Friday, November 13, 2009

CPP Fund assets grow 6.2 per cent to $123.8B, boosted by equities but hurt by high loonie

TORONTO — The Canada Pension Plan's investment fund saw its assets grow by 6.2 per cent to $123.8 billion between the first and second quarters of the fiscal year, spurred by revived equity markets but offset somewhat by a strong Canadian dollar.

The fund's assets have regained a large portion of the loss they experienced over the past year as equity markets tumbled amid economic uncertainty and the financial crisis. Year-over-year, the CPP Fund gained 5.5 per cent, but its assets are still below their value of $127.7 billion in the first quarter of fiscal 2009, before the financial crisis hit.

Although the fund's performance lagged that of the S&P/TSX composite index, which gained 11.2 per cent in the same July to September period, the head of the CPP's investment body emphasized that it is focused on a long-term investment horizon of 10 to 15 years and invests accordingly.

"Our view is to establish long-term strategic asset weightings and then to maintain them, and that's what we did when we were living through the equity market downturns... and we maintained them in this current market environment," David Denison, president and CEO of the CPP Investment Board, said in an interview with The Canadian Press.

"Now, we had some negative results in the equity markets last year, but having that longer-term consistent approach we think is the best thing for this fund and it will, over time, allow us to reap the returns that are necessary to keep the Canada Pension Plan stable going forward."

Denison said the plan's assets - which include a mixture of public and private equities, fixed income, real estate and other infrastructure holdings - can attribute their second-quarter gain to stronger equity markets, but this was counteracted somewhat by foreign exchange losses in its international investments.

"The strengthening Canadian dollar over the past six months has muted some of the returns in international markets but they've all still been solidly positive," he said.

In addition, Denison said valuations of the CPP Fund's investments in private equity, infrastructure and real estate tend to lag the public equity markets, and he expects these investments will start to reflect the general economic improvement over the next three to six months.

The CPP Fund is currently comprised of a 55.8 per cent weighting in equities, 30.7 per cent in fixed income investments, including bonds and money market securities, and 13.5 per cent in inflation-sensitive assets like real estate and infrastructure.

Quebec's Caisse de depot et placement pension fund has come under criticism that it's lagging behind the rest of the country because it missed out on the stock-market rebound because it moved too many of its assets out of equities during the financial crisis.

On Wednesday, the Caisse denied a report that said it is expected to pull in a five or six per cent return on investment for all of 2009, while other Canadian pension funds are on target for an average of 10 to 12 per cent.

Denison said the CPP Fund has no plans to significantly alter its asset mix, but he does see "a number of very attractive investment opportunities" in the private markets.

The CPP Investment Board recently announced a deal to become a "significant minority investor" in IMS Health after the U.S. health care software and data management company agreed to be acquired by the pension fund and TPG Capital for US$4 billion. And Denison said he sees many more opportunities like IMS out there.

He added that he also sees investment opportunities in real estate and infrastructure.

"We're seeing transactions in the infrastructure area. Those are very attractive assets for us to own because they tend to be very long duration assets with steady returns, more bond-like returns, which makes sense for a fund like ours," Denison said.

"We also think there'll be some very interesting real estate opportunities, particularly in the U.S., as the commercial real estate issues play out in that market over the next 18 months. We think some very attractive assets will come up for sale and we're poised to take advantage of that," he added.

The CPP Fund current has about six per cent of its assets or $7 billion invested in real estate, including 50 per cent of the Royal Bank Plaza and 25 per cent of First Canadian Place in Toronto.

The fund's increase from first to second quarter, after operating expenses, consisted of $5.4 billion in investment income and $1.9 billion in CPP contributions not needed to pay benefits.

The chief actuary reaffirmed in July that the public pension plan is sustainable throughout its projected 75-year time frame, with a 4.2 per cent real rate of return. The rate of return in the second quarter was 4.6 per cent. A new projection is expected in 2010.

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