CPPIB's Explosive Growth?
Whether they realized it or not, many Canadians did rather well in 2012 investing in companies that included Nintendo, Rolls Royce and MasterCard.This article generated a tremendous amount of comments from readers, many of which show how utterly clueless Canadians are about CPPIB and how and why they invest across public and private markets throughout the world.
The odds are also good that many of us will one day reap the benefits of our holdings in Australian shopping malls, toll roads in Chile and the sale of a $964-million stake in Skype, which were just three of the more notable deals that passed last year through the ledgers of the Canada Pension Plan.
The fund behind Canada's largest single-purpose pension was worth just over $170 billion by the end of September 2012, up from some $152 billion in 2011, partly on the strength of investments that include overseas real estate and infrastructure, according to the Canada Pension Plan Investment Board.
The Toronto-based board has since 1997 invested the pension's funds on behalf of the government — tasked with helping keep the CPP, a key ingredient of so many retirement plans, in the black.
Residents of Quebec are paid through a separate pension, the QPP, which is Canada's second largest pension fund and is managed by Caisse de dépôt et placement du Québec. The Caisse, which manages not just the QPP but several other public pension and insurance plans, is also an aggressive investor in a wide range of domestic and international ventures, with net assets totalling $165.7 billion as of June 30, 2012.
Canadian funds are global leaders
CPPIB's investments returned 6.6 per cent for the end of its last fiscal year, back in March; just above the four per cent plus inflation the bookkeepers say is needed to keep the fund sustainable at current contribution levels.
CPPIB and other public Canadian pension funds, such as the Ontario Teachers' Pension Plan, are these days out-performing public pensions elsewhere in the world.
"They've clearly done a good job… it's been explosive growth," Paul Taylor, chief investment officer for fundamental Canadian equities at BMO Asset Management, said of of the investment board's management of CPP funds.
The investment income isn't currently needed to maintain pension payments. Those expenses are covered by CPP contributions, though that is expected to change in 2021. By that time, "a small portion" of the investment income will be needed to make ends meet, according to CCPIB.
"The growth of the overall asset pool has been meaningfully moved along by actual contributions versus market growth," says Taylor. Eight years from now, "we'll be paying more in benefits than we're collecting in contributions."
That and the overall poor state of retirement savings among Canadians have led to calls for changes to CPP.
Foreign and private equity
Last year saw CPPIB invest in AMP Capital Retail Trust, which is part owner of two prominent Australian shopping malls. It also paid $1.1 billion for a near-majority stake in five toll roads in Chile and almost tripled its initial investment in Skype when the online video call service was bought by Microsoft.
Those deals are in keeping with a trend at pension funds away from public equity. CPPIB's newly appointed and well-regarded CEO, Mark Wiseman, has said private equity, real estate and infrastructure are a better fit for the long view and relatively risk-averse tastes of CPPIB.
"We believe that private equity assets can produce risk-weighted returns that will outperform public equities in the long run,” he told the Globe and Mail in September 2012. CPP's holdings in publicly traded companies amounted to 33.2 per cent of the portfolio in June 2012, down from 45.7 per cent in June 2009.
The change "makes a lot of sense" says Taylor. "By keeping a big chunk of their assets away from the public market, they get away from all that short-term noise. They don't want to go on a roller-coaster."
CPPIB is also gradually adding more international investments. About 40 per cent of its portfolio was Canadian in 2012, and though the board says "a large part" of the fund will remain invested at home, the need for a diverse portfolio will over time see more of its cash go overseas.
"A strategy that invests predominantly in Canada would not be in the best interests of CPP contributors and beneficiaries," says CPPIB on its website.
Large deals closed recently in the U.S. include a joint effort to acquire cable TV distributor Suddenlink Communications and CPPIB's $400-million investment in the auto racing Formula One Group.
Upon closing the shopping mall deal, Wiseman also expressed a general interest in Australian investments in light of, among other things, the country's resilience during the recent global economic crisis.
Weapons, tobacco and Tootsie Rolls
Leo Kolivakis, publisher of the Pension Pulse blog and a former senior analyst at Caisse de dépôt et placement du Québec, applauds the board's recent deals in the U.S. but has some doubts about Down Under.
Australia's similarity to Canada — both are resource-based economies — does little for the diversity of CPPIB's portfolio, says Kolivakis, and there are signs of weakness in its real estate market.
"What concerns me about Australia is the same thing that concerns me about Canadian real estate … that consumers are over-leveraged," he said. "The housing bubble has burst over there, and it's going to burst over here as well.
"But having said that, these are smart guys, they've done their homework, and they don't need to sell tomorrow. They can keep an investment for a long time and sell when the time is right."
CPPIB invests in a dizzying array of companies — everything from Porsche, Coca-Cola and the maker of Tootsie Rolls to more controversial businesses such as alcohol and tobacco firms and some of the world's biggest weapons manufacturers, which might raise a few eyebrows among some of the fund's contributors. Anheuser-Busch, Imperial Tobacco and Lockheed Martin are among the portfolio's holdings, according to CPPIB's latest update.
The board is mandated by law to evaluate companies only by their investment potential; morals and politics generally don't enter the picture. And though some Canadians might not approve, changing the law that governs the CPP is exceptionally hard and requires the approval of two-thirds of the provinces representing two-thirds of the population, a point not lost on the politicians currently wrestling with how best to preserve the CPP for the future.
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It's quite sad but I don't blame Canadians as most never worked at a large public pension fund. And to be brutally honest, these Canadian pension funds can do a hell of a lot more in educating the public as to their approach by some simple on-line tutorials or short interviews with the heads of each department explaining their approach (after all, we live in an age of social media which facilitates communication!).
As far as the article, I do recall Sean Davidson calling me before Christmas and we talked at length. He asked me of what I thought of Mark Wiseman and the way CPPIB is managing assets. I told him Mark is a very nice guy and extremely intelligent as are the people at CPPIB.
I took the time to explain to him why CPPIB and other large Canadian pension funds are investing billions in private markets and that even though these investments carry significant risks too, it makes sense for these large funds to deploy capital into these asset classes (real estate, private equity, infrastructure).
As far as specific investments, I am bullish on America, and think the Suddenlink deal and US real estate will pay off handsomely. I made the mistake of saying the Australian real estate bubble has popped. It hasn't yet but my point was that just like Canada, Australia faces its own perfect storm ahead.
In fact, Canada and Australia are so similar that any risk committee looking at investing in private and public assets between these countries should carefully weigh the diversification benefits. But as I stated, the real estate team at CPPIB did their homework and they don't have to sell these private market investments anytime soon.
One thing Canadians need to realize is that we are extremely lucky to have CPPIB managing our pension contributions at arms-length from the government. I read articles on Greece's rotten oligarchy and my blood boils because I know all too well how corruption and government interference can destroy public pensions.
I'm tough on CPPIB, the Caisse, PSPIB and all large Canadian public pensions but at the end of the day, I would much rather have our public pension system and its governance than most other pension systems (with exception of the Danish, Dutch and Swedish systems which are also excellent).
That is why I'm an ardent supporter of expanding the Canada Pension Plan and was disappointed to see that finance ministers squandered yet another opportunity right before Christmas to do so. Someone sent me an email yesterday with a link to a study from Caledon Institute of Social Policy proposing to strengthen the Canada Pension Plan, and I said that I'm all for it.
At a time when most Canadian and US corporate pension plans are reeling, and some are now being placed on a watch list by regulators, we simply can't afford to drag our feet any longer on meaningful pension reform. We can make all the excuses in the world, pander to banks, insurance and mutual fund companies, but the best solution to bolstering our retirement system lies in bolstering our public defined-benefit plans.
Below, CBC reports on CPPIB's explosive growth. Cheer up Canada, the perfect storm will hit us hard but at least our pensions are being managed wisely and if politicians can finally do the right thing, our pensioners will benefit from expanding the Canada Pension Plan.