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Mark Machin CEO of CPPIB,walks through their offices in Toronto.Mark Blinch/The Globe and Mail

The Canada Pension Plan Investment Board reported a decline in Canada Pension Plan assets to $298.1-billion in its third fiscal quarter, as a major drop in North American bond markets hampered investment results.

While CPPIB's chief executive officer Mark Machin predicted that Donald Trump would make it to the White House in 2016, he didn't foresee the broad declines in the U.S. fixed-income market that hit in November, as investors' expectation of inflation and economic growth in the United States picked up steam.

"The market priced in a lot of his policies remarkably quickly," Mr. Machin said, noting that the fixed-income wipe out in the three months to Dec. 31 was the largest quarterly decline in North American markets since the pension fund was started.

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CPPIB, which manages the Canada Pension Plan investment portfolio, said Friday that the $2.4-billion decrease in assets through the quarter ended Dec. 31 was caused by a swell in CPP payments made to cover benefits at the end of the calendar year, which exceeded the $1.7-billion in investment income the fund produced. The investment portfolio's return in the quarter was 0.56 per cent, after factoring in all costs.

While CPPIB is increasingly diversifying its investments around the world by geography and asset class, "The U.S. and Canada are the two biggest markets for us. And fixed income is still over 20 per cent of our portfolio. So that's a big chunk of our assets," Mr. Machin said. "So, when that gets caught in a draft of inflation expectations it does weigh on the portfolio."

Other market challenges included the strengthening of the Canadian dollar. CPPIB takes the strategic position not to hedge its investment portfolio against currency fluctuations, which means foreign-exchange changes can generate big gains or losses.

Mr. Machin has cautioned in recent months to expect more short-term volatility in the pension fund's investment results, as it adjusts its approach to risk in a way it expects will lead to higher long-term gains. So far, in the nine months of CPPIB's current fiscal year, the fund has produced a 6.9-per-cent investment return, after factoring in costs.

CPPIB said that it expects to see more CPP contributions flow into the fund during the first part of 2017, which will help to make up for payments exceeding contributions at the end of 2016. The fund noted that it receives more contributions annually than it pays out.

On the investment front, the pension fund was highly active in the quarter, particularly in real estate. CPPIB invested in student housing, office buildings and retail. The fund also sold a large stake in a Manhattan office tower.

Looking ahead, Mr. Machin said that CPPIB is optimistic about government infrastructure building plans in both the United States and Canada.

"[When] the infrastructure bank here gets off the ground here at some point that should provide a good constant flow of opportunities here," Mr. Machin said. "Similarly, if the U.S. gets its act together on that front it could again be a big flow of opportunities."

CPPIB reported a 10-year annualized return of 4.8 per cent after factoring in inflation, which exceeds the standard set by Canada's Chief Actuary. Equity investments made up 56 per cent of assets at the end of December, while 22.1 per cent of assets were in fixed-income investments such as bonds. Infrastructure and real estate assets made up the remaining 21.9 per cent.

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