PSP Investments' CEO Discusses Fiscal Year 2024 Results
Public Sector Pension Investment Board chief executive officer Deborah Orida is emphasizing focus and discipline as she prepares the $265-billion fund for a tougher investing environment that could face longer-term pressure from inflation and interest rates.
The leaders at PSP Investments spent much of the past fiscal year crafting a three-year plan that aims to sharpen the organization’s focus on areas where it is strongest and to increase the edge it can gain from actively managing investments, as markets look poised to stay volatile and uncertain for some time.
The fund, which manages pensions for the federal public service, Canadian Armed Forces and the RCMP, earned a 7.2-per-cent return on its investments in the fiscal year that ended March 31. That beat the performance of the fund’s internal benchmark, which gained 6.4 per cent, but underperformed relative to a reference portfolio of stocks and bonds set by the federal government, which gained 11.5 per cent.
Over 10 years, PSP Investments has earned an annualized return of 8.3 per cent, which is ahead of the reference portfolio return of 7.2 per cent. That translates to an extra $24.5-billion of investment gains above what the reference portfolio would have earned.
The fund’s total assets increased 8.7 per cent to $264.9-billion, moving it ahead of Ontario Teachers’ Pension Plan to become the third-largest pension-fund manager in Canada.
Pension funds with broad, diverse portfolios struggled to keep up last year when measured against stock markets that roared – although a huge share of those gains came from a small group of the largest technology stocks. High inflation and interest rates, wars and geopolitical tensions, as well as a challenging climate transition for many industries added to the tumult in markets.
Looking ahead, it appears likely that most of those factors are here to stay for a while, Ms. Orida said in an interview. “We have, going forward, an investing environment that’s potentially more uncertain and more volatile.”
Though some central banks – including the Bank of Canada – recently cut benchmark interest rates for the first time in years, buoying investor optimism, Ms. Orida cautioned that there are structural issues pushing inflation higher that won’t be easy to stamp out, including a trend toward deglobalization.
“I think the central banks will need to be mindful and may not, as we saw this last year, always cut as quickly as the markets get excited about,” she said.
PSP Investments’s stock portfolio performed well in the past year, gaining 17.5 per cent, while its infrastructure portfolio gained 14.3 per cent and its credit investments were up 14.2 per cent. The “phenomenal” credit spreads that private lenders enjoyed in recent years as some banks retreated from lending have compressed, she said, and credit investors such as PSP are needing to be more disciplined, but she still sees plenty of opportunities to earn good returns from credit.
By contrast, PSP’s real estate portfolio lost 15.9 per cent in the quarter, shedding $5.1-billion of value, as forces including weak demand for office space and high interest rates that have driven down property values battered the sector. Under new real estate head Louis Véronneau, PSP is pruning and revamping its portfolio of properties, but plans to move gradually in a down market and to take several years to complete the shift. “We don’t need to do a fire sale,” Ms. Orida said.
PSP Investments also announced the first four investments under the Canada Growth Fund, a $15-billion initiative it is managing for Ottawa with a goal to jump-start the growth of a clean economy. Ms. Orida hopes that will give PSP “insight or foresight” into investing trends around the energy transition that, combined with a more focused strategy, can help the core fund it manages for pensioners perform better.
“Ultimately we think that that will allow us to generate more alpha from active management and prepare us for a more volatile and uncertain market,” she said.
Wire News Fax also reports PSP Investments sees yield on the rise despite setbacks in real estate:
Montreal-based PSP Investments, which manages the $264 billion in federal employee pension plan assets, achieved a return of 7.2% for its fiscal year ended March 31, 2.8 points higher than the year former.
In its annual report released Monday, PSP management attributes this improved performance to “strong performance in investments in listed stocks, infrastructure investments and debt securities.”
These good sector results also helped to mitigate the impact of lower returns obtained in its investments in fixed income securities and natural resource assets, as well as the still very negative return suffered in its real estate investment portfolio.
Despite these short-term pitfalls, PSP management argues that as a pension fund asset manager with “a long-term investment approach,” it continues to exceed its comparable return targets.
Thus, at the end of the 2024 financial year, PSP posted a five-year annualized net return of 7.9%, or 2.6 points higher than its overall portfolio benchmark of 5.3%.
As for its annualized net return over 10 years, PSP announces it at 8.3%, or 1.6 points more than its overall portfolio benchmark of 6.7%.
“What satisfies me most in this annual review is the continuity of our good long-term performance with very strong results not only in public market assets [Stock Exchange], but also with our investments in infrastructure and debt securities,” said Deborah K. Orida, President and CEO of PSP, during an interview with La Presse.
Among the largest segments of its assets under management, the two largest portfolios – fixed income (56.2 billion) and publicly traded equities (55.6 billion) – produced respective returns of 2.9%. and 17.5% in the fiscal year ended March 31.
Furthermore, PSP’s portfolios in private placements ($40.4 billion), infrastructure investments ($34.5 billion) and debt securities ($26.2 billion) achieved returns of 12.1%, 14.3% and 14.2% respectively.
However, these sectoral returns were obscured by the significant underperformance (-15.9%) of its real estate investment portfolio, which stood at 27.2 billion as of March 31.
“In all of our real estate investments, it is the office building sector that has been particularly difficult to manage, mainly due to the impact of changes in working habits. In return, our investments in multi-family residential real estate and industrial real estate were more resilient and efficient,” summarizes Ms. Orida.
In its annual report released Monday, PSP management explains that “the negative revaluation of the [real estate investment] portfolio over the past two years was mainly attributable to higher interest rates and structural changes” in the property sector. real estate.
In particular, underlines PSP, “the traditional office [building] sector, particularly in North America, continues to be largely affected by a deterioration in occupancy rates and rental [income]. This reality reflects the uncertainty surrounding the hybrid work model and is amplified by the scarcity of available funding.”
For those of you who read French, you can read Martin Vallières’ La Presse interview here.
Also, Bloomberg's Layan Odeh covers PSP's fiscal year results here.
PSP Investments issued a press release stating it delivered solid financial returns in a complex investment environment:
- Net assets under management as of March 31, 2024 increase to $264.9 billion.
- Fiscal year ends at March 31, 2024 with one-year return of 7.2%.
- Ten-year net annualized return of 8.3% leads to $24.5 billion in cumulative net investment gains above Reference Portfolio, indicative of long-term added value through strategic asset allocation and active management decisions.
Montréal, Canada, June 17, 2024 - The Public Sector Pension Investment Board (PSP Investments) ended its fiscal year on March 31, 2024, with a 7.2% one-year net portfolio return and with strong performances delivered by the Public Market Equities, Infrastructure, and Credit Investments portfolios. This performance continues PSP Investments’ track record of delivering strong long-term returns through a total fund approach to portfolio construction and through the benefits of active management.
Net assets under management grew to $264.9 billion, up 8.7% from $243.7 billion at the end of the previous fiscal year. Net transfers received from the federal government represented $3.5 billion and $17.8 billion of net income was generated.
PSP Investments takes a long-term investment approach that considers pension funding risk and measures success at the total fund level through the following performance objectives:
- Achieve a return, net of expenses, exceeding the Total Fund Benchmark return over 10-year and 5-year periods: By the end of fiscal year 2024, PSP Investments achieved a 10-year net annualized return of 8.3% against the Total Fund Benchmark return of 6.7%, and a five-year net annualized return of 7.9% against the Total Fund Benchmark return of 5.3%. This represents $31.5 billion in excess net investment gains over 10 years and $27.2 billion in excess net investment gains over five years.
Focusing on our strengths with coordinated excellence
“As we look to the future, we will continue to focus on our strengths to deliver strong long-term performance and a resilient portfolio in the face of external forces that will impact our investment environment,” said Deborah K. Orida, President and CEO at PSP Investments. “We are an active global investment organization with proven capabilities to invest across major asset classes on a global scale for the long-term.”
“We recorded positive returns against a backdrop of the volatility of the last few years dominated by geopolitical uncertainty, inflation and rising interest rates,” said Eduard van Gelderen, Senior Vice President and Chief Investment Officer at PSP Investments. “As investors, we strive to build a robust portfolio, capable of withstanding market volatility and navigate a wide range of outcomes so we can consistently meet our mandate. PSP Investments’ performance showcases the strength and resilience of our portfolio and the caliber of talent of our people.”
“PSP Investments is honoured to manage the amounts transferred to us by the government of Canada to help support the pension funds of approximately 900,000 beneficiaries and contributors who have protected and served Canada,” added Ms. Orida. “As we pursue our mission and mandate, we are also proud to contribute to the Canadian economy through investments in companies that are creating quality jobs for Canadians, supporting communities, advancing the transition to a low-carbon future, and investing in innovation. Our $56 billion exposure to Canadian assets includes significant investments in public equities, real estate, natural resources, and infrastructure.”
According to a report released by data platform Global SWF, PSP Investments ranked among the world’s top 10 public pension funds and sovereign wealth funds that generated the largest compound annualized returns between 2013 and 2022. The report found PSP Investments had the second largest 10-year annualized rate of return of the Canadian plans who made the list and the sixth-largest 10-year annualized rate of return in comparison to the public pension funds and sovereign wealth funds listed in the report.
In fiscal year 2024, PSP Investments delivered on its strategic and operational priorities, effectively enhancing its investment capabilities in an increasingly complex investment environment. The organization continued its cost discipline and strengthened its talent pool to remain competitive in global markets. This approach led to an operating cost ratio of 29.5 bps, which is indicative of PSP Investments’ continued commitment to diligent cost management.
Investment highlights
ASSET CLASS
(at March 31, 2024)
NET ASSETS UNDER MANAGEMENT*
ONE-YEAR RETURN
FIVE-YEAR RETURN
TEN-YEAR RETURN
Public Markets Equities
$55.6B
17.5%
10.3%
9.8%
Fixed Income
$56.2B
2.9%
2.0%
3.4%
Private Equity
$40.4B
12.1%
14.8%
11.0%
Credit Investments
$26.2B
14.2%
9.8%
11.6%**
Real Estate
$27.2B
(15.9)%
0.9%
6.1%
Infrastructure
$34.5B
14.3%
12.0%
12.2%
Natural Resources
$15.2B
4.1%
7.0%
9.7%
Complementary Portfolio
$2.4B
20.6%
9.8%
11.5%***
*This table excludes Cash and Cash equivalents. All amounts in Canadian dollars, unless stated otherwise.
**Actualized return since inception (8.3 years).
***Actualized return since inception (7.2 years).At March 31, 2024
Capital Markets, comprised of Public Market Equities and Fixed Income, ended the fiscal year with $111.8 billion of net AUM, an increase of $13.3 billion from the end of fiscal year 2023. Public Market Equities, which uses a combination of active and passive strategies as well as alternative investments, ended the fiscal year with a net AUM of $55.6 billion. The five-year annualized absolute return of 10.3% outperformed the benchmark of 8.8%. Over this period, both actively managed public equity investments and alternative investments contributed positively. Fixed Income, managed using a combination of Global Sovereign Interest Rates and Emerging Market Debt, ended the fiscal year with a net AUM of $56.2 billion, an increase of $11.2 billion from the end of fiscal year 2023. Its annualized five-year return of 2.0% outperformed the five-year benchmark of 1.6% due to its strategic management and long-term investment horizon.
Private Equity ended the fiscal year with a net AUM of $40.4 billion and generated portfolio income of $4.5 billion. The five-year annualized return of 14.8% outperformed the benchmark return of 12.1%, showcasing the benefits of well-established partnerships with leading fund managers and the quality of the co-investment portfolio. Private Equity investments in the financials and healthcare sectors strongly contributed to the value-add. The asset class generated over $4.5 billion in cash distributions in fiscal year 2024 for a cumulative total of $32.5 billion over the last five years.
Credit Investments ended the fiscal year with a net AUM of $26.2 billion and generated portfolio income of $3.5 billion. The 9.8% five-year annualized return outperformed the 4.9% benchmark return due to strong credit selection, higher interest spreads versus the benchmark, and fee income. Credit Investments has strong differentiated capabilities due to team expertise in technology, industrials, and healthcare. All three sectors have generated significant outperformance compared to the relevant sector benchmarks. In the fiscal year, the asset class realized $6.2 billion of divestitures, mainly due to higher levels of borrower repricing activity linked to a resurgence of the syndicated loan market.
Real Estate ended the fiscal year with a net AUM of $27.2 billion and generated a portfolio loss of $(5.1) billion. The five-year annualized return of 0.9% outperformed the 0.7% benchmark return, despite this fiscal year’s negative return. The negative revaluation of the portfolio over the last two years was mostly driven by higher interest rates and structural changes. The traditional office sector, particularly in North America, continues to be significantly impacted by a deterioration in occupancy and rents, reflecting uncertainty around the hybrid working model and amplified by the scarcity of available financing. The performance of the impacted sectors was partially mitigated by the global logistics and alternative residential sectors such as student housing. Pursuant to the revision of the group’s investment strategy,
Real Estate continues to prune the portfolio, optimize partner relationships and transact in key sectors and select markets worldwide.
Infrastructure ended the fiscal year with a net AUM of $34.5 billion and generated portfolio income of $4.3 billion. The five-year annualized return of 12.0% significantly outperformed the 4.5% benchmark return. The portfolio outperformance was primarily driven by strong operating performance, high inflation linkage and downside protection. The portfolio also benefited from the value-add of its platforms, which provide strategic and competitive advantages. Investments in the data center and transportation subsectors, have significantly outperformed, supported by strong fundamentals and favourable market conditions. In fiscal year 2024, the asset class invested $4.0 billion of capital including new investments in Canada that support the energy transition.
Natural Resources ended the fiscal year with a net AUM of $15.2 billion and generated portfolio income of $0.6 billion. The five-year annualized return of 7.0% outperformed the (1.8)% benchmark return. The positive results reflect PSP’s long-term investment horizon and strong operating performance with like-minded, best-in-class, local operating partners. The portfolio also benefited from significant downside protection and inflation linkage. This allowed the portfolio to remain resilient in a rising rates environment that negatively impacted its benchmark.
Canada Growth Fund
In spring 2023, PSP Investments was announced by the Government of Canada as the investment manager for the Canada Growth Fund (CGF), a $15 billion investment vehicle established to support the growth of Canada’s clean economy. We are honoured to have been appointed to this role, in recognition of our investment expertise and track record, mature and scalable operational ecosystem, and governance framework that is independent and at arm’s length from the government. CGF is managed separately and independently from PSP Investments’ pension investment mandate.
Since then, Canada Growth Fund Investment Management Inc., has rapidly ramped up investment management activities, leading to multiple investment announcements in fiscal year 2024. For more information about the activities of CGF, visit https://www.cgf-fcc.ca/ or consult CGF’s first annual report.
Corporate highlights
Our mission, mandate, and strong sense of duty inform our decisions, underpin our success, and shape our strategies and culture. In addition to delivering solid performance and being well positioned for continued growth, PSP Investments continued to make important progress on strategic priorities.
Key accomplishments for the fiscal year 2024:
- We developed a three-year strategic plan that leverages PSP Investments' unique strengths as we aim to enhance our capabilities to deliver superior risk-adjusted returns, manage funding risk and execute with coordinated excellence to maintain a high level of stakeholder trust.
- We further enhanced our climate investing capabilities across asset classes, portfolio construction and enhanced data collection. By integrating material climate change considerations into our investment process, we aim to mitigate risks and capitalize on value creation opportunities in the transition to a low-carbon economy. More details about PSP Investments’ progress on sustainability and climate innovation will become available later this fall as part of our upcoming 2024 sustainability report.
- We reinforced the importance of our mission and refreshed our core values, emphasizing how they guide our actions and decisions, ensuring that we foster a culture where we can excel, individually and collectively, and tap into our diverse experiences to improve performance.
- Effective April 1, 2024, Mr. Patrick Charbonneau, President and Chief Executive Officer, Canada Growth Fund Investment Management, joined PSP Investments’ senior management team.
For more information on PSP Investments’ fiscal year 2024 performance, visit investpsp.com to download the annual report here.
About PSP Investments
The Public Sector Pension Investment Board (PSP Investments) is one of Canada’s largest pension investors with $264.9 billion of net assets under management as of March 31, 2024. It manages a diversified global portfolio composed of investments in capital markets, private equity, real estate, infrastructure, natural resources, and credit investments. Established in 1999, PSP Investments manages and invests amounts transferred to it by the Government of Canada for the pension plans of the federal Public Service, the Canadian Forces, the Royal Canadian Mounted Police and the Reserve Force. Headquartered in Ottawa, PSP Investments has its principal business office in Montréal and offices in New York, London and Hong Kong. For more information, visit investpsp.com or follow us on LinkedIn.
For more information on PSP Investments’ fiscal year 2024 performance, please download and read the annual report here.
Again, here are the important highlights:
On Friday, I had a chance to speak with PSP Investments' President and CEO, Deborah (Deb) Orida to go over Fiscal 2024 results.
I want to thank her for taking some time to go over results and also thank Maria Constantinescu for setting up the call.
Before I get to my discussion with Deb, a few tidbits from the annual report.
First, read Chair Martin Glynn's message below:
Next, read the message from PSP's President and CEO Deborah Orida:
I note this on performance:
By the end of fiscal 2024, we achieved a 10-year net annualized return of 8.3%, leading to $24.4 billion in cumulative net investment gains above our Reference Portfolio. We also outperformed our Total Fund Benchmark returns over the last five and 10 years, generating $27.2 billion and $31.5 billion in excess net investment gains over the respective periods. Since inception, we have delivered $171.0 billion in cumulative investment income.
Our 7.2% one-year net portfolio return exceeded the Total Fund Benchmark return by 0.8%, led by strong performance from our Public Market Equities, Infrastructure and Credit Investments asset classes.
And this on expanding PSP's role in Canada:
As we pursue our mission and mandate, we are also proud to contribute to the Canadian economy through investments in companies that are creating quality jobs for Canadians, supporting communities, advancing the transition to a low-carbon future and investing in innovation. Our $56-billion exposure to Canadian assets includes significant investments in public equities, real estate, natural resources and infrastructure.
One example is our recent investment in renewable energy producer Hydroméga Services Inc. (Hydroméga). A first- mover in private sector renewable energy production and development in Canada, Hydroméga has been operating clean power generation facilities in Québec and Ontario for decades and has a development pipeline of more than 2,000 MW of wind, solar, storage and hydroelectric projects. In spring 2023, PSP Investments entered into an agreement with the Government of Canada to be the investment manager for the Canada Growth Fund (CGF)1, a separate $15-billion investment vehicle established to support the growth of Canada’s clean economy. We are honoured by the confidence placed in our people, performance track record and governance model. Since assuming this responsibility, we have shown results through multiple investments. More information can be found on the Canada Growth Fund website and in its Annual Report.
We believe that our involvement in CGF, and the expertise we will develop, will be very useful to PSP Investments – most notably, by providing foresight into one of the most significant structural shifts affecting our investment environment. Accordingly, we are confident that this role will positively impact our ability to serve our important mandate to invest in support of the funding of the pension plans. To safeguard our ability to do so, our role as CGF investment manager is operationally distinct and independent from our pension investment mandate. Pension investment assets and investment income remain separate from CGF’s investments.
And this on strategy going forward:
Looking ahead, our Board and executive team spent considerable time in fiscal 2024 developing our roadmap for the future. We are facing a new, more complex investment regime characterized by fluctuating macro-economic conditions, geopolitical shifts, rapid technological advancements, the whole economy transition required by climate change, and significant demographic and societal changes – and we recognize the need to evolve and push ourselves to the next level.
We developed a strategy for the next three years, which builds on our strengths and will set us on a path toward our bold ambition to become the best pension investor in the world. Achieving this ambition will require a relentless focus on delivering superior risk-adjusted returns, managing funding risk, and executing with coordinated excellence to maintain a high level of stakeholder trust. You can learn more about our strategy on page 13 of this report.
Also worth noting PSP's overall asset class mix (broad asset classes) and its geographic distribution:
Remember, when looking at the performance of any pension fund, understand their asset mix extremely well as it determines long-term performance.
As far as PSP's overall results in F2024, they were excellent. The 7.2% one-year net portfolio return exceeded the Total Fund Benchmark return by 0.8%, led by strong performance from their Public Market Equities, Infrastructure and Credit Investments asset classes.
This is a solid return and I dug deeper with Deb to see where the results came from.
Also worth mentioning here even though CPP Investments and PSP Investments have the same fiscal years, you cannot compare both funds directly.
CPP Investments earned 8% in latest fiscal year, but significantly underperformed the 19.9% return of its reference portfolio. As I mentioned when covering its results with their CEO, this reference portfolio is problematic for a lot of reasons, the least of which is Andrew Coyne criticizing the Fund's active management.
CPP Investments where Deb Orida came from is very similar to PSP Investments in some ways but different in others.
Their asset mix is definitely not the same and once enhanced CPP takes over base CPP assets in many years, then and only then will their asset mix be similar (but again, not identical as they have different liabilities).
All you need to remember is they are both excellent funds run very professionally and adding significant alpha across public and private markets all over the world over the long run.
It doesn't matter that PSP beats its reference portfolio last year and CPP Investment significantly underperformed it, what matters are long-term results and both funds are delivering on that front.
Discussion With PSP Investments' President & CEO
Alright, let me get to my discussion with Deb Orida and once again thank her and Maria.
You should know I didn't have any material on Friday before talking to Deb but it didn't matter because I cover pension funds so closely, I know exactly what to ask.
I noted that I hadn't spoken to Deb since last year and covered PSP activities a little bit less this past fiscal year because there weren't many big announcements.
I asked her how she's doing, how has the transition been to Montreal/ PSP and to give me a broad overview of the results.
First, on the personal front, it's been great. I'm almost celebrating my second year anniversary. The move to Montreal has been great. My daughter just graduated high school here and had a fantastic time where she attended (school is omitted for privacy reasons). I feel I've been very lucky on the transition on the personal front.
Switching over to PSP, last year was solid. The one-year return was 7.2% which continues our track record of delivering both solid returns and stability. The 10-year return is 8.3% which means we outperformed the reference portfolio over the 10-year period by 110 basis points. We outperformed the reference portfolio over the 5-year period by a similar amount so I feel good about the returns and as you know, we're getting a little bit of money from Ottawa as well. Overall, that brings us to $265 billion which is a nice round number and I think that makes us number 3 in Canada now but you'd know better than me.
I confirmed that PSP overtook OTPP in terms of assets under management and is now officially Canada's third largest pension fund.
I then stated that after covering almost all the funds now (BCI is last to report in July which is quite annoying that they're so late), I saw that funds that had a broader allocation to public markets did better last year as there were headwinds in private markets except for private credit which did well.
I asked Deb to comment and again, keep in mind, I didn't have access to their documents so this was all new to me:
As you might imagine, that 7.2% was supported by strong performance from most of the asset classes. To your point, Public Equities delivered 17.5%. Again to your point, Private Credit delivered 14.2%. For us, Infrastructure continued to perform well, we delivered 14.3% last year and our 10-year return is 12.2%. As you know, I think we have a global leading franchise in infrastructure with a well-balanced portfolio across different sectors including data centres where we had opportunities to realize.
I noted I saw Patrick Samson liked the sale of PSP's stake in Vantage data centres on LinkedIn. Deb commented:
Yes, the Vantage realization where we got USD $2.3 of proceeds (for each dollar invested). With all the money flowing into infrastructure more broadly, we've had the opportunity to realize some of our long-term winners and it's been a good year.
This is important, pension funds can keep companies on their books for a long time and sell at an opportune moment. This is what happened with Vantage and the fact that they sold it shows demand for these high quality assets remains extremely strong despite higher rates.
Next, we moved to Private Equity which also had a strong year relative to peers who experienced more difficulties there. I noted just like CPP Investments and CDPQ, I read that PSP sold fund stakes in the secondary market last fiscal year to get more vintage year risk.
Deb commented:
Our Private Equity returns were solid last year, 12.1%. We did deliver proceeds in that portfolio including one of our long-term holdings, Amwins where we had the opportunity to realize some really strong returns that investment has generated (see details here).
She avoided discussing selling fund stakes in the secondary market but once again there, a great realization (sale of an asset) helped deliver strong returns.
Remember, you can't do these realizations every year but if you have great assets and willing buyers, your fiduciary duty is to jump on the opportunity.
The key thing to note is big realizations came through in big way to help PSP's Infrastructure and Private Equity teams deliver solid returns last year.
Next we moved to Real Estate where Deb noted:
You've written about it and you'll see our results there when you get the annual report. I won't pretend we escaped the downturn in that sector. But even though this year wasn't great (-15.9%),over the long term we delivered a 6.1% 10-year annualized return. We continue to think it should be part of a broadly diversified portfolio and we are happy with the leadership we have in place there.
I pressed her, asking if it's the same headwinds in office hurting every other fund. Deb replied:
We certainly have seen the structural change in office that has impacted the whole market with the behavioural change, work from home. I think the sector saw this year the lagged impact on cap rates from rising rates and the fact that the market is starting to see some transactions which is allowing the valuations to reflect that cap rate expansion.
Next, I asked her about Natural Resources where PSP is a leader in the pension world.
Natural Resources had a solid year, up 4.1%, but the 10-year return is 9.7%. As you stated, it's a good diversifier for our portfolio so we continue like the asset class.
I then noted that she's been there almost two years, the CIO is in charge of implementing PSP One, so I asked her what are the strategic shifts she envisions to bolster the organization going forward over the next five years. Deb replied:
When you get the annual report, you'll see we did spend time this past fiscal year just looking at how the investing environment has changed. How we are facing a more complex investing environment, whether it's macro or geopolitics, the impacts of climate change and technology evolution or social pressures.
We have launched a refresh strategy that has three pillars. One is to invest with focus and foresight.The second is to operate with excellence and the third is to be inspired by the mission.
Maybe I'll start with the last one because you know it's close to my heart. This idea to be inspired by the mission, to support the retirement of people who protect and serve Canada is one of the important pillars and opportunities for evolution in the organization.
The idea to operate in excellence is what's required to continue to deliver long-term returns in a more complex investing environment. And investing with focus and foresight is really focusing on our strengths and developing foresight in areas that will be significant forces in our investing environment of the futures. for example, taking on the Canada Growth Fund to develop foresight into the whole transition economy that is required because of climate change.
I asked Deb about the independence of the Canada Growth Fund as it was my understanding it's a separate entity altogether from PSP even though Patrick Charboneau and his team are from PSP. I told her that's what I expressed in my comment last Thursday when I went over the Gibson Energy deal.
Deb explained:
That is correct. We are the investment manager of the Canada Growth Fund so we make the investment decisions but the assets are not part of our $265 billion. The $15 billion sits in another Crown corporation. We set up a subsidiary, the Canada Growth Fund Investment Management that Pat (Charbonneau) is the CEO of and that team provides investment services (ie. makes the investment decisions) for the $15 billion Canada Growth Fund.
I noted that team invests in very interesting projects but if it's managed independently from PSP, how does the organization benefit from providing this investment service? Deb explained:
Exactly, that's exactly why we took this mandate, because we think it's going to make us smarter investors as it relates to the energy transition.
The offices are separate and we are providing the investment management services on a cost recovery basis so it's not costing the pensioners. But we do have the opportunity to gain the insights. So, for example, although Pat Charbonneau is the CEO of the Canada Growth Fund Investment Management, Pat Samson, J-F (Bureau) and I sit on the investment committee and we also have the opportunity for people to rotate into and do a secondment in the Canada Growth Fund and for PSP to recover the cost of our time when we do that.Deb also told me PSP will put out a sustainable investing report in the fall.
So, the key thing I got out of this is the $15 billion in assets the Canada Growth Fund is managing isn't part of the $265 billion PSP is managing and not part of their transition assets or green assets but there are definite synergies there the organization can capitalize on without costing the pensioners any money.
And again, this money is managed at arm's length, the Government cannot influence Pat Charbonneau and his team in any way, shape or form (Deb confirmed this and said it was part of the criteria for them accepting the mandate).
In closing our conversation, I asked her key things she wants to highlight:
I think what's most important is we have continued to deliver our track record of not only delivering strong returns but stability. That track record and the outperformance relative to the reference portfolio is what's taken us to that $265 billion and with our strategy to focus and continue to optimize and deliver alpha, I think we are well positioned for a more complex and uncertain investing environment.
If you think about alpha and beta, volatility will impact the beta but alpha is where you have the ability through active management to do value creation and deliver returns that are independent from market movements.
I ended it off by telling her my contacts have told me she's been doing a great job and that the culture at PSP is great and encouraged her to meet more employees if time permits from her hectic schedule.
Deb told me as an equity investor, she's an optimist. She's still learning and there's always more people to meet at PSP.
Interestingly, she told me when she first joined PSP, she did a floor tour, meeting different groups and managing directors and she thinks she will restart this floor tour.
I encourage all CEOs to do this, not just Deb.
Alright, let me wrap this up and get back to the pension prince, my little (now big) bundle of joy.
Once again, I thank Deb Orida for another insightful conversation.
Before I forget, here's a table summarizing executive compensation at PSP for fiscal 2024:
Keep in mind, it's the 5-year results that primarily determine compensation and I encourage you to read the details in the annual report.
Below, Alliance for American Manufacturing (AAM) President Scott Paul appeared on CNBC's Squawk Box on Monday, June 17, 2024 to discuss their new report examining the devastation caused by China's massive industrial overcapacity and the threat it poses to American manufacturing and good factory jobs.
In SHOCKWAVES: The Ripple Effect of China’s Industrial Overcapacity on American Manufacturing and Factory Workers, AAM outlines 10 policy actions needed to get in front of the problem of overcapacity and limit the damage to American industry.
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