Which institutional investors do best and why? In the September 2020 update of their paper entitled “The Canadian Pension Fund Model: A Quantitative Portrait”, Alexander Beath, Sebastien Betermier, Chris Flynn and Quentin Spehner compare performances of Canadian pension funds and those of other countries, focusing on Sharpe ratio of the fund assets, Sharpe ratio of the fund net portfolio (long assets and short liabilities) and correlation between fund assets and liabilities. They look at both large (over $10 billion U.S. dollars in assets as of 2018) and small funds. They consider two test periods, five years (2014-2018) and 15 years (2004-2018), excluding funds with missing annual data. The 5-five year sample has 250 funds from 11 countries. The 15-year sample has 105 funds. After comparing performance, they look for reasons why Canadian performance differs. Using performance data, asset allocation strategies and cost structures for the selected 250 pension funds, they find that:
- Canadian pension funds outperform international peers based on both asset returns and asset-liability matching.
- Among large funds during 2014-2018 (2004-2018), Canadian funds generate annualized asset portfolio Sharpe ratio 0.93 (0.75) versus 0.59 (0.62) for non-Canadian funds. Average annual return is 7.9% (7.5%) versus 6.1% (7.0%).
- Among small funds during 2014-2018 (2004-2018), Canadian funds generate annualized asset portfolio Sharpe ratio 0.82 (0.75) versus 0.62 (0.61) for non-Canadian funds. Average annual return is 7.3% (7.5%) versus 5.9% (6.7%).
- Factors driving outperformance of Canadian versus non-Canadian funds are:
- More in-house asset management for cost reduction, even after developing in-house expertise. During 2014-2018, average percentage of assets managed in-house is 52% versus 23% for large Canadian versus non-Canadian funds and 13% versus 3% for small funds.
- Somewhat more active asset management. During 2014-2018, average percentage of assets managed actively is 81% versus 79% for large Canadian versus non-Canadian funds and 82% versus 72% for small funds.
- Greater allocation to real assets, such as commodity producers, real estate and infrastructure. During 2014-2018, average allocation to real assets is 18% versus 9% for large Canadian versus non-Canadian funds and 10% versus 7% for small funds.
- For U.S. pension funds, the adoption of the Canadian approach would have increased asset portfolio Sharpe ratio for the 15-year test period by 15%.
In summary, evidence from Canadian versus non-Canadian pension fund performance results suggest that the more hands-on approach of the former is preferable.
Cautions regarding findings include:
- Findings may not translate to other investor classes.
- Test periods are short for comparison of annual performance.
