CPPIB has worst year since Great Recession as COVID-19 shocks stocks
The head of Canada Pension Plan Investment Board says office towers won’t stay out of favour forever.
Many banks are planning only a partial return to offices in the wake of the coronavirus pandemic and tech companies like Twitter Inc. and Shopify Inc. may never return fully return.
But the fund’s chief executive officer, Mark Machin, said the future is still good for prime office towers.
“There’s probably going to be still robust demand for great office space in central locations,” Machin said in an interview with Bloomberg TV on Tuesday. “Once there is decent immunity across the population or some lowering of the mobility of the disease, you’ll get people wanting to be with each other. This is human nature and the office is a part of that.”
Companies will probably even need more space for physical distancing, though he said the longer the pandemic goes on, the more efficient and attractive working from home will become. Elevators for the tall buildings will also pose a challenge when the economies reopen.
CPPIB has long invested heavily in hard assets such as office towers. Machin said other real estate such as data centres and warehouses have been buoyed by the e-commerce trend in the pandemic and will probably continue to thrive. Shopping malls will have a more challenging time.
The pension fund returned 3.1 per cent for the fiscal year, its worst showing since the Great Recession in the late 2000s, as the sell-off in equity markets in February and March dragged down results.
Net assets were $409.6 billion as of March 31, the fund’s fiscal yearend. That represented growth of $17.6 billion, consisting of $12.1 billion in net income from investments and $5.5 billion in new contributions, CPPIB said in a statement Tuesday.
The numbers mean Canada’s largest pension fund suffered about $15.8 billion in investment losses in the first three months of 2020.
The fund had reported $27.9 billion in investment gains for the nine months ended Dec. 31.
“Despite severe downward pressure in our final quarter, the fund’s 12.6-per-cent return on a 2019 calendar-year basis, combined with the relative resilience of our diversified portfolio, helped cushion the impact,” Machin said in the statement.
The fund’s 3.1-per-cent investment gain outperformed its benchmark portfolio’s 3.1-per-cent loss, which equates to a value-added return of $23.4 billion for the year, after deducting all costs, the fund said.
Ten-year and five-year annualized net nominal returns were 9.9 per cent and 7.7 per cent, respectively, which “should give Canadians
comfort that, even with periodic shocks, their pensions ultimately draw from decades of steady performance,” Machin said.
According to Machin, assets related to travel or experience within a small space will likely be affected for quite a while.
“The experience-economy trend is going to be hard, that’s on hold,” he said in the interview. “But then there are a lot of other trends, such as e-commerce, delivery, telemedicine, fintech, these areas have seen an enormous uptick of adoption, online education as well.”
While tensions between China and the rest of the world have increased, Machin still sees value in investing in Asia.
“The reason we invest in Asia, and any of the big, liquid emerging markets really, is that it is a huge market that we can diversify into that is relatively uncorrelated with the rest of the world. And alpha outperforms the inefficiencies in those markets,” he said.
Machin said the current environment will probably be a big test for private credit.
“Some of the players who were a little late to the game, and those who were more aggressive to build market share will likely face some pressure,” he said. “We’re going to see more stress on the credit space, depending on how long this goes on.”
CPPIB is designed to serve contributors and beneficiaries for decades, so long-term results are a more appropriate measure of performance than quarterly or annual cycles, the fund said.
“The COVID -19 pandemic poses a massive challenge for health, societies and economies globally. Amid the significant number of concerns many Canadians have today, the sustainability of the fund is one thing they shouldn’t worry about,” Machin said.
The fund’s holdings of Canadian public equities lost 12.2 per cent for the year and emerging markets stocks dropped 9.1 per cent, while foreign stocks generated a return of 1.6 per cent.
All credit investments returned 0.5 per cent and real estate returned 5.1 per cent, while infrastructure dropped one per cent. Canadian private equity investments lost 5.1 per cent, while foreign PE returned six per cent. Energy and resources had the single biggest loss, posting a negative return of 23.4 per cent.