Mark Machin, chief executive officer of CPPIB: ‘Extreme market movements resulting in short-term upswings and declines, as we’ve seen recently, illustrate why we emphasize 10-year returns, which is well above the chief actuary’s assumption to help ensure the sustainability of the fund.’Mark Blinch/The Globe and Mail
The past weeks' faltering public-equity markets and surge in volatility have yet to filter through to the Canada Pension Plan Investment Board's financial results, but the fund says little is changing as a result of the agitation.
While CPPIB, manager of the Canada Pension Plan's portfolio, is always on the prowl for investment opportunities that might arise from a downturn, chief executive officer Mark Machin is firmly focused on the long-term outlook. He's preparing to add new leadership with fresh ideas about the investment capabilities needed to carry the fund far into the next decade.
"Clearly we've had a strong run in markets for the last nine years or so, but the portfolio is designed to be robust and really well diversified globally across asset classes and strategies and to withstand, over the long term, the vagaries and short-term volatility and ups and downs of the markets," Mr. Machin said.
Strong public-equity market performance helped boost investment gains for CPPIB, which posted a 4-per-cent return after factoring in all costs in its fiscal third quarter of 2018, which ended Dec. 31. During that period, net assets reached $337.1-billion, up from $298.1-billion in the third quarter last year.
As investment returns and the size of the portfolio have grown, so have the investment management fees paid to run the fund. Fees escalated to $1.2-billion in the first three quarters of the fiscal year, up from $955-million for the same period last year. But transaction costs have decreased, and investment income is up over 2017 results.
Mr. Machin has begun to think about how the pension fund's strategy should evolve beyond 2020, when a portion of CPPIB's investment income will start to be needed to help pay pensions.
About five years ago, he was part of the board and management team that developed a new investment strategy for the fund. Part of the plan was to orient the portfolio to take on more risk by 2020 because of CPPIB's growth, the certainty of contributions from working Canadians and the long-term nature of the CPP fund. CPPIB invests on behalf of 20 million Canadian contributors and beneficiaries and must pay pensions decades into the future.
"I'm rolling forward and saying, 'Okay, what do we see out to 2025 and beyond?' That's what we're looking at now. It will be an extension of what we're doing now," Mr. Machin said.
One recent development linked to that long-term thinking was the establishment of the new group focused on the renewable power sector, he said. Since December, CPPIB has not only formed a joint venture to invest in Brazilian wind park assets, it also taken a stake in an Indian solar and wind developer and operator.
The fund is also focused on its longer-term financial results. It reported a 10-year annualized return of 5.7 per cent after factoring in inflation. That figure continues to exceed the performance standards set by the chief actuary, who issues a report on the financial state of the fund every three years. The most recent report – for 2016 – projected that the fund will produce a 3.9-per-cent real rate of return over the 75-year period that it studied.
Just days before releasing its financial results, CPPIB announced that three veteran executives would soon retire or otherwise depart as part of a planned renewal to inject some fresh perspectives and ideas into the fund. Chief operations officer Nick Zelenczuk, 62, global head of public market investments Eric Wetlaufer, 55, and former global head of real assets Graeme Eadie, 65, announced they will leave the fund before the summer.
Mr. Machin has yet to name successors for the first two men and says he prefers to announce departures and appointments separately.
"I'm in favour of doing things in a more transparent manner," he said. "You can either do it behind the scenes and have the person ready and announced, but I'm more in favour of saying the person's leaving … so anyone that wants to put their hand up and say they're interested in the position can do that."