CPPIB CEO Says No Government Influence Key to Returns

  • Canadian infrastructure investment OK if returns work: Machin
  • Country’s largest pension fund has 80% of assets abroad

Canada Pension Plan Investment Board’s success is largely due to the autonomy it’s had in making investment decisions, free of government influence, its chief executive officer said.

“If there was an actual constraint imposed on where we could invest - a constraint imposed on diversification -- that would be challenging,” Mark Machin said before a federal government finance committee in Ottawa on Tuesday. It was the first time a head of the country’s largest pension fund has appeared before lawmakers in 14 years.

Machin’s comments came just before Prime Minister Justin Trudeau’s government announced new infrastructure plans to lure investment from pension funds and global fund giants such as BlackRock Inc. In a fiscal update Tuesday, the government unveiled C$81.2 billion ($60.8 billion) in new infrastructure spending over the next 12 years and the creation of the Canada Infrastructure Bank in 2017 mandated to invest C$35 billion over the coming decade.

Machin said the fund has felt no political pressure to invest in Canada. "I don’t think there was political pressure and I think we emphasized that the model has worked well so far," Machin said in an interview after his testimony. "The proof is in the pudding."

Canada Pension has used its freedom to reduce risk by diversifying geographically and across asset classes, Machin said. Fully 80 percent of its investments are now abroad. The fund, which had C$300.5 billion ($245 billion) under management at end of the last quarter, returned a net 16 percent in 2015, its best year on record, Machin said. It has had an annualized 7.5 percent net return for the past decade, according to a spokesman.

Fund Expansion

The fund would consider investing in Canada’s expanded infrastructure plan, provided the returns were adequate, Machin said. He said he supported any efforts that would create more opportunities of scale for Canada Pension in Canada and abroad. 

There was plenty for investors to like in recommendations the government received from the Advisory Council on Economic Growth last month, Machin said. In particular, he supported the recommendation by the council to move to a so-called ‘flywheel’ reinvestment plan, akin to Australia’s.

In Australia, the federal government has committed 15 percent of the sale price of infrastructure assets to state governments that are dedicated to new infrastructure projects. The advisory council recommended Ottawa create a system of reinvestment so that private capital can buy or take stakes in existing infrastructure as well.

Need Proof

He said private investors need proof of a pipeline of potential investments to dedicate resources and people to the government’s plans, which was another recommendation of the council. Canada Pension typically tries to find infrastructure investments of at least C$500 million. “There’s just not been enough of those scale opportunities,” he said.

In addition to building out infrastructure, Prime Minister Justin Trudeau is also finalizing a trillion-dollar cash expansion of Canada Pension which which oversees the retirement savings of 19 million Canadians.

The expansion, to be rolled out from 2019 to 2025, will leave the fund on pace to reach C$2 trillion by 2045 -- double its original value. The plan will essentially create a two-stream system called “CPP 1” and “‘CPP 2.” While the original plan can take on more risk because of its structure, the new program is required be fully-funded and therefore will need to carry a lower risk profile, Machin said, adding his team is prepared to manage the additional funds.

Rising Costs

Canada Pension has come under fire for rising costs as it’s shifted toward active management in recent years. The active investment strategy, which includes investing in real estate, infrastructure, and other private investments as well as stocks and bonds, has returned C$17 billion more to the plan than if it remained as a passive investor, Machin said.

Machin said the fund takes its costs seriously, and that more than half of its expenses are related to fees paid to external fund managers. Canada Pension only employs external managers when it doesn’t have the capabilities to run the assets itself or they would cost too much to develop, he said.

The preference is to manage them internally. If Canada Pension had used external fund managers for C$16 billion in infrastructure investments it made in recent years, it would have cost up to C$700 million in fees. It costs less than a tenth of that to do it internally, he said.

"If we think we can make additional money for our pensioners over and above what we could do ourselves after all those costs, we’d be foolish not to, ” Machin said. “We’d be giving up opportunities that can make money for our pensioners.”

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