CPP defends oil, China holdings
PENSIONS CEO credits fund’s diversification for return amid strife
It was a “very rare” year in which stocks and bonds both slumped while inflation and interest rates soared around the world, but Canada’s biggest pension fund still eked out a modest return.
John Graham, CEO of the Canada Pension Plan Investment Board (CPP Investments), said in an interview Wednesday that the fund’s diversified investing approach helped it weather the financialmarket strife, as its infrastructure and private-equity holdings delivered solid returns.
Graham also told the Star he has not changed his view on two controversial topics: continuing to invest in China and refusing to divest from oil and gas assets.
CPP said it earned 1.3 per cent in its most recent fiscal year (ended March 31). That beat the fund’s reference portfolio (an internal benchmark it sets for itself ), which had a return of just 0.1 per cent, and brought the fund to a 10 per cent annualized return over the past decade.
There’s probably more volatility on tap for stock markets, Graham said, adding he’s “cautiously optimistic” about what lies ahead for the fund this year as certain sectors in some parts of the world appear ready to soar.
“For an active investor, that provides opportunities,” Graham said, referencing CPP Investments’ approach of combing the globe and often making direct investments in a wide range of assets, from airports to toll roads and energy utilities to malls.
Graham cited logistics, enterprise software businesses and multifamily residential buildings as areas of opportunity for CPP, adding, “I continue to believe in being a global investor.”
He said European investments have recently performed well as
have real estate holdings in India, where workers have returned to the office in higher numbers than in North America.
CPP’s real estate investments actually declined in value by 1.2 per cent last year, in large part because of the North American office sector, where many businesses have been slashing their leases as they adopt hybrid work models.
CPP’s infrastructure division posted a 5.6 per cent return; it earned 6.8 per cent on private equity; and its credit investments increased by six per cent.
The fund also got a boost on its investments held in U.S. currency because the loonie declined in value against the U.S. dollar (as well as other foreign currencies) during the year.
Earlier this month, CPP’s Michel Leduc, global head of public and corporate affairs at CPP, spoke with a federal parliamentary committee on Canada’s relationship with China, which has grown increasingly tense in recent months over claims of Chinese interference in Canadian politics.
Leduc, who said about 9.8 per cent of CPP’s overall portfolio is in China, said the fund uses several tools to carefully evaluate its investments and avoids stakes in “companies involved in wrongdoings, especially violations of human rights.”
“The organization feels we need to be exposed to China,” Graham said Wednesday. “It’s the secondlargest economy in the world.”
He also reiterated that CPP does not plan to divest from fossil fuel investments despite calls from some climate activists to stop funding businesses that have no viable path to reducing their carbon emissions to zero.
“We’ve been quite clear that we’re going to go down a path of engagement and not a part of divestment,” Graham said, referencing the view held by many investors that they can “engage” with the companies in which they hold stakes and influence those businesses to enact climate-friendly transition plans.
In a pension “report card” published in January, the eco-advocacy charity Shift: Action for Pension Wealth and Planet Health gave CPP an overall grade of C minus. Shift praised the pension fund for taking a more urgent approach to climate issues and for setting a target of reaching net-zero carbon emissions in its portfolio by 2050.
But Shift said CPP could do better, criticizing its refusal to divest from fossil fuels as well as the fact that it has not set interim targets on how it plans to reach net-zero by 2050.
Graham said he believes interim targets create an incentive to sell off investments in high-emitting businesses (which will likely be financed by someone else, he said), rather than spending the money it takes to reduce emissions.
By the end of its fiscal 2023 year on March 31, CPP Investments had net assets of $570 billion, up from $539 billion a year earlier.
CPP Investments manages the Canada Pension Plan money that is not needed to pay immediate benefits to beneficiaries. Most working Canadians pay into the CPP and it has 21 million contributors and beneficiaries.