The Canada Pension Plan Investment Board posted steady investment returns in its most recent quarter alongside making bold bets on a wide range of international investments.
CPPIB, the largest pension fund in the country and manager of the Canada Pension Plan's portfolio, posted investment gains of 4.8 per cent after factoring in all costs in its second fiscal quarter of 2017, which ended Sept. 30. During that period, total assets surpassed $300-billion, up from $272.9-billion at the same time last year.
Assets in the pension fund have climbed by $21.6-billion in the first two quarters of the fund's year. This gain was made up of investment income of $17.7-billion after costs, while $3.9-billion flowed in through net CPP contributions.
Mark Machin, chief executive officer of CPPIB, said that while the fund likes to focus on longer-term results, he's keeping an eye on low and negative interest rates in global markets. "It's incredibly early days to comment on it, but clearly there's been an increased expectation that has been priced into the markets in the U.S. for rising interest rates. That's changed in the last couple of days," he said.
Interest rates in the U.S. have climbed in recent weeks, and U.S.10-year treasuries spiked after election results were announced. This was taken as a signal of investors' expectation for a stronger U.S. economy, higher inflation and higher interest rates from president-elect Donald Trump.
The pension fund made a number of significant investments over the course of the quarter, with two notable transactions over $1-billion. CPPIB bought specialty property and casualty insurer Ascot Underwriting Holdings Ltd., and a related business from U.S. insurance giant American International Group Inc. for $1.1-billion (U.S.)
It also bought half of a portfolio of Canadian office properties for $1.2-billion (Canadian) from the real estate arm of fellow large pension fund, Ontario Municipal Employees Retirement System.
Other investments included stakes in a cruise company, a solid-waste disposal business, oil pipelines and Brazilian shopping malls.
There was also a stake taken in Viking Cruises alongside alternative asset manager TPG Capital. Mr. Machin pointed out that this was the fund's first investment in its thematic investing department, where investments must line up with one of the long-term macroeconomic trends the pension fund has identified. In this case, the increase in mature, middle-class consumers who might want to travel drew CPPIB's attention.
"All investment departments contributed to the fund's overall performance this quarter with solid gains across public and private markets," Mark Machin, chief executive officer of CPPIB, said in a statement. He stressed that the fund likes to focus on longer-term results.
In September, Canada's Chief Actuary released new estimates related to CPPIB's sustainability and found that the fund's performance is exceeding earlier projections for investment income. This review process is undertaken every three years.
The evaluation looked at the CPP over the next 75 years and found that the current contribution rate of 9.9 per cent is sustainable if the plan earns an average real rate of return, which takes inflation into account, of 3.9 per cent in that time. CPPIB reported a 10-year annualized return of 5.6 per cent after factoring in inflation – well ahead of that standard set by the Chief Actuary.
"The fund's investment returns have made a favourable impact and contributed to the lowering of the minimum contribution rate required to help keep the CPP sustainable over the long term," Mr. Machin said.
"Looking forward, just by the fact that we're measured over such a long time-frame, it just encourages us to have a really long-term perspective and think about our investments [that way]," Mr. Machin said.
The breakdown of CPPIB's investment portfolio was little changed in the quarter. Equity investments made up 55.5 per cent of assets at the end of the quarter, with 21 percentage points of that held in private investments, such as businesses owned and part-owned by CPPIB. Another nearly 24 per cent of assets are in fixed-income investments such as bonds. Infrastructure and real estate assets made up the remaining 20 per cent.