The net value added (NVA) by a $21 trillion cohort of global pension funds was negative in calendar 2023 – one of the largest negative figures on record and the first time it has happened in a decade – dragged down by exposures to private markets and real assets.
Toronto-based research house CEM Benchmarking says in its Fall 2024 Peer Intelligence newsletter that the average NVA for calendar 2023 was -140 basis points, and that almost 80 per cent of the funds in its database delivered negative NVA.
CEM collects data on funds that collectively manage about US$14 trillion in the US, Australia, Canada, Netherlands, Middle East, Nordic countries and the UK. Its latest findings are based on more than 90 per cent of the data that it ultimately expects to collect from funds.
CEM defines NVA as a fund’s gross returns minus all costs, relative to a relevant benchmark. The firm says the main culprit in the negative value added was private markets, but real assets also dragged on performance.
“More specifically, it is the NVA in private equity (materially negative) and real assets (modestly negative),” it says.
“This was amplified by the fact that private market investment has increased from 12 per cent of AUM in 2014 to 24 per cent in 2023.”
It adds that “public markets had a strong year in terms of beta, but were unable to generate positive NVA to offset private markets”.
CEM Benchmarking head of research Chris Flynn tells Investment Magazine there are several factors behind the negative 2023 figure, and “a massive one” is the appraisal-based valuation methodologies common in private markets.
“The nature of appraisal-based pricing tends to introduce delays in terms of pricing relative to public markets; and in some parts, especially in the real estate world, it tends to involve some smoothing relative to public markets,” Flynn says.
“But the other thing that of course was happening a bit in 2022 [was] private markets did quite well compared to public markets, so now…[funds are] overweight private markets going into 2023, and that’s not helpful either. It’s not like they should have necessarily tried to rebalance, because I think many of them probably rationally went: am I really overweight, or am I actually waiting for newer pricing? And if I’m waiting for newer pricing, I shouldn’t do anything.
“But [they think private markets] made me look good in 2022 and look bad in 2023. The truth is, you have to look through that. You have to let the valuations catch up.”
10-year average
The negative NVA recorded in 2023 saw the 10-year average NVA across the funds in CEM’s database drop to 17bps, more-or-less in line with the average recorded since the firm started measuring and reporting NVA in 1992.
Flynn says that over the past 30 years the average one-year NVA, equally weighting all years, is 18 basis points across all funds.
“It might move a basis point one way or the other as new data comes in,” he says.
“There’s time periods where it’s been higher than that on average, and time periods where it’s been lower. Prior to 2023 we’d actually been in a high decade where it had been closer to 40 [basis points], but partly, they’ve been waiting for the other shoe to drop, because it ended with a couple of good NVA years during Covid, and then the correction happened. That correction actually has brought the last 10 years back to within one basis point of the last 30 years.
“So 2023 is a bad year. We’d had an extra-good period, and it kind of dropped back to normal.”
CEM says that the NVA measure is “the sum of both manager value added within asset classes and tactical portfolio decisions across asset classes” and therefore has the advantage of being “relatively agnostic to asset mix, enabling comparisons across funds”.
One of the key reasons for calculating NVA in the first place is to determine whether paying for active management is justified over the long term. CEM says that long-term NVA in its fund database has been positive, suggesting active management has been rewarded, albeit modestly. CEM also notes that NVA can be volatile over time, and widely dispersed across funds.
Flynn says NVA is a globally comparable metric, and “it’s actually a significant part of what people pay for”.
“A brutal and oversimplified view of the investment world might be that you risk capital to earn beta, and pay fees to get value-add,” he says.
“Now that’s oversimplified, especially in the murky corner of private assets, where it’s very hard to disentangle the beta of private infrastructure from the alpha of private infrastructure, and so on. But if you say as a starting point, why do I care about NVA when it’s not the biggest part of my risk-return, you would go: that’s true, but it’s what you’re paying people a lot of money for.
“It’s a globally relevant [metric], and a lot of money and effort is spent on it. Discussing whether that’s worthwhile and how it’s going seems worth doing.”
