The Canada Pension Plan Investment Board reported an eight per cent return in its fiscal year ending March 31, but significantly underperformed the 19.9 per cent return of its reference portfolio.

The reference portfolio, made of 85 per cent global equity and 15 per cent Canadian bonds, benefited last year from stock price surges in the seven largest U.S. tech stocks (known as the Magnificent Seven), while the pension fund has a much broader portfolio that is also invested in infrastructure, real estate, private equities and credit.

“Against a very simple, naive construct like the reference portfolio that has become very concentrated with Magnificent Seven, I think we would expect to have wild swings in performance right now,” says John Graham, chief executive officer at the CPPIB.

Read: CPPIB generates net return of 8% as of Q1 2024, net assets increase to $632.3BN

The pension fund’s returns over the past 10 years have also fallen short of the reference portfolio, but only by 0.3 per cent. Looking ahead, a diversified portfolio could be even more important, says Graham, adding he sees returns reverting back to long-term trends, down from the higher returns of the past twenty years that were boosted by trends like falling interest rates and booming Chinese growth.

“It’s going to be harder to generate returns over the next 10 years than it has been over the past 20. Inflation is stickier than expected, stickier in the Americas for sure, and geopolitics is kind of front and centre and certainly having an impact on how the world is rewiring itself.”

Shifting trends in recent years has led CPPIB to pull away from emerging markets toward developed markets where the opportunities are better. The shift hasn’t, however, resulted in a higher proportion of investments going to Canada, something the federal government is trying to encourage.

The CPPIB’s portfolio had 12 per cent in Canada as of the end of March, down from around 16 per cent in 2019, and 31 per cent in 2014.

Read: CPPIB wants to grow credit investments to $115BN by 2029: report

Graham says the portfolio is still heavily over-weighted on Canada given its roughly three per cent of global gross domestic product and there’s a lot the country has going for it, including interesting opportunities in the energy sector.

Elsewhere, the CPPIB reduced its exposure to real estate by one percentage point to eight per cent as it made several office real estate sales in a struggling market. The real estate portfolio lost five per cent last year as higher interest rates and work-from-home trends affected office valuations.

“[Office real estate] had a challenging year and we took some lumps on it, but we made tough decisions and I think we’re in a great position going forward,” he says.

The CPPIB’s net assets totalled $632.3 billion on March 31, up from $570.0 billion a year earlier. The increase in net assets included $46.4 billion in net income and $15.9 billion in net transfers from the Canada Pension Plan.

Read: Expert Panel: CPPIB taking steps to face shifting investment landscape in China