Road to success for Canadian Pension Plan paved with complexity

Despite making enormous investments in some companies embarking on projects many view as detrimental to the future of the planet, The Canadian Pension Plan (CPP) is viewed as a model of stability by other nations, at least according to its director and CEO, David Denison.

CPP manages more than $640 billion in assets from around the world including railway companies in China, Manhattan real estate, telecommunications in Turkey and a motorcycle racing events management group in Madrid.

There's so much  diversification in the portfolio that, there's something for everyone to both love and hate.   CPP is invested heavily in the biggest players in the oil sands, as well as pipeline companies the government of Canada has thrown its support behind like Enbridge.

CPPs investments are as homespun as Tim Hortons, as nut and bolts as  a jet engine component and subsystem manufacturer based in Italy and  as loveable as Tootsie Roll.

By 2050, CPP expects to manage a notable $1 trillion. 

And it currently holds investments on behalf of the 17 million Canadians.

It wasn't always like this. 

In a presentation to European journalists in 2010, Denison described the crisis that had faced the fund during the nineties, a crisis  he said journalists would recognize from their own countries’  challenges.

Shifting demographics and how to fund fewer workers supporting more retirees was at the core of the problem.  An OECD report out the year before predicted that in Germany and Italy only 1 1/2 workers would be supporting every retiree. In Japan, it would be one on one.  And there would be a huge intergenerational wealth transfer in Canada

CPP’s recovery and success, Denison said, came through reforms such as reducing benefits, increasing contribution rates and forming a CCP Investment Board which operated at arms length from the government. 

And these reforms brought about impressive projections in growth of the portfolio.

 

Graphs show CPP having grown and continuing to grow since the late nineties further and further upward.  And lately, returns have come in at around ten percent per year, a rate that would make most money managers proud.  The fund is expected to have a value of $400 billion in twenty years. 

A primary source of the fund's broad diversity and growth was move the managers made to expand  beyond Canadian bonds and equities, transforming the fund through large purchases of foreign equities.  CPP now makes public all of its equity positions,  purchases that link the Canadian retirements to the nation's and the world's multinational corporations. 

 And last year, Denison told the C.D. Howe Institute that CPP "stands out as a bastion of stability and sustainability compared to its national counterparts in other countries around the world, notably, Social Security in the U.S."

"The Chief Actuary of Canada has recently confirmed CPP's sustainability as currently constituted, throughout the 75 year period of his report while taking into account Canada's changing demographics and increasing life spans."

CPP was ranked 5th best in the world in 2011 by Mercer Global Pension Index, he also said.

Worth $162 billion at the time of his talk, CPP employs some eight hundred and thirty people in Toronto, London and Hong Kong offices to "implement a variety of direct public market strategies."

Sources of success: diversity across sectors

Above: screen shot of CPP CEO David Denison's presentation illustrating percentages of CPP allocations

As Canada moves towards becoming a world energy superpower, CPP is heavily invested in the energy sector with around half a billion invested in Royal Dutch Shell and another half a billion in Exxon Mobile Corporation.  And the CPP owns $54 million with of Halliburton Company. Also in the fund is a relatively small amount of shares in Kinder Morgan Inc/Delaware, valued at $2 million.  Mining companies are also largely represented.

In the domestic equity portfolio (released last March), CPP owns $125 million in shares of Brookfield Asset Management, the company responsible for imminently logging one of British Columbia's most beautiful forests, located on Cortes Island. 

The oil sands companies held in the domestic porfolio are too numerous to list.  Ditto for mining companies.

However, there are also holdings in Canadian Solar Inc. One million dollars worth. And there is $2 million invested in the chlorine manufacturing facility located in North Vancouver under the Second Narrows Bridge, the Canexus Corp. Large investments are also in banks, railways, coal, gold and natural gas.

CPP owns $201 million worth of shares in Enbridge and $9 million in the Enbridge Income Fund Holdings Inc.   

The fund holds $182 in Cenovus, an oil sands company and $62 million of Nexen.

The CPP owns $366 million of shares in Suncor.

Moving beyond energy, CPP holds $814 million in Apple, $367 milion in Microsoft,  $204 million in Google, $334 million in Philip Morris International, Inc. and a sweet $6 million in the Tootsie Roll Industries. 

A variety of groups support ethical investing and belive shareholders should use their power to shift companies they own pieces of to become more environmentally and socially conscious.

Back in 2006, the Green Party's then leader Jim Harris promised to make the CPP's investments shift closer to what he described as reflective of Canadian values.

"Do Canadians really want their pension funds invested in Halliburton, Lockheed Martin, NIKE or Wal-Mart?" asked Harris. "The Green Party thinks not, and it's not because these investments are significant in the overall assets that the Canada Pension Plan manages, but because it sends a powerful message around the world about who Canadians are, what we believe in, and what we're ready to stand-up for."  Harris said:

According to the CPP, "While social investing is easily applied by individuals and small groups of like-minded people, it is extremely difficult, if not impossible, to implement for an institutional investor…Consequently, we do not select or exclude investments through the application of positive or negative screens based upon religious, social, economic, political, or personal criteria, or any other non-investment criteria."

A search of the web today turned up no recent demands that CPP focus on ethical investment. 

The CPP did not respond to requests for comment on this article.