Highlights
- CCPIB was established to manage amounts that are transferred to it from the Canada Pension Plan beneficiaries and contributors.
- Total net assets CAD 675.3b as of September 2024, with a 10 year annualized return of 9.2 % and a total cumulative net income of CAD 461.7b since inception in 1999.
- Low financing expense of 14% relative to net income.
- Strong liquidity position with substantial holdings of liquid assets invested in government bonds and money market provides a 2.4x cover against debt.
- Given the strong liquidity and returns, we believe this is an attractive option for investors given the 4.9% yield and a AAA rating from S&P and Moody.
Background
CPP Investments was established in December 1997 pursuant to the Canada Pension Plan Investment Board Act and is a federal Crown corporation with all of its shares issued to the Minister of Finance. It is responsible for managing amounts that are transferred to it in the best interest of the Canada Pension Plan (CPP) beneficiaries and contributors.
Overview of Investment Portfolio
CPP Investments team consists of 6 different investment departments, each with their own focus. The investment departments include
- Total Fund Management (TFM) – Manages a completion portfolio diversified across asset classes and geographic exposures.
- Capital Markets and Factor Investing (CMF) – Includes externally managed hedge funds and internally managed active strategies that invest globally in public equities, fixed income, currencies and commodities.
- Active Equities (AE)– Invests in global public and soon-to-be-public companies.
- Credit Investments (CI) – Invests in both public and private credit and credit-like products globally.
- Private Equity (PE) – Invests in a wide range of private equity assets globally, focusing on long-term value creation.
- Real Assets (RA) – invests in real estate, infrastructure as well as both conventional and renewable energy assets globally.
Chart 1: Net assets and asset class composition
Since receiving its first initial transfer of CAD12 mil, CPP Investments has grown its total net assets to CAD 675.3 bil as of September 2024. This is largely thanks to its strong long-term performance, recording a cumulative net income of CAD 461.7 bil since inception in 1999 with a 10-year annualized return of 9.2%.
CPP Investments is also diversified geographically, with its investment portfolio spread globally. The bulk of its assets (42%) is invested in the US, but it is partly because their investments in the US outperformed their investments in other regions, with 59% of their gains in the past 5 years contributed from the US.
Table 1: Annualised net returns and composition by geography
As of 31 March 2024 | 5-Year | 1-Year | Composition |
Canada | 4.20% | 5.90% | 12% |
United States | 8.90% | 9.40% | 42% |
Europe | 4.00% | 5.80% | 19% |
Asia Pacific | 4.60% | 0.10% | 21% |
Latin America | 7.70% | 11.50% | 6% |
Source: Company Reports, iFAST Compilation Data as of 31 March 2024 | |||
Low percentage of financing expense against net income
Table 2: Summary of Company Financials
Year Ended 31 March | FY21 | FY22 | FY23 | FY24 | 2Q25 |
Net Income (CAD millions) | 83,944 | 34,415 | 7,831 | 46,442 | 29,339 |
Financing Expense (CAD millions) | 1,036 | -136 | 2,147 | 5,927 | 3,408 |
Debt (CAD millions) | 41,321 | 50,703 | 59,362 | 73,122 | 76,926 |
Cash and cash equivalents (CAD millions) | 13,969 | 13,595 | 11,716 | 9,631 | 6,977 |
Liquid assets* (CAD millions) | 98,703 | 109,687 | 131,716 | 172,968 | 188,180 |
Source: Company Reports, iFAST Compilation Data as of 30 September 2024 *Money market and government bonds | |||||
The group saw an increase in average borrowing expense to CAD 5.9 bil in FY24, compared to CAD 2.1 bil in FY23. This was primarily driven by an increase in financing-related liabilities and also an increase in interest rates. Nevertheless, the financing expenses represents a small percentage of their total net income, at around 14%, given the recent performance of their investments.
Additionally, we are optimistic of CPPIB repayment capabilities, thanks to their large holdings of liquid assets which includes investment in money market, government bonds and cash and cash equivalents amounting close to CAD 195 bil. This provides a substantial cover over their existing debts at around 2.4x.
To manage and monitor its short-term liquidity, CPPIB tracks their 10-day liquidity coverage ratio. As of FY24, their 10-day liquidity coverage ratio of 3.8 is well above the minimum liquidity requirement of 1.0. This ratio measures the amount of available cash and liquid assets relative to CPP investment obligations over any 10-day period.
On the other hand, as CPPIB uses synthetic financing and borrowings to invest, there are limited by their board-level limit for their recourse leverage at 45% of the base CPP account. The recourse leverage ratio is a measure of the borrowed funds and synthetic assets that CPPIB invests over the base assets of the CPP accounts. Historically, the group has managed to maintain this leverage at 18% - 32% from FY21 to FY24.
Table 3: Liquidity and Leverage ratios
Limit | FY21 | FY22 | FY23 | FY24 | |
Recourse Leverage | 45% | 17.8% | 22.6% | 28.1% | 31.6% |
10-day Liquidity Coverage ratio | 1.0x | 6.2x | 2.9x | 3.5x | 3.8x |
Source: Company Reports, iFAST Compilation Data as of 30 September 2024 | |||||
Liquidity further supported by transfers from the CPP
We believe that continued contributions to the CPP will continue supporting their liquidity, at least in the short to medium term, despite Canada’s aging population.
Table 4: Transfers to and from CPP
FYE 31 March | FY21 | FY22 | FY23 | FY24 |
Transfer from CPP (CAD millions) | 44,071 | 49,195 | 66,598 | 65,695 |
Transfer to CPP(CAD millions) | (40,416) | (41,486) | (43,698) | (49,712) |
Source: Company Reports, iFAST Compilation Data as of 30 March 2024 | ||||
Looking back at their history of transfers, we noted that the transfers coming from the CPP continues to be higher than the transfers out to CPP. Though we would like to point out that there is quite a substantial increase in transfers out to the CPP in F23 to FY24. Nevertheless, we are positive that the trend of positive inflows will continue at least in the short to medium term, supported by population growth through international migration, where we see working class millennials becoming Canada’s largest generation as of July 2023.
Related Risk
CPPIB investments are exposed to common risk in the market, namely, interest rate risk, currency risk and credit risk. This means that the changes in fair value of their net assets are largely affected by these factors.
As such, the group is consistently measuring the sensitivity of their portfolio against market movements. Part of their ongoing monitoring includes a historical stress tests and scenario analysis. Examples of scenarios that are run and monitored are a repeat of the Global Financial Crisis in 2008 where the expected potential losses are approximately 12% or CAD 79 bil and a severe stress scenario where losses are expected at 22% or CAD 141 bil.
In these scenarios, we believe CPPIB will still be able to absorb the losses and meet the obligations given their sizeable net assets of CAD 675 bil, which includes liquid assets of CAD 188 bil.
Conclusion
CPPIB’s long term rating of AAA is warranted given their strong liquidity, diversified portfolio and their strong investment performance. Additionally, Canada’s current demographic is supportive of future positive inflows from the CPP, aiding CPPIB’s cash flow and ability to service its obligations. Given the strong credit rating, we believe this is an attractive option for investors given the 4.9% yield.
