Guest Post: CPPIB Suffers a 19% Loss in FY2009

Submitted by Leo Kolivakis, publisher of Pension Pulse.

Fiscal 2009 Portfolio Performance by Asset Class
Asset Class Fiscal 09* Fiscal 08*
Canadian public equities



Canadian private equities



Public Foreign developed market equities



Private Foreign developed market equities



Public emerging market equities



Private emerging market equities



Bonds and money market securities



Other debt



Public real estate



Private real estate



Inflation-linked bonds






Total CPP Fund



* Investment results by asset class are reported on an unhedged Canadian dollar basis, since any hedging takes place at the Total CPP Fund level. Results are reported on a time-weighted basis.
** Returns for emerging market equities were included in foreign developed market equities in fiscal 2008.

The Canada Pension Plan Investment Board, the country’s second-biggest public pension manager, reported a 19% loss for fiscal year 2009:

The CPP Fund ended its 2009 fiscal year on March 31, 2009 with assets of $105.5 billion, a decline of $17.2 billion after operating expenses from $122.7 billion at the end of fiscal 2008. The Fund’s decline for the year primarily reflects an investment return of negative 18.62 per cent or negative $23.6 billion, offset by CPP contributions of $6.6 billion.

Amidst this difficult environment, the return of the CPP Fund in fiscal 2009 essentially matched the Fund’s market-based benchmark, the CPP Reference Portfolio, adding one basis point above the benchmark return of negative 18.63 per cent. As a long-term investor, the CPP Investment Board (CPPIB) believes that value-added performance is best measured over rolling four-year periods. In the three years since adopting the CPP Reference Portfolio as the key total fund benchmark, the CPPIB has generated cumulative value-added returns of 487 basis points representing approximately $5.3 billion in additional investment income; this equates to an average annual value-added return of 162 basis points over this period.

“Despite the CPP Fund’s first substantial decline since its inception, which reflects unprecedented turmoil in the markets, we remain well-positioned to generate the returns necessary to deliver on our mandate of helping to pay pensions for decades and generations to come,” said David Denison, President and CEO, CPP Investment Board. “

While each individual fiscal year’s results are important, the CPPIB’s investment strategy is designed to perform over significantly longer timeframes. With our long investment horizon, steady cash inflows and deep investment capabilities, the CPPIB is able to capitalize on the current economic environment for the long-term benefit of the CPP Fund and its 17 million contributors and beneficiaries.”

Fiscal 2009 Market Conditions
Economic conditions over the past twelve months reflected the impact of the worst global financial crisis since the Great Depression. The credit crisis that began in 2007 accelerated in the summer of 2008 following the failure of Lehman Brothers. By the second quarter of fiscal 2009 the stress in the credit markets spread to equities and in the period from September to November the global equities and commodities markets experienced their sharpest declines in decades.

Despite the modest rebound during the latter part of March, the last month of fiscal 2009, the last quarter of the fiscal year (January to March, calendar 2009) saw public equity markets decline to levels last seen in the 1990s.

The primary factor affecting the Fund’s performance was the sharp decline in global public equity values during the course of the fiscal year. Worsening global economic fundamentals also resulted in lower valuations across the CPP Fund’s private equity and real estate holdings. The Fund benefitted from a significant increase in the value of its government bond holdings and solid cash inflows generated by its infrastructure investments.

“The CPPIB took a number of steps to weather the extraordinary challenges of the past year,” said Mr. Denison. “We continued to avoid investing in complex structures with serious hidden credit exposures, suspended our securities lending program and reduced position sizes in a number of our internal active investment programs.

At the same time, we employed a variety of short-term strategies in our public markets area to capitalize on the extreme volatility in the markets, while within our private investments areas we were rewarded for our patience over the past few years with the acquisition and increasing availability of high-quality infrastructure and real estate assets at attractive valuations.

While the current environment is presenting unprecedented opportunities, and the CPPIB has the capacity to pursue these opportunities, we will only do so if they meet our risk and return criteria.”

Four-year Results
Consistent with our view on measuring value-added performance, we also report on overall fund performance over rolling four-year periods.

The four-year annualized investment rate of return through March 31, 2009 was 1.42 per cent. The change in the four-year return from a year ago reflects the challenging market conditions of the past year, as well as the fact that positive performance in fiscal 2005 of 8.5 per cent has now rolled off of the reporting period.

By definition, the lower returns for fiscal 2008 (negative 0.29 per cent) and fiscal 2009 will weigh on the four-year returns going forward for the next two and three-year periods. When looking at the overall fund performance over the longer time period since the CPP Investment Board began investing a decade ago, the 10-year annualized rate of return was 4.3 per cent representing $24.2 billion of investment income.

The four-year annualized return of 1.42 per cent is less than the 4.2 per cent average real rate of return that the Chief Actuary of Canada estimates is required to help sustain the Canada Pension Plan over a 75-year period.

Over this long timeframe we expect that there will be four-year periods where returns are above or below this threshold. In the ten years since the CPP Investment Board began investing, returns for the CPP Fund in all four-year periods prior to fiscal 2009 exceeded the 4.2 per cent real rate of return.

Based upon historical experience and reasonable future return expectations, the CPPIB believes that the actual returns for the CPP Reference Portfolio and the CPP Fund will exceed the 4.2 per cent real return assumed by the Chief Actuary over the long investment horizon for the CPP Fund.

Long-term Strategy
While the CPPIB’s accountability system focuses on investment returns over four-year periods, the portfolio is managed with an investment horizon of decades and generations. The CPP Investment Board continues to focus on a long-term investment strategy to meet its mandate of maximizing returns without undue risk of loss.

“During the course of fiscal 2009, management and the board re-examined the CPP Investment Board’s strategy in light of the extraordinary market conditions we faced. We concluded that our long-term strategy remains sound and that the strategic asset weightings for the CPP Fund remain appropriate given its long investment horizon.

We have, however, modified a number of investment programs to take into account the cyclical and structural changes we see in the markets such as increased credit spreads, heightened volatility, the lower availability and higher cost of debt financing, and decreased levels of intermediation activities provided by banks and other financial institutions,” said Mr. Denison.

Fiscal 2009 Portfolio Performance by Investment Department
A key yardstick for our investment teams is value-added performance against their benchmarks. Below we report the value-added performance of each department, followed by year-over-year comparisons of their overall investment return.

Public Market Investments generated value-added returns of 40 basis points or approximately $0.5 billion of investment income relative to its benchmark.

Consistent with the organization’s long-term investment horizon and resulting investment strategy, the Public Market Investments department maintains a broad global market-based exposure of 2,900 public companies on major exchanges, which meant that it was most impacted by broad declines in equity markets. Of note, the three sectors of Canada’s markets hardest hit in fiscal 2009 were energy, financials and materials; these same sectors make up much of the Canadian economy and so are broadly represented within the Fund’s Canadian equity holdings.

Public Market Investments overall produced a return of negative 18.2 per cent or negative $17.9 billion, compared to a decline of 2.4 per cent or negative $2.4 billion in fiscal 2008. Public equities returned negative 31.0 per cent or negative $19.4 billion in net investment income, versus negative 6.8 per cent or negative $4.6 billion in fiscal 2008. In contrast, fixed income assets managed by the department performed well; bonds and money market securities earned a return of 5.4 per cent or $1.6 billion, compared to a gain of 6.9 per cent or $2.1 billion in 2008.

Private Investments generated value-added returns of 88 basis points, or approximately $1.1 billion of additional investment income for the CPP Fund relative to its benchmark.

In terms of overall return, the department recorded a decline of $5.3 billion before taking foreign exchange into account, which was negative $3.1 billion or negative 14.4 per cent when expressed in Canadian dollars.

The department’s infrastructure investments earned negative 5.0 per cent or negative $155 million in net investment income in fiscal 2009, down from 23.6 per cent or $524 million in fiscal 2008.

Private equities comprised of Funds & Secondaries and Principal Investing, recorded a return of negative 17.2 per cent, or $2.9 billion, which represents the net impact of distributions from our funds and changes in valuations on our holdings; this compares with a return of 8.2 per cent and a contribution to net investment income of $1.0 billion in fiscal 2008.

Value-add for Real Estate Investments was negative 75 basis points, representing approximately negative $0.9 billion of investment income relative to its benchmarks. The private real estate portfolio recorded a return of negative 14.0 per cent, amounting to negative $1.1 billion in net investment income, reflecting a slowdown in the U.S. and U.K. real estate markets. That compares to 8.1 per cent or $0.5 billion in fiscal 2008.

The Investment Planning Committee (IPC) makes investment decisions that are not attributable to a specific department such as allocating risk within limits set by the board of directors and making overall portfolio design decisions for the total fund.

The decision to expand into a wider range of asset classes such as real estate, infrastructure and private equity generated value-added returns this year of 49 basis points or approximately $0.6 billion. In addition, this committee may also decide to make investments having a significant alpha component, normally when the investment is beyond the mandate and risk budget allocation of any single investment department.

The IPC is accountable for the leveraged loan and distressed mortgage investments made in fiscal 2008. These investments reflect fair value determined under current market conditions and underperformed benchmark returns by negative $1.3 billion or negative 101 basis points.

Given the long horizon of the CPP Fund, the CPPIB will continue to hold these investments in the belief that they will deliver overall positive long-term risk-adjusted returns. In the aggregate, the investment decisions of the Investment Planning Committee realized a net value-added return of negative 52 basis points or approximately negative $0.7 billion.

Asset Mix
We have continued to diversify the portfolio by geography over the course of fiscal 2009. During the year, we undertook an extensive review of the CPP Reference Portfolio which resulted in an adjustment to the composition of the portfolio and is reflected in the chart below. More details about the CPP Reference Portfolio will be available in the 2009 Annual Report which will be available in late May 2009.

While Canadian assets will remain a significant part of the portfolio, as the CPP Fund continues to grow an increasing portion will be invested internationally. At fiscal year-end, total Canadian investment assets totaled $48 billion, or 45.5 per cent of the portfolio, with the remaining $57.6 billion invested outside Canada.

FOR THE YEAR ENDED MARCH 31 ($ billions) 2009 2008 2007 2006
Income (loss)
Net contributions





Investment income net of operating expenses





Increase in net assets (17.2)




AS AT MARCH 31 ($ billions) 2009 2009 2008 2007 2006
INVESTMENT PORTFOLIO (%) ($) ($) ($) ($)







Foreign developed markets






Emerging markets




Fixed Income






Other debt




Money market securities1





Inflation-sensitive assets
Real estate






Inflation-linked bonds












Investment Portfolio2






Rate of return (annual)3 -18.6% -0.3% 12.9% 15.5%
1Includes amounts receivable/payable from pending trades, dividends receivable, accrued interest and absolute return strategies.
2Excludes non-investment assets such as premises and equipment and non-investment liabilities.
3Commencing in fiscal 2007, the rate of return reflects the performance of the investment portfolio, which excludes the Cash for Benefits portfolio.

At March 31, 2009, equities represented 57.4 per cent of the fund or $60.6 billion. That amount consisted of 44.0 per cent public equities valued at $46.5 billion and 13.4 per cent private equities valued at $14.1 billion. Fixed income including bonds, money market securities and other debt represented 27.9 per cent of the portfolio or $29.4 billion. Inflation-sensitive assets represented 14.7 per cent or $15.6 billion. Of those assets, 6.5 per cent consisted of real estate valued at $6.9 billion, 3.9 per cent was inflation-linked bonds valued at $4.1 billion, and 4.3 per cent was infrastructure valued at $4.6 billion.

To see a summary of the financial highlights, go to:

Long-term Sustainability of the CPP Fund
CPP contributions are expected to exceed annual benefits paid through to the end of 2019, providing an 11-year period before a portion of the investment income is needed to help pay CPP benefits. During this period, the CPPIB expects net contributions of approximately $28 billion to flow into the Fund.

The Chief Actuary of Canada estimates that a 4.2 per cent real rate of return, over a long-term time period, is required to sustain the plan at the current contribution rate. The Chief Actuary has reaffirmed the conclusion in his 2007 report that the CPP is sustainable throughout the 75 year timeframe of that report; the Chief Actuary will publish a new projection for the CPP in 2010.

“The CPPIB strongly believes we have the investment strategy and portfolio designed to generate the investment returns required to help sustain the CPP for decades and generations to come,” added Mr. Denison.

CPP Investment Board
The CPP Investment Board invests the funds not needed by the Canada Pension Plan to pay current benefits on behalf of 17 million Canadian contributors and beneficiaries. In order to build a diversified portfolio of CPP assets, the CPP Investment Board is investing in public equities, private equities, real estate, inflation-linked bonds, infrastructure and fixed income.

The CPP Investment Board is accountable to Parliament and the federal and provincial finance ministers. Based in Toronto, the CPP Investment Board is governed and managed independently of the Canada Pension Plan and at arm’s length from governments. At March 31, 2009, the CPP Fund totaled $105.5 billion. For more information about the CPP Investment Board, visit

Bloomberg reports this on CPPIB’s record losses:

“Equity markets really performed quite negatively around the world,” Chief Executive Officer David Denison said in a media conference call. “All of them have traded down, Canada less so than some of the other markets that we invested in.”

The average Canadian pension fund lost 16 percent in the 12 months ended March 31, according to an April report by Royal Bank of Canada’s RBC Dexia unit. Global stock markets fell in the 12 months through March during the worst financial crisis since the Great Depression. The Canadian benchmark Standard & Poor’s/TSX Composite Index sank 35 percent.

Canada Pension had C$60 billion invested in equities, or about 57 percent of its assets, a higher percentage than Ontario Teachers’ Pension Plan and Caisse de Depot et Placement du Quebec.

The fund includes investment returns and contributions not needed to pay current pensions. Contributions in fiscal 2009 were C$6.6 billion. Canada Pension, which covers workers in every province except Quebec, lost 0.3 percent in fiscal 2008 and 1.5 percent in fiscal 2003.

Asset Allocation

Fixed-income investments such as bonds and money-market securities represented 28 percent of the fund’s assets. Inflation-sensitive assets such as real estate and infrastructure projects made up 15 percent.

Public equities dropped C$19.4 billion, or 31 percent, from a year earlier, Canada Pension said, while fixed-income assets earned C$1.6 billion, or 5.4 percent.

Over the next five to 10 years, the fund expects stocks to outperform bonds, Denison said in an interview. “We see a reasonable amount of risk in bonds over the next three to five years,” he said.

Infrastructure investment such as utilities lost C$155 million, or 5 percent, in the year, and private equities had a 17 percent loss, or C$2.9 billion.

Private real-estate holdings slid 14 percent or C$1.1 billion because of a decline in the U.S. and U.K. markets.

Seeing ‘Opportunities’

Denison said he sees investment “opportunities across the board,” including in real estate and infrastructure projects the fund was previously outbid on.

“We see a lot of infrastructure assets that have been bought over the past three, four years, often with a lot of debt financing,” Denison said. “When that debt comes due, there’s no way to replace those levels of debt financing. It means that those owners are going to have to sell.”

Canada Pension said March 26 it plans to issue as much as C$5 billion in debt over two years to finance investments in real-estate and infrastructure projects, including roads and airports.

Canada Pension is “no longer involved” in a joint bid with Ontario Teachers for BAA Ltd.’s Gatwick airport in London, Denison said. Canada Pension is interested in buying established shopping centers and major office towers in world cities, Denison said.

“We don’t want to be chasing things with very little likelihood of ultimate success,” he said. “This is an opportunity-rich environment for us, so we’ll concentrate our attentions on the ones that we really do think there’s a high probability of a successful transaction.”

The Caisse, Canada’s largest pension fund, lost a record C$39.8 billion, or 25 percent, in the year ended Dec. 31. The Teachers’ plan, the third-biggest retirement-fund manager, declined a record C$19 billion, or 18 percent.

Let’s analyze these results and statements in detail. In Public Markets, CPPIB “generated value added returns of 40 basis point ($0.5 billion) but produced a return of negative 18.2 per cent or negative $17.9 billion.

In Private Markets, CPPIB “generated value-added returns of 88 basis points, or approximately $1.1 billion of additional investment income for the CPP Fund relative to its benchmark.” In terms of overall return, the department recorded a decline of $5.3 billion before taking foreign exchange into account, which was negative $3.1 billion or negative 14.4 per cent when expressed in Canadian dollars.

How did they generate this “value added relative to benchmarks” in Public and Private Markets? Again, from CPPIB’s statement:

“The CPPIB took a number of steps to weather the extraordinary challenges of the past year,” said Mr. Denison. “We continued to avoid investing in complex structures with serious hidden credit exposures, suspended our securities lending program and reduced position sizes in a number of our internal active investment programs.

At the same time, we employed a variety of short-term strategies in our public markets area to capitalize on the extreme volatility in the markets, while within our private investments areas we were rewarded for our patience over the past few years with the acquisition and increasing availability of high-quality infrastructure and real estate assets at attractive valuations.

What exactly were these “short-term strategies” in public markets? Is it volatility strategies that were undertaken internally or with external hedge fund managers or both? How much risk was allocated to these “short-term strategies” and where exactly was it taken? In bonds, in stocks, or elsewhere?

In Private Markets, any discussion of value added over benchmarks is ridiculous when CPPIB doesn’t even bother disclosing their benchmarks in both Public and Private Markets.

What exactly does this mean:

The Investment Planning Committee (IPC) makes investment decisions that are not attributable to a specific department such as allocating risk within limits set by the board of directors and making overall portfolio design decisions for the total fund.

Who is accountable for these investment decisions? A committee? They lost $1.3 billion in leveraged loans and distressed mortgages and a committee is accountable? Holy smokes!!!

Let me share with you some comments I received from a senior pension fund manager:

They appear to be attributing the currency gains to investment portfolios, the exact opposite of what they used to do (when currency went against them). I wonder if there are now bonuses on currency movements? Also, the investments no one wants to do get done by a new committee?

Surprise, the investments do poorly, and a committee is accountable, which means no one. Wonder how the bonuses work on this “asset class”. Bad business model. Keep the organizational tourists and the risk people out of the investing decisions.

Like Calpers, someone should ask CPPIB to report the life IRR on its private investments, in Canadian currency. They won’t, because the number’s negative.

I also worry that they did the secondaries in private equity and immediately accreted the discount to boost their returns. Wouldn’t surprise me is there was $500 mm or more of returns in this type of gimmick, knowing the discounts that are out there. Someone should clarify their accounting policy for secondaries, as no way you want to bonus people on the accounting trick.

And on the benchmarks for Private Markets:

They are public market tracker index benchmarks, using markets in each geography indicies. So, basicly, they beat the public markets by a bit, mostly due to the infrastructure part which probably accounted for most of the apparent value add on the aggregate private markets. All marked to dcf (discounted cash flow) model. The infrastructure area is really looking like the area which is gamed the most.

These comments should be read by everyone who is concerned about the shenanigans going on with gaming private market benchmarks at most of the large Canadian public pension funds.

No wonder Mr. Denison sees “opportunities across the board” in real estate and infrastructure. These are the very asset classes where abuses of benchmarks are most rampant.

And Mr. Denison is so confident to forecast that “over the next five to ten years” stocks will outperform bonds. Would you like to bet that the giant experiment is going to shift back towards bonds? Mr. Denison’s view is conventional wisdom, but if you are betting billions in CPP contributions on the old “stocks for the long-run” mantra, the folks at CPPIB better be very confident with their forecasts.

Finally, we got no news release on compensation except for these principles of management compensation at CPP Investment Board, where I noted the following:

  • Given that compensation is linked to fund performance over four years and portfolio performance has declined this year, the impact of this year’s performance will affect compensation through to the end of 2012.
  • More details about management compensation for fiscal 2009 will be available in the 2009 Annual Report which will be published on May 28, 2009.

Can you please stop with this four year rolling return nonsense? You lost 19% or $23.6 billion in FY2009 and you have the audacity to even think you deserve any bonus whatsoever? For what? To retain your talented investment managers?

Give me a break. If they aren’t happy, let them go work for a real hedge fund or private equity fund where there is zero gaming of benchmarks. At these private funds, investment managers either deliver real returns (money in the bank!) or they’re fired.

[Note: If they want to get paid like hedge fund and private equity managers then we should introduce hurdle rates, high-water marks (so they recoup losses before making bonuses again) and clawbacks on bonuses if they suffer a disastrous year.]

For CPPIB to claim they are the most transparent fund but not provide details on the benchmarks governing all investment activities within public and private markets goes to show how out of whack their “arms-length” investment board has become.

It’s a total farce and it has to be rectified once and for all. Canadians deserve a lot more transparency and accountability for their hard earned CPP contributions. Unlike CPPIB’s investment managers, they can’t game their benchmarks to collect huge bonuses at the end of the year.

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  1. R

    Se parakalo Leo. I’m sure you do good work but do you really think we’re going to read all that?

  2. Leo Kolivakis

    How much money have you invested in CPP contributions over the years? I take the time to share my thoughts with you, so please take the time to read it. If you find it too long, move on. I make no apologies for the length of my pieces.



  3. "DoctoRx"

    I have no idea what CPP is.
    Though I have spent most of my life in states contiguous with Canada, I have visited Europe more often than Canada.

  4. Brick

    Its a pretty poor performance really especially if you compared it to the likes of the bank of england workers pension which increased its fund over the year.
    If it was a manufacturing business and you made a big loss like this then the whole board of directors would most probably be booted out.
    They won’t be of course because the people who ought to do it are hoping to get on the board themselves at some point.

  5. Leo Kolivakis

    CPP is the Canada Pension Plan. The CPPIB is the investment board which manages part of the CPP, basically they are responsible for contributions after March 1999.

    In the US, you have Social Security (SS), which is still in government bonds. but I am pretty sure they will move to reform SS under the same model.

    Who will benefit if they reform SS? Who else? Hedge funds, mutual funds and private equity funds.



  6. Leo Kolivakis


    It is also a poor performance when compared to the Turkish and South Korean state funds which invested primarily in government bonds in 2008.

    Please feel free to post a link to that Bank of England workers’ pension fund.

    thank you,


  7. Hondo

    How much do you think the private markets “really” have lagged the public markets? Is this just not another example of mark-to-model? It is hard for me to believe that private equity (especially the LBO driven stuff whose IRR’s were skewed upward to leveraging the asset up to take out money early and boost IRR’s early but the asset value is much lower due to leverage) would have returns that much better than public equity.

  8. Leo Kolivakis


    Most of the “added value” in private equity (and private real estate) came from financial engineering, meaning LEVERAGE.

    When you can borrow cheaply in debt markets and sell it to the next fool at higher premiums, you are not adding real value, just playing with leverage.

    If that’s the case, then the private market benchmarks at pension funds should reflect the leverage of the underlying investments.

    There are exceptional PE managers who know have operational experience and know how to revamp companies, but they are rare.

    Many of the “PE hotshots” I met came from investment banking and know how to plug numbers in a spreadsheet but they don’t know the first thing about running a company.



  9. John Rosevear

    Yves, it’s your blog, and I love your stuff dearly, but these uncut 5000 word missives on obscure Canadian pension tidbits are hard to see over and over and over again.

    Alternatively… Leo, please please please invest some time in understanding how to write for the web. This isn’t working for you.

  10. Leo Kolivakis


    I have been writing my blog for nearly a year. I have the largest pension funds in the world reading me, along with well-known hedge funds, PE funds, and government organizations which include the Fed and Bank of Canada.

    I know it isn’t always easy reading through a long comment, but I refuse to dummy it down (not that I complicate it either).

    I realize some of you do not like my style but nobody is forcing you to read my comments.



Comments are closed.