CPPIB predicts ‘new phase’ for infra as yearly returns drop

The $317bn pension manager said increased bond yield and asset appreciation is affecting how investors view the asset class in the current cycle.

Investments in Australia and Mexico helped grow Canadian Pension Plan Investment Board’s exposure to infrastructure to $24.3 billion over the last year, but the asset class’s return fell compared to the previous fiscal year.

CPPIB’s infrastructure returns over its fiscal year 2017 ended 31 March fell almost two percent compared to 2016, from 9.3 percent to 7.4 percent. However, its exposure to the asset class grew by $3 billion over the same period, bolstered by a $748 million investment in the Arco Norte toll road in Mexico and a $1.27 billion commitment to a rail logistics company in Australia.

Results were similar for real estate, which is grouped with infrastructure in CPPIB’s real assets portfolio. Real estate’s returns dropped from 12.3 percent in 2016 to 8.3 percent in 2017.

Infrastructure now comprises 7.7 percent of CPPIB’s overall portfolio, with 75 percent of assets located in western markets including North America, western Europe and Australia, and 25 percent in Latin America.

Looking ahead, CPPIB said it believes infrastructure is “approaching a new phase in the current cycle”. It said that increases in long bond yields and asset appreciation will lead investors to emphasise income generation with lowered expectations for capital appreciation.

“We expect this uncertain investment climate will continue to be challenging for market participants. But as patient and disciplined investors, we remain focused on selectively deploying our capital in opportunities that will generate returns for the CPP Fund,” the pension said in its report.

The pension manager’s total portfolio return rate last year was 11.8 percent, generating $33.5 billion in net income. It managed $316.7 billion in assets as of 31 March.