The latest annual results of Canada’s federal-level public pension funds are now out and depict a significant difference in performance between the Canada Pension Plan Investment Board (CPP Investments) and the Public Sector Pension Investment Board (PSP Investments) – with infrastructure proving crucial to achieving higher yields.
CPP Investments is responsible for managing the pensions of nearly all employed and self-employed people in Canada, apart from Québec. PSP Investments invests funds for the pension plans of the Public Service, the Canadian Armed Forces, the Royal Canadian Mounted Police, and the Reserve Force.
PSP Investments chalked up 4.4% annual net return for FY2023, exceeding the 1.3% reported by CPP Investments. Yet the bigger fund secured a 10-year annualized return of 10.0%, against PSP’s 9.2%.
To assess value-added from active management, the funds should be compared in relation to their performance against their respective reference portfolios. Again, CPP was the bigger winner in FY2023 with an outperformance of 1.2% against PSP’s 0.2%. However, over a 10-year period, CPP delivered an outperformance of 0.8% per annum while PSP notched up 1.6% - and long-term performance is the most valuable indicator for public pension funds with multi-decade horizons.
While both funds witnessed a similar rise in AUM, PSP derived most of its increase from net income from its portfolio, while CPP’s increase came largely from clients and policyholders. PSP’s AUM grew 5.7% to C$243.7 billion, of which net transfers received from the federal government (C$2.9 billion) represented 22% of the increase while the rest was generated from net income. Meanwhile, CPP’s AUM rose 5.8% to C$570 billion, with 74% of the increase originating from net transfers from the Canada Pension Plan and the rest from net income.
What lies behind PSP Investments’ relatively better performance compared to the larger federal public pension fund manager?
For FY2023, infrastructure was PSP’s star performer, with an annual return of 19%. Its allocations to credit investments and natural resources also saw double digit returns of 13.1% and 10.9%, respectively. In contrast, CPP’s infrastructure holdings grew by 5.6%, while the return for credit was 6.0%. Over a five-year period, both funds report their strongest asset class is private equity, but PSP still outperforms CPP with an annualized return of 15.6% to 14.8%. However, the weightier allocation to the traditional inflation-hedge of infrastructure has given PSP the edge.
