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Some gentle inter-institutional investor violence

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You might think that by now there would be broad agreement on the optimal way to manage large sums of long-term money. But no.

Approaches can vary wildly depending on whether you’re looking at a US university endowment, a Swiss insurance group, a European pension plan, a Brazilian family office or a Gulf sovereign wealth fund.

Which is why this presentation — by the former head of Norway’s sovereign wealth fund and current chair of the board of Dutch pension fund APG — caught FT Alphaville’s eye.

The presentation is part of a course on asset management taught by Knut Kjær, and compares Norges Bank Investment Management to Singapore’s GIC and the Canada Pension Plan Investment Board. In broad strokes their aims are similar: generate solid, long-term returns. In practice they are very different beasts.

NBIM is by far the largest, and is pretty much a passive 70:30 fund with a dash of real estate thrown in. GIC is more conservative in some regards (it has a larger bond portfolio) but invests a large chunk of its assets in private equity. CPPIB has a far more modest allocation to bonds, and puts a third of its money in private equity (and another 18 per cent in real estate and infrastructure).

But the most interesting bits are Kjær’s (gentle) criticism of CPPIB, which is sometimes considered the gold standard for large institutional pension funds.

The presentation notes that CPPIB is “extremely more costly” to operate than its peers — its staffing is both vastly larger and better paid — and that “reporting on performance lacks basic transparency”. Ouch.

Although CPPIB’s reported net returns are far better than NBIM’s or GIC’s — 10.8 per cent annually over the past decade compared to GIC’s 5.1 per cent and NBIM’s 6.7 per cent — Kjær argues that it’s hard to know whether that reflects better management or simply that it takes on greater risks.

— CPPIB is running with a higher risk (85/15 versus 70/30 and 65/35 in Owners’ defined risk tolerance). While it diversifies extensively, even with help of leverage, it remains to be seen how a portfolio with leverage and 32% allocation to private equity will perform if the fund run into years of market turbulence, even higher rates, liquidity constraints, continued depressed IPO market and lackluster equity market return

— As CPPIB don’t seem to present its performance against a clearly defined reference portfolio over its 25 years of history and the reporting on hard data seems insufficient, it’s not easy to make up an independent and informed opinion on the quality of the management and whether the building of a very large investment staff is justified.

It should be noted that Kjær didn’t just run NBIM before, he set it up. Moreover, he has also been an adviser to GIC (and China’s CIC), so if you’re a CPPIBer it’s probably tempting to dismiss this as rival sniping.

But he’s no private equity hater (Kjær was the first NBIM head to ask for PE to be added to its mandate) and the presentation raises some interesting points at an interesting juncture of the financial cycle, with some large institutional investors rethinking some of their allocations. For example, the Alaska Permanent Fund has been trimming its weighting to private equity in recent years, and plans to ratchet it back further.

Anyway, it’s a slow Monday morning in May, and we thought it was interesting. Read the full thing yourself and let us know your thoughts below.

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