Are you ready for a deep dive into quantitative investing, the private credit trend, and the Canada Pension Plan (CPP)? Then this episode is for you! Joining us today is Robin Wigglesworth, The Financial Times’ global finance correspondent, and author of Trillions: How a Band of Wall Street Renegades Invented the Index Fund and Changed Finance Forever, a groundbreaking book about the past, present, and future of passive investing. We talk with Robin about quantitative investing and the ideas he lays out in his article ‘A Quant Winter’s Tale’, before hearing his insights on the private credit trend and his intriguing new book titled Bonds, all about the history of the bond market. Today’s episode also features our Mark to Market segment, where Mark McGrath joins us to talk about the Canada Pension Plan (CPP), providing a comprehensive overview of its inner workings, his response to the criticisms levelled against it, and why he believes it’s of huge benefit to a great many Canadians. Next, we take a look back at our conversation with Alexandra Macqueen on annuities before sharing our thoughts on its relevance to today’s discussion and why it’s worth revisiting. Be sure to stay tuned for our after-show segment where we share our book, blog, and viewing recommendations, plus our favourite reviews, followed by a sneak peek of some of the exciting guests we have coming up. Press play now for a deep dive into quant investing, the hype around private credit, saving for retirement, and a whole lot more!

(0:04:05) An introduction to today’s guest, Robin Wigglesworth, followed by his breakdown of quantitative investing.

(0:09:59) Theories on what happened to factor investing between 2018 and 2020; what is meant by the quant winter and why we are now in a quant summer.

(0:15:13) How investor sentiment regarding factor investing changed after the quant winter and how the algorithm aversion phenomenon impacted it.

(0:20:14) The collapse of value; the impact of the COVID-19 pandemic (plus its role in the quant winter), and where we are right now.

(0:23:24) An overview of quant investing products, and why many of them are too expensive.

(0:25:51) Breaking down the noisy-ness in factor data and Robin’s predictions for where factor investing will go from here.

(0:36:36) Unpacking the hype around private credit: indications that it’s in a bubble, how it could impact broader trends, and who stands to benefit most. 

(0:40:22) We hear about the fascinating book that Robin is currently working on about the history of the bond market.

(0:41:50) Our Mark to Market segment on the complicated (and divisive) Canada Pension Plan (CPP); how it works, its profound benefits, and responding to the criticism it has received.

(01:01:31) A look back at our conversation with Alexandra Macqueen on annuities and how it links in with today’s discussion.

(01:04:33) Our after-show section: an update on the Money Scope Podcast, reading recommendations, reviews from our listeners, and some of the incredible guests we have coming up!

Read the Transcript

Ben Felix: This is the Rational Reminder Podcast, a weekly reality check on sensible investing and financial decision-making from two Canadians. We are hosted by me, Benjamin Felix and Cameron Passmore, portfolio managers at PWL Capital.

Cameron Passmore: Welcome to episode 291. Ben, I don't know about you, but I feel super rusty. I don't know. Our cadence is different this year. It's been great. A lot of great guests and stuff going on. It's just a little different.

Ben Felix: The cadence has been different. I'm not feeling that rusty, because I've been trying to do more videos on my YouTube channel. And so, I've been spending more time sitting in front of the camera.

Cameron Passmore: For the Money Scope.

Ben Felix: True. Well, there's Money Scope, but also, on my YouTube channel, I've been posting more videos. I haven't done one this week, but I've been trying to be more consistent with that. In this week's Rational Reminder episode, we welcome back our friend, Robin Wigglesworth. He had a couple of articles that really just caught our eyes, so we asked him if he'd want to come on to chat about them and he was willing to do so.

We talked about the quant winter, which was a period that listeners who have a value tilt in their portfolio will remember well, as we do, from 2018 to 2020, there was a pretty chilly. A lot of the quant and factor managers really felt that pain. And so, Robin did some really good reporting on that for an article. We talked to him about that. We also talked to him about private credit, which is something that we've been hearing a lot about, and he'd written a couple of nice pieces on that. That was a nice conversation with Robin Wigglesworth.

Then Mark McGrath joins us for the first Mark to Market of 2024. We're already done with the first month of the year and doing our first Mark to Market, because like you said, our cadence has been a little off. But we talked with Mark about Canada Pension Plan, which is a surprisingly divisive topic. I don't think it should be, as we discussed with Mark, but it is.

Cameron Passmore: And complicated.

Ben Felix: The complexity is not controversial, but the concept is controversial, and I don't think it should be. We'll try and explain that in the segment with Mark.

Cameron Passmore: Then with some luck, I'm actually going to do a quick review. We'll talk about our episode when our friend, Alexandra Macqueen was on to talk about annuities, which links into the discussion. We have Mark about CPP. Then we have the after show, which for the three people to stick around, we got a lot of reviews to go through. We got a lot of other stuff going on which we can cover off.

I also wanted to share a bit of a story. I'm in the office every day, as I think many people know these days. One of our advisors, Brady, is also in the office every day here in Ottawa. He's just commenting and passing, Ben, the other day about how much fun he's having meeting new people who are actually reaching out through the podcast, through Mark's Twitter feed, your Twitter feed, and people are actually engaging virtually and keeping an eye on us and following us and our information. Then going to the county links in Mark and yours bios in X, Twitter, and just looking automatically.

He's talking about the great pleasure he's having meeting people that feel like they know us. They know what they're looking for and they're looking for something different, and he's just having these incredible experiences as are all of our advisors right now just to happen to be chatting with Brady about it. I thought it was just an interesting phenomenon, how there's people out there who are engaged with what we're doing and reaching out.

One of our objectives is to really help Canadians help impact them on their finances, how they think about their finances and to see the work we're doing in things like this podcast and Money Scope and papers that you write, etc. It's nice to see the people reaching out.

Ben Felix: It is cool. We got more deliberate over the last year or so, saying that we're taking clients and if people are interested, we'd love to hear from you. Just saying that seems to have made a big difference in the number of people that are reaching out. That's been cool to see and it's good to know that Brady and the team are having fun with it.

Cameron Passmore: We're very grateful. Cool. With that, let's go to our episode then.

***

Cameron Passmore: All right, welcome to episode 291. Ben, do you want to tee up our conversation with our pretty good friend, Robin Wigglesworth. He's become a friend. He's always great to chat with. I had a chance to meet him when I was in London last year, which was really fun. Good guy. With that, why don't you queue up our conversation?

Ben Felix: Okay, sure. We both read his article, Quant Winter's Tale in the Financial Times. It really just piqued our interest, because it told a story that lived, maybe to a lesser extent than Cliff, who's featured in the article, but we certainly went through it, too. Robin is the author of the book Trillions. He was our guest in episode 184, so listeners will probably remember him. He's the Financial Times Global Finance Correspondent, also the editor of FT Alphaville, which is the FT's financial blog.

There's the article in December 14th, and it's not payable. You can read it. Anybody can go and read it. It's a really nice, easy read. He's also written a bit about private credit recently. Since we were talking to him, we asked him about that as well.

Cameron Passmore: Let's go to our conversation with Robin. Then right after Robin, we jump to our conversation with Mark for this week's Mark to Market.

Ben Felix: Robin Wigglesworth, welcome back to the Rational Reminder Podcast.

Robin Wigglesworth: Thanks for having me back on again. Clearly, I didn't scare you guys off the first time.

Ben Felix: Oh, you definitely did not scare us off. You wrote a couple articles recently that we want to talk to you about. They just really caught our interest, and I think they'll catch our audience's interest as well. Can you talk about what quant investing is?

Robin Wigglesworth: Yeah, one of my favourite subjects. People would like to call it scientific investing. But the way I most usually use the phrase is systematic investing, it’s rules-based investing. If this, then that. At its simplest form, it can be an index fund that says, buy all the stocks in the SP500 according to the market capitalization. ETF is a quant product, really. Quantitative investing product.

Most sophisticated on the other side of the spectrum, it is hedge funds like Renaissance, D.E. Shaw, Two Sigma, that use the whole gamut of artificial intelligence to basically, intake all the data that is out there in the world. Everything that happens online any day, any second, and passes it using the things like, machine learning to find signals, quite often very faint. Sometimes the signals that have really worked for very long and systematically mined them, essentially. It's basically something that isn't a human portfolio manager, sitting there, saying, “Hmm. I think Apple is going to have good earnings this quarter.”

Cameron Passmore: Your article talked about AQR, and Cliff Asness was in the article, who our audience knows. What does a quant shop like AQR, how do they differ from a firm, like you mentioned, Two Sigma, or D.E. Shaw?

Robin Wigglesworth: Yeah. This is something that people sometimes forget, or lose sight of in that systematic investing, quant investing. It's a very disparate group of strategies and cap strategies. Like I mentioned, obviously, there's a big difference between Renaissance's medallion fund, which is something called the stat art fund, statistical arbitrage. That's very fast machine learning stuff that we didn't know exactly what they do, but we know probably the broad contours of it, and in S&P 500 index funds.

It's not really clean spectrum, but you put AQR in the middle there, because they do something called multi-factor quant investing. They mine what academics and quant investors are found to be, in theory, durable signals. These are the things that come and go from minute-to-minute, day-to-day, the stuff that lasts ideally for years, maybe centuries across all markets. The tendency of small stocks to do better than large stocks, for example, or cheap stocks to do better than expensive stocks.

Now, that doesn't always work. This isn't the thing that is always going to be working. You are going to have bad years as Renaissance, I think, hardly ever has, but you can do it at scale. The problem with the stuff that Renaissance starts, or D.E. Shaw, Two Sigma is that there's a limit to how much money you can put to some of these strategies, because then those signals, they're so faint, they disappear. With factors, or smart beaters it’s sometimes called, essentially, there's infinite capacity, at least in theory.

This is something you can do a great size and that's something that AQR has been a real pioneer of. They were a hedge fund and they do a lot of hedge fundy stuff, but they've also take the signals, because you can do them at scale and package them up and sell them to other investors as well. When you have other firms like Dimensional Fund Advisors, Akkadian, Arrrowsmith, the multi-factor point world is large and diverse and fascinating, at least to me.

Ben Felix: You reminded me of something that Cliff Asness told us when he was on our podcast. He said something along the lines of, the difference between us, AQR and Medallion is that we'll take your money.

Robin Wigglesworth: I'm a big fan of index funds. I literally wrote a book about them. I put my money in Renaissance and Medallion fund. In fact, I'm pretty sure every investor in the world would. I do think, I'm not in the efficient market zealot. I think smart people can beat the market. I just think it's very hard. It's far harder than people commonly understand. If you look at every single top-notch investment manager that has generally done this, they're all close.

Yes, you cannot give your money to Renaissance and Medallion Fund. Two Sigma is shut down, D.E. Shaw is shut down. Millennium, Citadel also heavily quantitative in many respects, also close to new money. AQR is very keen on your money, especially, frankly, after what we saw factor investing did over the past five years or so.

Ben Felix: Can you talk about what happened to factor investing between 2018 and 2020?

Robin Wigglesworth: Short answer is, we don't really know. There's lots of theories. I mentioned that factors cannot work all the time. There's reasons for that, and again, theories behind it. But we know they don't always work. Sometimes they might have a bad day. Sometimes they might have a bad week, sometimes a bad month, sometimes a bad year. Sometimes perished before a bad decade.

Some factors can go through very short, painful. Momentum, for example. That's a tendency to, you can actually, systematically take advantage of the fact that if a stock's gone up for a certain amount of days, it tends to go up for another day. Same thing, we've seen these trends in all sorts of markets and you can systematically try and surf them almost. Occasionally, it works very badly and you get your face ripped off. Momentum does really well until it does terribly for a day, week, a month.

Value is a classic factor. It was existence investment style before even computers existed. This was what Ben Graham was really doing was value investing. In call, it says, I think that's one of these words, value investing can go through longer periods. It tends to not have these face-ripping the bad days, but it has face-ripping the bad years, sometimes decades. The ideal thing, if you're an AQR, especially you're some of these other multi-factor quants with shops, is that you use multiple factors. The idea, you try and buy in the ingredients in a way that even if one, essentially, sorry for my language, sucks, the other ones should do better.

What was, value had been doing really badly for a long time. But in from around 2018 onwards, we saw everything else also to use Clif Asness’s technical word, suck. Or, at least not do as well as they should. Essentially, the combined result was something that people called the quant winter. There's a good two, three, four years where again, Cliff Asness his favourite word, everything sucked.

Cameron Passmore: How did this quant winter affect the level of assets in the factor-based strategies?

Robin Wigglesworth: Well, value was the worst affected. We saw a lot of systematic value shops, a quant shops adjusted value, or some flavour of value. They did terribly. Several shutdown. We sort of value oriented discretionary managers do badly. Value just as a style and investment factor, whatever you call it, cheap stocks did badly, and expensive stocks did really well in basically, the decade after the financial crisis.

That hurt some of our AQR strategies, for example. If you're invested in a dimensional value fund, you would have had a terrible noughties. Broadly speaking, and you combine these things. You don't just do this one thing, or you use it to counterweight to something else. Until 2018, you are still growing massively. At their peak in 2018, AQR was the biggest hedge fund group in the world. I mean, a lot of that was long only, wasn't in hedge fund strategies. They managed well over 200 billion dollars. They were bigger than Bridgewater at that time.

Then, value went from bad to awful. A lot of other factors just stopped working. If you talk to some quants, they'll have all sorts of theories. Some people think it's the fact that there is some semi-mystical bond linked between the level of interest rates and factors, the performance of factors. Some academics and quants think, maybe you need a certain amount of interest rates to get these things to work for some reason. There are again, theories behind that.

I'm not quite convinced, just because I think you can back test and show correlation to anything you want. We don't have a good rationale for why that would be, why would these things not work as well. Maybe value works better in higher interest rate, I don't know. From 2018, we can see a lot of other things. I think, Cliff Asness’s argument, I've heard this from other quants, is that all systematic strategies, whether they use multi-factor quant or anything else, will have a valuation bias. You try to avoid buying really stupidly expensive stuff. Even if you have, let's say, a quality factor, or momentum factor, you have an implicit bias in your models towards value in those things.

As value just basically stunk out the place, it infected all the other factors, because there was value bias and all sorts of other factors. This was particularly what AQR thinks happened to it. I would be surprised that there are elements of that elsewhere.

There are theories that some of these things cannot work. We know in financial markets that as soon as somebody discovers something and publishes about it, that the impact of that, the effect of that disappears, or at least decays. It's called alpha decay. Some people just thought that some of these factors were just so well known, there was so much money chasing them, that they just went away until, essentially, people pulled their money out. AQR halved in size from their peak. Then now, things are good again. They have a quant summer. Lots of these quant strategies are doing really well again.

Ben Felix: After that really bad quant winter, how do you think investor sentiment about factor investing has changed?

Robin Wigglesworth: Well, it's definitely changed. I remember, I wrote an incredibly badly time piece about, basically, essentially saying, “Oh, this is the future.” Luckily, it wasn't on the literal cover of the Financial Times, but it did suffer from a classic magazine's curse, because factor investing started stinking quite soon afterwards.

In 2018 and 17, around that time, there was a real sense that the future is systematic investing. A Two Sigma, a D. E. Shaw, a Renaissance are all closed. If you're a big endowment, an ordinary investor, a private bank, this is the next big thing. Clearly, it just makes intuitive sense. Don't give your money to some guy sitting in Los Angeles, or New York, or Mumbai, or Delhi, or Dubai, and he picks his best stocks and avoids the worst ones. Doing this rigorously with rules, it just makes sense that it should work, and it did work.

There is a lot of money that went into it. There's this phenomenon called algorithm aversion, which is essentially, there's a paper that studied how we humans react to when machines go badly, or how we perceive when they go badly. Essentially, it gave people a bunch of human forecasters of the weather and a computer model of forecasting the weather. Humans trusted the machines a little bit more than the humans, until the machines made one mistake. Even though the machine was clearly better than the humans, more accurate than the humans, as soon as the machine made one mistake, we'd lost all trust in them.

The same way that human management, fund managers and investment styles have bad months, years, very short thought, even decades, as soon as something that was supposed to be this super cerebral, systematic, not infallible, but pretty close that system failed, there was – I don't think if you talk to Cliff, or anybody else in the factor world, I don't think they would call it aversion. They would just call it a full-on investor puking. Nobody wanted to touch this stuff. We're talking hundreds and hundreds of billions of dollars that left the strategies overall.

Actually, you'd be surprised. I'm almost surprised that there wasn't more given, just how bad performance was for a period. But I think, again, investors, also, there's an immense amount of inertia. We also know there's lots of money and terribly performing active strategies as well that never leaves you year after year.

The money's come back a little bit recently, but it's interesting that we've had at least two good years now from a lot of these strategies. Fantastic to okay years, and investors haven't really rushed back in yet, as far as I can see.

Ben Felix: The algorithm aversion thing is really interesting. I remember one of the other things Cliff said when he was on was, it's a lot easier for investors to live with bad performance in a beta strategy, in just an index fund, than it is in anything that is different from the index.

Robin Wigglesworth: I had this argument with him before, and it's one of the reasons why, although I'm personally intellectually intrigued by systematic investor and factor investing, I think it makes sense. I think, probably works in the long run. We're not machines ourselves, and we need to be aware of our own biases. It's just easier to stick with the strategy that does exactly what it says on the tin. It's one of the reasons why in every bear market, or ahead of every bear market, active managers always say, “Oh, passive funds will be proven to be terrible when the market goes down 50%, the fund will be down 50%. Everyone's going to bail out of index funds.”

Lo and behold, it never happens. Because basically, if I have an index fund and the market's down 50%, that fund is down 50%. Look, I'm not happy, but it's done what it's supposed to do. What we hate is being miss-sold something. They say, “Oh, this will do really well in the bear market,” such as active management. Active managers on average do worse in a sell off. That's why active managers tend to lose more assets in passive funds by far in every single bear market we've seen since the 70s.

I think, with factor investing, it's the same that Cliff and other quants in the factor world will talk about no pain, no premium. That the reason this works is because it's so hard to hold on to. Again, I don't know how rigorous it is, but it makes intuitive sense to me that this is essentially, a pain premium you are systematically harvesting. We're humans. We're not good at pain and certainly not financial pain.

If the entire edifice of factor investing is built on the idea that most people can't hang on, that strikes me as a very bad strategy for the vast majority of humans, who should just stick that super cheap, plain beater. This is Cliff, obviously, disagrees with me, but he thinks that he and other people in that world need to get better at making people hold on for their life as the kindness would say.

Ben Felix: No pain, no premium makes sense. I think it's also when the pain shows up. You look at the quant winter was when the world was seemingly collapsing. That's when value did really, really badly, so it came at a bad time.

Robin Wigglesworth: It was super bad timing. It was the pandemic. Because essentially, so value done terribly in 2018, and that hurt AQR. It done really badly in 2019. That's when AQR decided, we're going to lean in a little bit on value. You see a few other shots of the same thing, because basically, value, you can imagine the valuations and how cheap is value versus how cheap it normally is. Value stocks are cheap stocks, so they're generally speaking all was cheap.

In 2019, it was dotcom levels. It was extreme, the wildest we've seen for a long time, pretty much ever. This was after a very long draw down. It was both severe in size and duration. I saw one quant that calculated, you could extrapolate going back to the birth of the stock market in the 1700s, and value never had such a long draw down either. A lot of quants and discretionary, normal human fund managers said, value is going to come back in 2020.

Then COVID came and smacked them in the face. It was just brutal. It was just this ultimate rug pull. People were positioned from value after two terrible years having the mother of all comebacks. They leaned in on it, and it went terribly. That's why you saw in 2020, that was a real capitulation movement for a lot of these strategies. People, a few prominent names that literally retired. They couldn't hack it anymore. Ironic. obviously, that was pretty close to the bottom, because almost exactly when we saw the vaccines. They announced one of the vaccines in November 2020. You saw the first snapback. Since then, it was just been better and better and better, broadly speaking, for a lot of these strategies.

Cameron Passmore: Are you saying that the quant winter is over?

Robin Wigglesworth: If I say that, obviously, it's going to come back, knowing my history of protecting these things. Yeah, I think the quant winter, the 2018 to 2020 is over. That doesn't mean we can't have another one. In many ways, I guess, it's a good thing that money hasn't come rushing back into these strategies. The extreme in valuation for value stocks, if you look at high price versus low price, it wasn't as extreme as it was in mid-2020, but it's pretty wild still. That's why people like AQR, they’re actually super happy now on most of the performance, that it has been phenomenal the past couple of years.

This will happen again. You can prepare yourself for a bad year, maybe in a bad couple of years, but a super stinky three, or four years, it just gets hard, right? Can these factors last forever? I don't know. Maybe the whole idea needs to be essentially, demystified and say that, look, most human fund managers, when they describe the process, will say, “We'll try and buy good companies at reasonable prices.” It's the classic Buffett-ism. Let's say, a quality factor does, or a quality with a value tilt.

Essentially, they're just doing what a lot of human fund managers already do, just far more cheaply, essentially. My hope is that the prices of these products will come down, because again, they're not as expensive as human fund managers, but they're still probably too expensive for what they are, which is essentially, another form of beta, a fancy beta. They're not plain beta. If you can package it up in an ETF, and people are now doing that, then I don't think you should be charging anything close to hedge fundy fees for it.

Ben Felix: At least some of the long-only products, like Avantis and Dimensional, they've got ETFs now that are a little bit more expensive than beta, but getting pretty close.

Robin Wigglesworth: Yeah. We can see them as probably, digression. But the price of beta is basically zero for plain liquid large markets. We're probably heading there for the smart beater products as well. I think that's only fair. There are other ways to make money from these products. To be fair to them, I mean, if you buy an ETF from BlackRock that's a value ETF, there's a little bit of tinkering iteration that goes. But generally speaking, they don't spend a lot of money and time on iterating the research constantly.

If you go to a Dimensional and AQR, Panagora, these shops do spend quite a bit of time constantly changing things, because they do know that the world changes. Classic case is that value. Obviously, the way we value companies, very tilted, has a bias towards companies that have bigger factories. You look price to book. If you have big, hard assets are worth lots of things on accounting value, they tend to look cheaper. It means that companies have hugely valuable IP, and it’s treated as well.

I do know this. I know there were value investors, both humans and systematic quant jobs that have Apple as a value stock. Because really, if you [inaudible 0:25:18] them, insane amount of cash they've had on its books. The IP, you could very easily argue that Apple was a value stock through most of the noughties, which just goes to show these classifications are a little arbitrary, and you'll see different things at different shops.

There is iteration tinkering going on, for example, including intangibles in the value factor, for example. That seems to be having improved things a little bit. Talk to the people but standing still is falling backwards and you have to run pretty fast to stay ahead of the market curve.

Ben Felix: On a somewhat related topic, can you talk about what's going on with noisiness in factor data?

Robin Wigglesworth: It's like everything in world. It looks great from a distance, but the closer and closer you look, the fuzzier it gets. The resolution just starts breaking apart. Factors are the same way that value, momentum, quality, size, all these things look great. But then literally, fairly humdrum decisions about what timeframe do you use, or what size of stocks to include? You include microcaps, you include Botswani stocks, Chinese stocks, all these things.

What you include or exclude and timeframes, literally from day-to-day, month-to-month, can have a huge impact on what results you show. Now, most serious quants know this and will be very honest about it, that human attempts to impose an arbitrary, quantifiable, metrical system, or something is always doomed to failure, especially when you put it on something as chaotic as financial markets.

Yeah. There are people that say that a lot of the classic Fama-French factors that Eugene Farma and Ken French have discovered, if you look at what Ken French has is this online library, just changing what timeframes you met it, changes the results quite significantly. I think it's really interesting. I think it's a reminder for me, it's just a reminder that you need to take all this data, even when it comes with incredible scientific rigor by the finest academic, or practitioner minds in the industry, take it with a fistful of salt.

This is not physics. This is an attempt to put a framework on to something very messy. I've seen some people say, “Oh, this is factors that the whole noisy factors papers show that factors don't work.” Now, the people said, it means nothing. It doesn't mean nothing. It just is another reminder that we need to be careful about treating any things like this, like gospel is my view.

Cameron Passmore: Just to put a cap on this, where do you think factor investing goes from here?

Robin Wigglesworth: Well, I mean, it'll get cheaper. It'll get better. It'll have bad periods. It's been interesting to see that the money has not really come back, as far as I can see. It stops bleeding out. The multifactor quant industry would stop bleeding, but the money hasn't come back. It'd be interesting to see after AQR has had some phenomenal years. I think most people have had pretty good years, whether that starts coming back. Again, I think because of that algorithm aversion issue I talked about, it'll probably be pretty slow. But maybe that's a good thing for the performance, if it was a fundamental issue that this stuff just got over mind and overused, maybe that is a good thing that the longer people say, where the greater the pain, the greater the premiums for the people that either stuck to it, or go in opportunistically.

I think, you'll have another hype cycle, maybe. Maybe caused by financial gents like me. But I hope that people remember this as an example that there is no free lunch. You can't just say, “Oh, small stocks have done really well over the past century, so they're definitely going to outperform big stocks over the next century.” Because there is no law of science that says it is so. Classic case of this, this was Paul Samuelson. We talked about in the long run, stocks always do well. Well, not if you're investing in stocks in Russia in 1914, or 15. Those stocks went to zero. I think we need to be humble about what we know about these things.

As a bounce, as a component of the portfolio, some of these things do well when everything else stinks. It's really interesting that, for example, that a lot of AQRs, more hedge fundy strategies, at least, did really well in 2022 when everything else stuck out of the place. They would say, this showed that you should have not all your money in AQR strategies. Even they would say that. But should you have some of your money and some of these strategies that, yes, can lag behind the broader market when everything is going well, but when things like 2022 happen, they tend to do less badly, or maybe even well if it's a more hedge fund strategy.

That makes sense to me, that, I think, if you're someone in wealth fund, you can look at these things in a little bit more holistically. If you're an ordinary investor, I’d – I'm levered along Norwegian property and in index funds. I quite like not having to think about it from year-to-year at all.

Ben Felix: Yeah. Tracking errors is really hard for people.

Robin Wigglesworth: Yeah. Just literally, people will say that you'll have look at five different value ETFs. They'll perform radically different. Subtle differences. It’s just messy. This is why, frankly, even something like, if you talk to Bell Sharpe about this, who the guy who invented the term beta, he absolutely hates the term smart beta, because it implies that normal beta is dumb and this is smart. It really isn't. It's just marketing, to be, since I've been somewhat nice. I say, oh, I can say that one thing that AQR is really good at is marketing. They've marketed this.

I mean, it's partially like Cliff Assen's branding. He's a brilliant guy, but they put a lot of paper to the credit, fantastically transparent, including when things go badly. Frankly, as a financial journalist can tell you, it's very rare that people talk about stuff when things go badly. I'd say, assets in the AQR crew actually were better and talk about this, and picking out the scabs of their wounds when things were bad, than most people are when things are doing well to the credit. But it’s marketing. I think should you pull your money in a value ETF, or a value strategy, or even a multi-factor quant fund? I'd struggle with that. Some people, not just United, some people like Liverpool.

Ben Felix: Speaking of things that are maybe not doing so well, what do you think about all the hype around private credit?

Robin Wigglesworth: Yeah. I mean, it's fascinating. I wrote that private credit was just an incredible bubble, five years ago, I think. It was when I started getting cold calls in the United States, when I lived there. People were literally trying to sell me a credit, a corporate credit line. It won't shock you to know that journalists and journalism is not very credit worthy. If they are cold calling to try and generate supply, there is way too much demand out there. Lo and behold, it's just gone even more nuts since then.

I'm getting now cold pings on LinkedIn from people that are asking me if I would need any credit. Given everything else, we can see going on in the credit world, that's pretty wild to me. Against that, I think it seems bubbly. I've written about something called the email index indicator, how much emails I get. Whatever I get the most emails about is usually the most spurious bullshit going on the markets at any given time. For a long time, obviously, it was anything crypto is wild. Crypto is still annoyingly persistent in my inbox. ESG was pretty high for a period. AI recently, definitely a big index and the light flashing. Private credit is frankly, the worst one. I can literally write poems saying, this is stupid. People will say, “Oh, you should write that my private credit strategy.”

Against that, and it sounds very negative, because I think it is crazy. There's definitely some pain already happening now, because private credit is floating rate. As interest rates have gone up, it's increased. That's why the returns probably look okay so far, it's not like fixed income that goes down in value when interest rates goes up. Private credit yields better when the interest rates go up, up to a point when that company is basically, just blown apart. If you borrowed at 500 basis points, 5% above LIBOR. It was LIBOR five years ago. Today, you're paying 10%. All of these companies are not going to be able to stomach that. Also, these companies are not very asset rich.

Private credit funds will say, that we do lots of credit work. We have bespoke loan docs and all sorts of things, which I completely agree on and they do work for these things. But the docs would help you if this company just goes belly over. That is already starting and it's probably getting quite gruesome. There's still too much money chasing, too little. That said, I think the broader trend is really cool and interesting. I actually think that more lending should be done by the markets. That doesn't mean that that is a million times better.

Essentially, a loan is risk. The saying goes, can't destroy it. It just changes its form. Actually, I would rather that risk of that corporate loan being in the market, or the investment fund at unlevered usually, or modestly levered investment fund, than in a bank that even after 2008, is still heavily levered and holding my deposits, essentially. I want that risk in the markets, in the capital markets.

Private credit, bond market is really good at big, chunky stuff. If you're IBM, you don't give a crap about private credit. You can issue 10 billion dollars tomorrow. No problem. The bond market, even after Lehman Brothers went bust, IBM and some of these big companies, there's almost some sign of faith to show that they could. They did issue 10-year bonds. They paid 5%, 6%, 7%, 8%. Incredible prices. But they could do it even weeks after Lehman went belly up.

Smaller companies have a lot harder time, because banks can't, or they won't lend as much to them. Can in theory, private credit fill that void? That's what we've seen so far. I think a lot of the talk of this is mostly, again, marketing. In reality, if you look at the private credit world as it exists today, it seems overwhelmingly to be private credit funds scratching the backs of private equity funds. It's overwhelmingly supplanting leverage loans and high-yield bonds as a component in the broader leverage finance machine.

It's basically just helping other private equity funds. They're lending to each other's deals. Buying if sometimes a little bit iffy. In an ideal world, this phenomenon would go through a credit cycle or two, and maybe it might evolve into something that is genuinely a new valuable addition to the financial system, especially in the United States, where smaller companies can, but don't need to borrow, because the bond market won't take a 50-million-dollar bond anymore. They want 200 million, at least. Ideally, half a billion at a time. They want the liquidity.

If people are willing to accept the liquidity of private credit, suddenly, you're opening up a lot of companies that normally can't go to the bond market and might be disenfranchised by the big banks, can suddenly have raised capital. That'd be, I think, a positive thing. That's a very long answer to say, I think it's an incredible bubble. But out of bubbles, sometimes positive things do emerge.

Ben Felix: That is true. The theoretical future state, I agree, does sound interesting. As it exists now, though, who do you think stands to benefit most from private credit?

Robin Wigglesworth: Well, the private credit funds. I mean, these are incredibly fee-rich products. The asset management. You can see there's a reason why a Blackstone is worth more than Goldman Sachs now. It's worth more than BlackRock even. Their asset is, you know, almost 10 times the assets, because these are very expensive products. The saying in the industry, there will be differentiation.

The one thing that scares me as a journalist, when I've talked to people in this world, is that most of them will admit, say, look, yes, things are going crazy. People are doing dumb things and you'll come back to want them. But we're not doing dumb things. It's everybody else. That's what everybody's saying. Everything that everybody else is doing dumb, but we are remaining super-disciplined, conservative. This is when real credit work, due diligence, legal finessing, that will really make the difference. We will differentiate ourselves. I'm sure some of them will. I have no clue who it will be, but there are some of the bigger firms that you can see have more experience with these things. There will be some accidents.

The problem is, for a journalist like me is, we won’t to see them. These are private credits. It's really annoying trying to find out, even when there's extending and pretending going on, which I gather, there is a lot of. Finding those concrete, juicy examples you can splash on the front page of the FP is just very hard. If you're a rubber-necky like me, you like looking at accidents, financial accidents. The problem with private markets is that they happen most in the shadows.

Ben Felix: I also agree with the email index. This is the one that's, like you said, it's crazy how much emails I get and how – I went to a couple of conferences last year. The number of times I was approached to, “You got to look at our private credit fund.” It's like, man, how many of these things are there?

Robin Wigglesworth: I think, people know it's crazy, which makes me almost wonder, why are you still pushing this? The only example I could think of was private credit is a legit asset class. I actually hope will grow and become more important, because I think it has potentially a huge role to play. But it reminds me a little bit about the worst of the crypto excesses. That won't probably shock you by saying, I'm not a big believer in magic beans.

I once wrote a poem saying that crypto was like an Albanian Ponzi scheme, because there's some really fascinating parallels between this massive outbreak of Ponzi schemes in Albania after the fall of the Iron Wall, or the Iron Curtain. That basically, just ruined the country. It caused a civil war. It's just incredibly dramatic. How something that was entirely outside the financial system wormed its way in and caused carnage, wrecked political accountability at a very sensitive time, and this caused damage. This was quite incendiary of me writing this.

I still got a 100 emails saying, “Oh, you should write about my coin, because my coin is super good. This is really good and my blockchain project is the best in the world. It's going to revolutionize whatever.” People don't even read what you're writing. They just read that you're writing about it, [inaudible 0:39:48]. Private credit has been a little bit like that. Even when I write mean things, people tend to say, “Oh, you should talk to my people about this.” Which is good. I do want to talk to these people about it.

It's going to be fascinating to see how it plays out. The only worry I have is that I like to be publicly proven right. Maybe with private credit, we'll really only know in five years’ time when we see the actual investment returns, the net IRRs of some of these funds, when they start tricking out from institutional investors.

Cameron Passmore: Speaking of fascinating, can you share with our audience what you're working on now?

Robin Wigglesworth: For the people who can see me, I've got a very rustic background, because I've locked myself into a wood log cabin outside Oslo. We don't have running water. But it's because I can spend a solid amount of time working on my book, on the history of the bond market. I'm a bit of a history buff. I love history. I like, especially when you can use an unlikely hero to tell a wider story about how the world is the way it is.

My first book was about index funds. Really tried to write about the evolution of investment management and markets over a 100 years. I love bonds. It was my first job as a financial journalist was covering the bond market. There's Kat Stevens saying, the first cut is the deepest. I'm now writing it to a 1,000-year history of the bond market and how it shaped the world that we live in today. I was going to continue to shape it, because for the first time in history, bonds were actually half of all global credit.

For the first time, the beaten back bank loans, since they both, basically, immersion in Renaissance Italy, a 1,000 years ago, almost. That's why I'm going unshaven and unshowered for a few days to break the back of that project.

Cameron Passmore: Well, we look forward to that book. If it's as good as Trillions, which we absolutely loved and our audience loved it, it'll be a great read. For sure, we'll have you back when that comes out. Robin, great to see you.

Robin Wigglesworth: No, thanks so much for having me on.

Ben Felix: All right, Mark McGrath, welcome back to the Rational – do I even say welcome anymore? You're just a fixture.

Mark McGrath: I know. Well, it's been a while. Over the holidays in Mexico, visiting in-laws. It's been a while since we've done one of these.

Cameron Passmore: Plus, our schedule has been off so far this year with guests and whatnot. We're getting back to the normal groove now. What you got?

Mark McGrath: I'm going to talk about the Canadian Pension Plan today, CPP. I'm going to try not to get too far into the weeds on this. It's an incredibly complex topic. There's a ton of math involved. I don't want to get too deep into that. I'll explain it still at a high level, but I think what I want to get into is why I think at least CPP is a huge benefit for many, many Canadians. Maybe just talk about some of the common criticisms that I hear from opponents of it and address those.

I posted something on Twitter the other day about CPP, and it got quite a bit of attraction and tons of comments. There's a lot of comments in there about how it's theft and the government's stealing our money, and you should just be able to opt out of CPP for some if they choose to and invest the money themselves however they want and all these things. I just don't agree with that take, and I'm going to explain why in a minute. Ben, I know you've been thinking a lot about CPP lately. If you have anything to add, or to correct me on, by all means, just jump in.

CPP, yeah. It started in the mid-60s. I think it was 1966. It was primarily designed to address the economic instability of retirees. I think OAS had been around for a long, long time by then, but that was intended to be just a band-aid solution until something more structured could come along, and so, CPP was launched. The way it's designed is it's designed to replace 25% of your earnings up to certain earnings limits. There's an enhancement that's just come out, and we'll chat a bit about that as well.

What they call the YMPE, the year's maximum pension earnings is a number that's set every year and it's indexed to inflation. Your income up to that level is intended to be replaced at 25% replacement rate by CPP. It's not meant to fund your entire retirement. It's significantly lower than Social Security in the US, for example.

Ben Felix: The YMPE is not necessarily indexed to CPI. The yearly maximum pension earnings is based on wages, which don't – historically at least, have not grown in lockstep with inflation. Like you said, I have been looking at this recently. Going back to 1990, the yearly maximum pension earnings is growing about 50 basis points annualized faster than CPI. That actually has some really interesting implications for, if you look at the internal rate of return, how good of a deal is CPP. The fact that the benefit grows with the YMPE, it's additive to how interesting CPP is.

Once you start taking the benefit, it's indexed to CPI. But your contributions and your starting – like, when you start taking CPP in the first year, is all based on YMPE. When you talk about the 25% replacement rate, that's based on YMPE. And so, it changes at a rate slightly different from price inflation.

Mark McGrath: From CPI. Oh, it's interesting. Okay. I knew that it was indexed to wage inflation, but I didn't know, historically, what the difference was in the actual rates between the two. That's really fascinating. It's a contributory plan. People, you have to contribute now 5.95% of your earnings between $3,500. That first $3,500 a year that you earn is exempt from CPP contributions. Then up to that first ceiling, which now is, I think, 68,500. You contribute 5.95% of your earnings within that band. It works out to about $3,860, I think, right now. Of course, that'll increase over time.

If you're self-employed, you make both contributions. Employers also have to make the same contributions at the same rate, that 5.95%. If you're self-employed, it feels like you're making double the contribution, because you're seeing that coming out as a payroll tax. I'd argue that regardless for every Canadian, that 11.9% is being contributed. If I'm an employee, like I am at PWL, PWL is contributing that 5.95% on my behalf, and it forms part of my total compensation. This is actually a question I had for you, Cameron, because I got a lot of pushback from business owners saying, “Well, no. I have to make double the contributions.”

My rebuttal to that has always been, well, no. Your total compensation as an employee reflects all the benefits that you get and any pensions you have, as well as CPP contributions. Cameron, when you think about compensation for employees, presumably, you factor in that there's a cost of CPP.

Cameron Passmore: We call it DAS. Yeah, deductions as source. We include that whole envelope in compensation at a high level. Absolutely have to, because there's also health tax that you pay it, and other things you have to pay for sure.

Ben Felix: The idea that business owners pay double into CPP is always something that drives me crazy. In equilibrium, thinking, that money didn't come out of nowhere. I found one empirical paper on this that asked that question, who bears the cost of social benefits? I don't remember the specific details, but it varied by country. It was something like, around 90%, I think, of social benefit costs are borne by employees, like out of wages they would have otherwise earned.

Mark McGrath: Exactly. Because presumably, if the employer didn't have to contribute to CPP, then they'd have additional cash left over for compensation in other ways, and they would equalize in some sense. That's how I think about it. I totally get the feeling that you're doubling the contribution, that you have to pay more, but I just don't think that's true in practice if you frame it that way.

You contribute and they calculate your contributory period as the ages between 18, and when you take the pension, which is traditionally at 65, but you can delay it, you can take it early. From 18 until you take that pension, that's your contributory period, and they drop out certain years from it to make it a little bit easier on you. They drop out 17% of your lowest income years. There's additional dropouts for those who had lower income to raise children, up to seven years per child, and then there's a disability dropout provision as well.

If you're on the CPP disability, if you qualified for the CPP disability benefits, those years are also dropped out from the calculation. The way this all comes out is your actual contributory years between 18 and let's say, 65, are 39 or lower. 39, because you drop out eight years as the general dropout, that's 17%. If you raise kids around disability, then your total contribution period is less.

At a high level, that's how it works. You can take it at 65. If you take it early, there's a penalty of I think, 0.7. No, 0.6% per month to take it early, if I'm not mistaken. If you delay it, there's a benefit of 0.7% per month. There's an incentive there to take it at 65, or later. Because it's indexed to CPI, by delaying it past 65, you get that higher starting base and then it compounds at a rate of CPI. Usually, if you're projecting long enough lifespan, then delaying it usually can make sense mathematically, but we don't know.

That's generally how it works. The payments that you get right now, I think the maximum CPP payment is $1,364 per month. As some commenters said, “It's not even enough to pay my rent.” I think, well, that's true. But imagine if you didn't have it, it'd be a lot harder to pay your rent if you didn't have that money coming in. That's real money. We've all dealt with retirees. I've never met a retiree who didn't love their CPP. It's that steady inflation-adjusted income. It takes reliance off of other sources of risky assets, like a portfolio. When markets are down, they know they're getting that steady income check. All the risk has been transferred to CPP. In my experience, retirees love it.

Now, for business owners, you only contribute to CPP if you've paid yourself a salary. I was actually talking to two accountants the other day about this. They had a client primarily, not primarily, exclusively on a dividend compensation model. If you're a business owner and you have a corporation, you can compensate yourself by paying yourself a salary, or by paying yourself dividends. If you pay dividends, it's considered investment income. There's no CPP deduction for dividends.

What a lot of accountants, in my experience, will recommend is you just pay dividends. Then that way, you don't have to contribute to CPP. You save that money instead and do something else with it. There's a lot of downside to that in my experience. One, you don't get CPP. I just think CPP is great. Yeah, you don't get it. Two, a lot of people don't do a great job of taking those savings and actually investing them appropriately over long periods of time and actually compounding that savings into a sum that would be greater than what they would receive by CPP over the long run.

I think for me, the biggest one is you get no RRSP room if you do that. If you only pay dividends, there's no RRSP room given to you. You have to pay salary to get that. What often ends up happening is you have corporations that don't have individuals that can contribute to an RRSP and they haven't contributed to CPP, and you end up with what I consider is a bit of a concentration risk. You end up with too much in the corporation and not enough diversification of other sources of retirement income, like RRSP income and CPP. I'm a big fan of it from that perspective.

I think, the biggest thing that I realized while I was reading about this over the past couple of days is that this concept of being able to opt out and save the money and invest it yourself, I think is a very dangerous suggestion. I'm sure, there's people out there who could just absolutely nail this and do it properly and they would be way better ahead. But in looking at some stats from StatsCan and a couple of surveys over the past couple of days, Canadians are not doing a great job on average of preparing for retirement themselves.

CPP is a form of forced savings for a lot of people, it's going to save them. I just want to talk about some of these stats, which blew my mind. StatsCan said, that the average Canadian saves 6% of their disposable income per year. That's after-tax disposable income. They're only saving 6%. That's from Stats Canada. That's a very, very low savings rate. People are already, and the argument can be made, well, we can't save as much, because we have to make these CPP contributors. Sure, but on average, people are not saving a lot as it is.

There was actually a study that came out today from the National Institute of Aging. It said, only 33% of Canadians over the age of 50 say that their income is high enough to let them save at all. Over 50, only a third say their income is high enough to let them save. People are not doing a great job of saving. This is, to be clear, I'm not blaming anybody. I get it. Life is expensive. Housing costs here are expensive. Maybe wages aren't as high as you'd like them to be. But the reality is people have trouble saving for a variety of reasons.

70% of that same age group, Canadians over 50, said that they are afraid of running out of money in retirement. These are big numbers. CPP works in favour of people who are in those situations. It's a guaranteed indexed pension for life. Doesn't matter if you live to be a 120 years old, that money's going to keep coming in. If Canadians have trouble saving already, this forced savings program to me is going to save a lot of people.

A couple more interesting stats. Deloitte did a survey and found that only 14% of near retirees are expected to be comfortable in retirement. 14%. The rest are expecting a drop in their lifestyle of varying degrees when they retire. Very few people are going to be able to continue the same lifestyle in retirement as they've become accustomed to during their working years.

Oh, this one is interesting. I found this today. There's a lot of reasons for this, I'm sure. But the median net worth of a family that has an employer sponsored pension, so we're not talking CPP. This is your classic defined benefit plan from an employer. The median net worth of families that have a defined benefit plan was seven times higher than families that don't have one. Now, there's some causation correlation issues there, I'm sure, as well. Maybe higher income jobs have better benefits and more pensions, but I thought it was a very interesting stuff.

Cameron Passmore: That's basically counting the present value of that pension, I guess. Commuted value, perhaps?

Mark McGrath: Yes, exactly. I think the point there being, that those who don't have a pension, all things held equal, are not doing a good job. Because so much of this is behavioural. We know from talking to clients and people all the time about money, that people have a tough time saving adequately. These stats, I think, bear that out right.

With all that in mind, I think CPP is a great thing. I think, yes, there's absolutely some people who would do better on their own by not having to contribute. I saw a lot of comments saying, well, the government should put it in an account where you get to control the investment options. I just know enough people who’d just blow that up entirely by buying all sorts of irrational stuff. You'd have to put very serious restrictions, I think, on the investment options that are available.

The enhanced CPP, the new contribution plan, is going to, after 40 years, the maximum CPP benefit is going to go up by over 50%. I think, that's very meaningful. You won't get that benefit until the year 2065, or later, because it's being phased in over 40 years, but the improvements to the plan are going to replace up to 33% of earnings, instead of 25%. I just think that's great.

I think that's it. At the end of the day, it's a very controversial topic. It's a very complex topic. I think Canadians aren't doing a great job for a variety of reasons, not necessarily their own fault, but they're having trouble saving for retirement. CPP acts as a very good filler for maintaining a certain basic minimum level of index retirement income.

Ben Felix: That enhancement is the base CPP is 4.95% of your earnings on both the employer and employee sides. Then there's the initial enhancement, which is the extra 1%. Like you mentioned earlier, the contribution is 5.95%. Some of that is base CPP. Some of that is the additional CPP. Then now, there's another additional CPP. There's another contribution ceiling, which is this year, 2024, 7% above the yearly maximum pensionable earnings. Then in 2025, when it's fully phased in, it'll be 14% above the YMPE. We're making now 4% on both sides. That’s 8% total of the additional ceiling to get to that 33% replacement rate.

Mark McGrath: That's exactly right. The 5.95% contribution goes up to that first ceiling. Then there's a second range, a second ceiling and income between that range, you're contributing 4%, instead of 5.95%. That's primarily how they're able to increase the benefit to 33% in the future.

Ben Felix: Yeah, there's tons of interesting stuff in there, too. Our friend and fellow advisor, Ben, has done a bunch of work on this, and I'm working on something with him on it now that the base CPP results in a tax credit, which reduces tax at the lowest marginal tax rate, and then the additional CPP results in tax deductions. That makes the cost of CPP, of additional CPP lower for people in higher marginal tax brackets, because it's a deduction, rather than a credit.

Anyway, so this is really interesting curve of the total cost of contributing to CPP, depending on what your income is. Then likewise, for the employer side and the corporation, the cost of CPP also depends on what your corporate tax rate is, whether you're a small business or not. Like you said earlier, Mark, there's so many different layers of nuance and complexity to CPP. I think, based on the work that I'm doing right now, even from the perspective of investment return, is this a good investment? I think, depending on how long you live, it can look very, very attractive from the perspective of IRRs, from internal rate of return.

Also, it's the only way to get an inflation indexed annuity in Canada. You can buy an annuity and purchase indexing at a fixed rate. You can buy an index annuity at 2%, which you pay a lot for, and you get a 2% increase to your annual annuity payments. But that's not inflation indexing. If inflation's 8%, your 2% indexing doesn't save you. Whereas CPP is indexed to CPI. If we get runaway inflation, which is the biggest risk for retirees, CPP is designed to keep pace with that. You just can't get that asset elsewhere. CPP is the theoretical risk-free asset, and you cannot get it anywhere else. Why anybody would avoid paying into it is just beyond me.

Mark McGrath: Totally. I think, most people, most opponents of it, they complain about the return that they get on the contributions. The return is not calculable until after you've died. You have no idea what the return is going to be, because you don't know how long you're going to live. There's also disability benefits. There's child benefits, too. If the CPP contributor passes away and has a child under the age of 18, or 18 to 25, if they're at university, there's benefits there. There's a small death benefit. There's a survivor benefit as well. You can pass part of that CPP onto a surviving spouse. The IRR calculations just are so difficult, because the variables are so far out in the future for most people, and you just don't know what path it's going to take.

To your point, Ben, I just think it's not even an apples-to-apples comparison to compare something like CPP to an investment portfolio that has risky assets, volatile returns, sequence of returns risk, variable withdrawals. It's just not the same animal at all. The happiest client I ever had did have an indexed pension, and he had nothing else. This is a private pension. He was in his 80s when I started working with him. At that point, his monthly pension was over $8,000 a month, and he had zero portfolio assets. He just had that and his house.

He was the happiest client I ever had in my entire history as being an advisor, because he just didn't care about anything at all. Because that income was coming in, and he was just happy as a clam. Didn't care about the markets, volatility, risk, headline news, and none of that stuff. Just got his pension, got it indexed and loved it.

Ben Felix: Yeah. I think CPP is incredible for all those same reasons. You mentioned how long you live. You don't know what your rate of returns is going to be until you die, which is true. The other piece that matters is what inflation experiences over your lifetime. Because if you live long and inflation is high.

The other thing, and we got this from when Scott Cederburg has been on Rational Reminder, and we've talked about his work, domestic stocks don't do well when domestic inflation is high. International stocks give you a little bit of protection against domestic inflation. But CPP is a risk-free asset in real terms. If you get high domestic inflation and you have a Canadian home bias, like most Canadians do in their portfolios, Canadian stocks probably aren't going to do great over that period. Whereas, your Canada pension plan benefit, assuming the government stays solvent, even beyond that, CPP is an independent asset, or managed by an independent body. I don't understand why anybody would be opposed to having that asset.

Mark McGrath: It's inversely correlated in that sense, or negatively correlated when inflation is high to domestic stocks. You've got this other asset that's actually increasing the value as your monthly payments go up, while stocks go down. I think the other thing that people don't like about it is the death benefit is very small. I think it's $2,500. I totally get that. The people are saying, “I paid into it my whole life, and if I die at 64, my heirs getting nothing.” That's true, but I mean, the actuaries know that. The CPP math is based on exactly that. If you wanted some additional death benefit, the contributions would have to go up so significantly that I think there'd be no appetite for it anyway.

Cameron Passmore: You mentioned Aravind, Ben, earlier. We should give a shout out to the podcast episode that he did with our mutual friend, Jason Pereira, called The True Cause of CPP. That was on Jason's podcast, Financial Planning for Canadian Business Owners. It came out last week. Good episode. If someone wants to dig into the real details and they get pretty passionate about the math on this, of course, knowing those guys.

Ben Felix: The reason that I've been digging into this is that we're doing an episode on, for Money Scope, we're doing an episode on how to compensate yourself from your corporation. Of course, CPP is a big part of that, because it plays into the decision on whether you should take salary, or dividend. I've been talking to Aravind a lot, and then I've been modelling that decision. Do you pay yourself a salary and pay into CPP, or do you pay yourself a dividend, which lets you leave some money in your corporation? Because instead of paying into CPP, you've got this extra bit of money left over, which some people view as a tax, but as we've just talked about, it's not. You're paying into a valuable pension.

You compare taking a salary and paying into CPP, to paying yourself dividends and leaving a little bit in the corporation and investing that, how do those things compare? So far, preliminary findings, CPP looks very attractive for a business owner, relative to keeping money in the corporation to invest.

Mark McGrath: That's interesting. That's going to come out in the paper that you're working on with Aravind?

Ben Felix: That's what the paper that we're going to work on is going to be. Yeah.

Mark McGrath: I look forward to that. Aravind loves CPP. If listeners know him, reach out to him on Twitter, LinkedIn, he'll talk your face off of CPP all day long. Like I said, it's a complex topic, but I think maybe we leave it there for today. If listeners have questions, or want to reach out to me, they can find me on Twitter, or look me up and happy to chat about it as well.

Cameron Passmore: Great to see you. Thanks, Mark.

Mark McGrath: Awesome. Likewise. Okay, guys. See you soon.

Cameron Passmore: Great to have Mark back on. I thought that was a great conversation. I really like when we just riff on cool stuff and hear stuff you're working on and whatnot. I think that conversation does link to one of our earlier guests on the podcast. I remember the day, I was actually in New York City and you had texted me saying, we're just getting the rhythm of getting guests on the show. I remember you saying to me like, “Who are you getting for a guest next?” I just for some reason, thought of Alexandra Macqueen. She joined us on episode 59.

Alexandra is a terrific professional in our space and very serious person as well in our space. She's currently the Vice President of Learning Development and Professional Practice and Head of the FP Canada Institute at FP Canada, which is very cool. I knew her from the book Pensionize Your Nest Egg, which she wrote with another past guest, Professor Moshe Milevsky. He was on with us episode 122.

Just thinking about the book inspired me to reach out. She agreed to come on early. The episode was called Financial Economics and Annuities: Rational Planning for Retirement. It was a fantastic episode about annuities. We talked about the distinction between financial economics and financial planning. Financial economics being a branch of finance that is about the efficient and rational use of resources and conditions of uncertainty.

Alexandra highlighted that while this might sound like financial planning, planning is not advanced to this level of an academic discipline yet. This goes, the root of any discussion that you can have about annuities, while it might be sensible and rational, and we talked at length about this and you and I live this often with clients. Often, it's very hard to actually get people to implement from a behavioural standpoint and annuity for all kinds of reasons. Alexandra talked about the rules of the thumb in our industry that often discourage people from doing, or implementing things like annuities.

She talked a lot about product allocation and how that's different from asset allocation. Annuities can be a very important product to consider in retirement income planning. They're very efficient. They're very cheap. In Canada, a popular one is the single premium income annuity. It's worth noting that a simple annuity in Canada is very different than the complex ones in the US. She also highlighted that.

She went back to basics, explaining what an annuity is, how they work and how they can really improve, to Mark's point earlier, how they can really improve your retirement income situation. She also talks about the profile a person that might be best suited for annuity. If you're interested at all in this, or anywhere near retirement, I would also highlight with higher interest rates now than they were five years ago when Alexandra was with us, I think it's worth checking out our conversation with Alexandra Macqueen back on episode 59, which I know Ben, you remember that episode pretty well.

All right, let's go to the after show. We talked earlier about lead flows. Cool how that's all been working out and super fun to see people just automatically, just coming into orbit, which is really fun to have that experience.

Ben Felix: It's been incredible to see.

Cameron Passmore: Okay, so you got to give us an update. What's going on with the Money Scope? You're up to 33,000 downloads already. 2,000 subscribers.

Ben Felix: Oh, this is all news to me. I knew we were over 2,000 subscribers. I didn't know that total audio downloads. That's pretty good.

Cameron Passmore: It was ranked, still ranked really well, still ranked above this podcast in the Apple rankings, which is cool to see. You were number one for quite a while, you and Mark.

Ben Felix: Yeah, it hung on for a long time. The top spot on investing, and it was up super high in business. It's still ranking well on the Apple Podcast charts, whatever that's worth.

Cameron Passmore: You're going to be too humble to promote it. I'm going to promote it. I think it's fantastic. I think you and Mark, the chemistry is fantastic. It is a financial literacy course that is so beautifully done, like building blocks. The way it compounds at such a nice rate of being straightforward, but in depth on topics and you're not rushing. You give it the proper amount of time. I know you guys are reading notes, but you can't tell. It's really good. If anyone out there's interested in going through a systematic financial literacy course, I highly recommend you check it out.

Speaking of checking things out, for the month of January, we made available with our friends at Dimensional, the Errol Morris movie, Tune Out the Noise. That site was visited 17,000 times. The movie was watched over 6,000 times, which I didn't know what to expect. I think it blew away people's expectations, which is pretty cool. Speaking of movies, you and I talked about Griselda Blanco. If anyone hasn't seen it yet, it's what? Six episodes series in Netflix. It’s wild.

Ben Felix: Yeah, we haven't finished watching it. But we watched the first three episodes, I think, but I know her. I don't know if I listened to a podcast about it. I knew who she was, though, before we started watching the show. That show is well done.

Cameron Passmore: I was talking to Angelica, so she also recommended Cocaine Cowboys. I also liked Queen of the South, which I don't know what platform it’s on, but that's we're checking out. Five degrees in Ottawa today. Not helping your ski season.

Ben Felix: Okay, it's one degree where I am. I haven't skied this year. My kids have skied a bunch of times.

Cameron Passmore: Oh, I thought you went.

Ben Felix: No, I've been taking the kids.

Cameron Passmore: Oh, you take them.

Ben Felix: It's a bit tricky right now, because two of her kids are on the lift. One of them is just now going the lift. The next time we go skiing, I will probably have to ski, because the five-year-old needs someone to go on the lift with her and she doesn't want to go on the magic carpet anymore, because she's tried the lift. Then our youngest one is just on the magic carpet. It's been hard for my wife and I to ourselves ski, because we're supervising all these different levels of skiing skill. Now that our five-year-old has done the lift, I'll be able to ski next time and go with her, if it gets cold enough. I don't know if the ski will hold me open, or it'll probably be pretty icy. I don't know. I haven't checked it out.

Cameron Passmore: I haven't skied at all this winter either, but it's not been a great winter for it. I finished, at your recommendation, as well as Morgan Housel’s recommendation, I finished this morning the book, Fortune's Children: The Fall of the House of Vanderbilt. I know you had talked about it very early on in the podcast. What a book. What a story. The wealth that they created early on and completely blew it. This is a 600-page book. It is so interesting to see and you follow along the family tree, you get to know the names. Then it ends with a story of a Glory of Vanderbilt, who is Anderson Cooper's mother.

I knew about the Anderson Cooper's side of it, but I didn't know the story of the wealth. He just assumed Vanderbilt is wealth. It's like, wow, not true by the time you got through the family tree. I highly recommend that book, if you're interested.

Ben Felix: I listened to that on audiobook years ago. Like you said, we talked about it earlier on the podcast. It's an incredible story.

Cameron Passmore: The wealth they had in the late 1800s, it was unbelievable. Now, you read all the mansions they had on 5th Avenue, everything is gone. All is left from then and it's been renovated. It's Grand Central Station. All the cottage, everything else is changed and gone. 

Speaking of reading, you and I talked about this as well. I decided to chill a bit on reading with a little wacko last year, the number of books. You just realize that it's just this cascading waterfall of information. It becomes a cognitive burden to try to optimize what you can do with all this information. I'm sticking with the 24 and 24, which is still a lot of books.

Ben Felix: Shane Parrish's Farnam Street blog, I'm pretty sure it started out as him reading just a ton of books and writing about them, or summarizing them or whatever. Then he realized exactly what you just said, that you can't read that many books and actually retain anything and actually, change how you think. He started reading fewer books, but reading them more deliberately. I think he has a blog post on the Farnam Street blog about how to read a book in a way that you retain the information.

Cameron Passmore: Then you also realize that, yeah, you read whatever, 60 books, but there’s probably 6,000 books published last year. You're still only ever scratching the surface. Then when you start planning out the year and looking at who's coming on for guests and those books, the 24 slots fill up pretty quick. There's a few books I want to go back and reread, but it's just been more chilled about it.

Speaking of reading, the 24 and 24 reading challenge is on this year. It's our third year doing this challenge. If you want to register, go to rationalreminder.ca and there's a tab of the top, 24 and 24. Very easy to join. Set up your Readwise account. You can see what other people are reading and it'll track your books that you've read. There's book reviews in there, too, that you can post and you can check out. So far, we have a 121 people registered for this year's challenge. Already, there's been 80 active readers that have read 202 books. Get this, Ben, since the contest started with the 22 and 22, 7,481 books read.

Ben Felix: That’s a lot of books.

Cameron Passmore: Okay, you want to rip through some of these reviews?

Ben Felix: Yeah. Wow. I guess, because we haven't done an episode where we've had an after show for a while, there are a lot of new reviews. As we have always done, we will read them.

Cameron Passmore: As awkward as that is.

Ben Felix: Remember, there's a time when we were going to stop reading them and then we decided to just keep reading them. We've never gotten the feedback that people don't like hearing us read the reviews. We've never gotten the feedback that people like it either.

Cameron Passmore: There's only three people here, so I think we're good.

Ben Felix: That's a good point. Michael from Chicago says, “Best finance podcast available. This podcast is a masterclass in how to think about investing. But beyond that, it's a masterclass in how to apply the scientific method, how to learn from those who don't share your views and how to clearly present technical information. Ben and Cameron are open-minded, polite, empathetic, willing to learn from those who don't share their views and open to changing their views in the face of new evidence. It's an oasis of civility in today's polarized, hot take social media culture.” It's a very nice review.

Cameron Passmore: We are polite. Yes. Diplo John from the state said, “Best personal finance podcast out there. Ben and Cameron, I've been a lawyer listener since day one and I really admire the show's evolution over the time, the rigor and academic basis is crucial. I've appreciated your open-minded approach to disparate sources and evolution of low-cost index funds, or bust approach as a DIY investor. Recognize Ben's work on dividends. They still value dividends for the ability to grow a small portion over time through a drip. Would welcome your views on drips for investors starting with small initial investments and holding for the long term.”

Ben Felix: You're no better off with a drip than you are with a asset that never paid the dividend in the first place. You know what? If it's working for you, John, I think that that is perfectly fine. Dividends are one of those things that they're super fun to argue about, because people get so upset about it, but it doesn't really matter. If you want to have a dividend-focused portfolio. Okay, so you've got maybe a value and a profitability tilt. Maybe you're a little bit less diversified than could alternatively be. But if it's going to help you stick with the portfolio, I don't care. People just get so upset. It's always a fun topic to talk about.

I was actually looking around fund returns versus investor returns, which is a data point that you can get to some of the software that I have. I'm torn on whether I should say this or not, because people are going to pile on it. But we've talked about on past podcast episodes, the return gap between investor returns and fund returns. The return gaps for dividend funds are tiny. If you want an argument for dividend investing, it is that it improves investor behaviour. I should formalize that. It would be a really interesting research to show. For what purpose? I don't know. It'll encourage people to have suboptimal portfolios for behavioural reasons, I guess.

One more off track comment. We were having a conversation a while ago, you had met someone and you had talked to them about how they had met someone else, who they discovered was also a listener of our podcast. Then those two people bonded over the fact that they were both podcast listeners. For some reason, it's hard to comprehend the impact that us sitting here talking has on other people. It's something that I still struggle with.

People will tell me occasionally, how impactful, whatever, the podcast has been and stuff. I have trouble internalizing that and really grasping it. That story you told me about other people completely separate from us in another country, connecting over us talking. I don't know, that just made the impact hit home for me.

Cameron Passmore: They said, at their work, they all listen to the podcast at work.

Ben Felix: Because it's still just me and you sitting here talking on Zoom. Anyway, Clint from the United States of America says that this is his favourite podcast. “I started listening to Rational Reminder around two years ago and recently made my way through all the episodes. To date, I've learned so much on topics ranging from personal finance and investing to finding and funding a good life. The Ben and Cameron-only episodes are always interesting and insightful. But when they do bring on their A list guests, especially appreciate the interviewing style they employ. They ask pointed, good questions, rather than allow their guests to answer with little to no interruptions. Rational Reminder also inspired me to become a more avid reader through its reading challenges, along with their book summaries/recaps on the show. I look forward to the new episode each week. Keep up the good work.”

Cameron Passmore: Yeah, we've had some feedback lately that we should, or have the opportunity to push back sometimes, or some follow-up questions that perhaps, could have been better in their eyes. It's always a balancing act. We never profess to be professional interviewers either.

Ben Felix: We get that comment when someone disagrees with the guests, or whatever view. “I disagree with their view. You should have pushed back.” I got it. Maybe I didn't disagree. How about that?

Cameron Passmore: It's also, the questions are structured in such a way to help tell a story. We try not to mix it up too much and lose the flow of where the structure is intended to take us. It's all quite deliberate.

Ben Felix: I mean, we're talking about financial economics and psychology. You could get into a mucky debate with anybody on anything that they say. There's no point.

Cameron Passmore: 8009 from the states, “By far, the best personal finance podcast. Ben and Cameron do an incredible job presenting research-based insights and frameworks in an approachable way. I've learned so much from listening to them over the last year, and really love how they spotlight short summaries of past episodes to help listeners dig into their back catalogue. The guests are terrific in the discussions with listeners on their website is engaging in education. I look forward to the next episode every week.”

Ben Felix: Scott from Elora Ontario says, “Tuning out the noise. Cameron and Ben, thank you so much for the time, effort and passion you put into all that you do. I just watched Tuning Out the Noise and it reinforced again what I've learned from listening to the RR podcast. Providing a link for your listeners is very thoughtful. Thank you. For the time being, I'm going to stay true to VGRO across all my investment accounts.” VGRO is a Canadian asset allocation ETF. It's market cap weighted with the home country bias toward Canadian stocks. It's a Vanguard product, just for listeners’ context.

“I am intrigued about an all-equity portfolio like VEQT, which is VGRO is 80% stocks and VEQT's a 100% stocks, both asset allocation ETFs, after a recent podcast, but I just can't let go of some bonds.” Fair enough. No problem. You should not feel like you have to be all stocks, just because Scott Cederburg's research says that you should be. Although, that research, man, that impacted a lot of people. I'm not saying that's a good thing, or a bad thing.

There's a whole thread in the Rational Reminder community, how did the Scott Cederburg episodes changed your portfolio? I didn't change my portfolio, but I was already all stocks. I guess, I didn't have much to change.

Cameron Passmore: Babo Cho from the States, “Amazing podcast. As a Wall Street veteran and professor of finance, I find the episodes that explore recent scholarship to be interesting without being overly technical. In fact, it inspired me to launch my own podcast on what any educated person should know about markets to be a good citizen. Love your work, guys. Keep it up.”

Ben Felix: Simone Ferrero from Denmark, “Weekly companion in commute times. The Rational Reminder is a great podcast to increase your financial knowledge, regarding personal finance. While the topics are fairly complex to a complete beginner, Cameron and Ben do an amazing job at dissecting each topic with the help of their guests. In a world full of noise and continuous research of alphas, this podcast tackles reality with great humbleness, without asking anything in exchange. Thanks for this amazing, free resource. A European personal finance aficionado.”

Cameron Passmore: This last one, a bunch of consonants followed by gloss from Sweden said, “Not bad. Not bad at all.”

Ben Felix: I remember seeing that review and I was like, “You know what? It's nice. I'll take it.”

Cameron Passmore: We also discovered this week that this podcast is in the top half of 1% of 3.2 million podcasts based on what's called the listen score, which is as we understand it, to be a metric that shows the estimated popularity of the podcast compared to other RSS-based public podcasts. I don't know what goes into that algorithm, but it's more than just downloads. That's cool. The Median Podcast, if I remember correctly, has 32 downloads in the period after launch. It's a month after. The vast majority of podcasts do not have a lot of downloads, so it makes some extreme skewed data set.

Ben Felix: All right, last review. “Amazing podcast. Could benefit from more female guests. Incredibly insightful and interesting discussion on a wide range of financial topics. I especially love the episodes focus on happiness and psychology overlap with money. My main feedback, which is especially obvious when listening to the year-end review, is there a pretty limited female perspective is brought onto the show. Would be great to find a way to more consistently bring on female guests to round out the perspectives and insights.” Yup, we noticed that, too, but we noticed it too late.

Cameron Passmore: Yeah. We have a lot of female guests coming up, thankfully.

Ben Felix: I've been joking to my wife that I'm not convinced that 2023 actually happened. It just flew by so fast.

Cameron Passmore: Everything's flying by fast.

Ben Felix: We heard that feedback from the Rational Reminder community, too. We have been more deliberate in the guests that we've booked this year to get more female perspectives. I think that's a valuable feedback and it's definitely something we're going to take into account.

Cameron Passmore: Had a cool conversation last week with a listener, Gavin, who was going to be a future member of our community, our industry. He was speaking with another listener, and that person encouraged him just to reach out to talk about our industry and career path. Super fun to talk to him. Alistair from Evan, who is in our industry here in Canada and reached out on LinkedIn to say, “Loved watching the retirement gurus two weeks ago, who were so good.”

Up next week, many listeners will be familiar with Bridgewater Associates and its Founder, Ray Dalio. The story is written up in a book by Rob Copeland called The Fund: Ray Dalio, Bridgewater Associates, and the Unraveling of a Wall Street Legend. Pretty incredible conversation about a pretty incredible company personality.

Ben Felix: Some really interesting perspectives that new information, I think, at least from what was previously publicly available about Dalio and Bridgewater. It was an interesting conversation.

Cameron Passmore: In two weeks, we’re joined by two experts in the ETF arena, Dave Nadig, who was here in the past, as well as Eric Balchunas from Bloomberg. They're going to be here to talk about ETFs in general, but also, specifically, about the recent launch of the new spot Bitcoin ETFs, which have been a blockbuster success from what I can tell so far in the first few weeks of being available. In three weeks, special guests coming on. The man behind the 10% Happier Movement, Dan Harris will be here. We did a book review of 10% Happier a few years ago. There's also the app. But Dan has agreed to come on, which is pretty cool. Anything else, Ben, you want to highlight before we bring this in for a landing?

Ben Felix: No. I think we can bring in. I see in your notes that we're getting vests in the store. Is that real?

Cameron Passmore: Apparently. It’s what Angelica says. We're woefully low on merchandise. If you check out in the store, there's a lot of sizes is not available. There's still some stuff there. I know Jackie is topping up every order with the bucket hat and socks. If you make an order now for what is there, you're going to get lots of freebies. Guess we could promote that.

Ben Felix: What kind of vest are we getting?

Cameron Passmore: Not Patagonia, because the price point at Patagonia, although they're beautiful, is pretty high. I'm not sure there'd be a lot of demand for it. They found another alternative, which apparently, is quite appealing. I've not seen them. That's Angelica and the team are on that. I'm heading to Norway in October. If there’s any listeners in October want to suggest a meetup, going to be in Oslo the last week of October. Reach out if you have an interest in helping me set up a meetup, if there's any demand, we’ll see what we can do.

Okay. As always, you can check us out on LinkedIn, reach out anytime on X. We both have a county links in our X profiles, as does Mark. Reach out anytime. All right, thanks for listening.

Is there an error in the transcript? Let us know! Email us at info@rationalreminder.ca.

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Participate in our Community Discussion about this Episode:

https://community.rationalreminder.ca/t/episode-291-the-quant-winter-and-is-canada-pension-plan-a-scam-discussion-thread/27737

Books From Today’s Episode:

Pensionize Your Nest Egg — https://www.amazon.com/Pensionize-Your-Nest-Egg-Allocation/dp/1119025257

Fortune's Children: The Fall of the House of Vanderbilt — https://www.amazon.com/Fortunes-Children-Fall-House-Vanderbilt/dp/0062224069

Trillions: How a Band of Wall Street Renegades Invented the Index Fund and Changed Finance Forever — https://www.amazon.com/Trillions-Renegades-Invented-Changed-Finance/dp/0593087682

Links From Today’s Episode:

Rational Reminder on iTunes — https://itunes.apple.com/ca/podcast/the-rational-reminder-podcast/id1426530582.

Rational Reminder Website — https://rationalreminder.ca/ 

Rational Reminder on Instagram — https://www.instagram.com/rationalreminder/

Rational Reminder on X — https://twitter.com/RationalRemind

Rational Reminder on YouTube — https://www.youtube.com/channel/

Rational Reminder Email — info@rationalreminder.ca

Benjamin Felix — https://www.pwlcapital.com/author/benjamin-felix/ 

Benjamin on X — https://twitter.com/benjaminwfelix

Benjamin on LinkedIn — https://www.linkedin.com/in/benjaminwfelix/

Cameron Passmore — https://www.pwlcapital.com/profile/cameron-passmore/

Cameron on X — https://twitter.com/CameronPassmore

Cameron on LinkedIn — https://www.linkedin.com/in/cameronpassmore/

Mark McGrath on LinkedIn — https://www.linkedin.com/in/markmcgrathcfp/

Mark McGrath on X — https://twitter.com/MarkMcGrathCFP

Robin Wigglesworth — https://robinwigglesworth.com/

Robin Wigglesworth on LinkedIn — https://www.linkedin.com/in/robin-wigglesworth-17101722

Financial Times — https://www.ft.com/

‘Quant Winter's Tale’ — https://www.ft.com/content/e0f98278-432e-4ece-b170-2c40e40d2835

Episode 184: Robin Wigglesworth — https://rationalreminder.ca/podcast/184

Episode 93: Cliff Asness from AQR — https://rationalreminder.ca/podcast/93

Cliff Asness — https://www.aqr.com/About-Us/OurFirm/Cliff-Asness-Bio

AQR — https://www.aqr.com/

Two Sigma — https://www.twosigma.com/

D.E Shaw — https://www.deshaw.com/

CPP Investments — https://www.cppinvestments.com/

StatsCan — https://www.statcan.gc.ca/en/start

Financial Planning for Canadian Business Owners Episode 116: True Cost of CPP with Aravind Sithamparapillai — https://jasonpereira.ca/all-content-jason-pereira-toronto/true-cost-of-cpp-with-aravind-sithamparapillai-e116

Episode 59: Alexandra Macqueen — https://rationalreminder.ca/podcast/59

Griselda Blanco — https://www.imdb.com/title/tt15837600/

Cocaine Cowboys — https://www.imdb.com/title/tt0380268/

Queen of the South — https://www.imdb.com/title/tt1064899/

Farnam Street — https://fs.blog/

24 in 24 Reading Challenge — https://rationalreminder.ca/24in24

The Money Scope Podcast — https://moneyscope.ca/

The Money Scope Podcast on YouTube — https://www.youtube.com/@moneyscopepod