CPPIB posts record 20.4% gain during pandemic year as fund closes in on $500 billion

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The Canada Pension Plan Investment Board posted its largest annual gain since inception — 20.4 per cent — ending the year with net assets of $497.2 billion.

John Graham, who took over as chief executive of the management organization that invests funds for the Canada Pension Plan in February after the sudden resignation of Mark Machin, said the results put CPPIB “seven years ahead of projections.”

The double-digit return for the fiscal year that ended March 31, helped by a strengthening Canadian dollar, boosted the 10-year annualized rate of return to 10.8 per cent.

The days of finding inexpensive assets are over and it really comes down to doing your homework

CPPIB John Graham

Graham said the investing team started the fiscal year in a largely defensive mode, but capitalized on geographic dislocations and expectations of pent-up demand as the year progressed.

“All of the departments navigated through the beginning of the pandemic and then continued to be active and continued to invest,” he said.

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A bet on the U.S. consumer that began before COVID-19 was declared a pandemic in March of 2020 is now paying off, Graham said.

“As we went through the year with the monetary and the fiscal stimulus, the U.S. consumer in particular showed tremendous resilience,” he said. “Our U.S. consumer portfolio has turned out actually to do very well through the fiscal year.”

An example of CPPIB’s exposure is its credit investments team’s purchase arrangement with Service Finance Company, LLC, a company that makes home-improvement loans.

“That’s turned out to be a really fantastic investment,” Graham said. “As we all know, home improvement has been in a boom over the past year.”

Pent-up demand from lockdowns and other economic restrictions aimed at controlling the spread of COVID-19 is expected to drive consumer trends over the coming year.

“As we sit here today and look at the economies opening up, we continue to see a lot of momentum in the consumer space,” Graham said.

Energy was another driver of performance in the fiscal year, in which CPP Investments boosted its holdings in energy and resources to $10 billion from $7.3 billion a year earlier.

“From a return perspective, the conventional energy portfolio did very well over the past year,” Graham said. “It certainly was a positive contributor to overall results.”

Energy and resources posted a 45.8 per cent return for the fiscal year, while power and renewables was up 14.1 per cent.

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For the coming year, Graham said he sees a “very mixed” picture around the world, with some economies already bouncing back while other parts of the world remain mired in the pandemic.

“Different countries are having very different experiences,” he said, adding that the focus of CPPIB’s office in Mumbai is ensuring employees are safe and getting the support they need.

Europe is showing signs of bouncing back as is North America, with vaccine programs well under way. The pension management organization is expecting “a pretty robust second half of the year with respect to economic growth,” Graham said.

He said he talks often with Ed Cass, CPPIB’s chief investment officer, about how macroeconomic factors such as potentially rising interest rates and inflation should be considered in the fund’s long-term strategy.

“For a pension plan, it’s not a bad thing to have higher rates; the trajectory there is something we’re actively navigating,” he said, adding that the release of pent-up demand could lead to some short-term inflation.

“What that means from an investment perspective is building a portfolio that’s resilient to it, really thinking about the companies we invest in and the ability to navigate through either higher inflation or higher expectations of inflation.”

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Finding investments at reasonable valuations is already tough, he said, particularly with more institutional investors, sovereign funds and endowments developing a taste for alternative investments favoured by pension funds.

“The days of finding inexpensive assets are over and it really comes down to doing your homework, rolling up your sleeves and doing due diligence on the investment opportunities and finding good companies that are going to be leaders tomorrow,” he said. “So really the teams, that’s what they’re doing, is digging deep and looking for good opportunities.”

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