Canada Pension Plan's investments see 'explosive' growth

Whether they realized it or not, many Canadians did rather well in 2012 investing in companiesthat included Nintendo, Rolls Royce and MasterCard.

The odds are also good that many of us will one day reap the benefits of our holdings in Australian shopping malls, toll roads in Chile and the sale of a $964-million stake in Skype, which were just three of the more notable deals that passed last year through the ledgers of the Canada Pension Plan.

The fund behind Canada's largest single-purpose pension was worth just over $170 billion by the end of September 2012, up from some $152 billion in 2011, partly on the strength of investments that include overseas real estate and infrastructure, according to the Canada Pension Plan Investment Board.

The Toronto-based board has since 1997 invested the pension's funds on behalf of the governmenttasked with helping keep the CPP, a key ingredient of so many retirement plans, in the black.

Residents of Quebec are paid through a separate pension, the QPP, which is Canada's second largest pension fund and is managed by Caisse de dpt et placement du Qubec. The Caisse, which manages not just the QPP but several other public pension and insurance plans, isalso an aggressive investor in a wide range of domestic and international ventures, with net assets totalling $165.7 billion as of June 30, 2012.

Canadian pension funds are global leaders

CPPIB's investmentsreturned 6.6 per centfor the end of its last fiscal year, back in March; just above thefour per centplus inflation the bookkeepers say is needed to keep the fund sustainable at current contribution levels.

'They've clearly done a good job it's been explosive growth.' Paul Taylor, BMO Asset Management

CPPIB and other public Canadian pension funds, such as the Ontario Teachers' Pension Plan, are these days out-performing public pensions elsewhere in the world.

"They've clearly done a good jobit's been explosive growth," Paul Taylor, chief investment officer for fundamental Canadian equities at BMO Asset Management, said of of the investment board's management of CPP funds.

The investment income isn't currently needed to maintain pension payments. Those expenses are covered by CPP contributions, though that is expected to change in 2021. By that time, "a small portion" of the investment income will be needed to make ends meet, according to CCPIB.

"The growth of the overall asset pool has been meaningfully moved along by actual contributions versus market growth," says Taylor. Eight years from now, "we'll be paying more in benefits than we're collecting in contributions."

That and the overall poor state of retirement savings among Canadians have led to calls for changes to CPP.

Foreign and private equity

Last year saw CPPIB invest in AMP Capital Retail Trust, which is part owner of two prominent Australian shopping malls. It alsopaid $1.1 billionfor a near-majority stake in five toll roads in Chile and almost tripled its initial investment in Skype when the online video callservice was bought by Microsoft.

Those deals are in keeping with a trend at pension funds away from public equity. CPPIB's newly appointed and well-regarded CEO, Mark Wiseman, has said private equity, real estate and infrastructure are a better fit for the long view and relatively risk-averse tastes of CPPIB.

"We believe that private equity assets can produce risk-weighted returns that will outperform public equities in the long run," he told the Globe and Mail in September 2012. CPP's holdings in publicly traded companies amounted to 33.2 per centof the portfolio in June 2012, down from 45.7 per cent in June 2009.

The change "makes a lot of sense" says Taylor. "By keeping a big chunk of their assets away from the public market, they get away from all that short-term noise. They don't want to go on a roller-coaster."

CPPIB is also gradually adding more international investments. About 40per centof its portfolio was Canadian in 2012, and though the board says "a large part" of the fund will remain invested at home, the need for a diverse portfolio will over time see more of its cash go overseas.

"A strategy that invests predominantly in Canada would not be in the best interests of CPP contributors and beneficiaries," says CPPIB on its website.

Large deals closed recently in the U.S. include a joint effort toacquire cable TV distributor Suddenlink Communications and CPPIB's $400-million investment in theauto racing Formula One Group.

Upon closing the shopping mall deal, Wiseman also expressed a general interest in Australian investments in light of, among other things, the country's resilience during the recent global economic crisis.

Weapons, tobacco and Tootsie Rolls

Leo Kolivakis, publisher of thePension Pulse blogand a former senior analyst at Caisse de dpt et placement du Qubec, applauds the board's recent deals in the U.S.but has some doubts about Down Under.

Australia's similarity to Canadaboth are resource-based economiesdoes little for the diversity of CPPIB's portfolio, says Kolivakis, and there are signs of weakness in its real estate market.

"What concerns me about Australia is the same thing that concerns me about Canadian real estate that consumers are over-leveraged," he said. "The housing bubble has burst over there, and it's going to burst over here as well.

"But having said that, these are smart guys, they've done their homework, and they don't need to sell tomorrow. They can keep an investment for a long time and sell when the time is right."

CPPIB invests in a dizzying array of companieseverything from Porsche, Coca-Cola and the maker of Tootsie Rolls to more controversialbusinesses such as alcohol and tobacco firms and some of the world's biggest weapons manufacturers, which might raise a few eyebrows among some of the fund's contributors. Anheuser-Busch, Imperial Tobacco and Lockheed Martin are among the portfolio's holdings, according to CPPIB's latest update.

The board is mandated by law to evaluate companies only by their investment potential; morals and politics generally don't enter the picture. And though some Canadians might not approve, changing the law that governs the CPP is exceptionally hard and requires the approval of two-thirds of the provinces representing two-thirds of the population, a point not lost on the politicianscurrently wrestlingwith how best to preserve the CPP for the future.