CPP investment fund earned 14.9% return in fiscal 2010

Date: Friday, May 21, 2010
Author: Investment Executive

The Canada Pension Plan Investment Board says it has recovered most of the ground that was lost during the recession, capitalizing on the aftermath of the global financial crisis by making a record number of acquisitions.

“The CPP fund delivered one of its highest-ever annual returns, driven largely by strong public equity markets,” CPPIB president and CEO David Denison said in a statement Thursday.

The CPP Investment Board -- which invests money not required to pay benefits under the Canada Pension Plan -- grew by $22.1 billion in the financial year ended March 31, 2010, over the $105.5 billion it reported for 2008-2009.

The fund reached a record high of $127.7 billion in June 2008, just months before a crisis in the U.S. financial industry sparked a major global recession.

Investment income for the 2009-10 financial year was $16 billion, partially reversing a year earlier loss of $23.8 billion.

The CPP Investment Board reported investment returns of 14.9%, the third-highest rate in its 10-year history. In the previous year, when the fund’s value shrank, the rate of return was minus 18.6%.

The CPPIB’s rate of return bested its pension plan peer group, including the 13% posted by the Ontario Teachers Pension Plan, 10% by the Caisse de depot et placement du Quebec, and 10.6% at the Ontario public-sector pension manager known as OMERS.

The board made a record 37 acquisitions last year, taking advantage of its long-term horizon, scale and availability of cashflow to capitalize on investment opportunities that were beyond the reach of more small-scale investors.

“We have the benefit of being able to look beyond short-term market cycles, and to deal with volatility better than the majority of market participants,” Denison said.

However, as public markets experienced a sharp recovery, the fund underperformed its market-based benchmark portfolio by 5.87%.

Denison said the fund’s focus on private investments in real estate, infrastructure, private debt and private equity means their value typically lags that of the public market indexes.

“It can take additional time for appraised values of private assets to reflect public market levels, particularly in the face of a significant rally such as that experienced in global public equity markets in the past 12 months.”

CPP contributions paid by about 17 million Canadian employees and their employers fell to $6.1 billion from $6.6 billion in the year earlier.

The level of surplus contributions to the Canada Pension Plan is expected to continue declining as a greater proportion of the population retires.

The CPPIB is designed to build up a pool of investments that can generate enough money to take up the slack as contributions from employers and employees fall due to the changing demographic makeup of the population.

A report by the Chief Actuary of Canada issued in October indicated that the CPPIB has 11 years until its income will be needed to help pay pensions, when contributions are expected to fall short of the money being paid out to retirees.

The actuary estimates the fund requires a nominal rate of return of 6.2%, or a real rate of return of 4.2%, over a 75-year period.

The CPPIB says it is confident it will be able achieve an annualized real rate of return, which adjusts for the impact of inflation, of 4.2% over the long term.

In its 10-year history, the fund has averaged a 5.5% annualized rate of return.

“The past 10 years of investing have taken place during the worst calendar decade of performance for equity markets in the nearly 200 years of recorded stock market history,” Denison said.

“We are confident that with the fund’s current portfolio composition and reasonable levels of capital market returns, we will be able to generate the returns required to sustain the CPP at its current contribution rate over the longer term.”

The CPPIB says it will see strong growth between now and 2021, and after that will grow at a slower rate as portions of the investment incomes will be withdrawn to pay pensions.

About $54.9 billion of the $127.6 billion fund is invested in Canada, and the rest globally.

The CPPIB says it spent $7 billion on new investments in private assets including Macquarie Communications Infrastructure Group, and joint-venture investments in IMS Health and Skype.

The board invests in an array of public and private equities, real estate, inflation-linked bonds, infrastructure and fixed income instruments.