Looking first at 2011, the Pension Plan earned a gross investment return of 3.17%, or $1.7 billion in total investment income, following two years of strong returns that generated $9.7 billion in net investment income. Our substantial private market investments in infrastructure, real estate and private equity earned 8.20% or total investment income of $1.8 billion. Our strategy to shift capital from public to private markets is working in accordance with our Strategic Plan’s goal to achieve diversification in its asset mix. Our fixed income and real return bond portfolios comprising government bonds, corporate bonds and mortgages within Canada earned impressive returns of 9.13% for fixed income and 17.84% for real return bonds, or total investment income of $1.4 billion. Public equities were the weak spot, incurring a negative return of 11.29% for Canadian public equities and negative 4.96% for non-Canadian public equities, and a total investment loss of $1.5 billion. Sudden sharp declines in global equity markets in the second half of 2011 reminded us once again that stock markets can be fickle. There are many reasons why equity returns weakened – the sovereign debt crisis emanating from Europe, U.S. and European government deficits, a slowdown in growth in leading Asian economies, softer demand for commodities and the threat of global recession. Developing a successful strategy to manage volatility in global equity markets continues to be a top priority in 2012.
One-year returns tell an incomplete story. Our financial contract with almost 420,000 Plan members is to deliver pension benefits over their retirement years. To stabilize performance at a level that fully funds the Plan, we began to shift capital from public to private markets in 2004, when 82% of our total assets were invested in publicly traded stocks, bonds and related securities with the rest in privately owned assets. By 2011, the Plan was much better balanced with 58% invested in public and 42% in private market assets. In the past eight years, we have increased our investment in real estate, infrastructure and private equity transactions primarily in Canada, the United Kingdom and the United States by almost $18 billion.
This capital shift to private markets is designed to reduce exposure to volatile stock markets by acquiring private investments that generate reliable and rising cash flows to pay pensions. We continuously monitor the allocation of capital to various asset classes, particularly exposure to unpredictable stock markets. The Board and Management are currently conducting our regular triennial asset/liability study that takes the long view on the rising cost of pension benefits and the adjustments that may be necessary to the asset mix policy.