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Mark Wiseman, CEO of the Canada Pension Plan Investment Board.MICHELLE SIU/The Globe and Mail

The Canada Pension Plan fund saw its assets swell by $36-billion over the past fiscal year after recording its highest annual rate of return on investments in the past decade, but warns that good investment deals are harder to come by as more large investors flood into acquisition markets.

The Canada Pension Plan Investment Board (CPPIB), which manages Canada's largest pool of pension assets, said total assets hit $219-billion as of March 31, up from $183-billion a year earlier, which is the highest annual gain in dollar terms that the fund has ever earned.

"At the end of the day, the reason we're most pleased about that is that it's really what pays pensions," chief executive officer Mark Wiseman told reporters Friday. "Those returns will help pay pensions for the next 75 years and beyond. ... It continues to enhance the overall sustainability of the Canada Pension Plan."

CPPIB says its long-term rate of return is on track to cover all anticipated CPP payments for at least the next 75 years, which is the time frame measured by Canada's chief actuary. The fund needs to earn a 4-per-cent annualized rate of return above the rate of inflation to be sustainable for the long term, and currently has a 10-year rate of return of 5.1 per cent, which is ahead of the required level but a decline from 5.5 per cent at the end of 2013.

The 16.5-per-cent rate of return on investments in fiscal 2014, ended March 31, is the second-highest annual return earned by CPPIB in its 15-year history, outpacing all annual performance results except 2004, when the fund earned a 17.6-per-cent rate of return.

A major part of the return last year came from a $9.7-billion gain from converting foreign holdings into Canadian dollars for reporting purposes.

CPPIB said its 2014 return almost exactly matched the rate of return that would have been earned by a passive "reference portfolio" that simply invested in public stock indexes and government bonds. CPPIB earned $62-million less than a passive investment strategy would have produced after including operating costs.

The performance measure is closely watched because CPPIB decided eight years ago to begin actively investing its assets instead of passively investing in investments that matched indexes.

Mr. Wiseman said public stock markets earned "exceptional gains" during CPPIB's fiscal year, ended March 31, so it was a difficult year to outperform public market benchmarks in the reference portfolio.

He said returns are typically expected to lag the passive benchmark over the short term when public markets perform strongly because there is a a valuation lag for private market holdings – including private equity and real estate – that are difficult to revalue on an annual basis. CPPIB has about 40 per cent of its portfolio in private investments.

Mr. Wiseman said he remains committed to a strategy of increasing investments in private markets, which reduces risk by adding diversity to the portfolio. He said private investments have a lot of "embedded" value that is not easily measured until they are sold.

"We believe it's an extraordinary result to keep up with the reference portfolio in a period of time where there is extremely bullish equity markets," he said. "We would have expected generally in market conditions like these that we would have underperformed the reference portfolio, and we were quite pleased we were able to keep up with it."

In the eight years since CPPIB created its reference portfolio, the fund said it has earned $3-billion of additional returns above the passive benchmark after excluding operating costs.

Mr. Wiseman said Friday that the fund is seeing increasing competition for investment deals as more investment funds look to invest in alternative assets such as private equity and real estate, especially while interest rates remain low and credit is plentiful.

As a result, he said the fund is in a period of "patient" investing, selling some assets that are highly valued and being careful about new investments.

"In my career as an investor, this is probably the toughest market today to operate in as a value investor," Mr. Wiseman said.

He said most assets are "fairly priced," and better deals are often more complex or involve emerging markets like China and India that require time and expertise to handle well.

The fund said its $35.8-billion increase in assets last year included $5.7-billion from worker and employer contributions, and $30.1-billion from investment returns earned on the portfolio.

CPPIB also published its executive compensation report Friday, showing Mr. Wiseman earned a total of $3.6-million last year, up from $2.8-million in fiscal 2013. Most of the increase came from incentive programs based on CPPIB's four-year investment return. André Bourbonnais, senior vice-president of private investments, earned $3.5-million, an increase from $2.6-million last year.

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