Norway's Pension Fund vs Yale's Endowment Fund

Here is some very interesting reading comparing the investing styles behind Norway's pension funds and Yale's endowment funds (see here).

As ai-CIO reports:

"The Norway model – or its underlying philosophy – might be a more suitable template than Swensen’s Yale model for many investors, according to the paper published in October 2011 by David Chambers, Elroy Dimson and Antti Ilmanen. "There are three major reasons. First, while there is little long-term evidence of persistent alpha returns, there is ample historical support for beta returns from multiple factors. This can make the Norway Model attractive to many investors since they can also evaluate the potential future performance statistically, rather than relying on an ill-defined and unmeasured 'illiquid asset premium.' Second, the costs and managerial complexity of the Norway Model are significantly lower. Third, there is much less opportunity for agency problems when portfolio holdings are marked to market, centrally custodied, and observable. The Norway Model has been the subject of much recent discussion. It is likely to be an important contributor to investment thinking over the years to come.""

Both the Norway model and the Yale model can be reasonably replicated with low cost ETFs. So, what will it take for Canadian pension funds to jump on board?

Pension Woes

Mercer released the latest numbers for their Pension Health Index (see here). The ratio of assets to liabilities for a model Canadian pension plan has been continuously below 100 since mid 2002.

The asset mix for Mercer's model pension plan is:

"Asset mix: 42.5% DEX Universe Bond Total Return Index; 25% S&P/TSX Composite; 15% S&P 500 (CAD); 15% MSCI EAFE (CAD); 2.5% DEX 91 day T-Bills"

Poor financial markets might be behind the current low reading of the index, but the real problems started in the early 2000s.