May 21, 2009
TORONTO, ON (May 21, 2009): The CPP Fund ended its 2009 fiscal year on March 31, 2009 with assets of $105.5 billion, a decline of $17.2 billion after operating expenses from $122.7 billion at the end of fiscal 2008. The Fund’s decline for the year primarily reflects an investment return of negative 18.62 per cent or negative $23.6 billion, offset by CPP contributions of $6.6 billion. Amidst this difficult environment, the return of the CPP Fund in fiscal 2009 essentially matched the Fund’s market-based benchmark, the CPP Reference Portfolio, adding one basis point above the benchmark return of negative 18.63 per cent. As a long-term investor, the CPP Investment Board (CPPIB) believes that value-added performance is best measured over rolling four-year periods. In the three years since adopting the CPP Reference Portfolio as the key total fund benchmark, the CPPIB has generated cumulative value-added returns of 487 basis points representing approximately $5.3 billion in additional investment income; this equates to an average annual value-added return of 162 basis points over this period.
“Despite the CPP Fund’s first substantial decline since its inception, which reflects unprecedented turmoil in the markets, we remain well-positioned to generate the returns necessary to deliver on our mandate of helping to pay pensions for decades and generations to come,” said David Denison, President and CEO, CPP Investment Board. “While each individual fiscal year’s results are important, the CPPIB’s investment strategy is designed to perform over significantly longer timeframes. With our long investment horizon, steady cash inflows and deep investment capabilities, the CPPIB is able to capitalize on the current economic environment for the long-term benefit of the CPP Fund and its 17 million contributors and beneficiaries.”
Fiscal 2009 Market Conditions Economic conditions over the past twelve months reflected the impact of the worst global financial crisis since the Great Depression. The credit crisis that began in 2007 accelerated in the summer of 2008 following the failure of Lehman Brothers. By the second quarter of fiscal 2009 the stress in the credit markets spread to equities and in the period from September to November the global equities and commodities markets experienced their sharpest declines in decades. Despite the modest rebound during the latter part of March, the last month of fiscal 2009, the last quarter of the fiscal year (January to March, calendar 2009) saw public equity markets decline to levels last seen in the 1990s. The primary factor affecting the Fund’s performance was the sharp decline in global public equity values during the course of the fiscal year. Worsening global economic fundamentals also resulted in lower valuations across the CPP Fund’s private equity and real estate holdings. The Fund benefitted from a significant increase in the value of its government bond holdings and solid cash inflows generated by its infrastructure investments.
“The CPPIB took a number of steps to weather the extraordinary challenges of the past year,” said Mr. Denison. “We continued to avoid investing in complex structures with serious hidden credit exposures, suspended our securities lending program and reduced position sizes in a number of our internal active investment programs. At the same time, we employed a variety of short-term strategies in our public markets area to capitalize on the extreme volatility in the markets, while within our private investments areas we were rewarded for our patience over the past few years with the acquisition and increasing availability of high-quality infrastructure and real estate assets at attractive valuations. While the current environment is presenting unprecedented opportunities, and the CPPIB has the capacity to pursue these opportunities, we will only do so if they meet our risk and return criteria.”
Four-year Results Consistent with our view on measuring value-added performance, we also report on overall fund performance over rolling four-year periods.
The four-year annualized investment rate of return through March 31, 2009 was 1.42 per cent. The change in the four-year return from a year ago reflects the challenging market conditions of the past year, as well as the fact that positive performance in fiscal 2005 of 8.5 per cent has now rolled off of the reporting period. By definition, the lower returns for fiscal 2008 (negative 0.29 per cent) and fiscal 2009 will weigh on the four-year returns going forward for the next two and three-year periods. When looking at the overall fund performance over the longer time period since the CPP Investment Board began investing a decade ago, the 10-year annualized rate of return was 4.3 per cent representing $24.2 billion of investment income.
The four-year annualized return of 1.42 per cent is less than the 4.2 per cent average real rate of return that the Chief Actuary of Canada estimates is required to help sustain the Canada Pension Plan over a 75-year period. Over this long timeframe we expect that there will be four-year periods where returns are above or below this threshold. In the ten years since the CPP Investment Board began investing, returns for the CPP Fund in all four-year periods prior to fiscal 2009 exceeded the 4.2 per cent real rate of return. Based upon historical experience and reasonable future return expectations, the CPPIB believes that the actual returns for the CPP Reference Portfolio and the CPP Fund will exceed the 4.2 per cent real return assumed by the Chief Actuary over the long investment horizon for the CPP Fund.
Long-term Strategy While the CPPIB’s accountability system focuses on investment returns over four-year periods, the portfolio is managed with an investment horizon of decades and generations. The CPP Investment Board continues to focus on a long-term investment strategy to meet its mandate of maximizing returns without undue risk of loss. “During the course of fiscal 2009, management and the board re-examined the CPP Investment Board’s strategy in light of the extraordinary market conditions we faced. We concluded that our long-term strategy remains sound and that the strategic asset weightings for the CPP Fund remain appropriate given its long investment horizon. We have, however, modified a number of investment programs to take into account the cyclical and structural changes we see in the markets such as increased credit spreads, heightened volatility, the lower availability and higher cost of debt financing, and decreased levels of intermediation activities provided by banks and other financial institutions,” said Mr. Denison. Fiscal 2009 Portfolio Performance by Investment Department A key yardstick for our investment teams is value-added performance against their benchmarks. Below we report the value-added performance of each department, followed by year-over-year comparisons of their overall investment return.
Public Market Investments generated value-added returns of 40 basis points or approximately $0.5 billion of investment income relative to its benchmark. Consistent with the organization’s long-term investment horizon and resulting investment strategy, the Public Market Investments department maintains a broad global market-based exposure of 2,900 public companies on major exchanges, which meant that it was most impacted by broad declines in equity markets. Of note, the three sectors of Canada’s markets hardest hit in fiscal 2009 were energy, financials and materials; these same sectors make up much of the Canadian economy and so are broadly represented within the Fund’s Canadian equity holdings.
Public Market Investments overall produced a return of negative 18.2 per cent or negative $17.9 billion, compared to a decline of 2.4 per cent or negative $2.4 billion in fiscal 2008. Public equities returned negative 31.0 per cent or negative $19.4 billion in net investment income, versus negative 6.8 per cent or negative $4.6 billion in fiscal 2008. In contrast, fixed income assets managed by the department performed well; bonds and money market securities earned a return of 5.4 per cent or $1.6 billion, compared to a gain of 6.9 per cent or $2.1 billion in 2008.
Private Investments generated value-added returns of 88 basis points, or approximately $1.1 billion of additional investment income for the CPP Fund relative to its benchmark. In terms of overall return, the department recorded a decline of $5.3 billion before taking foreign exchange into account, which was negative $3.1 billion or negative 14.4 per cent when expressed in Canadian dollars. The department’s infrastructure investments earned negative 5.0 per cent or negative $155 million in net investment income in fiscal 2009, down from 23.6 per cent or $524 million in fiscal 2008. Private equities comprised of Funds & Secondaries and Principal Investing, recorded a return of negative 17.2 per cent, or $2.9 billion, which represents the net impact of distributions from our funds and changes in valuations on our holdings; this compares with a return of 8.2 per cent and a contribution to net investment income of $1.0 billion in fiscal 2008.
Value-add for Real Estate Investments was negative 75 basis points, representing approximately negative $0.9 billion of investment income relative to its benchmarks. The private real estate portfolio recorded a return of negative 14.0 per cent, amounting to negative $1.1 billion in net investment income, reflecting a slowdown in the U.S. and U.K. real estate markets. That compares to 8.1 per cent or $0.5 billion in fiscal 2008.
The Investment Planning Committee (IPC) makes investment decisions that are not attributable to a specific department such as allocating risk within limits set by the board of directors and making overall portfolio design decisions for the total fund. The decision to expand into a wider range of asset classes such as real estate, infrastructure and private equity generated value-added returns this year of 49 basis points or approximately $0.6 billion. In addition, this committee may also decide to make investments having a significant alpha component, normally when the investment is beyond the mandate and risk budget allocation of any single investment department. The IPC is accountable for the leveraged loan and distressed mortgage investments made in fiscal 2008. These investments reflect fair value determined under current market conditions and underperformed benchmark returns by negative $1.3 billion or negative 101 basis points. Given the long horizon of the CPP Fund, the CPPIB will continue to hold these investments in the belief that they will deliver overall positive long-term risk-adjusted returns. In the aggregate, the investment decisions of the Investment Planning Committee realized a net value-added return of negative 52 basis points or approximately negative $0.7 billion.
Fiscal 2009 Portfolio Performance by Asset Class
|CPP FUND RETURNS|
|Asset Class||Fiscal 09*||Fiscal 08*|
|Canadian public equities||-32.3%||3.2%|
|Canadian private equities||-7.8%||2.2%|
|Public Foreign developed market equities||-29.7%||-13.9%|
|Private Foreign developed market equities||-17.8%||8.5%|
|Public emerging market equities||-32.6%||N/A**|
|Private emerging market equities||-13.7%||N/A**|
|Bonds and money market securities||5.4%||6.9%|
|Public real estate||-43.7%||-24.2%|
|Private real estate||-14.0%||8.2%|
|Total CPP Fund||-18.62%||-0.29%|
* Investment results by asset class are reported on an unhedged Canadian dollar basis, since any hedging takes place at the Total CPP Fund level. Results are reported on a time-weighted basis. ** Returns for emerging market equities were included in foreign developed market equities in fiscal 2008.
Asset Mix We have continued to diversify the portfolio by geography over the course of fiscal 2009. During the year, we undertook an extensive review of the CPP Reference Portfolio which resulted in an adjustment to the composition of the portfolio and is reflected in the chart below. More details about the CPP Reference Portfolio will be available in the 2009 Annual Report which will be available in late May 2009.
While Canadian assets will remain a significant part of the portfolio, as the CPP Fund continues to grow an increasing portion will be invested internationally. At fiscal year-end, total Canadian investment assets totaled $48 billion, or 45.5 per cent of the portfolio, with the remaining $57.6 billion invested outside Canada.
|FOR THE YEAR ENDED MARCH 31 ($ b
|CHANGE IN NET ASSETS|
ncome net of operati
|Increase in net assets||(17.2)||6.1||18.6||16.7|
|AS AT MARCH 31 ($ billions)||2009||2009||2008||2007||2006|
|Foreign developed markets||38.3||40.4||47.5||46.1||32.7|
|Money market securities1||(0.7)||(0.8)||–||0.4||0.6|
|Rate of return (annual)3||-18.6%||-0.3%||12.9%||15.5%|
|1Includes amounts receivable/payable from pending trades, dividends receivable, accrued interest and absolute return strategies.
2Excludes non-investment assets such as premises and equipment and non-investment liabilities.
3Commencing in fiscal 2007, the rate of return reflects the performance of the investment portfolio, which excludes the Cash for Benefits portfolio.
At March 31, 2009, equities represented 57.4 per cent of the fund or $60.6 billion. That amount consisted of 44.0 per cent public equities valued at $46.5 billion and 13.4 per cent private equities valued at $14.1 billion. Fixed income including bonds, money market securities and other debt represented 27.9 per cent of the portfolio or $29.4 billion. Inflation-sensitive assets represented 14.7 per cent or $15.6 billion. Of those assets, 6.5 per cent consisted of real estate valued at $6.9 billion, 3.9 per cent was inflation-linked bonds valued at $4.1 billion, and 4.3 per cent was infrastructure valued at $4.6 billion.
To see a summary of the financial highlights, go to: www.cppib.ca/en/our-performance/financial-results.html.
Long-term Sustainability of the CPP Fund
CPP contributions are expected to exceed annual benefits paid through to the end of 2019, providing an 11-year period before a portion of the investment income is needed to help pay CPP benefits. During this period, the CPPIB expects net contributions of approximately $28 billion to flow into the Fund. The Chief Actuary of Canada estimates that a 4.2 per cent real rate of return, over a long-term time period, is required to sustain the plan at the current contribution rate. The Chief Actuary has reaffirmed the conclusion in his 2007 report that the CPP is sustainable throughout the 75 year timeframe of that report; the Chief Actuary will publish a new projection for the CPP in 2010.
“The CPPIB strongly believes we have the investment strategy and portfolio designed to generate the investment returns required to help sustain the CPP for decades and generations to come,” added Mr. Denison.
CPP Investment Board
The CPP Investment Board invests the funds not needed by the Canada Pension Plan to pay current benefits on behalf of 17 million Canadian contributors and beneficiaries. In order to build a diversified portfolio of CPP assets, the CPP Investment Board is investing in public equities, private equities, real estate, inflation-linked bonds, infrastructure and fixed income. The CPP Investment Board is accountable to Parliament and the federal and provincial finance ministers. Based in Toronto, the CPP Investment Board is governed and managed independently of the Canada Pension Plan and at arm’s length from governments. At March 31, 2009, the CPP Fund totaled $105.5 billion. For more information about the CPP Investment Board, visit www.cppib.ca.
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