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The Canada Pension Plan's investment portfolio earned a 6.6-percent return in the fiscal year ended March 31 thanks entirely to gains from the fund's private equity investments last year as public stock markets recorded losses.
The Canada Pension Plan Investment Board, which manages the CPP's investment portfolio, said the pension giant's asset base has reached a record $161.6 billion, which now makes the CPPIB Canada's largest pension fund manager based on publicly disclosed assets under management.
CPPIB, created in 1997 to manage the CPP's money, has for the first time surpassed the Caisse de dépôt et placement du Québec, which has long been Canada's largest pension fund manager with $159 billion in assets under management as of Dec. 31.
The Caisse does not report financial information on a quarterly basis, however, so its Dec. 31 asset total was likely significantly larger by March 31 and may have still topped CPPIB's March 31 numbers.
Despite its rapid growth over the past decade, CPPIB says it is still not a behemoth on a global scale, ranking 17th internationally among national pension and sovereign wealth funds.
The CPPIB said its $13.4-billion increase in assets in 2012 included $9.9 billion in gains from investments and $3.9 billion in new CPP contributions.
Despite predictions a year ago that CPPIB would slow its deal-making pace, "quite the opposite materialized," CPPIB chief executive officer David Denison told reporters Thursday. The fund instead invested more heavily in private companies, real estate and infrastructure over the past year as market turbulence drove smaller or weaker investors onto the sidelines.
"Even though it was quite turbulent in the markets, for a long-horizon investor like us turbulence does sometimes create opportunities," Denison said.
Mark Wiseman, CPPIB's head of investments who will become CEO after Denison retires on June 30, said CPPIB has emerged as a large private lender to corporations over the past three years, providing term loans and other short-term lending as banks and other traditional lenders scaled back during the financial crisis and Euro zone turmoil.
CPPIB lent $3.9 billion last year and currently has loans outstanding worth $4.7 billion, he said.
"I'd expect significant growth in fiscal 2013 in that market," he added.
Denison said CPPIB continues to increase the proportion of its private equity holdings and reduce its public stock portfolio, where returns are lower and far more volatile. Private assets have climbed to 36.6 percent of CPPIB's holdings from 31.6 percent at the end of fiscal 2011.
The fund's private equity holdings in Canada, for example, earned 8.1 percent last year, while its Canadian public equities lost 10.7 percent. Foreign market stocks lost 7.9 percent in emerging markets and earned 3.6 percent in developed markets.
By contrast, CPPIB's foreign private equity holdings in developed countries gained 12.1 percent while real estate holdings earned 13 percent and infrastructure climbed 12.8 percent.
The fund has also continued to shift its assets out of Canada and around the globe, Wiseman said.
With developing markets poised to see their share of global GDP climb to 59 percent by 2031 from 35 percent today, Wiseman said CPPIB has to follow the advice of hockey great Wayne Gretzsky and move to where "the puck is going to be, not where it is now."
CPPIB has 60 percent of its assets invested outside of Canada - or $96.7-billion - and will continue to shift money to developing markets when good deals are available, Wiseman said.
He said CPPIB no longer has any holdings of government sovereign debt except for Canadian bonds, and has sold all its European sovereign debt. He said the move came about because CPPIB liquidated its bonds to use the money for private equity investments in Europe, but the fund also does not anticipate investing in new European government debt this year.
Denison said CPPIB is still on track to earn the rates of returns it needs to remain sustainable for the next 75 years. The CPPIB needs to earn a "real" rate of return after inflation of 4-percent annually to meet its payout targets into the future, which requires returns of about 6-percent annually before inflation at current rates.
The fund's 10-year annualized rate of return is 6.2 percent, but its five-year rate of return is just 2.2 percent because the financial crisis and euro zone turmoil have drive public markets lower.
Denison said he is confident the fund will earn the average returns it needs over the long-term despite recent short-term turmoil.