A Conversation With Deb Orida on PSP Investments' Fiscal 2023 Results

James Bradshaw of The Globe and Mail reports federal pension manager PSP Investments looks to private assets, braces for economic slowdown;

The chief executive officer of Ottawa’s Public Sector Pension Investment Board is looking to private credit markets for attractive returns, as she braces for an economic slowdown and “sticky” inflation that could keep interest rates higher.

Deborah Orida, who joined PSP Investments as CEO last September, said the conditions are right for investments in private loans to companies feeling pressure from rising expenses, high borrowing costs and a broader pull-back in lending by some banks.

PSP Investments, which manages pensions for the federal public service, Canadian Armed Forces and the RCMP, earned a 4.4-per-cent return on its investment in its last fiscal year, which ended March 31. That beat the performance of a reference portfolio of stocks and bonds set by the federal government, which gained 0.2 per cent, and PSP Investments’s own internal benchmark, which lost 2.8 per cent.

Over 10 years, PSP Investments’s annualized return is 9.2 per cent, which also beat the reference-portfolio return of 7.6 per cent.

“Our diversified portfolio is well positioned for the risk of economic slowdown, which we do think may happen this year,” Ms. Orida said in an interview. “We think that inflation’s probably a little bit more sticky than the market is expecting and therefore rates are likely to remain high.”

In a tough year for stocks and bonds, the plan’s results were propped up by gains from exchange rates on foreign currencies and strong results from investments in private assets, most notably private credit and infrastructure.

About 40 per cent of PSP Investments’s portfolio is denominated in U.S. dollars – a “safe-haven currency” that helped insulate its results against pressures from a souring and volatile economic environment, Ms. Orida said. Currencies contributed 5.8 per cent to PSP Investments’s net return for the year.

At the same time, PSP Investments’s $29.4-billion infrastructure portfolio, which invests in assets such as toll roads, utilities and communications systems, generated a 19-per-cent return. And its $26.1-billion credit portfolio, which invests in debt issued to companies by non-bank lenders, gained 13 per cent. Both results beat PSP Investments’s benchmarks by wide margins.

In private credit, PSP Investments is finding it easier to do deals on attractive terms, and sees “a great opportunity for that asset class to continue to outperform,” Ms. Orida said.

The outsized returns from infrastructure and credit stand in contrast to PSP Investments’s public stocks and bonds, which gained only 0.3 per cent in the fiscal year and were saved from an annual loss by foreign-exchange gains. The plan’s real-estate portfolio also gained only 0.2 per cent, as North American office properties have come under pressure from higher vacancy rates at a time when working habits are changing.

With central banks still raising interest rates to battle stubbornly high inflation – the Bank of Canada raised its benchmark rate by one quarter of a percentage point on Wednesday – pension plans around the world are adapting to shifting investing paradigms, as borrowing costs rise. And the continuing war in Ukraine, combined with rising tensions between China and the United States as well as Canada, are adding to uncertainty for investors.

“I do think we’re in a new investing regime where there’s uncertainties around macroeconomics, around geopolitical tensions,” Ms. Orida said.

This year, PSP Investments elected to use its existing, smaller office in Hong Kong as a regional hub for Asia, rather than opening any new offices in the region. And it has tightened the approval process for new direct investments in China, requiring sign-off from a firm-wide committee.

“We’re being selective and I think we recognize that the risks have increased in China.”

PSP Investments has formed a dedicated team that is preparing to manage the Canada Growth Fund, an initiative announced by Ottawa that aims to spur private capital in the global clean economy by using government money to reduce investment risks in new technologies.

The federal government announced in its most recent budget that PSP Investments would run the CGF, raising questions around governance and independence. Currently, the operating model and governance structures for the fund are still being finalized. But Ms. Orida said PSP Investments is “ready to hit the ground running by leveraging the expertise that we already have in house.”

Barbara Shecter of the National Post also reports PSP Investments posts 4.4% return despite 'challenging' markets:

The Public Sector Pension Investment Board (PSP Investments) generated a net portfolio return of 4.4 per cent for the fiscal year that ended March 31 despite “challenging” markets, with officials crediting a combination of private market investments, international expansion and currency exposure.

Net assets under management grew to $243.7 billion from $230.5 billion, including $10.2 billion in net income and net transfers from the federal government of $2.9 billion, with double-digit one-year returns in asset classes including infrastructure, credit investments and natural resources.  

While overall 2023 results did not reach the double-digit return of 10.9 per cent achieved in fiscal 2022, PSP Investments met a handful of financial objectives, including beating the 10-year return of a reference portfolio after costs. At the end of the most recent fiscal year, PSP’s 10-year net annualized return of 9.2 per cent exceeded the reference portfolio return of 7.6 per cent. 

It was a “challenging year for both equities and fixed income” investments, said Deborah Orida, who took over as chief executive of PSP Investments on Sept. 1, 2022 after 13 years at the Canada Pension Plan Investment Board, where her roles included running CPPIB’s real assets department, encompassing infrastructure and real estate, and a six-year stint in Hong Kong.

“These results are indicative of the resilience of our diversified portfolio, the quality of our people, and our track record of entrepreneurialism that has supported the development of market-leading capabilities in areas such as infrastructure, natural resources, and private credit,” she said.

Orida credited “forward thinking and smart execution” for the pension’s performance and said these attributes “will become even more important in the coming years.”

Eduard van Gelderen, PSP’s chief investment officer, said the decision to diversify into private markets and expand internationally provided stability amid the “exceptionally volatile financial markets” in 2023.

Foreign currency exposure, meanwhile, boosted returns as the euro and British pound rebounded, while open U.S. dollar exposure “played its expected role in mitigating the total fund’s downside risk.”

PSP’s capital markets segment, which includes public market equities and fixed income, ended the fiscal year with net assets under management of $98.5 billion, a decrease of $1.4 billion from fiscal 2022, as global equity markets were hit by a combination of factors including measures taken by central banks to curb high inflation, global political tension and shockwaves sent through the financial sector by the U.S. regional banking crisis.

Fixed-income assets ended the year in positive territory, which PSP attributed mainly to “defensive positioning with a significant short duration bias amid the general bond market downturn caused by a global increase in interest rates.”

Credit investment performance, meanwhile, was boosted by higher interest spreads and upfront fee income growth in both credit investment and private equity portfolios.

The Canadian Press also reports PSP Investments earned 4.4 per cent return for its latest financial year:

 The Public Sector Pension Investment Board says it earned a 4.4 per cent return for its most recent financial year as it faced a challenging market environment.

The investment manager says net assets under management grew to $243.7 billion as of March 31, up from $230.5 billion a year earlier, helped by $2.9 billion in net transfers from the federal government and $10.2 billion generated from net income.

PSP Investments says its gains for the year topped its reference portfolio which returned 0.2 per cent.

The results came as the fund’s capital markets investments, which includes its public market equities and fixed Income, gained 0.3 per cent, while its private equity holdings returned 3.3 per cent and its credit investments gained 13.1 per cent.

PSP Investments says its real estate holdings returned 0.2 per cent and infrastructure investments gained 19.0 per cent. Natural resources assets returned 10.9 per cent.

The board invests money for the pension plans of the federal public service, the Canadian Forces, the Royal Canadian Mounted Police and the Reserve Force.

Earlier today, PSP issued this press release stating it posted a 4.4% return in fiscal year 2023, demonstrating resilience and outperforming markets in a challenging environment:

• Appointment of Deborah K. Orida as PSP Investments’ new President and CEO effective September 1, 2022, adds new deep expertise and global experience to the pension investor’s leadership team. 
• Ten-year net annualized return of 9.2% leads to $31.8 billion in cumulative net investment gains above Reference Portfolio, indicative of long-term added value through strategic asset allocation and active management decisions.
• Five-year net annualized return of 7.9% leads to $22.3 billion in cumulative net investment gains above Reference Portfolio.
• Net return of 4.4% exceeds Reference Portfolio return of 0.2%, amounting to $9.5 billion in excess net investment gains.
• Net assets under management grows to $243.7 billion, up 5.7% from $230.5 billion at the end of fiscal year 2022.
• Continued focus on risk management supports portfolio resilience in a volatile year for investors.
• April 2022 launch of inaugural Climate Strategy Roadmap ranks among key strategic initiatives that reflect PSP Investments’ continued momentum to address climate change risk and opportunities in our portfolio and to invest in the economy transition.

Montréal, Canada, June 7, 2023 - The Public Sector Pension Investment Board (PSP Investments) ended its fiscal year on March 31, 2023, with a 4.4% one-year net portfolio return, demonstrating the benefits of diversification and active management in a challenging market environment. Net assets under management grew to $243.7 billion, up 5.7% from $230.5 billion at the end of the previous fiscal year. Net transfers received from the federal government represented $2.9 billion, while $10.2 billion was generated from net income.  

PSP Investments takes a long-term investment approach, and measures success at the total fund level through the following performance objectives:

• Achieve a return – net of expenses – greater than the return of the Reference Portfolio over a 10-year period: By the end of fiscal year 2023, PSP Investments achieved a 10-year net annualized return of 9.2% against the Reference Portfolio return of 7.6%, which represents $31.8 billion in cumulative net investment gains above the Reference Portfolio. This outperformance of 1.6% per annum represents the value added by PSP Investments’ strategic asset allocation and active management decisions.
   
• 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 2023, PSP Investments achieved a 10-year net annualized return of 9.2% against the Total Fund Benchmark return of 7.4%, and a five-year net annualized return of 7.9% against the Total Fund Benchmark return of 5.5%. This represents an outperformance of $31.2 billion over 10 years and $25.4 billion over five years.
  

During fiscal year 2023, PSP investments continued to generate strong net income despite a challenging market environment, translating into higher assets under management (AUM) at the end of the fiscal year as compared to the end of fiscal year 2022.

“In a challenging year for both equities and fixed income, PSP Investments delivered 4.4% returns for fiscal year 2023, outperforming our Reference Portfolio,” said Deborah K. Orida, President and Chief Executive Officer at PSP Investments. “These results are indicative of the resilience of our diversified portfolio, the quality of our people, and our track record of entrepreneurialism that has supported the development of market-leading capabilities in areas such as infrastructure, natural resources, and private credit. Forward thinking and smart execution have fueled past performance and will become even more important in the coming years.”

“Our strategy to diversify into private markets and expand internationally has been key to maintaining stability in exceptionally volatile financial markets,” said Eduard van Gelderen, Senior Vice President and Chief Investment Officer at PSP Investments. “Our foreign currency exposure is an important component of our portfolio construction approach. This year, it contributed 5.8% to the net return as the euro and British pound rebounded, whilst our open US dollar exposure played its expected role in mitigating the total fund’s downside risk. While we measure performance annually, our long-term results are the best indicator of our capability to fulfill our mandate. Over the last 10 years we are pleased to have generated $31.8 billion of cumulative net investment gains above the Reference Portfolio.”

PSP Investments continued to expand its capabilities and strengthened its talent pool to remain competitive on the global markets, resulting in total operating costs of $760 million compared to $612 million in fiscal year 2022. The total operating costs increase in fiscal year 2023 resulted in an operating cost ratio within range of pre-pandemic levels.

ASSET CLASS (at March 31, 2023)	NET ASSETS UNDER MANAGEMENT*	ONE-YEAR RETURN	FIVE-YEAR RETURN	TEN-YEAR RETURN
Capital Markets	$98.5B	0.3%	5.8%	8.2%
Private Equity	$37.2B	3.3%	15.6%	12.1%
Credit Investments	$26.1B	13.1%	8.9%	11.2%
Real Estate	$32.0B	0.2%	6.0%	9.2%
Infrastructure	$29.4B	19.0%	10.5%	11.7%
Natural Resources	$12.3B	10.9%	8.5%	11.2%
Complementary Portfolio	$2.2B	(0.2)%	5.8%	10.1%

 *This table excludes Cash and Cash equivalents. All amounts in Canadian dollars, unless stated otherwise.

 As at March 31, 2023:

Capital Markets, comprised of Public Market Equities and Fixed Income, ended the fiscal year with $98.5 billion of net AUM, a decrease of $1.4 billion from the end of fiscal year 2022. Public Market Equities, which uses a combination of traditional active, alternative investments and passive strategies, ended the fiscal year with a net AUM of $53.4 billion. The five-year annualized return of 7.7% outperformed the benchmark of 6.5%. This performance came as global equity markets were impacted by measures taken by central banks to curb persistently high inflation, the escalation of global political tension, and recent shockwaves sent through the financial sector caused by the US regional banking crisis. Fixed Income ended the fiscal year with a net AUM of $45.0 billion, an increase of $4.3 billion from the end of fiscal year 2022.

Its annualized five-year return of 2.4% outperformed the five-year benchmark by 0.3%. Fixed Income’s positive performance in fiscal year 2023 was mainly driven by defensive positioning with a significant short duration bias amid the general bond market downturn caused by a global increase in interest rates.

Private Equity ended the fiscal year with net AUM of $37.2 billion, up $1.8 billion from the end of the previous fiscal year, and generated portfolio income of $1.2 billion. The five-year annualized return of 15.6% outperformed the benchmark of 12.3%, highlighting the strength and the quality of the private equity portfolio, both through co-investments and funds. The growth of the portfolio was driven by $4.6 billion in acquisitions and $2.5 billion in currencies gains. During fiscal year 2023, Mr. Simon Marc was promoted to Senior Vice President, Global Head of Private Equity and Strategic Partnerships, and became a member of PSP Investments’ Executive Committee.

Credit Investments ended the fiscal year with net AUM of $26.1 billion, up $4.2 billion from the end of the previous fiscal year, and generated portfolio income of $3.1 billion. Portfolio growth during the fiscal year was mainly driven by acquisitions of $6.7 billion and foreign currency gains of $1.7 billion. The 8.9% five-year annualized return outperformed the 3.7% benchmark return. Since inception, Credit Investments’ outperformance has been driven by strong credit selection, higher interest spreads versus the benchmark, and upfront fee income. During fiscal year 2023, Mr. Oliver Duff was promoted to Senior Vice President, Global Head of Credit Investments and became a member of PSP Investments’ Executive Committee.

Real Estate ended the fiscal year with net AUM of $32.0 billion, up $0.9 billion from the end of the previous fiscal year, generating a portfolio income of $58 million. The five-year annualized return of 6.0% outperformed the 3.0% benchmark return. Fiscal year 2023 was characterized by a rapid rise in interest rates and changing market conditions that negatively impacted the senior housing sector as well as the North American traditional office sector. Real Estate’s performance was primarily driven by the global logistics and residential sectors.

Infrastructure ended the fiscal year with net AUM of $29.4 billion, a $5.9 billion increase from the end of the previous fiscal year, and generated portfolio income of $4.6 billion. The five-year annualized return of 10.5% outperformed the 4.8% benchmark return. The evolution of the portfolio was driven by acquisitions of $4.2 billion, valuation gains of $1.8 billion and $1.6 billion in currency gains, partially offset by $1.7 billion in dispositions and financing proceeds. The portfolio demonstrated strong performance benefiting from the current high inflationary environment despite generally higher discount rates. The industrials sector, more specifically the transportation sector, was the primary contributor to the portfolio’s income, while the communications sector also contributed substantially. 

Natural Resources ended the fiscal year with net AUM of $12.3 billion, a net increase of $0.7 billion from the end of the previous fiscal year, and generated portfolio income of $1.3 billion. The five-year annualized return of 8.5% outperformed the 3.1% benchmark return. The evolution of the portfolio was driven by acquisitions of $2.7 billion, net valuation gains of $0.4 billion and $0.6 billion in currency gains, partially offset by $0.2 billion in dispositions and $2.8 billion in financing. The portfolio demonstrated robust and resilient performance during a period of rising inflationary pressures, increasing interest rates and global political uncertainty.

Corporate highlights:  

In addition to delivering resilient performance, PSP Investments continued to advance its strategic objectives during the fiscal year.

Key accomplishments for the fiscal year 2023 include:

• PSP Investments’ Board of Directors appointed Deborah K. Orida as President and CEO effective September 1, 2022. Prior to this appointment, Ms. Orida spent 13 years at the Canada Pension Plan Investment Board (CPPIB), where she most recently served as Senior Managing Director, Global Head of Real Assets & Chief Sustainability Officer, and also held senior management positions in public markets and private equity. Ms. Orida joined CPPIB from Goldman Sachs in New York.
   
• We launched our inaugural Climate Strategy in April 2022, which guides our climate-aligned investment targets and active ownership activities across the total fund. We are committed to using our capital and influence to support the transition to global net-zero greenhouse gas (GHG) emissions by 2050. More information about our climate strategy and our climate-related financial disclosures is available here and here.
  

Other corporate highlights:

• We continued to develop our talent and enhance the employee experience while fostering workplace inclusivity and raising awareness around equity, inclusion and diversity.
  • We implemented and evolved our hybrid workforce model to meet changing employee and business needs.
  • We enhanced our health and well-being benefits with increased virtual and mental health support, on-demand childcare services, summer work schedules and improved paid time off policies.
  • PSP Investments continued to rank among Montreal’s Top Employers for a sixth consecutive year.
     
• During fiscal year 2023, existing PSP Investments senior management members have taken on expanded responsibilities.  Mélanie Bernier, Senior Vice President, Chief Legal Officer, added Human Resources to her responsibilities and was appointed Senior Vice President, Chief Legal and People Officer.  Eduard van Gelderen, Senior Vice President and Chief Investment Officer, added Strategic Communications to his responsibilities, bringing together our communications and government relations efforts.
  

For more information on PSP Investments’ fiscal year 2023 performance, visit our website and download the annual report.

About PSP Investments

The Public Sector Pension Investment Board (PSP Investments) is one of Canada’s largest pension investors with $243.7 billion of net assets under management as of March 31, 2023. 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 Twitter and LinkedIn.

I recommend all my readers take the time to read PSP Fiscal 2023 Annual Report here.

This report is extremely well written and well worth reading. PSP discloses a lot in here, on benchmarks, sector & geographic diversification by asset class, governance, risk management, finance, compensation and more.

Below, you will find the table of contents:

Now, earlier today I had a chance to talk to PSP's CEO Deb Orida to go over the results.

Before I get to our discussion, let me begin with Chair Martin Glynn's message:

Martin Glynn began by thanking Neil Cunningham for 19 years of exceptional service at PSP Investments and I would like to note that Neil who is now the former CEO deserves a lot of credit for these results too (he set the foundations).

Neil is now retired, enjoying playing golf but he recently joined Sagard (Desmarais' private market arm) as a member of the board of EverWest Real Estate Investors and to provide strategic direction on the development of Sagard’s real estate and real assets business:

Formerly President and CEO of the Public Sector Pension Investment Board (PSP Investments) and with over 35 years of experience, Mr. Cunningham has deep industry knowledge and expertise in the real estate and financial industries.

Mr. Cunningham joined PSP Investments in 2004 and was instrumental in building the Real Estate group into one of the world's largest, most respected and successful institutional investment teams. He also led the team responsible for Natural Resources’ success in investing globally and establishing relationships with best-in-class local operators.

I publicly stated this was a great choice and I meant it. Neil has extensive experience and can guide Sagard's EverWest Real Estate Investors during these difficult times.

What else is worth noting in Chair Martin Glynn's message? I noted this:

Changes to our Board which took place at the end of our previous fiscal year brought new perspectives to our deliberations in fiscal 2023. It’s worth noting that our Board is now comprised of six women and four men, and women chair all four of our standing committees. I wish to thank all directors for their dedication and efforts in support of PSP Investments, and specifically Timothy Hodgson, who recently left the Board, for his significant contributions over many years.

Timothy Hodgson now sits on the Board of OTPP but it is worth noting that women have taken over PSP's Board and this isn't a bad thing (boy, times have changed since my time at PSP when it was a Boy's Club running the Board and Chair Paul Cantor -- God bless his soul -- was chummy with Gordon Fyfe).

If you look at the biographies of Board members on page 80, you'll see these are very accomplished professionals who know their stuff.

I also wanted to bring PSP's Board composition up because there were announced changes recently stating that two members of the public service unions would be joining PSP's board but this hasn't happened yet.

Next, take the time to read PSP CEO Deb Orida's message:

I note the following:

These results are a testament to the quality of the PSP Investments team. Since joining the organization in September 2022, I’ve been very impressed with the people I’ve met. They bring deep expertise and experience, a global mindset and a strong commitment to our important mandate. Together, they’ve fostered a warm culture, with an intimacy to the way people interact, which I’ve sincerely appreciated – especially as I settle into life in Montréal and hone my French language skills.

During the year, I was pleased to promote Oliver Duff and Simon Marc to our Executive Committee (ExCo). Both longstanding members of our London (UK) office, Oliver was appointed Senior Vice President and Global Head of Credit Investments, and Simon was promoted to Senior Vice President and Global Head of Private Equity and Strategic Partnerships. In addition, two existing ExCo members have taken on expanded responsibilities – Mélanie Bernier added Human Resources to her responsibilities and became our Senior Vice President, Chief Legal and People Officer, and Eduard van Gelderen, our Senior Vice President and Chief Investment Officer, added Strategic Communications to his responsibilities. I am thrilled to work with a group that possesses such talent, global experience and commitment to PSP Investments.

In February, our organization was named one of Montréal’s Top Employers for the sixth consecutive year – another signal that we’re on the right track when it comes to creating a progressive workplace where people have meaningful opportunities to accelerate their development.

And this:

What has also stood out to me as I’ve come to know this organization better is its track record of entrepreneurialism. PSP Investments has been ahead of the curve in building unique businesses such as Credit Investments, where we continue to see interesting market opportunities. PSP Investments was an early mover in investing in Infrastructure, and our platform approach to both Infrastructure and Natural Resources investments has been a winning formula. It’s this kind of forward thinking and smart execution that has fueled PSP Investments’ past performance and will become even more important in the coming years.

We expect the new year to be another challenging one for investors, with central banks’ fight against inflation dominating the economy and financial markets, the ongoing war in Ukraine, and rising geopolitical tensions causing disruption and uncertainty. Working with the Board, our leadership team is planning to refresh our corporate strategy in the new fiscal year to capitalize on the opportunities that will undoubtedly arise and to position the organization for long-term success in line with our mandate.

Deb also discussed why leading PSP is meaningful to her: 

My new role holds special meaning to me, as someone whose father served with the Canadian Armed Forces.

She told me he was in the Air Force at the Trenton base and I thought that was very cool.

A few points and these are my opinions mixed with facts:

• First, PSP does have a great team across investments, finance and IT.
• Second, I told Deb it was a great move to promote Oliver Duff and Simon Marc as both are doing a great job at PSP.
  
• Credit has taken off at PSP. Gordon Fyfe told me last summer that it was Andre Bourbonnais who introduced private debt at PSP (gave him credit) and this group works closely with PSP's private equity sponsors to lend to companies they know intimately well. So I'm not surprised Oliver and Simon work in the London office. Simon has done a great job in fund investments and co-investments and his PE network has undoubtedly helped PSP Credit team structure great deals.
• What else? I must admit I was a bit shocked that Mélanie Bernier who heads Legal added HR to her duties but good for her for assuming this important role. There was no way in hell the Head of Legal during my time was going to head up HR as well (that would have been an utter disaster), but I wish Mélanie all the best in this important role. But let me be even more blunt, Canada's large pension funds can ill-afford to take the same cookie cutter approach to finding, interviewing, hiring and onboarding new members and unfortunately, there is a serious lack of originality in this area (my opinion shared by many experts and former colleagues). 
• And what about Eduard van Gelderen, the CIO, adding Strategic Communications to his responsibilities? This too is odd. But I met Eduard for lunch a few months ago and we discussed this and other things at PSP. It might seem strange that a CIO handles communications but if you meet him, you'll understand why. He has a great holistic view of PSP and can effectively communicate where it is and where it's heading (he could have easily been named CEO). One thing however I would like to see is Eduard assume the role of a full CIO, meaning all the investment heads report to him. Not sure Deb is on the same page as me but for me, Neil Petroff was the ultimate CIO and he once explained to me how he can't do his job properly with one hand tied behind his back (I fully agree which is why not every CIO has same responsibilities).
  

Alright, let me get to my discussion with Deb and commend her entire executive team:

Discussion with Deb Orida, PSP's President and CEO

As I stated above, earlier today I spoke with Deb Orida. I want to thank her for taking 20 minutes to talk to me and also than Maria Constantinescu, Director of External Communications for setting up this call on a very busy day (for both us us as I was busy overseeing my dad's move to a nice residence near my brother and I).

I have yet to meet Deb (or Charles Emond for that matter) face to face but I look forward to doing so one day (have much more important things to focus on these days than meeting pension executives).

Anyway, Deb began by giving me the overview:

As you noted, positive performance in these challenging markets. The solid results speak to diversification, active management and global operations. We are proud of the results and more importantly, a continuation of outperforming the Reference Portfolio over the long term. Over ten years, we have generated $31.8 billion of value add over the Reference Portfolio and are proud of the resilience we have demonstrated. I think our strategy of diversifying into private markets and expanding internationally has paid off and in particular you saw some of the strong performance from some of our asset classes like Infrastructure, Credit and Natural Resources.

Deb then paused and let me ask some questions. I began by asking her about Real Estate and problem areas in Office and Retail:

Let's step back and talk about Real Estate overall. It continues to be a meaningful asset class -- 13% of total assets -- and our portfolio is diversified across sectors. It as also benefited this year from the international nature of the portfolio and in particular, currency gains.

The office sector as you rightly identified has been faced challenging markets conditions and I think we did a good job this year of reflecting these market conditions in our valuation work.

I actually commended Deb and PSP for marking down some of their private markets like Real Estate and Private Equity to reflect the challenges in some sectors.

I then asked her about currency gains which figured prominently in the overall results:

 As you know, the strategy has been to invest more in private markets and expand more internationally. in the CIO Office, we not only do asset allocation but also look at the composition of our currency exposure. The currency exposure we get as part of the international nature of our portfolio is part of the portfolio design. For example, this year the US dollar which is a safe haven currency performed its expected role of mitigating downside risk during uncertain times, so we are proud of how the portfolio performed during these uncertain times.

Deb then talked about the strong results in Credit. She noted that Oliver Duff has been working at PSP since 2016 and she promoted him this year. On the performance of Credit, she said this:

You're right it benefited from geographic exposure and therefore currency gains but the direct side of the business which is 85% of the portfolio, it is 85% floating rate, so we are not hurt by the raising rate environment if it had more fixed rate exposure like the benchmark does. The other benefit we have in that portfolio is sector exposure and security selection expertise. Being a sophisticated team based in New York and London they have done a good job taking resilient businesses in software and healthcare that have performed well despite market uncertainty.  

I asked her if Credit works with private equity sponsors they work with:

It is a sponsored financed business, you're right. There is an overlap on the sponsored financed business on the private equity side and on the private credit side. This is one of those areas where PSP's relationships factor in so one plus one equals three because of the synergies between private equity and private credit teams.

As far as Private Equity, I noted the one year performance was muted because they took some writedowns:

I think the thing to look at in PE is our long-term returns -- 15.6% over five years, outperfoming the benchmark. We felt it was important to reflect the market conditions in PE, so although the one-year performance reflects that, over the long term it's a very important asset class for our portfolio.

Next, we talked about Infrastructure which delivered a whopping 19% in fiscal 2023. I noted this is an outsized return in a portfolio that typically returns half that amount (typically returns between stocks and bonds with less vol):

I will say the Infrastructure portfolio benefited from currency gain. So, I look at longer term returns for that asset class which are more consistent with expectations - so five year returns of 10.5% and ten year return of 11.7%. It's an asset class that continues to benefit from a lot of capital interested in the stability and inflation protection offered by that asset class. And I think our portfolio and capabilities are well positioned given the diversity of sectors that we are exposed to as well as the platforms that we have that allow us to leverage the management expertise and have benefit of synergies when we are looking at acquisitions.

Next, we talked about the Natural Resources portfolio which is very impressive. I said it's a unique portfolio because it is the only portfolio that has 75% agriculture in there:

Exactly, I know the franchise we built there by partnering with families and working with their local expertise to give them the capital to expand their land portfolio and where appropriate their processing capabilities has been a real strength of PSP.

I ended by asking her how she feels being at PSP since September, what are the risk she sees and given her expertise in Real Assets and Sustainable Finance, what are the strategic directions she would like to take PSP:

I would say one the great upside surprises for me because I didn't know that many people at PSP when I was at CPPIB is the depth of talent. The number of people who have been here from the beginning and had an entrepreneurial spirit and built unique franchises like our Natural Resources portfolio or our Infrastructure capabilities or Private Credit we started at 2015. The level of investment expertise and opportunities we have as a global organization based in Montreal, we will continue to develop that expertise by letting people go work in our a London office and coming back to bring that perspective back to Montréal.

 Deb then impressed me with her French which she is learning and doing well.

She went on saying this about taking things to the next level:

We have great starting point We have some unique franchises and some great people and as you often pointed out, a very important mandate. I'm excited about the future and as we said in our annual report, we are working on our strategy and will be releasing it throughout this fiscal year. 

Deb also told me they will be releasing their sustainability report this fall.

I ended it off there and thanked her once again for taking the time to talk to me.

Deb is a really smart lady and she communicates effectively, always staying on message and she seems genuinely happy to be n Montreal and is her family and that's important.

Again, please take the time to read the annual report here and read a lot of the details and material I do not have the time to cover properly here (there is a lot of disclosure there).

Speaking of disclosure, here is the executive compensation table:

I will only say this, compensation is based on long-term results and as you can see from Neil's total compensation, it looks to me at least that $5 million seems to be the upper limit for now. 

As far as Deb, she deserves every penny as she left a high profile/ high paying job at CPP Investments to take on these responsibilities.

The other thing I will say about PSP's comp, similar to CPPIB's, its' very clear, the benchmarks are clear, the formula is clear, and we can argue whether Infrastructure massaged its figures in fiscal 2023 but the truth is, as Deb said, it's always long-term performance that counts.

Below, BNN Bloomberg's Paul Bagnell explains why the Bank of Canada increased its overnight rate by 25 basis points. No surprise to me and despite talk of a rate hike skip in June, I expect the Fed will also raise rates and this will profoundly impact markets and the economy in the second half of the year. 

Also, Frances Donald, chief economist at Manulife Investment Management, and Conference Board of Canada chief economist Pedro Antunes talk about the central bank's rate hike to 4.75 per cent.

Lastly, Senator Clement Gignac discusses the latest increase from the Bank of Canada on Zone Economie (in French). 

Update: Barbara Shecter of the National Post did an interview with Deb Orida on how she is navigating tumultuous markets:

Pension veteran Deborah Orida took over as CEO of the Public Sector Pension Investment Board (PSP Investments) in the middle of a tumultuous year for markets. Orida, who joined PSP in September after 13 years at CPPIB, helped navigate those choppy waters, guiding PSP to a 4.4 per cent net return for the fiscal year ending March 31. Orida spoke the Financial Post’s Barbara Shecter about how her strategy for the $243.7 billion fund will be shaped by turbulent times, both economically and geopolitically. This interview has been edited and condensed.

FP: Now that you’ve been in the job for a bit, what’s your take on the road ahead, especially in this environment?

DO: Positive returns in challenging markets are good. And I think what it really reflects is the diversity of our portfolio, the deep expertise of our investors and the global nature of our portfolio. Our strategy (has been) to diversify beyond public markets into private asset classes, some of which have performed very well this year, as well as to expand internationally. As a result we benefited from, for example, exposure to safe haven currencies like the U.S. dollar, which performed their expected role of mitigating some of the downside risks in challenging environments.

FP: How did PSP benefit from currency exposure and areas such as infrastructure and private markets, which have outperformed public markets, stocks and bonds? Do you see that outperformance continuing?

 

DO: Let me start with infrastructure. The one-year returns are spectacular at 19 per cent. But I think what’s more indicative is the ten-year performance at 11.7 per cent. I do think it’s an asset class that will continue to perform well in this market because it benefits from inflation protection and stability. So we continue to see a lot of interest from other investors in that market.

FP: Where else do you see opportunities and/or a competitive advantage right now?

DO: The other one that I would talk about is natural resources. I think this is a pretty unique franchise that PSP has, with over 70 per cent of that portfolio based in agriculture, which gives us a diversified exposure that has served us very well this year and over the long term as well. We have built this business where we go out and we partner with families, we leverage their local expertise and their farming expertise to be able to build out their land base or accumulate more land and, in some cases, add post-farm processing capabilities that add to the value of the investment. It’s a unique franchise and it’s been performing well for us. 

 

FP: Let’s talk about private credit, which has been a hot market and a hot topic lately, with many anxious to see how the asset class performs amid rising interest rates.

DO: Our private credit franchise is another one that I’m proud of. We established it back in 2015, and it has an (annualized) 11.2 per cent return since inception. And the portfolio performed well this year, even in a rising-rate environment, because about 85 per cent of the direct portfolio was floating rate. And we have the benefit of deep expertise. There’s a big team New York, a team in London, that have a track record of picking good businesses.

FP: How are the borrowers managing with floating rates? Any signs they are overstretched? Any areas of distress?

 

 DO: Our team does pick good businesses but when you look at the underlying sector exposure, I think the portfolio is also well positioned. So, for example, we have good exposure to health care, to technology, to businesses that are well positioned, I think, even in an uncertain economic environment. But, as you might imagine, we continue to monitor the portfolio, we’re looking at the interest coverage of all the positions in our portfolio. And I think the exciting thing is that we’re seeing really interesting new investment opportunities in private credit (with) double-digit all-in returns, top of the capital structure, lower leverage, better terms — taking the opportunity to take advantage of when the banks are being more cautious. 

 

FP: We’re hearing a lot about how credit is tightening at U.S. banks? So you are seeing business sort of booming, if I can put it that way?

DO: I wouldn’t say booming as the transaction volume in private equity (and) credit is lower. But it’s an uncertain market environment where only the best businesses, only the recession-resistant businesses are getting financed.

FP: And how does PSP make sure you get the other end of those transactions?

DO: I think structurally, we have the advantage of being long-term investors. Specifically, I think that the capabilities that we have in interesting markets like private credit, like natural resources and our platform strategy in infrastructure are real competitive advantages for us. 

 

FP: Another area we’re hearing a lot about when people discuss vulnerabilities in the current macroeconomic environment is real estate. How is PSP positioned to handle that, particularly commercial real estate?

DO:  Real estate is a meaningful part of our overall diversified portfolio. This year, we took a hard look at the valuations reflected in the change in environment for some areas, like office, but we also have good exposure to some areas that are benefiting from the environment, like logistics, like multifamily. So it’s a balanced portfolio.

FP: What about your geographical diversification? Any changes planned there in light of some of the new and emerging geopolitical risks around Russia and China?

 

DO: About 60 per cent of our portfolio in North America, between Canada and the U.S., about 17 per cent is in Europe and 17 per cent in Asia Pacific, including Australia. We do recognize that geopolitical tensions have increased and I think our approach to Asia, in particular, will allow us to be selective across the entire region. So we made the decision this year to build off our existing presence and have the one regional hub (in Hong Kong) that will allow the team to be selected across the region. I spent six years in Asia for CPPIB, so my observation is it is interesting but a complex market that presents both risks and opportunities and the best strategy for that region is to position yourself to be selective and be able to choose the best risk-adjusted return opportunities across the broader region.

 

FP: Some Canadian pensions have announced pausing direct investments in China for now, given the risks there. Does PSP have a stated policy on China?

DO: We haven’t made a public announcement, but we do recognize that the risks have increased. China is a small part of our portfolio, it’s about three per cent, but as a result of the increased risks, we have elevated the requirements for new private investments. So any new private investment has to come up to the top (to the) firm-wide investment committee.

FP: But you could do a direct investment if it came to the top and the risk-reward was seen to be there?

DO: What I would say is that having a team based in Hong Kong and looking across the region for opportunities, frankly, we’re seeing better risk-adjusted return (private equity and carbon) opportunities in places like … Japan, for example, India, Australia. There are other markets that we can look and where we’re seeing interesting opportunities. 

 

FP: Can you talk about where else geographically or what sectors you’d look for over the next year or so?

DO: We continue to be interested in what we call high inflation correlated assets (like infrastructure) and, in developed markets, we also continue to pursue and invest in the energy (and) renewables portfolio. One of the newer interesting areas that we invested in this past year is offshore wind.

FP: You’re adjusting to a new organization. Is there a big difference between CPPIB and PSP?

DO: I’d say there’s a lot of similarities, but PSP has some really unique franchises like the natural resources franchise, like the strength of our private credit, business, and this entrepreneurial spirit that I think is really valuable to the organization. 

 

FP: What are you expectations for the economy over the next year and how is that playing out in your investing strategy? Are you expecting more of the same volatility?

DO: We expect that there will be a mild recession in developed markets, in the U.S., maybe slightly in Europe, and stronger recovery in China. But overall, we’re positioned for thinking inflation will be a bit more sticky than the market is anticipating and therefore rates will remain high. You know, the market is obsessed with the Fed interest rate pivot, but I think we’re taking a more balanced approach to when central banks will switch from raising to lowering rates. And I think the diversification of our portfolio will continue to serve us well. Our view is that although inflation has come down, it will be a bit sticky because of some of the structural inflationary pressures and so as a result rates will stay higher for potentially longer than the market is expecting.

Lastly, Michelle Ostermann has recently left the organization and a replacement has yet to be announced.