With markets in turmoil due to the energy price spike following Russia’s intervention in Ukraine, losses were to be expected in H1 – yet, recent results indicate that private markets are a good hedge against the impact on nosediving public equities.

Today, Norges Bank (NBIM) reported a 14.4% decline of its Government Pension Fund Global (GPFG), wiping a record NOK1.68 trillion (US$173 billion) off the value of its portfolio, which totalled NOK11.66 trillion (US$1.2 billion) at end-June. Canada’s biggest public pension fund, CPP Investments, showed a loss of 7.0% over the January-June period. Canadian PPF, Québec’s CDPQ, also posted a loss of 7.9%.

Yet, another Canadian PPF, the Ontario Teachers’ Pension Plan (OTPP) delivered a H1 gain of 1.2% – amounting to an annualized return of 8.3% - as it posted AUM of C$242.5 billion (US$187.8 billion).

What is the explanation for this disparity in performance? The answer is: private market diversification. Funds with higher exposure to public equity, unsurprisingly, fared worse.

As well as the hit on global stock markets, the funds experienced losses in fixed income due to higher interest rates imposed by central banks to fight inflation. These losses were offset by foreign exchange gains against the US dollar and private market performance.

NBIM is a highly conservative fund and it was heavily impacted by the jolt to global public equities, which represent 68.5% of asset allocation and saw a 17.1% decline. Meanwhile, fixed income (account for 28.3% of AUM) fell 9.3% over the six months and unlisted infrastructure fell 13.3%. Offsetting these declines was a 7.1% boost from unlisted real estate, helped by logistics. CEO Nicolai Tangen said in a statement, “The market has been characterized by rising interest rates, high inflation, and war in Europe. Technology stocks have done particularly poorly with a return of -28%.”

CPP reports its financial year to end-March, but for the first half of the calendar year the fund reported big losses in fixed income (-6.3%) and public equities (-25.9%), offset by gains in private equity (+4.1%) and real assets (+1.1%). CPP’s President & CEO John Graham said, “Financial markets experienced the most challenging first six months of the year in the last half century, and the Fund’s first fiscal quarter was not immune to such widespread decline. However, our active management strategy – diversified across asset classes and geographies – moderated the impact on the Fund, preserving investment value.”

CDPQ was able to ameliorate losses in public equities (-10.6%) and fixed income (-13.1%) through its real estate and infrastructure portfolios, which gained 7.9% for the six-month period. However, its overall return was 2.6 percentage points above its benchmark with out-performance in all asset classes, indicating its effectiveness in delivering alpha.

Charles Emond, President and Chief Executive Officer of CDPQ, said, “The first six months of the year were very challenging. The mix of factors we faced had not been witnessed in several decades: spiking inflation that triggered rapid and sharp interest rate hikes, rare simultaneous corrections in both stock and bond markets, fears of an economic downturn and the war in Ukraine with its many collateral effects. Despite this turbulence, CDPQ’s portfolio continued to clearly outperform its benchmark portfolio due to the strategy’s evolution since the pandemic started, sound asset diversification and the quality of execution by our teams.”

OTTP was able to overcome a 24.6% loss in public equities (9% of AUM) through massive gains in bonds (+30.9% with an 18.6% allocation) and real assets (+13.0% with a 25.0% allocation). President and Chief Executive Officer Jo Taylor said, “These results show that diversification, active management and an agile investment approach enable us to generate returns in a wide array of investment environments and position us well to navigate through what is likely to be a challenging investment landscape over the next few years.”

The lesson sovereign investors will take from this crisis will be: diversify and adapt.

Related funds CDPQ CPP NBIM OTPP
Related tags Returns Asset Allocation