Finance Committee on Nov. 1st, 2016

[Mark Machin]

To the best of my knowledge, we don't have a specific investment today in solar. I believe that some of our existing infrastructure investments, some companies, have solar within their portfolios, and we see that growing dramatically around the world. In the U.S., I think that 65% of new capacity additions are solar and wind combined. It is something that's growing rapidly, and we're looking for those specific opportunities.

[The Chair, Liberal, Wayne Easter]

Thanks to both of you.

Mr. Grewal.

[Raj Grewal, Liberal, Brampton East, ON]

Thank you, Mr. Chair.

Thank you, gentlemen, for coming today. I really appreciate it. You guys also came and gave the committee a detailed presentation last year, which was very thoughtful of you and very much appreciated. Like some of my colleagues, I want to congratulate you on your performance. If I was half as decent at investing my own money, maybe I could retire a little earlier.

In talking about the geographical distribution—

Sorry?

[The Chair, Liberal, Wayne Easter]

On this side over here they're liking the fact you might retire.

[Some hon. members]

Oh, oh!

[Raj Grewal, Liberal, Brampton East, ON]

That doesn't mean that it's going to go to the other side.

Some 19.5% of the investments are in Europe. Can you comment on what's recently gone on in Europe with Brexit and the general financial instability and how that's going to affect our investments there? By “our”, I mean the board's investments. Also, could you comment on the outlook in the United States?

[Mark Machin]

Thank you very much again for the kind comments about our organization's performance. We appreciate that.

With respect to Europe, it has been a significant destination for our investments, the U.K. in particular. We have about 7.5% of our assets invested in the U.K.

Michel may not want me to drift off into the realm of policy, but speaking as a Brit, I'm disappointed in Brexit. I'm disappointed with that decision.

Speaking as president and CEO of CPPIB, I will say that we're concerned about the impact it will have on valuations and growth prospects in the U.K. We're monitoring that carefully. We hope that it will not have any impact on the openness to investment that the U.K. has displayed.

Europe overall continues to have relatively low growth, very low interest rates, and a number of other financial sector risks that we monitor very carefully and navigate around carefully.

[Raj Grewal, Liberal, Brampton East, ON]

Thank you.

Again, we're also very heavily invested in the United States. They've done relatively well in the last five years, but I think the future there, given the political climate, might be a little bit uncertain. Do you have any comments on how that affects our investment strategy on this side of the border?

[Mark Machin]

Yes. The U.S. is by far the largest destination for our capital, with approximately 40% of our investments. That's driven by the fact that it is still by far the largest economy in the world, and the largest capital market in the world by far. Even with some political uncertainty, it's still a place where we've been able to find investments that maximize returns without undue risk of loss, and across many different asset classes, because of the depth of the capital markets and the range of investment opportunities available. It's one place that we would expect will continue to provide many opportunities for different types of investments.

[Raj Grewal, Liberal, Brampton East, ON]

Thank you.

[The Chair, Liberal, Wayne Easter]

Mr. Cass, do you want in?

[Edwin Cass]

I was just going to point out that our culture is very much focused on risk. When we're evaluating any investment, we have to incorporate all the risks that we perceive for that investment. Certainly, the risks have risen in Europe and, arguably, have risen in the U.S., depending on the outcome of the election on November 8.

Those are things that we have to take into account when we're evaluating the investment, and we have to make sure we're getting compensated for them. Sometimes when risks are rising in a particular jurisdiction, it's actually something that allows us to demand more compensation and a higher expected return. That's something we have to take into account at the time of valuation.

[Raj Grewal, Liberal, Brampton East, ON]

That's excellent. Thank you so much.

I'm a big fan of the active investment strategy you employ, but at the general macro level, are you able to recruit the best and brightest to come and work for you?

[Mark Machin]

That's a very good question.

We work very hard to recruit the best and the brightest. In Canada and in other markets, we're respected for the high-performance culture that we have.

Also, there is an element for a lot of us in the fact that we are doing this for a very worthwhile cause. We're doing this to look after the retirement savings of 19 million people in Canada. That's also something that is appealing to a number of us.

We have to fight hard to hire the best and the brightest and to motivate and retain those people against all the temptations of the other opportunities that these high-performing people see across the financial industry.

[The Chair, Liberal, Wayne Easter]

Thank you, Raj and Mr. Machin.

Before I turn to Mr. Duvall, I have two questions.

You talked a fair bit about teams and their importance. Could you elaborate a bit more on that? I believe you emphasized 25 areas where you would have specialized teams in terms of investing. Why do you have it that way?

Second, you emphasized in your written submission the importance of “scale” in terms of your approach. Could you perhaps elaborate on that a little more as well? What do you mean by scale?

[Mark Machin]

I'll start, and Mr. Cass can add to it.

On the 25 teams, we feel that it's important, again, to diversify, not just geographically, but across the types of investments and strategies that we have. We have specialists who look at different types of public market strategy. We have specialists who look at credit strategies, whether it's private credit or real estate credit. We have specialists who look at private equity, specialists who look at fund investments, and specialists who look at infrastructure, real estate, and other types of private investing around the world.

When you look at all the different strategies, it adds up. There are approximately 25 different strategies. We believe that those strategies can add value when we look at the risk-and-return profiles of those strategies over time.

On scale, when we're competing for larger investments there are fewer people competing for them, so we can find better value. Not always, but in certain strategies, we believe that you're in more rarefied territory where there's less competition. Therefore, we can demand better compensation for the risks we're taking on and better pricing. Scale helps us in quite a few strategies.

[The Chair, Liberal, Wayne Easter]

Okay.

Do you want to add anything, Mr. Cass?

[Edwin Cass]

No, I think he got it.

[The Chair, Liberal, Wayne Easter]

He got it all? That's great.

Mr. Duvall, and then Mr. Ouellette.

[Scott Duvall, NDP, Hamilton Mountain, ON]

Thank you, Mr. Chair.

Would the changes to the CPP that are being proposed in Bill C-26 result in adjustments to the CPPIB investment strategies? What would be the nature and extent of any such adjustments?

[Mark Machin]

Thanks for the question.

On the changes in Bill C-26, we recognize that there will need to be separate and joint financial statements, and we're working through those details. We think it will be possible to manage the consolidated fund while taking into account the funding requirements and the difference between the base and the additional CPP. As I said previously, we think there is an additional reliance on investment income in the additional CPP because of its fully funded nature. We think there will be a need for a more conservative asset mix for the additional CPP. That is something the details of which we'll be working through carefully in the coming months.

[Scott Duvall, NDP, Hamilton Mountain, ON]

Last, are any changes needed to the CPPIB Act? If so, what changes are needed, and why?

[Mark Machin]

Michel will answer.

[Michel Leduc]

That's a terrific question.

As for what we'll say, we'll look back to the time when the act was created, bringing together 10 governments. There is a fantastic book that I recommend to everyone. It's called Fixing the Future and it describes the debates and the policy analysis taking place as to how you design this organization with a commercial purpose but with a public purpose at the same time.

We engage with interested parties all over the world, including important outlets like the Financial Times and other newspapers, and when they ask what the secret recipe is for Canada, we point to the elements in the act, such as the strong governance framework, the clarity of the mandate, and the requirement to have high disclosure, because our transparency is what ensures public trust. The more transparent we are, the more we can gain public trust.

What we would say is that it's within the hands of our stewards to decide whether there are any changes to the act. However, when people ask us what has made us successful, we point to the act. We point to this document that was created with a lot of careful balancing of different interests. It's worked really well for the organization.

If I were in the room and giving advice, I would say, “Do no harm.”

[The Chair, Liberal, Wayne Easter]

Thanks to both of you. That's pretty good advice.

Mr. Ouellette, you have the last question, and then we have a motion in the last five minutes.

Go ahead.