From Tootsie Rolls to tobacco: What's in your CPP fund
Next time you’re sucking on a Tootsie Roll, just think — you’re sucking on your financial future.
You may also be sipping on it during your morning coffee or slowly squirting it out on your favourite hotdog.
That’s because Tootsie Roll Industries, Tim Hortons Inc. and H.J. Heinz Company are just a few of the hundreds of companies Canadians have a stake in as part of their Canada Pension Plan fund.
The fund, managed by the Toronto-based CPP Investment Board (CPPIB), was set up in 1997 by the federal government and provinces to invest the contributions not needed to pay for current benefits to the CPP.
The investment philosophy is simple – "maximize investment returns without undue risk of loss."
"It was set up to build a diversified global portfolio, to help contribute to the sustainability of the CPP," said Don Raymond, senior vice-president and chief investment strategist for the CPPIB.
And those investments are diversified among different assets, like real estate holdings, bonds and public equity investments that include 2,600 international and 500 Canadian public companies.
A list of some of the companies in the CPP fund portfolio
Air Canada, Athabasca Oil Sand Corp, B2 Gold Corp
Bank of Montreal, Bombardier, Canadian Imperial Bank of Commerce, Canadian Tire
Haliburton, Heniken, H.J. Heinz Company, Home Depot, Johnson and Johnson, Kraft Foods,Lockheed Martin
Imperial Tobacco Group, Lululemon Athletica, Lockheed Martin
MasterCard, Mitsubishi Corp, Nintendo, Nissan Motor Co.,
Pepsi, Philip Morris International, Procter and Gamble, Rogers, Qantas, Quebecor,
Rolls Royce Group, Shoppers Drug Mart, Telus, Tim Hortons Inc., Time Warner
Toshiba, Toyota Motor Corp., Tootsie Roll Industries Inc, Wal-Mart
(As of March 31, 2011)
For example, take the Rockefeller Center and the McGraw-Hill Building shown in the opening credits of Saturday Night Live – Canadians own a part of them.
Complaining about the profits of banks and oil companies? Canadians may think twice, since they’re invested in those, too.
And next time Ontario motorists are driving along Highway 407, they may be surprised to learn that they own a 29 per cent chunk of that roadway as well. (In fact, it’s CPPIB's biggest direct investment in a private asset.)
Fund more than triples
Canadians used to own a $300-million stake in Skype, until it was purchased by Microsoft. But that purchase more than tripled the CPPIB's initial investment.
Air Canada, Apple, LuluLemon, Best Buy, KraftFoods, Heinken, Wal-Mart — all make up part of the largest single-purpose pension in Canada and one of the largest in the world.
According to the CPPIB website, over the last 10 years, the fund has grown from nearly $49 billion in assets to almost $153 billion. During that time period, the annualized rate of return was 5.7 per cent.
Raymond said the fund needs to earn a 4.0 per cent rate of return above inflation to make the whole plan sustainable.
But Raymond readily admits you can’t earn that kind of return "without taking some investment risk." (He says as a comparison, the yield of a 10-year bond in Canada is two per cent, but with inflation at two per cent, the real yield is zero.)
When looking for assets, the board tries to find those that will outperform the stocks and bonds already in the portfolio.
"We go and buy a significant chunk of the 407. We have to decide which of those stocks and bonds that we would otherwise own that we're now going to sell in order to buy that part of the 407," Raymond said. "If the 407 outperforms over a long period of time those stocks and bonds that we've sold, then we've added value relative to the reference portfolio."
In 2006, the fund's board decided to become "active managers," Raymond said, meaning the board would choose individual stocks, bonds, buildings and infrastructure assets they thought would outperform the global portfolio that consists of of 65 per cent stocks and 35 per cent bonds.
"By definition, diversification, you expect some investments to perform well and some investments not to perform well. The more diversified you are, the more likely that will happen."
Not every year has seen growth. In 2009, during the global financial crisis, the fund, like many, took a big hit, plummeting 18.6 per cent and losing $24 billion.
This sparked a backlash from some critics who complained the top executives of the board received $7 million in bonuses despite the losses.
The fund has also been criticized for some of its holdings, which include oil companies like Haliburton, tobacco companies like Imperial Tobacco and Philip Morris and munitions manufacturers like Lockheed Martin and BAE Systems.
But the fund has a strict "investment only" mandate and, by law, cannot take political or moral considerations into account when choosing investments.
"We have essentially said we will invest in anything that would be legal or a business that would be legal if carried on in Canada," Raymond said.
Changing that mandate would require the federal government and two-thirds of the provinces representing two-thirds of the population to agree.
"It’s more difficult to change the CPP investment board act than it is to change the Canadian constitution," Raymond said.
Bigger deals 'can come back to haunt you'
Leo Kolivakis, publisher of the Pension Plus blog and a former senior investment analyst at the Caisse de dépôt et placement du Québec and the Public Sector Pension Investment Board, offered praise for the board, saying it has one of the best governance structures in the world.
"I think they’re doing a great job. They’re very good at what they do," he said, adding that the 5.7 per cent rate of return over 10 years is "decent."
But Kolivakis said he does have some concerns.
"My biggest concern with any fund of that size is that economies of scale catch up to them, meaning once you’re managing assets they're managing, you become too big, too lethargic."
Kolivakis said the size of the fund forces the board to invest in bigger and bigger deals.
"That works well when the economy is doing well and the markets are doing well, but it can come back to haunt you," he said.
"What I ‘m afraid of is because of their size they're going to be forced to deploy their capital and possibly make investments that have a lot more risk. But I don’t want to overemphasize that point, because right now they are able to manage their size."