CPP Investments Gains 5% in Q2 Fiscal 2021

Paula Sambo of Bloomberg News reports that CPP Investments posts 5% quarterly return as equities recover:

Canada Pension Plan Investment Board returned 5% in the quarter ending Sept. 30 on the strong rebound in equity markets, which lifted the value of public and private holdings in the country’s largest pension fund.

The fund’s growth to C$456.7 billion (US$349 billion) in its fiscal second quarter was attributed to gains in a broad range of asset classes, CPPIB said in a statement on Monday. A stock market pullback in September, driven by concerns over renewed lockdown measures and the lack of a new stimulus package in the U.S., tempered some of these gains.

“CPP Investments’ diversified fund performed well this quarter, generating strong returns,” Chief Executive Officer Mark Machin said in the statement. “However, we continue to be cautious about the months ahead given the highly uncertain economic fallout of Covid-19 and its effect on markets.”

Key Insights

  • Ten-year and five-year annualized nominal returns were 10.5% and 9.6%, respectively, net of costs
  • CPPIB’s additional account reached C$4.1 billion in assets versus C$3.3 billion the quarter before. Investment returns were 3%
    • This account is made up of additional contributions CPPIB started receiving in January 2019 after the government decided to expand the plan. CPPIB invests this money differently than its base account
  • “All of our investment departments generated positive returns this quarter. Our investment professionals continue to pursue opportunities that will bring value to the fund over the long term,” Machin said
  • CPPIB holds nearly C$44 billion in real estate. In May, Machin said office towers won’t stay out of favor forever.
    • “There’s probably going to be still robust demand for great office space in central locations,” Machin said in an interview with Bloomberg TV. “Once there is decent immunity across the population or some lowering of the mobility of the disease, you’ll get people wanting to be with each other. This is human nature and the office is a part of that.”
  • CPPIB held C$143.6 billion in public equities and C$112.2 billion in private equities as of Sept. 30, while government bonds accounted for C$97.4 billion of the portfolio and credit was C$55.2 billion
  • Machin told Bloomberg News last month that the fund is looking at deals in the travel industry, confident that it will enjoy a strong recovery when the Covid-19 pandemic eases. The fund subsequently said it would invest more in Viking Cruises
  • In September, CPPIB promoted Edwin Cass to the newly created role of chief investment officer amid a push to more than double its assets under management

I already covered Ed Cass's nomination to be CPP Investments' first-ever CIO here

Last week, I covered how CPP Investments is cruising for value.

Yesterday was the final day to report 13-F filings for Q1 for institutions and I checked out CPP Investments' top holdings and where they added last quarter:

As shown above, they added a tiny position in Carnival Corporation (CCL) but it's a pittance and nothing compared to what they added to Dell Technologies (DELL) or Snap Inc (SNAP) where they made a killing recently.

It confirms that CPP Investments might be cruising for value but it's in no rush to buy beaten down re-opening stocks. Maybe the vaccine news from Pfizer and Moderna will change all that but I doubt it.

That's why when CNBC Trading Nation tweeted this earlier:

I replied: "No rush, it's dead money for a while."

People get too excited with vaccines but the problem is they have no medical training and don't realize they're not a magic pill.

This morning I was listening to a real medical scientist who stated flat out: "We are encouraged by the news from Moderna and Pfizer but we need to review the full data set and have it peer reviewed."

That's a true medical scientist, she knows what she's talking about.

CPP Investments has to two doctors leading their organization: Dr. Mark Machin (CEO) and Dr. Heather Munroe-Blum who was reappointed as Chairperson of the Board for a term of three years ending in October 2023. 

They are both trained medical doctors who don't get carried away with media hype on vaccines.

Anyway, let's review CPP Investments' long press release on its second quarter Fiscal 2021 results:

Canada Pension Plan Investment Board (CPP Investments) ended its second quarter of fiscal 2021 on September 30, 2020, with net assets of $456.7 billion, compared to $434.4 billion at the end of the previous quarter.

The $22.3 billion increase in net assets for the quarter consisted of $21.6 billion in net income after all CPP Investments costs and $0.7 billion in net Canada Pension Plan (CPP) contributions.

The Fund, which includes the combination of the base CPP and additional CPP accounts, achieved 10-year and five-year annualized net nominal returns of 10.5% and 9.6%, respectively. For the quarter, the Fund returned 5.0% net of all CPP Investments costs.

For the six-month fiscal year-to-date period, the Fund increased by $47.1 billion consisting of $44.5 billion in net income after all CPP Investments costs, plus $2.6 billion in net CPP contributions. For the period, the Fund returned 10.8% net of all CPP Investments costs.

“CPP Investments’ diversified Fund performed well this quarter, generating strong returns. However, we continue to be cautious about the months ahead given the highly uncertain economic fallout of COVID-19 and its effect on markets,” said Mark Machin, President & Chief Executive Officer, CPP Investments. “All of our investment departments generated positive returns this quarter. Our investment professionals continue to pursue opportunities that will bring value to the Fund over the long term.”

The Fund’s growth is primarily attributed to the continued recovery of global public equity markets in the first two months of the quarter, reflected in gains in both the Fund’s public and private holdings. Stock markets retracted in September driven by concerns over new COVID-19 lockdown measures and uncertainty related to monetary stimulus, tempering these gains.

CPP Investments continues to build a portfolio designed to achieve a maximum rate of return without undue risk of loss, taking into account the factors that may affect the funding of the CPP and the CPP’s ability to meet its financial obligations. The CPP is designed to serve today’s contributors and beneficiaries while looking ahead to future decades and across multiple generations. Accordingly, long-term results are a more appropriate measure of CPP Investments’ performance compared to quarterly or annual cycles.

Fund 10- and Five-Year Returns1, 2, 3

(for the period ending September 30, 2020)


Performance of the Base and Additional CPP Accounts

The base CPP account ended its second quarter of fiscal 2021 on September 30, 2020, with net assets of $452.6 billion, compared to $431.1 billion at the end of the previous quarter. The $21.5 billion increase in assets consisted of $21.5 billion in net income after all costs, less $54 million in net base CPP outflows. The base CPP account achieved a 5.0% net return for the quarter.

The additional CPP account ended its second quarter of fiscal 2021 on September 30, 2020, with net assets of $4.1 billion, compared to $3.3 billion at the end of the previous quarter. The $0.8 billion increase in assets consisted of $0.1 billion in net income and $0.7 billion in net additional CPP contributions. The additional CPP account achieved a 3.0% net return for the quarter.

The base and additional CPP differ in contributions, investment incomes and risk targets. We expect the investment performance of each account to be different.

Long-Term Sustainability

Every three years, the Office of the Chief Actuary of Canada conducts an independent review of the sustainability of the CPP over the next 75 years. In the most recent triennial review published in December 2019, the Chief Actuary reaffirmed that, as at December 31, 2018, both the base and additional CPP continue to be sustainable over the 75-year projection period at the legislated contribution rates.

The Chief Actuary’s projections are based on the assumption that, over the 75 years following 2018, the base CPP investments will earn an average annual rate of return of 3.95% above the rate of Canadian consumer price inflation, after all costs. The corresponding assumption is that the additional CPP investments will earn an average annual real rate of return of 3.38%.

The Fund, combining both the base CPP and additional CPP accounts, achieved 10-year and five-year annualized net real returns of 8.8% and 8.0%, respectively.

Diversified Asset Mix

Operational Highlights:

Corporate developments

  • Hosted 10 public meetings, one for each of the nine provinces that participate in the CPP and one meeting for the three territories, to inform Canadians about the Fund’s financial performance and our investment strategy.
  • Published the 2020 annual Report on Sustainable Investing, which outlines CPP Investments’ approach to environmental, social and governance factors. The report shows that our investments in global renewable energy companies more than doubled to $6.6 billion in the one-year period of the report.
  • Thinking Ahead, the thought leadership lab at CPP Investments, issued research on How COVID-19 is shaping the landscape for long-term investors. In this latest report, professionals at CPP Investments analyzed the breadth of change expected following the global pandemic, as well as emerging opportunities.

Executive announcements

  • Appointed Ed Cass as CPP Investments’ first dedicated Chief Investment Officer (CIO) and Head of Total Fund Management. The CIO role was created to effectively address the anticipated size and scale of CPP Investments by 2025 and beyond. Total Fund Management comprises the former Total Portfolio Management department and the Balancing & Collateral team formerly residing in the Capital Markets and Factor Investing department. Ed was most recently Global Head of Real Assets.
  • Appointed Deborah Orida as Senior Managing Director & Global Head of Real Assets, where she will be responsible for the global Real Assets program, which encompasses Energy & Resources, Infrastructure, Power & Renewables, Real Estate and Portfolio Value Creation. Deborah was most recently Senior Managing Director & Global Head of Active Equities.

Board announcements

  • Dr. Heather Munroe-Blum was reappointed as Chairperson of the Board for a term of three years ending in October 2023. Dr. Munroe-Blum first became a Director of CPP Investments in 2010 and assumed the role of Chairperson in 2014. She also serves on the board of the Royal Bank of Canada and is Chairperson of the Gairdner Foundation. Dr. Munroe-Blum served as the Principal and Vice-Chancellor (President) of McGill University from 2003-2013.
  • Mary Phibbs was reappointed to the Board of Directors for a term ending in May 2023. Ms. Phibbs was first appointed a CPP Investments Director in May 2017. She also serves as Chairperson of Virgin Money Unit Trust Managers Limited and is a non-executive Director of Morgan Stanley International Limited, Morgan Stanley & Co International plc and Morgan Stanley Bank International Limited. Ms. Phibbs previously had a 40-year, multidisciplinary career in international banking and finance, both in executive and non-executive roles.
  • The National Association of Corporate Directors (NACD) named the CPP Investments Board of Directors as a winner of this year’s NACD NXT® awards. NACD NXT showcases boards that are leveraging innovation and diversity to elevate company performance, and this is the first time the recognition has been awarded to a Canada-based organization.
  • Board Chairperson Heather Munroe-Blum was appointed to The Committee on the Future of Corporate Governance in Canada, a joint initiative established by TMX Group and the Institute of Corporate Directors to provide updated guidance on corporate governance for Toronto Stock Exchange-listed companies.

Bond issuance

  • Completed two international debt offerings: GBP one-year term notes totalling £200 million and USD five-year term notes totalling US$1 billion. CPP Investments uses a conservative amount of short- and medium-term debt as one of several tools to manage our investment operations. Debt issuance gives CPP Investments flexibility to fund investments that may not match our contribution cycle. Net proceeds from the issuances will be used by CPP Investments for general corporate purposes.

Second-Quarter Investment Highlights:

Active Equities

  • Invested an additional C$309 million in a rights offering by Cellnex Telecom S.A., a leading mobile-tower owner and operator based in Spain, holding total ownership in the company at 4.95%.
  • Invested US$50 million in Perfect Day, Inc., an animal-free dairy maker, the first investment in our Climate Change Opportunities strategy.

Credit Investments

  • Invested US$75 million in a senior secured term loan issued by Global Lending Services LLC, an auto financing solutions provider.
  • Invested US$175 million in the first lien term loan, senior secured notes and second lien term loans of LogMeIn, Inc., a provider of remote working, collaboration and customer engagement software-as-a-service solutions.
  • Committed to acquire up to US$1 billion of home improvement focused consumer loans from Service Finance Company, LLC, a sales finance business owned by ECN Capital Corp. Under the agreement, the purchases will be made through 2020 and 2021.

Private Equity

  • Committed US$300 million in equity to the proposed acquisition of Virtusa Corporation (Virtusa) for an approximate 24% stake, alongside Baring Private Equity Asia. Virtusa is a global provider of a full spectrum of IT services.
  • Increased our investment in Visma, the software-as-a-service provider headquartered in Norway, to an approximate 6% stake.
  • Completed the acquisition of Galileo Global Education, a leading international provider of higher education and Europe’s largest higher education group, as part of a consortium of investors, with an investment of €550 million for a significant minority stake.

Real Assets

  • Extended our partnership with GLP through the launch of the GLP Japan Income Fund (GLP JIF), the largest private open-ended logistics fund in Japan. The partnership with GLP was first established in 2011, and at the end of August 2020, CPP Investments successfully exited the investment in GLP JDV I, receiving approximately JPY 48 billion (C$590 million) of net proceeds. Following the disposition, CPP Investments recommitted JPY 25 billion (C$307 million) of the proceeds into the newly established GLP JIF.
  • Expanded the existing multifamily joint venture alongside Cyrela Brazil Realty to include new partner, Greystar Real Estate Partners, LLC, the global leader in rental housing. Together, the joint venture partners will develop a portfolio of world-class rental housing assets across São Paulo and continue to target an investment of up to R$1 billion in combined equity. We will maintain majority interest in the joint venture.

Asset Dispositions:

  • Sold our ownership interest in Zoox, a U.S. technology company focused on developing a fully integrated autonomous vehicle mobility solution, as part of Amazon.com, Inc.’s acquisition of the company. Our ownership interest was initially acquired in 2018.
  • Sold our 45% stakes in AMLI 900, AMLI Lofts, AMLI Campion Trail, and AMLI Arts Center, multifamily properties in the U.S. Combined net proceeds from the sales were approximately US$224 million. Our ownership interests were initially acquired in 2012 and 2013.
  • Exited the investment in luxury retailer Neiman Marcus Group LTD LLC through Chapter 11 proceedings in U.S. Bankruptcy Court and, as a result, did not realize any net proceeds from the investment. Along with our co-sponsor, we continue to be majority investors in Mytheresa, a high-growth, online ultra-luxury fashion retailer. Our ownership interest was initially acquired in 2013.
  • Sold 10,000,000 shares in the capital of Battle North Gold Corporation, a Canadian gold mine developer, through the open markets for net proceeds of approximately C$19 million.

Transaction Highlights Following the Quarter:

  • Entered into an agreement to invest an additional C$50 million, through a private placement of common shares, in Premium Brands Holdings Corporation, a specialty food manufacturing and differentiated food distribution businesses, to support its joint acquisition of Clearwater Seafoods Incorporated with a Mi’kmaq First Nations coalition.
  • Invested an additional US$350 million in Viking Holdings Ltd, the parent company of Viking Cruises, alongside our co-investor TPG Capital. Viking Cruises is a leading provider of worldwide river and ocean cruises and this investment will support its continued development. The transaction is subject to customary closing conditions, including regulatory approvals.
  • Invested in a combination of secondary offerings and market purchases of Avantor Inc., a leading global provider of products and services to customers in the biopharma, healthcare, education and government, and advanced technologies and applied materials industries, holding total ownership in the company at 2.0% with a combined investment of US$285 million.
  • Allocated an additional £300 million of equity to investment vehicles in the United Kingdom targeting the logistics sector, alongside Goodman Group and APG Asset Management N.V. The expansion follows the success of the Goodman U.K. Partnership established in 2015.
  • Exited our 18% ownership stake in Advanced Disposal Services Inc., a solid waste services company in the U.S., through its acquisition by Waste Management Inc. Net proceeds from the sale were US$502 million. Our ownership stake was originally acquired in 2016.
  • Converted and sold our convertible debt position in Bloom Energy, a manufacturer of solid oxide fuel cells in the U.S. Net proceeds from the sales and an April 2020 partial repayment from the company were approximately US$452 million. Our position was initially acquired in 2015, followed by two further investments in 2016 and 2017.
  • Sold our 50% interest in Phase One of Nova, an office-led mixed-used development in London Victoria, U.K. Net proceeds from the sale are expected to be approximately C$720 million. Our ownership interest was initially acquired in 2012.
  • Invested €200 million in Embracer Group, a Sweden-listed developer and publisher active in the global video game industry, for a 3% stake.

 About Canada Pension Plan Investment Board

Canada Pension Plan Investment Board (CPP Investments™) is a professional investment management organization that manages the Fund in the best interest of the more than 20 million contributors and beneficiaries of the Canada Pension Plan. In order to build diversified portfolios of assets, investments are made around the world in public equities, private equities, real estate, infrastructure and fixed income. Headquartered in Toronto, with offices in Hong Kong, London, Luxembourg, Mumbai, New York City, San Francisco, São Paulo and Sydney, CPP Investments is governed and managed independently of the Canada Pension Plan and at arm’s length from governments. At September 30, 2020, the Fund totalled $456.7 billion. For more information, please visit www.cppinvestments.com or follow us on LinkedIn, Facebook or Twitter.

As you can read, the professionals at CPP Investments were very busy in Q2 Fiscal 2021 and I just highlighted the deals that caught my attention.

I'd like to make a few critical points because I was recently asked to produce a report comparing CPP Investments with OTPP, HOOPP and a couple of other smaller pensions.

In order to really appreciate and understand what CPP Investments is all about, you need to carefully read the Fiscal 2020 Annual Report cover to cover.

I know, it's long, it's tedious and a lot of you will get lost in the weeds but it's the only way to really appreciate the complexity and simplicity of this mega pension fund, the largest and most important in Canada.

When I tell my readers CPP Investments is one of the best pension funds in the world, it's because I base it on facts and truly appreciate everything they do across public and private markets, and how they assess risks across all their investment activities.

Some key points I want you all to understand but first take a look at CPP Investments' strategic portfolio asset class and geographic classifications and percentage weights:

It's critical to understand the difference between the strategic asset mix of base CPP and additional CPP in order to appreciate their difference in performance and risk tolerance. 

Importantly, base CPP makes up the bulk of CPP Investments' total assets and it's a partially funded pension plan. In contrast, additional CPP assets are small but will grow much faster over the coming decades and they represent assets of a fully funded pension plan.

This is why the allocations in Public and Private equities are a lot larger in base CPP than additional CPP where the asset mix looks a lot more comparable to large Canadian peer pensions.

What else? CPP Investments' excess return since inception of active management (2006) when they started allocating more into private markets and doing it using the right approach has been significant and well above the minimum return required for the Plan's sustainability:

I keep harping on this point because you have naysayers who don't believe CPP is sustainable even when the independent Chief Actuary of Canada tells you it is going out 75 years and people who simply don't understand what people at CPP Investments are doing across public an private markets to add significant added value over the long run.

That brings me to my final point. Yes, it's true that the CPP Fund is doing well so far in Fiscal 2021 but that's too be expected given the bounce back in global equity markets since March lows.

CPP Investments and PSP Investments fiscal year end at the end of March, so I fully expect both these large Canadian pension funds are doing well in fiscal 2021 (CPP Investments more given its larger weighting in Public and Private Equities).

What's critical to understand is that both these large pensions tend to underperform their benchmarks when global equity markets are in a roaring bull market and outperform when they retrench.

[Note: CPP Investments Reference Portfolio (benchmark) is made up of 85% S&P Global Large and Mid Cap Index and 15% FTSE TMX Canada AllGovernments Nominal Bond Index for base CPP and the corresponding weights for additional CPP are 50/50).]

Over time, the excess return they generate over their benchmark is significant and is directly attributable to their investment strategies across public and private markets and the approach they take in private markets.

That's why you don't see me covering CPP Investments' quarterly returns every quarter, it's simply nice to know but not a long enough period to really matter.

The press release states: "The Fund, which includes the combination of the base CPP and additional CPP accounts, achieved 10-year and five-year annualized net nominal returns of 10.5% and 9.6%, respectively. For the quarter, the Fund returned 5.0% net of all CPP Investments costs."

Always focus on long-term returns, not quarterly returns which move up and down like a yo-yo depending on how well or badly stocks are performing.

Alright, let me wrap it up here but before I do, yesterday, Mark Machin, President & Chief Executive Officer of CPP Investments, announced the appointment of Frank Ieraci as Senior Managing Director & Global Head of Active Equities, and a member of the Senior Management Team, effectively immediately:

In this role, Frank will lead the Active Equities department, which invests globally in public and soon-to be public companies, as well as securities focused on long-horizon structural changes which can include earlier-stage private companies. The department also includes CPP Investments’ Sustainable Investing group.

“Frank is well positioned to take on this senior leadership role, with his extensive understanding of the organization and its investment strategy gained from more than a decade with the Fund as well as his considerable investing experience. This promotion is a clear demonstration of the deep bench strength of talent that CPP Investments can draw from,” said Mr. Machin. “Under Frank’s leadership, the Active Equities department will continue to help advance our long-term investment strategy and champion data-driven research and advanced analytics to improve long-term performance.”

Frank was previously Managing Director, Head of Research and Portfolio Strategy at CPP Investments. In this role, Frank lead data-driven research efforts for Active Equities and was responsible for delivering alpha through active security selection driven by alternative data and advanced analytical techniques. He also oversaw Portfolio Strategy for Active Equities, including managing portfolio design and construction.

Frank has also held several other positions at CPP Investments, including Managing Director, Head of Active Fundamental Equities. In that role he was responsible for managing a concentrated portfolio of equity investments and leading a team of sector specialists. As a leader and mentor within the organization, Frank has championed inclusivity and well-being, including reducing the stigma of mental health challenges in the workplace.

Prior to joining CPP Investments in 2007, Frank held roles in finance and pension investing, based in Toronto. He holds a BA in Economics and Management Science from Ryerson University, an MA in Financial Economics from the University of Toronto and is a CFA charterholder.

On behalf of everyone reading this comment, I congratulate Frank Ieraci for this appointment and I'm sure he'll do a great job:

Below, a recent conversation with CPP Investments' CEO Mark Machin and Michael Katchenship, co-founder and CEO of Wealthsimple moderated by PWC's Anita McQuat and hosted by the Canadian Club Toronto. Watch this and listen carefully to what Dr. Mark Machin had to say, great insights as usual.

If you have any comments regarding this post, shoot me an email at LKolivakis@gmail.com.