The Canada Pension Plan Investment Board is among those funds that I pay very close attention to. Its widely regarded as one of the best-run public pension funds in the world and, more than that, its been a handy shortcut of mine for many years instead of actually having to think about a challenging question pertaining to institutional investment, I just start by saying what the CPPIB does and that buys me some time to give a more thoughtful response. It works because our little community seems to be fascinated by the CPPIBs organization and investment strategies.
Of particular interest to me over the years has been the way the CPPIB conceptualized its inherent competitive advantages in the financial marketplace and then focused the investment operations and strategy around those characteristics. So, for example, the following quotation from CPPIB CEO David Denision is one that I often refer to in presentations and speeches:
Our view is that the vast majority of the considerable intellectual capital devoted to the investment industry is actually focused on a 0 - 24 month time horizon. Rather than us joining this hyper competitive universe, we quite simply believe there is a better opportunity for us to capture value added returns by focusing on the long horizon end of the spectrum where there are far fewer participants and far less competition...
Isnt that a fabulous way of looking at the financial marketplace and a long-term investors place therein? I think so. Which is why I was quite surprised to open up the CPPIBs new 2012 Annual Report only to find the following news:
The Short Horizon Alpha (SHA) group was formed in late ﬁscal 2011 with a mandate to seek value-added through active trading strategies that have a typical investment horizon of under six months."
Wait, what thats now? CPPIB is building an internal team to invest over the short term? No, that cant be right. Let''s keep reading:
The group comprises 15 professionals with diverse backgrounds who manage four distinct strategies. These strategies seek to proﬁt from arbitrage opportunities and relative value divergences among similar securities in all major markets. SHA continues to build capabilities, to further develop risk-based portfolio construction techniques and reﬁne allocations among strategies as prevailing market regimes change.
OK. It is right.
This group focuses on the development and implementation of scalable shorter horizon active management strategies. It exemplifies our commitment to the development of scalable active management strategies. The three functional areas within this group are Active Alpha (hedge fund beta strategies, variance and volatility strategies and additional scalable alpha generation programs), Credit and Active Strategic Research.
So, in effect, the CPPIB has gotten into the business of short-term trading. Huh.
The people who run the CPPIB are smart. Very. Very. Smart. So Im quite certain that they have thought all this through. Perhaps SHA is about portfolio completion? Perhaps its about getting some internal expertise to hold outside hedge funds more accountable? Perhaps the fund is getting ready for the day (in 2021) when it has short-term liabilities coming due and will require short-term strategies?
But whatever the reason, I still have trouble understanding how this new 15 person (and growing!) SHA group can be reconciled with David Denisons statement about not joining this hyper competitive universe. Why is the CPPIB spending scarce internal resources to build up capabilities in a strategy that doesn''t seem to match up with its innate competitive characteristics?
This is a bit like seeing a marathon champion lined up at the 100-meter sprint. No doubt the marathoner is fast and could hold his or her own, but sprinting still isnt where the marathoner should be focusing his or her efforts...