One of the leaders of the year, with a 96% score, was Canada’s largest Public Pension Fund, CPP Investments. We had the great pleasure of speaking with Ed Cass, its SMD and Chief Investment Officer about the GSR scoreboard different elements, the keys for CPP Investments’ success and his future ambitions for the fund.
[GSWF] CPP Investments closed FY22 with CAD 539 bn (US$ 421 bn), which is CAD 56 bn (US$ 44 bn) more than initially projected. How did you do that and what are the fund’s main success factors?
[CPP] The projections were prepared by the Chief Actuary assuming returns between 5% and 5.5% p.a. for 2019-2021. However, and mainly due to the strong performance of global equity markets, the fund did better than anticipated and averaged a 10% return over that period.
[GSWF] In the past 10 years, the fund has reduced 20% of its weight in bonds and stocks to the benefit of PE and infrastructure; and 24% of its weight in Canada. What will your portfolio look like in 10 years from now?
[CPP] 15 years ago, we embarked on a journey of active investment that has allowed us to increase our geographical diversification as well as our exposure to alternatives. Undoubtedly, there will be changes along the way, but I’d say we are now at our targeted level of diversification in terms of both regions and asset classes. Possible areas of future change include incorporating inflation sensitive assets and adapting the portfolio to reflect the increasing size of the Additional CPP, which has a lower targeted level of risk. I don’t anticipate major changes around liquidity and leverage either.
[GSWF] Your performance in FY22 was driven by Private Equities and Real Assets – what do you expect for FY23 given an environment of high inflation, low interest rates and high geopolitical uncertainty?
[CPP] We continue to study the effects on the fund our portfolio construction under various scenarios. We think it is reasonable to expect that real rates will continue to renormalize. That should lead to an increase in the discount rate upon which all asset prices are valued, which will be a headwind for asset prices in general.
[GSWF] CPP Investments has now over 2,000 employees in nine different cities managing over 90% of its portfolio in-house. Have you reached your optimal organizational size, or are you planning any other office?
[CPP] While we do not plant flags in every major investment market, we have established a strong regional presence in proximity to significant assets and partners in Americas, Europe and Asia-Pacific. Our current footprint serves our needs and we do not foresee pursuing a major expansion plan.
[GSWF] You recently had a workshop with CalPERS to share your journey and best practices – what would be your advice to other SOIs reading this report and trying to follow CPP Investments’ footsteps?
[CPP] One of our keys for success is to build the most robust portfolio possible, and not to incorporate too many tactical elements in its construction. The best protection is to be resilient to market cycles and different market stresses.
[GSWF] Let’s now look at the three different aspects of the GSR Scoreboard for CPP Investments:
Governance (“G”):
[GSWF] The split between Base CPP and the Additional CPP seems a bit confusing from a risk appetite perspective – how do you ensure independence and fairness between both pools of capital?
[CPP] The Additional CPP is required to be a fully funded pension plan, while the Base CPP is partially funded only, which implies different levels of risk appetite and asset allocation. We tie funding levels of the accounts to targeted levels of risk, and internal advisors and policies are in place to ensure fairness between the two accounts. These policies are reviewed annually by our Board.
[GSWF] CPP Investments is a frequent co-investor with other Government-related investors, including those from the Middle East and Far East Asia – what is your take on global strategic relations?
[CPP] We partner with diverse types of investors across the entire investment universe such as other public pension funds, PE, state-owned enterprises, banks, asset managers, and so on – whenever we strike a common goal.
Sustainability (“S”):
[GSWF] Last year, CPP Investments merged various teams to create “Sustainable Energies” and also appointed its first Chief Sustainability Officer. Is ESG integrated across all asset classes?
[CPP] ESG risks and opportunities are embedded in the investment strategy where we can achieve the most value - our investment teams work closely with support teams including legal, finance risks and analytics to ensure that ESG is considered in the investment decision process where we can identify opportunities or mitigate risk. We are also in the journey of becoming Net Zero by 2050, hence the appointment of Deb Orida as Chief Sustainability Officer (CSO).
[GSWF] CPP Investments has committed to reach Net Zero by 2050 and yet, it is still absent from the Paris Aligned Investment Initiative and from the Net Zero Asset Owner Alliance – is this by design?
[CPP] Yes, it is indeed by design. Committing to short term goals is challenging for a fund of our size and for the nature of our mandate. We believe we must retain flexibility in the path towards these goals and signing up for these initiatives would not be prudent for us. However, we have our own targets for decarbonization and aim at increasing our investments in green and transition assets from CAD 67 bn (US$ 54 bn) to CAD 130 bn (US$ 104 bn) by 2030.
Resilience (“R”):
[GSWF] CPP Investments demonstrated an incredible resilience during the market turbulence of FY16 and the COVID-19 pandemic in FY20, beating its benchmark significantly. How did you do that and are you confident it will keep working during the next market shock?
[CPP] We spend most of our time ensuring our portfolio is diverse in terms of asset classes and regions and is sustainable in the long term. During COVID-19, we managed to strengthen our crisis management governance, which will allow us to even better respond to future, similar market shocks.
[GSWF] You joined CPP Investments in 2008 – what main changes have you observed in the past 14 years and what changes do you think are still needed to make the fund a bullet-proof organization?
[CPP] In the past 14 years, CPP Investments has experienced a dramatic increase in terms of offices (from 3 to 9 today), employees (from 386 to 2,000+ today) and asset size (from CAD 122 bn to CAD 540 bn today). These were fueled by the level of active management (from 20% to 60% today), internationalization (from 50% in Canada to 16% today) and leverage across the portfolio (from 0% to 22% today), among other changes.
Going forward, we will continue to tackle climate change across three dimensions: transition, fiscal and innovation risk.
