Canadian pension fund giant CPP Investments reported its annual results on Wednesday, earning an 8 per cent return in the fiscal year that ended in March. The fund credited strong equity market performance and gains in its private equity portfolio for boosting returns, while emerging markets and real estate assets turned in a weaker performance.

The fund, which invests retirement funds on behalf of more than 20 million Canadian workers and retirees, now has more than $630 billion worth of assets in its portfolio. That makes the fund not only one of the biggest pension funds in the world, but also one of the best performing ones, with a 10-year annualized return of 9.2 per cent.

John Graham, CEO of the Canada Pension Plan Investment Board, told BNN Bloomberg on Wednesday that the portfolio “performed as designed” and added that diversification across various asset classes and geographies was key to the fund’s performance.

Investing for the long-term

CPP’s portfolio needs to grow to meet the payout obligations of plan members for decades to come, which Graham says is why his team has to keep a long-term focus.

"In a portfolio like ours you can’t swing around in the markets. You can’t make tactical views,” he said.

He added his team has built a "supertanker that will move through rough waters and a range of macroeconomic conditions."

The importance of diversification

In order to accomplish optimal results, the fund "has exposure to geographies all over the world."

And with the S&P 500 up over 88 per cent in the past five years, Graham says the fund has benefited from the performance of U.S. markets, particularly in the last year.

Despite the temptation to double down on a winner in, as Graham put it, "an age of U.S. exceptionalism from a return perspective," he says diversification in other geographies remains a top priority for the fund’s managers.

Cutting real estate exposure

Canada’s biggest pension funds have been major owners of real estate, but a sluggish commercial real estate market has taken a toll on pension funds’ returns.

CPP Investments recorded a 5 per cent loss on its real estate holdings last year, a drop it blamed on high interest rates and work-from-home trends that held back commercial real estate valuations across the board.

The fund recently sold its interests in a pair of Vancouver towers and a business park in southern California following underperformance within the sector.

"We probably have less (real estate exposure) than many peers around the globe," Graham said. "Real estate is a very heterogeneous asset class."

Graham added the ongoing Artificial Intelligence boom has boosted valuations of assets such as data centres, which CPP owns a number of. "Residential real estate in the Americas is also performing well but that is all offset by challenges in the office space [and] retail has been challenged for a while."

Currently, CPP has about 8 per cent of its funds invested in real estate but despite the recent underperformance, Graham added the fund will continue to invest in the sector as opportunities present themselves.

Cautiously optimistic on equities

CPP has a significant exposure to equities both in the public and private markets, which has led the fund to rank among world’s best in terms of long-term performance.

"We have certainly benefited over the last 10 years or even longer from a pretty constructive backdrop for equities markets\," Graham said.

But today’s markets are not the same as they were just few years ago. Graham recognizes that low rates and low inflation might not be tailwinds for the markets going forward.

"With rates being higher, inflation being sticker and geopolitics coming front and centre … it’s important to be in the equities market but we will experience some reversion to the mean to the long-term expected returns."

Investing more at home

Earlier this year, over 90 top business leaders put their names to an open letter asking pension funds to invest more in Canada. The request has generated a lot of reaction from those in favour of the plan and opposed it, and has even prompted the federal government to tap former Bank of Canada Governor Stephen Poloz to examine the issue.

Graham says the ongoing debate is a healthy one, and one the CPP is happy to engage in.

"Right now this dialogue is going in the right direction… I am thinking about how we make Canada more investible, not only for domestic capital but to international capital. That’s ultimately the goal," he said.

Graham added the Canada remains an important market for the fund as it continues to look for opportunities at home.