CPPIB changes asset weights, expands risk management…

David DenisonThe C$105 billion Canada Public Pension Investment Board (CPPIB) has adjusted the investment allocations in its reference portfolio, including an increased foreign exposure, and made significant risk management enhancements, as a response to the volatile economic environment and its long-term asset-liability matching.

Three years ago the CPP Reference Portfolio, a low-cost, low-complexity portfolio that could easily be expected to meet the needs of the pension plan, was created as the benchmark for the CPP Fund. Taking a total portfolio approach, the CPPIB adds value above this portfolio by investing in better beta, through asset diversification, as well as alpha.

In fiscal 2009, which the CPPIB measures to the end of March, a number of changes were made to the reference portfolio including a gradual reduction in the Canadian equities exposure from 25 to 15 per cent, and a reduction in the Canadian real return bond weighting from 10 to 5 per cent. The foreign equity exposure was increased by 5 per cent to 45 per cent, with new allocations of 5 per cent each allocated to emerging market equities and foreign sovereign bonds. The allocation to Canadian nominal fixed income remains at 25 per cent.

All foreign equity exposures are unhedged, but the bond allocation is hedged.

According to the CPPIB annual report, in fiscal 2009, the return of the CPP Fund, matched the reference portfolio benchmark with 1 basis point of added return. However the board takes a long-term attitude to performance, with the focus of returns on four-year periods, not one year. In the three years since the reference portfolio was established as the total fund benchmark, 487 basis points have been added. From next year the performance will be measured on a rolling four-year basis.

In the past year the CPP Fund differed slightly in its asset allocation from the reference portfolio. In aggregate the fund had a 57.4 per cent allocation to equities, split between public equities (44 per cent) and private equities (13.4 per cent) versus a total equities allocation of 65 per cent in the reference portfolio. Fixed income allocations totalled 27.9 per cent versus 30 per cent in the reference portfolio. And 1.7 per cent was allocated absolute return strategies. One of the stronger sources of value-added returns was a 14.7 per cent allocation to inflation-sensitive assets.

During the year, the board also introduced new investment risk management systems and a comprehensive review of its enterprise risk management framework.

Each year the board approves an active risk limit which restricts management’s discretion to vary its aggregate risk exposure from the reference portfolio. The chief executive, David Denison, and senior management members are accountable for managing an active risk budget, with active risk allocated to the investment departments to divide among various categories of actively managed investments.

In the past year the CPPIB has separated the allocation and monitoring of risk, with the oversight responsibilities transferred to the investment risk management group within the treasury, risk, operations and technology department. The portfolio design and investment research department previously held this function.

The position of vice president, portfolio strategies was created within this portfolio design department, with the aim of identifying emerging risk factors that should be integrated into the portfolio design.

In addition a head of investment risk management was created to consolidate risk measurement, monitoring and control functions within a dedicated team.

Active and total portfolio risk is measured daily and reported to the investment planning committee weekly and to the board at least quarterly.

In what was a busy year for the CPPIB, its operations were expanded internationally with new offices in London and Hong Kong, as well as Toronto, employing 490 full time staff.