Canada's Maple 8 Feeling The Strain?

Alan Livsey of the Financial Times reports Canada’s Maple revolutionaries in pensions feel the strain:

Shortly after she took over as UK Chancellor, Rachel Reeves offered some advice to the UK pension industry — “learn lessons from the Canadian model and fire up the UK economy”. She was on her way to Toronto to meet the bosses of the country’s top pension plans, so perhaps a little flattery ahead of time made sense.

Reeves went to visit them for good reason. For more than 30 years, Canada has been a model for pension funds around the world. Now it is more common for pensions to invest in alternative assets such as private assets and hedge funds. But Canada led the way, with its pension funds often taking direct stakes in companies or assets and managing more of them internally rather than just relying on external managers.

As a 2012 Economist article on the “Maple revolutionaries” reported, “they own assets all over the world, including property in Manhattan, utilities in Chile, international airports and the high-speed railway connecting London to the Channel Tunnel. They have taken part in six of the top 100 leveraged buyouts in history.”

The result has been indisputably a success. The Canada Pension Plan Investment Board — the seventh largest pension fund globally — points out the country now has the third largest share of pension wealth of any nation in the world. “We’re one of the few countries on the planet that has a solvent pension plan,” it says. By 2021, Canada had eight of the world’s 100 biggest pension funds.

But the Maple model has come under strain. CPPIB’s latest annual report published last week delivered another set of mediocre investment results in the year to March with the value of its fund, net of fees, rising 7.8 per cent but trailing its benchmark portfolio for the third consecutive year, this time by 5.4 percentage points. That was the longest stretch of underperformance for CPPIB since 2007.

It is not alone among its Maple peers to suffer underperformance. Ontario Teachers and Alberta’s Aimco — which have reported over a similar period as CPPIB — have also tripped up in the past three consecutive years compared with their own benchmarks. But given its size, CPPIB is a magnet for scrutiny and there have been some complaints that the fund’s internal management of its portfolio is not delivering good returns for members.

Some perspective is required. No one is accusing CPPIB or its peers of failing their mandates. Canada’s Office of the Chief Actuary evaluates CPPIB every three years. In December it reported that the fund must and can deliver the necessary 4 per cent after-inflation gains to keep it financially stable. Over the past decade it has delivered 5.9 per cent in real terms.

Is that three-year underperformance more than a blip? CPPIB “has been earning a pretty good return in the last 10 years”, University of Calgary economist Jack Mintz told the FT. But it is “very difficult” to accurately assess the performance due to a lack of detail of the underlying alternative assets they hold beyond aggregate headline numbers for growth.

However, it is clear that a big part of its problems lies in its private equity investments, which make up 24 per cent of its portfolio. Net of fees, CPPIB’s private equity portfolio was up 2 per cent last year. According to CPPIB’s latest annual report, private equity has trailed its expected performance over five and 10-year periods. Using its own figures, private equity has added no value to its portfolio for a decade.

The state of the private equity market does not help. Despite lively public equity markets and increasing activity in initial public offerings, deals and exits are not happening fast enough to return money to limited partners. Private equity groups agreed mergers and acquisitions worth $172bn in the three months to March this year. That was a 36 per cent fall from the previous quarter, according to Dealogic, and down 8 per cent from the same period last year.

Bain in a recent report said that private equity funds were holding investments for about seven years before managing to exit, up from five to six years in the period between 2010 and 2021. Greater competition, from both institutional and retail investors, has perhaps made earning outsized returns from private equity more challenging.

If so, that raises questions about the competitive advantages that CPPIB and its peers have had for decades in terms of their size and ability to manage private holdings internally in the years ahead.

None other than the Financial Times is now questioning whether Canada's Maple 8 still have their "revolutionary" touch given the marked slowdown in private equity activity.

Of course, the Maple 8 don't just invest in private equity, they invest in infrastructure, real estate, private equity and private debt. 

But the focus remains on private equity and deservedly so since it has been the most important asset class at he Maple 8 over the last 30 years (I'd argue that infrastructure is displacing it).

The key issue? Is there a structural change in private equity that will continue to impact performance in that asset class for many years to come?

I honestly don't know, the industry is still working off excesses of vintage years 2021-2022, but clearly with rates higher for longer, the old glory years of leveraged buyouts are finished.

I'd also argue that significant structural changes in public markets are exacerbating the underperformance of private equity relative to listed equity indexes.

What do I mean? Excessive herding, concentration risk, elite hedge funds and quant funds ramping up stocks like it's 1999 on steroids.

Look at shares of Marvell Technologies today:

 Algos are ramping it up as they took a break from ramping up Micron.

The frequency and ferocity of these parabolic moves are no fluke of nature. It's a concerted effort to manipulate markets, forcing everyone to chase narrower performance.

Of course, the Maple 8 are not chasing tech stocks going parabolic, nor should they.

Read my recent conversation with CPP Investments' CEO John Graham here, where we go over their fiscal 2026 results. 

He literally told me they are not chasing performance even if that means another year of relative underperformance.

The Fund prefers to remain highly diversified across public equities and private markets in order to be better prepared for the eventual decline in stock markets.

You can question whether this is the right approach given the AI investment mania going on, but over the long run, they believe this is the right approach despite what critics claim. 

As far as feeling the strain, I talk to executives of the Maple 8 pretty regularly; they're all fine and focused on delivering the best long-term returns. 

Below, the CNBC Investment Committee debate the best way to position your portfolio as stocks hover at record highs.