In 2006, CPP Investments decided to adopt an active management strategy as a means of improving the overall returns of the CPP Fund. Given that ten years have passed since that decision, we thought we’d take the opportunity to step back and assess its impact to date. While a decade is too short a period to form conclusions, we can get a general sense of how our active investment approach is tracking.
How we looked ten years ago
At the end of March 2006, the CPP Fund was valued at $98 billion. At that time, the Chief Actuary of Canada (who reports triennially on the sustainability of the Fund) predicted it would rise to $235 billion by the end of 2015, assuming investment returns of between 3.6% and 4.4% per year.
By 2006 the CPP Investment Board had been in existence for nine years (having been created by an Act of Parliament in 1997) and had 90 full-time employees. It managed the Fund passively, adopting essentially a low-cost approach that favoured tracking existing indices rather than seeking out unique investment opportunities through in-house expertise and research.
The decision to invest actively
In the context of our mandate CPP Investments assessed whether it could generate value-added results above a passive benchmark while not taking on excessive risk. Given CPP Investments’ comparative advantages of a long investment horizon, the certainty of our cash flows, and scale, management concluded that an active management strategy would be a responsible choice and in the best interests of the Fund. By building broad internal expertise and strong relations with potential partners, and by applying a total portfolio approach, we felt confident we could achieve above-market returns over the long term.
Shifting to an active model
The decision to invest actively was not made lightly. In order to justify the significant resources needed to execute the strategy and the increased complexity and risk that come with active management, we first had to be confident that we could generate sufficient additional returns over the long term. To achieve this goal, we needed expert talent, skill and global capabilities; the ability to generate and leverage best-in-class research; and appropriate internal systems, processes and strong operational support. Finally, we had to develop an overall approach that was thoughtful, patient and disciplined.
So how have we done?
Overall we have seen solid performance over the ten-year period. Since fiscal 2006 we have generated cumulative net investment income after costs of $125.6 billion. We have generated a nominal rate of return of 6.8%. And we’ve created $17 billion in dollar value-add which would otherwise not have been available through a passive portfolio.
In other words, the Fund – and the people of Canada – have benefited significantly from our active management approach.
It is important to remember that our active investment programs weren’t all in place for the entire ten-year period. As these programs – and our assets – mature, we anticipate achieving even greater value-building growth in future. The work we have done to develop the associated expertise, systems, operational capabilities and culture provides a strong foundation to benefit from active management over the long term.