Tuesday, February 27, 2007

Canada Pension Plan, invests in the US

CPP enters U.S. office venture with $500-million investment
Canadian Press Feb 27

With investments worth $500- million (U.S.), the Canada Pension Plan Investment Board has entered a U.S. office properties joint venture with TIAA-CREF Asset Management.

CPP said Tuesday it will invest $300-million, or 49 per cent of the price, in a series of Class A U.S. office buildings, while TIAA-CREF will plug in another $312-million, or 51 per cent, into the deal.

The anticipated value of the partnership will be about $1.5-billion.

The agreement begins with two suburban properties near San Francisco and another in McLean, Va., near Washington, D.C.

From there, future investments will focus solely on large capital properties with a value of $100-million to $200-million, especially partly leased locations in stable metropolitan areas with at least 500,000 residents, the company said.

CPP is also committing $200-million to TIAA-CREF's direct investment strategy, which handles “institutional-quality” assets in the United States.

TIAA-CREF is a division of Teachers Advisors Inc. With more than $405-billion in assets under management, it is a major provider of retirement services in the academic, research, medical and cultural fields and one of the largest real estate investors in the United States.

“We are pleased to partner with TIAA-CREF Asset Management which is a knowledgeable, long-term investor in the U.S. real estate market,” said Graeme Eadie, senior vice-president of real estate.

“Our investment significantly increases our exposure in the U.S. real estate market which supports our focus of diversifying the overall CPP Investment Board portfolio by product type and geography.”

TIAA-CREF executive vice-president Scott Evans said the joint venture “speaks to our commitment to building relationships with high quality institutional investors by providing investment solutions centred on our nearly 90 years of portfolio management experience.”

The CPP Investment Board invests the funds not needed by the Canada Pension Plan to pay current benefits. To build a diversified portfolio of CPP assets, the board is investing in publicly traded stocks, private equities, real estate, inflation-linked bonds and infrastructure to balance its government bond portfolio.

As of Dec. 31, the CPP fund totalled $110.8-billion, including about $5-billion in real estate investments.

CPP gets freer rein to invest in derivatives
Finance Minister says agency has proved itself mature enough to operate without restriction

STEVEN CHASE Globe and Mail Feb 26

Ottawa and the provinces have quietly relaxed their leash on the board that manages Canadian Pension Plan investments, allowing it to expand its use of derivatives beyond “plain-vanilla” applications.

That removes a restriction in place since 1998 when the CPP Investment Board was handed the task of managing the country's public retirement funds. The board now manages about $111-billion.

Finance Minister Jim Flaherty's department said it's removing the board's training wheels — and allowing more exotic uses of derivatives — because the agency has proven itself mature enough to operate without this constraint.

“Since its inception ... [the board] has developed a global reputation for sound risk management and corporate governance policies,” the Finance Department said in a Feb. 24 note on a decision to repeal restrictions on derivative use.

“Therefore, [the rule] is no longer required as a prudential measure,” Finance said.

Derivatives are investment contracts in which the price is derived from the value of underlying assets. They include futures contracts, options, and swaps. They can be used to mitigate risk but also for more speculative purposes, and can produce outsized profits and losses.

The repealed federal regulation in question, Section 14, stipulated that the board use derivatives only for very basic purposes such as hedging against risk and required that it hold cash or other assets to back a derivative investment.

“Regulation 14 really only contemplated a very simple, plain-vanilla usage of derivatives,” Don Raymond, the board's senior vice-president of public market investments, said of the regulation that's been excised.

The CPP Investment Board said it lobbied for the change in Ottawa and the provinces, which share responsibility for the fund, on the grounds that it would make investing more efficient and cut costs.

Board officials argued the change will put them on a more level playing field with other pension funds and should help increase returns.

“We can't guarantee obviously, but there are some pretty simple arguments in terms of efficiency ... that lead us to believe that will in fact be the case,” Mr. Raymond said.

He said the change does not mean that Canada Pension Plan investments will face any greater risk in the market. “With the exact same amount of risk, we should be able to generate higher returns primarily because of these efficiency arguments,” he said.

Mr. Raymond emphasized that risk management is at the heart of the board's investing strategy. “We're not going to be taking any more risk as a result of this,” he said.

The change, which took effect Feb. 1, required the approval of two-thirds of participating provinces representing two-thirds of their total population. All nine provinces agreed to the move, Finance said. Quebec was not involved because it has its own separate public pension fund.

Finance said the change will give the board managing CPP funds the same margin to manoeuvre as rival organizations in the market.

“[It] will allow the board to undertake transactions that competing pension funds can already undertake to increase returns without increasing risk,” Finance spokesman David Gamble said.

The Canada Pension Plan fund had an 8.7-per-cent return in its most recent quarter. In the three months ending Dec. 31, the fund grew by $7.5-billion to $110.8-billion. For the first nine months of its fiscal year, the fund had a 10.1-per-cent return or a gain of $10.3-billion.