CPP Investments' Net Assets Total $575 Billion in Q1 F2024

Tim Kiladze of the Globe and Mail reports CPP’s investment arm reports small loss in first quarter, assets grow to $575-billion:

Canada Pension Plan Investment Board (CPPIB) delivered a 0.8-per-cent loss during the first quarter of its fiscal year, driven by negative returns on both public and private investments.

Because it is only the first quarter, CPPIB does not provide detailed reporting on each of its divisions. In a release, the fund attributed the small loss to the declining values of fixed income assets — bond prices tend to fall when rates rise — and foreign exchange losses from a stronger Canadian dollar relative to the U.S. dollar.

Despite the small loss, CPPIB’s total assets grew over the quarter to $575-billion, up from $570-billion at the end of the fiscal year, because Canadians are currently contributing more to the fund than the amount being drawn from its reserves, though that is expected to reverse as more Baby Boomers retire. The CPP is the primary national retirement program for working Canadians, and CPPIB has managed the plan’s money since 1999.

Although U.S. equity markets have delivered large returns so far this year, gains from other stock markets around the world this year are much more muted. Private assets have also struggled after years of scorching returns, and there are concerns this sector will see write downs if interest rates remain high.

Private assets include real estate, infrastructure and private credit, and commercial real estate in particular is facing intense scrutiny. The world’s most sophisticated private real estate investors, including Canadian pension plans, say scores of properties they own are worth hundreds of millions of dollars each and have held most of their value. However, investors have been dumping shares of publicly-traded real estate investment trusts (REITs), particularly those that own skyscrapers, because they don’t think such lofty values still make sense

Over the past decade CPPIB has reported an annualized net return of 9.8 per cent, though its recent performance is more muted. In its last fiscal year the fund reported a 1.3-per-cent return, with gains from private investments helping to offset weak performance from public stocks and bonds.

CPP Investments put out a press release earlier today stating its net assets total $575 billion at first quarter fiscal 2024:

All figures in Canadian dollars unless otherwise noted.

First-Quarter Performance¹:

• Net assets increase by $5 billion
• 10-year annualized net return remains strong at 9.8%

TORONTO, ON (August 10, 2023): Canada Pension Plan Investment Board (CPP Investments) ended its first quarter of fiscal 2024 on June 30, 2023, with net assets of $575 billion, compared to $570 billion at the end of the previous quarter.

A net loss of $5 billion was offset by $9 billion in net transfers from the Canada Pension Plan (CPP) to increase net assets by $5 billion for the quarter ended June 30, 2023.

The Fund, which includes the combination of the base CPP and additional CPP accounts, achieved a 10-year annualized net return of 9.8%. For the quarter, the Fund’s net return was negative 0.8%. In the 10-year period up to and including the first quarter of fiscal 2024, CPP Investments has contributed $314 billion in cumulative net income to the Fund.

“The quarter’s results reflect gains across most asset classes, which were offset by the impact of foreign exchange losses due to a stronger Canadian dollar relative to the U.S. dollar,” said John Graham, President & CEO. “While we anticipate periods of uncertainty to persist, we expect our portfolio will continue to be resilient and create value for CPP contributors and beneficiaries for generations to come.”

The Fund’s quarterly results reflect positive returns across investment departments in local currency terms. Investments in public equities and renewable energy, along with gains by external portfolio managers, contributed to the quarter’s results. Investments in credit and real assets were relatively flat in local dollar terms. In addition, fixed income assets declined in value due to higher interest rates instigated by central banks.

Performance of the Base and Additional CPP Accounts

The base CPP account ended its first quarter of fiscal 2024 on June 30, 2023, with net assets of $547 billion, compared to $546 billion at the end of the previous quarter. The $1 billion increase in assets consisted of a net loss of $4 billion and $5 billion in net transfers from the CPP. The base CPP account’s net return was negative 0.8% for the quarter, and a five-year annualized net return of 7.4%.

The additional CPP account ended its first quarter of fiscal 2024 on June 30, 2023, with net assets of $28 billion, compared to $24 billion at the end of the previous quarter. The $4 billion increase in assets consisted of a net loss of $242 million and $4 billion in net transfers from the CPP. The additional CPP account’s net return was negative 0.9% for the quarter, and an annualized net return of 5.0% since inception in 2019.

The additional CPP was designed with a different legislative funding target and contribution rate compared to the base CPP. Given the differences in their design, the additional CPP has had a different market risk target and investment profile since its inception in 2019. As a result of these differences, we expect the performance of the additional CPP to generally differ from that of the base CPP.

Furthermore, due to the differences in their net contribution profiles, the assets in the additional CPP account are also expected to grow at a much faster rate than those in the base CPP account.

Long-Term Financial Sustainability

Every three years, the Office of the Chief Actuary of Canada, an independent federal body that provides checks and balances on the future costs of the CPP, evaluates the financial sustainability of the CPP over a long period. In the most recent triennial review published in December 2022, the Chief Actuary reaffirmed that, as at December 31, 2021, both the base and additional CPP continue to be sustainable over the long term at the legislated contribution rates.

The Chief Actuary’s projections are based on the assumption that, over the 75 years following 2021, the base CPP account will earn an average annual rate of return of 3.69% above the rate of Canadian consumer price inflation. The corresponding assumption is that the additional CPP account will earn an average annual real rate of return of 3.27%.

CPP Investments continues to build a portfolio designed to achieve a maximum rate of return without undue risk of loss, while considering the factors that may affect the funding of the CPP and its ability to pay current benefits. 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 and plan sustainability.

Operational Highlights

Corporate developments

• Issued a joint statement with Canada’s leading pension plan investment managers that calls on companies to embrace the new International Sustainability Standards Board disclosure framework. The new framework will help to improve trust and confidence in company disclosures about sustainability to inform investment decisions.

• CPP Investments leaders were featured in the Women at the forefront of alternative investments report, providing insights on private equity, venture capital and the value of gender equity.

First-Quarter Investment Highlights

Active Equities

• Invested US$55 million into Northvolt AB’s 2023 convertible note issuance. Founded in Sweden, Northvolt AB is a European lithium-ion battery manufacturer.

Credit Investments

• Committed to provide €85 million in financing to support KKR’s acquisition of a portfolio of European loans.

• Invested US$100 million into a repurchase facility to a regional U.S. bank.

Private Equity

• Completed the sale of Inmarsat, a European satellite service provider, to Viasat Inc., a U.S.-based global communications company, in which we now own an approximate 9% stake. Net cash proceeds from the sale were US$206 million.

• Invested NZ$105 million (C$88 million) to acquire a 9.4% stake in Pushpay Holdings Ltd., a New Zealand-headquartered donor management software system for churches and charities, alongside BGH Capital.

• Committed US$300 million across Genstar Capital Partners XI, LP and Fund XI Opportunities, which will make control investments in middle-market companies primarily headquartered in North America.

• Committed US$150 million to TA Associates XV, L.P., which will target equity investments in the technology, heath care, financial services, consumer and business services sectors worldwide.

• Invested US$20 million in PT Samator Indo Gas Tbk, the largest industrial gas company in Indonesia, alongside CVC Capital.

• Invested US$40 million in the acquisition and merger of two leading Australian frozen food producers, Patties Foods and Vesco Foods, alongside PAG. We own a 16.3% stake in the combined company.

• Committed US$160 million to Multiples Private Equity Fund IV, which targets mid-market growth opportunities in India.

Real Assets

• Invested an additional C$537 million in our Indian toll roads portfolio company IndInfravit Trust, in which we now own a 60.8% stake, to help fund the acquisition of four operating road concessions.

• Signed a definitive agreement in support of the proposed merger between Viterra and Bunge, a U.S.-based agriculture, commodities and food company. Through this transaction, we will receive an approximate 12% equity position in the combined company and US$0.8 billion in cash upon the close of the transaction.

• Agreed to acquire a 24.99% stake in FCC Servicios Medio Ambiente Holding, SAU, the environmental services division of Spanish conglomerate Fomento de Construcciones y Contratas, S.A., for C$1,438 million. FCC Servicios Medio Ambiente is a leading waste management operator in Iberia, the U.K. and Central Europe, with a growing presence in the U.S.

• Committed US$100 million to Just Climate’s inaugural fund, Climate Asset Funds I. Just Climate is a London, U.K.-based investment fund dedicated to climate-led investing to address the net-zero challenge at scale.

• Sold our 75% ownership interest in Phoenix Tower, an office building in Houston, Texas. Net proceeds from the sale were approximately US$18 million. Our original investment was made in 2017.

• Sold our 50% interest in Kumho Asiana Tower, a prime-grade office building in Seoul, South Korea. Net proceeds from the sale were C$181 million. Our original investment was made in 2018.

Transaction Highlights Following the Quarter

• Sold our 45% stake in a portfolio of medical office buildings in Southern California. Net proceeds from the sale were approximately US$100 million. Our original investments were made between 2015-2017.

• Invested US$50 million in ServiceTitan, Inc. as part of an equity financing round alongside other investors. Headquartered in the U.S., ServiceTitan is a cloud-based software platform built to power trades businesses.

• Invested £93 million in a debt facility to Vårgrønn, owner of a 20% stake in Dogger Bank Wind Farm, which is an offshore wind farm currently under-construction, located off the coast of England.

• Invested US$19 million in Works Human Intelligence, a leading human capital management software provider in Japan, alongside Bain Capital Asia.

• Committed US$150 million to American Industrial Partners Capital Fund VIII, which targets value-oriented, control investments primarily in the North American industrials sector.

• Announced a new partnership with Amsterdam-based Power2X, in which we will invest an initial €130 million to accelerate the growth of Power2X as a development platform and fund green molecule projects. Power2X is a leading European green molecule developer and advisor focused on the decarbonization of hard-to-abate industrial sectors.

• Completed a structured liquidity transaction surrounding 12 North American energy funds generating gross proceeds of approximately US$860 million with the opportunity for further distributions.

About CPP Investments

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 21 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 June 30, 2023, the Fund totalled $575 billion. For more information, please visit www.cppinvestments.com or follow us on LinkedIn, Instagram or Twitter.

Alright, CPP Investments posted its Q1 F2024 results which it has to do by law and the highlights are available here. 

Let me begin by thanking Frank Switzer for emailing me earlier to let me know but I was also honest with Frank, I'm not a big fan of quarterly or semi-annual results which will soon be coming out from other large Canadian pension investment managers that have a credit rating.

I prefer annual results for the simple reason that you can then gauge how private markets are doing and have a better view of the entire Fund's portfolio.

Nonetheless, we do get a glimpse of how the Fund is positioned.

For example, look at the first slide from the highlights:

 

What this tells me is CPP Investments remains long US dollars which makes sense since that's where they invest the bulk of their assets and that the rate hikes from central banks hurt their fixed income portfolio in fiscal Q1 as long bond yield backed up.

The fact that the Canadian dollar rallied during their fiscal Q1 as energy prices climbed explains the currency losses.

There's nothing earth-shattering here which is why it's important to focus on long-term performance:

There is one bright spot worth mentioning here, investments in public equities and renewable energy, along with gains by external portfolio managers, contributed to the quarter’s results, while investments in credit and real assets were relatively flat (all in local dollar terms):

 

What else is worth mentioning here? well, we know Michael Hill departed CPP Investments to head up OMERS Infrastructure. I covered this here earlier this week.

It was also announced this week that Bill Rogers will be the new Global Head of Sustainable Energies at CPP Investments:

Bill will be taking over this job from Bruce Hogg who I was told is moving to Total Fund Management group.

Needless to say, this is a big position with huge responsibilities and I wish Bill and the Sustainable Energies team a lot of success.

Below, a panel discussion which took place a little over year ago on ramping up infrastructure investments.

Moderated by Simon Wright, industry editor, The Economist, the speakers include:

• Bill Rogers, (former) managing director, head of sustainable energies, Europe and Asia, Canada Pension Plan Investment Board
• Greg Clark, chair, Connected Places Catapult
• Jane Stevensen, founding director, JS Global Advisory
• Nuwan Goonetilleke, head, shareholder assets, Phoenix Asset Management

Take the time to listen to Bill Rogers's comments on sustainable infrastructure.