Last week I commented on CPPIB’s 19% loss in FY2009. On Thursday, CPPIB released its 2009 Annual Report and it’s worth going over some details below.
[Note: For some strange reason (probably to annoy me), CPPIB locked their PDF file, so I had to embed images below. Click to enlarge the images to properly view text and tables.]
We begin on page 4 where there is a discussion on management compensation:
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We then skip over to page 54 to see the following:
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This brings us to the summary compensation table:
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As you can see, even though the senior officers did not get their STIP, they still got phenomenal total compensation packages, way above what ordinary Canadian citizens receive.
And that four year rolling return benefits the senior officers because if you go back 100 years and look at a portfolio of 60% stocks/40% bonds, you’ll see there were very few negative rolling four-year returns.
Moreover, as I wrote last week:
Can you please stop with this four year rolling return nonsense? You lost 19% or $23.6 billion in FY2009 and you have the audacity to even think you deserve any bonus whatsoever? For what? To retain your talented investment managers?
I would add that FY2009 losses wiped out four years of contributions but senior managers collected millions over those years.
CPPIB’s 2009 Annual Report did provide a discussion on benchmarks on pages 18-21:
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And on private market benchmarks, they state the following on page 21:
In the case of private equity, we select a benchmark that matches as closely as possible the geography and industry of the underlying investments. Accordingly, energy company operating in the United Kigndom would be benchmarked against the U.K. energy sector with an adjustment for the increased leverage inherent in many private equity structures.
They go on to state that the same principles are applied to benchmarking other types of active investment strategies such as real estate and infrastructure.
They also show a table at the bottom of page 21 showing how they translate actual and benchmark return into an incentive compensation system for private equity:
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If this all sounds too sophisticated and complicated to you, that’s because it is. I believe CPPIB is complicating these benchmarks deliberately to blow smoke and hide what they really are.
Importantly, given the size of the CPP Fund, there is every reason to believe they are primarily investing in large private equity buyout funds in the U.S. and Europe and if this is the case, there is simply no need to set benchmarks according to specific geography and sectors.
Ever heard of the KISS principle (Keep it Simple Stupid)? Give me a benchmark like MSCI World Equity and add a spread to reflect illiquidity and leverage of private markets and for pete’s sake, publish your benchmarks in private markets!
What we got in this 2009 Annual Report was a justification for paying outrageous compensation following a disastrous year and a complicated explanation of private market benchmarks.
What a joke. Is this the transparency and accountability Canadians can be proud of? I can just imagine what hedge fund managers struggling with hurdle rates and high water marks are saying to themselves: “Damn, how do I get a gig at CPPIB so I can get a big fat comp based on four year rolling returns?”
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For freaking sake, self imposed Deity’s, the priest cast of finance has finally lost all attachment to reality, have they no sense of history at all.
Has J.P. Morgans poltergeist invaded all upper executive financiers and trying to pull his I. M. M. ploy again (i.e. I own all the shipping, save one and can set my own price.) Must of felt good to have the prez of the USA rock up and ask for a 68M loan eh, were sill paying that one back too [?].
Skippy…sorry for the rant Leo, just getting cross eyed these days.
Leo (and Yves… and whoever else who has had to suffer through a locked PDF):
There’s an excellent little open source application called PDF Split and Merge (http://sourceforge.net/projects/pdfsam/) that let’s you extract any (or all) pages from a PDF. Best thing about this app is that it ignores any PDF locking, extracting unlocked PDFs as the “split” pages. Just load the PDF into the app, split out all the pages, then re-merge them back into a single file and volia, it’s now unlocked.
Finally I can contribute something of value to this blog!
Cn
Leo,
You should forward this article to the Canadian business news TV channels. I saw some talking heads on TV today who didn’t discuss the benchmark issue.
Taking a quick look at the numbers and I come to the conclusion that they made no money during 2008 but the board paid themselves considerably more. Looking at 2009 the board took home less money but it was still more than in 2007 when they did make money. So they whacked up their pay last year so they would look good paying themselves what they usually get this year.
Looking at the benchmarks I am not sure their performance was that good, even taking into account the benchmarks might be an easy target. Their weightings don’t seem to match up to well with their allocations. Why did they for instance change there benchmark portfolio in 2009. Who were the independent experts who validated the change?
The explanation about moving from 95 percent fixed income to 57 percent equities is a bit weak as well and I don’t think much of their risk return accounting framework. Looking forward lots of investment into real estate and I am not sure where they have marked down the value of their current portfolio.
It brings to mind what Lord Acton said: “Power tends to corrupt, and absolute power corrupts absolutely.”
In looking for historical parallels I came across this one:
The Spaniards, slipping easily into the position of the privileged elites they had vanquished, took immediate advantage of the glittering opportunities that opened up before them. While their first response to conquest was to seize and share out the portable booty, they also moved quickly to make themselves the masters of economic and tributary systems that were still in relatively good working order in spite of the disruptions caused by the conquest. To satisfy their own overwhelming greed they were all too soon to wrench these systems out of context, expecially in Peru, where they inherited forms of labour organization and redistributive systems carefully designed to provide an adequate food supply for populations living at different altitudes and in a diversity of ecological environments, rising from the sea-coasts to the high peaks of the Andes. In effect, for the first twenty or thirty years of plunder economy, although endowing it with a spurious respectability by the institution of the encomienda, which was supposed to carry with it certain spiritual and moral obligations, but was liable to be no more than a license to oppress and exploit.~
–J.H. Elliott, Empires of the Atlantic World: Britain and Spain in America 1492-1830~
And just like the executives of CPPIB, the looting received the imprimatur of leading eclesiatics, intellectuals and moralists of the era, who gave the plunder an aura of legitimacy and respectability. Foremost among them was Juan Gines de Sepulveda, preceptor of Phillip II, who opined:
It is with perfect right that the Spanish dominate these barbarians of the New World…who are so inferior to the Spanish in prudence, ingelligence, virtue, and humanity, as children are to adults, or women to men, that I am tempted to say that there is between us both as much difference as between…monkeys and men… [N]othing more healthy could have occurred to these barbarians than to be subjected to the empire of those [the Spaniards] whose prudence, virtue, and religion shall convert the barbarians, who hardly deserve the name of human beings, into civilized men, as far as they can become so.~
(Can we say American Interprise Institute?)
Carlos Fuentes summed the aftermath of the conquest up as follows: “The Reniaissance dream of a Christian Utopia in the New World was…destroyed by the harsh relities of colonialism: plunder, enslavement, genocide.”
The result was of course predictable:
During the 1590s the boom conditions (in Spain) of the preceding decades came to an end. The principal reason for the change of economic climate is to be found in a demographic catostrophe. While the white and mixed populaton of the New World had continued to grow, the Indian population of Mexico, scourged by terrible epidemics…had shrunk from some 11,000,000 at the time of the conquest in 1519 to little more than 2,000,000 by the end of the century (Barbara and Stanley Stein in The Colonial Heritage of Latin America paint an even more extreme picture of the genocide, putting the indigenous population at the time of the conquest at 25 million declining to 1 million in 1605); and it is probable that a similar fate overtook the native population of Peru. The labour force on which the settlers depended was therefore dramatically reduced. In the absense of any significant technological advance, a contracting labour force meant a contracting economy.~
–J.H. Elliott, Imperial Spain: 1469-1716So the Spanish Empire’s productive engine stalled. And the fate of the empire was sealed. Sure, there was a financialization of the economy like what we’ve seen in the U.S. over the past 30 years–an attempt “to make money out of money,” as Elliott put it. There were hubris, military adventures and pretensions of world hegemony. But by 1648 the great empire was no more. Elliot rendered its epitath as follows:
Its currency was chaotic, its industry in ruins, its population demoralized and diminished. Burgos and Seville, formerly the twin motors of the Castilian economy, had both fallen on evil times… While the rival city of Cadiz gradually arrogated to itself the position in the American trade previously enjoyed by Seville, the trade itself was now largely controlled by foreign merchants… Castile was dying, both economically and politically; and as the hopeful foreign mourners gathered at the death-bed, their agents rifled the house.
I added an update at the end and a nice pic from the Toronto Star.
The media AND the policians are finally waking up.
cheers,
Leo
Leo,
I maybe have an opposing view of your presentation (and let me say here that I can relate to your “outrage”). But here are my thoughts.
1) Regarding bonuses. I think they deserve them. The investment managers are given benchmarks to follow (which I’m assuming are given to them by independent consultants or that there is at least an independant third party to comment), therefore, they must work within those benchmarks. They do not have complete discretionary authority, or even close (which I’m sure they’re wished they had). That would never happen. Imagine the public pressure when they find the investment team is running a portfolio without any guidelines or specific asset targets. It wouldn’t fly politically. So they’re constrained. The alternative is to simply index your returns to the benchmark without any “active management.” But from the report, although the investment team lost 19%, they SAVED the plan 1 or 2 billion dollars as a result of their decisions within those constraints. Therefore, a bonus of 5,10,15 million is economically rational. Which costs less, $15m in bonuses or $2B in additional losses?
2) On Private Benchmarks. I agree with you. It should be simple. Use a publicly traded index and add basis points for illiquidity and leverage. But, they should also use a benchmark from Cambridge Associates or Venture Economics. These benchmark returns for private investments by vintage year. This seems more sensible as publicly traded indexes are obviously valued by the minute whereas private investments are only valued quarterly (using publicly traded comps). So there will always be a lag if your comparing private equity and real estate to some public index. But, your point is a good one nonetheless.
I’m not opposed to the compensation. If you pay them any less they’ll simply go to work in the private sector and you’ll have a revolving door. Numbers show they are adding value, afterall they saved the plan between one and two billion dollars.
What we’re left with is an emotional response that somehow leads us to think, fallicously, either 1) you should only be paid for positive returns (which doesn’t work if they have to work within the scope of certain benchmarks and constraints) or 2) it’s not that hard to add basis points (which is extremely difficult to do when the majority of your portfolio is publicly traded). We may not like it, but it is rational.
I need to ammend my comment. The investment team saved approximately $105m, not $1B (forgot to move a decimal point). Still makes sense to pay a bonus of a couple million to senior managers.
Jenga wrote: “1) Regarding bonuses. I think they deserve them. The investment managers are given benchmarks to follow (which I’m assuming are given to them by independent consultants or that there is at least an independant third party to comment), therefore, they must work within those benchmarks.”
Let me be crystal clear here. Neither CPPIB nor PSPIB have gone through a full scale performance audit by the Auditor General of Canada or any independent expert.
You are assuming their value added is based on clear, transparent and accurate benchmarks that reflect the credit, leverage illiquidity and beta of underlying investments.
I am telling you NO THEY DON’T!!!
cheers,
Leo