CPPIB sharp­ens game plan ahead of in­creased pen­sion con­tri­bu­tions next year

The Globe and Mail (Alberta Edition) - - SPORTS - JAC­QUE­LINE NELSON

Pen­sion plan pre­par­ing to man­age money on be­half of 20 mil­lion Cana­dian work­ers and ben­e­fi­cia­ries

Canada Pen­sion Plan In­vest­ment Board is chart­ing a new in­vest­ment strat­egy aimed at mak­ing the fund more com­pet­i­tive as it pre­pares to man­age more of Cana­di­ans’ money than ever be­fore.

CPPIB is pre­par­ing for an in­flux in new cap­i­tal linked to the Canada Pen­sion Plan ex­pan­sion. As it pre­pares to man­age more money on be­half of 20 mil­lion Cana­dian work­ers and ben­e­fi­cia­ries, the fund is also look­ing for ways to bet­ter com­pete with other global in­sti­tu­tions chasing the same pub­lic- and pri­vate-mar­ket in­vest­ments.

On Thurs­day, CPPIB posted net in­vest­ment gains of 11.6 per cent in its 2018 fis­cal year, which ended March 31. As­sets hit a record of $356.1-bil­lion, up from $316.7-bil­lion at the same time a year ear­lier.

Mark Machin, chief ex­ec­u­tive of CPPIB, at­trib­uted the gains to buoy­ant pub­lic-eq­uity mar­kets through much of the year, with pri­vate hold­ings adding value when volatil­ity reared up in its fi­nal quar­ter. But Mr. Machin warned that dou­ble-digit re­turns shouldn’t be ex­pected ev­ery year.

“I think the re­turn en­vi­ron­ment is go­ing to be lower over then next five years than it has been for the last five years. We’ve had ex­traor­di­nar­ily ro­bust con­di­tions and rising valu­a­tions around the world, but I don’t think that’s go­ing to con­tinue,” he said in an in­ter­view.

The higher as­set valu­a­tions pose a chal­lenge, and the amount of money held by an in­creas­ing num­ber of global funds edged up last year. Mr. Machin said CPPIB has to be care­ful not to pur­sue prospec­tive pri­vate-mar­ket ac­qui­si­tions too ag­gres­sively.

“We’re turn­ing down lots of pri­vate eq­uity op­por­tu­ni­ties right now, be­cause there’s such a wall of money chasing them. Same in in­fra­struc­ture,” he said. On top of this, pub­lic mar­ket volatil­ity and low yields on in­come-ori­ented in­vest­ments have posed in­vest­ment chal­lenges.

“This not only makes it hard to pick our spots; it el­e­vates the risk of a cor­re­lated de­cline in prices in both pub­lic and pri­vate mar­kets. In fact, it is gen­er­ally ex­pected that as the eco­nomic cy­cle in the U.S. in par­tic­u­lar – and to some ex­tent in the rest of the world – be­comes more ma­ture, then most fi­nan­cial as­sets are likely to gen­er­ally un­der­per­form,” Mr. Machin wrote in CPPIB’s an­nual re­port.

Amid these chal­lenges, CPPIB’s board of di­rec­tors en­dorsed its newly de­vel­oped 2025 strategic direc­tion, which up­dates the fund’s last plan for 2020 that it has largely al­ready com­pleted. The new plan has three key com­po­nents: in­creased fo­cus on emerg­ing mar­kets, in­vest­ments in new tech­nol­ogy and im­prov­ing the fund’s abil­ity to act quickly.

On the first goal, the fund now plans to in­vest up to a third of its as­sets in emerg­ing mar­kets by 2025, largely fo­cused on China, Brazil and In­dia. Right now, the fund has $56.1-bil­lion, or 15.8 per cent of its to­tal as­sets, al­lo­cated to emerg­ing mar­kets.

The tech­nol­ogy piece in­cludes in­vest­ing in new data and pro­grams that could re­shape in­vest­ment de­ci­sions. The fund is look­ing for a new chief tech­nol­ogy and data of­fi­cer as pri­vate mar­ket in­vestors across Canada con­tinue to re­think how they col­lect, an­a­lyze and use in­for­ma­tion through­out their in­vest­ment pro­cesses.

The third com­po­nent, called “agility,” is about al­lo­cat­ing cap­i­tal more ef­fec­tively across that fund’s 26 in­vest­ment groups. This is linked to the man­age­ment changes that the pen­sion fund has made over the past year as it re­assessed ex­ec­u­tive re­spon­si­bil­i­ties.

CPPIB must man­age this while pre­par­ing to take on new CPP con­tri­bu­tions start­ing on Jan. 1, 2019, which will sup­port a steady in­crease in the ben­e­fit amount work­ing Cana­di­ans will get in their re­tire­ment years. These ad­di­tional top-up con­tri­bu­tions, ex­pected to reach $1-bil­lion in the first year, will be in­vested us­ing a dif­fer­ent, more con­ser­va­tive risk pro­file than the ex­ist­ing CPP ac­count.

About 55 per cent of the new money will be man­aged by the same pro­fes­sion­als that run the ex­ist­ing port­fo­lio at CPPIB. The other 45 per cent will be in­vested di­rectly in low-risk bonds.

“We’re try­ing to do it in a way where we can use all the ben­e­fit of the ex­ist­ing in­vest­ment teams, and use their power to drive both the base CPP and the ad­di­tional CPP,” Mr. Machin said. He added that there will be few ad­di­tional costs or new hires to sup­port the new flow of funds.

Still, the top chal­lenge on Mr. Machin’s mind is “mak­ing sure we are not over­pay­ing for things. Just be­ing cool-headed about our in­vest­ments around the world.” The fund per­formed 275 global trans­ac­tions in fis­cal 2018, up from 182 in 2017.

I think the re­turn en­vi­ron­ment is go­ing to be lower over then next five years than it has been for the last five years. MARK MACHIN CANADA PEN­SION PLAN IN­VEST­MENT BOARD CEO


Mark Machin, CEO of CPPIB,walks in the fund’s Toronto of­fices in Jan­uary. CPPIB posted net in­vest­ment gains of 11.6 per cent in its 2018 fis­cal year.

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