CPPIB returns 8.9% in 20th year investing, first year with additional contributions

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Piggy bank with word CPP. Canada Pension Plan concept. © Vitaliy Vodolazskyy /123RF Stock PhotosThe Canada Pension Plan Investment Board returned a net annual 8.9 per cent at fiscal 2019 year-end, with assets increasing by $35.9 billion to $392 billion.

This was a significant year for the CPPIB because it marks its 20th year investing. In 1999, it received the first transfer of CPP funds to invest in publicly traded stocks. Until March 1999, the CPP fund was only invested in non-marketable Canadian, federal, provincial and territorial bonds, which were known as CPP bonds.

Over the last 20 years, the CPPIB has evolved its investment approach significantly with a well-diversified portfolio of both public and private assets. The plan’s asset mix as of March 31, 2019, was 8.5 per cent infrastructure, 9.1 per cent credit investments, 10 per cent government bonds, cash and absolute return strategies (net of external debt issuances), 12.1 per cent real estate, 3.4 per cent other real assets, 33.2 per cent public equities and 23.7 per cent private equities.

This year was tough for many pension funds, with significant market volatility in December 2018.

“The role of diversification came through clearly this year, and we were encouraged to see nearly all investment departments contributed positively to our results,” said Mark Machin, president and chief executive officer of the CPPIB, in a press release. “CPPIB’s investment teams also took advantage of our international reach and competitive strengths to pursue select transactions, as well as explore new areas of growth.”

It was also a significant year for the CPPIB because it started collecting additional CPP contributions in January. While the base CPP is designed to be partially funded, the additional CPP is designed to be fully funded. As such, investment income will play a larger role in sustaining the additional CPP than it does for the base CPP, noted the report.

The CPPIB is managing this by using a two-pool investment structure. “To meet these objectives, CPPIB established two investment pools, each divided into units that are valued daily,” it said. “Each of the base CPP and additional CPP accounts will invest their long-term investment portfolios through holdings of these units.”

There’s a core pool, which initially was made up of the CPPIB’s long-term portfolio. Future net cash flows to and from the base CPP will be allocated to and from the core pool, as will 55 to 60 per cent of additional CPP cash inflows.

“To maintain the lower-risk target of the additional CPP, the remaining assets of the additional CPP investment portfolio are invested in a lower-risk ‘supplementary pool.’ This pool is composed of fixed income securities,” the report said.

The base CPP account ended the fiscal year with net assets of $391.6 billion, with a 8.9 per cent net return.

The additional CPP account ended the fiscal year with net assets of $0.4 billion, achieving a return of five per cent ($11 million) for its first quarter, which excludes $9 million of non-recurring additional CPP startup costs.

“Beginning to accept, invest and manage additional CPP contribution amounts in January marked a pivotal moment in CPPIB’s journey, and was the culmination of more than a year of preparations,” Machin said. “This new CPP program has the full advantage of CPPIB’s global network, expertise, investment strategies and risk governance framework.”

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