Eking out a 1.1% during the last quarter of 2018, the pension giant expects lower returns across asset classes in the coming years
Given the last-quarter volatility that struck markets in 2018, most investors would be happy to have escaped with even a small positive return. The head of Canada’s largest pension fund said as much on Thursday as he warned of weaker returns amid a “pretty sluggish period” across most global economies.
“I think we’re going to see much lower return on assets going forward than we have since the global financial crisis and the recovery,” Mark Machin, president and chief executive officer of the Canada Pension Plan Investment Board (CPPIB), told the Financial Post.
On Thursday, the CPPIB announced that it had recorded $368.5 billion in net assets for the quarter ended December 31, representing a $200-million increase over the previous period. Overall, it said its investment portfolio managed a net return of 1.1% during the last three months of 2018, which included the fit of turbulence that roiled markets across the world.
“The fact that our portfolio held up pretty well during that shows that diversification works,” Machin said.
That diversified portfolio included a $670 million payment to a partner in exchange for a controlling stake in a Brazil-based hydro power company — a strategic acquisition, Machin said, as the country was among the few that were “desynchronized” from the global economic slowdown.
In the third quarter, the fund also signed an agreement, along with the Ontario Teachers’ Pension Plan, to acquire a 49% stake of a 309-kilometre toll road in Mexico for $314 million; the board has left the door open for a possible second investment of $218 million.
In June last year, the CPPIB also held its first ever green-bond sale, which it said was also a first for pension funds. More recently, the fund expanded its asset base with its inaugural sale of Euro-denominated green bonds. It amounted to 1 billion euros’ worth of 10-year fixed-rate notes, the proceeds of which will be invested in “eligible assets such as renewables, water, and real estate projects.”
“I would imagine we’ll continue to use that market,” Machin said.
CPPIB is also set to see further increases to its AUM base as it started to receive additional CPP contributions in January, following the effectivity of the federal government’s measures to shore up the fund.
Looking at its 10-year and five-year records, the pension fund reported annualized returns of 10% and 11%, net of all costs. But those trailing records may very well creep lower in the next few years, as Machin shared expectations of lower returns across all asset classes due to economic challenges and higher valuations driven by increased competition for assets.
“Whether it’s a public or private asset it’s going to be a similar story,” Machin said in an interview with Reuters. “There’s a large amount of capital in the world competing for assets at the same time.”