Appetite for risk

Mark Machin is sitting in a bustling midtown-Manhattan restaurant not long after sunrise, showing off the first of, as he puts it, "55,000" cellphone photos of his grinning daughters, when he's interrupted by a sharp rap on the window.

Behind the glass is a familiar face: Mark Wiseman, the man Mr. Machin replaced last summer as head of the Canada Pension Plan Investment Board. A moment later, the other Mark is spinning through the revolving door, exuberantly shaking hands over the table and chiding us for being laggards at daybreak. "You know, this place only opens at 7:30 – I've already had breakfast!" Mr. Wiseman boasts.

It's a chance encounter that makes a bistro in New York feel like a small-town diner. But it also serves to highlight some key differences between the old and new Marks.

Mark Wiseman, who led CPPIB for four years, is loquacious, warm and can get carried away when discussing a topic he's passionate about – and he's passionate about a lot of topics. Mark Machin, on the other hand, does not seem like the kind of man to introduce himself by way of a knock on the window. He is more understated when he speaks, and seems perfectly content conducting business out of the spotlight. In the seven months since taking over as the first foreign-born chief executive officer of Canada's largest and most important pension fund, his public appearances and interviews with media have been few.

For Mr. Machin, one of the three biggest surprises of 2016 came from his chatty colleague: Mr. Wiseman somehow managed to keep secret his plan to leave CPPIB for a senior position at asset manager BlackRock Inc.

"The second surprise to me was that the board selected me as the successor," he says between bites of bagel with salmon, pickles and English cucumber. "I understand lots of other things, but I don't understand Canada and I thought that was pretty important for the role. So that was a big surprise." The third surprise, he says, was that his wife embraced the idea of uprooting their lives in Asia, where they had lived for the past two decades.

The British-born Mr. Machin is no stranger to unfamiliar situations, nor to risk. CPPIB's new boss is a man who has built a career – and a life – on a series of bold bets that have a way of paying off. From medical school at Cambridge to a less-formal education in finance at the school of Goldman Sachs. From London to Hong Kong. And Hong Kong to Toronto, where he's settling into his first Canadian winter.

He arrived at a critical moment. In the past five years, CPPIB's managed assets doubled to $300.5-billion as the fund weathered challenges posed by unexpected geopolitical events, low interest rates and volatile equity markets. Amid that growth and uncertainty, CPPIB put its investment strategy under the microscope.

The goal? Build a more resilient pension fund that will score even higher returns in the future. Out of that intensive review came a plan to gradually, but significantly, overhaul the fund's approach to investment risk by 2020. Seeing it through is Mr. Machin's job.

About 19 million Canadians are counting on him to get it right. While he concedes that many particulars of the path forward have not yet crystallized, one thing is clear: The time has come to be bold. CPPIB has set its sights on expanding further globally, building new investment specialties and putting more money into private companies and assets such as infrastructure. It's a plan built on taking on more risk, with the expectation of higher returns in the long run. But it's likely to lead to some bumpy years.

Navigating through it? "That's not going to be easy," says pension-policy advocate and consultant Keith Ambachtsheer. The strategy may be laid out in broad strokes "but Mark No. 2's challenge is to actually execute it. In my view, it's a people-management thing. It's a talent management thing."

The doctor is out

The first time he heard about the Canada Pension Plan Investment Board, Mr. Machin was less than enthralled. He was in Beijing serving as vice-chairman of Asia, excluding Japan, at Goldman Sachs when a recruiter dangled a job.

"She called me and said, 'Well, it's not the Bill & Melinda Gates Foundation, but you can wake up every morning and know you're doing something good for 19 million people.' And I said, 'What is it?' She said, 'It's a pension fund.'"

His initial thought? It sounded "quite boring."

His decision to take the job stands out as something of an anomaly in a life that has largely been spent avoiding boredom at all costs.

"As with most of us, we don't change that much," says Stephen Peel, who has been friends with Mr. Machin since they met at a bus stop at the age of 11 and who also pursued a career in high finance. "Mark, as he is now, walked through walls because it was sort of intellectually challenging, fun, hard and the right thing to do. And that's sort of where he still goes."

The biggest bet of Mr. Machin's professional life began with a bout of his trademark curiosity. Back in 1990, he was Dr. Machin, interning at a district hospital near the University of Cambridge, where he studied medicine after getting a degree from the University of Oxford. Tall and trim from years of rowing and running, Mr. Machin would be a reassuring presence in a crisp white lab coat. His bedside manner might at first seem astringent; that is until a typical deadpan, self-deprecating remark betrays his British wit.

While he was studying the human body, he had become increasingly fascinated by a different kind of anatomy: the intricacies of financial markets and how capital moved about the world. He didn't understand it. But he wanted to.

"I had to make a call," he remembers. "Do I continue on in medicine for as far as the eye can see, or should I take a leap and try something different?"

What he didn't want was to go back to school. Getting paid to learn was a more attractive prospect, so he applied for trainee jobs at banks that were targeting new business graduates and finance greenhorns from other fields. He settled on an offer from New York-based investment bank Goldman Sachs's London office where he was the only new analyst from the medical field.

"It was curiosity. It wasn't 'I'm going to pursue a career for the rest of my life in finance.' I didn't even think that was an option," he says. "I thought it was something I could probably afford to do – take time out of the medical career and go and do it for a couple of years."

But a few years later, Mr. Machin was on the move – sent to Hong Kong as one of a handful of people on the equity team at Goldman's first Asian outpost. Mr. Machin, who'd never even been to the continent, faced a steep learning curve. And not just his own.

"I had to correct people, you know, explain to people what Goldman Sachs was. People had never heard of it. They got the name wrong, thought it was Golden Socks, or Golden Sacks – S-A-C-K-S," he says. "And then they had no idea what an investment bank was. A lot of it was just going around explaining."

Mr. Machin's entrepreneurial attitude and his ability to speak to all kinds of stakeholders – from government officials to corporate clients and public market investors – set him apart, says Frank Tang, who worked with him at Goldman in the 1990s and now heads FountainVest Partners, a China-focused private equity fund that was backed in 2008 by CPPIB and Ontario Teachers' Pension Plan, among others.

Mr. Tang, who worked on the floor above Mr. Machin at Goldman in Hong Kong, recalls hearing stories about his unusual way of relaxing when the work became intense. "People worked really, really late, and at 11 p.m. when everyone started to order food and call their girlfriends, he'd pick up a medical journal and study those organs," he says with a laugh.

Mr. Machin didn't intend to linger overseas, either. But he was fascinated by economic development in Asia and drawn to the chance to build the Goldman business and compete with the region's stalwart British financial firms, such as Jardine Matheson, HSBC Bank and Barings Bank, which later collapsed.

"I mean, in Asia, you can never get bored," Mr. Machin says of his years at Goldman in Asia. "It was phenomenal change all the time."

Mr. Machin's Australian wife, Melissa Mowbray-D'Arbela, isn't afraid of change either. Her career has spanned architecture, law, banking, private equity and entrepreneurship. "She's much more interesting and talented than I am," Mr. Machin says, with a mixture of pride and admiration.

Ms. Mowbray-D'Arbela was so moved by the struggles of Hong Kong's distressed migrant women and children, that she co-founded a charity to assist them. The experience of meeting one pregnant woman in particular would change their family of three forever. After a complicated legal battle, they adopted the baby girl – their second daughter.

Professionally, Mr. Machin's 20-year career at Goldman saw him lead capital markets, financing and investment banking businesses in Asia. The team went from unknown to leading multibillion-dollar bond issuances for companies such as China Mobile, and the privatizations of massive state-owned firms such as PetroChina.

"It was not a straight line. It was a huge, huge, huge amount of hard work by hundreds, and thousands, of people. But it was terrific to be part of that," Mr. Machin says. Goldman became the top-ranked investment bank in China during his time there, although it has since been surpassed by other lenders.

Still, Mr. Machin felt there was potential to do more. That's when the recruiter called with the CPPIB offer. There was something about the idea of working for a good cause, doing a job "more worthwhile in the world," that stuck with him. Plus, his would-be boss, Mr. Wiseman, came with good recommendations from trusted associates.

So, in 2012, Mr. Machin came aboard as senior managing director and president of CPPIB Asia Inc., running the pension fund's first international office, which was ramping up with a small real estate presence and some other fund investments.

There were about 20 CPPIB staff on the ground, compared with the hundreds at Goldman. At the time, about 60 per cent of the fund's assets were invested outside of Canada. Just over a year later, Mr. Machin gained oversight over CPPIB's international investment activities and its global advisory relationships, as well as the Asian operations.

The promotion meant a gruelling new travel schedule. When he wasn't in the air, the phone beckoned. "Calls would start 8 p.m. through midnight, four nights a week. Friday nights at 1 a.m. – that's where my concentration is really fading. But I was pretty diligent with this stuff," he says.

Today, less than 20 per cent of the pension fund's assets are in Canada, and that figure is set to decrease even further in the coming years. China, in particular, will likely be a hotbed for new investments, thanks to its rising middle class and economic-growth projections. Based on those projections, the pension fund bought a series of Chinese malls for its real estate portfolio last year.

"We've gone from [being unknown], to now being understood and recognized and being, you know, very high on the call list for major situations in Asia and internationally, as well as also in our home North American markets," Mr. Machin says. "That's not important just to make us feel good. … It's important that we're high on that list so we get to see the best investment opportunities so we can create the best value for our 19 million people."

Charting a new course

There's a lot of work ahead.

With almost 1,300 employees in seven offices across the world, CPPIB is among the top-10 pension funds globally. It strikes a deal or makes a transaction practically every other day, with 180 in its fiscal 2016 year.

The fund is now invested through more than 25 different investment strategies, up from just six a decade ago. Still, Mr. Machin foresees adding a few more specialties as the fund grows. A report from Canada's chief actuary projects assets will climb to $476-billion by 2025.

To keep track of the moving parts and missing pieces, he has "The Chart."

"Literally, one of my favourite charts is a big Gantt chart with everything that's happening and how it's fixed to go," he says, referencing the type of horizontal bar graph often used to show the timelines and status of a large project's components. "There's some things we might think of as a perfect platform that might not come around for five-plus years. We just want to watch it and move when the opportunity arises. We're determining that sort of strategic long-term lens of where we want to be."

It must be a big chart. "It's printed in very small font," Mr. Machin says dryly.

In the 2014 fiscal year, CPPIB's board and management team, including Mr. Machin, drew up the broad strokes of an investment strategy for the next decade. The plan was based on an idea that the fund could stomach more volatility and risk in its investment portfolio because of its size, the certainty of contributions from working Canadians and the long-term nature of the CPP fund.

Moving along the spectrum of risk might cause financial results to see-saw in the short term, CPPIB reasoned, but in the long run the fund should earn higher returns for pensioners. That would allow the fund's stewards to decrease contribution rates, increase paid benefits or just safeguard the plan against future unknown forces.

This direction was hashed out while Mr. Machin was overseeing the international business, but his promotion to CEO now puts him in control of how to shape the finer details. Right now, the targets and plans are "very short statements, but we end up with a huge number of knock-on consequences," Mr. Machin says.

"All the plumbing that goes on behind that, and how do you actually do that? We're just in the thick of it. It's going to take a couple of years to get that done properly," he says, his dulcet accent straining slightly over the din of the dining room. "I need 22 screens working away on our new investment framework. That's the type of thing I'm spending all my time on."

He thinks of the task as having two parts. The first, is to develop a better way to see the results of investment decisions and adjust accordingly. "We're a long-term investment organization, but we need to be able to decide, okay we structured the portfolio this way, is it working well? What were the consequences of those decisions?" The second goal is making sure all the investment teams are working together when the pension fund takes a position on a movement in the market, something Mr. Machin refers to as "strategic tilting." That means when a top-of-house view is made that European credit is cheap, or that U.S. equities are expensive, the whole fund is working together in a cost-effective, systematic way to invest along those themes.

In the last decade, CPPIB has dramatically extended its range of investments, from far-flung businesses to buildings. In the past few months alone, CPPIB has spent hundreds of millions of dollars on office space in New Zealand, shopping malls in China, a solid-waste disposal firm and a vacation cruise company with ships sailing to 44 countries. This expanded range comes with some complications. Infrastructure, real estate and private investments are tougher to buy and sell quickly. These assets are valued less frequently than the instant ups and downs of the public markets, and require making some assumptions.

"As they move into more private equity – and this is true for everybody – you increase the operational risk of misestimating the performance of those assets," says Jason Mercer, an analyst with Moody's Investors Service who rates the pension fund's financing arm, CPPIB Capital Inc. He has noted in reports that CPPIB doesn't have a dedicated chief risk officer, unlike financial-sector peers.

Navigating by Mr. Machin's road map will require filling in some holes where the fund could invest more, as well as reorganizing staff and finding a new chief financial officer. Benita Warmbold, who also oversees investment risk, said this week that she plans to retire in June. The pension fund also recently put its infrastructure, real estate and agriculture-investment groups together after the departure of a third Mark – Mark Jenkins – who left the role of global head of private investments.

All of this change comes at a time when the spotlight seems to be intensifying, forcing Mr. Machin into a more public role than he's used to. In early November, the CEO was called before the House of Commons finance committee – the first such request of a CPPIB leader in 14 years – to explain the fund's investment strategy, its need for independence and evolving approach to risk. Just two weeks later, he was sitting alongside Prime Minister Justin Trudeau and other federal ministers discussing the potential to create an infrastructure bank in Canada.

And the public toll will only rise as the fund adjusts its approach to risk, says Malcolm Hamilton, a pensions expert and senior fellow of the C.D. Howe Institute.

"The hard thing here is that as right as the new solution is, it will make them look less like all of the pension funds to which we now compare them," he said, adding that CPPIB has probably been unduly conservative and should never have been compared to the investment approach of other more mature or fully funded pension plans. "There will come a year when they're going to have a year with dramatically worse or dramatically better returns than the other plans … and everyone should get their head around why that makes perfectly good sense."

The pension plan has faced more scrutiny from Canadians and lawmakers ahead of the planned increase to the Canada Pension Plan contributions that workers and employers will make to fund their retirement years, in order to boost the benefits they will receive. That is set to begin in 2019 – around the time Mr. Machin's retool of the fund's current investment approach is set to wrap up. This separate pool of contributions will require its own investment-management strategy.

Mr. Ambachtsheer is in favour of bringing the thinking of the Goldman Sachs "profit machine" to the world of public service.

But there are operational challenges that come with such a transition, he says. There's the control question that comes with managing so many different investment lines: "Are you getting the diversification that you think you're getting?" he says. "And then you've got a motivation question, an incentives question, around can you get the kind of people that you need to run this kind of an organization – will they stick around long enough to actually make a difference? You have to have a strong-enough culture that people have to buy into."

As he considers the changes CPPIB needs to make, Mr. Machin pictures a decathlete that's still developing his abilities. "I think of us as fairly grown up. We have a lot of muscle and a lot of ability to do different things, but we're an athlete with a good long period of development ahead," he says.

Moving from passive to active asset management, and local to global investing, CPPIB's evolution has been rapid and expansive. Mr. Machin is the coach now charged with making the fund a tougher, more disciplined competitor.

"There's not going to be explosive growth from here," he warns. "This is about applying the strength we have in lots of intelligent ways and making sure we do so more and more effectively."