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Investment Case Study: Some Oxford Dons Take Skeptical Look at Yale and Canadian Investment Fads, Um, Models

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We’ve attached a hot-off-the-presses case study by Ludovic Phalippou of Oxford’s business school. Unlike many in academia, Phalippou is willing and able to inject humor into his teaching.

His case study is in the form of a discussion among Oxford dons of various prevailing models for investing which in their view, have been treated with far too much reverence. From the overview:

This case study discusses the different approaches to asset allocation and some of the key issues that asset owners currently face. It covers the Yale model, the Canadian model, and more traditional approaches. The case is set up as a debate with a dense content; about the equivalent of three traditional case studies. Speakers give their best arguments in a concise and impactful manner. Each proposal and data point gets immediately and effectively criticized. Each side of each argument is exposed and boiled down to its essence. Although fictitious the dialogue is close to what is said behind closed door in practice. The author experienced these discussions first-hand and took an active part in them. Finally, the overall discussion style should keep the reader engaged and amused.

This piece does a fine job of presenting the differences between the “Yale model,” which is the model used by some universities but Yale has been the most successful, hence aspirants look to Yale as exemplar (amusingly, before Harvard started having performance issues, Harvard was more often cited as the one to imitate). The second is the so-called Canadian model used by the Canada Pension Plan Investment Board. It differs markedly from Yale, with its biggest point of differentiation being that it rejects the idea of asset classes and instead relies on factors….which sound an awful lot like asset classes, just really broad ones. From the paper:

Small wonder all these pension funds and endowments want to go Canadian. I tell you what is new here: we now have compensation packages dressed up as professional investment models.

If you are at all finance literate, you’ll both enjoy this paper and find it informative.

Queens-case-study-April-2016-1
Queens case study April 2016-1

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4 comments

  1. Jim Haygood

    Page 1: “The antiquated Professor of British History was Bursar for Queen’s College.”

    “Antiquated?” That don’t sound quite right.

    Prolly the same guy who had a collection of “well-hung portraits” in his library, in a two-volume vanity press novel by a noted investor.

    1. JEHR

      Right now our Finance Ministers are meeting to talk about expanding CPP. CPP does not pay very much for retirement and it can be clawed back if you earn too much in other monies.

      From the article, I take it that CPP depends too much on private equity and hedge funds.

      1. Jim Haygood

        The CPPIB’s 10-year return after inflation, is 5.1 per cent.

        Baja Canadians can only dream of such investment performance.

        SocSec Trust Fund reporting is opaque (they’ve never heard of GIPS compliance). With a little math, though, one can work out that their portfolio of hinky “unmarketable” Treasury debt earned about 4.5% nominal over the past 10 years, or 2.7% after inflation.

        But since the Trust Fund is only 17% funded, it wouldn’t matter if it were slamming the ball out of the park with 20% annual returns — it still wouldn’t be enough to ever catch up.

        In pointed contrast:

        According to the Twenty-sixth Actuarial Report on the Canada Pension Plan, the level of assets under steady-state funding is projected to stabilize at a level equal to about five years of expenditures. Investment income from this pool of assets will help pay benefits as the large cohort of baby boomers retires.

        Steady-state funding is based on a constant rate that finances the CPP without the full-funding requirement for increased or new benefits.

        http://www.esdc.gc.ca/en/reports/pension/cpp_reports/2014/cpp_report.page

        Again, Baja Canadians can only gaze northward with envy. Our 535 Kongress Klowns have never heard of “steady-state funding.”

      2. Some Guy

        To clarify, there is no claw back on CPP based on your earnings. Other support for seniors (GIS) is means tested, but not CPP.

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