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Does the Canadian model produce alpha?

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The investment strategies made popular by Canadian pension funds can add as much as 60 basis points a year above a passive benchmark, according to data from CEM Benchmarking.

Renowned consultant and CEM founder Keith Ambachtsheer analysed the returns from eight Canadian funds in the 10 years to the end of 2015.

The Canadian model – defined by Ambachtsheer as featuring “a clear mission, a strong independent governance function, and the ability to attract and retain the requisite talent to be successful” – was shown to outperform not only CEM’s comparable universe of funds but also pension funds in other regions.

Using ‘net value added’ (NVA) calculations based on CEM’s data, Ambachtsheer compared the pension funds’ returns to a passive replication of their strategies and took into account management costs.

The eight funds produced 0.6% a year NVA above the passive benchmark, the data showed. CEM’s broader sample of 132 funds showed an average NVA of 0.1%.

Ambachtsheer estimated this would equate to roughly CAD4.2bn (€2.8bn) in additional returns every year.

Ambachtsheer compared these findings to similar research into Australian superannuation funds and Swiss pension funds. In Australia, a data set covering 1997 to 2016 found a negative NVA – an underperformance of 1.3% a year. The Swiss data set only covered 2010 to 2012, but estimated an underperformance of 0.7% a year.

According to the consultant’s paper summarising his research, the eight Canadian funds tended to insource more of their investment functions and allocated more to private markets than peers. Their cost base tended to be in line with the broader market average throughout the decade in question, and the funds were generally more volatile than the market average.

The full research paper is available here.

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