Canadian retail investors spent the majority of March watching in terror as their portfolios crumbled alongside the stock market, but they weren’t alone: It’s now clear that the professionals who handle billions of dollars in investments for Canada’s largest pension plans were not immune from the pain either.
The Canada Pension Plan Investment Board, for one, appears to be sitting on a loss of more than $1 billion on an ill-timed investment in Royal Caribbean Cruises Ltd., a cruise line whose share price collapsed following the outbreak of COVID-19, regulatory filings released on Wednesday suggest.
Canada’s largest pension plan, which has more than $420 billion in assets under management, discloses its portfolio of U.S.-listed stocks every quarter to the U.S. Securities and Exchange Commission.
Those filings show that the pension fund invested heavily in the Miami-based cruise line in the three months ending on Dec. 31, 2019. CPPIB already owned about US$332 million worth of Royal Caribbean stock going into that quarter, but then tripled the number of shares it held. The move made Royal Caribbean one of CPPIB’s Top 10 U.S.-listed equity holdings, and brought the value of the investment to US$1.08 billion.
What CPPIB could not know was that cruise lines were about to play a high-profile role in the spread of COVID-19. Early in March, multiple ships became de-facto petri dishes for the virus with passengers falling ill in droves. Investors quickly dumped the stocks and Royal Caribbean, which was trading at US$135.32 before the pandemic hit, lost 85 per cent of its value.
CPPIB appears to have sold only 472 of the 8,102,492 shares it owned in December, while the overall value of the position plunged from US$1.08 billion to US$260.6 million by March 31. Using the exchange rates on that day, the decline of nearly US$820 million would translate to well over $1 billion CAD.
Because the filings only disclose end-of-quarter holdings, and do not account for trades within the quarter, a precise gain or loss could not be determined. CPPIB declined to comment on the investment.
Keith Ambachtsheer, president of KPA Advisory Services and director emeritus at the International Center for Pension Management, said CPPIB can comfortably hold on to shares of a stock that have seen their value tumble because its investment horizon extends decades into the future.
The pension hasn’t realized a loss because it hasn’t sold all of the shares and CPPIB can afford to be patient and see if they regain their value once concerns over COVID-19 diminish.
“They have a much longer time horizon because the base CPP is still 75 per cent driven by just contributions and 25 per cent by the investment portion,” Ambachtsheer said. “You can’t avoid the reality that even with sustainable cash flows that the capital value is going to fluctuate over time. The luxury you have if you’re a long-term investor is that you don’t care.”
For years, the cruise line industry had been a popular investment among retail and institutional investors alike. Business was booming for the industry, which became a top vacation option for middle-class travellers. It set new records for the number of passengers every year since 2013, according to the Cruise Line International Association. Another record of 32 million passengers was expected in 2020, according to the association’s forecasts, before the pandemic shut down the the industry.
Over the years, cruise stocks have flourished as a result. Royal Caribbean more than doubled between September 2016 and February 2020. Norwegian Cruise Line Holdings Ltd followed a similar growth pattern. Aside from their growth, they also provided with enticing dividend payments. In 2019, Royal Caribbean’s dividend yield was nearly three per cent. Carnival Corp.’s was closer to five per cent.
CPPIB held smaller investments in Norwegian and Carnival, but has sold thousands of the shares since the beginning of the year.
After trading as low as US$19.25, Royal Caribbean shares have since rebounded somewhat, briefly trading near US$50, before falling off again. They closed Thursday at US$35.15.
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