CPPIB staying in market even as `bumpy' year lingers on
Net assets decrease in environment where inflation is too high for comfort
Wild swings in equity and currency markets, increased geopolitical tensions and persistent inflation are extending a “bumpy” year for the Canada Pension Plan Investment Board (CPPIB), chief executive John Graham said Friday.
“It's changing by the day, sometimes by the hour, or even by the minute, and it's dramatically impacting the global economy,” Graham said in a speech at the Canadian Chamber of Commerce's annual meeting in Ottawa.
After successfully navigating through the first couple of years of the pandemic, the pension management organization reported lower net assets of $523 billion at the end of June than at its fiscal year-end on March 30 despite an influx of $7 billion from Canada Pension Plan contributions.
“It's looking like a radically different world POST-COVID,” Graham said, noting that inflation is proving to be higher and more persistent than central bankers and other prognosticators anticipated a year ago.
He noted that even former juggernaut China is experiencing lower than anticipated growth from a combination of COVID lockdowns and systemic challenges in the economy.
But he stressed that Canada's largest pension plan is primarily focused on generating long-term returns to provide for 21 million workers and retirees. “While we're paying very close attention to current events, we're keeping an eye firmly fixed on the future,” he said. “As always, those challenges will create new opportunities.”
For example, supply chain issues and national security concerns are driving “de-globalization,” creating opportunities for “onshore, local investment” in semiconductors, battery technology, and active pharmaceutical ingredients.
The CPPIB team also expects to find opportunities in infrastructure investment, helped in part by long-lasting spending programs, particularly in the United States, Graham said.
The energy crisis in Europe is proving to be a catalyst for the energy transition that was already underway, with $755 billion spent globally last year, he said.
CPPIB aims to double its green and transition assets to $130 billion by 2030 from around $65 billion today. In his speech, Graham noted CPPIB'S recent investment in stationary energy storage through a Toronto-based company called Hydrostar Inc., and a strategic partnership in the United Kingdom with Octopus Energy Group Ltd., which delivers green energy services.
All portfolio companies and new investments go through a screening for physical and transition risks, but Graham said there is a case to be made to “transition away from thinking of climate as a risk (and) look at it as huge investment opportunity.”
He has said previously that the pension management organization, which invests the largest single pool of capital in the country, does not support a wholesale divestiture of traditional oil and gas investments. In a question-and-answer session following his speech Friday, he received applause when he said CPPIB remains committed to continue investing in extractive industries including oil and gas companies.
“Our approach to sustainability and our net-zero commitment considers the important role we can play in assisting companies as they map their transitions, and support them through it,” he told the audience.
The CPPIB investing team is keeping a close eye on how labour markets and consumer spending appear to be changing in the aftermath of the pandemic, Graham said, adding that market volatility should present some good entry points for long-term investors like the Canadian pension giant.
“When any market correction happens, and they will, strong individual companies emerge from the pack,” Graham said. “As patient, active investors we are focused on identifying investment opportunities with the right capabilities that will succeed in this uncertain environment.”
With a lot of “dry powder” in the market waiting to be invested, he said CPPIB will continue to differentiate itself through active management and diversification across asset classes and geographies to mitigate concentration risk.
He said the pension management organization is committed to staying in the market and looking for opportunities through each cycle, and not losing conviction in long-term beliefs during a market selloff.
“That means buying equities when equities are selling off,” he said, and sticking with geographic allocation even when growth slows for a time in one part of the world.
“We don't look to tactically move in and out of markets.”
Investments in emerging markets, a portfolio that includes China and India, have grown to $120 billion, or 22 per cent of the CPP fund, from around $25 billion in 2017, which represented just shy of eight per cent of the fund. Growth has remained fairly flat over the past year, Graham said, and the average annual return on the emerging markets investments is 8.4 per cent.
He said the Canadian pension is seeking to generate returns around the world by designing investment ownership structures to its advantage, particularly in private markets.
“We can be with a company from private through to IPO (initial public offering) then continue on post-ipo. This approach allows us to maximize value not only for the duration of our holding period but brings value in how we approach our exits,” Graham said.
He noted that the CPP fund's negative return of 4.2 per cent in Q1 outperformed global indexes that declined “well into double-digit territory,” and that five- and 10-year annualized net returns were 8.7 per cent and 10.3 per cent, respectively.
“We continued to outperform the market, adding over $40 billion of ... value from active management over the past 10 years,” he said.
We're keeping an eye firmly fixed on the future. As always, those challenges will create new opportunities.