Home > News > Asset Allocation > Canada Pension Plan Investment Board Returns 5% for Quarter

Asset AllocationNovember 18, 2020

Canada Pension Plan Investment Board Returns 5% for Quarter

Asset value rises to C$456.7 billion for Q2 of fiscal year 2021; fund names Frank Ieraci as head of active equities.

The investment portfolio for the Canada Pension Plan Investment Board (CPPIB) returned 5% net of fees for the second quarter of its fiscal year 2021 ending Sept. 30, raising its asset value to C$456.7 billion (US$348.6 billion) from C$434.4 billion at the end of the previous quarter.

It is the second straight strong quarter for the fund, which returned 5.6% during the first quarter of the fiscal year.

Of the C$22.3 billion increase in net assets for the quarter, C$21.6 billion came from net income after all CPPIB costs, and C$700 million was from net Canada Pension Plan contributions.

For the first half of the fiscal year, the fund returned 10.8% net of all CPPIB costs, and gained C$47.1 billion in asset value, which consisted of C$44.5 billion in net income and C$2.6 billion in contributions. The fund also reported five- and 10-year annualized net nominal returns of 9.6% and 10.5%, respectively.

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“CPP Investments’ diversified fund performed well this quarter, generating strong returns,” Mark Machin, president and CEO of CPPIB, said in a statement. “However, we continue to be cautious about the months ahead given the highly uncertain economic fallout of COVID-19 and its effect on markets.”

Machin added that all the fund’s investment departments generated positive returns during the quarter.

The portfolio’s growth was mainly attributed to the continued recovery of global public equity markets during the first two months of the quarter, which were evident from gains for its public and private holdings. However, these gains were somewhat offset by the stock markets declining in September over concerns of new COVID-19 lockdown measures and uncertainty related to monetary stimulus.

As of Sept. 30, the portfolio’s asset allocation was 31.5% in public equities (18.4% foreign, 11.6% emerging markets, 1.5% Canadian), 24.6% in private equities (20.8% foreign, 3.5% emerging markets, 0.3% Canadian), 21.3% in government bonds (16.3% marketable, 5% non-marketable), 12.1% in credit, 9.5% in real estate, 8.2% in infrastructure, 1.8% in energy and resources, and 2% in power and renewables. A negative balance of 11% represents the net amount of financing through derivatives and repurchase agreements, and the net position from absolute return strategies.

The Canadian pension giant also named Frank Ieraci as senior managing director and global head of active equities, and appointed him to be a member of the senior management team, effectively immediately.

Ieraci will lead the active equities department, which invests in public and soon-to be public companies worldwide, as well as securities focused on long-horizon structural changes that can include earlier-stage private companies. The department also includes CPPIB’s sustainable investing group.

He was previously CPPIB’s managing director, head of research and portfolio strategy, and was responsible for delivering alpha through active security selection. He also oversaw the portfolio strategy for active equities, including managing portfolio design and construction.

“Frank is well positioned to take on this senior leadership role, with his extensive understanding of the organization and its investment strategy gained from more than a decade with the fund as well as his considerable investing experience,” said Machin. “Under Frank’s leadership, the active equities department will continue to help advance our long-term investment strategy and champion data-driven research and advanced analytics to improve long-term performance.”

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Tags: active equities, Canada Pension Plan Investment Board, Coronavirus, COVID-19, CPPIB, Frank Ieraci, lockdown, Mark Machin, Pandemic, second quarter

Home > News > Asset Allocation > How Transitioning to a Low-Carbon Economy Impacts Equity Markets

Asset Allocation November 17, 2020

How Transitioning to a Low-Carbon Economy Impacts Equity Markets

JPMorgan report says the impact of climate transition across and within sectors is likely to vary significantly.

By Michael Katz

The “drag on corporate profitability” from a transition to a low-carbon economy could lead to average equity values experiencing a “modest fall” of around 3%, according to a new report from JPMorgan. However, the report also said this will likely vary significantly across sectors and countries, and that there are “countervailing forces at play.”

Sectors that are expected to see gains from shifting to a low-carbon economy are, not surprisingly, renewable energy and green infrastructure. And the sectors that are likely to be hit the hardest include energy, materials, consumer cyclicals—particularly the auto industry—and some utilities.

“Companies in these sectors will suffer from demand destruction as the goods they sell become less sought-after and carbon costs become an ongoing burden,” according to the report. “A company’s emissions intensity and its capacity to pass on carbon costs to consumers will determine how difficult the climate transition will be for an individual company.”

Because fossil fuel extraction and oil consumption are significant causes of carbon dioxide emissions, most oil companies “will likely suffer” as the world moves toward a low-carbon economy, according to the report. However, it said that these risks are not new to the market and the underperformance of the energy sector over recent years indicates that these risks might be starting to be priced in already.

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JPMorgan also said it expects “quite meaningful dispersion” within the energy sector for three main reasons: First, some types of oil extraction are more polluting than others, and will likely face tougher curbs on their activity. Reduced access to capital is also already hitting oil supply growth and is likely to disproportionately affect producers that are more reliant on external capital. And third, some big oil companies are using their infrastructure, access to capital, long-term investment approach, and technological expertise to rebrand as “big energy” companies.

The report cited as an example oil giant BP announcing a decarbonization strategy that includes a 40% reduction in oil and gas production, and a tenfold increase in its investment in green energy. It also noted that Danish energy company Ørsted has changed its focus from producing oil and gas to renewable energy, and is now the largest offshore wind farm company in the world.

“Markets have been slow to distinguish between energy companies that embrace the transition to a low-carbon economy and those that do not,” the report said. “However, more recently, investors have started to welcome announcements by oil companies to shift toward new markets.”

JPMorgan also said it found a “positive correlation” between a company’s exposure to technologies supporting a low-carbon transition and its price-to-book ratios, as firms more exposed to transition technologies have higher price-to-book ratios.

“In sum, the nuanced impact of the transition to a low-carbon economy underscores the value of an active approach to security selection,” according to the report. “We believe that investors should construct their equity portfolios to be ‘transition ready.’ This can help insulate them from the risks of climate change while seizing the investment opportunities made possible by the transition.”