Source: The Canadian Press

The Canada Pension Plan Investment Board’s holdings reached a record high of $138.6 billion in its second quarter, helped by a rebound in stock markets that enabled the fund to push beyond its pre-recession high.

“It’s an encouraging story for the Canada Pension Plan,” said David Denison, president and CEO of the CPP Investment Board — which invests money not required to pay benefits to millions of retired Canadians under the plan.

“The biggest factor in the overall returns was the strength of the equity markets in the second quarter and around the world we had very strong performance in those markets,” he added.

The solid financial results add to the long-term health and sustainability of the national pension plan and gives it a bigger pool of money to invest around the world to boost future performance.

The investment fund’s performance is key to ensuring that future generations have access to CPP payouts, even when the number of contributors declines in relation to pensioners as baby boomers retire and the workforce ages.

The billions of dollars set aside for future use also give the fund’s managers assurance that they will not have to boost contributions or cut payouts in the future.

The CPP fund manager had reached a record high of $127.7 billion in June 2008, just months before a crisis in the U.S. financial industry sparked a major global recession and sent stock values plunging by about a third.

The fund has been trying to make up ground lost in the recession ever since.

The CPPIB reported Wednesday that it ended its second quarter of fiscal 2011 with $138.6 billion in assets as of Sept. 30, the end of its fiscal 2011 second quarter.

That compared with $123.8 billion in assets a year ago and $129.7 billion at the end of the first quarter.

Investment income was $8.4 billion, representing a return of 6.6% as the CPP fund rebounded from a loss of $1.7 billion, or a negative return of 1.3%, in the first quarter when stock values plummeted.

CPPIB is heavily exposed to stock market volatility because public equity investments represent 38.6% of its portfolio. Private equities make up another 14.6%, and bonds make up about 32%.

“The financial markets are inherently unpredictable in the short term,” Denison said.

“But in the long term we do believe that the asset mix that we have in the fund will generate positive returns and lead to the sustained growth that the Canada Pension Plan needs in order to be sustainable.”

However, the fund continues to emphasize opportunities to increase private investments in order to offset some of the short-term risks associated with being heavily exposed to stock market volatility, Denison said.

The pension fund manager has been buying up infrastructure and real estate assets around the world. It likes those investment opportunities because they have a predictable cash flow, offer inflation protection and are easy to maintain.

“One of the benefits of investing in assets like real estate and infrastructure is that it does take some of that short term volatility out of the returns and those assets are the quintessential long-life assets,” Denison said.

“They’re just really attractive assets for a fund the nature of ours, with reasonably predictable cash flows and by nature ones that don’t go up and down in value with market sentiment,” he said.

Real estate currently makes up 6.5% and infrastructure 4.5% of the CPPIB investment portfolio.

The fund’s huge pool of capital and long-term investment strategy allowed it to ride out market volatility during the recession and even take advantage of opportunities to buy up a number of promising assets from distressed owners.

Earlier this month, it announced it is joining with a partner to acquire a regional shopping centre near Cologne, Germany, for the equivalent of C$223.4 million (euro157.3 million).

It paid $237 million for a 45% stake in two Washington, D.C., properties last month.

It also plans to acquire a 30% stake in Ontario’s busy 407 Express Toll Highway indirectly through a $3.2-billion proposed takeover of Australian toll operator Intoll Group, formerly Macquarie Infrastructure Group. The CPPIB is also acquiring an additional 10% stake from the highway’s major shareholder, Cintra Infraestructuras, for $894 million.

During the quarter surplus contributions from CPP fund members fell to $500 million from $3.8 billion in contributions in the first quarter and $1.9 billion in CPP contributions in the year-earlier.

Denison said that’s because of seasonal factors that push many contributions forward to the first quarter of the year, but also because of demographic and other factors such as the current unemployment rate.

For the five-year period ended Sept. 30, the CPP fund has generated an annualized investment rate of return of 3.4% or $18.3 billion of investment income.

For the 10-year period, the fund generated $44 billion of investment income reflecting an annualized rate of return of 5.5%.

The most recent projection pegs the sustainability of the fund at 75 years, with contributions expected to exceed annual benefits paid until 2021.

A report by the Chief Actuary of Canada estimated the fund requires a nominal rate of return of 6.2%, or a real rate of return of 4.2%, over a 75-year period.

The CPPIB is a professional investment management organization that invests surplus contributions on behalf of 17 million Canadian contributors and beneficiaries of the Canada Pension Plan.

The CPP isn’t expected to draw on the CPPIB’s funds for several years.