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.
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.
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.
Canada’s two biggest pension funds are separately looking for partners to potentially bid on Rio Tinto’s stake in Iron Ore Company of Canada, the Wall Street Journal said on Friday, citing two people familiar with the matter.
The Canada Pension Plan Investment Board and Quebec’s Caisse de depot et placement du Quebec are “sounding out” other major institutional investors, the Journal said.
The Canada Pension Plan was not immediately available to comment and Caisse declined to comment.
Rio received 13 to 15 initial bids for its 59% stake in Canada’s largest iron ore producer and drew up a shortlist of roughly half that number, sources with knowledge of the situation said in early June.
The global miner, like its rivals, has promised to focus on key assets and sell off non-core operations as it stares down a US$19-billion debt burden and weak commodity prices.
When news of the possible sale broke in March, an industry source said a deal could value IOC’s stake above US$1.8-billion. The Journal said the stake could be worth some US$4-billion.
The Canada Pension Plan Investment Board and GE Capital Real Estate are teaming up in Japan with a joint venture dubbed the Tokyo Office Venture.
The initial investment will be JPY40 billion, or US$403 million, with GE holding a 51% stake.
“This venture will leverage the locally-based origination, underwriting, asset management and leasing teams of GE Japan Corporation, a wholly-owned subsidiary of General Electric Capital Corporation,” the joint venture partners said in a statement.
GE Capital Real Estate has been actively originating and managing real estate properties in Japan since 1998, and has acquired more than US$6.9-billion in office assets.
Graeme Eadie, senior vice-president and head of real estate investments at CPPIB, said in a statement that the investment provides “an attractive entry point to the Tokyo office sector” and supports the Canadian pension plan’s strategy to expand the real estate portfolio in Asia.
“We look forward to partnering with GECRE, one of the world’s premier real estate lessors with a proven track record in Japan,” Mr. Eadie said.
François Trausch, President of GE Capital Real Estate Asia Pacific, said the venture will benefit from the “global investment reach” of the Canadian pension.
Mark Wiseman, the chief executive of the Canada Pension Plan Investment Board, which invests on behalf of Canadian workers and retirees, says he won’t be lured into competition for hot real estate assets that could drive down returns.
“We have the luxury of not having to invest … and we can pick our spots,” Mr. Wiseman said in an interview Friday after the CPP Fund reported third-quarter financial results.
“Presently in both debt capital markets and in real estate, we’re seeing a lot of competition for assets … and we’re being very cautious.”
The situation is particularly acute in real estate, where there is limited supply of the well-situated, top-tier retail and office properties generally sought by CPPIB.
By way of example, Mr. Wiseman pointed to the record $1.27-billion paid by two real estate investment trusts in March for the downtown Toronto headquarters of the Bank of Nova Scotia.
He said he expects CPPIB’s private equity teams to be busier over the next little while, noting the appetite for leverage that was demonstrated in the recent US$24.4-billion privatization of computer maker Dell. CPPIB, which invests the funds not needed by the Canada Pension Plan to pay current benefits, was not involved with that deal.
The fund reported gross investment returns of 3% in its fiscal 2013 third quarter.
“We continued to see solid returns this quarter due to strong increases in global public equity markets and income generated by the portfolio’s private assets,” said Mr. Wiseman, who took the helm at the CPPIB last July following the retirement of David Denison.
“This quarter’s results reflect the strength and capabilities of our diversified global platform, as all investment groups delivered gains.” In the first nine months of the fiscal year, which ends in March, the CPP Fund increased by $11-billion to $172.6-billion. This includes $9-billion in investment income before operating expenses, representing a gross investment return of 5.5%, and $2.4-billion in net CPP contributions. The fund’s asset mix at the end of December included public and private equities totalling $85.4-billion, $57.8-billion of fixed income and real estate, and infrastructure assets of $29.6-billion.
The CPPIB said net assets as atDec. 31 were $172.6-billion, up $2.5-billion from the quarter ended Sept. 30.
The increase in net assets after operating expenses resulted from $5-billion in investment income, offset by $2.4-billion of seasonal cash outflows.
The CPP fund says it routinely receives more CPP contributions than are required to pay benefits in the first part of the calendar year and then remits a portion of those funds for benefit payments in the latter part of the year.
In the latest triennial review released in November 2010, the chief actuary of Canada reaffirmed that the CPP remains sustainable at the current contribution rate of 9.9% throughout the 75-year period of his report. That includes the assumption the fund will attain an annualized 4% real rate of return.