Canada Pension Plan Returns 11.6% in Fiscal 2018

CEO expects fund to report double-digit losses once every 10 years.

The Canada Pension Plan’s (CPP) investment portfolio returned 11.6% net of all costs for the fiscal year ended March 31, outperforming its benchmark of 9.8%, and helping boost the fund’s total net assets to a new high of C$356.1 billion ($277.7 billion) from C$316.7 billion at the end of fiscal 2017.

“Soaring public equity markets through the first nine months of the fiscal year were the primary source of growth,” Mark Machin, CEO of Canada Pension Plan Investment Board (CPPIB), said in a release. “As volatility returned during the fourth quarter, our private holdings proved resilient, adding significant value.”

The investment board manages Canada’s national pension fund on behalf of 20 million Canadians. Despite the results, Machin said he expects the fund’s value will fall by at least 12.5% in a single year approximately once per decade.

“Strong relative returns this year is certainly good to see,” he said, “but we expect significant swings in performance relative to this benchmark in any single year because of our deliberate choice to build a prudently diversified portfolio beyond just public equities and bonds.”

The investment portfolio’s five-year annualized net nominal return was 12.1%, while its 10-year annualized net nominal return was 8.0%. The C$39.4 billion increase in assets in 2018 consisted of C$36.7 billion in net income after all CPPIB costs, and C$2.7 billion in net contributions. The fund also said all of its investment departments provided positive returns during the fiscal year.

“Our investment framework actively seeks to manage risk, maintain balance, and help contribute to the sustainability of the CPP itself,” said Machin. “While we don’t expect every investment department to produce gains in any given year by design, all our departments made strong contributions this fiscal year.”

In the five-year period up to and including fiscal 2018, CPPIB has contributed C$150.1 billion in cumulative net income to the fund after all costs, and C$215.6 billion since CPPIB’s inception in 1999.

The fund’s asset allocation as of March 31 was 38.8% in public equities, 20.3% in private equities, 12.9% in real estate, 11.1% in government bonds, cash, and absolute return strategies, 8% in infrastructure, 6.3% in credit investments, and 2.6% in other real assets.

The fund measures its performance against a market-based benchmark, which represents a passive portfolio of public market indexes that reflect the level of long-term total risk that it believes is appropriate for the fund. The fund said its investment portfolio’s single-year net dollar value-added return was C$5.7 billion more than the reference portfolio’s return, after deducting all costs.

For fiscal 2018, the fund also paid C$1.03 billion in management fees and C$709 million in performance fees to external managers, as well as C$401 million in transaction costs. However, Machin suggested that the fees were worth it due to the returns generated by active management.

“Our active management strategy has added nearly C$20 billion to the fund since the start of the active management program in 2006,” said Machin, “and created a more resilient portfolio by taking advantage of our comparative advantages.”

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