In CEM’s thirty-year experience, institutional investors have objectively created value. What can we learn from those that have been successful?
In our April edition of Peer Intelligence, I shared CEM’s key lessons on investment performance from our thirty-year experience of benchmarking from over 500 institutional investors per year globally. You may recall that between 1991 and 2021 investors delivered an average of 69 basis points of gross value add per year, with roughly 75% being consumed by investment management costs. This resulted in an average net value added (NVA) of 16 basis points or $200B on the assets that CEM tracks annually.
Over the past decade, the average NVA – at 33 basis points – has been particularly strong. One group of large public Canadian defined benefit plans (i.e., the Maple 8) has delivered more than twice the level – approximately 70 basis points – of net value added.
This performance was not uniquely driven by being big. If we look at the universe of all funds in our database with AUM in excess of US$50B, the NVA for the past decade was 37 basis points. Above average, but still less than that of the Maple 8. So, what made the difference? I’ll focus on three areas:
A more internal investment style. The Maple 8 managed almost 80% of their assets internally, compared to less than 30% for their $50B+ peers. We see an inflection point around $10B in AUM, where assets are increasingly managed internally. Our data shows an intuitive internalization path that starts with public equity and fixed income.
A greater reliance on active management. I’ll first note that being active matters more in some asset classes than others. For example, being active has generated NVA in U.S. small cap. equity (53 bps) and destroyed value (-2 bps) in U.S. large cap. So, it’s the combination of being more active (~80%) and in private market asset classes (~50%) that helped lift Maple 8 performance.
An ability to optimize costs. The larger investors did use their scale to drive down costs. For example, total investment costs for externally managed active U.S. small cap. equity portfolios increases slower than AUM. Where an external $200 million portfolio of active small cap. U.S. stock is expected to cost 55 bps, a $2 billion portfolio is expected to cost only 40 bps.
I have framed superior NVA above in the Canadian context, but it’s not unique to Canada. With the acceleration of fund consolidation in Australia, emergence of OCIOs, MEPs and PEPs, particularly in the U.S., and ongoing guidance from the U.K. Chancellor regarding the Local Government systems, similar strategies are being deployed globally.
It is worth noting that for many institutional investors deploying the strategies described above is not possible; there may be limiting governance, commitment and/or talent factors. We still observe some investors in these situations superior NVA, particularly considering the alternative being retail funds. These investors deploy situational strategies that include finding public alternatives to private markets (e.g., listed real estate) and avoiding high-cost investment strategies (e.g., fund of funds).
In this issue of Peer Intelligence, we are also delighted to share:
Pension fund transparency plays a vital role in building trust, improving strategic focus, and fostering positive relationships with stakeholders. In the first of this series, we will focus on what sets the most transparent fund in the world, the Government Pension Fund Global in Norway, apart from its peers.
The European Public Real Estate Association (EPRA) is set to unveil its second analysis of the European institutional investor market, titled "Asset allocations, returns, volatilities, Sharpe Ratios, and investment costs experienced by large European institutional investors, 2005-2021." This research, conducted by CEM's research team, highlights shifting asset allocation trends and challenges the conventional wisdom surrounding illiquid asset class returns. Read on to hear Dr. Alexander Beath's key findings from the analysis.
In the world of pension administration, member experience is paramount. Crafting an effective survey program is key, but the question remains: does your choice of survey scale matter? In this article, James provides insights on choosing scale and offers a glimpse into the exciting future of Voice of the Customer!
Daniel is a Senior Analyst in CEM’s Canadian office, primarily serving the firm’s global pension administration and investment benchmarking clients. He shares his journey from Wellington, New Zealand, to Toronto and what he sees as the next big frontier in pension plans.
Digital-first strategies have become essential in pension administration, and learning how industry peers navigate their own digital transformation journey can provide valuable insight. Today, we share five important conversations from the PIN that can help us all navigate the ever-changing pension admin world.
The CEO of Norges Bank Investment Management, Nicolai Tangen, supports CEM’s collaboration with The Global Pension Transparency Benchmark as a key tool to improve transparency.
CEM data was utilized in recent defined benefit research by De Vries et al., which received first prize in the International Centre for Pension Management’s (ICPM) 2023 Research Awards.
The CEM Research Team and DCALTA report updated findings for the use of alternatives in target date funds (both custom and OTC) and balanced options in 2022 by large U.S. pension plan sponsors.
