CPP Investments' CEO on Finding Opportunities in a Post-COVID World

Barbara Shecter of the National Post reports CPPIB is staying in the market, 'buying equities when equities are selling off':

Wild swings in equity and currency markets, increased geopolitical tensions and persistent inflation are extending a “bumpy” year for the Canada Pension Plan Investment Board (CPPIB), chief executive John Graham said Friday.

“It’s changing by the day, sometimes by the hour, or even by the minute, and it’s dramatically impacting the global economy,” Graham said in prepared remarks for a speech at the Canadian Chamber of Commerce’s annual meeting in Ottawa.

After successfully navigating through the first couple of years of the COVID-19 pandemic, the pension management organization reported lower net assets of $523 billion at the end of June than at its fiscal year-end on March 30 despite an influx of $7 billion from Canada Pension Plan contributions.

“It’s looking like a radically different world post-COVID,” Graham said, noting that inflation is proving to be higher and more persistent than central bankers and other prognosticators anticipated a year ago.

He noted that even former juggernaut China is experiencing lower than anticipated growth from a combination of COVID lockdowns and systemic challenges in the economy.

But he stressed that Canada’s largest pension plan is primarily focused on generating long-term returns to provide for 21 million working people and retirees.

“While we’re paying very close attention to current events, we’re keeping an eye firmly fixed on the future,” he said. “As always, those challenges will create new opportunities.”

For example, supply chain issues and national security concerns are driving “de-globalization,” which is creating opportunities for “onshore, local investment” in semiconductors, battery technology, and active pharmaceutical ingredients.

The CPPIB team also expects to find opportunities in infrastructure investment, helped in part by long-lasting spending programs, particularly in the U.S., Graham said.

The energy crisis in Europe, meanwhile, is proving to be a catalyst for the energy transition that was already underway, with $755 billion spent globally last year, he said.

CPPIB aims to double its green and transition assets to $130 billion by 2030 from around $65 billion today. In his speech, Graham noted CPPIB’s recent investment in stationary energy storage through a Toronto-based company called Hydrostar Inc., and a strategic partnership in the United Kingdom with Octopus Energy Group Ltd., which delivers green energy services.

All portfolio companies and new investments go through a screening for physical and transition risks, but Graham said there is a case to be made to “transition away from thinking of climate as a risk (and) look at it as huge investment opportunity.”

He has said previously that the pension management organization, which invests the largest single pool of capital in the country, does not support a wholesale divestiture of traditional oil and gas investments. In a question-and-answer session following his speech Friday, he received applause when he said CPPIB remains committed to continue investing in extractive industries including oil and gas companies.

“Our approach to sustainability and our net-zero commitment considers the important role we can play in assisting companies as they map their transitions, and support them through it,” he told the audience.

The CPPIB investing team is keeping a close eye on how labour markets and consumer spending appear to be changing in the aftermath of the pandemic, Graham said, adding that market volatility should present some good entry points for long-term investors like the Canadian pension giant.

“When any market correction happens, and they will, strong individual companies emerge from the pack,” Graham said.

“As patient, active investors we are focused on identifying investment opportunities with the right capabilities that will succeed in this uncertain environment.”

With a lot of “dry powder” in the market waiting to be invested, Graham said CPPIB will continue to differentiate itself through active management and diversification across asset classes and geographies to mitigate concentration risk.

He added that the pension management organization is committed to staying in the market and looking for opportunities through each cycle, and not losing conviction in long-term beliefs during a market selloff.

“That means buying equities when equities are selling off,” he said, and sticking with geographic allocation even when growth slows for a time in one part of the world.

“We don’t look to tactically move in and out of markets.”

Investments in emerging markets, a portfolio that includes China and India, have grown to $120 billion, or 22 per cent of the CPP fund, from around $25 billion in 2017, which represented just shy of eight per cent of the fund. Growth has remained fairly flat over the past year, Graham said, and the average annual return on the emerging markets investments is 8.4 per cent.

He said the Canadian pension is seeking to generate returns around the world by designing investment ownership structures to its advantage, particularly in private markets.

“We can be with a company from private through to IPO (initial public offering) then continue on post-IPO. This approach allows us to maximize value not only for the duration of our holding period but brings value in how we approach our exits,” Graham said.

He noted that the CPP fund’s negative return of 4.2 per cent in the first quarter outperformed global indexes that declined “well into double-digit territory,” and that five- and 10-year annualized net returns were 8.7 per cent and 10.3 per cent, respectively.

“We continued to outperform the market, adding over $40 billion of  added value from active management over the past 10 years,” he said.

Divya Rajagopal of Reuters also reports Canada's biggest pension fund is hunting for bargains in volatile markets:

The CPP Investment, Canada's largest pension fund, is hunting for bargains amidst persistent market volatility, which is expected to continue given ongoing geopolitical tensions and a sticky inflation, CEO John Graham said on Friday.

However, as a patient and active long-term investor, CPP is hoping that strong individual companies would emerge during market corrections, Graham said, even as he warned of challenging times.

"We anticipate a continued bumpy road ahead," Graham told the members of the Canadian Chamber of Commerce, adding the volatility coming from various corners of economy pointed towards global recession.

The CPP which had C$523 billion ($379 billion) under management as of June 2022, reported a negative return of 4.2% in the June quarter, and its peer Quebec's Caisse de dépôt et placement du Québec reported a negative 7.9% return in the first six months of this year, in line with negative returns posted by other global pension funds.

Graham said that this downturn was different than the rest as investors have an "abundance" of unspent cash reserve that is waiting to be invested.

"Capital is a somewhat of a commodity today," he said.

CPP, which manages pensions of 21 million Canadians, was set up to create value over long term.

"That doesn't mean we're immune to volatility in the markets," Graham said. "It means we're well-positioned to weather the storm over the long term."

John Graham was the keynote speaker at the Canadian Chamber of Commerce’s annual meeting in Ottawa this morning and he delivered a lot of the critical points in his address to members.

The key points I get from reading these articles are the following:

• The world is changing, inflation pressures are persisting, and markets will be "bumpy" for the foreseeable future. De-globalization and supply chain concerns are creating opportunities to “onshore, local investment” in semiconductors, battery technology, and active pharmaceutical ingredients.
• CPP Investments remains focused on generating long-term returns in public and private markets and is particularly focused on investing in infrastructure and finding opportunities in the energy transition economy as they continue to invest in green assets. CPP Investments aims to double its green and transition assets to $130 billion by 2030, from about $65 billion today. 
• John reiterated that the organization does not support blanket disinvestment of traditional oil and gas investments, preferring to engage with these companies. "Our approach to sustainability and our net-zero commitment reflect the critical role we can play in helping companies as they map their changes, and support them through it."
• He also mentioned that they're not trying to time markets, they remain fully invested and focus on seizing opportunities as they present themselves to generate long-term returns. 
• Investments in emerging markets, a portfolio that includes China and India, have grown to $120 billion, or 22 per cent of the CPP fund, from around $25 billion in 2017, which represented just shy of eight per cent of the fund. John said even though growth has remained fairly flat over the past year, the average annual return on the emerging markets investments is 8.4 per cent.
• Interestingly, he said they can take part in an IPO and remain invested in a company post-IPO "to not only maximize value for the duration of our holding period, but bring value to how we approach our exits."
• Also, he said that this downturn was different than the rest as investors have an "abundance" of unspent cash reserve that is waiting to be invested. "Capital is a somewhat of a commodity today."
• He noted that the CPP fund’s negative return of 4.2 per cent in the first quarter outperformed global indexes that declined “well into double-digit territory,” and that five- and 10-year annualized net returns were 8.7 per cent and 10.3 per cent, respectively. “We continued to outperform the market, adding over $40 billion of added value from active management over the past 10 years,” he said.
  

Capital is somewhat of a commodity today and that's why CPP Investments and its large Canadian peers are acting like differentiated capital where they can bring a lot more to the table.

The focus is on long-term returns and it's clear that CPP Investments is delivering on this front and that it's active management and diversification strategy is working to generate these long-term returns.

Clearly a lot of the growth in the future will come from emerging markets like India where CPP Investments just committed C$60 million in follow-on investment to India’s NHAI InvIT.

As far as markets, CPP Investments has been bracing for a downturn and is ready to seize opportunities as they present themselves.  

Again, as John states, the Fund is "not immune" to volatility in the markets but over the long term, it can seize opportunities across public and private markets to deliver solid risk-adjusted returns. 

On the corporate side, I note this week that  Kristina Fanjoy was appointed the role of CFO:

TORONTO, CANADA (October 12, 2022) – John Graham, President & CEO, Canada Pension Plan Investment Board (CPP Investments), announced today the appointment of Kristina Fanjoy as Senior Managing Director & Chief Financial Officer.

In this role, Fanjoy will be responsible for the Fund’s financial policy and reporting strategy; business planning; performance reporting and analytics; valuations, financial controls and accounting; and tax governance. Fanjoy joined CPP Investments in 2010, during which time she has taken on progressively senior roles, most recently as Managing Director and Head of Finance.

“Kristina has been instrumental in helping ensure CPP Investments is at the forefront of leading corporate finance practices,” said John Graham. “Her team-building capabilities and technical expertise, coupled with her extensive understanding of the organization, places her well to add significant value to our Senior Management Team. I’m pleased that we’ve promoted from within, once again demonstrating the quality of our talent within CPP Investments.”

Prior to joining CPP Investments, Fanjoy grew a career at KPMG across audit, compliance and advisory disciplines, culminating in a practice delivering international tax advice to global organizations in a variety of sectors. She holds a Bachelor of Commerce degree from the University of Toronto and is a Chartered Professional Accountant.

I congratulate Kristina Fanjoy and wish her much success as she assumes this important role. 

Below, on June 23^rd John Graham, President and CEO, appeared in front of the Canadian Club of Toronto audience to update Canadians on CPP Investments and its solid performance amid uncertain market conditions. John addressed how the Fund is navigating geopolitical events, inflation, rising rates, and volatility.

As John noted during his speech: “It is going to be an investors market going forward, and active management is the best protection for today’s market conditions, amid the slowing of global growth.”

John’s remarks and discussion with the Globe and Mail’s Rita Trichur covered a wide range of topics, from investing in emerging markets and the energy evolution, to leading disruptive technologies.