CPPIB breaks winning streak with $23-billion loss

Uncertain investing climate and market volatility expected to continue

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The Canada Pension Plan Investment Board, which had been stick-handling economic and market fallout from the COVID-19 pandemic without losses, ended that streak in its first fiscal quarter.

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On Thursday, CPPIB reported a 4.2 per cent loss, equivalent to $23 billion, for the three months ending June 30. Net assets fell to $523 billion from $539 billion, and included an influx of $7 billion from CPP contributions.

“Uncertain business and investment conditions and market turbulence (are) anticipated to continue throughout the fiscal year,” CPPIB, the manager of assets for Canada’s national pension scheme, said in a document accompanying its financial results.

However, it added that the CPP Fund is “well positioned to continue to add value over the long term and successfully navigate market turbulence.”

CPPIB said there was a 52 per cent increase in market volatility in the first quarter from a year earlier, with contributing factors including Russia’s invasion of Ukraine, inflation, supply chain interruptions and “pandemic spark” volatility, which resulted in significant declines in global equities and bond prices.

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The Fund’s five-year net real return, which accounts for all costs and inflation, is 5.3 per cent. The 10-year net real return is 7.8 per cent. Before those adjustments, the five and 10-year annualized net returns were 8.7 per cent and 10.3 per cent.

CPPIB said the first-quarter loss was driven primarily by losses in public equity strategies, due to the broad decline in global equity markets, while investments in private equity, credit and real estate “contributed modestly to the losses.”

Meanwhile, losses in fixed income due to higher interest rates imposed by central banks to fight inflation were offset by foreign exchange gains of $3.1 billion as the Canadian dollar weakened against the U.S. dollar. CPPIB invests around the world but reports its financial results in Canadian dollars.

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The pension management organization said positive results in the first quarter came from gains by external portfolio managers, quantitative trading strategies and investments in energy and infrastructure.

“Financial markets experienced the most challenging first six months of the year in the last half century, and the Fund’s first fiscal quarter was not immune to such widespread decline,” John Graham, chief executive of CPPIB, said in a statement. 

“However, our active management strategy — diversified across asset classes and geographies — moderated the impact on the Fund, preserving investment value.” 

Canada’s chief actuary has determined that the CPP fund will be sustainable at current contribution rates over the next 75 years if it returns 3.95 per cent annually on base accounts and 3.38 per cent on additional accounts, after taking into account inflation and all costs.

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In his statement, Graham said the portfolio is set up to withstand a double-digit percentage loss once every 20 years, and noted that CPPIB beat returns for leading global indices in the first quarter. The global indices declined, on average, well into double-digit territory, he said.

“The uncertain business and investment conditions we noted in the previous quarter continue, and we expect to see this turbulence persist throughout the fiscal year,” Graham said. 

“We know Canadians are concerned about the impact of market volatility on their retirement plans, and they can take comfort in the fact that the Fund is expected to deliver solid performance over the long term, even with periodic turbulence such as we are witnessing this year.” 

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Veteran pension consultant Keith Ambachtsheer said declines in the market value of pension plan portfolios should not be considered true losses because assets were not sold for less than their acquisition price. 

“The decline in market value of (the CPP Fund’s) portfolio in the last quarter simply means that its investments were valued somewhat lower than they were three months ago,” he said, adding that lower valuations should works in CPPIB’s favour as it continues to hunt for investments. 

“This means its incoming cash flow can now buy assets at lower prices than it could three months ago,” he said.

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