Trade war headwinds to spill over: CPPIB CEO

T ORON T O • Mark Machin, chief executive of the Canada Pension Plan Investment Board, said the trade dispute and heightened tensions between the United States and China offer little good news for investors over the next 12 months.

“The impact is not isolated to the No. 1 and No. 2 economies suppressing growth in the world. It spills over,” said Machin, whose CPP Fund announced Wednesday that it posted an 8.9 per cent annual return for fiscal 2019, with net income of $32 billion. The fund also received $3.9 billion in CPP contributions and ended the fiscal year with assets of $392 billion.

Machin said the past year was a healthy one for deal making despite some assets being on the expensive side due to concerns about tax and regulatory changes. CPPIB completed 69 transactions valued at more than $300-million around the world.

The pension management organization, which invests on behalf of the Canada Pension Plan, has been stepping up its exposure to China, and Machin did not signal a change to that strategyt.

Investments in Mainland China represented 9.4 per cent of the portfolio at the end of March, up from 6.3 per cent a year earlier.

Machin said in an interview that is expected to move up to the “mid-teens” by 2025, in keeping with the strategy of boosting the representation of emerging markets including India, China, and Brazil to 33 per cent in that timeframe.

Investments in the United States accounted for 33.5 per cent of the portfolio in fiscal 2019.

The fund’s diversification — geographically, by sector, and by asset class — should help moderate the impacts of the “multifaceted” tensions including trade that threaten to play out over the coming year, Machin said.

One potential beneficiary would be fixed-income investments that do well in a low-interest-rate environment.

“Interest rates will probably stay very low for much longer, as central banks have no alternative but to keep supporting economic growth as the life force is being sucked out of it by tension,” he said.

“Ultimately, yes, there will be winners and losers. But generally everything (is going to be) slowing down … there’s not much of a good news story in that unfortunately.”

Machin said CPPIB was not interested in Westjet Airlines Ltd., the subject of a $5-billion friendly bid from Onex Corp. this week. While he has talked openly about the pension organization’s interest in buying an airport, he said the low barriers to entry and business model of an airline do not fit with the strategy for the fund.

Five out of six CPPIB departments including credit investments, real assets, active equities, and private equities posted positive returns during the past fiscal year, with capital markets and factor investing as the exception. Machin said the unit, which includes hedge fund strategies, has nonetheless posted positive returns over the past five years.

The final quarter of the fiscal year marked the first time CPPIB invested funds contributed through enhanced CPP. The additional CPP account generated a return of $11 million, or five per cent for its first quarter, excluding one-time startup costs of $9 million.

“That was a great quarter to start investing,” Machin said, noting that stock markets bounced back while real assets such as real estate and infrastructure also performed well.

Overall, the CPP Fund has produced a five-year real rate of return (after all costs and inflation) of 8.9 per cent and a 10-year return of 9.2 per cent.

Mark Machin