Fixed income performance keeps CPP in the black

(February 5, 2003) The Canada Pension Plan posted marginally positive numbers over the last three quarters as strong bond performance offset mixed results in the plan’s equity portfolio, says CPP Investment Board president John MacNaughton.

For the nine months ending December 31, 2002, the CPP’s investment income rose by $114 million, for a 0.8% rate of return. Total CPP assets were $54.8 billion at the end of 2002.

About two-thirds of the CPP’s assets are invested in fixed income securities, while the remainder are invested in equities, managed by the CPP Investment Board.

Fixed income assets earned $600 million for the federal government pension plan in the third quarter and have generated $3.1 billion over nine months for a rate of return of 8.8%.

The equity portfolio earned $1 billion in the third quarter, but lost $3 billion over the nine-month period, a nearly 16% decline.

“Year-to-date results have turned positive after a difficult year,” said MacNaughton in a conference call, calling the turnaround a welcome recovery.

“We are pleased the CPP has positive results, even after one of the worst six-month periods in equity markets in a century,” MacNaughton added. “On the other hand, as a long-term investor, with substantial annual cash inflows for the next 20 years, a continuation of lower equity prices would be to our advantage as we build a broad-based portfolio.”

Since the CPP changed its structure in the late 1990s to create the investment board, assets have grown to $54.8 billion from $44.5 billion, MacNaughton said, a combination of excess pension contributions and investment income.

Legislation is currently before parliament that would transfer the fixed income portion of the CPP to the CPP Investment Board from the federal Department of Finance, MacNaughton said. “Assuming this legislation is passed, a cash reserve of $4.6 billion will be transferred over the next six to 12 months and the bond portfolio of $31.8 billion will be transferred on a monthly basis over the next three years.

“In the future all the CPP assets will be managed on a consolidated basis,” he said.

As part of its diversification strategy, CPP is also planning to add a real return asset class to its portfolio, which could include real estate, infrastructure, energy, natural resources and real return bonds, although MacNaughton stressed no specific investments have been selected.

Filed by Doug Watt, Advisor.ca, dwatt@advisor.ca