• Warren Laing

Is bigger always better?

Updated: Apr 9, 2020

When it comes to investment managers, the common thinking is that the large institutions can produce superior investment returns over any small manager – but is that always the case? The following comparison of investment returns may interest you. The comparison is between eight of the major public institutions such as; Quebec’s Caisse de Depot, The Ontario Teachers' Pension Plan, OMERS, etc., that published their annual investment results over the past five years.

The table lists the Canadian Institutions in descending order of their total equity exposure as of December 31, 2017. Please note the total equity exposure is based on our assessment of whether the alternatives they have invested in are either equity-based investments or debt-based investments. The purpose is to encourage the comparison of funds with similar equity exposures. The table lists: the fund’s total assets under administration (“AUM”), the equity weighting, the annual investment returns for each of the last five years and the compound annual rate of return over the five year period. Please note that returns that are underlined are net of expenses.

This comparison raises some questions. Most importantly, does a large financial institution (managing investment portfolios amounting to billions of dollars) consistently produce superior investment returns compared to an investment manager with less than $1.0 billion in assets under management (“AUM”)? If not, how do small managers compete? These institutions have overwhelming resources; large investment departments made up of many talented people, a wide array of investment options available to them; such as private equity funds, infrastructure funds and real estate funds to name but a few. Whereas Open Access is restricted to mutual funds that are issued under a prospectus approved by a securities commission. On the surface, it does appear to be a traditional David and Goliath contest.

To complete this comparison of investment returns, the large institutional funds have been ranked by their percentage commitment to equities, and then compared to the Open Access CAP portfolio with a similar commitment to common stocks. Then the five-year compound annual investment returns have been compared.

In the first example, the equity exposure for the three funds is within a range of 1.8%, although the 5-year compound annual returns show a high dispersion totaling 284 basis points (a basis point is 1/100th of 1%)

In the second group the equity exposure range is relatively tight (all within 3.2%) and the 5-year returns all fall within 50 basis points.

The third group shows an equity exposure range of 6.5%. The range of investment returns is greater than the 115 basis points indicated due to the fact that the U of T return is net of expenses. If the expenses were removed the total return would be greater than the 11.03% shown. However, since the quantum of the expenses was not disclosed, no adjustments could be made.

The final group has an equity exposure range of 5.7% but a narrow range of returns of 113 basis points.

After reviewing this data one may conclude that a small investment manager is, in fact, able to produce investment returns comparable to the leading pension and endowment fund institutions in Canada. This raises the question, what enables the small investment manager to compete? One possible competitive factor is size. The large institutions have such significant monthly cash flows from their investment return on existing assets (plus new contributions) that their attention is focused on getting these funds invested. As a result, they are sometimes forced into securities that can have limited marketability and are therefore riskier. Due to this pressure to get the funds invested it is often difficult for these institutions to change their asset mix as it is somewhat akin to turning an ocean liner around. On the other hand, Open Access as a value manager has set an equity range for each of the nine CAP portfolios and actively shifts the commitment to common stocks within that range.

Comments are welcome.

Warren Laing

Warren is the founder of Open Access, a company whose prime objective is to ensure plan members not only retire, but retire "well".

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