Tuesday, May 22, 2012

CPPIB Returns 6.6% in Fiscal 2012

Last week, the Canada Pension Plan Investment Board (CPPIB) reported its fiscal 2012 results:
The CPP Fund ended its fiscal year on March 31, 2012 with net assets of $161.6 billion, compared to $148.2 billion at the end of fiscal 2011, which marks a new all-time high for the Fund. The $13.4 billion increase in assets after operating expenses resulted from $9.9 billion in investment income and $3.9 billion in net CPP contributions. The portfolio returned 6.6% for fiscal 2012.

“Overall our investment programs delivered a strong performance in fiscal 2012 despite the challenging global equity markets over the past year,” said David Denison, President and CEO, CPP Investment Board (CPPIB). “While we witnessed dramatic fluctuations in global capital markets, our diversification of assets and growing number of global investments contributed to the Fund’s resilience.”

While Canadian equity markets suffered declines in the past year, CPPIB saw gains in its investments in U.S. and foreign equity markets, and in fixed income instruments. The Fund also realized gains from its investments in private markets, including holdings in infrastructure and real estate.

“The fiscal 2012 performance of the Fund benefitted from our active management programs and private market holdings, which are less sensitive to the excessive volatility experienced by the public equity markets,” said Mr. Denison. “This was a very active year for the Fund. As a long-term investor, we were able to take advantage of opportunities provided by market dislocations. We also expanded our global reach in order to participate in the growth and vitality of the world’s emerging markets.”

During fiscal 2012, CPPIB’s investment teams added a number of significant private equity, infrastructure, real estate and private debt investments to the portfolio. Some highlights of the year’s activities include:
  • We completed the acquisition of Kinetic Concepts, Inc., a leading global medical technology company, partnering alongside Apax Partners and the PSP Investment Board. This was the second largest private equity transaction globally in calendar 2011 and marks the third consecutive year that CPPIB has participated in the largest or second largest global private equity transaction.
  • We completed a wide range of real estate investments, including CPPIB’s largest real estate investment to date with the investment of $1.84 billion in a portfolio of regional malls and redevelopment sites in the U.S.; our first direct entry into the U.S. multifamily sector; our first direct investment in Hong Kong to acquire an industrial facility; two new retail investments in Brazil; a joint venture to develop Victoria Circle in a prime area of London’s West End; and a joint venture to develop a major office tower in downtown Toronto.
  • We completed the acquisition of a 24.1% stake in the Gassled Joint Venture, a major gas transport infrastructure in Norway, partnering alongside consortium members Allianz Capital Partners and a wholly-owned subsidiary of the Abu Dhabi Investment Authority.
  • We completed the acquisition of 99 Cents Only Stores, a U.S.-based deep discount retailer, partnering alongside Ares Management LLC and the Gold/Schiffer Family.
  • We participated in the sale of Skype Technologies to Microsoft Corporation. This sale of our direct investment yielded a significant return of approximately $964 million on our initial capital investment of $329 million which was made in September 2009.
  • We also announced a significant infrastructure investment following the fiscal year-end, entering an agreement to acquire a significant minority stake in five major Chilean toll roads for $1.14 billion.
Long-Term Sustainability

In the latest triennial review released in November 2010, the Chief Actuary of Canada reaffirmed that the CPP remains sustainable at the current contribution rate of 9.9% throughout the 75-year period of his report.

The Chief Actuary’s projections are based on the assumption that the Fund will attain an annualized 4.0% real rate of return.

“We are pleased that our 10-year annualized nominal rate of return of 6.2% is above the 4.0% prospective real rate of return that the Chief Actuary has incorporated in his latest report confirming the sustainability of the CPP, which was achieved even with the sharp declines in equity markets in recent years,” said Mr. Denison.

“Although the recovery that began in 2010 and continued into 2011 faltered slightly this year, the 10-year return reinforces our confidence in the ability of the Fund’s current portfolio composition and our active investment strategy to generate the returns required to sustain the CPP at its current contribution rate over the longer term.”

The Chief Actuary’s report also indicates that CPP contributions are expected to exceed annual benefits paid until 2021, providing a 9-year period before a portion of the investment income from the CPPIB will be needed to help pay pensions.

Performance Against Benchmarks

In fiscal 2007, CPPIB launched an active management strategy to generate additional returns for the Fund. CPPIB measures its performance against a market-based benchmark, the CPP Reference Portfolio, representing a passive portfolio of public market investments that can reasonably be expected to generate the long-term returns needed to help sustain the CPP at the current contribution rate.

In fiscal 2012, total portfolio returns outperformed the CPP Reference Portfolio, adding $3.1 billion to the Fund. Given our long-term view, we also track cumulative value-added performance for the six-year period since the inception of our active strategy. The cumulative outperformance added $4.8 billion to the CPP Fund. The net dollar value-added after expenses is $3.3 billion over this period.

“Our active management programs contributed to the Fund’s outperformance in fiscal 2012,” Mr. Denison said. “CPPIB has been increasing the proportion of the Fund’s holdings in private market investments, which are well suited to our size, certainty of assets and long-term investment horizon. Over time, we expect these assets to add even greater value given the inherent long duration of these types of investments.”
Active management definitely contributed to the CPP Fund's outperformance in fiscal 2012. The table below breaks down results by asset class (click on image to enlarge):

One note to CPPIB, when presenting such results, please present them along with the benchmark results for each asset class and the overall Fund results vs. benchmark.

However, CPPIB did present long-term results and breakdown of assets by asset asset class in their financial highlights and on their press release (click on image below to enlarge):

From the fiscal year highlights, it is worth noting that the Skype deal was by far the most significant deal as it significantly contributed to the Fund's added value. One senior pension fund manager from another major Canadian fund called the Skype deal a "home run for CPPIB" but added that "such deals don't come along every year."

Indeed, such deals don't come along every year but the CPP Fund recovered nicely from losses suffered in fiscal 2009 and delivered exceptionally strong results in fiscal 2012. I was told that the Fund's overall results were 200 basis points above the Reference Portfolio, which is an outstanding year by any measure.

Of course, the long-term performance is what ultimately counts and it looks like the diversification strategy into private markets is paying off in important ways. Those of you who want to read more on CPPIB's fiscal 2012 results can go over the details in the 2012 Annual Report, aptly titled "People. Purpose. Performance."

I would like to take a moment to thank David Denison for his tireless contribution in leading CPPIB during a turbulent and difficult period. Mr. Denison announced he is retiring from this position at the end of June to be replaced by Mark Wiseman, CPPIB's CIO.

In the past, I've been tough on CPPIB, especially when senior managers collected outrageous bonuses in fiscal 2009, but the truth is David Denison, Mark Wiseman and the rest of the team at CPPIB are doing an excellent job. One of my favorite speeches by David Denison on what it means to be a long-term investor explains a lot of their successful approach. It's a must read for every long-term investor trying to cope with these schizoid markets.

Finally, last Friday I warned my readers not to buy the hype on Facebook. And now Reuters' Alistair Barr is reporting that Facebook's lead underwriters, Morgan Stanley (MS), JP Morgan (JPM), and Goldman Sachs (GS) all cut their earnings forecasts for the company in the middle of the IPO roadshow.

Below, Aaron Task and Henry Blodget discuss the possible fallout from these shenanigans. Did hedge funds have privileged information? If so, the SEC needs to investigate and heads should roll!

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