A farmer’s field in Saskatchewan and a reinsurance company based in Bermuda are not typical “assets” one might expect to find in the portfolio of Canada’s largest pension fund.
But offbeat investments are becoming more common for the Canada Pension Plan Investment Board, which manages a fund that has grown so large, so fast — about $220-billion in assets — that it would own roughly 10% of every company in the broad Canadian market index if it invested only in domestic stocks.
Deploying a growing pile of cash more sensibly has meant looking at alternative investments and looking well beyond Canada.
Created in 1997 to invest funds not needed to pay current benefits of the national Canada Pension Plan scheme, the CPPIB now owns real estate and infrastructure such as toll roads, and has offices in Hong Kong, London, New York, and Sao Paulo. Investments are spread across the world including China, India, Brazil, and Mexico.
With projections of steep growth of investible cash from the annual contributions of Canadian workers, plus investment income, continuing to find deals that will add value is a challenge.
We get shown a lot of deals and opportunities . . . I would say we turn down 95% of them
“We get shown a lot of deals and opportunities,” Ed Cass, who took over as the fund manager’s chief investment strategist in April, said in an interview. “I would say we turn down 95% of them.”
A single-profession pension such as the Ontario Teachers’ Pension Plan has to deal with the challenges of a large aging pool of pension beneficiaries against a shrinking pool of younger contributors, but the biggest challenge at CPPIB is arguably the pressure to find a constant stream of investments for its funds. While that sounds easy enough, trying to buy alongside a group of equally motivated competitors can drive up prices and eat into returns. The active investments, together with a passive portfolio, must produce sufficient returns to fulfill CPPIB’s mandate of providing a foundation for the retirement security of 18 million Canadians.
“There are much bigger funds, like some sovereign wealth funds, out there and this is a problem for all of them in employing active management,” said Robert Heinkel, a finance professor at the Sauder School of Business at the University of British Columbia. “The more money dumped into an active strategy, the harder it is to add value [in part because] asset decisions move asset prices.”
The CPPIB’s growing assets surpassed those of the powerhouse Caisse de dépôt et placement du Québec for the first time in the summer of 2012, at $165.8-billion, and the growth since then has been phenomenal. CPPIB now manages a fund with assets of nearly $220-billion as of March 31 — and Canada’s chief actuary expects them to balloon to more than $1-trillion by 2045. It is the only Canadian pension in the top 10 of the latest P&I/Towers Watson Ranking of 300 global pension funds.
Adding to the fund’s girth is the fact that none of the invested funds will be drawn down to pay benefits until at least 2023, according to a recent report from Canada’s chief actuary.
There is little danger of growing too big to actively invest. After all, as Mr. Heinkel noted, “the value of all global commercial real estate, for example, is a pretty big number.”
But CPPIB’s mandate prohibits it from becoming too concentrated in a single area.
Mr. Cass says diversification, both in terms of geography and assets, is and will remain an important element of the strategy as the fund grows. “[It] gives us the opportunity to assess investment opportunities in areas we feel will be major drivers of global growth in the years ahead, such as developing markets,” he says.
And if competition is making some private assets expensive, CPPIB’s team is not under pressure to invest right away.
Putting money in a passive “reference” portfolio of stocks and bonds allows the fund’s managers “to buy time as we examine other opportunities,” Mr. Cass says. “We’re not constrained to having to source deals in order to deploy assets.”
CPPIB’s long investment horizon also gives it an advantage over other buyers, such as private equity players who often have a much shorter investment horizon of three-to-five years. As a result, the deals keep rolling in, sometimes weekly.
In June alone, for example, CPPIB announced a real estate purchase in London with a partner, a US$332-million investment in India’s infrastructure sector and the $250-million acquisition of a 6% stake in financial information services provider Markit Ltd. through its initial public offering.
On Friday, CPPIB expanded its multifamily residential portfolio in the United States, committing an additional US$330-million to bring the organization’s total equity commitments in the sector to US$1.3-billion.
Though it’s early-days in pension terms, CPPIB’s seven-year-old strategy of balancing passive investments in public markets with active investments aimed at generating higher returns — so far resulting in a “value add” of $3-billion after costs — has drawn international attention.
We’re not constrained to having to source deals in order to deploy assets
A study commissioned by Norway’s Ministry of Finance this year urged that country’s sovereign wealth fund — nearly four times the size of the CPP fund — to emulate the investing style of the Canadian investment organization.
A couple of years ago, Canadian pension managers including CPPIB and the OTPP were dubbed “maple revolutionaries” by the Economist magazine in recognition of the decision to take investing expertise “in-house” and invest directly outside the public markets.
Mr. Cass acknowledges the need to cast a wider net these days, but insists investments can remain within the CPPIB’s broad mandate and expertise.
A recent transaction he allows as “atypical in a historical sense” is last December’s agreement to invest up to $128-million to acquire the assets of Assiniboia Farmland LP. The fund manages about 115,000 acres of farmland in Saskatchewan. Another is the acquisition of re-insurance company Wilton Re; in March, CPPIB paid US$1.8-billion for its first direct investment in the insurance business.
Wilton Re is an operating insurance firm, but the investment group characterizes the investment as an acquisition of an attractive “asset class” — life insurance portfolios purchased at a discount that will throw cash from premiums, perhaps for decades. It is also viewed as a platform for further purchases within that asset class.
While unusual, both the farm and insurance investments are nonetheless in keeping with CPPIB’s goal of building a global diversified portfolio that can be scaled up as the fund and its obligations grow, Mr. Cass said.
“They’re new in that we haven’t done them before, but they still adhere to the same kind of overarching principles,” he said.
Another important strategy for CPPIB is working with sophisticated investment teams around the world. Initial investments in global private equity funds have led to direct investments by CPPIB as a partner when the private equity players source fresh deals.
The Canadian fund is often called upon as a preferred investor in such “smart partnering” arrangements, Mr. Cass said.
This has led to some notable wins, such as a US$300-million investment in Internet communications company Skype that more than tripled in just 18 months. That deal was sourced though an initial investment in funds run by Silver Lake Partners, a global investment firm specializing in technology.
But not every deal will be a Skype, and as the fund grows Mr. Cass said the team is well aware that risk-management must also evolve. To that end, a two-year effort is under way “to ensure that scalable investment risk-management tools are in place that are appropriate to the continuing evolution of our investment programs,” he said.
The CPP fund’s 10-year annualized rate of return was 7.1% as of March 31 and the cumulative investment income for a 10-year period is $95.1-billion.
Given that the CPPIB plays such an important role in the retirement security of Canadians, some would like to see beefed-up disclosure of individual and sector returns to better assess the strategy as the fund grows.
Pension expert Keith Ambachtsheer said it’s still early to assess the CPPIB’s overall performance, in part because it’s difficult to accurately value private investments, and also because there are issues that can arise, from economic to political, that affect long-term performance.
In addition, results that may not compare favourably to a passive portfolio in a bull market can be expected to look better when public markets inevitably correct.
“It’s a 20-year process,” Mr. Ambachtsheer said, adding that the success of the Ontario teachers plan board, which pioneered the active investing style in the 1990s, is easier to judge.
The “value-added” by Teachers’ investment strategy works out to 2% per year over two decades.
“That’s a good figure,” Mr. Ambachtsheer said.