Market volatility rocks CPPIB returns, private equity remains bright spot

The Canadian pension has been hit by turbulence in the public equities and REIT markets, but its alternatives fared well in 2007, with infrastructure leading the way.

The Canadian Pension Plan Investment Board has said its alternative investments fared well in 2007, despite negative returns on its overall portfolio of investments, losing C$303 million ($308 million; €196 million) over the past year.

David Denison, president and chief executive officer of CPP Investment Board, said negative rates of return were “never encouraging” but insisted the drop was “well within” the fund’s long-term risk parameters. It reflected, he said in a statement, “the challenging capital markets conditions that prevailed” during much of 2007 and the start of 2008.

Canada’s largest single-purpose pension said it ended the fiscal year 2008 with a negative investment return of 0.29 percent, mainly owing to turbulence in the stock market which affected its equity and REIT investments. A C$6.5 billion rise in contributions not needed by the fund offset the negative return, leaving the fund with C$122.7 billion in assets as of March 31.

However, private equity and real estate investments remained steady – both reporting returns of 8.2 percent. During the fiscal year 2007, returns were 33.1 percent and 27 percent respectively.

Infrastructure was the strongest performer of the pension plan’s portfolio, recording a return of 23.6 percent in 2008 against 18.4 percent for the previous 12 months. The pension’s infrastructure group makes equity investments ranging from $300 million to $600 million; it recently was part of a Goldman Sachs-led consortium bidding for the $12.8 billion lease on the Pennsylvania Turnpike, but a Citi-led consortium ultimately won the auction.

In the fiscal year ended 31 March, CPPIB’s investments in equities returned negative 6.8 percent compared to a return of 13 percent in 2007. Investments in public real estate were negative 24 percent in 2008 compared to returns of 38 percent the previous year.

The pension plan – which represents 17 million Canadians – has vigorously increased its allocations to private equity, private real estate and infrastructure over the past year, with the three asset classes now accounting for 19 percent of fund’s portfolio.

Private equity investments grew the most during the past 12 months however, to $13.4 billion from $8.1 billion, including “draw downs from fund investments and new principal investments of $2.4 billion”.

Real estate assets grew to C$6.9 billion in 2008, compared to C$5.7 billion in 2007, according to the pension, with new investments made in the UK, Europe, China and Mexico.

Infrastructure assets grew by C$600 million over the past 12 months, although that excludes the pension’s 28.1 percent stake in Washington state utility company, Puget Energy, purchased for $884 million. The deal is still awaiting regulatory approval.