Public Sector Pension Investment Board chief executive officer Deborah Orida is emphasizing focus and discipline as she prepares the $265-billion fund for a tougher investing environment that could face longer-term pressure from inflation and interest rates.
The leaders at PSP Investments spent much of the past fiscal year crafting a three-year plan that aims to sharpen the organization’s focus on areas where it is strongest and to increase the edge it can gain from actively managing investments, as markets look poised to stay volatile and uncertain for some time.
The fund, which manages pensions for the federal public service, Canadian Armed Forces and the RCMP, earned a 7.2-per-cent return on its investments in the fiscal year that ended March 31. That beat the performance of the fund’s internal benchmark, which gained 6.4 per cent, but underperformed relative to a reference portfolio of stocks and bonds set by the federal government, which gained 11.5 per cent.
Over 10 years, PSP Investments has earned an annualized return of 8.3 per cent, which is ahead of the reference portfolio return of 7.2 per cent. That translates to an extra $24.5-billion of investment gains above what the reference portfolio would have earned.
The fund’s total assets increased 8.7 per cent to $264.9-billion, moving it ahead of Ontario Teachers’ Pension Plan to become the third-largest pension-fund manager in Canada.
Pension funds with broad, diverse portfolios struggled to keep up last year when measured against stock markets that roared – although a huge share of those gains came from a small group of the largest technology stocks. High inflation and interest rates, wars and geopolitical tensions, as well as a challenging climate transition for many industries added to the tumult in markets.
Looking ahead, it appears likely that most of those factors are here to stay for a while, Ms. Orida said in an interview. “We have, going forward, an investing environment that’s potentially more uncertain and more volatile.”
Though some central banks – including the Bank of Canada – recently cut benchmark interest rates for the first time in years, buoying investor optimism, Ms. Orida cautioned that there are structural issues pushing inflation higher that won’t be easy to stamp out, including a trend toward deglobalization.
“I think the central banks will need to be mindful and may not, as we saw this last year, always cut as quickly as the markets get excited about,” she said.
PSP Investments’s stock portfolio performed well in the past year, gaining 17.5 per cent, while its infrastructure portfolio gained 14.3 per cent and its credit investments were up 14.2 per cent. The “phenomenal” credit spreads that private lenders enjoyed in recent years as some banks retreated from lending have compressed, she said, and credit investors such as PSP are needing to be more disciplined, but she still sees plenty of opportunities to earn good returns from credit.
By contrast, PSP’s real estate portfolio lost 15.9 per cent in the quarter, shedding $5.1-billion of value, as forces including weak demand for office space and high interest rates that have driven down property values battered the sector. Under new real estate head Louis Véronneau, PSP is pruning and revamping its portfolio of properties, but plans to move gradually in a down market and to take several years to complete the shift. “We don’t need to do a fire sale,” Ms. Orida said.
PSP Investments also announced the first four investments under the Canada Growth Fund, a $15-billion initiative it is managing for Ottawa with a goal to jump-start the growth of a clean economy. Ms. Orida hopes that will give PSP “insight or foresight” into investing trends around the energy transition that, combined with a more focused strategy, can help the core fund it manages for pensioners perform better.
“Ultimately we think that that will allow us to generate more alpha from active management and prepare us for a more volatile and uncertain market,” she said.
James Bradshaw