Putting a plan into action

Mark Machin, CEO of the Canada Pension Plan Investment Board, reveals how Canada’s largest pension fund limits risk and enhances returns

Putting a plan into action

As the head of the investment arm of the Canadian Pension Plan, Mark Machin bears the responsibility for ensuring the long-term sustainability of Canada’s largest pension fund. The Office of the Chief Actuary has predicted that the CPP will be viable for the next 75 years, assuming a 3.9% real rate of return. Currently, the CPPIB’s 10-year annualized real rate of return is 5.3%, which suggests Machin and his colleagues are succeeding in their remit.

Addressing advisors at the recent Advocis symposium in Toronto, Machin discussed the “confidence deficit” affecting this country – specifically, the fact that, according to a recent CPPIB study, 64% of Canadians believe the Canada Pension Plan will not be there for them when they reach retirement.

Such a high number is concerning, especially considering that the same research revealed that 42% of working-age Canadians expect to rely heavily on the CPP when they retire. That figure is inextricably linked to people’s attitudes about money – and in particular, how much they’re saving for retirement.

A World Of Debt
That Canada has an issue with personal debt is no secret, and it’s something Machin and the CPPIB keep a close eye on.

“Housing debt and personal debt in thiscountry are very high – a record high, in fact,” Machin says. “Canadians have $1.69 of debt for every dollar in disposable income. It’s something we need to be aware of when making investments in Canada. We have to make sure we don’t have all our eggs in one basket, so we diversify around the world – not just across asset classes, but across strategies, too.”

Machin assumed his current role after  serving as senior managing director and president of CPPIB in Asia. He already had a high level of expertise in that market, having overseen Goldman Sachs’ capital markets, financing and investment banking divisions on the continent. Machin’s time in Beijing and Hong Kong made him a good fit for the top job at the CPPIB, which is truly global in its outlook.

When it comes to attitudes about money, Machin does see differences between Canadians and other nationalities.

“In Asia, there is a very high savings rate,” he says. “People have been through tough times and think about their retirement from a very young age. That means not taking on too much debt and saving your income. When you have generations that have only seen good times, they tend to save less. Racial or national stereotypes are less relevant than the experiences people have been through.”

Responsible Investing
In terms of investment strategy, diversification is paramount for the CPPIB. Currently, the fund’s highest concentration is in foreign developed market public equities (27%), while Canadian equities account for only 3%. Although Canada’s economy is currently performing well, there are headwinds that can’t be ignored, particularly when you’re investing $382 billion on behalf of 20 million people.

Another important asset class for the fund is infrastructure, which accounts for 7.7% of total investments and acts as an important counterpoint to its equity exposure.

“We want long-term, stable cash flow that protects us from inflation and that we can rely on,” Machin says. “We generally don’t invest in projects that are higher-risk – we have very little greenfield, for example, where there is construction, regulatory and permitting risk. We generally invest in brownfield projects, where we have a fairly wide range – power investments in the US; toll roads in Canada, Mexico, Chile and Australia; water utilities in the UK.”

Most recently, the CPPIB and Goldman Sachs banded together for a $950 million investment in Peruvian private equity firm Enfoca. The CPPIB commitment amounted to $380 million, reflecting its confidence in the progress of the Andean nation.

“Looking at South America, we have substantial real estate investments in Brazil that have done quite well,” Machin says. “In Peru, we have investment in private equity, and we also own half of the major gas pipeline that brings all the industrial gas into Lima. That has been a terrific investment for us.

Peru is very sensibly managed as a country.”

Aside from diversification, environmental, social and governance [ESG] factors are a crucial part of the CPPIB’s investment ethos. The organization publishes a sustainable investment report annually, focusing on the four areas of water, executive compensation, labour rights and climate. And, as Machin explains, whenever the board makes an investment in a company, it is far from a silent partner.

“We take our responsibility seriously, and when we are an owner, we exercise all our proxy rights,” he says. “We voted on almost 52,000 items in 50 different countries last year. Every investment we make, we look at through an ESG lens.”

Governed by the Canada Pension Plan Investment Board Act, the CPPIB’s primary function is to maximize returns without undue risk of loss. This isn’t mutually exclusive to high ESG ratings; in fact, the twocomplement each other quite well.

“If you invest in things that are sustainable, then generally the returns will be there in the long term,” Machin says. “It is making sure the companies you are investing in are continuing to improve their environmental, social and governance capabilities. We engage with a company and tell them where they need to improve. That’s one of the responsibilities we have as an owner. The world has gone too far into index funds, with people not necessarily exercising those responsibilities. We think we have a pretty important role to play to make sure that companies hear our views.”