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Analysis of Active versus Passive Management of Canadian Public Pension Plans.pdf
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Figures 3-1 and 3-2 Data.xlsx
In response to parliamentary interest, PBO analyzed the investment performance of the Canada Pension Plan Investment Board (CPPIB) and the Public Sector Pension Investment Board (PSPIB). More specifically, the objective was to determine whether their active management strategy resulted in higher returns compared to a passive strategy, once additional management costs related to active management were netted out.
Active management can be defined as trying to achieve higher returns by identifying investments which will outperform a chosen benchmark. This is usually accompanied by higher complexity and additional personnel costs.
Passive management tries to mimic a certain benchmark or index, with the goal of achieving the same or very similar returns.
PBO’s analysis compares the actual returns of the CPPIB and the PSPIB, both of which use active management strategies, to that of a customized passive portfolio. It spans from 2006-07 until their most recent annual reports (2018-19 for the CPPIB and 2017-18 for the PSPIB). All transaction costs and management fees associated with actively managing the funds were netted out from the annual returns, while operating expenses were assumed to be the same under either approach for both the CPPIB and the PSPIB.
The passive portfolio was constructed using two large public equity and fixed income indices. The baseline scenario for the passive portfolio used a weight of 70 per cent equity and 30 per cent fixed income. PBO also performed a sensitivity analysis on the weights allocated in the passive portfolio, with a higher (85 per cent) and lower (55 per cent) portion allocated to equity.
In all three scenarios, the CPPIB’s actual net returns outperformed the returns of the passive strategy. For the baseline scenario, total net assets under management at the end of the period were $48.4 billion higher than they would have been under the passive strategy, which represents an average additional annual return of 1.2 per cent. For the higher and lower equity weighting scenarios, total net assets under management at the end of the period were $31.5 billion and $66.7 billion higher, which accounts for an average additional annual return of 0.6 per cent and 1.8 per cent, respectively.
The PSPIB’s actual net returns were roughly the same as the returns of the passive strategy. For the baseline scenario, total net assets under management at the end of the period were $1.7 billion higher than they would have been under the passive strategy, which represents an average additional annual return of 0.3 per cent. For the higher and lower equity scenarios, total net assets under management at the end of the period were $6.1 billion lower and $9.8 billion higher, which accounts for a lower average annual return of 0.4 per cent and a higher average annual return of 0.9 per cent, respectively.