2016

ANNUAL REPORT
PUBLIC SECTOR
PENSION
INVESTMENT
BOARD

President's report

It has been a year since I assumed my duties as President and CEO and it remains an honour for me to serve in such a privileged position.

ANDRÉ BOURBONNAISPresident and chief
executive officer

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Fiscal Year 2016
FINANCIAL HIGHLIGHTS

  • Total
    portfolio return

  • Five-year
    annualized return

  • 10-year
    annualized net return

  • $7.2

    billion


    Of cumulative net investment gains above the return objective over 10 years

  • $45.3

    billion


    Of cumulative 10-year net investment income

  • $14.6

    billion


    In new investments and commitments to Private Markets and Private Debt in fiscal year 2016



  • Increase in net assets

    4%


  • Net
    contributions

    $4.0

    billion


net assets per pension plan account

As at March 31, 2016 ($ billion)

$23.0

19.7%

Canadian Forces

$8.5

7.3%

RCMP

$0.6

0.5%

Reserve Force

$84.7

72.5%

Public Service

Asset Mix

As at March 31, 2016

12.0%

Canadian equity

10.7%

Private equity

32.5%

Real return assets

29.4%

Foreign equity

15.4%

Nominal fixed income

2016

Asset classes

PUBLIC MARKETS

$ 68.6

billion
net assets

58.8%

of total
net assets

One-year
rate of return
Five-year
annualized return

Public Markets is composed of Canadian equities, foreign equities, fixed income and world inflation-linked bonds.


Investments are allocated by internal and external managers using a combination of active and index-replication strategies.

Actively managed internal portfolios are invested in 11 different sectors in more than 39 countries. At the end of fiscal year 2016, net assets managed in internal active strategies totalled $21.3 billion.

REAL ESTATE

$ 20.4

billion
net assets

17.4%

of total
net assets

One-year
rate of return
Five-year
annualized return

Real Estate favours direct ownership and co-investment through joint ventures. Its long-term investment approach allows adjustments for short-term macroeconomic conditions.


In fiscal year 2016, Real Estate deployed $3.5 billion in new investments and committed $1.5 billion to new and existing partners. It targets markets with a growing and increasingly urban population, a rising middle class, and a high rate of technological innovation and adoption.

In developed markets, the group focuses on Canada, the US, the UK, Europe, Australia and New Zealand. In emerging markets, it remains committed to Mexico, Colombia and China.

DIVERSIFICATION
BY GEOGRAPHY As at March 31, 2016

8.1%

Emerging countries

7.8%

Australia, New Zealand and Japan

41.8%

United States

21.9%

Canada

20.4%

Europe

DIVERSIFICATION
BY SECTOR As at March 31, 2016

3.8%

Real estate debt

3.5%

Healthcare
RE

4.3%

Other

29.5%

Office

28.2%

Residential and retirement

16.1%

Industrial

14.6%

Retail

Private equity

$ 12.5

billion
net assets

10.7%

of total
net assets

One-year
rate of return
Five-year
annualized return

Private Equity generates long-term direct investments and co-investments by focusing on fund relationships providing sector expertise and geographic diversity. It is developing an important investment presence in London.


In fiscal year 2016, the team committed $2.7 billion to funds with existing and new partners and completed new direct investments and co-investments totalling $1.2 billion.

Investments included the acquisition of AmWINS Group, a leader in the US wholesale insurance industry, and of Homeplus, one of South Korea’s largest multi-channel retailers, in a deal led by fund partner MBK Partners.

DIVERSIFICATION
BY GEOGRAPHY As at March 31, 2016

25.8%

Asia

14.5%

Canada

11.1%

Europe

48.6%

United States

DIVERSIFICATION
BY SECTOR1 As at March 31, 2016

20.7%

Communications

20.6%

Financial

13.8%

Technology

12.0%

Consumer cyclical

4.9%

Industrial

3.0%

Energy

3.3%

Other

21.7%

Consumer non-cyclical

1 Excluding investments in funds of funds.

Infrastructure

$ 8.7

billion
net assets

7.4%

of total
net assets

One-year
rate of return
Five-year
annualized return

Infrastructure co-invests globally in transportation, power generation and other public utilities, and has a long-term investment horizon of 10 years or more.


In fiscal year 2016, Infrastructure disbursed $1.6 billion in direct investments and existing platforms across various geographies.

Investments included re-investments in Angel Trains Limited, in Cubico Sustainables and in AviAlliance, and committed US$1.2 billion for the acquisition from ENGIE Group of a portfolio of hydroelectric assets (1.4 GW) in New England.

DIVERSIFICATION
BY GEOGRAPHY As at March 31, 2016

20.7%

North America

17.9%

United Kingdom

15.2%

Latin America

4.4%

Australia

5.5%

Asia and
others

36.3%

Europe

DIVERSIFICATION
BY SECTOR As at March 31, 2016

28.4%

Electrical generation and transmission

8.8%

Telecom infrastructure

6.0%

Oil and gas storage and transport

3.3%

Water
utilities

0.6%

Other

52.9%

Transportation

NATURAL RESOURCES

$ 2.5

billion
net assets

2.1%

of total
net assets

One-year
rate of return
Annualized
return 4.75 year
(since inception)

Natural Resources invests in assets that involve the production, harvest or extraction of natural resources, such as timber, agriculture, mining, and oil and gas.


The team focuses on sizable, direct long-term investments with like-minded partners or best-in-class operators.

In fiscal year 2016, Natural Resources integrated the upstream oil and gas assets from the Infrastructure portfolio. Valuation gains in timber and agriculture were materially offset by markdowns in oil and gas investments.

DIVERSIFICATION
BY GEOGRAPHY As at March 31, 2016

27.3%

North America

3.2%

Latin America

4.4%

Other

65.1%

Australasia

DIVERSIFICATION
BY SECTOR As at March 31, 2016

16.8%

Agriculture

10.4%

Oil and gas

0.3%

Mining

72.5%

Timber

PRIVATE DEBT

$ 640

million
net assets

0.5%

of total
net assets

Rate of return
0.3 years

since inception

Private Debt is PSP Investments’ newest asset class, created in November 2015. It focuses on principal debt and credit investments in primary and secondary markets worldwide, with a view to provide credit capital to non-investment grade US and European corporate borrowers.


By the end of fiscal year 2016, Private Debt had committed approximately US$2.3 billion to transactions.

Investments included a significant financing commitment to the take private transaction of The ADT Corporation, a leading home and business security monitoring company.

vision 2021

Our vision is to be a leading global institutional investor that reliably delivers on its risk-return objective by driving a total fund perspective, striving to be an agile and sought-after enabler of complex global investments and always acting in the best interests of its Canadian contributors and beneficiaries.

Cultivate
One PSP

Shift the focus toward total fund risk and return, with the creation of the Chief Investment Officer group, alignment of incentives, pursuit of attractive non-traditional transactions and greater collaboration.

Improve our brand locally
and internationally

Strengthen our brand as an agile and sought-after enabler of complex global investments, which will form the basis of deeper partnerships.

Increase our
global footprint

PSP Investments has and will continue to open international offices to improve local knowledge and enhance execution ability for global transactions.

Create scalable and efficient
investment and operational activities

Actively seek opportunities to invest innovatively at scale and continually improve on our agility and efficiency as an organization to quickly execute on complex transactions.

Develop
our talent

Evolve our people processes to better identify, attract and develop a diverse and talented team of professionals.

Cultivate
One PSP

Shift the focus toward total fund risk and return, with the creation of the Chief Investment Officer group, alignment of incentives, pursuit of attractive non-traditional transactions and greater collaboration.

Improve our brand locally
and internationally

Strengthen our brand as an agile and sought-after enabler of complex global investments, which will form the basis of deeper partnerships.

Increase our
global footprint

PSP Investments has and will continue to open international offices to improve local knowledge and enhance execution ability for global transactions.

Create scalable and efficient
investment and operational activities

Actively seek opportunities to invest innovatively at scale and continually improve on our agility and efficiency as an organization to quickly execute on complex transactions.

Develop
our talent

Evolve our people processes to better identify, attract and develop a diverse and talented team of professionals.

one psp

CIO Daniel Garant explains the new focus of our investment strategy.

President's report

As I adapted to my new role and built the executive team, we set a path to transform our organization and respond to growth challenges ahead.

In fiscal year 2016, we undertook a comprehensive, five-year strategic review, Vision 2021. We identified five axes to drive our transformation in order to become a leading global institutional investor that reliably delivers on its risk-return objective. We shifted our investment, accountability, operating and incentive models from a traditional focus on asset class returns to a more holistic strategy to capture value based on a total fund return.

Among the many options we have for constructing our portfolio, we increasingly focus our investment approach on business-to-business relationships and alternative investments which operate on partnership based models. During the year, we introduced a new asset class, private debt, and opened an office in New York, where private debt financing is centred. We developed London as a European hub, as well.

In fiscal year 2016, our active management produced a positive relative result against our policy benchmark return. Our absolute result, however, reflected the overall decline in major Canadian and international public markets. These returns were offset by the strong performance of alternative asset classes, such as real estate, infrastructure and natural resources, which confirms the relevance of our new strategic direction.

Ultimately, our success depends on our people. It is my intention to continue to reinforce the dedication and diligence of all employees with shared values and a strong culture built on collaboration, creativity and entrepreneurship.

André Bourbonnais