Canada’s PSP Investments has reported its best performance in a decade with a 18.4% net return for FY2021, ending March 31. Not content in resting on its laurels, the fund is driving forward the evolution of its top-down total portfolio strategy and the development of data analytics to further improve decision-making.

Strong returns and the inflow of pension payments ensured that AUM leaped 20.4% to C$204.5 billion (US$162.7 billion). Since 2011, the fund has reported an 8.9% annualized return, beating its reference portfolio by 1.1% and generating C$11.3 billion (US$9 billion) in net gains, while the five-year return of 9.3% beat the benchmark by 1% with C$4 billion (US$3.2 billion) in net gains.

Just under half of PSP Investments’ allocation was in capital markets, which reported a 26.6% annual return – in line with what we are seeing in the market. It beat the benchmark by 3.6%, reflecting strong returns in public equities.

Private equity – the second largest asset class in the portfolio representing 15.5% of AUM – saw stellar growth of 28.4%. Although this was still lower than the benchmark return of 31.7%, there is an ongoing question over the assumptions behind portfolio valuations and whether values are overly inflated. The fund has a very sophisticated approach to private equity acquisitions and divestments, existing when it deems an optimum value is reached. Yet, the volume of exits remains unclear in PSP’s report.

One mystery in the strategic asset allocation is the allocation to hedge funds, which is unstated but Global SWF believes is very significant, estimated at around 5% of AUM.

Going forward, PSP is looking to grow its private credit business. Valued at C$14.5 billion, it has become one of the largest and best in class among state-owned investors and generated an annual 10.5% net return and a five-year annualized return of 11.7%, beating its benchmark by 6.6%.

Total Fund Approach: From Bottom-Up to Top-Down

Strong returns come amid PSP’s development of its total fund portfolio approach, which CIO Eduard van Gelderen claims has made it resilient in the face of market volatility. In the face of a global pandemic, PSP it did not panic or budge from its strategic positions, even as every investment went through a rigorous risk assessment.

In the two decades since its formation, the fund has moved from passive investment in public equity and bonds to an increasingly acquisitive involvement in private markets, including infra, real estate and private equity. It is also flipping its approach from a bottom-up building of investment teams to a top-down total fund approach that examines the role of these teams within the total fund.

The focus now is not simply on maximizing returns but matching pension liabilities as well as concern with funding risks. It is also moving towards a more sector-driven approach, rather than an emphasis on allocation by asset class – for instance, drawing together people with different asset class experiences within its healthcare team.

Another major driver is the fund’s interest in emerging markets, which represent 8.5% of its private equity portfolio, 9.8% of real estate and 27.9% of infrastructure. Global SWF believes that the fund is likely to start establishing new overseas offices beyond New York, London and Hong Kong.

Bolstering Data Analytics to Fine-Tune Strategy

Big data and analytics will play an important role in making this approach successful. The focus on tech and digital strategy, enshrined in its new PSP Forward strategic plan, has been accompanied by the promotion of David Ouellet to CTO – the only change of personnel at a board level.

One of the reasons for developing tools, such as the application of artificial intelligence and machine learning in improving the quality of decision-making, is in overcoming the challenges in assessing ESG performance.

In his interview in the PSP annual report, van Gelderen remarked, “These new tools not only improve our capacity to assess risks, they’re also being used to help identify investment opportunities that arise in an ever-evolving ESG landscape… We are very keen to understand and adequately assess the investment opportunities and assets related to the energy transition as well as low-carbon assets. This is why we assembled a multi-asset class deal team—the Climate Working Group—to determine actionable investment opportunities in climate change and to start due diligence on a select number of them.”

Despite the emphasis on ESG, PSP Investments has yet to join the United Nations-Convened Net-Zero Asset Owner Alliance and has not committed to a net zero target.

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