Canada Pension Plan fund boasts record return on investments
TORONTO — The CPP Fund generated the highest oneyear return in its most recent fiscal year since it was created in 1999 — and racked up the largest chunk of annual investment income.
The investment portfolio of Canada’s biggest pension fund generated a net investment return of 18.3 per cent, according to results for fiscal 2015 released Thursday.
Assets climbed by $45.5 billion to $264.6 billion. The growth included $40.6 billion in net investment income after all costs of the Canada Pension Plan Investment Board. The balance came from CPP contributions.
“Many factors helped lift the year’s results but the impact of decisions made over several years — and patience — is evident,” said Mark Wiseman, chief executive of the CPP Investment Board.
He said he views longer term returns as even more important than the single’s year’s “exceptional” results. The 10-year investment rate of return for the fund is eight per cent, while the real return — which takes inflation into account — is 6.2 per cent.
Canada’s Chief Actuary says the fund must generate an average annual rate of return of four per cent to be sustained at current contribution rates and meet its obligations over the next 75 years.
In the past year, the fund benefited from strong public equity markets, as well as diversification across currencies as the relative value of the Canadian dollar fell.
“We accept occasional swings in the portfolio, currency being one example,” Wiseman said, explaining the decision not to hedge to smooth results year to year.
On the investment front, there were fewer deals than a year earlier, which reflects continued competition that is pushing up prices, he said. But that hasn’t altered the strategy of global diversification that led to some recent investment gains.
“I certainly hope and expect that we will find one or more Alibabas in these transactions we completed in the past year,” Wiseman said, referring to CPPIB’s early investment in the Chinese e-commerce behemoth that was taken public last year.
The CPP Investment Board’s active investment style, which is measured by how much the investment portfolio exceeds a benchmark return after costs, added $2.8 billion to returns in fiscal 2015.
“It’s really, really hard to beat the reference portfolio in a bull market,” Wiseman said. “Where (it) will really pay off is when the market turns.”
While year-to-year results are expected fluctuate, he said the long-term horizon of the fund, as well as its size and scale, should result in a “high tolerance for potential future negative shocks.”
Wiseman said the fund’s characteristics should also allow for a gradual increase in risk appetite over the next few years in both the reference portfolio benchmark of public equity and bond investments, and in its total portfolio, which includes private investments such as infrastructure and real estate.
“On the margin, we’re going to prudently increase our risk appetite over a period of time,” he said.
Ed Cass, chief investment strategist at the CPP Investment Board, said this will be achieved, in part, by tweaks in the permissible weight level of certain geographies and assets classes.
The CPP Investment Board invests funds not needed by the Canada Pension Plan to pay current benefits.
Investment income, which made up around half the CPP fund’s cumulative assets for the first time in fiscal 2014, now accounts for more than 57 per cent.
“ON THE MARGIN, WE’RE GOING TO PRUDENTLY INCREASE OUR RISK APPETITE OVER A PERIOD OF TIME,”
MARK WISEMAN