CPPIB head says U.S. inflation a potential risk, but threat of overheated economy anything but imminent

The chief executive of the Canada Pension Plan Investment Board on Friday said U.S. inflation continues to pose a risk to the fund, but added those concerns are tempered by strong economic underpinnings south of the border.

“Am I worried about a market where 40 per cent of our money is invested? Absolutely, it’s our biggest market,” Mark Machin said.

Still, he said that risks to the U.S. economy, which would include a spillover into Canada, are likely not imminent.

“The U.S. has been well supported by economic growth,” Machin said. “It has driven earnings growth. The fundamentals in the U.S. are still incredibly strong, and the question now is: how long can that go on?”

In a written message along with CPPIB’s quarterly earnings that were released Friday, Machin said that “solid performance today cushions the fund for an inevitable future market downturn.”

The U.S. is by far CPPIB’s largest market, with $131 billion invested as of March 31, 2018. Canada is next with $54 billion, or 15 per cent of its portfolio, followed by Europe at $47 billion (13 per cent).

Some economists worry that inflationary pressures in the U.S. threaten to spur a market correction, hastened by President Donald Trump’s hefty stimulus plans and a recent tax reform aimed at encouraging business investment. Higher oil prices have also helped fuel inflation.

Rising wage growth in Canada, which observers say could push inflation higher, compounds those worries at home. A recent Bank of Canada survey found 34 per cent of businesses expected to face a labour shortage in the second half of 2018.

In a recent research note, Desjardins Group analysts said the BoC “will have to monitor this situation closely” as wage growth continues to rise while productivity loses ground, threatening to nudge inflationary pressure upward.

The U.S. Federal Reserve hiked its main interest rate in June for the second time this year, up to two per cent. The Bank of Canada in July raised its benchmark rate to 1.5 per cent.

Some market watchers, however, say the risks of the U.S. overheating are exaggerated, driven mainly by stock market volatility and rapid wage growth in a few select sectors such as oil and gas.

The CPPIB on Friday reported net assets of $366.6 billion for the quarter ended June 30, compared with $356.1 billion at the end of March. It reported net investment returns of 1.8 per cent, largely tied to its private-asset holdings.

In May, CPPIB reported an 11.6-per-cent return on investments during the last fiscal year, but warned that such double-digit growth was not sustainable as competition for assets intensifies.

That competition has been particularly visible for renewable energy assets as private equity floods into the market while previous asset holders shed their positions. That has pushed valuations sharply higher as various governments introduce stringent climate policies and offer incentives to would-be developers.

“It’s been fairly expensive for the last few years around the world, there’s a lot of capital chasing renewables,” Machin said. “We’ve found it difficult to find assets that we wanted.”

Over the quarter, the fund purchased a stake in various onshore renewable assets in North America and offshore wind projects in Germany from Enbridge Inc. for $2.25 billion. CPPIB also purchased 396 megawatts of renewable capacity from its subsidiary, Cordelio Power, for $740 million.

Large investment funds have flocked to renewables as they become increasingly competitive and offer stable returns for investors.

“We’re not going after them because they’re renewables, we’re not filling a bucket of renewables,” Machin said. “We have a view that the energy transition is underway.”

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Canada Pension Plan sets record for country’s largest green bond in $1.5-billion debut

Canada Pension Plan Investment Board went green with a bang.

The pension fund, which boasts the highest credit score at the three largest rating firms, priced $1.5 billion (US$1.15 billion) of green bonds Wednesday in what it called the first green bond sold by a pension fund globally. It was also a record size for a single green bond transaction in Canada, according to Bloomberg data.

The 10-year bonds, sold via its unit CPPIB Capital Inc., were sold at a spread of 71 basis points over similar-maturity federal government bonds and offer a 3 percent coupon. They attracted 79 buyers with demand at $2.7 billion, according to a CPPIB statement. The sale was led by CIBC World Markets Inc. and RBC Dominion Securities Inc.

“I like the AAA and the spread is attractive given the credit support,” said Mark Carpani, who helps manage $1.2 billion as head of fixed income at Toronto-based Ridgewood Capital Asset Management and bought the CPPIB green bonds. “CPPIB will put proceeds to good use so I’m fine supporting this.”

CPPIB’s new debt dethrones Ontario’s securities due 2025 as the country’s largest green bond in Canadian dollars. The province’s outstanding securities due 2023 stand at $1.55 billion, yet that total was split between two offerings; an initial $750 million was sold in January 2016, followed by a $800 million add-on of the same notes a year later.

Canada’s green bond issuance has recently been dominated by provincial governments, but an increasing number of other issuers such as insurers and municipalities have been making forays into the market lately too.

In November, Manulife Financial Corp. became the world’s first life insurer to sell green bonds when it priced securities in Singapore dollars. The company followed that transaction in May with the first corporate green bond in Canadian dollars since 2015. The city of Ottawa sold green bonds in November, while Toronto seeks to follow suit in the second half of this year.

CPPIB’s green-bond framework allows for investments in wind and solar energy, sustainable water and wastewater management, as well as green buildings. It plans to invest more than $3 billion in renewable energy as it prepares for an expected global transition to a lower-carbon economy.

CPPIB invests on behalf of the $356.1 billion Canada Pension Plan. It started issuing debt in 2015, selling bonds in both Canadian and U.S. dollars and the euro since.

Bloomberg.com

CPP Investment Board approached about Trans Mountain, but no decision yet: CEO

OTTAWA — The head of the Canada Pension Plan Investment Board says the federal government’s financial adviser has raised the possibility of getting involved in the Trans Mountain pipeline project but there’s been no political pressure applied.

CPPIB chief executive Mark Machin says that the Toronto-based fund manager and its peers will likely take a look at the stalled Trans Mountain project because there are a limited number of investment opportunities of its magnitude.

Machin’s comments to the House of Commons finance committee come less than two weeks after the government announced it would buy the project for $4.5 billion from Kinder Morgan to ensure the pipeline will be completed.

Finance Minister Bill Morneau has predicted the Trudeau government will have no difficulty selling the Trans Mountain pipeline expansion project after uncertainty about its future is resolved.

The federal government’s hand was forced by B.C. Premier John Horgan, who is waging a court battle over the federally regulated pipeline, which would carry diluted bitumen from Alberta’s oilsands to a sea port near Vancouver.

Machin told the finance committee that the Canada Pension Plan Investment Board has had both good and bad experiences with pipelines and will use its usual approach when deciding whether to put money into Trans Mountain.

CPPIB plans inaugural green bond to fund renewables

Canada Pension Plan Investment Board plans to issue green bonds in Canadian dollars for the first time, joining a growing list of borrowers selling the debt to finance environmentally friendly investments.

“The issuance of green bonds is a logical next step to CPPIB’s investment-focused approach to climate change, and we are pleased to be a pioneer among pension funds in this regard,” Poul Winslow, senior managing director and global head of capital markets and factor investing, said in a statement Monday. “The capital raised will help support strong, long-term investments in eligible green assets that position the fund for continued success.”

CPPIB’s statement doesn’t specify the timing or size of the sale, but says the Toronto-based fund engaged the Centre for International Climate Research, which specializes in providing second opinions on the qualification of debt for green bond status.

CPPIB’s green-bond framework allows for investments in wind and solar energy, sustainable water and wastewater management, as well as green buildings. It plans to invest more than $3 billion (US$2.3 billion) in renewable energy as it prepares for an expected global transition to a lower-carbon economy.

Canada’s green bond issuance, totaling $8 billion according to data compiled by Bloomberg, has recently been dominated by provincial governments, yet an increasing number of other issuers such as insurers and municipalities have been making forays into the market in recent months.

Manulife Financial Corp. in November became the world’s first life insurer to sell green bonds when it priced securities in Singapore dollars, and followed that transaction in May with the first corporate green bond in Canadian dollars since 2015. The city of Ottawa sold green bonds in November, while Toronto seeks to follow suit in the second half of this year.

The province of Ontario is the country’s biggest green borrower with $3.05 billion of securities outstanding that were sold in five transactions, including the country’s largest — $1 billion of seven-year bonds — sold in January.

CPPIB invests on behalf of the Canada Pension Plan. The $356.1 billion pension fund, which boasts the highest credit score at the three largest rating firms, started issuing debt in 2015. It has sold debt in the loonie, U.S. dollar and the euro.

Bloomberg.com

CPPIB backs fledgling hedge funds as titans falter

Canada’s biggest pension plan aims to back as many as four fledgling hedge funds a year at a time when investors are balking at high fees and disappointing returns from the industry’s biggest managers.

Canada Pension Plan Investment Board has made initial investments of as much as $250 million each in five startups and young hedge funds under its Emerging Managers Program in the past two years, according to Poul Winslow, Toronto-based head of thematic investing and external portfolio management. While the pension fund has allocated to external hedge funds for almost a decade, it rarely invested in managers with a track record of less than a year before the start of the program in October 2015, he said in a telephone interview.

The Canadian investor, which has $337 billion (US$261 billion) in assets, is getting into promising hedge funds earlier in their life cycles to secure the ability to invest more as they expand. The move reflects a growing realization that smaller managers can access a different set of investment opportunities while being flexible on fees and other terms. It’s also a symbolic shift from a focus on industry behemoths, who have taken a lion’s share of investor assets even as returns from many high-profile managers have been lacklustre in recent years.

“There is some argument that early-stage managers have a different return profile, something that can diversify our investments in mature funds,” said Winslow. “With early-stage investments, you can negotiate better fees, revenue share, capacity and transparency terms with the managers.”

Globally, hedge fund managers overseeing at least US$5 billion attracted US$166.1 billion of additional capital since the start of 2009, while smaller peers saw US$13.2 billion of net outflows, according to data from Hedge Fund Research Inc. Funds larger than US$1 billion gained an average of 6.1 per cent in 2017, while those smaller than US$250 million were up 9.7 per cent, according to an eVestment report in January.

California Public Employees’ Retirement System, the largest U.S. public pension fund, decided in 2014 to divest its entire US$4-billion hedge fund holdings, partly citing the inability to expand such investments in a way that could justify costs. Investors have also pushed hedge funds to change the way they charge fees to better align investor and manager interests.

CPPIB has produced an annualized real investment return of 5.7 per cent in the past 10 years, according to a February quarterly update. It has farmed out $75 billion to 160 external hedge- and private-equity funds by March 2017 to help diversify investments, said Winslow.

Its emerging managers program, led by London-based Pete McConnon, typically commits US$150 million to US$250 million of seed capital each to hedge fund startups for two or three years in exchange for a cut of their fee revenue and the ability to invest more later, said Winslow. It also participates in what it calls “acceleration” deals, where it provides a similar amount of money to managers that have typically been operating for fewer than three years and oversee less than US$250 million of assets, he said.

CPPIB seeks to stay with successful managers after the initial lockup periods end, using the emerging managers program as a way to expand its investments in mature managers, Winslow said. It has given additional capital to several funds in the program, he added. That sets it apart from other hedge fund seeders that raise money for private-equity-like funds and often reinvest their money somewhere else once the initial lockups end.

Ovata, the Hong Kong-based startup it backed, is led by James Chen, who previously ran the Asian equities team at Michael Platt’s BlueCrest Capital Management. It started trading on Dec. 1 with more than US$200 million. His team, which trades Asian stocks, includes members of his former BlueCrest team.

 

Bloomberg.com

CPPIB looking for bargains amid market selloff, Machin says

The head of the Canada Pension Plan Investment Board sounded optimistic Friday about opportunities that may arise out of the recent return of volatility to markets.

“I think there was a lot of euphoria coming into the new year, so I think some of that’s blowing off here,” said Mark Machin, president and chief executive officer of the CPPIB, in an interview with the Financial Post. “Hopefully, there’s opportunity thrown up by some of this volatility. Certainly, our public market teams are looking at better entry positions into stocks that wouldn’t otherwise be there because there’s volatility.”

The CPPIB reported Friday net assets of $337.1 billion for its fiscal third quarter ended Dec. 31 2017, up from $328.2 billion for the previous quarter. Canada’s largest pension fund said its net return was 4 per cent for the quarter, 12.1 per cent on a five-year annualized basis, and 7.4 per cent on a 10-year basis.

For the nine months to date in its fiscal year, CPPIB reported that the fund had increased by $20.3 billion, delivering a net return of 6.7 per cent. 

CPPIB, which manages investments for the Canadian Pension Plan, chalked up some of the gains to the scorching pace of international stock markets last year (as of the end of the quarter, 30.5 per cent of its assets were foreign public equity, totalling $102.7 billion). That pace finally slackened this past week, helping trigger the first correction in the Dow Jones industrial average in two years.

The recent downturn also marked the first time that the market has entered correction territory since Machin was appointed to lead the fund in 2016.

Machin said the “fundamental reason” driving the volatility has been the longstanding anticipation of rising interest rates. He also said the shake-up did not change anything about the CPPIB’s approach, which includes long-term infrastructure and real estate investments.

“This type of short-term volatility doesn’t affect us at all,” he added. “It’s part of what we’re set up to be protected against, because we broadly diversify the portfolio across different geographies, across different strategies, across different asset classes.”

However, as something to watch, Machin highlighted the CPPIB’s recent creation of a group focused on power and renewable energy. CPPIB came to terms with a Brazilian energy company during the quarter on forming a new joint venture that purchased two working wind farms in the northeastern part of the South American country. The fund made an initial investment of $272 million in equity as part of the transaction.

CPPIB also sold an 18-per-cent ownership stake in a European heat and water sub-metering during the quarter for net proceeds of approximately $1 billion. Following the quarter, CPPIB announced it would pay US$144 million for a 6.3 per cent ownership stake in an Indian renewable energy developer.

The quarter also preceded some of CPPIB’s more recent transactions, such as a US$20-billion deal involving Thomson Reuters’ financial and risk business. A consortium led by U.S.-based private equity firm Blackstone, and including CPPIB, aims to own 55 per cent of the financial data business through a new company. 

The CPPIB also announced several coming changes to its C-suite this week, with senior managing director and chief operations officer Nick Zelenczuk, as well as senior managing director Graeme Eadie, to retire at the end of May and March, respectively. Eric Wetlaufer, senior managing director and global head of public market investments at the fund, is also departing the CPPIB effective May 31.

Machin said the moves were part of “planned renewals.” 

“We’re going through processes to make sure we have strong successors in place, and doing that sort of transparently,” he said.

Financial Post

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Canada Pension Plan Undermines Feds By Investing In Coal

A coal mining operation in Sparwood, B.C., is shown on Wednesday, Nov. 30, 2016.

OTTAWA — Canada’s national pension fund manager is among a group of Canadian companies that are undermining the federal government’s international anti-coal alliance by investing in new coal power plants overseas, an environmental organization says.

Friends of the Earth Canada joined with Germany’s Urgewald to release a report today looking at the top 100 private investors putting money down to expand coal-fired electricity — sometimes in places where there isn’t any coal-generated power at the moment.

The report lists six Canadian financial companies among the top 100 investors in new coal plants in the world. Together, Sun Life, Power Corporation, Caisse de depot et placement du Quebec, Royal Bank of Canada, Manulife Financial and the Canada Pension Plan Investment Board have pledged $2.9 billion towards building new coal plants overseas.

Urgewald tracks coal plants around the world and reports there are 1,600 new plants in development in 62 nations, more than a dozen of which don’t have any coal-fired plants now.

Environment Minister Catherine McKenna will meet with leaders and officials from the alliance this week in Paris, where French President Emmanuel Macron is hosting a climate change meeting to mark the two year anniversary of the Paris climate change accord.

While Environment Minister Catherine McKenna is claiming to be a global leader on phasing out the dirtiest of electricity sources, private investors are “undermining that commitment,” says Friends of the Earth senior policy adviser John Bennett.

Canada and the United Kingdom last month teamed up to launch the Powering Past Coal Alliance, trying to bring the rest of the world on side with a campaign pledge to phase out coal as a power source entirely by 2030 for the developed world and 2050 for everyone else.

Twenty national governments and at least seven subnational governments — five of them from Canada — signed onto the alliance last month. The hope is to grow the number to 50 by the time the United Nations 24th climate change conference takes place in November 2018.

McKenna will meet with leaders and officials from the alliance this week in Paris, where French President Emmanuel Macron is hosting a climate change meeting to mark the two year anniversary of the Paris climate change accord. This meeting is largely focused on international climate finance as the world tries to meet the goal to have $100 billion a year to invest in climate change mitigation and adaptation projects in the developing world by 2020.

The accord commits the world to keeping the average global temperature from rising more than two degrees Celsius over pre-industrial levels by the end of the century. To do that, scientists suggest global carbon emissions have to start dropping in less than three years, and the only way that is going to happen is by shutting down coal plants.

Coal is responsible for almost half of global carbon dioxide emissions.

McKenna’s office did not respond to a request for comment.

Last week, McKenna was in China where she said she was talking about phasing out coal. While China is trying to cut its own coal use, it uses more coal to make power than the rest of the world combined. Hence, McKenna said it’s currently impossible to expect China to commit to eliminating it.

Canada can do more: climate institute

McKenna said she wasn’t planning to raise the issue of China investing in new plants outside its borders. Urgewald’s data show Chinese-owned companies are behind about 140 new coal plants in development outside China.

Turns out Canadian money is also financing international coal plants, through private investors.

Dale Marshall, national program manager for Environmental Defence, said the Paris meeting this week has a lot of work to do trying to figure out how national governments can increase their commitments but also leverage more from the private sector.

Erin Flanagan, director of federal policy for the Pembina Institute, said Canada can do more to discourage Canadians from investing in coal and encourage investments in clean energy. That could include a national requirement for investment companies to include climate change risks when publishing decisions about investment opportunities.

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CPPIB buying 30 per cent interest in BGL Group for $1.1 billion

TORONTO — The Canada Pension Plan Investment Board has signed a $1.1-billion deal to acquire a 30 per cent stake in BGL Group, a digital distributor of insurance and financial services.

BGL Group’s brands include Comparethemarket.com, LesFurets.com and online life insurer BeagleStreet.com.

Under the deal, CPPIB will nominate a non-executive director to represent it on the BGL board.

BHL, the current owner of BGL Group, will retain a majority interest in the business.

The deal is subject to customary closing conditions including regulatory approvals.

It is expected to close by the end of April.