The value of the Canadian model

A lot has been written about the superiority of the “Canadian model” for managing pensions, but can a value be assigned to this organisational design structure? Keith Ambacthsheer seeks to find out.

When The Economist wrote about the approach to investing by Canada’s largest public pension funds in its article, Maple Revolutionaries it started the hype around the “Canadian model” of investing that includes large allocations to direct investments, and managing a high proportion of assets inhouse.

Five years since the article has been written, and Keith Ambachtsheer seeks to find out whether this model of investing actually produces better result. Or in other words what is the Canada model worth?

To find out, Ambachtsheer draws on the data of the CEM Benchmarking database, of which he is founder and part owner. CEM collects information on gross investment returns, the internal and external costs of running the investment operation, a passive reference portfolio which captures the organisation’s investment policy, as well as organisational data such as fund size, proportion managed internally and proportion invested in private markets.

In his analysis Ambachtsheer chooses eight Canadian funds which have provided CEM with data for 2006-2015 and have had three Canadian model features for the 10 year period – which he defines as a clear mission, a strong independent governance function, and the ability to attract and retain talent. And they have had sufficient scale to insource the investment function if they chose to.

CEM has continuous data for another 132 funds which provide a comparison point for the performance of the Canadian funds over the period.

The analysis looks at net value added (NVA) which is gross return minus the cost of running the investment operation minus the return on the passively managed reference portfolio

Ambachtsheer compares the eight Canadian funds to the wider database and finds the eight “Canadian model” funds insource more than the wider group (75 per cent versus 17 per cent) and they also have a tendency to invest more in private markets (average of 23 per cent versus 11 per cent). But despite the bias to allocate more to private markets, the investment cost structures of the Canadian funds generally fall in the middle of the broader fund universe (48 basis points versus 50 basis points average for the broader universe).

The Canadian model funds were more successful at generating positive net value added over the 10-year period than most of the 132 other funds, with a success ratio of 88 per cent versus 61 per cent.

And the net value added of the Canadian model funds was higher at 0.6 per cent a year versus 0.1 per cent for the broader universe.

In a bid to place a value on the Canadian model, Ambactsheer takes the aggregate average value of the eight funds over a 10-year period, which is $832 billion, and applies the excess return relative to the broader CEM universe, which is 0.5 per cent.

He thus calculates the “value” of the Canada model, according to his analysis, to be $4.2 billion a year. Which Ambachtsheer points out “pays a lot of pensions!”

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