CPPIB and the Caisse Focus on EMs?

CPPIB put out a press release, Driving long-term value creation through investor-corporate dialogue in Brazil:
How long-term value creation can be driven by investor-corporate dialogue was the subject of an October 9 discussion with senior executives from Brazilian corporations at CPPIB’s Sao Paolo offices.

A McKinsey Global Institute analysis of 615 large- and mid-cap U.S. publicly listed companies from 2001 to 2015 shows clearly that focusing on the long term reaps economic benefits.

The study finds that between 2001 and 2015, companies classified as long term added nearly 12,000 more jobs on average than other firms. Similarly, they found the market capitalization of long-term firms grew $7 billion more on average between 2001 and 2014 than that of other firms.

Still, an FCLTGlobal survey of more than 1,000 executives and directors globally finds short-termism remains pervasive – 87% of respondents say they feel pressure to demonstrate strong financial performance within two years or less. This is an 8% increase from 2013’s survey results.

Our President and CEO Mark Machin and Rodolfo Spielmann, Managing Director and Head of Latin America, shared these findings to prompt discussion on practical actions shareholders and companies can take to drive long-term value creation in Latin America.

There was general agreement among participants that interactions between shareholders and corporations in Latin America are effective, given the ownership structures and economic conditions that are unique to the region.

The engaging discussion ranged from the short-term pressures facing Latin American corporations, to the differences between how public companies and private companies view the issue.

Participants also shared their experience and discussed effective ways to promote long-term behaviour.
Brazil is one of the emerging markets CPPIB has plans to grow its allocation in over the next few years.

It's not the only pension fund interested in Brazil. Bloomberg reports French utility Engie SA and a the Caisse plan to offer as much as $9 billion (34 billion reals) for Petrobras’s natural gas pipeline network, potentially a $1 billion boost from their initial bid.

Apart from Brazil, there is a keen interest in India and China. The Caisse just increased its stake in Azure Power Global Ltd. (Azure Power), a leading player in solar energy, to 40% through a US$100 million contribution to the company’s recent capital raising. This new investment in Azure Power brings the total amount invested by CDPQ to US$240 million:
Azure Power is one of India’s largest independent solar power producer with a pan-Indian portfolio of more than 3 GW spread across 23 Indian states. With its in-house engineering, procurement and construction expertise and advanced in-house operations and maintenance capability, Azure Power provides low-cost and reliable solar power solutions to customers throughout India. It has developed, constructed and operated solar projects of varying sizes, from utility scale, rooftop to mini & micro grids, since its inception in 2008.

“Through this investment, we are reaffirming our commitment to Azure Power and our willingness to support its growth. Azure Power is a leader in the fast-growing sector of solar power in India, a priority market for CDPQ, and has a high-quality management team that possesses thorough knowledge of the industry. Furthermore, this transaction fits perfectly with CDPQ’s desire to contribute, as an investor, to a global low-carbon economy,” said Mr. Emmanuel Jaclot, Executive Vice-President, Infrastructure at CDPQ.

“CDPQ’s successive investments into Azure Power since we went public on NYSE in 2016 are a strong testament of our leading solar power platform in India. CDPQ’s new investment enables our continued organic growth of highest quality solar power assets and our contribution towards realization of India’s Hon'ble Prime Minister's commitment towards clean and green energy", said Mr. Inderpreet Wadhwa, Founder, Chairman and Chief Executive Officer at Azure Power.
I just covered how Canadian pensions have crossed an important ESG threshold and it's fair to say that the Caisse is taking the lead in terms of impact investing by signing a big deal with Al Gore’s Generation Investment Management.

The Caisse has explicitly stated it aims to cut its carbon footprint by 25% by 2025 and its leader, Michael Sabia recently sounded the alarm on climate change but also stated it represents an economic opportunity and pensions need to invest in these opportunities.

His counterpart at CPPIB, Mark Machin, has pledged a 'huge push' on climate change risk assessment:
Canada Pension Plan Investment Board chief executive Mark Machin pledged Thursday to step up the assessment of global climate change risks to make better investment decisions, as the fund he oversees posted an annual net return of 11.6 per cent.

“We’re going to make a huge push on it this year… We want to do a much better job of being able to understand the risks that we’re taking on in each investment and the risks we have embedded in the portfolio, and make sure we’re being paid for them,” Machin said in an interview.

“If we’re not being paid for the risk, then it doesn’t make sense to own them. Others, where we think we’re being paid for the risk, then we’ll continue to own them.”

He said much more work needs to be done on key questions including how quickly the “energy transition” from traditional sources to alternatives and renewables will take place. This will be influenced by a number of factors, from geography to government policy and regulation to social demands.

“Nobody’s cracked this, nobody’s got a great tool kit yet, so we’re having to develop it ourselves,” Machin said.

“We don’t think it’s going to happen by next year. We think there’s still going to be a role for oil and gas related assets for some period of time. But how fast that transition happens is one of the key drivers, and then we need to understand all the other risks embedded in each investment.”

CPPIB, which invests money for Canada’s national pension scheme, is pairing its plan to build better ways to measure the risks inherent in sectors such as oil and gas with a concerted search for more investments in alternative and renewable energy assets.
CPPIB has a long-term focus and its strategy and this is why it needs to pay attention to climate change risk, just like all other pensions.

Its long-term focus is also why it is aiming to double its allocation to China by 2025. During a recent trip to Beijing, Mark Machin spoke to China Daily's Jiang Xueqinq about how the fund plans to lift its China investments:
CPPIB plans to increase funding across country as it eyes long-term market opportunities from growing middle-income group, aging population.

By 2025, Canada Pension Plan Investment Board plans to have 20 percent of its estimated C$800 billion ($612 billion) assets invested in the Chinese mainland, Hong Kong, Macao and Taiwan, said Mark Machin, president and CEO of CPPIB.

"It's a sensible thing to increase our supply to this market. We are building expertise, and we think valuation is not perfect in this market, so there are opportunities for skilled investors to find really good value," Machin said during a recent business trip in Beijing.

The further opening-up of China's financial markets to foreign investors has also increased the CPPIB's confidence in making greater investments in the world's second-largest economy, he said.

China is also undergoing significant population changes, including a growing middle-income group and an aging population. With expected spending increases in education, financial services, health and elderly care, the Toronto-based global investment manager is eagerly eyeing China's growth markets.

Currently, the CPPIB's asset allocation in China is broadly diversified, with investments in the A-share market through both the Qualified Foreign Institutional Investor program and the mainland-Hong Kong stock connects. The institutional investor is starting to participate in the bond market via the bond connect program and has access to the interbank market.

In an interview with China Daily, Machin shared his views on China's pension system and further opening-up, as well as the CPPIB's investment strategy in the country.

What experience could China learn from the Canadian pension system?

The Canadian pension system was developed all the way back in the 1890s. There has been a lot of experience gained, lessons learned and mistakes made over the years.

One of the things we learned is that a multi-pillar system is the way to go. So it's important to have a system where you have the government system, plus company pensions, personal pensions, life insurance, etc. All of those need to be developed and work alongside each other. You can't just have one pillar providing everything, and you need some type of consistency across those, and incentives that work to encourage people to save.

The other thing is the way that pensions are managed in Canada. Government-related pensions are unique in that they are put at arm's length from any government involvement in the investment process. The governance is very strong. It allows the building of expertise and professional management of the funds.

What are the major challenges facing China in terms of the pension system?

The main challenge at the moment is the returns that the various parts of the pension system earn. Due to a limited range of investments, the returns are pretty low on a lot of pensions.

Another challenge is that the funding of the system continues to need improvement. I think the transferring of a part of State-owned enterprise ownership to the National Council for Social Security Fund is a very good move. That will help to improve funding for the overall system.

The consolidation of provincial pension systems to be managed centrally is a good move as well, so they can be managed with transparent, strong and robust governance.

What will be the effect of China's policies to further open up its financial markets to foreign investors like CPPIB?

The opening-up is really, really good and will encourage more and more investors to invest here. It's an important moment for China to decide whether to really open up or whether to slow down the opening-up, given internal and external challenges.

I encourage much more bold opening-up, which will improve the vigor of the economy here and the strength of the markets.

Right now, about 8 percent of our funds are invested in the Chinese mainland and about 10 percent of our funds overall are invested across the Chinese mainland, Hong Kong, Macao and Taiwan. We expect the latter to increase to 20 percent by 2025.

We are already involved in the QFII and the mainland-Hong Kong stock connects. We have joint ventures here in logistics and real estate. We have invested in companies like Alibaba and Postal Savings Bank of China. We have a very broad portfolio here across many aspects, and we're going to continue to grow that over time.

The more open China is, the more confidence we have to deploy more money here. We expect to have up to a third of the fund invested in emerging markets by 2025, and China will be at least half of that.

Your investment portfolio in China seems to be a major bet on the country's consumption growth. Right now, there is sentiment that China's consumption is downgrading. How do you view that?

Our investment portfolio in China shows the demographic trend of the growing middle-income group. The typical sectors we are looking for are the ones that are going to be exposed to the rise of middle class prosperity.

People are going to spend more on education, financial services, and both online and offline retail. We are also looking at healthcare and other services that would be important for the aging population. For example, in Europe we have invested in a long-term care provider ORPEA, which has already established operations in China.

Right at this moment, if we were a short-term investor, the consumption would be a doubt. But in the longer term, with the growing prosperity of the country over time, there will be demand for consumption growth in these areas. I don't think there will be a downtrend of consumption over time.

What is CPPIB's plan to invest in services for the aging population in China?

I'd like us to find ways of investing in this aging demographic. It's something that should be really aligned to what we do and our expertise. We haven't found the best business model and the best partner to work with yet, so we continue to explore it.

A lot of people have been trying to find a business model that works. It's not just real estate development. There are a number of models whereby you try to keep people living as independently for as long as possible in communities; and when they can't live independently, there is assisted living; and when they need end of life care, the healthcare is there. It can all be in one community that works well and is near family as well.

We have invested in Europe in the end of life care. It's high-end and a combination of healthcare and old age care.

We have a lot of research around the world in aging demographics. I'll give you an example that you won't expect: In the US, as baby boomers are aging, a lot of them want to go and see Europe. One of the best ways to see Europe is to go on a riverboat. So we invested in a company called Viking Cruises, and a huge number of passengers are aging US citizens.
That is a very interesting interview which gives you a lot to ponder because 2025 is just around the corner.

If CPPIB achieves its goal of allocating a third of its assets into emerging markets by 2025, half of which will be in China, it needs to find the right partners across public and private markets to do so.

You might think this is an ambitious goal, and it is, but have a look at the current snapshot of global economies (h/t, Kelly Trihey via The Visual Capitalist, click on image):

As you can see, the economies of China, India and Brazil are still below that of the US economy but they're catching up fast and will overtake it.

"But Leo, you just wrote a comment about the market topping out and stated you‘re nervous about the Fed overdoing it with rate hikes and think emerging markets are still a short despite the selloff."

Yes, and I stick to those macro views but that is short-term, not long-term. CPPIB, the Caisse, and Canada's large pensions aren't managing for the next year or three, they are managing billions for the long run and need to maintain that long-term focus on emerging markets.

Does China make me nervous? Yes, it's still a communist country and my personal investments will always be in the US stock market because my personal bias is the US economy is the best economy in the world and it will remain so for a very long time.

Having said this, China is growing by leaps and bounds and in some areas, like e-commerce and renewables, it's already leading the world or close to it. And there are big advantages of having a command economy when governing over 1.4 billion people. You get things done quickly.

At the CAIP conference I attended yesterday, one of the speakers, George Varino, Head of Emerging Market Solutions at Investec Asset Management, had an interesting presentation on China and distributed an interesting report titled "China: The Second Great Transformation" (listen to an Investec podcast here).

He brought up many excellent points on how the country is growing its middle class and how services now account for a large extent of the economy and how they are addressing their high debt and shadow banking system.

Admittedly, he's bullish on China for a reason, so I take some points with a dose of skepticism but other secular trends are hard to deny, especially the growing middle class (think he said 20 million people a year but don't quote me).

Perhaps what worries me most is the possibility that the US and China are at risk of a '10- or 20-year' economic cold war, which is something former Fed governor Kevin Warsh told CNBC recently.

Similar concerns were raised by D.J. Peterson, Longview Global Advisors founder and president, on  'Squawk Box' this morning as he weighed in on geopolitical risks to the market regarding China and Saudi Arabia.

These are all valid concerns but in the end, Trump or no Trump, there is no denying China needs the US and the US needs China to thrive over the long run.

Lastly, Mark Machin wrote an excellent op-ed recently on how CPPIB is advocating for more women on boards. I encourage you to read it.

I also want to bring to your attention something Marlene Puffer, President and CEO at CN Investment Division posted on LinkedIn from the Canadian Gender & Good Governance Alliance, a CEO blueprint for gender diversity:
This is a blueprint for CEOs who understand that implementing gender balance throughout their organization is important. It will give you a step-by step framework on the components of building a vision, structuring and mobilizing management teams and focusing on gender diversity initiatives that actually work.

Building a gender diverse organization is more than the morally right thing to do. A conclusive body of evidence indicates that diverse organizations tend to be more innovative and perform better financially than their peers. Your customer base reflects growing social diversity, and you need to respond to stay competitive.

If you are a publicly traded company, your investors might already ask for your gender diversity policies before buying your shares. And in the global race for talent, organizational diversity will be a key recruitment tool.

Designed to help frame a CEO's agenda on gender diversity, the CEO Blueprint outlines three key steps and provides tactics throughout for:

1. Building your vision
2. Making it mission critical
3. Focusing on high impact practices

This guide can show you how to take advantage of leading practices for your organization.
You can can download the guide here. it is also available in French.

They should create a similar blueprint for minorities including people with disabilities.

I call on all organizations, especially Canada's large and mighty public pensions to set firm goals to hire more women at all levels and a lot more people with disabilities (that's easy from the current 0.01%).

Anyway, another discussion for another day.

Below, Mark Machin, Canada Pension Plan Investment Board president and chief executive officer, discusses the pension plan's investment strategy and global interest rates with Bloomberg's Erik Schatzker on "Bloomberg Markets" at the Bloomberg Global Business Forum in New York on Sept. 26, 2018.

And Mark also discusses why CPPIB put money in Viking Cruises because of a trend it noticed involving aging US Baby Boomers.

Lastly, D.J. Peterson, Longview Global Advisors founder and president, joins 'Squawk Box' to weigh in on geopolitical risks to the market regarding China and Saudi Arabia.

Take the time to listen to all the discussions and remember, CPPIB is in it for the long run and despite what Keynes once said, it, the Caisse and other large Canadian pensions need to focus on the long run.