CPP Investments Responds to Andrew Coyne's Latest Critique
This time they waited until page 41 to admit it.
As with most things at the Canada Pension Plan Investment Board, its annual reports have become increasingly bloated over the years. Once, the organization responsible for investing Canadians’ public pension savings reported on its activities each year in a relatively straightforward fashion. The typical CPPIB annual report in those days was a relatively restrained 15,000 to 20,000 words.
That was before 2006, when the CPP’s surplus funds were still invested passively, that is in a way designed to track the broad market indexes. In that year, the fund switched to active management: picking individual stocks, bonds and other assets in an attempt to beat the market. Since then the fund’s annual reports have become, essentially, extended advertisements for active management.
They now run to more than 80,000 words: page after page of dense, jargon-filled and numbingly repetitive prose on the many arcane strategies and reams of research the fund has deployed in the quest to “add value” – to earn a higher return, that is, than it would have had it just stuck to investing in the indexes.
To be sure, the fund’s managers will concede, this approach is more costly – much more costly. Where 20 years ago the CPPIB had just 150 employees and total costs of $118-million, it now has more than 2,100 employees and total expenses (not including taxes or financing costs) in excess of $6-billion.
And yet, for all its eagerness to explain how it invests your money – the process – the fund is rather less keen to go into the results. This year’s report is no exception. To be sure, there, in large type, is the headline figure: a rate of return of 9.3 per cent in the fiscal year ending March 31.
As in previous years, the fund’s managers are quick to congratulate themselves on this achievement. “This year, we delivered solid returns for the Fund,” writes the fund’s president, John Graham, crediting “the disciplined execution of a forward-thinking strategy, by a high-performing team.”
Now, 9.3 per cent certainly sounds impressive, unless you recall that equity markets generally were up wildly last year. The U.S. market returned more than 30 per cent in calendar 2024; Canada’s, more than 20 per cent; other developed countries, an average of 12 per cent. Bonds earned much less, of course, but with any reasonable mix of stocks and bonds it would have been like falling off a log to earn 9.3 per cent.
In fact, the CPP’s traditional benchmark portfolio, a mix of 85 per cent stocks and 15 per cent bonds, earned 13.4 per cent last year – half again as much as the fund’s team of disciplined, forward-thinking high-performers were able to generate. That’s what you’d get just by buying the averages, or – what is the same thing – if you’d just picked stocks at random.
That, however, is not the point. Any one year you could put down to bad luck. But the CPP fund didn’t just underperform the indexes last year. It has done so, on average, ever since it switched to active management. That’s the admission you find buried on page 41 (it was on page 39 last year): since fiscal 2007, “the Fund generated an annualized value added of negative 0.2 per cent.”
Compound that 0.2 per cent annual shortfall over 19 years, and it adds up to more than $70-billion in forgone income, on assets that now total $714-billion. The fund’s managers have spent nearly two decades and a total of $53-billion trying to beat the market, only to produce a fund that is nearly 10-per-cent smaller than it would be had they just heaved darts at the listings.
That’s not a comment on the skills of its employees. It’s a comment on the strategy. The best managers in the world regularly underperform the market, especially after costs are taken into account – two thirds in any given year, nearly all of them over longer time frames. It’s one of the most well-studied phenomena in the literature. Which is why many large pension funds have given up trying, switching from active to passive management.
Still, if the fund’s managers can’t be blamed for this performance, neither should they be rewarded for it. Which is the other scandal here: notwithstanding the fund’s indifferent returns, everyone there is making out like bandits – not just in the executive suite, whose five highest-paid inhabitants earned nearly $5-million apiece on average in salaries and benefits last year, but across the organization, whose 2,100-plus employees were compensated to the tune of more than $500,000 on average.
CPP Investments is an organization that is literally out of control. It is long past time it was reined in and given new directions.
Stop the presses, if Andrew Coyne says that CPP Investments is out of control and needs to be reined in, then Canadians should be highly concerned.
After all, he's a well respected columnist for the Globe and Mail, a graduate of the University of Toronto and London School of Economics, he is regularly seen on CBC dispensing his political punditry so surely he's an expert on our national pension fund and how it manages money.
No doubt, he's a smart chap, I enjoy his political comments but he clearly has a beef with CPP Investments and its active management strategy and I don't think he's right on this topic.
It was literally a year ago when I went over why he's dead wrong on CPP Investments' active management.
Like clockwork, every year after the Fund posts its fiscal year return and releases its annual report, Coyne will come out to publish a critical comment on why its active management strategy doesn't work and compensation has run amok there.
Interestingly, he only targets CPP Investments but his criticism can easily target all of Canada's Maple Eight funds and other smaller well-known pension investment managers I cover on this blog.
Basically, if the guys and gals at these large sophisticated pension funds can't beat their benchmark over a year, three years or five years, why are we paying them big bucks?
And since nobody can beat the S&P 500 over a long period, even more of a reason to dismantle all our large pension funds and just index their assets to 70% equities/ 30% bonds and be done with all this silly active management which enriches private equity funds, hedge funds and senior managers at these organizations.
With me so far? Makes a lot of sense, right? Coyne surely read Burton Malkiel's A Random Walk Down Wall Street and for him it's as clear as night and day, get rid of all these costly investment managers who work at our large pension funds as well as their external investment partners and replace them with low-cost indexing strategies.
Simple as 1-2-3.
Millennial Moron made the same points when he went over the problem with CPP Investments albeit he did his homework and actually delved deeply into the the annual report to raise important points.
Well, yesterday Michel Leduc, Global Head of Public Affairs and Communications at CPP Investments sent me a short 5-page document titled "Everyone is entitled to their own opinion, but not to their own facts" addressing Coyne's criticism.
I thank Michel for sending me this document.
I embedded it below, it was shared with many stakeholders, not just me, and I will then go over some critical parts:
Alright, now let me get to the important points I note this from page 1:
CPP Investments is the investment engine behind that strength. Since we began investing, nearly 70% or $492.1 billion of the CPP Fund’s current value has come from net investment income.
In terms of sheer financial performance, over the past 10 years, which is widely considered the most relevant time frame for pension performance, the CPP Fund has outperformed its deliberately demanding benchmark. It is not by accident that the investment manager with the highest yardstick also consistently delivers top total fund returns.
In addition, as illustrated here, Global SWF ranks CPP Investments second among the world’s 25 largest public pension funds based on 10-year returns.
Go read my recent conversation with CEO John Graham going over fiscal 2025 results.
The press release states:
The Fund returned a 10-year annualized net return of 8.3%. Since CPP Investments first started investing the Fund in 1999, it has contributed $492.1 billion in cumulative net income, which is approximately 70% of its value today, with the balance attributed to net contributions.
On a relative basis, the Fund’s 10-year return outperformed the aggregated benchmark portfolios, generating 1.4% in value added. This amounts to billions of dollars that are attributable to active management (after costs). The benchmark portfolios’ fiscal 2025 return of 10.9% exceeded the Fund’s net return of 9.3% by 1.6%.
So yes, over a longer period, CPP investments has outperformed the aggregate benchmark portfolios but in the last couple of years, headwinds in private equity and Mag-7 concentration risk meant they underperformed their benchmark last two fiscal years.
And who knows, it might happen again this year as mega cap tech stocks roared back after Trump's tariff tantrum sent them reeling.
Does this mean the Fund's active strategy isn't working or they should chuck it for a cheaper indexing strategy? Of course not, it just means the Fund will not outperform its benchmark during a roaring bull market characterized by high concentration risk.
In terms of costs, I note this from page 2 of the document:
Comparing today’s CPP Investments to its early-2000s structure is like comparing a global enterprise to an emerging start-up. Our cost structure reflects the scale and complexity required to deliver consistent, long-term value. We have been open and transparent: building a global multi-strategy investment platform is not low cost. Even so, we maintain strict discipline in managing our costs. Take our operating expenses, which include costs associated with running the organization. These expenses are within our direct control as we strive to deliver value. Our operating expenses have consistently decreased, reaching a five-year low of 26.1 basis points in fiscal year 2025. We continue to focus on increasing efficiency; we currently manage approximately $140 billion more than we did just two years ago with roughly the same number of employees.
Shining a light on our costs is legitimate and, indeed, costs have not been static by any
means. Still, some perspective is needed. In 1999, Ottawa transferred $12 million dollars to
CPP Investments. At that time, the CPP Fund was projected to reach $500 billion dollars by 2028. Reaching that trajectory required resources, which we employed, and did so prudently. Last year we earned $60 billion dollars after all costs reaching more than $700 billion. Context is critical.
When it comes to national pension plans, Canada punches well above its weight. The CPP Fund is leading globally by outperforming peers, delivering consistent value after costs, and helping to secure Canadians’ retirement futures. The facts tell a much different story than what has been implied. CPP Investments has delivered tens of billions of added financial heft available to the CPP after all costs.
In terms of managing risks, I note this from pages 2,3 and 4 of the document:
An important part of how CPP Investments contributes to the long-term sustainability of the CPP Fund is to strike an appropriate balance between delivering a maximum rate of return on the one hand and being prudent about risk on the other. Each extreme is reckless. The solution is diversification, which requires professional capabilities and capacity, and which no simple public equity index can provide.
If the only role of CPP Investments were to chase the highest possible return, without considering risks or the need to pay pensions decades into the future, then it would be easy to see why one might be drawn to mimicking short-term equity market surges. But that would be reckless.
The CPP Fund is not a speculative portfolio—it is a $714.4 billion pension fund designed to be resilient through multiple market cycles.
As the investment manager tasked with ensuring the sustainability of the CPP Fund, CPP Investments’ mandate is not to maximize returns at any cost, but to consider risks and the best interests of contributors and beneficiaries such that the CPP will be able to meet its financial obligations at any given point—as required under Section 5 of the CPPIB Act.
Diversification is core to this. Indexing alone may look good in bull markets but would leave the CPP Fund dangerously exposed in downturns.
The reality is that we will see periodic plunges, which have happened at least five times over the last century. This is relevant for any investor, but particularly so for a long-term investor responsible for considering actuarial factors for the next 75 years and beyond. The average drop of those downturns is nearly 50%, as illustrated. The only way out of severe concentration risk offered up by a low-cost index is to prudently invest in capabilities to diversify away from undue risk of loss in accordance with section 5 of our enabling legislation. We also won’t ignore political risk of holding less than 3% of our portfolio in Canada, even if it aligns with the country’s weight in the context of global markets. Strength at home is vital to any successful global powerhouse, which is why 12% of the CPP Fund is invested here.
It’s also important to challenge the claim that “no one beats the market.” While it’s true that most investors who try to time the market or make concentrated bets tend to underperform, this generalization doesn’t hold for institutional investors with distinct advantages. Scale, asset certainty, and long investment horizons enable strategies that can deliver sustained value beyond standard indices—aligned with our mandate to maximize long-term returns. When compounded, those additional returns create meaningful buffers against future volatility. Just as crucial is the fact that managing a pension fund differs fundamentally from individual wealth maximization. Resilience isn’t optional—it requires prudent diversification that only active management can achieve in the best interests of current and future beneficiaries.
The Fund is on track to reach $1 trillion by 2030—well ahead of schedule. It has grown in 25 of the past 26 years. Even during the COVID crash, we delivered positive net income. That’s resilience—and that’s what Canadians deserve.
In my opinion, the essence of the CPP Fund and its active management is clearly explained above right there.
Not only would indexing expose the Fund to serious downside risk, it would violate the mandate of the Fund where they have to consider risks and the best interests of contributors and beneficiaries such that the CPP will be able to meet its financial obligations at any given point.
Sure, they can easily index 70% of the assets into global equities and put 30% in global fixed income but that exposes the Fund to serious downside risk which if it occurs, it could take years to recover.
And the Fund already takes on a lot of Equity risk (both public and private) because base CPP where most assets reside is a partially funded plan so they were able to take on more risk than their peers (enhanced CPP is more in line with a fully funded plan, much more diversified, less risk, an asset mix more in line with larger peers).
From that vantage point, the outperformance of the Fund relative to global peers can largely be explained by its asset mix tilted to equities but active management also added meaningful returns over a longer period.
Moreover, not to get too technical, but if you believe in Ken Rogoff's thesis that a major inflationary wave is coming, both stocks and bonds will be challenged as will some private assets like private equity, so you'd better have a diversified portfolio if you're a large pension fund.
What gets me is people like Andrew Coyne aren't stupid, far from it, if you sit them down and rationally discuss this with him or even Millennial Moron who I consider a lot more financially astute, they will concede all these points.
The document ends by stating:
Some lines of critique simply do not withstand scrutiny. For example, citing the length of our annual report as a measure of institutional failure does not make sense. Consider other large financial institutions, such as banks and insurers, who produce robust financial reporting. Our annual report similarly reflects the information desired and required by different stakeholder groups and international financial reporting standards. Indeed, linking an organization’s performance to the length of its annual report is puzzling.
Our transparency is widely recognized. Over the past three years, we have either ranked first or second globally for pension fund transparency, according to the Global Pension Transparency Benchmark.
What’s more, our connection with Canadians goes well beyond the annual report. We hold public meetings, report to Parliament, publish regular updates on our website, disclose new investments and maintain year-round engagement through investor relations, roadshows, and digital reporting. Transparency is not an afterthought—it is embedded in our governance and operations.
Substance over soundbites
At a time when many pension systems globally are under strain, Canadians deserve to take pride in their national fund. And so they should: the CPP Fund has grown steadily, achieves world- leading risk-adjusted returns after all costs and remains on track to serve beneficiaries well into the future. This success is underpinned by CPP Investments’ clear mandate, strong governance, rigorous transparency and a portfolio built for resilience. Opinions are welcome—but facts must ground the debate. And the facts are clear: CPP Investments continues to deliver for Canadians, today and into the future.
Here I will admit that CPP Investments' annual report is inordinately long, complex and even experts can get confused at times but it is the largest, most important pension fund in the country and they definitely are transparent and cover a lot in that report.
Is it a quick read? Hell no! Can they probably edit it down and make it more reader friendly? Probably and that requires an effort from their Communications team in charge of putting it all together and they'd need to work with all the individual groups from Finance to Investments to Risk to make it more readable so the average Canadian without a PhD in Finance can understand it.
Having said all this, I do agree that Coyne's innuendos are silly, they're not trying to obfuscate or hide things intentionally, quite the opposite, they set the bar for transparency and no other Canadian or international fund comes close, except for Norway's mammoth sovereign wealth fund, the global leader in transparency.
How do I know all this? In 2007, I wrote a governance report for Treasury Board Secretariat of Canada on the governance of the Public Service Pension Plan and looked at best governance standards all over the world.
In my humble opinion, Norway is way ahead of everyone when it comes to transparency, even Canada, but the CPP Fund is definitely right up there.
Can we improve transparency? You bet, if it were up to me, the total compensation of every employee working at CPP Investments and all the Maple Eight would be published, clearly explained and this way we can know who is contributing and why they're being compensated big bucks.
It's not enough to publish the top five executives' compensation, I'd go into a lot more detail because I want to know how many senior directors or managing directors are pulling in more than a million dollars a year and why.
That's me, I believe governance is always a work in progress and transparency can always be improved.
Why am I bringing this up? I read this Reddit thread where Millennial Moron and others posted their thoughts and someone called Got-Engineers posted this:
Thanks for replying with all this information! My own personal adult (typo) is that people in the Canadian pension industry are overpaid, especially at the poor performing funds. They have to attract talent or people to work there, but do they have any experience? I worked in the Canadian pension industry for over eight years and I swear the amount of time you saw someone that got hired that had no actual experience, but turned out they had a connection to someone that worked there, it was very prevalent. The people that work in tech consulting. It’s a huge drift and it’s a very selfish industry to work. Most people are looking out for themselves and their own care interests. Peter principal very prevalent! and don’t ask about severance compensation! The actual numbers of severance compensation at some of the poor performing pension funds in Canada would be alarming to the public if they found out how much money their pension fund is paying people to not work for them.I have no clue who this is, they can learn to write better, but there have definitely been a few suspect hires at all of Canada's large pension funds over the years at all levels and sometimes you scratch your head trying to figure out how they got in the door.
And yes, sometimes the Peter principle applies, people rise to their level of incompetence but this is far rarer nowadays for a lot of reasons, first and foremost, you can't hide your incompetence for long.
But I do believe in meritocracy and hiring and promoting the best people no matter their age, gender, skin colour, religion, disability, sexual orientation, etc.
Real meritocracy requires radical transparency, to borrow a term from Bridgewater.
Lastly, it is important to note that CPP Investments and all of Canada's large pension funds do index their US equity exposure, they've all read A Random Walk Down Wall Street.
Except they try to add add alpha over that beta through internal absolute return strategies and by investing with the top hedge funds all over the and the last couple of years, that has helped them add significant alpha.
Take it from me, I used to invest in top hedge funds, when rates are ultra low, most underperform even on a risk-adjusted basis, but when rates rise back to historic norms, they deliver meaningful alpha.
As far a private equity, no doubt there are serious headwinds there but the approach CPP Investments and other large Canadian pension funds have adopted is a winning strategy over the long term.
This is why while no fund can beat the S&P 500 every year (not even elite hedge funds can do that), over the long term, a well diversified portfolio across public and private markets using the right approach can add significant value added.
And while everyone knows Warren Buffett's track record over the long run, trouncing the S&P 500, fewer people know Brookfield's long term track record which is even better than Buffett's since inception of that fund.
Canada's Maple Eight basically follow Brookfield's approach in long-term investing.
Alright, let me end it there, if I need to edit or add anything, let me know and please remember to read my recent conversation with CPP Investments' CEO John Graham as he delves into all these topics and more.
As far as Andrew Coyne, I will continue listening to him on television and reading his political commentaries, on CPP Investments' active management strategy, I think he's beating a dead horse.
Below, Andrew Coyne joins Steve Paikin on The Agenda to discuss his new book, "The Crisis of Canadian Democracy." This is a great discussion and I'll buy Coyne's book to read it this summer.
Also, Rudyard Griffiths welcomes back Globe and Mail columnist Andrew Coyne to talk about Mark Carney's early economic plan for Canada. Coyne suggests that the PM's vision is a mixture of centre right and centre left politics and mimics the language of Stephen Harper.
Griffiths and Coyne then try to break down the reasons for Canada's stagnant growth and agree that we need more labour, more investment, and more innovation driven by competition. Talk then turns to this week's meeting between Canada's premiers which will focus on interprovincial trade: how might national unity suffer if trade barriers are dismantled? And why is the Prime Minister dragging his feet on this obvious made-in-Canada solution to Trump's tariff threat?
Third, Harvard economist Ken Rogoff joins Charlie Rose to discuss his new book, Our Dollar, Your Problem, where he goes over his thoughts on debt, inflation and the dollar. Great discussion, take the time to watch this.
Lastly, Brookfield CEO Bruce Flatt sat down with CNBC Squawk Box Asia to discuss their business growth, the impact of tariffs and inflation, and the opportunities they continue to see in digitalization and AI infrastructure.
If you want to understand why the Maple Eight try to emulate Brookfield, listen to Bruce Flatt.
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