Spokesperson explains some of the trends underlining headline numbers released last week
CPP Investments may have broken a milestone in its past fiscal year, hitting $632.3 billion in net assets and surpassing the $600 billion mark years ahead of expectations. Nevertheless, the underlying performance numbers speak to a changing macroeconomic and demographic environment that CPP Investments must factor into their strategy.
Frank Switzer, managing director of investor relations for CPP Investments, offered BPM some insights into CPP Investments’ overall performance and what drove growth as well as the performance detractors. He spoke to some of the macroeconomic themes that are currently playing out and the role they play in CPP Investments’ strategy. He emphasized the long-term nature of CPP Investments’ outlooks and plans throughout.
“Our long-term performance – an annualized net return of 9.2 per cent over ten years -- shows that diversification both across classes and geographies will provide long-term value,” Switzer says. “By prioritizing this, we aim to be more resilient to future macroeconomic conditions, which we anticipate will be more volatile over the next few years than was the case for the past decade.”
For fiscal 2024, Switzer explained that strong public equity market performance was a significant contributor to the annual return of 8.0 per cent. CPP Investments also saw gains in their private equity portfolio as well as in credit, infrastructure, and energy.
Looking at subsectors, US equities led returns, for the sake of comparison the S&P 500 has returned roughly 25 per cent in the past 12 months. Technology holdings in private equity led returns for that segment, as well as healthcare and financial sector holdings. Credit performance was driven by tightening credit spreads, higher cash flows, and what Switzer describes as some “favourable exits.” Sustainable energy investments benefitted from increases in commodity prices, and toll road investments in Canada and Mexico, as well as port services in the United States, helped generate some returns.
Emerging market allocations detracted from performance, according to Switzer. As did some real estate assets. The fiscal year report noted that CPP Investments now holds around an 8 per cent allocation to real estate, down from 9 per cent one year ago and 12 per cent five years ago. Rather than a reallocation, however, Switzer notes that their real estate allocations have remained relatively similar on a dollar basis for the past several years. There have been some exits from office real estate which Switzer characterizes as “portfolio rebalancing decisions to redeploy capital to higher performing sectors.”
As political noise swirled around Canadian pension plans’ allocations to Canadian assets, Switzer highlighted that CPP Investments’ Canadian portfolio returned 5.9 per cent. Those gains were primarily from infrastructure and government bonds. That portfolio represents 12 per cent of the overall portfolio, equivalent to $74 billion. “Canada remains an important market for CPP Investments and we will continue to look for new investment opportunities here,” Switzer says.
While many of the major decisions impacting CPP around benefits and contribution rates are set by Government, CPP Investments still has to manage their assets in a changing demographic and macroeconomic environment. Namely, one where the Canadian population is aging and retiring in large numbers, while many economists expect inflation to remain somewhat elevated and geopolitical uncertainty to persist.
When asked how CPP Investments is working to manage the potential impact of an aging population, Switzer noted that CPP Investments has far exceeded their growth targets. In their first 25 years of investing, the CPP fund has exceeded the Office of the Chief Actuary’s early projections by around $150 billion, due in large part to net income earned on investments.
Going forward, Switzer accepts that inflation may be higher than it has been in the past decade. To protect against the impact of inflation on their overall returns, he noted a few investment areas that can protect. Infrastructure and utilities investments, for example, are typically strong assets during inflationary periods. Toll roads, in particular, offer strong cashflows to protect against rising costs.
Overall, the CPP Investment strategy retains their long-term focus, with a view towards gradually integrating and adapting to new asset classes and new trends in the asset management space.
“Our overall strategy remains the same: to diversify across asset classes and geographies,” Switzer says. “We regularly review our long-term view of strategic mix of exposures and leverage as markets and other economic circumstances change. For example, we have been building out our capabilities in credit for the past 10 years. And we have made a commitment to double our green and transition assets over the next few years, so we are seeing an increasing focus on renewables and infrastructure.”
