Monday, February 18, 2013

“F..k is that all?”

If the executives of Canada Pension Plan Investment Board (CPPIB) were like Encana’s executive you might have heard some expletive after revealing their investment portfolio’s target performance of 4%. You may have caught a whisper like “4%? F..k is that all?”

Fortunately, the CPPIB’s executive is a lot better mannered than Encana’s and probably bright enough not to split its oil and gas business into two separate companies. In fact, Encana’s executive did not only split their company into Encana and Cenovus (I guess to realize shareholder losses J) but today the new Encana’s  board has the incredible foresight to diversify from natural gas into… oil. Wow!!! No wonder they’re scared sh.tl.ss (vowels ‘i’ and ‘e’ are missing - sorry no other language possible) about a foreign takeover!  Those pampered executives would lose their overpaid jobs the moment the take-over was formalized.
So what has this to do with the CPPIB and the National Post’s header: “CPPIB ‘cautious’ amid competition in real estate, debt capital markets”? Just as little as the relevance of the Post’s headline to the real message of the story! He! My blog’s headlines have to grab your attention too! J
The true story is here about today’s realistic investment expectations and asset allocation.  The first significant take-away from the article is CPPIB’s investment performance expectation. And if this expectation is set by a conservative, highly reputable, investment board such as the CPPIB then maybe we should pay some attention. For 2013 the fund’s expected real return is 4% [or 6% after inflation - my estimate based on 2% inflation].
The CPPIB also states that it has NET assets of $172.6 Billion of which $85.4 billion is in equities (stocks), $57.8 in fixed income and real estate, and another $29.6 in infrastructure.  If I do the math right then the asset categories add up to $172.8 Billion. But he! What is a discrepancy of a mere $0.2 Billion or $200 Million to the CPPIB… after all it’s not their but our money!  That or maybe the National Post had problems adding things up.
Thus, our Canada Pension is 100% invested today, other than funds needed for its daily operations (including this year’s pension cheques and of course it’s executive compensation). Thus its asset allocation is 49.4% in stocks another 33.4% in fixed income and real estate (strange asset mix!) and another 17.1% in infrastructure.  Speculating that the CPPIB’s split between real estate and fixed income is 50%, sets their fixed income portfolio at only 16.7%.
There two other things we may learn from this newspaper article. Firstly, Mark Wiseman, chief executive of the CPPIB says about its real estate acquisition policy: “we have the luxury of not having to invest… and we can pick our spots”.  This is also true for us small investors, we do not HAVE to invest… instead we can stay in cash and keep our powder dry. Apparently that is often not the case for professionals.  I would call this our ‘competitive edge’. Secondly,  Mr. Wiseman states that he won’t be lured into competition for hot real estate that could drive down returns and neither will we.
But Mr. Wiseman, if you are truly happy with the expectation of a 4% real return in 2014 and if I sat on your board then I would probably whisper: ““F..k is that all?” Lucky for you, you don’t pay taxes on your investment income as us small investors have to.

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