A Conversation With CPP Investments' CIO Ed Cass

Tim Kiladze of the Globe and Mail reports CPPIB restructures largest investment group and parts ways with group leaders early in new CEO’s tenure:

The investment arm of the Canada Pension Plan is restructuring its largest group by assets, according to internal memos, marking the fund manager’s first substantial changes under newly appointed chief executive officer John Graham.

The Canada Pension Plan Investment Board is also revising its senior ranks, with at least three managing directors departing.

Total Fund Management is CPPIB’s largest group by assets and oversees macro portfolio strategy for the fund manager’s public markets division. The group is overseen by chief investment officer Ed Cass and was created last fall by merging Total Portfolio Management, which had $180-billion under management, with the fund’s Balancing and Collateral team.

Under the new restructuring, the memos say, the group will have five subdivisions, including portfolio design and active investment management. Total Fund Management will also revise its staffing level, which is likely to affect about 25 per cent of its employees, or about 30 people. The changes will include departures and internal transfers.

CPPIB is also making changes at the managing director level and has internally announced the departures of Kevin Bespolka, who oversaw the macro strategies group within its public markets arm, and Nick McKee, who was head of financial institutions for direct private equity.

Earlier this week, CPPIB also announced that it is forming a sustainable energy group that spans renewables and conventional energy and will have $18-billion in assets. As part of the merger, managing director Avik Dey, who was head of energy and resources, will leave the fund.

The changes come a little more than one month into Mr. Graham’s tenure. He took over in late February from Mark Machin, who resigned when the fund manager learned he received a COVID-19 vaccination in early February in the United Arab Emirates.

In an e-mail, CPPIB senior managing director Michel Leduc wrote that while the changes were made shortly after the new CEO’s appointment, Mr. Graham had been leading an enterprise-wide assessment of the fund’s structure in recent years, and worked with other executives in doing so.

As part of this, CPPIB appointed Mr. Cass as its first chief investment officer last fall, making him responsible for decisions such as capital allocation between investment programs and balance sheet management. CPPIB has been preparing for its coming growth as a result of federal changes that will mean 20 million Canadians contribute more money to CPP annually.

Mr. Graham previously ran private credit investments, which is a 125-person team that manages $42-billion. CPPIB is Canada’s largest pension fund manager, with $476-billion in assets.

Earlier today, I had a chance to speak with Edwin (Ed) Cass, CIO of CPP Investments. I'd like to thank him for taking the time to talk to me and thank Michel Leduc and John Graham (who suggested I talk to Ed) for arranging this call.

Ed Cass has huge responsibilities at CPP Investments and what I like about him is even though he's very intelligent, he has a great sense of humor and is fun to talk to.

First, let me cover this article above, it was obviously leaked by someone to the Globe and it needs to be placed in proper context. 

As Ed explained. CPP Investments started its active management program in 2006.

"So, we went from zero active in 2006 to 80% actively managed now and we needed to address gaps in terms of allocating capital across assets and strategies. That required a change in roles, responsibilities and accountabilities and this is why we restructured our team."

About three years ago, a group was created to look into how these gaps would be addressed and out of that group came the creation of the CIO position which was announced last September.

As Ed explained, it's more of a "relative value" group looking at systematic risks across assets and the 30 different global strategies and allocating capital dynamically across strategies and assets (maybe his title should be 'Chief Risk Allocator').

Nothing has changed in terms of reporting lines, the heads of each investment group "act like the CIOs of their investment activity" and still report to John Graham.

"Our group does not focus on individual deals (security selection), the Real Estate, Infrastructure, PE groups do that, we focus on allocating capital to strategies and assets where there are opportunities and where we can get the highest risk-adjusted returns."

He added: "We use factor investing and risk targets to redeploy capital where opportunities lie."

Of course, to do this, Ed Cass and his team have regular dialogue with the individual teams to assess where opportunities lie. "We don't force them to deploy capital but we have five-year targets. For example, our Real Estate group has been mostly selling over the last two years. We redirect capital to where risk exposures offer the most compelling risk-adjusted returns."

This isn't an easy job, in fact, it's downright difficult.

CPP Investments is managing close to $500 billion across 30 different global strategies but one thing Ed did mention is they always remain focused on the long term. 

Still, even when you adopt a long term view, things can change materially in any given year. 

He gave me the example of Fixed Income where rates collapsed last year. "They have come back this year but the the risk free rate for long bonds is now 2-2.5% whereas steady state is 3-3.5%."

Interestingly, we got to talking about the inflation-deflation debate and he told me he doesn't hold firm views either way but when John Graham asked him recently what keeps him up at night, he replied "rates".

He expanded: "We might get cost-push inflation or the secular stagnation scenario you're worried about but either way, there will be a lot more volatility in rates."

He went on: "I guess inflation will hurt us in the short run if rates spike up but longer term, we can capitalize and lock in those high rates if they rise high enough."

He said many of his peers are not as fortunate because their pensions are a lot more mature and "they're path dependent."

I asked him if he was referring to base CPP (partially funded) versus additional CPP (fully funded) and he said "both" as in both cases inflows are very strong for many years swamping what they need to pay out ("additional CPP is still in its infancy").

In terms of knowledge sharing, I found it interesting when he explained that CPP investments' thematic investing team doesn't report to him. Instead, he said there is a group internally at CPP Investments that gets key insights from each investment team, aggregates it and makes it "easily accessible" to all the teams.

"There's a tremendous amount of information circulating, we try to break down the silos and focus on total fund performance."

As you can appreciate, Ed Cass and his team are continuously incorporating a lot of information to make sure the Total Fund Management approach at CPP Investments is working well and that capital is being deployed in areas that offer the best long term risk-adjusted returns.

Going forward, the Total Fund Management team will play an increasingly critical role in how assets are deployed across strategies at CPP Investments. 

In fact, Ed told me the traditional 60/40 stock/bond portfolio is not producing the required return nor will it going forward, so active management including total portfolio management is more important than ever.

Like I said, it's not an easy or enviable job, but Ed Cass and his team are up for the challenge.

Of course, I plugged myself and Mihail Garchev, BCI's former head of Total Fund Management, who put together a great series on my blog last year (see Part 6 on capability here).

I didn't mince my words: "CPP Investments is Canada's biggest and most important pension fund, you should hire the best talent across the country and outside the country, and let them work remotely if needed."

In related news, CPP Investments' CEO recently told Barbara Shecter of the Financial Post that divestment is off the table under his watch:

The new chief executive of the Canada Pension Plan Investment Board has no plans to institute a blanket divestment of oil and gas assets during his tenure, in part because he believes science will find solutions to many of the issues that have made environmentalists and some investors question such holdings.

“Simple divestment is essentially a short on human ingenuity,” John Graham told the Financial Post in a recent interview, adding that there are “incredibly bright, talented” scientists and engineers in the oil and gas industry.

“We’ve taken the position that we invest in the entire energy ecosystem, and we do not pursue a path of blanket divestment,” he said.

Invoking science to support energy investments may not be a popular position in some quarters these days, but the 49-year-old, who was abruptly named to the top post at the $475 billion fund in February, has the credentials to back it up.

A research scientist for more than a decade, Graham has a PhD in chemistry from the University of Western Ontario, as well as an MBA from the University of Toronto’s Rotman School of Management.

Navigating the political minefield around energy investments will be one of the key challenges Graham faces as head of the investment platform for Canada’s national pension scheme, which has mandate to “maximize investment returns without undue risk of loss.” Like other large institutional investors, CPPIB is facing criticism not only from environmentalists but from academics who are quick to point out that fossil fuels, no matter how lucrative now, represent risk.

But Graham is not taking sides.

On Tuesday, CPPIB announced that two existing investment groups — energy and resources and power and renewables — will be rolled into a single $18-billion platform called the Sustainable Energy Group to build on investments in renewables, conventional energy and innovation through new technologies and services.

“We will continue to invest across the entire energy ecosystem including active investments we have in Alberta,” Graham said in the interview, which took place shortly before the announcement.

Among those investments is Calgary’s Wolf Midstream, which he pointed to as an example of what he sees as the path forward.

The company, which CPPIB first invested in six years ago, is involved in the conventional oil and gas sector. But Wolf also built and owns the 240-kilometre Alberta Carbon Trunk Line, which captures industrial emissions from fertilizer facilities and refineries and delivers the carbon dioxide to use in enhanced oil recovery at mature oil and gas reservoirs and for permanent storage.

“It is one (investment) we’re quite proud of — a great example of some of the forward-looking thinking around carbon capture,” Graham said.

“I’ve met lots of people through my career, scientists and engineers, who work in the oil and gas sector, and they’re incredibly bright, talented people who will undoubtedly play a role in the energy transition.”

Graham is the second consecutive executive with a science background to lead the investment management team for Canada’s national pension scheme. His predecessor, Mark Machin, was trained as a medical doctor before turning his attention to high finance. Machin resigned from his job as CEO of CPPIB suddenly in February after it was revealed that he had travelled to the United Arab Emirates and been vaccinated against COVID-19 while those his age in Canada were still awaiting inoculation.

While Machin only worked as a doctor for about a year before moving into the world of investing at Goldman Sachs, Graham worked for several years as a researcher in the innovation group at Xerox, before transitioning to a strategy role at the technology company.

He had begun to work on his MBA when a headhunter came calling and lured him to CPPIB. He started in portfolio construction before moving into private investments and credit. As he moved up the ranks, his application of the scientific method was evident.

Take his decision in 2018 to move all CPPIB’s credit investors into a single department, a shift he describes as deliberate and methodical.

Before then, what had become one of the largest global asset classes was being managed within regional departments and asset class groups such as real estate, with a district focus on investment grade versus non-investment grade assets.

Graham’s view was that a broader lens across geographies and assets would help CPPIB capitalize on the opening of less-developed credit markets in China, India and Latin America, where there were fewer such silos or distinctions.

“We think of credit as an investment in credit, and really have built this department that can do public, it can do private, it can do corporate, it can do real estate, it can do structured credit,” he said. “The investment teams will build a portfolio with the best opportunities.”

The investment management organization won’t set “hard” allocations for specific asset classes, Graham said, adding that he will rely on chief investment officer Ed Cass when it comes to assessing macro-economic factors such as interest rates to determine portfolio construction and capital allocation.

While Graham’s ascent to the top job in February was abrupt, given the circumstances, he was far from a dark horse and had been on a very short list of possible successors to Machin since last summer, according to sources with knowledge of the succession planning.

His experience on the credit side of investing is understood to have worked in his favour, given the growing prominence of private debt alongside the sometimes flashier world of private equity. A person with knowledge of the pension management organization’s inner workings said Graham worked under seasoned fund veterans such as Cass and Mark Jenkins, who spearheaded CPPIB’s $12-billion acquisition of major credit platform Antares Capital, and was recognized as a smart and disciplined investor who also possessed a combination of strong leadership skills and strategic sense.

Graham is one of three CPPIB executives on the board of Antares, which was purchased in 2015. He described the in-house investment process that drove that acquisition as a guide to what can be expected under his leadership. Perhaps not surprisingly, the two-year process was methodical — it involved identifying a promising market segment and its key players, the writing of a research paper to back the investment thesis, and then careful observation.

“We watched the market…. When GE went to sell Antares, in many ways we’d already done all the homework,” he said. “We knew it was the market leader, we knew it was the platform we wanted to buy, and the organization was able to move (with) speed. And it’s been a fantastic investment for us.”

Indeed, Antares has been a phenomenal investment for CPP Investments.

As far as divesting from oil and gas, I'm with John Graham and his team, it's not the best long term approach and the organization was right to create the Sustainable Energy Group headed by Bruce Hogg to look at energy opportunities along the energy value chain.

Below, Deborah Orida, senior managing director and head of real assets of CPP Investments, joins BNN Bloomberg to discuss the pension's interest in renewables and clean energy as they create the Sustainable Energy Group. She says they are investing around the world and that they are well positioned for the consolidation in the conventional energy space. Watch it here if it doesn't load below.