May 22, 2008
TORONTO, ON (May 22, 2008): The CPP Fund ended the fiscal 2008 year on March 31, 2008 at $122.7 billion, an increase of $6.1 billion from $116.6 billion at the close of the previous year. This growth consisted of $6.5 billion in CPP contributions not required to pay current benefits, partially offset by an investment return of negative 0.29 per cent, representing negative $303 million. “While a negative rate of return is never encouraging, our fiscal 2008 result was well within our long-term risk and return parameters and reflected the challenging capital markets conditions that prevailed during much of the year, particularly during our final quarter of January to March 2008,” said David Denison, President and CEO, CPP Investment Board. “In the context of our multi-generational mandate, the CPP Fund remains on course to help ensure the sustainability of the CPP.” Active Investing Delivered Value-added Returns above Benchmark While the rate of return was negative, the investment team outperformed its market-based benchmark by adding 241 basis points or approximately $2.9 billion in added value to the portfolio above the benchmark return of negative 2.7 per cent. This was the second consecutive year in which the organization’s value-added return exceeded 240 basis points. “Over the last two fiscal years the CPP Investment Board has generated approximately $5.3 billion in additional investment returns over and above our market-based benchmark to help sustain future pensions for 17 million Canadians,” said Mr. Denison. In fiscal 2008 these additional returns were generated primarily through active strategies in private equity, which contributed $2.2 billion of added value, along with real estate and infrastructure programs which contributed another $0.7 billion. Four-year Results The CPP Investment Board reflects its long investment horizon by regularly reporting rolling four-year performance. The four-year annualized investment rate of return through March 31, 2008 was 9.0 per cent, which has added a cumulative $32.2 billion of assets to the CPP Fund and was well above the return required to sustain the Canada Pension Plan at its current contribution rate. The CPP Fund earned 12.9 per cent in fiscal 2007, 15.5 per cent in fiscal 2006 and 8.5 per cent in 2005. Fiscal 2008 Market Conditions “The CPP Fund was certainly not immune from the sometimes extreme volatility of the equity markets during our fiscal 2008 year,” said Mr. Denison. “Given that global developed equity markets were down 12.8 per cent over that period, our almost 52 per cent weighting of public equity holdings was certainly caught in that downdraft.” However the CPP Fund avoided the credit-related problems that affected many financial institutions and investors during the year. At the time the credit crisis began to materialize in August 2007, the Fund had no exposure to sub-prime mortgages or other investments subject to credit-related repricing. Another factor impacting performance was the Canadian dollar’s rise against the U.S. dollar, and to a lesser extent other major currencies, which reduced returns on the Fund’s foreign holdings when expressed in Canadian dollars. We maintain a long-term strategic unhedged exposure to foreign currencies amounting to 40 per cent of the assets in the portfolio and only hedge exposures beyond that level. Overall, currency factors reduced returns on the Fund’s foreign holdings by approximately $1.4 billion or 1.1 per cent when expressed in Canadian dollars for the year. Fiscal 2008 Portfolio Performance by Investment Department A key yardstick for our investment teams is value-added performance against their benchmarks. Below we report the value-added performance of each department, followed by year-over-year comparisons of their overall investment return. Public Market Investments generated value-added returns of 11 basis points at the total fund level or approximately $138 million of investment income relative to its benchmark.
Consistent with the organization’s long-term investment horizon and resulting investment strategy, the Public Market Investments department maintains a broad global market-based exposure of 2,600 public companies on major exchanges, which meant that it was most impacted by broad declines in equity markets. Public Markets overall produced a return of negative 2.4 per cent or negative $2.4 billion, compared to a gain of 11.0 per cent or $10 billion in fiscal 2007; approximately $1 billion of that negative return was attributable to foreign exchange. Public equities returned negative 6.8 per cent or negative $4.5 billion in net investment income, versus positive 13.1 per cent or $8.1 billion in fiscal 2007. In contrast, fixed income assets managed by the department performed well; bonds and money market securities earned a solid return of 6.9 per cent or $2.0 billion, up from 5.9 per cent in 2007. Private Investments generated value-added returns of 225 basis points at the total fund level, or approximately $2.7 billion of additional investment income for the CPP Fund relative to its benchmark.
In terms of overall return, the department earned $1.7 billion before taking foreign exchange into account and netted $1.5 billion or 10.8 per cent when expressed in Canadian dollars. The department’s infrastructure investments earned 23.6 per cent or $524 million in net investment income in fiscal 2008, up from 18.4 per cent or $235 million in 2007. Private equities, comprised of Funds & Secondaries and Principal Investing, earned a return of 8.2 per cent and contributed $1.0 billion in net investment income, comprised of both distributions from our funds and valuation gains; this compares with 35.3 per cent or $1.9 billion in fiscal 2007. Real Estate Investments produced a value-added return of 10 basis points at the total fund level, representing approximately $105 million of investment income relative to its benchmarks.
The private real estate portfolio generated a return of 8.2 per cent, amounting to $0.5 billion in net investment income, reflecting particularly strong performance in Canada, partially offset by a slowdown in the U.S. and U.K. markets. That compares to 27.0 per cent or $0.9 billion in fiscal 2007. Investment Planning Committee Investment returns for the Investment Planning Committee, which provides direction to the investment departments and makes investment decisions that are not attributable to a specific department, were $50 million less than its benchmarks or negative five basis points at the total fund level. Fiscal 2008 Portfolio Performance by Asset Class
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CPP FUND RETURNS |
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|
Asset Class |
Fiscal 08* |
Fiscal 07* |
|
Canadian public equities |
3.2% |
12.4% |
|
Canadian private equities |
2.2% |
45.3% |
|
For ign public equities |
-13.9% |
13.5% |
|
Foreign private equities |
8.5% |
33.1% |
|
Bonds and money market securities |
6.9% |
5.9% |
|
Other debt |
0.3% |
– % |
|
Public real estate |
-24.2% |
38.1% |
|
Private real estate |
8.2% |
27.0% |
|
Inflation-linked bonds |
9.3% |
0.9% |
|
Infrastructure |
23.6% |
18.4% |
|
Total CPP Fund |
-0.29% |
12.9% |
* Investment results by asset class are reported on an unhedged Canadian dollar basis, since any hedging takes place at the Total CPP Fund level. Results are reported on a time-weighted basis.
Growth of Private Equity, Infrastructure and Real Estate Assets During fiscal 2008, we continued to focus on our goal of expanding our investments in private market categories including real estate, private equity and infrastructure. Real estate assets grew by $1.2 billion in fiscal 2008 to $6.9 billion, with properties added in the U.K., Continental Europe, and a number of emerging markets including China and Mexico. Private equities grew substantially by $5.3 billion to $13.4 billion including both draw downs from fund investments and new principal investments of $2.4 billion. Infrastructure assets grew by $0.6 billion by the end of fiscal 2008; this amount does not include a transaction to purchase a 28.1 per cent interest in Puget Energy, Inc. in Washington State for US$884 million ($907 million), which is awaiting regulatory approval. Overall, assets in these categories now represent approximately 19 per cent of the portfolio. Asset Mix We have also continued to diversify the portfolio by geography. While Canadian assets will remain a significant part of the portfolio, as the CPP Fund continues to grow an increasing portion will be invested internationally. At fiscal year-end, total Canadian investment assets totaled $65.1 billion, or 53.0 per cent of the portfolio, with the remaining $57.7 billion invested outside Canada.
|
FOR THE YEAR ENDED MARCH 31 ($ billions) |
2008 |
2007 |
2006 |
2005 |
|
CHANGE IN NET ASSETS |
|
|
|
|
|
Income |
|
|
|
|
|
Net contributions |
6.5 |
5.6 |
3.6 |
4.5 |
|
Investment income net of operating expenses |
(0.4) |
13.0 |
13.1 |
6.3 |
|
Increase in net assets |
6.1 |
18.6 |
16.7 |
10.8 |
|
|
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|
INVESTMENT PORTFOLIO |
||||
|
Equities |
|
|
|
|
|
Canada |
28.9 |
29.2 |
29.1 |
27.7 |
|
Foreign |
48.2 |
46.4 |
32.6 |
20.9 |
|
Fixed Income |
|
|
|
|
|
Bonds |
30.2 |
29.2 |
27.2 |
28.6 |
|
Other debt |
1.1 |
– |
– |
– |
|
Money market securities1 |
(1.5) |
0.1 |
0.6 |
3.1 |
|
Absolute return strategies |
1.5 |
– |
– |
– |
|
Inflation-sensitive assets |
|
|
|
|
|
Real estate |
6.9 |
5.7 |
4.2 |
0.8 |
|
Inflation-linked bonds |
4.7 |
3.8 |
4.0 |
– |
|
Infrastructure |
2.8 |
2.2 |
0.3 |
0.2 |
|
Investment Portfolio2 |
122.8 |
116.6 |
98.0 |
81.3 |
|
|
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|
Rate of return (annual)3 |
-0.29% |
12.9% |
15.5% |
8.5% |
|
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1Includes amounts receivable/payable from pending trades, dividends receivable and accrued interest. 2Excludes non-investment assets such as premises and equipment and non-investment liabilities. 3Commencing in fiscal 2007, the rate of return reflects the performance of the investment portfolio, which excludes the Cash for Benefits portfolio. |
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At March 31, 2008, equities represented 62.7 per cent of the fund or $77.1 billion. That amount consisted of 51.8 per cent public equities valued at $63.7 billion and 10.9 per cent private equities valued at $13.4 billion. Fixed income including bonds, money market securities and other debt represented 24.3 per cent of the portfolio or $29.8 billion. Absolute return strategies represented 1.3 per cent of the portfolio or $1.5 billion and inflation-sensitive assets represented 11.7 per cent or $14.4 billion. Of those assets, 5.6 per cent consisted of real estate valued at $6.9 billion, 3.9 per cent was inflation-linked bonds valued at $4.7 billion, and 2.2 per cent was infrastructure valued at $2.8 billion. Long-term Sustainability of the CPP Fund CPP contributions are expected to exceed annual benefits paid through to the end of 2019, providing a 12-year period before a portion of the investment income is needed to help pay CPP benefits. The Chief Actuary of Canada estimates that a 4.2 per cent real rate of return, over a long-term time period, is required to sustain the plan at the current contribution rate. The Chief Actuary also estimates that the CPP Fund will grow to approximately $310 billion at the end of 2019, making it one of the largest single purpose pools of investment capital in the world, thereby helping to secure the CPP for the long term. CPP Investment Board The CPP Investment Board invests the funds not needed by the Canada Pension Plan to pay current benefits on behalf of 17 million Canadian contributors and beneficiaries. In order to build a diversified portfolio of CPP assets, the CPP Investment Board is investing in public equities, private equities, real estate, inflation-linked bonds, infrastructure and fixed income. The CPP Investment Board is accountable to Parliament and the federal and provincial finance ministers. Based in Toronto, the CPP Investment Board is governed and managed independently of the Canada Pension Plan and at arm’s length from governments. For more information about the CPP Investment Board, visit www.cppib.ca.
For further information contact:
Joel Kranc
Manager, Communications
(416) 874-5163