John Graham, President and CEO of the Canada Pension Plan Investment Board, speaks during the Annual General Meeting and Convention of the Canadian Chamber of Commerce in Ottawa on October 14, 2022. Sean Kilpatrick/The Canadian Press
With 2023 set to be another volatile year for investors, the managing director of the Canada Pension Plan Investment Board, John Graham, is in a picky mood.
The CEO of the $529 billion pension fund manager sees 2022 – marked by COVID-19 lockdowns, Russia’s invasion of Ukraine, supply chain disruption, high inflation and the rising interest rates – in the rearview mirror.
The new year doesn’t look much easier at first. But in an interview at CPPIB’s Toronto office, Graham predicted that 2023 could mark a shift to a different investment landscape where the pension plan asset manager could leverage its financial clout and its global reach.
He calls it the start of the “alpha decade” – a time when active investors, with the luxury of choice of country, company and asset, should be able to beat benchmarks and to distinguish oneself.
Over the past 20 years, Graham says, investors of all persuasions have largely benefited from a series of tailwinds that have benefited the global economy. These included cheap lending rates, low inflation and, in hindsight, a relatively supportive political environment. Combined, these factors have created a rising tide for investors, and passive investing strategies have grown in popularity.
As each of these factors has reversed, investors are reassessing risk, deals are harder to come by, and financing is not always readily available. Investors are suddenly taking more diverse approaches to allocating their money. And with government bonds offering generous yields for the first time in years, “there are options now,” Graham said.
Canada’s largest pension plans are increasingly investing in offshore wind projects
“We see the next decade as the decade of value creation, the decade of alpha,” he said. “Because of this tailwind, simply harvesting market returns has been a very successful strategy over the past 20 years. And right now it’s all about choosing your spots. It’s about choosing the right regions, the right asset classes and the right stocks.
In the long run, he added, “it actually offers the opportunity to build a bit more interesting portfolio.”
The CPP administers funds for the Canada Pension Plan, the main national pension program for Canadian workers, which has approximately 21 million contributors and beneficiaries. Since its inception in 1997, CPPIB has taken an increasingly active management approach, shifting more of its investments into assets such as real estate, infrastructure and private equity in addition to stocks and bonds. public bonds.
The first six months of CPPIB’s fiscal year were challenging, with assets down 4% to $529 billion as of September 30. This is a better result than some relevant benchmarks, as the sell-offs caused some stock markets to fall by double-digit percentages.
Over the past 10 years, CPPIB has returned an average of 10.1% per year.
Prior to being named chief executive in 2021, Graham led CPPIB’s lending business, which includes private loan investments in businesses that are beginning to feel the effects of rising interest rates. Much has been made of the valuation gap between listed assets, which in many cases have fallen sharply, and private assets, which have been slower to adjust. But Mr Graham said the Office has been ‘fairly disciplined’ in assessing its portfolios against the markets and does not expect deep discounts ‘based on what I see now’.
He also said many businesses are responding well to the higher borrowing costs that come with rising interest rates. “So far we haven’t seen a lot of stress to be honest. Many companies are doing well.
Despite the many challenges rocking the markets, he also listed some positive signals that are boosting investor sentiment: a reopening in China after the draconian COVID-19 lockdowns, a gradual drop in inflation, a relatively warm winter in Europe , easing pressure on energy supplies and a strong start to the year for stock markets.
However, Mr Graham said the economic dynamics shaping the global investment landscape are more complicated than they have been in recent years. “There is now a national security lens, a national interest lens, applied to economic and industrial policy. It’s not just about maximizing profits. There are other factors at play,” Graham said.
In this regard, he said it was particularly important to be “a bit surgical” when it comes to prioritizing countries and knowing how to invest there, including which sectors to focus on. The Office has eight offices outside of Toronto, from New York and London to Hong Kong and Mumbai.
“Our appetite for a particular country comes and goes based on the opportunities we see at this point,” Graham said. “For now, we are quite comfortable with our exposure to emerging markets.”
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