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The people managing the country’s largest pension fund oversee a portfolio far different than yours. But they’re guided by a few core principles that are relevant to everyday investors who value a simple, low-drama approach to long-term wealth-building.

To start with, the Canada Pension Plan Investment Board doesn’t sweat a single bad year like 2018. The board reports investing results quarterly and thus is accountable for short-term gains and losses. But the view at the CCPIB is short-term results tell you mainly about what the stock and bond markets did in a particular year. You can’t properly assess your investment holdings and the strategy that binds them together until a block of years pass.

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Eric Chow/The Globe and Mail

“We look very closely at five- and 10-year returns,” said Geoffrey Rubin, senior managing director and chief investment strategist at the CPPIB. “That’s that we put particular prominence on when we think about our performance.”

The CPPIB has yet to report results for the final three months of 2018, when stocks were at their wildest. But the five- and 10-year returns to Sept. 30 were 12.1 per cent and 9.1 per cent, respectively. For context, the FTSE TMX Canada Universe Bond Index averaged 4.4 per cent over the 10 years to Sept. 30, the S&P/TSX index averaged 6.3 per cent, the S&P 500 averaged close to 12 per cent in U.S. dollars and the MSCI Europe Australasia and Far East (EAFE) Index averaged almost 8 per cent (total returns are used here – they include dividends).

A big difference between your portfolio and the CPPIB’s $368-billion investment fund is that the latter had 48.4 per cent of its assets in publicly traded securities as of Sept. 30 and 51.6 per cent in private investments that include actual holdings in real estate and infrastructure. For the most part, it’s simply not practical for retail investors to invest in privately held assets.

But the CPPIB still assesses itself in ways that are relevant to individuals holding their stocks, exchange-traded funds and mutual funds. Mr. Rubin said the board believes returns must exceed what a very simple, plain vanilla portfolio would have actually returned. An easy way to do similar in your portfolio is to measure your returns against various stock and bond indexes, or against balanced funds with a comparable asset mix to yours. For example, you could use the new “portfolio in a box" ETFs from Vanguard – the ticker symbols are VCNS, VBAL and VGRO.

Make sure you compare your own portfolio against a similar mix of assets. Mr. Rubin said the CPPIB portfolio is considered to have a risk profile equivalent to a conventional portfolio of 85-per-cent stocks and 15-per-cent bonds. This mix has been calibrated to sustain the CPP over the long term when combined with future contributions from workers and employers.

Aging populations and weak increases in economic productivity have led to a growing sense that investment returns from both stocks and bonds will be modest in the years ahead. The CPPIB is among those who see an answer to this in developing markets, where growth levels are higher.

“We’re actually not as pessimistic about developed market growth as some others might be,” Mr. Rubin said. “But it’s clear that emerging markets are in a different state of development than more mature markets.”

He said emerging markets are now about 17 per cent of the fund, but could go as high as one-third over the next decade.

Take a lesson from the CPPIB on fees by comparing what you paid and what you got in returns. Fees for the CPP’s investment portfolio come to 0.91 per cent with all costs considered, while a much simpler portfolio of globally diversified ETFs can be had for as little as 0.11 per cent (brokerage commissions extra).

“We clearly appreciate and acknowledge that every dollar of expense is a dollar that does not otherwise go into the Canada Pension Plan itself,” Mr. Rubin said. “But we very carefully trace the net investment returns of our investment portfolio, inclusive of all fees that we pay externally and internally.”

The year ahead marks the beginning of a long process of improving CPP retirement benefits for future retirees. Increased contributions will be drawn from workers and employers and some of the money invested in a portfolio that is partitioned off from the main CPP investment fund. This new portfolio will have a risk level equivalent to a portfolio split evenly between bonds and stocks, which is to say it will be more conservative than the main fund.

With its private equity and real assets, the CPP is light years more complicated than the typical individual’s portfolio. Yet in curbing risk in the new portfolio to fund CPP enhancements, the board has opted for a basic strategy of blending Government of Canada bonds in to the existing investment approach.

“It’s a very effective, simple, low-cost way for us to benefit from the demonstrated diversification that government bonds bring to a riskier portfolio,” Mr. Rubin said.

An enormous pension fund loading up on federal government bonds has the potential to distort the bond market. With a ready buyer, there would be less pressure on the feds to increase yields on new bonds being sold to finance government operations. Mr. Rubin said the CPPIB doesn’t see a material effect on Canada’s bond market for at least 10 years; longer term, the board will likely branch out to bonds from other governments.

For everyday investors, the least risky bonds are those maturing in five years or less. But with its long-term investing horizon, the CPPIB can afford to liberally mix in bonds maturing 10 to 30 years as well.

At the opposite end of the risk spectrum from government bonds are investments in the cannabis sector and cryptocurrencies such as bitcoin. The CCPIB has exposure to cannabis stocks through investments that track the broad stock market and has researched cryptocurrencies, Mr. Rubin said. “At this point, we don’t view cryptocurrency as an investable asset class for this organisation.”

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