The Canada Pension Plan Investment Board is bracing for headwinds in the event of a recession, but says a wide range of investments makes it well-positioned for uncertain economic conditions.
The CPPIB reported Wednesday it earned a net return of 1.3 per cent in its latest fiscal year as inflation and rising interest rates weighed on both stock and fixed income markets. The organization said the investment gains combined with net transfers from the CPP brought its net assets to $570 billion as of March 31, up from $539 billion a year earlier.
“I think we’ve been trying to be very clear and share the investing market has gotten more competitive and more challenging,” says John Graham, the CPPIB’s chief executive officer. “We expect forward-looking returns to be down compared to where they’ve been historically, but we’re also in a position where we’re really benefiting from active management and benefiting from diversification.”
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He also says geopolitical events and a potential recession could be difficult to forecast, but the CPPIB is well prepared. “The key is for us to build a resilient portfolio — a portfolio that will perform through a wide range of macroeconomic and geopolitical scenarios. The way we do that is diversification.”
The CPPIB said the gain for its latest fiscal year reflected returns on investments in infrastructure and certain U.S. dollar-denominated private equity and credit assets, which benefited from foreign exchange. External investment managers using quantitative, equity and fixed income trading strategies also contributed positively to results, said the organization, which noted that a weaker loonie against the U.S. dollar and other major currencies also helped boost investment returns. The increase included $8 billion in net income and $23 billion in net transfers from the CPP.
But its performance was partially offset by declines in both equities and fixed income across major markets as high inflation and rising interest rates weighed heavily on both asset classes. “We had headwinds in certain parts of the portfolio and tailwinds in other parts of the portfolio,” says Graham, highlighting challenges in office real estate, retail and the technology space over the past year. “Certain asset classes continue to be pretty robust — like renewable had a pretty robust year, conventional energy had a robust year.”
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As of March 31, the CPPIB’s portfolio included 33 per cent in private equities, 24 per cent in public equities, 12 per cent in fixed income, 13 per cent in credit investments, nine per cent in real estate and nine per cent in infrastructure. In addition to investing across various asset classes, Graham says global diversification is key to the CPPIB’s strategy for navigating a possible recession.
But amid Canada’s ongoing political tensions with China, he says the CPPIB remains “surgical” and “selective” in determining which companies in that country to invest in. He says the CPPIB has invested around nine per cent of its funds in China and “we constantly debate whether that’s the right amount.
“The right amount is really based on whether we think we’re going to get compensated on a going-forward basis for the risk,” he continues. “We do believe that we should have exposure to China because it is the world’s second-largest economy. It is a fast-growing economy and it’s very connected right now to the broader world. We certainly are aware and alive to some of the challenges and we spend a lot of time thinking about how one should invest in China.”
On a relative basis, the fund’s net return of 1.3 per cent for the year beat the 0.1 per cent return by its aggregated reference portfolios over the same period. The fund’s 10-year annualized net return stood at 10 per cent.
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