CPPIB Gains 3% in Q3 FY2011

The Montreal Gazette reports, CPP investment board boasts record assets:

The Canada Pension Plan Investment Board, which manages surplus contributions for the Canada Pension Plan, said Thursday its total assets were valued at a record $140.1 billion at Dec. 31, the end of the third quarter of fiscal 2011, up from $138.6 billion at Sept. 30.

The rate of return was three per cent for the quarter and 8.3 per cent for the nine months.

Investment income gained from favourable equity markets, the CPPIB said. Equities make up more than 50 per cent of its holdings. During the latest quarter, it paid out $2.4 billion in benefits; which are normally heavier in the last half of the fiscal year.

CEO David Denison said the board will continue to boost its property and infrastructure investments to improve its long-term income streams. The valuations for many of these investments will be higher when the board reports for the full year.

Infrastructure holdings were 6.8 per cent of assets at Dec. 31, up from 4.6 per cent at March 31. Real estate composed 6.6 per cent, up from 5.5 per cent.

The board manages the Canada Pension Plan investments on behalf of 17 million contributors and pensioners across the country.

I invite you to carefully read CPPIB's press release. Pensions & Investments published a Bloomberg article, CPPIB gains 3% in latest quarter:

The Canada Pension Plan Investment Board, Toronto, reported an investment gain of 3% in its fiscal third quarter as stock markets rose.

Investment income for the three months ended Dec. 31 was C$3.9 billion (US$3.92 billion), according to a statement released Thursday. Assets rose to C$140.1 billion, from C$138.6 billion on Sept. 30.

“Public equity markets have been the key driver,” David Denison, president and CEO, said in an interview. It “was a very solid quarter for Canadian equity markets and really all international markets.”

Returns in the period were partly offset by cash outflows of C$2.4 billion to pay benefits.

The board had a five-year annualized return rate of 3.5%, and a 10-year rate of 5.6%.

CPPIB’s performance missed the average 4.3% return for the country’s pension funds, according to a January report by RBC Dexia Investor Services.

The board will pursue more private equity deals, including real estate transactions, this year, Mr. Denison said.

Private equity deals are likely to increase in 2011 as debt markets improve and availability of financing improves, he said. Opportunities to invest in real estate may also surge as “an incredible amount” of real estate debt financing matures this year through 2013, he said.

“We’re very focused on the major real estate markets,” Mr. Denison said. That includes the U.S., U.K., Europe, Australia and some emerging markets including China and Brazil.

Finally, aiCIO reports, CPPIB Pursues US Commercial Real Estate:

The head of one of Canada's most active global investors has revealed that it is eyeing US commercial property.

David Denison, chief executive of the Canada Pension Plan Investment Board (CPPIB), which oversees $140 billion in assets for Canada's national pension plan, told the Wall Street Journal that he has witnessed a spike in the availability of commercial real estate in the US, and that he is expecting that trend to continue.

Largely due to a number of major purchases in recent months, the fund reported its infrastructure holdings have ballooned over the past nine months to become 6.8% of the fund’s total assets with a total value of $9.5 billion, up from 4.6% of assets worth $5.8 billion as of last March 31. Meanwhile, real estate assets have grown to $9.2-billion in value representing 6.6% of the fund’s holdings, an increase from $7 billion or 5.5% of total assets last year.

The CPPIB is one of the country's most active investors. In September, Onex, Canada’s largest private-equity firm, and the CPPIB announced that they completed the acquisition of Tomkins, a UK-based manufacturer serving the general industrial, automotive and construction markets around the globe. The total value of the deal came to $5 billion — including equity and debt — making it the largest private-equity deal of the year. The deal surpassed Blackstone’s $4.8 billion acquisition of Dynegy, announced in August. The fund additionally spent $3.4-billion to buy privately owned Intoll Group of Australia, which held a 30% stake in the 407 toll highway north of Toronto. CPPIB also bought a further 10% stake in 407 highway from Spain’s Cintra Infraestructuras S.A., giving the CPPIB a 40% interest in the toll road.

“Consistent with our investment thesis for our proposed acquisition of Intoll Group, we believe 407 ETR is an attractive infrastructure asset and is a strategic fit with CPPIB’s portfolio and long-term investment mandate,” said André Bourbonnais, senior vice-president of private investments at CPPIB in a statement. “As an essential toll road in the Greater Toronto area, Highway 407 ETR is situated strategically to ease traffic congestion and to benefit from future urban growth in Toronto.”

Fueled by an increase in global stock markets, according to the CPPIB, the fund reported a 3% return on its assets -- an increase of 1% from the previous quarter. “It’s very much strategic. We think infrastructure assets and real estate assets make compelling good sense for a long-horizon fund such as the CPP and we’ve been acquiring assets on a disciplined basis over the past four or five years in each category,” Denison said, according to the Globe and Mail.

The Alberta Investment Management Corporation (AIMCo), the corporation created to manage Alberta's pension and sovereign wealth capital, has also embraced infrastructure, mirroring the move by other big pension funds to invest directly in infrastructure assets as opposed to relying on third-party funds. Earlier last month, in an effort to locate stable long-term investment vehicles with decent yields, the fund manager agreed to buy a 50% stake in Autopista Central, a motorway in Santiago, Chile. AIMCo's de Bever, often regarded as the king of infrastructure investment, told the Financial Times that such deals made sense because some infrastructure funds still carry 2-and-20 style performance fees (2% of assets and 20% of profits), noting that pensions have thus moved away from investing through third-party investing vehicles largely because of the fees involved.

Infrastructure investments are long duration assets and it makes sense for pensions to invest in this asset class. But I agree with Leo de Bever, you got to invest wisely or else you're just going to be doling out fees that will dilute your returns. And with so much global competition, the deals are getting pricey, so pick your investments wisely.

As for CPPIB, it's still mostly about beta, but their private assets, which are valued at the end of their fiscal year (March 31st) will help them deliver more alpha. What about buying US commercial real estate? Isn't that a risky move? Not really. I like US commercial real estate for two reasons: it's cheap (especially with the CAD near parity) and second, US employment will pick up from these levels. The best time to invest in commercial real estate is at the bottom of the employment cycle.

And what if things get worse and the US economy suffers a protracted period of debt deflation? If that happens, most pension funds are screwed. But if you're going to make money in the long-run, now is a good time to make some wise contrarian bets. CPPIB is doing just that.