May 23, 2001
In releasing its unaudited results for fiscal 2001, the Canada Pension Plan Investment Board announced today that it remains confident equities will produce attractive investment returns over the long term, despite the negative return in the fiscal year ended March 31, 2001.
The market value of assets held by the CPP Investment Board totalled $7.2 billion at fiscal year end, compared with $2.4 billion a year earlier. These assets, which are invested exclusively in equities, represented approximately 14% of the consolidated assets of the Canada Pension Plan,. (The Canada Pension Plan itself has a portfolio of federal and provincial bonds and an operating cash reserve, both of which are administered by the Department of Finance Canada. In the opinion of the management of the CPP Investment Board, these fixed-income assets had an estimated market value of $42 billion on March 31, 2001).
The CPP Investment Board registered an $852 million loss in the year ended March 31, 2001, of which $788 million occurred in the fourth quarter. (The fixed-income assets owned by the Canada Pension Plan earned approximately $3.8 billion in fiscal 2001).The return on the equity assets was a negative 9.4% in fiscal 2001, compared with a positive 40.1% return in fiscal 2000. Over the past two years the CPP Investment Board has earned an annualized return of nearly 15%. (The estimated return on the consolidated assets available to the Canada Pension Plan was 7% for fiscal 2001). At year end, 70% of equity assets were Canadian and 30% foreign, compared with 82% and 18% respectively a year earlier. ”Our fiscal 2001 rate of return compared favourably with declines in the markets in which we invest, recognizing that in our third and fourth quarters we witnessed the worst six-month stock market declines since 1974,” commented John A. MacNaughton, president and chief executive officer. “We are a patient investor committed to creating long-term risk-adjusted net value added. We are not deterred by the severity of the recent market downturn that undermined our short-term results.” Mr. MacNaughton said that a regulatory change the CPP Investment Board sought was approved by governments in August 2000. This enabled the CPP Investment Board to implement a risk management initiative by reducing exposure to Nortel, which then dominated the TSE 300 Index. “As a result, our concentration in this single stock declined from 28% of our total assets in August 2000 to 4% by year end. This risk management action had a significant positive impact on our total portfolio, avoiding approximately 8.0% of negative return, or approximately $535 million in lower asset values.” Mr. MacNaughton noted that corrections followed by recoveries are the natural behaviour of equity markets, with five major corrections in the past 30 years including last year. “Few investors rejoice at the sight of falling stock prices.
However, we are in the fortunate position of being able to put to work at more advantageous prices the substantial cash flows that come to the CPP Investment Board each month. High cash inflows allow us to dollar cost average by buying equities at lower prices, putting us in a stronger position to benefit when markets recover.” Based on the Canada Pension Plan’s actuarial assumptions, contributions are expected to exceed benefit payments until 2021, providing a 20-year investment horizon before investment income is needed to pay pensions. In the next 10 years alone, the CPP Investment Board expects to receive $80 billion in cash from the Canada Pension Plan. Based on the federal Chief Actuary’s investment and actuarial assumptions, the value of assets under management is expected to grow to at least $130 billion by 2011.
“Our team will be working hard in the years ahead to create the value added necessary to meet or exceed the Chief Actuary’s expectations,” Mr. MacNaughton said. The CPP Investment Board is a crown corporation created by an Act of Parliament in December 1997. It invests in capital markets funds not needed by the Canada Pension Plan to pay current pensions. Cash flows are currently invested only in equities to balance the bond portfolio owned by the Canada Pension Plan. By increasing the long-term value of funds, the CPP Investment Board will help the Plan to keep its pension promise to Canadians. The CPP Investment Board is governed and managed independently of the Canada Pension Plan and at arm’s length from governments. The Annual Report for the CPP Investment Board’s 2001 fiscal year will be released in the last week of June. In addition to audited financial statements, it will include information and commentary on the CPP Investment Board’s governance, strategic plan, investment and risk management frameworks, active investment management plans, including the expansion beyond public equity markets into private equity markets, and performance results.
A teleconference has been scheduled for May 23, 2001 at 10:00 a.m. e.d.t. If you would like to participate, please contact Julie Winget at 416-868-6664. Note – Re: Performance Comparisons with Other Large Public Sector Funds It is difficult to compare the results of one pension fund with another because of major differences such as asset mix policy, risk tolerance and diversity of investments. For example, the CPP Investment Board presently invests only in equities. Other funds also own assets such as bonds and real estate. In addition, our year-end is March 31 while most funds report on a calendar year basis. The returns of large public sector pension funds that reported calendar 2000 returns ranged between 6.2% and 10.2%. The CPP Investment Board’s 12-month return for calendar 2000 was 12.2%, reflecting our 100 percent commitment to equities. This return does not include the income of the Canada Pension Plan bond portfolio and cash reserves.
For further information contact:
John A. MacNaughton
President and Chief Executive Officer
(416) 868-4077