CPP Investment Board Cautions That 40% Investment Return Is Unlikely Again

In releasing its second annual report today, the Canada Pension Plan Investment Board reported that it earned a 40.1% rate of return on its investments in its first full year of operations and had $2.4 billion in assets under management on March 31, 2000.

It attributed "this extraordinary performance" to its current policy of investing solely in equities, with 80% of cash flow invested in a fund that substantially replicates the Toronto Stock Exchange 300 Composite Index. The TSE 300 was one of the top performing global markets in the 12 months ended March 31, 2000 and the CPP Investment Board's Canadian equity fund earned 45.3%.

The remaining 20% of cash flow was invested in two foreign stock index funds, one in the United States and the other principally in Europe and Asia, that together earned 16.6%.

CPP Investment Board President and Chief Executive Officer John A. MacNaughton commented: "While pleased to report these results, I caution that as we broaden our asset allocation base, the volatility of our portfolio will decline, as will the likelihood of achieving such outstanding annual results again."

He noted that since the Canada Pension Plan was founded in 1966 the TSE 300 Index's nominal return has exceeded 40% on only three occasions, and the index was highly volatile from year to year, losing 11.3% as recently as fiscal 1999.

The federal Chief Actuary has estimated that the Canada Pension Plan needs to earn a real rate of return (that is, adjusted for inflation) of 4% over the long term. In the past 34 years, the Canadian market produced an average real return in excess of 4%, although it fell short of that level 50% of the time.

"While it is not possible to hit the 4% real return target consistently year after year, we believe it is a prudent basis for future expectations," Mr. MacNaughton commented.

The CPP Investment Board received $1.9 billion in cash flow from the Canada Pension Plan in fiscal 2000 and earned $464 million in investment income net of investment expenses. (Investment income consists of dividends, interest, distributions from pooled and mutual funds, and both realized and unrealized capital gains and losses).

The current policy of investing all cash flows in stock index funds takes into account the $30.3 billion government bond portfolio held by the Canada Pension Plan itself. The bond portfolio is administered by the federal government. The combined assets of the Canada Pension Plan and the CPP Investment Board were approximately 7% equities and 93% bonds on March 31, 2000.

The CPP Investment Board will develop a new investment strategy to diversity is assets after its senior management team is in place later this year.

"This will involve looking at the benefits of passive and active investing in such areas as equity and debt, merchant banking, private equity, infrastructure projects, venture capital opportunities, and real estate investments, and the use of derivative contracts," Mr. MacNaughton explained.

The CPP Investment Board projects that it will have assets of $100 billion under management within the decade. These assets, and the income earned on them, will be available to the Canada Pension Plan to pay future pensions.

In fiscal 2000, it cost $3.7 million to operate the CPP Investment Board, of which $0.5 million related to investment activities and $3.2 million to governance and administration. Total costs represented 31 basis points on average assets under administration during the year.

The CPP Investment Board was created in December 1997 to invest funds not required by the Canada Pension Plan to pay current pensions. It received its first cash transfer in March 1999. The CPP Investment Board is governed by a board of directors with extensive business, investment and financial expertise, and is managed independent of the Canada Pension Plan by a small team of investment and business executives.

The Canada Pension Plan itself is administered by the federal government, which collects contributions and pays pensions. The federal and provincial governments jointly set the plan's contribution rates, benefit levels and funding policy.