Investment news - winter 2010

Submitted by diane on Sat, 09/04/2010 - 11:56

Investment news - winter 2010

As most market watchers will attest, 2009 was a much better year for investors than 2008, and the CAAT Plan results reflect this. Although not all of our numbers were final at press time, the Plan's preliminary return for 2009 is 15%.

However, it's important to keep in mind that the negative effects of 2008's market crash on the Plan will be with us for some time. We will not see a return to a fully funded status in the near future. Even with the good returns of 2009, the Plan's long term returns measured against inflation have not kept pace with the required return. Over the past 10 years, the realized annual real return (above inflation) is 1.5%. In order to maintain a fully funded status, over the long term a 4.5% real return per year is required.

As we have mentioned in some past newsletters, in 2009 the Plan was able to take advantage of several opportunities that presented themselves as a result of price declines in a number of asset classes. Among other things, over the course of the past year the Plan has taken these steps:

  • allocated funds to an investment-grade corporate bond portfolio
  • made a commitment to a private market, distressed debt fund, a fund that will invest in securities of high quality, but currently financially troubled, firms
  • committed to a private equity fund that in turn purchases existing private equity funds in the secondary market
  • began investing in Canadian real estate.

All of these efforts help to better diversify the fund's asset mix, reducing risk relative to our liabilities (pension payments) and providing a better expected return. In time, they will help the fund return to a fully funded status.

Of course, our good governance requires that the investment strategy be forward-looking, flexible and well balanced at all times, not just in the wake of a bad year. For several years, the Plan has had other initiatives in place to help mitigate risk. These include:

  • investing in inflation-sensitive assets such as real return bonds and infrastructure
  • partially hedging our foreign currency exposures
  • investing in longer term bonds to better match the long term nature of our liabilities.

Although the road to recovery is not short, we believe that these efforts are helping move us in the right direction.

Assets as of December 31, 2009
Asset Category
(Millions $)
% of fund
Target % of fund
Bonds
1,776
37
28
Infrastructure
147
3
10
Real estate
138
3
5
Total –liability hedging
2,061
43
43
Canadian equity
663
14
13
Non-Canadian equity
2,112
43
44 *
Total – Return enhancing
2,775
57
57
Total
4,836
100
100


* includes a 5% allotment to private equity which is currently being developed.