A 1.1-per-cent quarterly return before inflation isn't stellar. But Canada Pension Plan Investment Board, the investment arm of national pension plan, believes it's a decent gain given the state of the markets.
"I think the portfolio performed exactly how we expected it to perform in the first quarter," CPPIB head Mark Wiseman said in an interview.
Mr. Wiseman said his fund's gain was decent in a quarter where 10-year U.S. Treasury yields jumped 66 basis points, the S&P/TSX composite index dropped 5 per cent, the S&P 500 climbed more than 5 per cent and global equity indexes churned out varying returns.
CPPIB "put up a single on the board," he said, making a baseball analogy. The quarter wasn't a home run, but a runner got on base. "To me that feels like a pretty good outcome."
However, CPPIB is no longer a passive investor that tracks the markets. Over the past decade the pension fund has built its own investing arm by hiring experts it believes can outperform the stock indexes. So while CPPIB might have matched the returns of global indexes last quarter, the results were not overly impressive.
Mr. Wiseman stressed that there shouldn't be too much emphasis placed on one short-time period. "A quarter for us is 25 years, not 90 days," he said, adding that everything the fund does is with a long-term approach.
For that reason, don't expect any major reactions to rising bond yields. "What we're not going to do is flop the portfolio around," he said. Though will take tactical positions from time to time in different asset classes, it won't move to 100 per cent equities one month and 100 per cent bonds the next.
While rising bond yields will hurt portfolio returns, many pension funds can offset these losses by arguing that the higher rates make their pension plans more solvent. By earning better long-term yields on their portfolios, they are better able to meet their long-term liabilities.
Mr. Wiseman said CPPIB doesn't enjoy this luxury to the same extent. The reason for it is wonky and ties back to accounting rules, but in short CPP uses "open group accounting" which assumes that its pension plans is a going concern and that new people will always enter the work force and pay into it. For that reason, its solvency isn't affected by rising yields as much as a fund like the Ontario Teachers' Pension Plan.
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(Tim Kiladze is a Globe and Mail Capital Markets Reporter.)