Finance Committee on June 11th, 2018

[Mark Machin]

It was Greenhill, the investment bank.

[Pierre Poilievre, Conservative, Carleton, ON]

Is your fund doing any analysis on value of the assets that are for sale?

[Mark Machin]

At this stage, we haven't done any analysis. We're still evaluating the situation. Obviously we have an obligation to investigate and assess any major investment opportunity that comes along and to fully understand all the risks, fully understand the potential returns, and to understand the fit for our portfolio as well. We'll decide whether to evaluate it further.

[Pierre Poilievre, Conservative, Carleton, ON]

Neither you nor any member of your management or board has discussed the Trans Mountain pipeline with any member of the government?

[Mark Machin]

No.

[Pierre Poilievre, Conservative, Carleton, ON]

Okay.

Obviously you're going to receive more contributions based on the schedule of increased payroll taxes that the government has set on track.

The Fraser Institute reports that 83% of your holdings are outside of Canada. We understand you need to diversify internationally, given your mandate to maximize returns without undue risk of loss; however, an increase in CPP contributions will necessarily reduce private savings, and private savings are typically affected by home bias, which is that when people are investing their own money, they tend to invest in their own country. What do you think about the suggestion that if Canadians are diverted away from their own private savings and into CPP, more of those savings will translate into investments outside of Canada rather than being invested here at home?

[Mark Machin]

Thank you. That's an interesting question.

From our point of view, our mandate is very clear: it is to invest the funds that are not immediately needed and to make sure that we are maximizing returns without undue risk of loss. As you said, diversification is a really key element of that, from both a return point of view but particularly from a risk point of view. It's to make sure that we don't have all our eggs in one basket, and one of the—

[Pierre Poilievre, Conservative, Carleton, ON]

Right, and I'm not criticizing you for that at all. I think you are carrying out your mandate properly. I am asking whether the decision by the government to increase CPP contributions could have the effect of diverting savings that would otherwise have been invested by Canadians in Canada to, say, investments of which 83% will go abroad. Do you have any response to that?

[Mark Machin]

Mr. Leduc could comment.

[Michel Leduc]

I think that's a terrific question.

We don't have in our possession any studies that would demonstrate whether “long-term savings”—if I can use the word—increasing into the CPP will cannibalize private savings.

We're very interested in financial literacy in Canada, and what we see that Canada has as one of its biggest strengths is these three pillars to combat what is arguably one of the biggest financial challenges that any Canadian faces, which is lifelong retirement security. Our view is that all three pillars have to function and fire on all cylinders, whether it's saving at home, saving through CPP, or saving at work.

[Pierre Poilievre, Conservative, Carleton, ON]

Thank you very much for that.

I see on page 16 of the report you provided the following quote:

Because of the pressures and different objectives of prevalent shorter-term investing, we believe that individual security prices and current valuations often do not represent their long-term intrinsic value.

You're not alone in making this observation. It does seem as if the text written here would have been written by someone who is a value investor. Often when Canadians go to hire an investment adviser, they want to know the investment philosophy.

Would you describe yourself, Mr. Machin, as a Benjamin Graham–style value investor, or what investment philosophy do you bring to this role?

[Mark Machin]

I think that as an institution we do tend to be value investors, so we are looking for companies and opportunities and assets that are lower than their long-term intrinsic value. We try to take advantage of dislocations in markets or situations where things are not fully valued and invest in them so that we can make money for the fund over the long term, so yes, we absolutely look out for those opportunities, and a number of our strategies are more value-focused.

[Pierre Poilievre, Conservative, Carleton, ON]

You're a bargain-hunter.

[Mark Machin]

We certainly love to find bargains. There are not many in the world these days, but we certainly are looking for them.

[Pierre Poilievre, Conservative, Carleton, ON]

And do you—

[The Chair, Liberal, Wayne Easter]

We'll have to leave it there before we find out how valuable this bargain is that Mr. Poilievre is onto.

Mr. Fergus is next.

[Greg Fergus, Liberal, Hull—Aylmer, QC]

Thank you, Mr. Chair.

Thank you, Mr. Machin and Mr. Leduc. On behalf of all Canadians, I want to say how much we appreciate all your efforts to secure the Canada Pension Plan through your investment decisions.

In your 2018 annual report, you indicate that, as of March 31, the geographic breakdown of the CPP portfolio was as follows: roughly 38% in the U.S., nearly 20% in Europe, 15% in Canada, and 20% in Asia.

I'm curious as to whether that geographic mix is optimal in your eyes. Do you anticipate a change in the short term, and if so, why?

[Mark Machin]

We gradually will evolve the portfolio over time. I would say with respect to the U.S. that because it's the biggest economy in the world, the biggest capital market in the world, and one of the most developed investment markets in the world, it's likely to continue to be a large portion of our investments.

I'd say that gradually, over time, we'll increase our emerging market exposure. That's approximately 15% of the portfolio today. We published, on page 31 of the annual report, the strategic portfolio, which represents where we anticipate heading toward by 2022. We increase the emerging market weight toward 22% and we'd anticipate it to increase after that toward one-third of the fund. By 2025, we anticipate emerging markets will be 47% of global GDP, and by 2026 China could overtake the U.S. as the largest economy in the world, so we anticipate more of the money, being more responsible, to be more diversified into emerging markets over time.

[Greg Fergus, Liberal, Hull—Aylmer, QC]

That's great. Thank you.

You answered Mr. Albas's question on this, but there's something I'd like you to clarify. It has to do with the regular or, rather, base CPP and the additional CPP. I'd like to know how those strategies differ.

[Mark Machin]

Thank you very much for the question.

There is a lot of detail on pages 21 and 22 of the annual report. Since you have the annual report, it is probably too much detail to go into today, but essentially the additional CPP is more of a fully funded pool of capital versus the base CPP, which grows into its liabilities over the long term. It's a sustainable fund but it is not fully funded. That means that for the additional CPP, the investment returns and the funds available for paying the benefits are much more tightly correlated, so we should run a lower risk for that piece of the portfolio.

Therefore, we're going to run a lower risk for the additional CPP and we'll continue with the base CPP at the current risk levels.

[Greg Fergus, Liberal, Hull—Aylmer, QC]

I assume that, at some point, that will change or be adjusted. How many years will it take for the base CPP and additional CPP to even up or for the conditions to be more or less the same, in terms of the duty to clients.

[Mark Machin]

Over the long term, over many decades, gradually, there is the base CPP, which again is fully sustainable but is not fully funded. That gradually will converge over time as it becomes more funded over the decades ahead, and the risks that we'll be running for the two streams, the additional and the base CPP, will converge many decades in the future. They will converge toward each other in the future, yes.

[Greg Fergus, Liberal, Hull—Aylmer, QC]

You said that you planned to invest responsibly in new technology and data capabilities in order to be more competitive internationally.

Could you tell us how that kind of investment will improve your competitiveness? Also, what percentage of the entire investment portfolio will it represent?

[Mark Machin]

What I referred to in those remarks was some of the internal investment we'll be making to lift our capabilities. We, along with every asset manager in the world, understand that we have a lot of data, and data is valuable. If we can use that data effectively, then we should be able to enhance our capabilities as an investor, whether it's simply being more efficient operationally, whether it's sharing ideas more efficiently across the different investment teams, or whether it's using data to provide better insights for the investment teams.

It is something that we and all of our peers around the world are moving toward, and we expect to make sure we are doing that and investing in that in a responsible and prudent way, making sure we are keeping up with them and maintaining our competitiveness as other investors around the world invest in all of those areas.

[The Chair, Liberal, Wayne Easter]

Thank you both.

Mr. Kmiec is next.