know. We would like to see a capitulation trade, but the seasonals are starting to turn,” Brenner said. “The end of February to the middle of March is an awful time for equity seasonals.”
Stocks rebounded on Friday after a selloff that shed about $5 trillion from the S&P 500’s value. It took just 16 trading sessions for US stocks to tumble into a correction, leaving a frazzled Wall Street asking just how long the “adjustment period” White House officials have warned about will last.
In the prior 24 instances when stocks have fallen at least 10% from a record but avoided a bear market, it has taken an average of eight months to reclaim an all-time high, according to data from CFRA Research. That would leave the Feb. 19 high intact until mid-October. The average drawdown reached 14% in those cases.
“Corrections are unnerving in the moment, though they are not unusual, and often act as a pressure release valve for overheated markets,” said Mark Hackett at Nationwide. “This will not be the last correction, pullback, or market scare that the bulls will have to face, and yes, an element of caution is warranted.”
To Ross Mayfield at Baird Private Wealth Management, what usually differentiates quicker (often healthy) selloffs from drawn-out bear markets is whether a recession follows.
The 23 non-recession corrections since 1965 averaged a 16% drawdown, he said. Meantime, the eight recession selloffs over that period averaged a 36% drawdown.
“The good news is that despite headwinds, a near-term recession still looks unlikely,” he noted.
Last Friday I asked whether Trump was playing global investors for fools and went over the charts of a bunch of growth and some retail stocks that were getting clobbered as the tariff tantrum unfolded.
On Monday, the carnage continued with some stocks like Tesla hitting a low of $220, Nvidia a low of $106 and Reddit a low of $100.
The Nasdaq was off almost 5%, volume was abnormally high, I knew the worst was over for now because old trader rule of thumb, when the Nasdaq is down almost 5% on big volume, you hold your nose and buy the dip.
Wednesday's inflation report was in line with expectations, the tariff drama continued but the action on Thursday confirmed to me at least the worst was over (Nvidia eked out a gain).
Today, despite Americans being sour on the economy as inflation expectations hit highest level since 1991, markets roared back led by mega cap growth shares and high octane growth shares like Palantir, MicroStrategy and of course quantum computing stocks like D-Wave, Rigetti and IonQ.
Will the party continue? Maybe, nobody has a clue but it's my hunch without a recession, these corrections are being bought hard by large funds and off we go but at a slower clip full of volatility.
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Alright enough on markets, I wanted to bring to your attention a clip someone sent me made by a fella who calls himself "Millennial Moron".
Now, as you will find out very quickly, this young millennial is anything but a moron, he really did his homework here and put together an extremely detailed, analytical and long clip going over what he believes is the problem with CPP Investments.
And before you dismiss it, as a pension expert who he cites and sort of criticizes a couple of times here (once that I remember), I'm telling you this clip is definitely worth watching because he raises a lot of excellent points and uses annual reports and academic research to make his case.
When I began watching it and saw Andrew Coyne, I knew right away his angle and where he was going with this but I kept watching and I have to give this young kid credit, even if I disagree with him at times, he brings up many excellent points and no matter who you are or where you work, take the time to watch the entire clip.
His basic premise is by its own admission, CPP Investments is failing to beat its Reference Portfolio over the long run and taking on more risk as it underperforms it, so why are we paying these investment professionals so much money to open up offices all over the world and engage in an active management strategy that invests across public and private markets if they can't deliver the goods?
That's right, it's cool to open up offices in London, New York, Mumbai, San Paulo and Sydney to invest in private markets but if you can’t beat your own Reference Portfolio and are severely underperforming it, then there's a serious problem.
Now, I am giving you the condensed version but as you watch this clip you'll quickly realize this kid is super smart, he's definitely done his homework and really delves into the expenses at CPP Investments including the cost of financing to ask some very pertinent questions.
At one point he refers to my blog and says I note the true measure of success of a pension fund is to have more than enough assets to meet its long-dated liabilities and then goes on to destroy that concept calling it baloney.
And he's definitely not wrong, makes many small mistakes along the way but on big issues, he raises a lot of good points/ questions.
The funny thing is he says he's not against the CPP Investment Board and thinks CPP makes sense for all Canadians but he spends almost two hours criticizing the active management strategy at CPP Investments and he does a pretty damn good job.
It took him months to bring this all together and it shows.
Some of the questions he goes over:
- Is the CPP sustainable?
- Will CPP still be there when I retire? How do we know?
- What is the 30% rule for Canadian pension funds?
- Who is accountable for the investing strategy of the CPP fund?
And a lot more, he delves into the annual reports and looks deep into the financials, cites academic work and really knows his stuff.
So why am I bringing this up? I think that CPP Investments and the Maple Eight, Nine, Ten, Eleven have an image and communication problem and instead of ignoring this and other criticism of their active management, they really need to get ahead of it and answer their critics head on.
IMCO CEO Bert Clark wrote an excellent comment for the Financial Post late last year stating the S&P 500’s performance in 2024 made investing look easy, and this year it's anything but easy precisely because of the high concentration of Mag-7 stocks at the beginning of the year (see my Outlook 2025 for more details).
But a lot more needs to be done to really explain to members and the general public why active management is worth it over the long run and a few articles in national newspapers won't cut it.
Let me be blunt: there's a perception out there that the reason Canada's large pension funds are engaging in active management investing in private markets and private credit all over the world is to maximize their own personal compensation by fudging the numbers and ignoring the fact that they have underperformed passive indexes significantly over a long period.
Whether it's right or wrong -- and I do believe it's wrong -- that perception is widespread and needs to be addressed.
In the case of CPP Investments which is the leader among the Maple Eight and by far the largest and most important pension fund in the country, there is an even higher standard that needs to be met.
Stating they score high on some global transparency index just doesn't cut it any longer.
They need to answer people like Millennial Moron and many others who criticize their active management strategy and their Board needs to implore them to communicate things a lot clearer including compensation and how it's justified even if they significantly underperform their Reference Portfolio.
Truth be told, I never liked CPP Investments' Reference Portfolio made up of 85% MSCI World/ 15% Canadian Government bonds because I knew it was a very tough benchmark to beat in roaring bull markets.
A long time ago I expressed this to Mark Wiseman and he told me "we will always underperform in roaring bull markets but significantly outperform in a bear market and that's how we add value over the long run."
That was true in the past, and might be true in the future but it hasn't been the case in a long time.
Still, I understand why pension funds don't just index their entire portfolios to global equities (only a portion) and why they invest in infrastructure, real estate, private equity and private credit.
I understand CPP Investments' approach of investing in top private equity funds and co-investing in large transactions to lower fee drag.
There is a lot of detail that Millennial Moron doesn't allude to or leaves out maybe because he hasn't worked at a pension fund and doesn't get it but that's not his fault, he still raises many excellent points worth noting.
I leave it up to CPP Investments and all of Canada's large and small pension investment managers to take the time this weekend to watch this clip, take lots of notes.
One last thing for Millennial Moron which he alludes to, base CPP is a partially funded plan which is why a lot more risk is taken in base CPP (huge allocation to private equity, for example) whereas enhanced CPP is a fully funded plan and more like other Maple Eight pensions so it takes far less risk.
As far as the 30% rule, it was scrapped in the last budget and rightfully so.
Alright, it's late, it was a long week in every respect, I thank the person that sent me this clip and I applaud Millennial Moron (sorry, don't know your real name) for putting this together, excellent work even if I don't agree with everything.
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