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Canada Pension Plan Investment Board (CPPIB)

August 12, 2013

Drama. The Canada Pension Plan Investment Board (CPPIB) currently manages $190 billion in a capital pool that is funded by Canadian employees and their employers at a rate of about $15 billion per year, which is the surplus of funds actually collected and not used to pay Canada Pension Plan Benefits to the current beneficiaries, that is, to the pensioners who are, effectively, the shareholders and owners of the fund.

The most recent triennial report by the Chief Actuary of Canada indicated that the CPP is sustainable over a 75-year projection period.

The most recent triennial report by the Chief Actuary of Canada indicated that the CPP is sustainable over a 75-year projection period.

Its technologies, investment strategies, and personnel are admirable – state of the art – and it should have no problem in meeting its long term investment benchmark of a real return (net of inflation) of +4% per year which would drive the capital pool to the extraordinary amount of $800 billion (in real and current terms) in the next thirty years.

But therein lies the problem. How would we invest $800 billion today and expect to get a 4% real return this year?

It was a pyramid, you say?

It was a pyramid, you say?

Or, at worst, the average over the next several years lest there be drama in the Boardroom (which would not recover our losses).

For example, last year (ending on March 31 this year), the fund earned +10% in real terms and attributes its success to a buoyant equity market, with no help from fixed income. In the first quarter of this year (April through June), the fund has earned +1.1% and attributes its failure to earn more, akin to last year, to a volatile bond market, despite a buoyant equities market (The Globe and Mail, August 9, 2013, Volatile markets slam CPPIB returns).

An Accounting Error

An Accounting Error

To us, a return of +1.1% in three months on $180 billion, would be an accounting error and not a return at all. Nor should the apology sound like the discussion that we might have with our children who nearly missed the curfew because, after all, +1% per quarter might amount to +4% for the year.

CPPIB Returns Chart

CPPIB Returns Chart

Nor are our concerns misplaced, or without worry, because volatility has seriously bedeviled the fund in the recent past, using all of their technology and investment nous.

In the hands of experts, dedicated to the purpose, the fixed income market of government and corporate bonds might yield +5% per year over thirty years not adjusted for inflation.

Nor can we rely on infrastructure investments, whether local or global, because infrastructure tends to rust, needs maintenance and is illiquid, and, at the end of day, can’t be sold.

B

The S&P TSX “Hangdog” Market

Finally, we get to the equity markets which is 50% of the fund, and the readers of these Posts know that volatility is an excuse, not a reason.

There is a solution and it involves changing the name from “Investment Board” to “Income Board” and paying us, the shareholders in absentia, a provable dividend every year on a reasonable capital.

Postscript

We are The RiskWerk Company and care not a jot for mutual funds, hedge funds, “alternative investments”, the “risk/reward equation” and every other unprovable artifact of investment lore. We have just one product

The Perpetual Bond™“
Alpha-smart with 100% Capital Safety and 100% Liquidity”
Guaranteed
With No Fees and No Loads on Capital

For more information on RiskWerk, please follow the Tags or Categories attached to this Letter or simply enter Search for additional references to any term that we have used. Related data may be obtained from us for free in a machine readable format by request to RiskWerk@gmail.com.

Disclaimer

Investing in the bond and stock markets has become a highly regulated and litigious industry but despite that, there remains only one effective rule and that is caveat emptor or “buyer beware”. Nothing that we say should be construed by any person as advice or a recommendation to buy, sell, hold or avoid the common stock or bonds of any public company at any time for any purpose. That is the law and we fully support and respect that law and regulation in every jurisdiction without exception and without qualification to the best of our knowledge and ability. We can only tell you what we do and why we do it or have done it and we know nothing at all about the future or the future of stock prices of any company nor why they are what they are, now. The author retains all copyrights to his works in this blog and on this website. The Perpetual Bond®™ is a registered trademark and patented technology of The RiskWerk Company and RiskWerk Limited (“Company”) . The Canada Pension Bond®™ and The Medina Bond®™ are registered trademarks or trademarks of the Company as are the words and phrases “Alpha-smart”, “100% Capital Safety”, “100% Liquidity”, ”price of risk”, “risk price”, and the symbols “(B)”, “(N)” and N*.

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