Thanks for sharing, interesting thesis. How do you square your concerns re: US equities vs Equity PM's being benchmarked to the S&P500? This isn't going to change any time soon...
I don't think it will have much of an effect. The big institutional funds (CPPIB, GIC, etc.) benchmarks are generally a global equity benchmark (at least for their active equity sleeve). For example, CPPIB's reference benchmark portfolio is the following:
"The Reference Portfolio for the base CPP is 85% global equity and 15% Canadian governments bonds. For the additional CPP, which carries greater sensitivity to shortfalls in investment returns, the Reference Portfolio is 55% global equity and 45% Canadian governments bonds."
So they aren't forced to invest in the US (although the US is now ~65% of the global equity allocation). But that's the only place to be for the last ~15 years so everyone is crowded in. The allocations aren't set in stone either and can change over time. But the process of making those changes through investment committees takes time.
Another thing to consider, a fund in Canada can be labeled a "Canadian equity fund" as long as its foreign allocation doesn't exceed 30%. So you'll find a lot of "Canadian equity funds" that have 20-30% of their allocation in US equities (which has made beating the TSX very easy).
Here's one example of a ~$15b fund (group) with over 20% allocated to the US:
I have no idea if it's is the same as in Europe or Asia but I wouldn't be surprised either if there's lots of "cheating" going on there too. Of course, nothing is forcing them to stay in the US (other than for performance reasons).
Of course, if you are a PM that's benchmarked to the S&P, there's not much you can do about it. However if you start seeing outflows (either because investors/allocators are pulling money or the fund's asset allocation changes), you could be a forced net seller too.
Thanks for sharing, interesting thesis. How do you square your concerns re: US equities vs Equity PM's being benchmarked to the S&P500? This isn't going to change any time soon...
Hi Dan,
I don't think it will have much of an effect. The big institutional funds (CPPIB, GIC, etc.) benchmarks are generally a global equity benchmark (at least for their active equity sleeve). For example, CPPIB's reference benchmark portfolio is the following:
"The Reference Portfolio for the base CPP is 85% global equity and 15% Canadian governments bonds. For the additional CPP, which carries greater sensitivity to shortfalls in investment returns, the Reference Portfolio is 55% global equity and 45% Canadian governments bonds."
So they aren't forced to invest in the US (although the US is now ~65% of the global equity allocation). But that's the only place to be for the last ~15 years so everyone is crowded in. The allocations aren't set in stone either and can change over time. But the process of making those changes through investment committees takes time.
Another thing to consider, a fund in Canada can be labeled a "Canadian equity fund" as long as its foreign allocation doesn't exceed 30%. So you'll find a lot of "Canadian equity funds" that have 20-30% of their allocation in US equities (which has made beating the TSX very easy).
Here's one example of a ~$15b fund (group) with over 20% allocated to the US:
https://www.scotiafunds.com/en/home/all-funds/mutual-fund.en.rtcdiv.bns385.canadian-equity-funds.scotia-canadian-dividend-fund.html
I have no idea if it's is the same as in Europe or Asia but I wouldn't be surprised either if there's lots of "cheating" going on there too. Of course, nothing is forcing them to stay in the US (other than for performance reasons).
Of course, if you are a PM that's benchmarked to the S&P, there's not much you can do about it. However if you start seeing outflows (either because investors/allocators are pulling money or the fund's asset allocation changes), you could be a forced net seller too.