Policy Papers
May 25, 2016

An Open Letter to Andrew Coyne In Response To His May 18, 2016 National Post Column: 'CPP Board Can't Escape Blame For Fund's Bloated State'

By Keith Ambachtsheer

Dear Andrew,

I am a big fan of the ‘At Issue’ panel on the CBC ‘The National’ newscast, and your contributions to it. Well-reasoned common sense has been your trademark.

So your column on the CPP Investment Board last week came as a surprise. You told readers that the manager of their collective CPP nest egg had a “conspicuously bloated” organization, and had “plunged into an increasingly esoteric risky range of private investments” for “no appreciable [financial] pay-off”. You also declared the just-released Annual Report “unreadable”.

I agree the CPPIB Annual Report needs a short, readable summary, and that is what I am going to provide you here.

You declare that investment theory implies “active managers cannot consistently beat the market”. That is true if all participants have access to all information, and interpret and use that information identically. In the real world, these assumptions do not hold. For example, a recent academic study found that a sample 500,000 Canadian retail mutual fund investors consistently underperformed ‘the market’ by an average 3% per year over the course of the last 15 years. Why? Due to excessive use of high fee mutual funds and value-destroying ‘buy high-sell low’ trading activity. And what about their 5,000 advisors? It turned out their own accounts underperformed the market by an even worse average 4% per year for the same reasons. The researchers pronounced the cause of these disastrous investment results as “misguided investment beliefs”.i

What about long-term investors who have systematic (legal) access to a broad range of macro and  micro information and, on average, interpret and use it correctly? I showed in a recent paper that investors with these characteristics consistently outperform ‘the market’ by statistically significant margins.ii

So what kind of investor is CPPIB? Its Annual Report is clear about that. CPPIB sees itself as a long-term global investor with good macro and micro information sources, and an ability to turn that information into actionable investment decisions, especially in the expert-intensive (and expensive) private debt, equity, real estate, and infrastructure markets. Active investors of this kind (rather than the buy-high/sell-low short-term traders) are a key ingredient of functional capitalism. It is these kind of investors who transform retirement savings into wealth-producing capital.

So how is CPPIB doing? Has there really been “no appreciable pay-off” from its active, labour-intensive (and hence more costly) strategies to date? Let’s take the last five years as the period during which these ‘active’ strategies have been in full force. Over this period, CPPIB’s net return (i.e., after all expenses) was 10.6% per year versus a 9.1% return for ‘the market’.iii  The Annual Report translates this 5-year return outperformance into $16 billion of additional net value-creation for the CPP’s 19 million participants. These results are in line with previous research findings for this kind of active investing.iv

Just to make sure you ‘get’ this, let me make the same point differently. If, over the course of the last five years, CPPIB had invested in its ‘reference portfolio’, its estimated value increase from March 31, 2011 to March 31, 2016 would have +$89 billion. Instead, the actual increase was +$105 billion, a net value-added increase of +$16 billion due to CPPIB’s active management strategies.    

Andrew, do you really believe that this additional $16 billion active management contribution (after all costs) to CPP’s assets over the course of the last five years represents “no appreciable pay-off” due to its chosen strategic stance? Aren’t you being a bit churlish about the significance of this $16 billion value-added pay-off? I said above that well-reasoned (and well-researched) common sense has been your trademark over many years. By that standard, your recent CPP column was an anomaly. I wish you a speedy recovery to your old self.

Yours sincerely,

Keith Ambachtsheer v

President, KPA Advisory Services Ltd.

Director Emeritus, International Centre for Pension Management

Rotman School of Management, University of Toronto


Read Andrew Coyne's May 18, 2016 National Post Article.



  1. See Linnainmaa, Melzer, and Previtera (2015), “Costly Investment Advice: Conflicts of Interest or Misguided Investment Beliefs?”
  2. See Ambachtsheer (2014), “The Case for Long-Termism”. See also my new book “The Future of Pension Management: Integrating Design, Governance, and Investing”.
  3. ‘The market’ in this case is CPPIB’s ‘reference portfolio’, which it defines as a low-cost way to achieve CPP’s long-term return objective. You argue the ‘reference portfolio’ is less risky because it has greater liquidity. This is irrelevant: the CPP doesn’t need liquidity and thus illiquidity is not a CPP risk. As a further point, the CPPIB’s 10.6%/yr. is net of all implementation expenses, while no implementation expenses are deducted from the ‘reference portfolio’ gross return of 9.1%. Thus arguably, the 9.1% overstates the ‘reference portfolio’s’ achievable return.
  4. See endnote 2 above. As a specific example, Ontario Teachers’ has outperformed its benchmark portfolio by a net 2.2% per year over the course of the last 25 years, adding $36 billion of value due to its active management strategies.
  5. I was involved in the CPP reforms that created the CPPIB. Since its creation, I have occasionally provided strategic advice to the organization through KPA Advisory Services. I am also a co-owner of CEM Benchmarking Inc., which provides ‘value-for-money’ benchmarking services to hundreds of pension organizations around the world, including CPPIB.

The information herein has been obtained from sources which we believe to be reliable, but do not guarantee its accuracy or completeness.


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