personal finance

Canadian pension fund chief warns there is ‘no place to hide’ in crisis


The Canada Pension Plan Investment Board, one of the world’s biggest retirement funds, entered the crisis in decent shape.

With assets of C$409.6bn ($297.6bn) at the end of March it is far smaller than mega-groups such as BlackRock and Vanguard but, unlike commercial businesses, it can rely on steady quarterly inflows from the millions of Canadian workers who are compelled to save into the fund.

The body manages the investments of the Canada Pension Plan, a key plank of the country’s retirement savings system with more than 20m contributors and beneficiaries that has been lauded by policymakers.

But, as with all groups, CPPIB is entering uncharted waters. “We do depend to some extent on inflows,” says Mark Machin, chief executive of the CPPIB, who is British.

Despite the immediate impact of Covid-19 on financial markets, Mr Machin is relatively relaxed.

“The strategy of diversifying around the world is paying off,” he says, even though the group made a net return of 3.1 per cent in the year to March, down from 8.95 per cent for the prior financial year.

At the time of publication, Canada had 6,982 confirmed Covid-19 deaths according to the Johns Hopkins Coronavirus Resource Center. This stands in stark contrast to the US, which hit 100,000 deaths last week. But the outgoing governor of the Bank of Canada, Stephen Poloz, recently warned that the country is “dealing with unparalleled uncertainty”.

Mr Machin expected lower returns even before the virus struck, calling the prospect of double-digit returns year on year “too optimistic”. He says his views have not changed, but the group is not rushing to make big changes to its allocations in response to the crisis.

Canada Pension Plan Investment Board

Established
1997 — CPP was created in 1966, while CPPIB manages the fund

Assets C$409.6bn

Headquarters Toronto

Employees 1,824

Ownership Independent body

The independent CPPIB, in common with other Canadian pension funds, is known for being a proponent of “direct” investment, in which it bypasses intermediaries to make deals or buyouts of its own. Private equity is a large focus: just under a quarter of its portfolio is invested in the asset class.

Like other Canadian groups it is also known for its focus on so-called real assets: airports, office blocks and energy projects as opposed to complex derivatives, which accounted for about a fifth of assets at the end of March.

CPPIB’s portfolio includes stakes in UK mega-shopping centres Westfield Stratford City and Birmingham’s Bullring & Grand Central, as well as a 50 per cent stake in Ontario’s Highway 407, a toll road.

Those bets — made for good reasons such as hedging against inflation and providing steady returns for pensioners — look less certain now.

Across the industry, commercial property valuations have taken a hit in expectation of the coming recession with uncertainty over demand from retail and office tenants. But Mr Machin says demand for private equity has not gone away.

“When the history books are written this [won’t be] a surprise,” he says of the pandemic. “China was shut down at the time of Davos, but people didn’t believe economies would be shut down. That’s the surprise.”

He adds: “The central banks and governments have moved with huge speed and huge size — that’s really dampened the blow in the financial markets. The question is how long will this continue?”

Mr Machin is better placed than most to follow the minutiae of medical developments, having trained as a doctor before switching to banking and a career at Goldman Sachs.

Mark Machin

Born 1966 Chester, UK

Total Pay C$5.88m

Education

1984-87 BA in physiological sciences, Oxford university

1988-90 MB BChir, Cambridge university

Career

1990-91 Practises medicine

1991-2012 Goldman Sachs, various roles including European corporate finance, head of investment banking division in Asia ex-Japan, and vice-chairman of Asia ex-Japan

2012 to present CPPIB, various roles including president for Asia, head of international, president and chief executive

“I was always interested in how the human body works,” he says. “I’m amazed at how people have little curiosity over what they are. That was an easy choice.”

He practised medicine in a hospital for a year before considering other careers. “The possibilities of the world I became more aware of,” he says. “Who owns this building, where’s the capital? It seemed a massive hole in my understanding of the world.”

Being used to working “ridiculous hours” helped him make the shift to banking, he says. Initially based in London, he went to Hong Kong in the early 1990s just as the country’s capital markets opened up. It was there he was recruited to run CPP’s Asian business in 2012, before taking the top job four years ago.

Under his watch CPPIB has built its exposure to emerging economies and China in particular in the hunt for juicier returns.

Last year it revealed plans to increase its exposure to Asia’s biggest economy and allocate up to 20 per cent of its assets to the country by 2025. Overall, it plans to allocate up to a third of assets to emerging markets, including China, over the same period, goals that Mr Machin says are unchanged.

India is another market it has marked out as particularly promising, having opened an office in Mumbai five years ago. China is good for those seeking alpha — its inefficiencies suit “patient, fundamental investors” but he warns there is still “no place to hide” in the crisis.

One bright spot, he adds, is technology, with the health crisis spurring the development and uptake of things such as grocery delivery and online education. CPPIB opened an office in San Francisco last year, its second in the US after New York, bringing it closer to Silicon Valley.

“All of these things have accelerated in adoption,” he says.



READ SOURCE

Leave a Reply