How does one of the top 10 pension funds diversify their assets ?

Canadian Pension Plan

The Canadian-Pension-Plan is in the top 10 largest pension funds in the world. All individuals over the age of 18 who work inside of Canada are eligible to contribute toward and receive benefits from the Canadian Pension Plan (CPP). In 2019 there are changes coming to the CPP to gradually enhance the pension  Canada Pension Plan enhancement.

CPP Asset Allocation

Being one of the worlds largest funds, it’s sole mandate is to invest the assets of the CPP Fund with a view to achieving a maximum rate of return without undue risk of loss. This distinguishes CPP from a sovereign wealth fund that are swayed by political agendas.

The CPP has 320 billion in assets and according to the Chief Actuary forward looking numbers it is sustainable for a 75 year period and that is estimating inflation at 3.9%.

Source: CPP performance

The CPP asset allocation As of March 31, 2017.

Fund Size: $316.7B Asset Mix:

55.4% Equity; 21.5% Fixed Income; 23.1% Real Assets

Canadian Equity: 3.3%
US/EAFE Equity: 27.9%
Emerging  Equity: 5.7%
Private Equity: 18.5%
Fixed/Plus/Global Bonds/Mortgages/Credit: 21.5%
Real Estate: 12.6%

 

Rate of return

1 year (2017) 11.8%
5 year 11.8%
10 year 6.7%

 

Final Thoughts

Notice Canadian equity is 3.3%. In my opinion this is acceptably considering Canadian stock market cap is only 2,360 bn.
Most Canadian investors have a home bias and if you live, work, bank, invest, own a business, and hold your assets  in just one country , you are putting all of your eggs in one basket.

As a Canadian for your own long-term portfolio you might want to consider a similar asset allocation. After all, these funds are faced with the pressure of providing millions of people with a secure retirement now and decades into the future.

 

Don’t wait for retirement to enjoy life !!

 

 

Comments

    • Hi tom,

      I am also interested in how the big diversified investors allocate their assets. Especially being Canadian, we have such a small economy unlike the US we really have to be diligent and get international exposure.

  1. That’s transparent, in terms of asset allocation and returns. Probably the Canadian government is doing a better job than US.

    Having contributed so many years to the Social Security funds, I even don’t know if and how they are being invested. Every year, they are talking about the fund running out very soon. It is a mess in US.

    • Hi Helen

      I think the only reason the CPP is so transparent is because it does not have political ties, it’s sole mandate is to invest the assets of the CPP Fund with a view to achieving a maximum rate of return without undue risk of loss. I think if it was a sovereign wealth fund the politicians would find a way to screw it up.

  2. Great post!

    I think Canadians love their preferred taxes on the dividend income too much to keep their asset allocation at <4% of their portfolio. Some are like 100% Canadian.

    I have a post coming up in a few weeks about asset allocation 🙂

    • Hi GYM,
      I think most Canadians have more than 4% in Canada equity, myself included. But always something to keep an eye on and try to diversify outside of Canada.

    • Hey Caroline

      Me too, especially if you start considering net worth (houses etc). I just watched an interview with the head of the CPP and with equity, infrastructure, and real estate the total Canadian allocation is about 17%. With the Canadian market just over 2% of the world market, I can see how most Canadians have a home bias.

  3. I like the overall asset allocation. 55% in equities and 45% in fixed income is perfect. It might seem very defensive … but if there is an extended drop in stocks … it would be easy to keep the monthly pensions going without selling at a loss. Nice strategy.

    The ROIs looks good too. But, the last 10 years have been the best bull market. I would also look at the performance between 2000 to 2010.

    Lastly, what is the assumed ROI while funding this pension?

    • Hi DG,
      Yes 55% equity and 45% fixed seems very reasonable to me.

      The Roi has been slow and steady over the years, and average real rate of return of 6.2 percent after expenses with the chief actuary uses 4 percent real rate of return assessing the sustainability of the CPP.

      It helps that with a contribution rate of 9.9% Employer & employee and with the fixed income it should be easy to keep the monthly pensions going without selling at a loss. I also like that the chief actuary has to produce a report to the minister of finance every 3 years.

  4. Its definitely heartwarming to note that the CPP is at least sound for the next 75 years…so no need to worry I guess. 🙂 It’s impressive when you also consider how much they have in assets and the annual returns generated over the years.

    • Hi Enoch

      75 years works for me!
      With 55% in equities and 45% in fixed income I think they have a good asset allocation which seems to be a general consensus what the majority of us should have in our portfolio’s.

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