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rob carrick

One of the smartest, steadiest investing teams around lost $1.7-billion in the quarter ended June 30.

It was actually a pretty good quarter for the Canada Pension Plan Investment Board, which looks after about $130-billion in CPP assets. While the S&P/TSX composite index fell 6.2 per cent in the quarter and the S&P 500 index fell 11.9 per cent, CPPIB lost just 1.3 per cent.

Looking for some conservative ideas for your portfolio at a time when the stock market looks as unpredictable as ever? Then consider the way the CPPIB mixes investments.

First, a proviso. With billions of dollars in assets, pension funds like the CPP can do a lot of things you can't do easily as well as some things you probably can't do at all. They can buy all or part of office buildings, shopping malls or toll highways, they can buy pieces of private companies and they can lend money to businesses as a bank alternative.

But the general blueprint used by the CPPIB is still worth a look, especially if you're okay with an investment mix that produced an average annual return of 5.1 per cent for the 10 years to June 30. Lots of investment products made more than that, and plenty made less. The CPP's investment approach is for people who don't mind being in the unglamorous middle.

As of midyear, 53.9 per cent of the money in the Canada Pension Plan was invested in stocks, 32 per cent was invested in bonds and the rest was spread among what the CPPIB describes as inflation-sensitive assets - real estate, infrastructure and inflation-linked bonds, also called real-return bonds.

Low-Risk Investing

Let's remember the investment board's mandate here: to preserve and to grow. That explains a weighting in stocks that is right in the zone of what asset allocation calculators typically suggest for people in their early to mid-50s. This mix would also work for younger investors who don't like risk.

Blending stocks and bonds isn't an exact science, by the way. There are multiple views on this and none are the last word. Go with what feels comfortable and can be expected to generate the returns you need to meet your financial requirements.

Now to the question of how to build that 53 per cent in stocks. The CPPIB has investments in Canada, naturally, but it also had a strong presence in global markets as of the end of March. Global markets have been sinkholes for Canadian investors for most of the past decade, but the CPPIB obviously believes in the diversification benefits.

The board's stock holdings can further be divided into public equity - that means companies traded on the stock markets - and private equity, or holdings in companies that are not publicly traded. Private equity offers big growth potential, but it's something the average person can skip because the risk of making bad investments outweighs the potential gains.

Most of the CPP's exposure to the stock market (and some bond exposure) comes through indexing, which means replicating the holdings of major indexes rather than choosing individual securities. Indexing is cheap and easy for retail investors to use either through exchange-traded funds (best) or index mutual funds (second best).

The bond portion of the CPP's holdings includes a wide range of bonds and money market instruments, which are short-term borrowings by governments and companies. There's also a small component of private debt, which means loans directly to companies.

PIMCO's Gross has Canada in his sights Giant of private-sector bond investing talks about deflation, what it's going to take to revive the economy, and where his money may go next

For your portfolio, think about holding a diversified range of individual bonds or guaranteed investment certificates, bond ETFs or bond funds (be picky on that last option because there are many bad choices out there).

Following the CPPIB's asset mix gets trickier when we get to the inflation-sensitive component. For real-return bonds, you can choose from a small number of ETFs and mutual funds that specialize in these bonds.

Infrastructure can be covered by a small number of sector mutual funds and ETFs, but you may not want to bother. Whereas pension funds can buy directly into bridges and roads to benefit from steady toll income, you'll be buying the shares of infrastructure companies and thus increasing your exposure to the stock market.

Real estate is accessible through real estate investment trusts, or REITs, which are also a kind of stock. Here, though, you're getting a good flow of income through monthly or quarterly cash payments yielding in the area of 5 to 7 per cent. Steady income is never a bad thing for conservative investors, pension plans included.