Canada Pension Plan Investment Board Case Study
The Canada Pension Plan Investment Board
The main concern of the Senior Vice President is whether CPPIB will be able to sustain its positive results with its current investment strategy and the long term nature of the pension plan. A shift towards an active strategy concentrated on Private and Alternative Investments has certainly paid off since its implementation. However, the pension plan has reached somewhat of a roadblock considering the recent loss it has suffered. The million dollar question remains as such : Should it continue to explore that avenue and further develop this existing strategy or should it revise its strategy given current market conditions and its current financial situation?
CPPIB's investment strategy shifted
from a big emphasis on public equity combined with a minor focus on fixed income securities towards a more diversified focus on public, private equities, fixed income securities and alternative investments. In addition, its investment strategy differed from other pension plans in that it allocated its investments based on their risk levels rather than across asset classes. The main idea behind such an unconventional approach, known as the Total Portfolio Approach was to maximise the risk/return ratio. Given the CPPIB's long term goal of contributing to the financial strength of the CPP and sustaining the the pensions of 17 million beneficiaies and its investment orientation of maximising returns without undue risk of loss, they are aware of the plethora of risks they are exposed to given the shift toward private and alternative investments. Although they are well above the benchmark returns required to be sustainable across their 75 year horizon, CPPIB remains very conscious of the risks inherent in their active investment stratey.
Its benchmark pertains to a passive alternative strategy of 65% public equities comprising of 25% Canadian and 40% foreign and 35% fixed income securities. This Reference Portfolio was regularly monitored and compared to their current active investment strategy to ensure that the 4.2% long term return was being met. CPPIB's main objective behind an active startegy is to achieve enhanced alpha through better management and security selection and better beta by diversifying their invesments to incorporate more asset classes.
Private Investments comprised of 4 departments, namely Funds and Secondaries, Principal Investing, Infrastructure and Private Debt. Given CPPIB's risk based allocation approach, the amount of active risk that each department contributes to the overall portfolio was compared to the ReferencePortfolio benchmark to determine whethert to undertake a particular investment. Part of their investment policy also included comparing the risk and return of a particular investment with regards to the passive investments forsaken. The Funds and Secondaries dept managed Limited Partnerships Private Equity Investments and Direct Investments on the Private Equity secondary market with more focus on large scale LBO firms and mid market private equity compared to venture capital. The Principal Investing dept invested in companies directly alongside other partner funds. The Infrastructure dept, unlike the previous two, invested alone in direct investment projects. The Private Debt group, the newest out of all 4, makes direct investments, mostly to LBO firms.
The main concern of the Senior Vice President is whether CPPIB will be able to sustain its positive results with its current investment strategy and the long term nature of the pension plan. A shift towards an active strategy concentrated on Private and Alternative Investments has certainly paid off since its implementation. However, the pension plan has reached somewhat of a roadblock considering the recent loss it has suffered. The million dollar question remains as such : Should it continue to explore that avenue and further develop this existing strategy or should it revise its strategy given current market conditions and its current financial situation?
CPPIB's investment strategy shifted
from a big emphasis on public equity combined with a minor focus on fixed income securities towards a more diversified focus on public, private equities, fixed income securities and alternative investments. In addition, its investment strategy differed from other pension plans in that it allocated its investments based on their risk levels rather than across asset classes. The main idea behind such an unconventional approach, known as the Total Portfolio Approach was to maximise the risk/return ratio. Given the CPPIB's long term goal of contributing to the financial strength of the CPP and sustaining the the pensions of 17 million beneficiaies and its investment orientation of maximising returns without undue risk of loss, they are aware of the plethora of risks they are exposed to given the shift toward private and alternative investments. Although they are well above the benchmark returns required to be sustainable across their 75 year horizon, CPPIB remains very conscious of the risks inherent in their active investment stratey.
Its benchmark pertains to a passive alternative strategy of 65% public equities comprising of 25% Canadian and 40% foreign and 35% fixed income securities. This Reference Portfolio was regularly monitored and compared to their current active investment strategy to ensure that the 4.2% long term return was being met. CPPIB's main objective behind an active startegy is to achieve enhanced alpha through better management and security selection and better beta by diversifying their invesments to incorporate more asset classes.
Private Investments comprised of 4 departments, namely Funds and Secondaries, Principal Investing, Infrastructure and Private Debt. Given CPPIB's risk based allocation approach, the amount of active risk that each department contributes to the overall portfolio was compared to the ReferencePortfolio benchmark to determine whethert to undertake a particular investment. Part of their investment policy also included comparing the risk and return of a particular investment with regards to the passive investments forsaken. The Funds and Secondaries dept managed Limited Partnerships Private Equity Investments and Direct Investments on the Private Equity secondary market with more focus on large scale LBO firms and mid market private equity compared to venture capital. The Principal Investing dept invested in companies directly alongside other partner funds. The Infrastructure dept, unlike the previous two, invested alone in direct investment projects. The Private Debt group, the newest out of all 4, makes direct investments, mostly to LBO firms.