The coronavirus pandemic and the economic fallout from efforts to contain it will have a long-term effect on the Canada Pension Plan Investment Board’s $409.6 billion fund, CPPIB chief executive Mark Machin said Tuesday, after the fund posted its worst annual performance since the financial crisis in 2009.
“I don’t expect as good returns in the next 10 years as they have been in the last 10 years,” Machin said in an interview after the CPP fund posted a 3.1 per cent annual return for the year ended March 31, a period that also contained punishingly low oil prices and deep interest rate cuts.
While there was a positive return for the fiscal year, that was largely due to strong investment gains in the first nine months. Among CPPIB’s holdings, energy and resources were hit particularly hard, posting the worst performance of the year at -23.4 per cent, compared to -0.6 per cent a year earlier.
Over the past 10 years, the fund’s net rate of return is 9.9 per cent, and $235.2 billion has been generated in net investment income after costs.
Machin said CPPIB, which invests on behalf of the Canada Pension Plan, doesn’t intend to make big changes to the portfolio despite the recent market conditions, which were described in the fund’s results as “devastating.” He noted that diversification of geography and asset classes helped weather the latest crisis.
“While there was nowhere to hide in the world, some countries were coming out of it as others were going into it,” he said, noting that countries in Asia and even Europe began to ease economic restrictions while North American was locking down to try to slow the spread of COVID-19.
Flights to safety, including government bonds, also boosted parts of the portfolio. This shifted specified weightings, which caused CPPIB to rebalance the portfolio, in part by buying lower-priced equity and credit investments and selling sovereign bonds.
Machin said the pension management organization is keeping a close eye on geopolitical developments around the world, such as trade tensions between the United States and China, some of which pre-dated the pandemic.
“Those tensions are very real and it’s not just tensions with the U.S., it’s tensions with a lot of places around the world,” he said.
We need to be aware of where policy is today, where policy may go tomorrowMark Machin, CEO, CPPIB
“We need to be aware of where policy is today, where policy may go tomorrow, and how that’s going to impact those two economies and economies around the world, and companies, and sectors, and markets. It’s important for us to really understand where things might go on all of those fronts.”
For the time being, though, CPPIB remains committed to increasing its exposure to emerging markets including China, he said. Investments in emerging markets totalled $87.6 billion, or 21.4 per cent of total assets, at the end of fiscal 2020. That was up from $77.9 billion, or 19.9 per cent of assets a year earlier.
Machin said less than 11 per cent of the CPPIB portfolio is invested in China, which is about one-third of the amount invested in the United States. Before the pandemic hit, the huge and booming Chinese economy was seen as a major draw for the Canadian fund. A year ago, Machin told the Financial Post he expected the portfolio allocation to China to be in the “mid-teens” by 2025, in keeping with the strategy of boosting the representation of emerging markets including India, China, and Brazil to 33 per cent in that timeframe.
He indicated no change to that strategy during Tuesday’s interview, and noted that equities had declined by far less in China than in Canada, the U.S., or the United Kingdom.
For the fiscal year, CPPIB’s investments in China — where key holdings include a long-term stake in e-commerce company Alibaba — produced returns of 9.8 per cent, he added.
The fund’s overall growth to $409.6 billion in fiscal 2020 was driven by $12.1 billion in net income and $5.5 billion in net CPP contributions.