'We’ve navigated through some pretty choppy water pretty well,' CPPIB CEO John Graham, seen in 2021, said in an interview.Fred Lum/the Globe and Mail
Canada Pension Plan Investment Board reported an 8-per-cent return in its last fiscal year, driven by strong gains by public and private equities, though the pension fund’s chief executive officer is now preparing to weather a tougher climate for investors.
Total assets under CPPIB management increased to $632-billion in the fiscal year ended March 31, as the fund added $46-billion of investment income and almost $16-billion of new contributions from members of the Canada Pension Plan, the primary national retirement program for working Canadians.
Over the past 10 years, CPPIB has seen an average annual return of 9.2 per cent on its investments. That span covered a highly volatile period for global markets that included the pandemic, high inflation, a surge in interest rates and a simultaneous plunge in stocks and bonds that dented investment returns last year.
“The portfolio is performing as designed,” CEO John Graham said in an interview. “We’ve navigated through some pretty choppy water pretty well.”
As he looks ahead to the next 10 years, however, some of the tailwinds for markets that helped buoy investment returns in prepandemic years now look like they could work against investors. Once-low interest rates are expected to remain higher, inflation looks more persistent and geopolitical upheaval is increasing, marked by wars in Ukraine and Gaza as well as escalating tensions among superpowers.
“Overall global growth might just be more challenging over the next decade,” Mr. Graham said. “We do continue to believe in reversion to the mean and that markets will revert to the mean over time.”
Public stocks had the strongest gains, with a one-year return of 13.8 per cent. Private equity investments, which make up 31 per cent of CPPIB’s portfolio, gained 10.4 per cent despite a stalled market in which few deals were getting done. And the pension fund’s credit portfolio gained 10.8 per cent.
By contrast, CPPIB’s real estate portfolio suffered a 5-per-cent loss last year, as high interest rates and weaker demand for office and retail properties drove down valuations. CPPIB also sold some properties in cities such as San Francisco and New York at steep discounts.
“We should always be allocating capital to where we have the best opportunity for returns going forward, even if it means making difficult decisions,” Mr. Graham said. “We’ve taken some hits on office and retail, but going forward are actually reasonably comfortable with the portfolio.”
The hot performance of stock markets, particularly a cluster of the largest U.S. technology companies, has created challenges for investors such as CPPIB that seek to spread their investments – and their risks – across a broad array of assets and countries.
CPPIB’s returns trailed the performance of the reference portfolios it uses as a benchmark by a wide margin. That benchmark, based on a mix of 85 per cent global stocks and 15 per cent Canadian government bonds, returned 19.9 per cent last year, driven by those same U.S. tech stocks. Over 10 years, CPPIB’s performance trails it by 0.3 per cent.
Mr. Graham said CPPIB no longer believes it is the right benchmark to use because the reference portfolios contain a basket of stocks that is too concentrated in the United States and in a handful of companies to be a realistic investment alternative for a pension fund of CPPIB’s size and threshold for taking risks.
“Something that we are firm believers in is the long-term value of diversification, especially for the scale of the portfolio that we’re managing,” he said.
Starting this fiscal year, CPPIB will switch to a different performance yardstick. It will aggregate a set of internal benchmarks that track passive alternatives to different asset classes, which are already used by individual investment teams internally. It is a change that has been “in the works for a long time,” Mr. Graham said.
If CPPIB one day decided to put all its assets in passive investments, instead of employing large investment teams to try to earn higher returns, the old benchmark “is not actually what we would do,” Mr. Graham said.
“It’s too concentrated,” he said. “So let’s actually incent people, let’s reward people against the benchmark, or against a portfolio, that we actually want to build.”