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CPPIB posts strong gains as push to increase investment diversity continues

CPPIB CEO Mark Machin walks through the pension fund’s Toronto offices in this file photo.

Mark Blinch/The Globe and Mail

In Mark Machin's first year at the helm of the Canada Pension Plan Investment Board, the fund posted its second-strongest investment returns, increasing the diversity of its investment portfolio amid fiercely competitive global markets.

CPPIB, the largest pension fund in the country and manager of the Canada Pension Plan's portfolio, said that double-digit returns across many major stock market indexes helped the fund reach net investment gains of 11.8 per cent in its fiscal 2017 year, which ended March 31. These buoyant equity markets pushed assets up to $316.7-billion, compared with $278.9-billion at the same time last year.

Mr. Machin, chief executive officer of CPPIB, said the fund is still finding plenty of pockets of investment opportunities, even as valuations have climbed in many asset classes.

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"While infrastructure may be really highly priced, and private equity in the U.S. might be really highly priced, and core real estate might be really highly priced – we have teams and capabilities to find the other opportunities," Mr. Machin said in a press event to discuss the fund's results.

CPPIB's annual returns rebounded from just 3.4 per cent in its 2016 year, when the fund was contending with pessimistic global equity markets shaken by the threat of Brexit and Europe's refugee crisis. Just one year before that, CPPIB had a net return of 18.3 per cent, its highest ever. Mr. Machin said the fund is increasingly able to accommodate these swings, and he even expects to take the occasional steep annual loss, all because of the way CPPIB has dialled up its risk profile in recent years.

In the past year, CPPIB has extended the range of investments it makes around the world. CPPIB did 182 global transactions in 2017, a figure that has has crept higher in the last few years. Of those transactions, 19 were worth more than $500-million.

Mr. Machin said this has been one of the most active years for the fund in part because investment teams at CPPIB are getting more developed.

The thematic investing team, for example, bought a stake in the parent company of river and ocean cruise operator Viking Cruises. Meanwhile, the fund's private investment team acquired specialty insurance company Ascot Underwriting Holdings Ltd. and the pension fund also took a stake in a Mexican toll road.

None of those investments is headquartered in Canada, which is fitting given that 83.5 per cent of the fund's total assets are now located beyond Canada – a share that is also on the rise.

Still, CPPIB is highly exposed to Canada, given the country's overall contributions to the global economy, Mr. Machin says. "But we're comfortable being massively overweight [in] Canada because it is our home turf and we really understand it," he said.

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Ed Cass, CPPIB's chief investment strategist, said that diversification in geography and asset class is the "one free lunch in financial markets" that the fund gets. On top of affording the fund more investment options to choose from, this strategy helps it hedge against risks such as shaky domestic economic performance and the longevity of 20 million CPP contributors and beneficiaries, CPPIB says.

But this year, the abundance of private investments that CPPIB holds led to its 11.8-per-cent return underperforming the 14.9-per-cent return of the fund's reference portfolio, a benchmark that is heavily weighted toward public equities. Still, CPPIB executives say that infrastructure, real estate, private credit and other alternative investment classes will help improve investment results over the long term.

In the coming year, CPPIB will be focused on further expanding its global investment activities and tinkering with its investment framework. It will also work toward accepting and investing the new tier of Canada Pension Plan contributions.

CPPIB reported a 10-year annualized return of 5.1 per cent after factoring in inflation, which exceeds the standard set by Canada's Chief Actuary.

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