CPPIB Gains 11.6% in Fiscal 2018

Benefits Canada reports, CPPIB posts 11.6% return for 2018 fiscal year:
The Canada Pension Plan Investment Board posted a net annual return of 11.6 per cent as the end of its fiscal year on March 31, 2018.

Adding $39.4 billion to its overall holdings, the fund now boasts $356.1 billion in assets under management. The increase included a $36.7-billion return after all expenses and $2.7 billion in contributions from Canadian workers.

“While strong annual results are encouraging, we maintain a long-term perspective,” said Mark Machin, president and chief executive officer of the CPPIB, in a news release.

“We fully expect that one year in 10, the value of the fund will drop by at least 12.5 per cent. The long-term investment horizon of the fund means that we are well prepared to withstand short-term market declines in order to maximize long-term returns.”

Results from Canadian public equity were lacklustre compared with the prior year, pulling in a 2.2 per cent return versus 19.2 per cent in 2017. The fund also decreased its holdings in that segment of its portfolio, finishing the 2018 fiscal year with $8.7 billion in Canadian equity and $1.8 billion less than in 2017. Foreign and emerging markets fared better, with returns of 11 per cent and 18.6 per cent, respectively, but still not reaching the 18.9 per cent that each category gained the prior year. The CPPIB increased its holdings in both areas, raising foreign equity by $14.9 billion to reach $103.3 billion and make up 29 per cent of the fund’s overall portfolio. Emerging market equities rose by $8.5 billion to reach $26.4 billion.

Foreign private equity vastly outstripped the fund’s allocation to Canadian private equity, making up 17.3 per cent and 0.3 per cent of its assets, respectively. The former saw a $10.2 billion increase in the last fiscal year. As for returns, foreign and emerging market private equity earned 16 per cent and 19.5 per cent, respectively, compared to 1.8 per cent for its Canadian investments in that asset class.

Marketable bonds saw a 1.6 per cent gain, compared with 2017’s negative return of 0.9 per cent. Non-marketable bonds fared better, posting a 2.7 per cent gain, versus 1.8 per cent last year.

Real estate grew to $46.1 billion in assets. It posted a 9.4 per cent return, up from 8.3 per cent the year before. Infrastructure grew by $4.3 billion to $28.6 billion and pulled in a 15.2 per cent return, a significant increase from the 7.4 per cent it posted in 2017. Other real assets, consisting of natural resources and agriculture investments, saw a negative return of 9.8 per cent, compared with a positive result of 16.8 per cent the year before.

While fund’s credit investments grew to $22.6 billion from $17.6 billion, the segment’s return fell to 6.9 per cent from 13.9 per cent in 2017.

Notably, the board did see higher costs than the prior year, spending $3.2 billion versus $2.8 billion during the 2017 fiscal period. The release noted operating expenses for the fund were 31.5 basis points, falling in line with its five-year average of 31.6. Other costs consisted of $1 billion in management expenses, $709 million in performance fees paid to external managers and $401 million in transaction costs.

The release noted management expenses increased because of the growth in the fund’s assets with external managers, as well as higher performance fees paid to them due to the strong returns they were able to deliver in the past year.
In his article covering CPPIB's results, Matt Scuffham of Reuters notes the following:
The CPPIB, which manages Canada’s national pension fund and invests on behalf of 20 million Canadians, said it ended the year ended March 31 with net assets of C$356.1 billion ($278.7 billion), compared with C$316.7 billion a year ago.

“Soaring public equity markets through the first nine months of the fiscal year were the primary source of growth. As volatility returned during the fourth quarter, our private holdings proved resilient, adding significant value,” Chief Executive Mark Machin said in a statement.

The fund has diversified internationally, becoming one of the world’s biggest investors in infrastructure and real estate.

It is also a major global investor in equities and bonds, with most of its earnings derived from overseas.
In her article going over CPPIB's results, Jacqueline Nelson of the Globe and Mail notes CPPIB is charting its next strategic direction amid challenging investment conditions:
In CPPIB’s annual report, Mr. Machin delved into the challenges of putting the fund’s capital to work in an investment climate of public market volatility, low yields on income-oriented investments and fierce competition for pricey private market assets – all chased by more large institutional investors.

“While recent increased volatility has dampened values a little, assets of most every type remain expensive from a historical perspective,” he wrote in the report. “This not only makes it hard to pick our spots; it elevates the risk of a correlated decline in prices in both public and private markets. In fact, it is generally expected that as the economic cycle in the U.S. in particular – and to some extent in the rest of the world – becomes more mature, then most financial assets are likely to generally underperform.”

For CPPIB, all this means expected lower returns in many assets over the next few years, and more work trying to carve out where it’s most likely to be able to grow investments over the long term. The fund performed 275 global transactions in fiscal 2018, up from 182 in 2017. The fund said 60 of these transactions were valued at more than $300-million each.

CPPIB’s board of directors also recently endorsed CPPIB’s newly developed 2025 strategic direction, which updates the fund’s 2020 plan. Board chairperson Heather Munroe-Blum said this new approach looks at, among other things, “the growing significance of emerging markets to the world economy, and the need to leverage the power of technology and data to position the organization to better drive investment decisions and operational excellence.”

One goal set for 2025 is that the fund will invest up to a third of its assets in emerging markets, with the expectation that these places will account for 47 per cent of global GDP. This would about double the $56.1-billion, or 15.8 per cent of the fund’s total assets, allocated to emerging markets right now – much of that in China.

CPPIB also expects to spend money to improve its technology and data capabilities that it says will lead to better investment decisions, among other things.
CPPIB put out a press release, CPP Fund Totals $356.1 Billion at 2018 Fiscal Year-End:
Highlights include:
  • Net annual return of 11.6%
  • Assets increase by $39.4 billion second largest annual growth since inception
  • Investment portfolio outperforms benchmark by $5.7 billion after all costs
  • Compounded dollar value-added since inception approaching $20 billion
  • Operating expenses of 31.5 basis points in line with five-year average of 31.6 bps

TORONTO, May 17, 2018 (GLOBE NEWSWIRE) -- The CPP Fund ended its fiscal year on March 31, 2018, with net assets of $356.1 billion compared to $316.7 billion at the end of fiscal 2017. The $39.4 billion increase in assets consisted of $36.7 billion in net income after all CPPIB costs and $2.7 billion in net Canada Pension Plan (CPP) contributions.

The investment portfolio achieved 10-year and five-year annualized net nominal returns of 8.0% and 12.1%, respectively. For the fiscal year, the investment portfolio returned 11.6% net of all CPPIB costs.

“The Fund reached a new high of $356.1 billion at the end of our fiscal year due to continued strong equity markets,” said Mark Machin, President & Chief Executive Officer, Canada Pension Plan Investment Board (CPPIB). “Soaring public equity markets through the first nine months of the fiscal year were the primary source of growth. As volatility returned during the fourth quarter, our private holdings proved resilient, adding significant value.”

In fiscal 2018, CPPIB continued to prudently execute its long-term investment strategy of seeking value-building growth while also diversifying the CPP Fund across multiple geographies and asset classes. All of CPPIB’s investment departments provided positive returns in the fiscal year.

“Our investment teams continue to execute on diversification,” added Mr. Machin. “Our investment framework actively seeks to manage risk, maintain balance and help contribute to the sustainability of the CPP itself. 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 now contributed $150.1 billion in cumulative net income to the Fund after all CPPIB costs. Since CPPIB’s inception in 1999, it has contributed $215.6 billion on a net basis.

“While strong annual results are encouraging, we maintain a long-term perspective,” added Mr. Machin. “We fully expect that one year in 10, the value of the Fund will drop by at least 12.5%. The long-term investment horizon of the Fund means that we are well prepared to withstand short-term market declines in order to maximize long-term returns.” (click on image)

Long-Term Sustainability

CPPIB’s 10-year annualized net nominal rate of return of 8.0%, or 6.2% on a net real rate of return basis, was above the Chief Actuary’s assumption of an average 3.9% return over the 75-year projection period of his report. The real rate of return is reported net of all CPPIB costs to be consistent with the Chief Actuary’s approach.

“While periodic economic stress affecting global markets will place downward pressure on the Fund, our portfolio is designed to be resilient over longer periods and weather the ups and downs of multiple market cycles,” added Mr. Machin. “Through our investment programs, global footprint and top talent, we are helping to ensure that the CPP will be there for people who aren’t even born yet.”

In the most recent triennial review released in September 2016, the Chief Actuary of Canada reaffirmed that, as at December 31, 2015, the CPP remains sustainable at the current contribution rate of 9.9% throughout the forward-looking 75-year period covered by the actuarial report. The Chief Actuary’s projections are based on the assumption that the Fund’s prospective real rate of return, which takes into account the impact of inflation, will average 3.9% over the 75-year period.

The Chief Actuary’s report confirmed that the Fund’s performance was ahead of projections for the 2013-2015 period as investment income was 248%, or $70 billion, higher than anticipated.

Relative Performance against the Reference Portfolio

CPPIB also measures its performance against a market-based benchmark, the Reference Portfolio, representing a passive portfolio of public market indexes that reflect the level of long-term total risk that we believe is appropriate for the Fund.

In fiscal 2018, the Investment Portfolio’s net return of 11.6% outperformed the Reference Portfolio’s return of 9.8% by 1.8%. The Investment Portfolio’s single-year net dollar value-added return was $5.7 billion above the Reference Portfolio return, after deducting all costs from the Investment Portfolio and CPPIB’s operations.

The Investment Portfolio grows not only through the value added in single years but also through the compounding effect of continuous reinvestment of gains (or losses). We calculate compounded dollar value-added as the total net dollars CPPIB has added to the long-term Investment Portfolio through all sources of active management, above Reference Portfolio returns alone. CPPIB has generated $19.3 billion of compounded dollar value-added, after all costs, since the inception of active management at April 1, 2006.

“Our active management strategy has added nearly $20 billion to the Fund since the start of the active management program in 2006, and created a more resilient portfolio by taking advantage of our comparative advantages,” said Mr. Machin. “Strong relative returns this year is certainly good to see, 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.”

Managing CPPIB Costs

CPPIB is committed to maintaining cost discipline. This fiscal year operating expense ratio is lower than both the fiscal 2016 and 2015 ratios, and remained relatively flat compared to fiscal 2017. Importantly, our focus continues to be creating a global platform that will deliver value-building growth over the long term, after all costs.

To generate the $36.7 billion of net income from operations after all costs, CPPIB incurred costs of $3,192 million for fiscal 2018, compared to $2,834 million for the previous year. CPPIB costs for fiscal 2018 consisted of $1,053 million, or 31.5 basis points, of operating expenses; $1,029 million in management fees and $709 million in performance fees paid to external managers; and $401 million of transaction costs. CPPIB reports on these distinct cost categories, as each is materially different in purpose, substance and variability. We report the net investment income that our investment departments generate after deducting these fees and costs. We then report on total Fund performance net of these fees and costs, as well as CPPIB’s overall operating expenses.

Investment management fees increased primarily due to the strong returns generated by our external managers resulting in higher performance fees paid as well as the continued growth in the level of assets and commitments with external managers.

Transaction costs decreased by $46 million compared to the prior year. Transaction costs vary from year to year as they are directly correlated to the number, size and complexity of our investing activities in any given period.

Portfolio Performance by Asset Class

Portfolio performance by asset class is included in the table below (click on image).

A more detailed breakdown of performance by investment department is included in the CPPIB Annual Report for fiscal 2018, which is available at www.cppib.com.

Asset Mix

We continued to diversify the portfolio by the return-risk characteristics of various assets and countries during fiscal 2018. Canadian assets represented 15.1% of the portfolio, and totalled $54.0 billion. Assets outside of Canada represented 84.9% of the portfolio, and totalled $302.3 billion. (click on image)

Investment Highlights:

Highlights for the year include:

Public Market Investments
  • Invested a combined US$391 million in ReNew Power Ventures Pvt. Ltd. (ReNew Power), one of India’s leading clean energy companies with more than 5,600 megawatts of capacity diversified across wind, utility-scale solar and rooftop solar power-producing assets.
  • Invested a further €200 million in Elis SA (Elis), a market leader in the industrial laundry, textile rental, and hygiene and well-being industry in Europe and Latin America, to help fund its transformational acquisition of Berendsen. Combined with additional open market purchases, CPPIB’s ownership stake in Elis is now approximately 9%.
Investment Partnerships
  • Committed US$380 million to a newly formed fund managed by Enfoca through a direct secondary transaction. The fund will focus on investing in Peruvian mid-market companies. CPPIB led the transaction with Goldman Sachs Asset Management LP’s Vintage Funds as co-lead.
  • Invested US$250 million in Meituan-Dianping, China’s largest service-focused e-commerce platform, alongside Tencent, Trustbridge and other investors through a Series C financing. Meituan-Dianping connects more than 280 million annual active buying consumers with more than five million annual active local merchants across 2,800 cities in China.
  • Acquired Nord Anglia Education, Inc. (Nord Anglia) alongside Baring Private Equity Asia for US$4.3 billion, including the repayment of debt. Nord Anglia operates more than 45 leading premium international schools globally in 15 countries in Asia, Europe, the Middle East and North America.
Private Investments
  • Entered into a partnership agreement with Thomson Reuters for its Financial & Risk (F&R) business as part of a consortium led by Blackstone. Under the partnership agreement, the consortium will, subject to regulatory approvals, own 55% of the equity in a new corporation created to hold the F&R business and Thomson Reuters will retain a 45% equity stake, at an overall valuation of US$20 billion. Thomson Reuters F&R is a world-leading data and financial technology platform.
  • Invested approximately £525 million for a 30% stake in BGL Group, a U.K.-based leading digital distributor of insurance and household financial services. BGL Group owns brands including comparethemarket.com, LesFurets.com and BeagleStreet.com.
  • Agreed to purchase a portfolio of Spanish non-performing real estate developer loans with a gross book value of approximately €700 million from Banco de Sabadell, S.A.
  • Invested US$900 million in the take-private of Calpine Corporation, one of the largest independent power generators in the United States. CPPIB made this investment as part of a consortium comprised of Energy Capital Partners and other investors for US$5.6 billion in cash.
Real Assets
  • Signed an agreement with Votorantim Energia, the energy subsidiary of Brazil’s Votorantim Group, to form a new joint venture focusing on investments and developments in the Brazilian power generation sector. The joint venture has initially acquired two operational wind parks in Northeastern Brazil with combined generation capacity of 565 megawatts. As part of the transaction, CPPIB has initially contributed approximately R$ 690 million (C$272 million) in equity. The acquisitions are subject to customary closing conditions and regulatory approvals.
  • Partnered with Alpha Investment Partners Limited (Alpha) and Keppel Data Centres Holding Pte. Ltd., for an initial allocation of up to US$350 million alongside the Alpha Data Centre Fund (ADCF), with the option to invest another US$150 million. Launched in 2016 by Alpha, ADCF aims to develop a quality portfolio of data centre assets in key data centre hubs across Asia Pacific and Europe.
  • Signed an agreement with Gas Natural Fenosa to acquire a 20% minority equity interest, alongside Allianz Capital Partners (ACP), in Gas Natural Fenosa’s Spanish natural gas distribution business (Nedgia) for €1,500 million. CPPIB will invest €900 million and ACP will invest €600 million. Nedgia is the largest gas distribution network in Spain with more than 5.3 million connection points and serving some 1,100 municipalities.
  • Invested US$928 million in in the privatization of Parkway, Inc. (Parkway), a Houston-based real estate investment trust, through the acquisition of the company’s outstanding common shares. Parkway owns one of the largest office portfolios in Houston, totalling approximately 8.7 million square feet across four campuses.
Asset Dispositions:

Highlights for the year include:

Private Investments
  • Sold our 18% ownership stake in ista International GmbH, a European heat and water sub-metering company. Net proceeds to CPPIB from the sale were €659 million. CPPIB acquired its ownership interest in 2013.
  • Sold our 25% stake in AWAS, a Dublin-based aircraft lessor, to Dubai Aerospace Enterprise. The sale was made alongside Terra Firma. Net proceeds to CPPIB from the sale were US$542 million. CPPIB had been an investor in AWAS since 2006.
Real Assets
  • Sold our 50% ownership interest in Constitution Square, an Ottawa office property. Net proceeds to CPPIB from the sale were approximately C$240 million before customary closing adjustments. CPPIB acquired its ownership interest in 2005.
Investment highlights following year end include:
  • Signed agreements with Enbridge Inc. and its related entities (Enbridge) to acquire 49% of Enbridge’s interests in select North American onshore renewable power assets, as well as 49% of Enbridge’s interests in two German offshore wind projects, for approximately C$1.75 billion.
  • Announced that CPPIB and Allianz Capital Partners (ACP), on behalf of Allianz insurance companies, are acting as anchor investors in the first private infrastructure investment trust in India, known as IndInfravit Trust (IndInfravit). Sponsored by L&T Infrastructure Development Projects Limited, IndInfravit will initially acquire five operational toll roads in India. CPPIB will invest approximately C$200 million for 30% of IndInfravit units.
  • Entered into a joint venture partnership with GIC to acquire Kumho Asiana Main Tower, a Grade A office building in Seoul, South Korea, from Kumho Asiana Group, parent of Asiana Airlines, for KRW418 billion (US$380 million). CPPIB and GIC will each own a 50% stake in this landmark property, which is located in Seoul’s Central Business District.
  • Acquired a US$400 million interest in a US$3.3 billion A-note secured by a Class-A office building located in the Central Business District of Hong Kong.
  • Signed an agreement to acquire a portfolio of six Canadian operating wind and solar power projects from NextEra Energy Partners, LP for C$741 million, inclusive of working capital and subject to customary adjustments. The transaction is subject to customary regulatory approvals and closing conditions.
  • Invested an additional INR 9.38 billion (C$185 million) into the Island Star Malls Developers Pvt. Ltd. (ISMDPL), the strategic investment platform it co-owns with The Phoenix Mills Limited (PML). Through this second tranche, CPPIB’s total investments into ISMDPL is now INR 16.62 billion (C$328 million), for a 49% ownership stake.
Corporate Highlights:
  • On April 24, 2018, CPPIB announced the following senior executive appointments, effective June 1, 2018:
    • John Graham was appointed Senior Managing Director, and will lead the Credit Investments team.
    • Suyi Kim was appointed Senior Managing Director & Head of Asia Pacific.
    • Deborah Orida was appointed Senior Managing Director & Global Head of Active Equities.
    • Poul Winslow was appointed Senior Managing Director & Global Head of Capital Markets and Factor Investing.
    • Shane Feeney, Senior Managing Director & Global Head of Private Investments, will become Senior Managing Director & Global Head of Private Equity.
  • Following fiscal year end, Scott Lawrence was appointed as Managing Director, Head of Infrastructure. Scott was previously Head of Fundamental Equities and takes over the Infrastructure role following the departure of Cressida Hogg who had led the group since 2014.
  • CPPIB Capital Inc. (CPPIB Capital), a wholly owned subsidiary of CPPIB, completed five international debt offerings, totalling US$3.5 billion and €3.0 billion, ranging in tenor from 21 months to 15 years. CPPIB utilizes a conservative amount of short- and medium-term debt as one of several tools to manage our investment operations. Debt issuance gives CPPIB flexibility to fund investments that may not match our contribution cycle. Net proceeds from the private placements will be used by CPPIB for general corporate purposes.
About Canada Pension Plan Investment Board

Canada Pension Plan Investment Board (CPPIB) is a professional investment management organization that invests the funds not needed by the Canada Pension Plan (CPP) to pay current benefits on behalf of 20 million contributors and beneficiaries. In order to build a diversified portfolio of CPP assets, CPPIB invests in public equities, private equities, real estate, infrastructure and fixed income instruments. Headquartered in Toronto, with offices in Hong Kong, London, Luxembourg, Mumbai, New York City, São Paulo and Sydney, CPPIB is governed and managed independently of the Canada Pension Plan and at arm's length from governments. At March 31, 2018, the CPP Fund totalled $356.1 billion. For more information about CPPIB,please visit www.cppib.com or follow us on LinkedIn, Facebook or Twitter.


Certain statements included in this press release constitute forward-looking statements with respect to CPPIB’s future financial or business performance, strategies or expectations. Forward-looking statements are typically identified by words or phrases such as “trend,” “potential,” “opportunity,” “believe,” “expect,” “anticipate,” “current,” “intention,” “estimate,” “position,” “assume,” “outlook,” “continue,” “remain,” “maintain,” “sustain,” “seek,” “achieve,” and similar expressions, or future or conditional verbs such as “will,” “would,” “should,” “could,” “may” and similar expressions. The forward-looking statements are not historical facts but reflect CPPIB's current expectations regarding future results or events. These forward-looking statements are subject to a number of risks and uncertainties that could cause actual results or events to differ materially from current expectations, including available investment income, intended acquisitions, regulatory and other approvals and general investment conditions. Although CPPIB believes that the assumptions inherent in the forward-looking statements are reasonable, forward-looking statements are not guarantees of future performance and, accordingly, readers are cautioned not to place undue reliance on such statements due to the inherent uncertainty therein. CPPIB does not undertake to publicly update such statements to reflect new information, future events, and changes in circumstances or for any other reason. The information contained on CPPIB’s website is not a part of this press release.
Earlier today, I spoke with Michel Leduc, CPPIB's Senior Managing Director & Global Head of Public Affairs and Communications.

I wanted to speak with Mark Machin, CPPIB's President and CEO, but he was booked "back to back" today and Michel was kind enough to fill in. I enjoyed our conversation, for a senior director of public affairs he sure knows his investments extremely well and truth be told, we covered a lot so I wanted to begin this comment by thanking him for taking the time to speak with me.

Before I begin, please take the time to read CPPIB's fiscal year 2018 Annual Report which is available here.

In her Chairperson's Report, Dr. Heather Munroe-Blum notes the following:
While CPPIB’s focus is firmly set on the long term, we are neither immune from nor indifferent to short-term events impacting global markets and investors. From natural disasters to geopolitical risks, to new federal pension developments with the creation of the additional stream of CPP, fiscal 2018 brought to both Board and Management a number of significant developmental considerations and related activities along with a sustained focus on long-term investment performance.

As our CEO, Mark Machin, completes his second year at the helm of CPPIB, he continues to demonstrate that CPPIB is in strong, capable hands. He leads the enterprise with resolute focus on CPPIB’s mandate and special public purpose, its long-term investment strategy, organizational culture and talent development. With his leadership and an outstanding community of CPPIB colleagues, the organization continues to move forward on a firm course through an important period of development against a global backdrop of some uncertainty.
And on CPP's enhancement, she notes:
In addition to overseeing the organization as it embarks on the CPPIB 2025 strategic direction, the Board is also intently focused on the oversight of CPPIB’s preparations for additional CPP contributions, which begin on January 1, 2019.

The additional contributions mean the CPP Fund will grow larger and faster. The Board has been deeply engaged with Management, seeking confidence about how the different risk profiles of the existing and additional parts of the CPP will be managed, how to ensure the best interests of both parts, what operating efficiencies may be achieved and what opportunities might be gained with a larger investment Fund to manage. The Board is engaged with establishing the most appropriate governance framework to ensure CPPIB is well-positioned to manage these additional assets.
Dr. Munroe-Blum states "CPP enhancement is an inflection point for CPPIB" and she goes into detail. I urge you take the time to read her entire Chairperson's Report (pages 4-6).

You should also take the time to read the President's Message (pages 7-10) where Mark Machin goes into detail on the investment climate, CPPIB's fiscal 2018 performance, building the Fund for generations, the strategic plan, climate change and the priorities for the upcoming year.

Both the Chairperson and the President go into a lot of detail, much more than others do in their annual report, so take the time to read what they wrote even if you don't have time to read the entire Annual Report.

As shown below, the CPP Fund is expected to grow to $1.5 trillion in 2040 (click on image):

This growth will place increasing demands on CPPIB's senior management, its Board, its employees and they are preparing for it against a challenging investment and legislative backdrop where things continuously evolve.

Michel Leduc and I started speaking on enhanced CPP and how increased funds will be handled starting in January 2019 (see page 21 of fiscal 2018 Annual Report).

The focus will remain on investing for the long term and properly diversifying assets across global public and private markets.

Michel told me the 8% annualized ten-year return includes the global financial crisis and the Fund's performance experienced swings of -18% to +18% during this period.

In the press release, Mark Machin was honest and warned Canadians not to just look at the good results from the last two fiscal years to project them forward:
“While strong annual results are encouraging, we maintain a long-term perspective,” added Mr. Machin. “We fully expect that one year in 10, the value of the Fund will drop by at least 12.5%. The long-term investment horizon of the Fund means that we are well prepared to withstand short-term market declines in order to maximize long-term returns.” 
In any given year, the CPP Fund can experience a loss of at least 12.5%. It might be bigger, as it was back in fiscal 2009 which included the 2008 crisis, and that is perfectly normal and expected on their part.

I see too many people looking at these returns projecting them forward and all I can say is stop drinking the Kool Aid, returns will necessarily come down for all asset classes in the next few years, and be warned, this is as good as it gets for CPPIB and all other large institutional investors.

Sorry, I need to get that off my chest because I know how people only tend to look at the latest results and project them forward.

I'll give you one area where I see trouble for CPPIB and other pensions over the next year: emerging markets which have helped the Fund a lot over the last two fiscal years. Read my latest comment on whether a summer rally is upon us and read why Harvard professor Carmen Reinhart is worried about emerging markets, more so than in 2008.

My very short-term trading thoughts are if the US dollar stabilizes here, emerging market shares (EEM) could rally, but use this rally to short them or at least underweight the asset class.

Of course, Michel Leduc agreed with me, things can move either way in the short-run, but over the long run, CPPIB wants to increase its allocation to public and private emerging market investments to 30% in 2025 from the current 15.8% allocation, "but that all depends on available opportunities and keeping the focus on risk-adjusted returns".

He told me they're focused on three emerging markets: China, India and Brazil. He also told me Canada's Chief Actuary, Jean-Claude Ménard, was at their offices this week and asked: "Why do you still consider China an emerging market?". Good point.

I told him I like India because all the tech powerhouses are investing there (so is Walmart) and that tells me they have done their due diligence. I also told him I made a mistake back in April of stating CPPIB is investing big in India when truth be told, the Fund's investments in emerging markets are still small relative to what emerging market economies represent as a share of global GDP (the problem with emerging markets is rule of law and developed, transparent and liquid capital markets).

Michel made the point of CPPIB being very transparent in terms of costs and performance. This is what helped CPPIB Capital get a great credit rating from DBRS.

Michel told me CPPIB's Reference Portfolio is the equivalent of 85% global equity and 15% Canadian government bonds and that in calendar year 2017, it gained 20% and "no fund with 40% invested in private markets can beat such a benchmark."

Of course, that all changed in Q1 of this year when public markets got whacked and volatility picked up. "That's when the benefits of our diversified approach took hold and we were able to add meaningful value over our benchmark."

I told him that reminds me of a conversation I had with Mark Wiseman, CPPIB's former President and CEO when he told me flat out: "We underperform in a raging bull market when public markets are soaring but outperform in a bear market and that's exactly what we expect and want."

Think about it this way, say you're popping a 20%+ annual return in a raging bull market for five years in a row and you think you're a financial genius and then one year "BOOM!", you get whacked 50% or more as markets get clobbered. Good luck trying to make up those losses.

Well, a pension fund like CPPIB which manages over $300 billion and is growing fast doesn't want to experience anything close to a 50% drawdown in bad years which is why it has diversified its portfolio into global public and private investments which are less volatile by definition and provide more stable sources of income.

Capiche? This is why these big funds invest in real estate, infrastructure and private equity, they don't want to be solely exposed to global stocks and bonds and they want to capitalize on their long investment horizon to take advantage of opportunities in public and private markets.

Anyways, getting back to my conversation with Michel, he told me CPPIB separates out its performance fees and stated that higher fees means higher net returns from external hedge funds and private equity funds. "For us, if we can invest a dollar elsewhere and get a higher net return, we see this as part of our fiduciary duty."

Interestingly, he told me co-investments in private equity weren't just to lower overall fees: "They're done when we can partner up with a manager who has expertise in a sector like technology on a bigger deal". So co-investments are based on scale and value of special expertise.

What else? He told me CPPIB is taking climate change very seriously, something which I read on pages 27 and 38 of the Annual Report (click on image):

I asked him if all this was part of a "fad' and he said: "No, it's driven by changes in legislation and changes in the attitudes of consumers and corporations which are increasing looking for LEED certified buildings and taking climate change very seriously."

On F/X, he told me what I already knew, CPPIB doesn't hedge currency risk (too costly) so in years where foreign currencies outperform the Canadian dollar, they gain more and vice versa in years where the loonie outperforms foreign currencies (mainly the USD, click on image):

Lastly, you need to compensate people properly for delivering the long-term results CPPIB has delivered (click on image):

Take the time to read the entire Annual Report and Compensation Discussion and Analysis starting on page 78 before jumping to any conclusions. CPPIB is the most important fund in Canada, you need to compensate its senior managers accordingly and fairly based on long-term performance, which they have delivered.

I thank Michel Leduc for taking the time to talk to me. I know I haven't done justice to our entire discussion but tried to focus on the important points. If there is anything I forgot, will ask him to email me so I can edit this comment.

Please take the time to read CPPIB's fiscal year 2018 Annual Report which is available here.

I congratulate Mark Machin and the entire team at CPPIB for delivering another excellent year but I warn all of you, the good years are coming to an end, so prepare for much lower returns ahead.

Nevertheless, I also know that no matter how bad markets get, the folks at CPPIB are doing a great job and CPP is a great deal for Canadians.

Below,  CPPIB's CEO Mark Machin discusses the board's investment strategy with Bloomberg's Amanda Lang on "Bloomberg Markets."

Also, a clip from my recent comment on CPPIB's buying spree. Mark Machin discusses how to align asset owners and asset managers for the long term by optimizing investment mandates. He speaks with Alison Loat of FCLTGlobaland.