Capitalising on opportunities arising from the financial crisis, including savvy private equity, real estate, infrastructure and private debt deals, marked a successful fiscal year for the Canadian Pension Plan Investment Board which recorded one of its highest ever annual returns.
For the fiscal year ending March 31, 2010 the fund returned 14.9 per cent and its asset are now at a pre-crisis level.
David Denison, president and chief executive of CPPIB, said the fund’s long-time horizon, distinct investment approach, available capital and specialised investment expertise allowed it to make significant investments last year that were beyond the reach of many investors.
“We have the benefit of being able to look beyond short-term market cycles, and to deal with volatility better than the majority of market participants,” Denison said. “Unlike many other investors, we did not suffer from capital or liquidity constraints last year. In fact, our experienced investment teams completed a number of significant transactions during the year.”
These included the acquisition of Macquarie Communications Infrastructure Group, as well as partnerships with other investors to acquire IMS Health and Skype.
About 25 per cent of the total portfolio is made up of private assets such as real estate, private equity, infrastructure and private debt. While these investments are expected to generate strong returns over the long term, it also contributed to the annual total portfolio return coming in 5.87 per cent below that of the reference portfolio.
“Private investment returns are expected to play out over the long-term and cannot be captured within just a 12-month snapshot. For example, we believe there is considerable value embedded in our real estate and infrastructure investments that will be realised over time,” Denison added.
CPPIB’s five-year annualised return is 4 per cent, and its 10-year annualised return is 5.5 per cent.
The CPPIB has a unique investment approach, whereby it divides each investment into its underlying debt and equity attributes.
For example where real estate may be 6 per cent of the total portfolio, the underlying economic characteristics may be 4 per cent equity and 2 per cent debt.
Taking this further, a core non-Canadian real estate investment is characterised as comparable to 40 per cent global developed market equity, 50 per cent hedged foreign sovereign bonds and 10 per cent Canadian real return bonds. If it is mortgaged then the percentage of bonds is reduced and the equity component is increased.
This provides a “look through” of all public and private assets into the fundamental underlying economic exposures across: equity markets volatility; movements in government bond yields; geographic and industry sectors; and currency exchange rates.
For the year ending March 31, the CPPIB’s portfolio was made up of 43 per cent in Canadian assets, and 57 per cent foreign assets.
Equities represented 55.7 per cent of the portfolio, with 43.2 per cent allocated to public equities and 12.5 per cent private equities.
Fixed income which included bonds, other debt, money market securities and debt financing liabilities represented 30.8 per cent or $39.3 billion.
Inflation-sensitive assets represented 13.5 per cent and of those assets, 5.5 per cent were real estate, 4.6 per cent was infrastructure, and 3.4 per cent was inflation-linked bonds.
CPPIB also added 76 new employees in the past year, 34 in the investment teams and the remainder largely in information technology, investment finance and operations. At year end, had 566 employees: 534 in our Toronto office, 21 in London
CPPIB actual asset allocation
Asset class 2010 2009
Canadian equities 14.5 14.7
Foreign developed markets 36.2 38.3
Emerging markets 5.0 4.4
Bonds 28.8 26.9
Other debt 2.8 1.7
Money market securities 0.2 (0.7)
Debt financing liabilities (1.0)
Real estate 5.5 6.5
Infrastructure 4.6 4.3
Inflation-linked bonds 3.4 3.9