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President’s message to our fellow Canada Pension Plan contributors and beneficiaries

To our fellow Canada Pension Plan contributors and beneficiaries,

Canada Pension Plan Investments has been through a remarkable evolution since it first began to invest your contributions 20 years ago.

We have steadily expanded internationally, broadened our investment and risk management capabilities and worked hard towards being the best fund of our type in the world – all to serve the 20 million people who have entrusted us with the foundation of their retirement savings.

At this 20-year milestone moment, CPP Investments is taking stock of the past, but focused firmly on our future and the opportunities and challenges we see coming over the next 20 years. We understand the importance of data and technology, the shift in economic power toward emerging markets, and how we can use our comparative advantages and the reputation we’ve built to access the best investment opportunities and to attract the best people.

It is critical to me, as CEO, that Canadians have conviction that we will safeguard and grow the money that they, and their employers, contribute each month. This was top of mind for CPP Investments in January, as we began to receive and invest additional CPP contribution amounts.

Much like 20 years ago, the first additional CPP transfer of funds was small – less than $15 million. Over time, that will increase to support the enhanced benefits that contributors will receive from CPP in their retirement years. The maximum benefit level will begin to climb from one-quarter to up to one-third of their average work earnings covered by the CPP. For CPP Investments, this means more capital to invest over the coming decades, since additional CPP assets are expected to match base CPP assets by 2055.

Today, both the base CPP and additional CPP have the full advantage of CPP Investments’ global network, expertise, investment systems and risk management. (You can learn more about our strategy for investing these funds on page 20.)

While we look forward to this new phase of growth, it is also important to stay true to the mandate that has been our compass since the beginning: to achieve a maximum rate of return, without undue risk of loss, having regard to the factors that may affect the funding of the CPP. Each and every one of us at CPP Investments is seized with the responsibility to invest on behalf of our contributors and beneficiaries, recognizing – as we did in 1999 – that a CPP pension is the source of basic retirement income for many people in this country. And, taken with Old Age Security, it is often the only money that provides precious peace of mind when it comes to the overwhelming challenges posed by life expectancy and market risks.

Another constant is our dedication to earn the trust of Canadians and ensure they are informed about CPP Investments and our approach to managing their money. The compulsory nature of our asset management role – that Canadians don’t get to choose CPP Investments– imposes an even greater responsibility to demonstrate that they can count on us. We will continue to inform Canadians more directly by expanding our digital communication channels and seeking new ways to supply them with facts about the Fund that are efficient and low cost.

About 15 years from now, we project that CPP Investments will cross $1 trillion in net assets, and we have conviction that the highly scalable investment programs we are building today can comfortably handle the increased size of the CPP Fund to serve Canadians now and in the future. Moreover, greater heft will strengthen CPP Investments’ competitiveness against investment behemoths that are already measured in trillions of dollars today.

Over the past 20 years, CPP Investments has earned its standing as an influential and resourceful investor with a wide range of global capabilities that can keep pace with its asset growth. In fact, this year The Economist called us “an investment force to be reckoned with” and a model for many other countries. We view this accolade with humility, knowing that the world is changing rapidly and we can never be complacent. Our next 20 years will require us to expand our skills and embrace new technologies. We will also need an innovative spirit that will continue pushing us towards fresh ideas.

As I think about CPP Investments’ next phase of growth, it’s clear that the principles that have defined our culture since day one – partnership, integrity, high performance and a strong sense of purpose – will guide us forward.

Investment climate

The past year confirmed our view that CPP Investments will need bold and transformative thinking to anticipate the trends that will drive growth in the coming years, as well as navigate the vagaries of unexpected and unpredictable markets.

To begin with, geopolitical risks are more acute, with unpredictable potential outcomes witnessed around the world. Equity markets took a tumble as the last pages of the calendar were turned in 2018, but we then saw an early 2019 rebound in financial conditions, with generally supportive central banks – at least at the time of my writing, that is.

Aside from a confluence of temporary shocks, there are country-specific questions hanging over the global economy. In the United States, issues such as a government shutdown and a fading impulse from tax reform slowed the economy for the moment. Meanwhile, China’s policymakers looked to targeted fiscal and monetary stimulus as they responded to trade pressures and witnessed a slowing in industrial activity that contributed to reduced GDP forecasts. What’s more, Europe also felt the impact of an economic slowdown, with a decrease in exports that is reverberating through its economies and giving way to constrained fiscal and monetary policy.

These are tensions that we can’t control. What we can do is continue to diversify the Fund and remain ready to take advantage of market dislocations and the opportunities that these uncertainties create. We must keep our eyes on our extended horizon and withstand the heavy pressures of dealing with current events.

Against a difficult backdrop, our investment departments worked creatively and collaboratively to find, assess and execute on new investment opportunities. This includes the partnership between Energy & Resources and Thematic Investing to explore the long-horizon potential to invest in the still-nascent electric car charging space, as well as the Infrastructure team working closely with both Power & Renewables as well as Relationship Investments to bring to bear new opportunities in hydroelectric power and water and wastewater management, respectively.

Extending our network of partners and deepening our global connections has also become increasingly important to our strategy as more and more large sources of capital compete for the best assets. CPP Investments is grateful to its partners for another year of collaboration and idea sharing that helped build businesses and generate growth in the past year.

Another factor that is reshaping the global investment environment is climate change. As a long-term investor, understanding environmental impacts on our investments is a key consideration and we continue to chart both the risks and opportunities stemming from climate change. This year, we launched our inaugural Green Bond, becoming the first pension fund to do so. We followed that with a euro-denominated offering. These issuances provide additional funding for CPP Investments as it increases its holdings in renewables and energy-efficient buildings as world demand gradually transitions in favour of such investible assets.

We expect that the next several years will look very different from today as demographic trends, new digitally driven business models and evolving consumer demand change the investment landscape. Our ability to navigate the increasingly complex and unpredictable future requires agility in our thinking and in our investment approach. To win we must continue to build our investing programs, strengthen our commitment to pushing deep into emerging markets and mine insights from our data systems.

Our performance

CPP Investments’ efforts to create a resilient Fund and build value is on track, as we report a 10-year rate of return of 11.1% this year, net of all costs.

To translate some of that success into dollar terms (because that’s what pays pensions, after all), CPP Investments’ investment operations have contributed $152 billion in net investment income, after all costs, over the last five years alone. While we launched our active management strategy more than a decade ago, it takes time for programs to solidify and their assets to mature, so we are pleased to see this momentum.

Of course, as our 20-year journey shows, incremental gains along the way can add up too. In fiscal 2019, the Fund grew to $392.0 billion, comprising $32.0 billion in net income and received $3.9 billion in net contributions. We achieved a solid net return of 8.9% this year.

While these are strong annual results, our focus is on making a contribution to the long-term sustainability of the Fund. And we know that at our chosen risk level, which we believe maximizes returns in the long term while also not taking undue risk as detailed on page 30, we expect to incur annual losses of 17% or more once in any 20-year period. We also measure our success against our Reference Portfolios, a representation of the passive public investment alternative each account might otherwise hold. When public markets soar, we expect our Reference Portfolios to perform exceptionally well, often better than our total Fund.

However, during a downturn, our diversified Fund demonstrates its resilience, as it did this year where we had some bearish turns and bumps, particularly in December 2018 when a broad equity market sell-off saw the S&P 500 drop by roughly 14% during the fourth quarter of the calendar year.

Our dollar value-added (DVA) compared to our Reference Portfolios for the fiscal year was $6.4 billion. While it’s important to report on our annual progress, we know that DVA is a volatile measure, and this is why we look at our success over the long term, and as of the end of the fiscal year, we have delivered $29.2 billion in compounded DVA since inception of our active management strategy.

As the Fund grows, and our investment decisions become increasingly global, we’re also developing new risk management capabilities. This past year, the Risk group worked with senior management, and in partnership with the Board of Directors, to develop a new framework that supports and enables the risk-taking required to fulfil our mandate and to pursue returns, without taking excessive risk. Our new Integrated Risk Framework leverages our strong existing risk management practices while ensuring we have the necessary agility for seizing investment opportunities.

Our 2025 strategy

With two decades under our belt, CPP Investments has hit its stride and truly knows its potential as a global active manager of capital. Last year, I wrote about the Board-approved strategic direction for CPP Investments in 2025. Over this past year, we’ve continued to refine this 2025 strategy, and chart the course for the coming years.

Pillars of our 2025 plan include investing up to one-third of the Fund in emerging markets such as China, India and Latin America, increasing our opportunity set and pursuing the most attractive risk-adjusted returns. We have reoriented our investment departments to deliver on this growth plan, to manage a larger Fund and to achieve our desired geographic and asset diversification.

We will continue to develop an enterprise-wide technology and data capability and to improve our analytics and automation processes, while also better capitalizing on our collective knowledge. This year we were pleased to welcome Kelly Shen as Senior Managing Director & Chief Technology and Data Officer, a newly created role on the senior leadership team, to lead our advancements in this area.

Our corporate functions, including the human resources, tax, legal and other professionals are critical to ensuring it is possible for our operations to perform seamlessly.

We do all this while we further strengthen our focus on how we govern the organization, how we operate each day, and how we find, hire and retain talented professionals. Through it all, our employees, our stewards and our stakeholders can expect us to be transparent in our financial and investment disclosure. As mentioned earlier, public trust in our work is the lifeblood of CPP Investments’ mandate, and we must work hard to earn it every day and connect directly with contributors and beneficiaries.

CPP Investments aspires to be a world-class, global investment organization in terms of strong governance, talent and delivering superior financial returns through our strong performance over the long term.

Looking ahead

At CPP Investments’ 20-year milestone moment, we reflect on what has helped us overcome many hurdles as well as what has fuelled this organization’s growth.

Through this time, the one constant has been the quality of our people, who are all driven to succeed by the knowledge that they are helping to lay the groundwork for Canadians’ retirement security. No matter which CPP Investments office I visit internationally, I see that our employees are motivated to deliver their best for you each day.

I am enormously grateful for the opportunity to lead CPP Investments as we meet these challenges and opportunities, and I am proud to lead an organization that has come so far since its founding. Thank you to our Board of Directors and all my colleagues at CPP Investments for their hard work this past year, and for their relentless commitment and support of our organization and our mandate in the next phase of our journey. And thanks to you for trusting us with investing today for your tomorrow.

Sincerely,

Mark Machin
President & CEO

To our fellow Canada Pension Plan contributors and beneficiaries, Canada Pension Plan Investments has been through a remarkable evolution since it first began to invest your contributions 20 years ago. We have steadily expanded internationally, broadened our investment and risk management capabilities and worked hard towards being the best fund of our type in the world – all to serve the 20 million people who have entrusted us with the foundation of their retirement savings. At this 20-year milestone moment, CPP Investments is taking stock of the past, but focused firmly on our future and the opportunities and challenges we see coming over the next 20 years. We understand the importance of data and technology, the shift in economic power toward emerging markets, and how we can use our comparative advantages and the reputation we’ve built to access the best investment opportunities and to attract the best people. It is critical to me, as CEO, that Canadians have conviction that we will safeguard and grow the money that they, and their employers, contribute each month. This was top of mind for CPP Investments in January, as we began to receive and invest additional CPP contribution amounts. Much like 20 years ago, the first additional CPP transfer of funds was small – less than $15 million. Over time, that will increase to support the enhanced benefits that contributors will receive from CPP in their retirement years. The maximum benefit level will begin to climb from one-quarter to up to one-third of their average work earnings covered by the CPP. For CPP Investments, this means more capital to invest over the coming decades, since additional CPP assets are expected to match base CPP assets by 2055. Today, both the base CPP and additional CPP have the full advantage of CPP Investments' global network, expertise, investment systems and risk management. (You can learn more about our strategy for investing these funds on page 20.) While we look forward to this new phase of growth, it is also important to stay true to the mandate that has been our compass since the beginning: to achieve a maximum rate of return, without undue risk of loss, having regard to the factors that may affect the funding of the CPP. Each and every one of us at CPP Investments is seized with the responsibility to invest on behalf of our contributors and beneficiaries, recognizing – as we did in 1999 – that a CPP pension is the source of basic retirement income for many people in this country. And, taken with Old Age Security, it is often the only money that provides precious peace of mind when it comes to the overwhelming challenges posed by life expectancy and market risks. Another constant is our dedication to earn the trust of Canadians and ensure they are informed about CPP Investments and our approach to managing their money. The compulsory nature of our asset management role – that Canadians don’t get to choose CPP Investments– imposes an even greater responsibility to demonstrate that they can count on us. We will continue to inform Canadians more directly by expanding our digital communication channels and seeking new ways to supply them with facts about the Fund that are efficient and low cost. About 15 years from now, we project that CPP Investments will cross $1 trillion in net assets, and we have conviction that the highly scalable investment programs we are building today can comfortably handle the increased size of the CPP Fund to serve Canadians now and in the future. Moreover, greater heft will strengthen CPP Investments' competitiveness against investment behemoths that are already measured in trillions of dollars today. Over the past 20 years, CPP Investments has earned its standing as an influential and resourceful investor with a wide range of global capabilities that can keep pace with its asset growth. In fact, this year The Economist called us “an investment force to be reckoned with” and a model for many other countries. We view this accolade with humility, knowing that the world is changing rapidly and we can never be complacent. Our next 20 years will require us to expand our skills and embrace new technologies. We will also need an innovative spirit that will continue pushing us towards fresh ideas. As I think about CPP Investments' next phase of growth, it’s clear that the principles that have defined our culture since day one – partnership, integrity, high performance and a strong sense of purpose – will guide us forward. Investment climate The past year confirmed our view that CPP Investments will need bold and transformative thinking to anticipate the trends that will drive growth in the coming years, as well as navigate the vagaries of unexpected and unpredictable markets. To begin with, geopolitical risks are more acute, with unpredictable potential outcomes witnessed around the world. Equity markets took a tumble as the last pages of the calendar were turned in 2018, but we then saw an early 2019 rebound in financial conditions, with generally supportive central banks – at least at the time of my writing, that is. Aside from a confluence of temporary shocks, there are country-specific questions hanging over the global economy. In the United States, issues such as a government shutdown and a fading impulse from tax reform slowed the economy for the moment. Meanwhile, China’s policymakers looked to targeted fiscal and monetary stimulus as they responded to trade pressures and witnessed a slowing in industrial activity that contributed to reduced GDP forecasts. What’s more, Europe also felt the impact of an economic slowdown, with a decrease in exports that is reverberating through its economies and giving way to constrained fiscal and monetary policy. These are tensions that we can’t control. What we can do is continue to diversify the Fund and remain ready to take advantage of market dislocations and the opportunities that these uncertainties create. We must keep our eyes on our extended horizon and withstand the heavy pressures of dealing with current events. Against a difficult backdrop, our investment departments worked creatively and collaboratively to find, assess and execute on new investment opportunities. This includes the partnership between Energy & Resources and Thematic Investing to explore the long-horizon potential to invest in the still-nascent electric car charging space, as well as the Infrastructure team working closely with both Power & Renewables as well as Relationship Investments to bring to bear new opportunities in hydroelectric power and water and wastewater management, respectively. Extending our network of partners and deepening our global connections has also become increasingly important to our strategy as more and more large sources of capital compete for the best assets. CPP Investments is grateful to its partners for another year of collaboration and idea sharing that helped build businesses and generate growth in the past year. Another factor that is reshaping the global investment environment is climate change. As a long-term investor, understanding environmental impacts on our investments is a key consideration and we continue to chart both the risks and opportunities stemming from climate change. This year, we launched our inaugural Green Bond, becoming the first pension fund to do so. We followed that with a euro-denominated offering. These issuances provide additional funding for CPP Investments as it increases its holdings in renewables and energy-efficient buildings as world demand gradually transitions in favour of such investible assets. We expect that the next several years will look very different from today as demographic trends, new digitally driven business models and evolving consumer demand change the investment landscape. Our ability to navigate the increasingly complex and unpredictable future requires agility in our thinking and in our investment approach. To win we must continue to build our investing programs, strengthen our commitment to pushing deep into emerging markets and mine insights from our data systems. Our performance CPP Investments' efforts to create a resilient Fund and build value is on track, as we report a 10-year rate of return of 11.1% this year, net of all costs. To translate some of that success into dollar terms (because that’s what pays pensions, after all), CPP Investments' investment operations have contributed $152 billion in net investment income, after all costs, over the last five years alone. While we launched our active management strategy more than a decade ago, it takes time for programs to solidify and their assets to mature, so we are pleased to see this momentum. Of course, as our 20-year journey shows, incremental gains along the way can add up too. In fiscal 2019, the Fund grew to $392.0 billion, comprising $32.0 billion in net income and received $3.9 billion in net contributions. We achieved a solid net return of 8.9% this year. While these are strong annual results, our focus is on making a contribution to the long-term sustainability of the Fund. And we know that at our chosen risk level, which we believe maximizes returns in the long term while also not taking undue risk as detailed on page 30, we expect to incur annual losses of 17% or more once in any 20-year period. We also measure our success against our Reference Portfolios, a representation of the passive public investment alternative each account might otherwise hold. When public markets soar, we expect our Reference Portfolios to perform exceptionally well, often better than our total Fund. However, during a downturn, our diversified Fund demonstrates its resilience, as it did this year where we had some bearish turns and bumps, particularly in December 2018 when a broad equity market sell-off saw the S&P 500 drop by roughly 14% during the fourth quarter of the calendar year. Our dollar value-added (DVA) compared to our Reference Portfolios for the fiscal year was $6.4 billion. While it’s important to report on our annual progress, we know that DVA is a volatile measure, and this is why we look at our success over the long term, and as of the end of the fiscal year, we have delivered $29.2 billion in compounded DVA since inception of our active management strategy. As the Fund grows, and our investment decisions become increasingly global, we’re also developing new risk management capabilities. This past year, the Risk group worked with senior management, and in partnership with the Board of Directors, to develop a new framework that supports and enables the risk-taking required to fulfil our mandate and to pursue returns, without taking excessive risk. Our new Integrated Risk Framework leverages our strong existing risk management practices while ensuring we have the necessary agility for seizing investment opportunities. Our 2025 strategy With two decades under our belt, CPP Investments has hit its stride and truly knows its potential as a global active manager of capital. Last year, I wrote about the Board-approved strategic direction for CPP Investments in 2025. Over this past year, we’ve continued to refine this 2025 strategy, and chart the course for the coming years. Pillars of our 2025 plan include investing up to one-third of the Fund in emerging markets such as China, India and Latin America, increasing our opportunity set and pursuing the most attractive risk-adjusted returns. We have reoriented our investment departments to deliver on this growth plan, to manage a larger Fund and to achieve our desired geographic and asset diversification. We will continue to develop an enterprise-wide technology and data capability and to improve our analytics and automation processes, while also better capitalizing on our collective knowledge. This year we were pleased to welcome Kelly Shen as Senior Managing Director & Chief Technology and Data Officer, a newly created role on the senior leadership team, to lead our advancements in this area. Our corporate functions, including the human resources, tax, legal and other professionals are critical to ensuring it is possible for our operations to perform seamlessly. We do all this while we further strengthen our focus on how we govern the organization, how we operate each day, and how we find, hire and retain talented professionals. Through it all, our employees, our stewards and our stakeholders can expect us to be transparent in our financial and investment disclosure. As mentioned earlier, public trust in our work is the lifeblood of CPP Investments' mandate, and we must work hard to earn it every day and connect directly with contributors and beneficiaries. CPP Investments aspires to be a world-class, global investment organization in terms of strong governance, talent and delivering superior financial returns through our strong performance over the long term. Looking ahead At CPP Investments' 20-year milestone moment, we reflect on what has helped us overcome many hurdles as well as what has fuelled this organization’s growth. Through this time, the one constant has been the quality of our people, who are all driven to succeed by the knowledge that they are helping to lay the groundwork for Canadians’ retirement security. No matter which CPP Investments office I visit internationally, I see that our employees are motivated to deliver their best for you each day. I am enormously grateful for the opportunity to lead CPP Investments as we meet these challenges and opportunities, and I am proud to lead an organization that has come so far since its founding. Thank you to our Board of Directors and all my colleagues at CPP Investments for their hard work this past year, and for their relentless commitment and support of our organization and our mandate in the next phase of our journey. And thanks to you for trusting us with investing today for your tomorrow. Sincerely, Mark Machin President & CEO
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