In a chaotic fiscal yr marked by warfare, rising rates of interest, excessive inflation and market volatility, Canada’s greatest pension fund supervisor CPP Investments posted returns of 1.3%. Despite headwinds, it continued to spend money on the Indian market, increasing its portfolio by 11% to C$22 billion (US$16.7 billion) in FY23. John Graham, president and CEO of CPP Investments, spoke to Swaraj Dhanjal & Arijit Barman concerning the fund’s efficiency, the altering funding panorama, India’s potential and company governance in startups comparable to Byju’s the place CPP is an investor. Graham, an MBA from the University of Toronto and a PhD from the University of Western Ontario, joined CPP in 2008 and assumed cost of the pension fund’s world credit score investments in 2018 earlier than taking on as CEO in 2021 after the exit of his predecessor throughout Covid. Edited excerpts:
In the final one yr, we now have seen a warfare, market volatility, price hikes, predictions of a US recession. We’re kind of taking a look at a complete new world – a brand new regular – so to talk. How do you see the world within the final one yr from the prism of CPP?
Over the previous 20 years, we had a very constructive investing setting typically – declining rates of interest, low charges, fairly low inflation, benign geopolitical setting and a worldwide financial system that was very eager on globalisation. Fast ahead to at the moment, we now have greater charges, sticky inflation, geopolitical tensions proper within the coronary heart of Europe and development charges around the globe being a bit of bit decrease than they have been traditionally.

So the query that I feel lots of people are asking is, is that this the brand new regular? What’s cyclical versus what’s secular?
And how does one spend money on a market going ahead, the place we may have greater charges for longer, inflation that may most likely flare up periodically, and only a extra complicated geopolitical backdrop. Overlay that with international locations around the globe totally engaged in industrial coverage of making an attempt to cultivate strategically delicate industries, shifting previous an period of simply pure revenue maximisation to 1 the place there’s form of larger affect and prioritisation of capital flows.

So does that recalibrate your funding technique in any means?
I’d say for us, it has not really modified it. So CPP Investments has been on a – name it a 15 yr functionality constructing train – of constructing out capabilities in key geographies, in key asset lessons around the globe. The means we take into consideration investing over the subsequent 5-10 years; we name it the last decade of alpha. And that we have to actually focus in and choose our spots, construct competencies and experience and asset lessons that we’re actually fascinated by and in geographies that we’re actually fascinated by. And the vast majority of the investments we make are lively. I feel proper now there’s a actual perception in lively administration, that the trail ahead is not only merely of using the massive beta wave, however really choosing your spots.For FY23 you reported a return of 1.3%. What impacted the return?
Public markets have been difficult for positive. During that point interval, our personal markets did okay. Real property, as realty did around the globe, struggled. But we additionally bought an uplift from the US greenback. During intervals of market selloff, the US greenback definitely strengthens. We have fairly a couple of US-denominated belongings and they also benefited from the US greenback appreciation, however definitely our public markets portfolio final yr did not carry out as properly. And our personal markets carried out a bit of bit higher.

Asia Pacific has delivered 5 yr annualised internet returns of 5.1%, decrease than complete fund returns of seven.9% and 9.8% for the US and solely barely higher than your own home market of Canada at 4.9%.

What is the explanation for the underperformance of the rising markets portfolio comparable to Asia Pacific?
First of all, I’d say, 5 years will not be a enterprise cycle. It’s additionally sophisticated by foreign money, as a result of what you are quoting is Canadian greenback, and there could possibly be very a lot a foreign money overlay in there. Take a step again and take into consideration why we make investments globally. We make investments globally for diversification. And for the chance so as to add alpha. As some markets go up, some markets do not go up as a lot or go down. And over the long term, that diversification gives actual worth by dampening the volatility within the broader market. We’re very dedicated to being a worldwide investor. We’re very dedicated to the Asia Pacific area. And extra importantly, we proceed to be actually constructive and look to develop our Indian portfolio.

Did you face vital headwinds in your massive tech funding portfolio on condition that tech has seen fairly a little bit of a meltdown?
I’d not classify it as massive. We have a broadly diversified world portfolio, and our development fairness portfolio is sort of small in comparison with our extra conventional personal fairness portfolio. I feel tech is the next beta sector, and you’ve got the expectation that you should have extra volatility in your greater beta sectors. But as a long-term investor, the bottom line is to carry the positions and maintain them by means of the volatility.

Considering the worldwide volatility in public markets, would you naturally lean extra on personal fairness? Is there a binary there?
No, we proceed to be constructive on personal fairness as an asset class and we’ll proceed to spend money on it. But for CPP Investments, we don’t have laborious allocations into public or personal and numerous it’s primarily based on the chance. Over the previous yr it has been form of properly documented, a minimum of throughout the US and Europe, that personal house has not been as lively because it has been traditionally. A number of our exercise previously yr has really been within the public house, the place we’re seeing good relative worth.

We’ve really been lively within the public actual property house, the REIT (actual property funding belief) house, the place we see good worth. Part of the worth of getting each private and non-private, is the power to pivot between the 2 the place we see worth.

Considering world geopolitical flux, are you pulling capital out of China and redeploying extra into India or different rising markets?

We haven’t dialled again any of our lively programmes in any of the geographies we spend money on. That being mentioned, if there’s not numerous exercise degree in a given geography, we’re not doing quite a bit both.

Has India been a standout marketplace for you within the area?
When I take a look at our Indian portfolio, one of many issues that I’m actually inspired by is the breadth of our funding portfolio. It’s not only one sector. We have equities, throughout monetary companies, expertise, healthcare. We have infrastructure, we now have renewables, we now have credit score, actual property, so we now have publicity throughout a broad set of asset lessons. So even throughout the geography, there’s actual diversification. We proceed to be very dedicated to India, and a part of it’s due to the depth of the market and the power to construct a diversified portfolio inside India. So it is difficult to match to different jurisdictions the place chances are you’ll not have as diversified a portfolio.

Some world CEOs have said that different international locations like Vietnam, Philippines, Indonesia, Malaysia have up to now been larger beneficiaries of this world disruption of the provision chain, the so-called China+1 technique.

Do you assume they’ve some extent? Or do you assume that India really is being the trailblazer?
The decoupling, the de-risking that is happening, it’s a worldwide phenomenon. And the massive economies on this planet, the US and such, need to cultivate strategically delicate industries, typically for nationwide safety causes. Over the previous yr, there’ve been many beneficiaries to this, together with the US itself, together with Mexico and Canada, and lots of extra. What may be very attention-grabbing proper now as a worldwide investor, is watching how the world is making an attempt to rewire itself and learn how to take part in that rewiring.

There’s additionally numerous chatter round what individuals would name Dedollarization. Do you assume that is certainly one thing that we’ll see or that is extra discuss than actuality?

As a Canadian investor, the greenback continues to be essential from our perspective. I’m clearly very properly conscious of the chatter. But with our belongings, I feel the US greenback is our greatest publicity and as a worldwide investor that strikes capital around the globe, the US Dollar and US Treasuries proceed to be a very vital supply of actually vital form of foreign money for us.

You have invested C$22 billion in India, amounting to round 4% of your world portfolio. Where do you see that rising to, within the subsequent three to 5 years?

We haven’t got laborious allocations into international locations, and it’s primarily based on the chance set.

Our expectation is that this (India) portfolio will proceed to develop, and can proceed to develop relative to the broader portfolio and for a couple of causes. One, we now have dedicated to placing individuals on the bottom in India and creating that native information, which is a sign of our dedication to investing within the nation, and our need to develop our publicity. Two, we now have a C$22 billion portfolio, and we wish to develop these corporations, we wish to proceed to spend money on these corporations and develop them. And we’re at all times on the lookout for new funding alternatives. So we count on the portfolio to develop with present companions, we count on to develop new companions, and discover new funding alternatives. And so we definitely count on it to develop.

The lion’s share of CPP’s investments is in Indian infrastructure, particularly roads and renewables. Are you taking a look at different pockets — airports, ports, transmission or rising areas comparable to information centres?

Data centres most likely sit in the actual property portfolio and never the infrastructure portfolio, they’re neither right here nor there. If you take a look at our broader infrastructure portfolio, we now have publicity to ports within the US, toll roads, energy. Our staff is being requested to construct a globally diversified infrastructure portfolio. So, we’re definitely taking a look at all elements of the infrastructure house.

CPP has turn into the bulk shareholder in ReNew Power. So far, individuals related CPP as an investor that takes vital minority positions somewhat than controlling stakes. Is that indication of a shift in technique — that you’re now extra open to taking management of corporations?

If you take a look at our world portfolio, it actually does run the gamut. An enormous a part of our portfolio is partnership pushed, the place we spend money on funds, and we are going to spend money on funds and can do co-investing, co-sponsorship, co-partnership, co-underwriting with the overall companions. And then in sure asset lessons, we are going to purchase an asset 100%. We really do have a handful of management positions throughout the portfolio. It’s definitely on technique, definitely one thing we are going to do for the suitable belongings.

As a pension fund that has a further fiduciary duty since you’re dealing with pensioners’ cash, what’s your view on Byju’s, the place you might be an investor, and the way in which issues have panned out? Do you assume that company governance in Indian startups has been under par?

I’m not going to remark particularly on Byju’s. We are a worldwide investor and we’re invested throughout many alternative asset lessons in many alternative jurisdictions. And we take our fiduciary duties critically and are good stewards of the belongings. We are massive believers in good governance and selling good governance.

Part of the worth proposition of CPP being an investor is that we are going to definitely share our expectations and finest practices of governance around the globe. Now, we respect administration and the board, and the roles and duties that every has. But as an investor, we now have expectations round governance. And we predict it is incumbent for us to be very clear about our expectations.

We take board seats when it is commensurate with our possession stake. We definitely have investments the place we do not take board seats, however as an investor and not using a board seat, we nonetheless share our expectations on good governance. And in public corporations we are going to vote accordingly.

Are you taking a look at this correction in startup valuations as a superb alternative to take a position?

We are a long-term investor and a giant believer in imply reversion. And I’d say that throughout the markets, our portfolio administration system is about up in order that when there’s an fairness selloff, we purchase equities. When equities are rallying, we’re most likely promoting equities to rebalance our portfolio.

Many world PE and infrastructure buyers are placing cash into vitality transition and decarbonisation themes in India. What is CPPs technique on these alternatives in India?

We consider it is a full financial system transition. This is extra than simply investing in renewables. Our method to sustainability is to spend money on each inexperienced and transition belongings. Our funding philosophy is to be a affected person long run capital as these corporations look to make the transition. We see it as a generational funding alternative

And in actual fact we proceed to spend money on conventional oil and gasoline. We did a transaction within the US – Aera Energy – which is California’s second largest oil and gasoline producer. It’s actually a transition story, to make that firm basically a decrease emitter and finally transition.

One of the targets we put on the market was to develop our inexperienced and transition belongings to $130 bn from beginning within the low 60s and as of our final reporting interval we’re at $79 bn. We are actually investing in serving to corporations transition. We have constructed competencies in our sustainable vitality group in our portfolio worth creation group that work with corporations to assist them decarbonise.

While CPP has invested billions on the fairness aspect in India your method to credit score has been extra conservative. What are the plans on the credit score aspect of the enterprise?

Certainly India is an on technique marketplace for Credit. To date the portfolio will not be fairly as massive as a number of the different jurisdictions. Part of that’s that the US is the deepest, most subtle credit score market – when you take a look at our world credit score portfolio it has a focus within the US. But we proceed to take a look at alternatives.