You can learn from the Canada Pension Plan

One of the smartest investing teams in the world lost about $1.7-billion in the quarter that ended June 30, 2010.

Does that make you feel any better about your investment success?  It should.  But that bad news is old news.  The financial climate has changed and our Canada Pension Plan (CPP) has predominantly righted the ship since The Great Recession.  Earlier this year, it was reported our CPP ended the third quarter of fiscal year 2011 with a record $140.1 billion in assets. That’s much better guys!

Regardless of the losses reported back then I’d argue you can learn from the folks who run the Canada Pension Plan.

Like what you might ask?

Firstly, I like their mandate:  “To maximize long-term investment returns without undue risk…to meet its financial obligations.”   I think this is a great mandate for any investor, even folks who go it alone (DIY).   Secondly and most importantly, how about their commitment to a diversified portfolio:

“As a fiduciary acting on behalf of 17 million contributors and beneficiaries, our investment objective is to help ensure the sustainability of the CPP. We do this by designing a portfolio to address the CPP’s projected liabilities and by investment activities that enhance risk-adjusted returns.”

To me that means, preserve money and make more money.   I would agree with that.  For most investors, that could imply a weighting in stocks that is right in the zone of what many asset allocation calculators might suggest for folks in their 40’s:  at least 30% of your portfolio in bonds.  This mix could also work well for younger investors who don’t like much risk or older investors who don’t mind taking more on.   Here’s what the CPP asset mix looks like:

CPP has our money in lots of Canadian equities and even more foreign equities.   You could argue some global markets have been sinkholes for Canadian investors in the last decade but the CPP Investment Board obviously believes in diversification.  So should you.  Most of CPP’s exposure to the stock market (and some bond exposure) comes through indexing, which means replicating the holdings of major indexes rather than choosing individual securities.  I like that and follow that rule myself in my RRSP.  While I love holding some dividend-paying stocks unregistered and in my TFSA, I think indexing is a cheap, low-cost alternative for all investors to get immediate diversification through exchange-traded funds (my favourite) or indexed mutual funds (a good runner-up choice).

The bond portion of the CPP’s holdings includes a wide range of bonds and money market instruments, which are short-term borrowings by governments and companies. There’s also a small component of private debt.  I think for most investors, holding one or two bond ETFs or bond index funds are a wise move.  I just bought some bonds, so I’m not just writing about this, I’m doing it myself.

Following the Pension Plan’s asset mix gets a bit trickier beyond that when we find the inflation-sensitive component.  Whereas pension funds can buy directly into bridges and roads (like the 407 highway that runs across Toronto) individual investors can’t go this route so easily.  So, like CCP, to benefit from steady income, you and I can instead buy shares in infrastructure companies, real estate investment trusts (REITs) or a small number of sector ETFs.  This way, we’ll have some monthly or quarterly income from the dividends and distributions these companies pay.  I own RioCan and H&R REITs myself.

So there you have it, an overview of all our money in CPP, now about $148 billion dollars worth as of March 31, 2011.

I guess if a mix of 54% equities, 30% fixed-income and 16% inflation-sensitive assets are good enough for millions and millions of Canadians, why wouldn’t it be a good start for you and I?  

Have you learned anything about investing or your own portfolio from institutional investing – good, bad, otherwise?

Tell me about it!

6 Responses to "You can learn from the Canada Pension Plan"

  1. Wonder when PM’s ( Gold & Silver ) will get their own section? Lets look back in 10 years and kick ourselves … oh well … even the Cdn Central Bank is way short on bullion holdings while other CB’s bulk up.


  2. Hi My Own Advisor,

    What about Risk Management?

    I don’t see any stories here.

    Everyone likes to talk about rates of return, but as my dad always said “your health is the most important thing! Yes, we may lose our job or we can have a set back in business, but without our health we can’t bounce back from life’s misfortunes.”

    Life, disability and critical illness insurance are often overlooked and certainly not discussed in the media because they are not fully understood.


    1. @Brian,

      Thanks for stopping by! You mean risk of using CCP as benchmark or personal health risks that could prevent folks from ever getting CPP?

      I guess the premise of my article was that folks could learn a few things from CPP, in terms of types of holdings, asset allocation, other. This doesn’t mean they need to follow this recipe, rather, learn from it and tailor their own approach and investments. Do you disagree with that?

      Yes, rates of return for any investments are important but “if you don’t have your health, you don’t have much”. So, there, regardless of personal finance, investing, or anything in life, we are definitely aligned 🙂

  3. Good point- if its good enough for all of us Canadians, it’s probably good enough for the individual Canadian!

    Great post 🙂 I should get more into indexing. Those dividend stocks are too attractive though.


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