The chief executive officer of Ottawa’s Public Sector Pension Investment Board is looking to private credit markets for attractive returns, as she braces for an economic slowdown and “sticky” inflation that could keep interest rates higher.
Deborah Orida, who joined PSP Investments as CEO last September, said the conditions are right for investments in private loans to companies feeling pressure from rising expenses, high borrowing costs and a broader pull back in lending by some banks.
PSP Investments, which manages pensions for the federal public service, Canadian Armed Forces and the RCMP, earned a 4.4-per-cent return on its investment in its last fiscal year, which ended March 31. That beat the performance of a reference portfolio of stocks and bonds set by the federal government, which gained 0.2 per cent, and PSP Investments’s own internal benchmark, which lost 2.8 per cent.
Over 10 years, PSP Investments’s annualized return is 9.2 per cent, which also beat the reference-portfolio return of 7.6 per cent.
“Our diversified portfolio is well positioned for the risk of economic slowdown, which we do think may happen this year,” Ms. Orida said in an interview. “We think that inflation’s probably a little bit more sticky than the market is expecting and therefore rates are likely to remain high.”
In a tough year for stocks and bonds, the plan’s results were propped up by gains from exchange rates on foreign currencies and strong results from investments in private assets, most notably private credit and infrastructure.
About 40 per cent of PSP Investments’s portfolio is denominated in U.S. dollars – a “safe-haven currency” that helped insulate its results against pressures from a souring and volatile economic environment, Ms. Orida said. Currencies contributed 5.8 per cent to PSP Investments’s net return for the year.
At the same time, PSP Investments’s $29.4-billion infrastructure portfolio, which invests in assets such as toll roads, utilities and communications systems, generated a 19-per-cent return. And its $26.1-billion credit portfolio, which invests in debt issued to companies by non-bank lenders, gained 13 per cent. Both results beat PSP Investments’s benchmarks by wide margins.
In private credit, PSP Investments is finding it easier to do deals on attractive terms, and sees “a great opportunity for that asset class to continue to outperform,” Ms. Orida said.
The outsized returns from infrastructure and credit stand in contrast to PSP Investments’s public stocks and bonds, which gained only 0.3 per cent in the fiscal year and were saved from an annual loss by foreign-exchange gains. The plan’s real-estate portfolio also gained only 0.2 per cent, as North American office properties have come under pressure from higher vacancy rates at a time when working habits are changing.
With central banks still raising interest rates to battle stubbornly high inflation – the Bank of Canada raised its benchmark rate by one quarter of a percentage point on Wednesday – pension plans around the world are adapting to shifting investing paradigms, as borrowing costs rise. And the continuing war in Ukraine, combined with rising tensions between China and the United States as well as Canada, are adding to uncertainty for investors.
“I do think we’re in a new investing regime where there’s uncertainties around macroeconomics, around geopolitical tensions,” Ms. Orida said.
This year, PSP Investments elected to use its existing, smaller office in Hong Kong as a regional hub for Asia, rather than opening any new offices in the region. And it has tightened the approval process for new direct investments in China, requiring sign-off from a firm-wide committee.
“We’re being selective and I think we recognize that the risks have increased in China.”
PSP Investments has formed a dedicated team that is preparing to manage the Canada Growth Fund, an initiative announced by Ottawa that aims to spur private capital in the global clean economy by using government money to reduce investment risks in new technologies.
The federal government announced in its most recent budget that PSP Investments would run the CGF, raising questions around governance and independence. Currently, the operating model and governance structures for the fund are still being finalized. But Ms. Orida said PSP Investments is “ready to hit the ground running by leveraging the expertise that we already have in house.”