CPP reserve fund swells to $87 billion

(August 11, 2005) The Canada Pension Plan Investment Board (CPPIB) is beefing up its real estate and infrastructure holdings in an ongoing effort to diversify and hedge pension assets against inflation. In the last quarter, the board nearly doubled its real estate holdings to meet those objectives. Overall, the CPP reserve fund grew $5.7 billion to $87 billion during the quarter ended June 30, 2005.

The CPP reserve fund manages investment earnings and CPP contributions that are not needed to pay current pensions. Since the fund made its first investment back in 1997, the reserve fund has almost doubled to its current level of $87 billion. Nearly 60% of those gains, or $25 billion, were generated through investment returns. David Denison, president and CEO of the CPPIB, says he expects assets will almost double again to $160 billion in the next six or seven years.

In the last quarter real estate holdings nearly doubled, thanks to the fund’s $1 billion investment in a national portfolio of commercial real estate properties including, among others, the Canterra Tower in Calgary, Edmonton City Centre and the Bell Tower in Edmonton, Royal Bank Plaza and One Financial Place in Toronto and the Guinness Tower in Vancouver. The CPPIB acquired a 50% ownership interest in the portfolio of properties from Oxford Properties Group in June.

Although there is no fixed target for the asset class, ultimately the fund would like to increase holdings its property and infrastructure portfolio to about 10% of the overall portfolio.

To that end, the CPPIB has created a separate department for real estate investments and appointed vice president Graeme Eadie, former CFO at Consumers Packaging and Dylex Limited, and COO of Cadillac Fairview, to head of real estate investments.

“As you can see from our results, we’ve grown our real return assets from 1.2% at the start of the year to 4%,” says Denison. “That is significant progress, but we are going to be disciplined about the kinds of investment activity that we make in this area.”

Going forward, he says it is unlikely that rate of progress will continue the next quarter. “Certainly if opportunities that are of the quality of the Oxford investment, we will examine those. If we can acquire them at reasonable valuation we would certainly be prepared to do so.”

During a conference call, Denison also announced the fund recently appointed John Ilkiw, former director of research and strategy at the Russell Investment Group, to vice president of research and risk management.

During the last quarter the fund earned $3 billion from investments and gained $2.7 billion from CPP contributions. During the last five years the fund has earned an inflation-adjusted, real rate of return of 4.6%, exceeding the fund’s own targets of 4.5%, and the 4.1% the Chief Actuary of Canada says is needed for the fund’s long-term sustainability.

Filed by Kate McCaffery, Advisor.ca, kate.mccaffery@advisor.rogers.com