Pension board seeks investment opportunity in depressed market

TORONTO — The Canada Pension Plan Investment Board says it hopes to take advantage of weak stock and credit markets by finding bargains and ramping up its private investments in infrastructure, real estate and other sectors.

TORONTO — The Canada Pension Plan Investment Board says it hopes to take advantage of weak stock and credit markets by finding bargains and ramping up its private investments in infrastructure, real estate and other sectors.

Steep declines on global stock markets in the last three weeks will no doubt have an impact on the fund’s second-quarter results, as more than 50 per cent of its portfolio is made up of stocks, said David Denison, president and CEO of CPPIB.

But the size and long-term focus of the board — which invests the money not immediately required to pay retirement pensions to Canadians —mean that it can benefit from depressed stocks and tighter credit markets during periods of economic uncertainty, he added.

“We’re more than willing to take advantage of our comparative strengths as an investor during these times,” Denison said in an interview after the board announced a big increase in its latest quarterly assets.

“We think as others —whether out of neccessity, or fear, or momentum — are driven to be sellers of assets, this is the time we can step in as a buyer.”

Recent moves by the board to aggressively pursue opportunities in private equity, real estate and infrastructure helped the fund end the first quarter of its fiscal 2012 year with net assets up 18 per cent year over year.

The fund had $153.2 billion in net assets at June 30, up from $129.7 billion at the end of the first quarter of fiscal 2011.

“Equity markets were still pretty negative in this quarter, the Canadian equity market was down almost five-and-a-half per cent, for instance,” Denison said.

“But what was a key contributor, was the valuations of our private market assets in this quarter.”

Earlier Thursday, the CPP Investment Board said the increased asset values came largely from $1.3 billion of investment income, despite a tumultuous quarter for global stock markets.

Though the fund’s private holdings make up a smaller percentage of its portfolio than public equities, higher valuations in that market helped to offset weakness on the stock market.

Real estate in the U.S. and the U.K. had been severely undervalued in the last two years, reflecting the troubling economic conditions, but during the quarter, values returned to more “realistic” levels, providing the CPPIB with better income, Denison said.

The board had earlier signalled caution about buying opportunities this year as credit market activity began to heat up, allowing more competitors to bid on assets it wanted.

“Obviously those market conditions have changed fairly dramatically, so our worry about frothy markets is a distant memory now,” Denison said.

The board was very active in the most recent quarter, announcing more than $2.2 billion in deals.

It scooped up a stake in shopping centres in the U.S., Germany, and Australia, as well as a 50 per cent stake in an industrial facility in Hong Kong, a 24 per cent stake in Norwegian gas transport infrastructure, and a stake in a Western Canadian oil and gas platform.

“We actually think that we may see more of those similar kind of compelling investment opportunities come out of these uncertain volatile market conditions,” Denison said.

“We don’t wish these market conditions on ourselves or anyone else, but when they do appear there are just a few organizations like us that have the opportunity to take a long-term view — that aren’t as reliant on accessible credit markets.”

Equities make up 51.8 per cent, or $79.4 billion of the CPPIB investment portfolio. Public equities represent 36.1 per cent, or $55.3 billion of that value and 15.7 per cent or $24.1 billion invested in private equity.

Fixed income, which includes bonds, money market securities, other debt and debt financing liabilities, represented 31.1 per cent or $47.7 billion of its portfolio in the most recent quarter.

About eight per cent of the fund is invested in infrastructure and about six per cent is in real estate.

In its first-quarter, the value of the fund’s assets also improved by $5 billion from the previous quarter, ended March 31. About $3.8 billion in excess CPP contributions also helped the fund grow in the most recent quarter.

The fund saw investment returns of 0.9 per cent, compared to minus 1.3 per cent in the quarter last fiscal year.

The fund’s five-year annualized investment rate of return stood at four per cent, at the end of the quarter. The 10-year rate of return was six per cent.

The CPPIB is designed to build up a pool of investments that can generate enough money to take up the slack as contributions from employers and employees fall.

The most recent projection pegs the sustainability of the fund at 75 years, with contributions expected to exceed annual benefits paid until 2021.