The Canada Pension Plan Investment Board earned an eight per cent return last year but significantly underperformed the 19.9 per cent return of its reference portfolio.

The lower return can be explained in part by higher volatility in the stock-focused benchmark portfolio compared with the diversified, long-term return focus for the pension fund, says John Graham, the CPPIB’s president and chief executive officer.

As of March 31, 2024, the pension fund’s net assets totalled $632.3 billion, up from $570 billion a year earlier. The increase in net assets included $46.4 billion in net income and $15.9 billion in net transfers from the Canada Pension Plan.

Read: CPPIB returns 3.4% in Q3 2024, driven by global equity, fixed income assets

The reference portfolio, made of 85 per cent global equity and 15 per cent Canadian bonds, benefited last year from stock price surges in the seven largest U.S. tech stocks known as the ‘Magnificent Seven,’ while the pension fund has a much broader portfolio that is also invested in infrastructure, real estate, private equities and credit.

“Against a very simple, naive construct like the reference portfolio that has become very concentrated with the Magnificent Seven, I think we would expect to have wild swings in performance right now,” says Graham.

He adds the CPPIB’s returns looked “really good” against a more diversified benchmark, which would be more the norm in the pension industry where stable, long-term performance is the goal. The pension fund’s returns over the past 10 years have also fallen short of the reference portfolio, but only by 0.3 per cent.

Looking ahead, a diversified portfolio could be even more important, as Graham says he sees returns reverting back to long-term trends, down from the higher returns of the past 20 years that were boosted by trends like falling interest rates and booming Chinese growth.

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“It’s going to be harder to generate returns over the next 10 years than it has been over the past 20. Inflation is stickier than expected, stickier in the Americas for sure, and geopolitics is kind of front and centre and certainly having an impact on how the world is rewiring itself.”

Shifting trends in recent years has led the CPPIB to pull away from emerging markets toward developed markets where the opportunities are better, he notes. However, the shift hasn’t resulted in a higher proportion of investments going to Canada, something the federal government is trying to encourage.

The CPPIB’s portfolio had 12 per cent in Canada as of the end of March, down from around 16 per cent in 2019 and 31 per cent in 2014. Graham says the portfolio is still heavily overweighted on Canada given its roughly three per cent of global gross domestic product and that there’s a lot the country has going for it, including interesting opportunities in the energy sector.

But, he says it’s also important to have growth and to figure out how to create large investment opportunities, as well as a conducive investing backdrop in areas like regulations and permitting. “At the end of the day, the markets will go off of growth.”

Read: More work to be done on feds’ plan to encourage domestic pension investments: lawyers

Some of the biggest global transactions the fund made last year included boosting its holdings in U.S.-based renewables developer Pattern Energy Group by US$905 million; an agreement to invest up to US$2.9 billion in NetCo, Italy’s largest fixed telecoms network; and the sale of its stake in the Hohe See and Albatros wind farms off the shores of Germany for $374 million in proceeds.

The investment in Pattern fits within CPPIB’s plans to double its green and transition assets by 2030 as it works toward a 2050 net-zero target. However, the fund has resisted calls to set interim emission reduction targets, as many other pension funds already have.

The fund remains focused on economy-wide reductions and helping companies transition, rather than short-term targets, says Graham. “Really focusing on investing in companies and investing in their decarbonization plans and not focused on short-term, because in the short term, we could even see the carbon in our portfolio increase.”

Elsewhere, the CPPIB reduced its exposure to real estate by one percentage point to eight per cent as it made several office real estate sales in a struggling market. Indeed, its real estate portfolio lost five per cent last year as higher interest rates and work-from-home trends affected office valuations.

“Office, you know, had a challenging year, and we took some lumps on it, but made tough decisions and I think we’re in a great position going forward.”

Read: CPPIB, Oxford Properties sell two Vancouver office buildings, OMERS closes €750 million term notes offering