Global upswing surprises CPPIB CEO

TORONTO • Mark Machin, chief executive of the Canada Pension Plan Investment Board, says the “synchronized global economic upswing” of the past few months has been a “big surprise” to him, and very likely to others at the helm of large, institutional investment organizations.

“If you’d asked me a year ago or even a month ago ... I might’ve been a little more cautious about it,” he said in an interview. “I thought we’d have some strength but … most places in the world are doing pretty well economically and that’s driving a lot of performance, and better underpinning valuations for markets.”

The good times in Europe, Asia, and North America are a mixed bag for the CPP Investment Board — which invests the assets of the Canada Pension Plan — because the buoyancy tends to make it harder to find assets to invest in at reasonable prices, and the high-flying Canadian dollar dented the fund’s latest quarterly returns.

“Valuations are quite strong everywhere, there’s tons of liquidity, and so there’s very little that’s cheap in the world,” said Machin. “So we are remaining disciplined and cautious.”

Two infrastructure transactions in the most recent quarter — a co-investment to acquire a 20-per-cent equity interest in Gas Natural Fenosa’s gas distribution business in the Spain, and a US$750-million investment in Calpine Corp., one of the largest independent power generators in the United States — came about only because circumstances lined up for CPPIB, Machin said.

“It was nice to get a couple of infrastructure investments done in the last quarter, because that’s something that we’ve struggled to find … at decent prices,” Machin said.

“There’s just not enough supply versus the huge demand, and so there were circumstances around these couple of investments … that led us to be able to buy them at what we thought were reasonable prices.”

Other potential buyers were tied up elsewhere, he said. Another factor in the Canadian investment organization’s favour was the time and expertise that could be applied to understand complex and specialized plays in the sector.

One area where Machin said the CPPIB remains cautious on the investment front is in the U.K., particularly in London, when it comes to real estate.

“We see that’s got quite a drag, given the Brexit overhang,” he said.

“But we’ve still got substantial investments there and we’re finding one or two pockets of places to do things.”

Canada’s economy, on the other hand, is among those “doing fantastically,” Machin said. But the strengthening loonie played against CPPIB’s net returns in the third quarter, which ended Sept. 30, because investments in other currencies aren’t worth as much when converted back to Canadian dollars.

The currency drag led to a return of just 0.7 per cent in the three-month period, with net assets climbing to $328.2 billion from $326.5 billion at the end of the second quarter.

“When you look at the quarter’s return, we had $9 billion of income, with all the underlying investment strategies doing fine and all conforming to plan, and then we had the drag of $6.7 billion of currency, so it creates $2.3 billion of net income,” Machin said.

The pension organization does not hedge currency, opting instead to diversify the portfolio across markets and currencies.

“On the currency front, we do snapshots, and we’re going to have ebbs and flows over time,” said Machin. “Over the long-term, we believe it’s a bit of a wash.”