Achi news desk-
Canada’s largest pension fund earned an eight per cent return last year, but significantly underperformed its benchmark portfolio’s 19.9 per cent return.
The Canada Pension Plan Investment Board’s lower return in its fiscal year ended March 31 can be explained in part by higher volatility in its equity-focused index portfolio compared to the pension fund’s long-term diversified return focus, CEO John Graham said. on Wednesday.
The benchmark portfolio, made up of 85% global stocks and 15% Canadian bonds, benefited last year from share price gains in the seven largest US technology stocks (known as the Magnificent Seven), while the pension fund has a much broader portfolio. Also invested in infrastructure, real estate, private stocks and credit.
“Against a very simple and naive structure like the reference portfolio that became very concentrated with Magnificent Seven, I think we would expect to have wild swings in performance right now,” Graham said in an interview.
He added that CPPIB’s returns looked “really good” against a more diversified index, which would be more the norm in the pension industry where stable long-term performance is the goal.
Pension fund returns in the last 10 years also fell short of the reference portfolio, but only by 0.3 percent.
Looking ahead, a diversified portfolio could be even more important, as Graham said he sees yields returning to long-term trends, down from the high yields of the past 20 years that have been boosted by trends such as falling interest rates and growth in China.
“It will be more difficult to generate returns over the next 10 years than over the last 20,” he said.
“Inflation is stickier than expected, stickier in the Americas without a doubt, and geopolitics is kind of front and center and definitely affects how the world reconnects.”
Changing trends in recent years have led CPPIB to move away from emerging markets and toward developed markets where opportunities are better, Graham said.
However, the change did not result in a higher rate of investment moving to Canada, something the federal government is trying to encourage.
CPPIB’s portfolio had 12 percent in Canada as of the end of March, down from about 16 percent in 2019 and 31 percent in 2014.
Graham said the portfolio is still overweight Canada given its roughly three percent of global GDP, and the country has a lot going for it including interesting opportunities in the energy sector.
But he said that it is also important to have growth, and to understand how to create large investment opportunities, and a favorable investment background in areas such as regulations and permits.
“At the end of the day, the markets came down from growth.”
Some of the largest global deals the fund made last year included increasing its holdings in renewable energy developer Pattern Energy Group by $905 million; An agreement to invest up to 2.9 billion dollars in NetCo, the largest fixed telecom network in Italy; and the sale of its share in the Hohe See and Albatros wind farms off the coast of Germany for $374 million in return.
The investment in Pattern fits with CPPIB’s plans to double its green and transition assets by 2030 as it works towards a net zero target of 2050. However, the fund has resisted calls to set interim emissions reduction targets, as many other pensions already have.
The fund continues to focus on reductions in the economy and helping companies transition, Graham said, rather than short-term goals.
“We really focus on investing in companies, and invest in their carbon plans, and not focus on the short term, because in the short term, we could even see the carbon in our portfolio increase.”
Elsewhere, CPPIB reduced its exposure to real estate by one percent to eight percent as it made several sales of office real estate in a struggling market.
The real estate portfolio lost five percent last year as higher interest rates and work-from-home trends weighed on office valuations.
“For Opis, you know, it was a challenging year, and we took a few lumps on it, but we made tough decisions and I think we’re in a great position going forward.”
CPPIB’s net assets amounted to $632.3 billion on March 31, compared to $570.0 billion a year earlier.
The increase in net assets included $46.4 billion in net income and $15.9 billion in net transfers from the Canada Pension Plan.
This report by The Canadian Press was first published on May 22, 2024
