CPP Investments' CEO on the State of the Fund in December 2022

CPP Investments posted President and CEO John Graham's end of calendar year letter where he shares why 21 million Canadians can take comfort knowing that CPP Investments is resilient and the foundation for their retirement is in good hands and why they remain cautiously optimistic about the year ahead:

This has been a challenging year for many Canadians.

The lingering global pandemic, prolonged war in Ukraine and other global conflicts, persistent inflation and the steady rise of interest rates continue to concern us all.

At our recent public meetings held across the country and virtually, you told us how these issues and more were directly impacting your lives.

We want to assure you that the Canada Pension Plan Fund is strong and the future value of your benefits remains solid. As one of the 10 largest and most enduring pension plans in the world, we are built to weather all types of economic and geopolitical pressures, just like the ones we face today.

Keeping a clear purpose

While we can’t predict what exactly will happen in 2023, we believe these challenges will continue. Canadians can take pride in the fact that their Plan is backed by a fund that has a universally admired and respected business reputation and is managed by investment professionals dedicated to maximizing the returns of the Fund without undue risk.

CPP Investments’ purpose is to help improve the financial security of Canadian retirees. This purpose, from which we never waver, helps us manage risk and build resilience in difficult times. We expect periods of uncertainty; we plan for them and have designed the Fund to withstand exactly these kinds of pressures.

Due to the cyclical nature of markets, some quarterly or annual declines in returns are inevitable. That’s okay. Market cycles can last several years, but we invest with a 75-year time horizon.

While the value of our assets may fluctuate over that 75-year period, our investing approach and risk management help to ensure the overall trend is positive. Our most recent 10-year annual return is 10.1% and the Fund is now C$529 billion dollars.1

Operational Highlights

  • Committed portfolio and operations to net-zero by 2050.
  • Rated the world’s most transparent pension fund by the Global Pension Transparency Benchmark.
  • Held our 10th Annual Living our Guiding Principles Day, where more than 2,000 employees gathered to discuss what it means to operate with integrity, partnership, and high performance.

Big Deals

  • After a 10-year investment, we exited our 37% stake in Australia’s AMP Capital Retail Trust at a transaction value of C$2.0 billion.
  • Expanded our investment in Ports America to become the 100% owner of North America’s largest marine terminal operator.
  • Completed France’s first commercial-scale offshore wind project, the 480-megawatt Saint-Nazaire Offshore Wind Farm, alongside EDF Renewables and Enbridge Inc. The wind farm will produce the equivalent of the consumption of 700,000 people with electricity every year.

Active management is a strength

One of our greatest strengths is our active management approach, a style of investing that enables us to exceed market returns. Rather than buying a benchmark basket of securities and letting it rise and fall in line with the market, we search worldwide for the very best investments. We invest in all major asset classes and have the ability to invest in the largest economies across the globe. We seek to own significant positions in companies that we believe have the potential to outperform over the long term.

Leaders in sustainable investing

Despite today’s market challenges, we recognize the importance of sustainability to long-term value creation.

That’s why earlier this year, we committed CPP Investments to net-zero greenhouse gas emissions by 2050. This decision was made only after significant study of what this commitment would mean for our organization and its investment activities. It’s worth noting that more than 10 years ago, we started to incorporate climate risk into how we manage the portfolio. Over the past two years, we’ve expanded that to now view all opportunities with climate impacts in mind.

This fall, our new Chief Sustainability Officer, Richard Manley presented our Framework to help companies develop transparent, credible plans to reduce their greenhouse gas emissions. This will help us create and protect the value of the Fund, as the whole economy transitions to net zero. You can read more here.

What this means for Canadians in 2023

We remain cautiously optimistic about the year ahead. Yes, we’re in for a bumpy ride, but market volatility is inevitable. It’s how speculative bubbles are deflated, and expectations reset. We’re confident our portfolio will endure the ups and the downs and, when prices for attractive assets decline, position us to take advantage of the long-term opportunities that emerge.

Canadians benefit from one of the most advanced pension systems in the world. We’re proud of the foundation that Canada has created, and we at CPP Investments fully intend to protect it, so that today’s contributors and beneficiaries can be confident in their retirement security in the future.



1 As at September 30, 2022.

This is an excellent letter from John Graham reassuring Canadians about the state of the CPP Fund.

At the beginning of the month, John wrote a comment for the National Post on how Canadians should rest assured, Canada Pension Plan is resilient despite today's choppy markets.

I covered that comment and more here, going into detail on why the CPP Fund is resilient and well positioned during these challenging times:

[...] as the publisher of a blog that has focused on pensions since the Great Financial Crisis erupted in 2008, I can tell all Canadians that the CPP Fund and all of Canada's large pension funds are doing very well and they will weather any storm that comes our way.

There is one caveat, however, as long as governments never mingle in any way with our large pension funds and they maintain their independent governance model, you can rest assured your retirement benefits will be there over the long run.

So what is the secret to their success? Well, it's not hard to explain to any novice investor.

You see, most Canadians invest in tax-free savings accounts (TFSAs) and registered retirement savings plans (RRSPs) and they also pay down a mortgage on their house to live there and hopefully sell it at a much higher price when they retire to downgrade to a smaller house/condo or rent an apartment.

Whatever the case, retail investors can only invest in stocks, bonds, GICs, mutual funds, ETFs, all of which are public market investments. This works well when we are in a secular bull market.

They can't invest in elite hedge funds, private equity funds, commercial real estate, infrastructure, timerbland, farmland and private debt. 

Moreover, they typically invest in Canada or the US, not all over the world.

Because CPP Investments is a large institutional fund, it invests across public and private market assets all over the world.

Moreover, because they hire and pay professionals excellent compensation, they are able to internalize costs as much as possible and co-invest with top funds on large transactions or just invest directly in infrastructure, real estate and private equity.

When markets get rattled, you should be happy for your retirement, you might suffer steep losses in your personal portfolio but rest assured the guys and gals working at CPP Investments are taking advantage of dislocations across public and private markets to invest over the long run to generate great long-term returns.

That's it, that's what it's all about, diversification across public and private markets all over the world and internalizing costs as much possible to benefit from compound return.

The only private investment retail investors can invest in is their house and that works well in periods where interest rates and inflation are low and house prices keep going up, not so well when the opposite is true.

Now, CPP Investments or the CPP Fund isn't immune to global economic downturns or if stocks and bonds get crushed like in the first half of 2022. It will also suffer losses.

Having said this, its active management strategy is centered mostly around private markets and dislocations in public and private markets, so when things go really bad, it tends to lose a lot less than the typical market indexes which it measures its performance against.

The trick is not losing as much money as stocks and bonds when the hurricane hits, and being able to generate steady returns in private markets like real estate, infrastructure and private equity.

That trick, by the way, goes for any investor or trader, you want to limit the downside risks when it hits the fan, but the advantage of a large, multi-billion dollar fund like CPP Investments is it can wait a long time for investments to turn positive and invest alongside the best investors in the world. 

So, trust John Graham when he tells you because of CPP Investments’ distinctive mandate and approach, and I would add comparative advantages, it leaves them well positioned to navigate bumps in the road.

And if you don't believe me or John Graham, you should trust Canada's Chief Actuary, Assia Billig, and her team which are in charge of making sure the CPP Fund is sustainable over the long run. 

You can read the latest presentation from our Chief Actuary on the CPP here and the latest report on the sustainability of the CPP here (a new report will be out soon).

One last caveat on John Graham's comment above.

I recently went over CPP Investments' Q2 results in fiscal 2023, explaining the difference between base and additional CPP.

It is true that long-term results are what count and CPP Investments' five-year and 10-year annualized net returns of 8.5% and 10.1%, respectively are well above the required actuarial rate-of-return.

The only thing I'd caution is to prepare for lower returns over the next ten years across both public and private markets, so those long-tern returns will be coming down but they will remain above the actuarial hurdle rate and that's what ultimately counts for the sustainability of the Canada Pension Plan over the long run.

What else?

CPP Investments has been bracing for a downturn and bolstering its One Fund approach for some time now.

I'm more certain than ever, and these are my opinions based on my analysis on markets and global economies, that we are heading toward the deepest and most prolonged global recession/ bear market since 1973-74.

[Note: I have dreams of Ray Dalio circa 2005 asking me: "What's your track record?" Well, I called the 2008 crisis back in 2006 and it cost me my job as everyone thought I was too negative, and I am even more confident that 2023-24 will be an even bigger disaster]

What does that mean? It means global stocks markets led by the US market will get dinged hard in the first half of next year as we enter what I call the real bear market and it will be painful.

If you paid attention to Fed Chair Jerome Powell this week during his presser, we have to accept that higher for longer is the new norm

Sure, the Fed is approaching the end of its tightening cycle but it isn't pivoting any time soon. It will most likely raise another 50 basis points and then pause for a while.

The big risk next year is inflation pressures begin to subside and then pick up as wage inflation intensifies, forcing the Fed to raise more as unemployment spikes.

This is what happened in the 1970s:

Will it happen again? I don't know for sure but I'm astounded that some well-known hedge fund managers are calling on the Fed to raise its inflation target from 2% to 3% stating 2% is no longer credible or achievable given structural inflation:

Bill Ackman displays serious economic ignorance here and doesn't understand what a slippery slope the Fed would be entering if it took his monetary policy advice. 

Imagine if the Fed raised its target to 3% then wage inflation picks up. Will he be asking the Fed to raise it to 5% and then when the bond market explodes and equities crash, what will he say then?

Ackman needs to focus on his fund's performance and delivering high risk-adjusted returns, his monetary policy recommendations are total nonsense as far as I'm concerned.

The Fed will achieve its 2% inflation target and it will do this through a hard landing.

A soft landing is a pipe dream right now and I will get into a debate with any permabull who thinks otherwise (more tomorrow when I cover markets).

So, what does a prolonged and deep recession and a prolonged bear market mean for the CPP Fund and all of Canada's large pension funds?

Well, they're not immune to what is going on in markets but because they invest across public and private markets all over the world, they're more diversified than retail funds and they can use their liquidity and long investment horizon to take advantage of dislocations as they arise.

And there will be plenty of dislocations across private and public markets next year, rest assured of this.

I'm very confident that CPP Investments and other large Canadian pension funds will weather the storm ahead, they will be very busy investing next year, capitalizing on opportunities as they arise.

Over the next five years, they will produce significant risk-adjusted returns but lower returns than in the past as rates will normalize and remain elevated.

Also, if my worst fears come to fruition and we enter a prolonged recession/ bear market, then it will be the toughest environment Canada's large pension funds will face in decades.

A lot of the juniors on staff have never lived through or experienced the pain of a nasty bear market.

John Graham and I discussed this in June when he came to town and was kind enough to meet me.

He's a very experienced leader who knows we are heading toward a very difficult environment.

This is why I will advise all of Canada's large pension funds to stop ageism and hire experienced people who have lived through bear markets and have the intestinal fortitude to live though another one, a much nastier one.

As I stated last Friday, this time is different, it will be much worse!

I mean it but hopefully it won't ruin our holiday season.

And trust me, I'm no permabear, I see amazing innovation taking place over the next 20 years and remain hopeful and bullish over the long run but the big bubbles are deflating, including the lunacy in the crypto space.

Alright, let me end it there.

Below, as 2022 comes to a close, listen to the December 2022: State of the Fund message from John Graham, CPP Investments’ President and CEO. John shares his views on how their clear purpose, active management strategy and sustainable investing leadership helped them navigate this year’s challenges, and why they remain cautiously optimistic about the year ahead.

I'm not optimistic about the next couple of years, I am far more optimistic that the CPP Fund and all of Canada's large pension funds will be able to weather the storm ahead and will capitalize on opportunities across public and private markets all over the world, delivering stellar long-term risk-adjusted returns.