Canada’s pension powerhouse scans globe for offbeat investments as cash pile balloons

A farmer’s field in Saskatchewan and a reinsurance company based in Bermuda are not typical “assets” one might expect to find in the portfolio of Canada’s largest pension fund.

But offbeat investments are becoming more common for the Canada Pension Plan Investment Board, which manages a fund that has grown so large, so fast — about $220-billion in assets — that it would own roughly 10% of every company in the broad Canadian market index if it invested only in domestic stocks.

Deploying a growing pile of cash more sensibly has meant looking at alternative investments and looking well beyond Canada.

Created in 1997 to invest funds not needed to pay current benefits of the national Canada Pension Plan scheme, the CPPIB now owns real estate and infrastructure such as toll roads, and has offices in Hong Kong, London, New York, and Sao Paulo. Investments are spread across the world including China, India, Brazil, and Mexico.

With projections of steep growth of investible cash from the annual contributions of Canadian workers, plus investment income, continuing to find deals that will add value is a challenge.

We get shown a lot of deals and opportunities . . . I would say we turn down 95% of them

“We get shown a lot of deals and opportunities,” Ed Cass, who took over as the fund manager’s chief investment strategist in April, said in an interview. “I would say we turn down 95% of them.”

A single-profession pension such as the Ontario Teachers’ Pension Plan has to deal with the challenges of a large aging pool of pension beneficiaries against a shrinking pool of younger contributors, but the biggest challenge at CPPIB is arguably the pressure to find a constant stream of investments for its funds. While that sounds easy enough, trying to buy alongside a group of equally motivated competitors can drive up prices and eat into returns. The active investments, together with a passive portfolio, must produce sufficient returns to fulfill CPPIB’s mandate of providing a foundation for the retirement security of 18 million Canadians.

“There are much bigger funds, like some sovereign wealth funds, out there and this is a problem for all of them in employing active management,” said Robert Heinkel, a finance professor at the Sauder School of Business at the University of British Columbia. “The more money dumped into an active strategy, the harder it is to add value [in part because] asset decisions move asset prices.”

The CPPIB’s growing assets surpassed those of the powerhouse Caisse de dépôt et placement du Québec for the first time in the summer of 2012, at $165.8-billion, and the growth since then has been phenomenal. CPPIB now manages a fund with assets of nearly $220-billion as of March 31 — and Canada’s chief actuary expects them to balloon to more than $1-trillion by 2045. It is the only Canadian pension in the top 10 of the latest P&I/Towers Watson Ranking of 300 global pension funds.

Adding to the fund’s girth is the fact that none of the invested funds will be drawn down to pay benefits until at least 2023, according to a recent report from Canada’s chief actuary.

There is little danger of growing too big to actively invest. After all, as Mr. Heinkel noted, “the value of all global commercial real estate, for example, is a pretty big number.”

But CPPIB’s mandate prohibits it from becoming too concentrated in a single area.

Mr. Cass says diversification, both in terms of geography and assets, is and will remain an important element of the strategy as the fund grows. “[It] gives us the opportunity to assess investment opportunities in areas we feel will be major drivers of global growth in the years ahead, such as developing markets,” he says.

And if competition is making some private assets expensive, CPPIB’s team is not under pressure to invest right away.

Sanjit Das/Bloomberg

Sanjit Das/BloombergIn June, CPPIB announced a US$332-million investment in India’s infrastructure sector, one of several deals announced that month. Above, a cyclist rides past a buildings under construction in a Larsen & Toubro Ltd. construction zone in the Anandapur area of Kolkata, West Bengal, India.

Putting money in a passive “reference” portfolio of stocks and bonds allows the fund’s managers “to buy time as we examine other opportunities,” Mr. Cass says. “We’re not constrained to having to source deals in order to deploy assets.”

CPPIB’s long investment horizon also gives it an advantage over other buyers, such as private equity players who often have a much shorter investment horizon of three-to-five years. As a result, the deals keep rolling in, sometimes weekly.

In June alone, for example, CPPIB announced a real estate purchase in London with a partner, a US$332-million investment in India’s infrastructure sector and the $250-million acquisition of a 6% stake in financial information services provider Markit Ltd. through its initial public offering.

On Friday, CPPIB expanded its multifamily residential portfolio in the United States, committing an additional US$330-million to bring the organization’s total equity commitments in the sector to US$1.3-billion.

Though it’s early-days in pension terms, CPPIB’s seven-year-old strategy of balancing passive investments in public markets with active investments aimed at generating higher returns — so far resulting in a “value add” of $3-billion after costs — has drawn international attention.

We’re not constrained to having to source deals in order to deploy assets

A study commissioned by Norway’s Ministry of Finance this year urged that country’s sovereign wealth fund — nearly four times the size of the CPP fund — to emulate the investing style of the Canadian investment organization.

A couple of years ago, Canadian pension managers including CPPIB and the OTPP were dubbed “maple revolutionaries” by the Economist magazine in recognition of the decision to take investing expertise “in-house” and invest directly outside the public markets.

Mr. Cass acknowledges the need to cast a wider net these days, but insists investments can remain within the CPPIB’s broad mandate and expertise.

A recent transaction he allows as “atypical in a historical sense” is last December’s agreement to invest up to $128-million to acquire the assets of Assiniboia Farmland LP. The fund manages about 115,000 acres of farmland in Saskatchewan. Another is the acquisition of re-insurance company Wilton Re; in March, CPPIB paid US$1.8-billion for its first direct investment in the insurance business.

Dave Olecko/ Bloomberg News

Dave Olecko/ Bloomberg NewsCPPIB recently acquired the assets of Assiniboia Farmland LP, a fund that manages about 115,000 acres of farmland in Saskatchewan.

Wilton Re is an operating insurance firm, but the investment group characterizes the investment as an acquisition of an attractive “asset class” — life insurance portfolios purchased at a discount that will throw cash from premiums, perhaps for decades. It is also viewed as a platform for further purchases within that asset class.

While unusual, both the farm and insurance investments are nonetheless in keeping with CPPIB’s goal of building a global diversified portfolio that can be scaled up as the fund and its obligations grow, Mr. Cass said.

“They’re new in that we haven’t done them before, but they still adhere to the same kind of overarching principles,” he said.

Another important strategy for CPPIB is working with sophisticated investment teams around the world. Initial investments in global private equity funds have led to direct investments by CPPIB as a partner when the private equity players source fresh deals.

The Canadian fund is often called upon as a preferred investor in such “smart partnering” arrangements, Mr. Cass said.

This has led to some notable wins, such as a US$300-million investment in Internet communications company Skype that more than tripled in just 18 months. That deal was sourced though an initial investment in funds run by Silver Lake Partners, a global investment firm specializing in technology.

But not every deal will be a Skype, and as the fund grows Mr. Cass said the team is well aware that risk-management must also evolve. To that end, a two-year effort is under way “to ensure that scalable investment risk-management tools are in place that are appropriate to the continuing evolution of our investment programs,” he said.

Denis Doyle/Bloomberg

Denis Doyle/BloombergA Skype investment panned out nicely for CPPIB.

The CPP fund’s 10-year annualized rate of return was 7.1% as of March 31 and the cumulative investment income for a 10-year period is $95.1-billion.

Given that the CPPIB plays such an important role in the retirement security of Canadians, some would like to see beefed-up disclosure of individual and sector returns to better assess the strategy as the fund grows.

Pension expert Keith Ambachtsheer said it’s still early to assess the CPPIB’s overall performance, in part because it’s difficult to accurately value private investments, and also because there are issues that can arise, from economic to political, that affect long-term performance.

In addition, results that may not compare favourably to a passive portfolio in a bull market can be expected to look better when public markets inevitably correct.

“It’s a 20-year process,” Mr. Ambachtsheer said, adding that the success of the Ontario teachers plan board, which pioneered the active investing style in the 1990s, is easier to judge.

The “value-added” by Teachers’ investment strategy works out to 2% per year over two decades.

“That’s a good figure,” Mr. Ambachtsheer said.

CPPIB names Heather Munroe-Blum to replace Robert Astley as chairperson

Heather Munroe-Blum has been appointed chairperson of the board of directors of the Canada Pension Plan Investment Board.

Her three-year term begins Oct. 27.

Ms. Munroe-Blum, who spent a decade as principal and vice-chancellor of McGill university, replaces Robert Astley, who has been chairperson since 2008.

“Mr. Astley oversaw CPPIB through a tremendous period of growth as it evolved into a global investment organization, endured the global financial crisis, diversified the CPP Fund globally and pursued its long-term active management strategy,” according to a statement from the pension manager.

Ms. Munroe-Blum has been a director of CPPIB since 2011 and is a member of its human resources and compensation committee. She is a director of the Royal Bank of Canada and has been on the boards of Four Seasons Hotels, Alcan, Yellow Media Inc., and Hydro One (Ontario).

“I am honoured to assume the role of Chairperson and build on Bob Astley’s remarkable leadership,” she said in a statement. “I look forward to working closely with the Board of Directors and President & CEO Mark Wiseman and his management team as CPPIB continues to pursue its long-term strategy to invest the largest single-purpose pool of capital in Canada.”

The CPPIB invests the funds not needed by the Canada Pension Plan to pay current benefits. The CPP Fund totalled $219.1-billion at the end of March, the most recent reporting period.

The chairperson appointment process is overseen by the federal finance minister in consultation with participating provinces.

 

CPPIB ventures into India with $332-billion stake in toll road company

The Canada Pension Plan Investment Board is making its first infrastructure investment in India by taking a US$332-million stake in a toll road company.

CPPIB will invest in L&T Infrastructure Development Projects Ltd. in two tranches through a wholly owned subsidiary.

L&T Infrastructure owns the largest toll-road concession portfolio in India with 19 toll-roads spanning more than 2,200 kilometres that connect cities, ports and economic corridors. The parent company Larsen & Toubro Ltd., is the country’s largest engineering and construction company.

“This transaction represents CPPIB’s first investment in India’s infrastructure sector with a highly reputable partner and fits well with our strategy for India as a long-term growth market,” said André Bourbonnais, senior vice-president of private investments at the Canadian pension.

CPPIB, which invests funds not needed to pay current benefits of the Canada Pension Plan, has made large investments in toll roads in the past, including a $1.14-billion stake in five major Chilean toll roads and a significant holding in the 407 toll highway in the Toronto area.

The transaction in India is subject to closing conditions and approval from government authorities and regulators.

The second investment of US$166-million will be made 12 months after the first investment of equal size closes.

The CPP Fund had assets of just over $219-billion at the end of March, its most recent reporting period.

With CPPIB in its corner, Markit Ltd surges in first day of trading

When Burnaby, B.C.-born Lance Uggla left his job with TD Bank in England to launch a financial data startup, he probably didn’t have the Canada Pension Plan’s investment arm in mind as a future investor.

But that’s exactly what he ended up with.

One day after Mr. Uggla’s company, Markit Ltd., raised US$1.3-billion in its initial public offering, Canada Pension Plan Investment Board said Thursday it invested US$250-million to acquire a 6% stake in the company.  There was clearly no shortage of demand for the offering, as shares surged more than 11% in the first day of trading to close at $26.70 on the Nasdaq.

CPPIB’s investment makes it one of Markit’s top shareholders, and gives it the right to nominate a director to the board.

And it all came from Mr. Uggla’s realization that there was a market for clear, transparent data about the credit default swap industry – a market that has grown, now that regulators are demanding more information following the subprime loan crisis of 2008.

“These regulatory changes have required a couple of very key changes to the marketplace, especially for derivatives, that have been a boon to Markit’s growth,” Mr. Uggla said. “That’s been a growth area for the firm and will continue to be as those requirements move to other asset classes.”

The credit derivative industry, in which lenders who are concerned customers won’t be able to repay their loans can transfer the risk to someone else, came under the microscope after the financial crash. In Europe and North America, derivatives now have to be centrally cleared and trades have to be reported to a regulator.

That creates a cost for financial institutions and an opportunity for Markit to provide a solution. Today, the company has expanded to 20 offices worldwide providing a range of data and services.

Mr. Uggla said a difference between Markit and its competitors is that his company produces its own data, whereas companies like Reuters and Bloomberg focus on distributing it. In fact, Markit provides some data to Reuters and Bloomberg for distribution, he said.

“We do compete, but in all financial information and services, there are many participants doing some things the same and some things quite differently,” Mr. Uggla said. “If you are a market participant that respects its competitors, there are also opportunities to be partners.”

Mr. Uggla said Daniel McCarthy, a banker with Credit Suisse Canada, introduced Markit to CPPIB. Credit Suisse was one of the underwriters of the IPO.

Sources familiar with the matter said early in 2013, Mr. McCarthy approached Scott Lawrence, CPPIB’s vice-president of relationship investments, reasoning Markit would be a good fit with the pension fund’s strategy of long-term investment in growing companies. But Markit didn’t go public right away, raising capital by selling a large stake to the Singapore investment firm Tamasek that spring instead.

Mr. McCarthy continued to encourage Markit and CPPIB to get to know each other, eventually arranging a dinner meeting in London in January. The meetings and research continued for months, the source said.

In a regulatory filing in early June, CPPIB indicated an interest to purchase up to $450-million of shares.

Mr. Lawrence said $450-million was an upper limit. “The demand for the stock was so high, it made sense to give additional stock to some of the other interested investors to generate more liquidity in the stock and facilitate trading,” he said.

The Markit deal is characteristic of a more aggressive investment approach CPPIB has been taking, which comes with higher potential rewards but also higher risk. Mr. Lawrence said he’s confident Markit was a good buy – and that having a hand-picked director on the board will help ensure the company is making good use of Canadians’ future retirement funds.

“We think it’s appropriate when you have a large enough stake to have governance go alongside it,” Mr. Lawrence said. “I think it speaks to our conviction in the future prospects of Markit and our belief that the company has a fantastic growth opportunity far into the future.”

Mr. Uggla said CPPIB’s investment is a point of pride for Markit.

“Their investment in us is a real testament to our company. They did a substantive amount of due diligence and we’re quite proud that they made the decision to participate in this offering,” Mr. Uggla said. “I think they help our brand and credibility, not just in Canada but around the world, as a well-known, prolific investor.”

One of world’s top wealth funds urged to adopt style of investing pioneered by Canadian pension

One of the world’s top sovereign wealth funds is being urged to improve returns by adopting a model pioneered by Canada’s largest pension manager, the Canada Pension Plan Investment Board.

A study by the Columbia Business School, commissioned by Norway’s Ministry of Finance, says the Norwegian Government Pension Fund Global, which manages $860-billion, should take more risk and adopt the “opportunity cost model” pioneered by the CPPIB.

The Canada Pension Plan Investment Board, which manages nearly $220-billion, combines a “reference portfolio” of low-cost passive exposure to stock and bond indexes with active investments intended to provide “superior risk adjusted returns” relative to the reference portfolio.

In the aftermath of the financial crisis of 2008, the Norwegian pension reduced its exposure to risk and “is likely missing out on opportunities to increase returns through a more balanced approach,” the study says, adding that the “Canadian model would help improve that.”

“The focus of active management becomes the component of returns that cannot be obtained in public market investments as captured in the reference portfolio benchmark,” the study notes. “This raises the bar and accountability for active management.”

The Norwegian fund manages that country’s royalties from oil and gas reserves in the North Sea and is one of the largest capital pools in the world. It holds predominantly publicly traded stocks and bonds, and only began investing in real estate in 2011.

CPPIB would consider BlackBerry investment if company goes private

Canada Pension Plan Investment Board’s Chief Executive Officer Mark Wiseman said he would consider an investment in BlackBerry Ltd. if the smartphone maker decided to go private.

“It’s safe to say that any large deal in Canada or elsewhere is something that we would make sure we took a hard look at,” Wiseman said in a phone interview Friday when asked about BlackBerry. “You could say that about that asset.”

Canada Pension has invested and benefited from technology companies in the past. It more than tripled a $300-million investment in Skype Technologies SA in two years before selling the stake in 2011 to Microsoft Corp. The Toronto-based fund manager had invested in Skype with private-equity firms including Silver Lake Management LLC.

BlackBerry is considering going private as a way to turn the company around, Reuters reported earlier Friday.

Canada’s second-largest pension fund manager had $188.9-billion of assets and manages retirement savings for 18 million people in every province except for Quebec.

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CPPIB earns 1.1% return in first quarter

TORONTO — The Canada Pension Plan Investment Board said Friday it earned a return of 1.1% for the first quarter of its current financial year.

The fund managed by the CPP Investment Board totalled $188.9-billion at June 30, up from $183.3-billion at the end of the previous quarter.

The gain included $1.9-billion in net investment income and $3.7-billion in net CPP contributions made by Canadian employees and employers.

The fund held $93.5-million in equity investments such as stocks, $63.4-million in fixed income such as bonds and $31.9-billion in real estate and infrastructure investments.

The CPP Investment Board invests money not needed by the Canada Pension Plan to pay benefits for current retired contributors.

CPPIB continues investing in Brazil with stake in public real estate company

The Canada Pension Plan Investment Board is departing from strategy by making an investment in a publicly traded real estate company, rather than the underlying asset.

CPPIB, which invests funds for the Canada Pension Plan, signed an agreement Monday to buy a 27.6% stake in Brazil’s Aliansce Shopping Centers S.A. from General Growth Properties Inc. for US$480-million. The transaction is expected to close this fall.

Based in Rio de Janeiro, Aliansce is one of Brazil’s top publicly traded real estate operating companies, according to a statement from the Canadian pension. It owns, manages and develops enclosed shopping centres, and has a portfolio of 17 shopping centres and two development projects in various regions of Brazil including São Paulo, Rio, Salvador, Belem and Belo Horizonte.

Aliansce was formed in 2004, and owns or manages a retail portfolio totalling more than 8.6 million square feet.

“Acquiring an interest in Aliansce allows us to gain scale in a key target segment with a diversified portfolio of high-quality, modern shopping centres located throughout Brazil including the economically dominant Southeast and fast-growing Northeast regions,” said Peter Ballon, vice-president and head of real estate Investments for the Americas at CPPIB.

“We look forward to working with Aliansce’s experienced management team, whom we know well, as we look to expand our retail platform in Brazil.”

CPPIB already had a real estate portfolio in Brazil, alongside partners, with a value $900-million. The portfolio includes interests in retail, office and logistics properties totalling more than 35 million square feet, including development assets.

“This transaction represents a significant expansion of CPPIB’s real estate portfolio in Brazil which remains a strategic market for us over the long term,” said Mr. Ballon. “We will continue to seek attractive investment opportunities across the retail, logistics and office sectors through partnerships with top-tier local partners.”

In an interview from London on Monday, Mr. Ballon said CPPIB was approached by the seller, General Growth Properties, which is also a joint-venture partner of CPPIB in the United States. The Canadian pension decided to buy the stake in the publicly traded Brazilian real estate company because it shares the growth profile of direct real estate investments in that country, he said.

“We are looking at this as a very long-term investment,” Mr. Ballon said, adding that short-term market movements won’t be used as a measure of success or failure.