Finance Committee on Nov. 1st, 2016

[Gérard Deltell, Conservative, Louis-Saint-Laurent, QC]

Thank you, Mr. Chair.

Gentlemen, welcome to your Parliament, and welcome to your House of Commons committee. It's a great honour for us to welcome you here. You have perhaps not been here for many years, but it's never too late to be good. It's maybe also an indication that you have to be away from the political agenda to do some things, and you have done so well.

Mr. Machin, you arrive in a brand new role as the head of a crown corporation, which is very inspiring for all Canadians.

The board's results in the past 10 years speak for themselves. After making an adjustment for inflation, we can see there was a net growth of 5.6% in 10 years. Also, in the past five years, there has been a return of over 10%. That's what we call a very respectable result. It's an excellent result that benefits all Canadians. The magic number of $300 billion may make our head spin, but it can also serve as an inspiration to continue making progress, as you have done so nicely for many years.

You know that Quebec has an equivalent institution, the Caisse de dépôt et placement. About a year and a half or two years ago, the Caisse de dépôt et placement decided to invest in a municipal infrastructure program, the Montreal public transit system. This surprised many people, but also piqued people's curiosity.

I want to hear your thoughts on this type of investment. I'm not asking for your opinion on the Caisse de dépôt et placement's decision. However, as a manager, do you think the board could make this type of investment? Does it currently have the power to do so?

[The Chair, Liberal, Wayne Easter]

Mr. Machin.

[Mark Machin]

Thank you for the question and for the comments on our performance. We're very grateful for those.

Infrastructure is one of the strategies that we invest in. It's a strategy in which we've invested approximately $16 billion over the years, and we have about $22 billion of current value invested in Canada and around the world in infrastructure. We've invested in a variety of different types of infrastructure from toll roads to pipelines to ports and will look to continue to find opportunities.

One of our challenges is that in order to maintain a reasonable cost structure internally our team can't be too big. We need to keep a relatively small team. That team therefore generally restricts itself to look for quite large investments. That's the way we can keep our costs reasonable. We generally look for investments of over $500 million when we're looking for new investments. We welcome more opportunities to look for those types of investments.

[Gérard Deltell, Conservative, Louis-Saint-Laurent, QC]

Am I correct in saying that you have invested, you can invest, and you will invest in the future? You don't have another thing to do for that: you have all the power to decide by yourself if it's good to invest in infrastructure in Canada. Am I correct?

[Mark Machin]

That's correct. There's nothing additional that we need in order to look at Canadian infrastructure investment. Our largest investment is in Canada, where we own a stake in the 407 motorway around Toronto. That's a significant infrastructure investment that we have made, so yes.

[Gérard Deltell, Conservative, Louis-Saint-Laurent, QC]

Okay.

I'll summarize in French what you said. You told us that you have already invested in infrastructure in Canada and around the world. You mentioned that you have invested, you are currently investing and you could invest in the future. You have all the tools on hand to invest in infrastructure if you think it would be profitable for Canadians. I simply wanted to say it in French. I see Mr. Leduc nodding his head, so I assume my interpretation is correct.

However, Mr. Machin, if someone from the political world were to call you to say that it would be a very good idea for the board to invest in Canadian infrastructure, would that constitute political interference?

[Mark Machin]

I think that one of the secrets of the success of the Canadian model of pension funds and of our governance has been that separation of the management and the decision-making around investment and government. I think the fact that we are accountable to government, but are kept at arm's length when we're making our professional judgments on investments, is really important, and it is something that we hope would continue. To the extent that it crosses that line and a call is made that exerts undue pressure, that would not be a good thing.

I would say that if there are additional opportunities here or elsewhere in the world where we can assess things and look at them professionally, based on whether they maximize returns without undue risk of loss for our beneficiaries and contributors, we'd welcome looking at those opportunities.

[Gérard Deltell, Conservative, Louis-Saint-Laurent, QC]

If we look at the results you have had in the last 10 years, and especially in the last five years, with a more than 10% return on investment, I think the policy you have is good, so any attempts by the political side to grab some of your power would be wrong.

Thank you.

[The Chair, Liberal, Wayne Easter]

You have time for one more question.

[Gérard Deltell, Conservative, Louis-Saint-Laurent, QC]

One more? Okay.

You have a lot of international experience. What is the reputation of Canada around the world with regard to your new portfolio, with what you have now with your institution?

[Mark Machin]

I think the reputation of the Canadian pension funds, particularly CPPIB, is quite good around the world. I think people see us as high-performing organizations that have an ability to make good professional judgements on investments, and as sound and reliable partners for other organizations, and we have high integrity. That combination is respected and welcomed around the world, and as we become more known around the world, it has opened up more opportunities. I think that will continue over time. They are qualities that people like.

[The Chair, Liberal, Wayne Easter]

Thanks to both of you.

Mr. Duvall.

[Scott Duvall, NDP, Hamilton Mountain, ON]

Thank you, Mr. Chair.

Thank you, gentlemen, for being here today. It's much appreciated. I have a couple of questions, and one isn't on investments.

The CPPIB owns one and a half million shares of a Canadian company called Nevsun Resources Limited. Nevsun Resources is the major owner of the Bisha mine in Eritrea. In 2016, a United Nations Commission of Inquiry on Human Rights found the country's military dictatorship responsible for crimes against humanity and that Nevsun Resources was engaged to supply labour at the mine under conditions that have been described as slave labour.

Can you describe the measures and procedures that are in place to ensure that CPPIB avoids investments in companies linked to human rights violations?

[Mark Machin]

Thank you for that question. It's a very important question.

I would say on environmental, social, and governance responsibilities that we take them very seriously. We publish an annual report on sustainable investing, which covers all of our policies and how we think about them. This year, we added human rights as an additional focus area of concern.

I can't comment on the specific investment itself. We can revert on the specifics there, but I suspect it's within the passive portfolio, so its probably part of an index. I'll come back and confirm on that.

But what I can say on human rights in particular is that we're involved in a number of initiatives. One that is related would be that we're part of a coalition trying to improve the supply chain of cobalt mining in the Democratic Republic of the Congo. We're working in collaboration to improve the supply chains for electric vehicle companies, the battery companies, and the associated electronics companies that get their cobalt from the Democratic Republic of the Congo. We're concerned about similar practices there and are exerting due pressure to improve those practices and improve supply chains.

That's something that is not exactly answering your question, but it's a similar initiative, and it is an important area for us to focus on.

[Scott Duvall, NDP, Hamilton Mountain, ON]

If a company were found guilty of these crimes, would we withdraw our shares?

[Mark Machin]

We've had a policy of engaging and trying to improve practices, whether that's through our voting as a shareholder or engagement with other partners to make sure these practices change. That's more of a philosophy of engagement and trying to exert change rather than divesting and letting someone else, who may be less able, deal with the problem. That's been our philosophy.

[Scott Duvall, NDP, Hamilton Mountain, ON]

Thank you. In—

[The Chair, Liberal, Wayne Easter]

Mr. Duvall, Mr. Leduc wanted to add something.

[Michel Leduc]

Yes, if I may, I'd just put a final point on that. I think it's an excellent question, and it does give us an opportunity to make a clear distinction between passive investing and active investing. We'll get back to you on the facts on this particular holding. We have exposures to over 2,000 public companies around the world, so we'll look at this one.

In the active management dimension, it's been commented—we've taken note—that maybe the CPP could be broadly invested in an exchange traded fund, which would be purely passive. If you look at the active management, you see that what it does is give an organization, an institutional investor that is willing to be patient, productive, and highly engaged, a look at those specific practices to understand how management behaves.

We take a very strong view that management that takes on social and governance responsibilities and engages with their local community is a really good proxy for excellent management. Most importantly for us, because of our exceptionally long holding periods—particularly on active and the decisions we make, we will hold that active for a very long time—we can have influence in working with management and the board. That's because we have a strong conviction that those organizations that pay particular attention to those facts will build much more value than a comparable organization that does not.

[Scott Duvall, NDP, Hamilton Mountain, ON]

Thank you. I appreciate that.

In terms of the report, what factors explain the increase in the CPPIB operating expenses since 2007, and to what extent are these rising operating expenses a cause for concern?

[Mark Machin]

We take our expenses extremely seriously, because every dollar we spend on expenses is a dollar less for our pensioners. It's important that we minimize them as much as we possibly can.

There are really three elements when we look at costs. The first is the expenses that we pay to external fund managers. That's the bulk of the costs. It's probably about a half of the costs. There, when those fund managers are doing well, they generally end up with higher performance fees. It's a good sign, to some extent, that those fees are going up. At the same time, we negotiate extremely hard with those external fund managers to make sure we minimize the fees as much as we possibly can. We have teams that keep a very close eye on all of those fees and make sure they are kept to a minimum.

We also try to make sure that we maximize the opportunities where we can: invest alongside those funds in a low- or zero-fee basis and therefore average down the fees across those funds. Those funds are generally private equity funds, and there are some public market fund strategies. We only invest in those funds where we believe that it's going to be too challenging or too costly to develop equivalent internal expertise. The more that we can do internally, the better.

For example, earlier, I mentioned our infrastructure investing portfolio. We've invested about $16 billion in infrastructure over the years. If we were to do that externally, through external funds, that would probably cost somewhere between $650 million to $700 million. It costs less than a tenth of that to do that internally, so to the extent that we can develop teams that have capability, then we will do that internally. For external management, we only look for where, net of all of those costs, they could still outperform what we think we could achieve internally. As I say, the two main areas are select public market strategies and private equity.

Then there are also the transaction costs that are driven by the number of private deals we negotiate. Again, the teams spend a lot of time trying to minimize those transaction costs.

Finally, there are the operating costs of operating the offices and employing the people. That runs at about 32 basis points, so far, of cost.

That's where we are today.

[The Chair, Liberal, Wayne Easter]

Thanks to both of you.

Mr. Machin, on the information that you indicated you would provide, you can forward that to the clerk and she will distribute it to the members.

Mr. Sorbara.

[Francesco Sorbara, Liberal, Vaughan—Woodbridge, ON]

Thank you, Mr. Chair.

I welcome you this morning, Mr. Machin. Welcome to the Standing Committee on Finance and also welcome to Canada. It's been a few months. Welcome aboard. Congratulations on your new role.

Last night I took a read of the actuarial report, the 28th report, which came out after the CPP agreement was signed. In that report, I'm looking at the investable assets, the additional CPP assets, that are going to grow to $1.5 billion by 2019, to $70 billion by 2025, and to $196 billion by 2030.

I'll quote from page 15 of the report: “It is expected that a separate investment policy will be developed by the CPPIB with respect to the additional CPP assets.” When do you think we'll have that policy laid out if we don't have it yet? I want to clarify that.

[Mark Machin]

First of all, thank you for your comments and your welcome to Canada. I very much appreciate those comments.

Secondly, on the additional CPP and the investment portfolio there, as I said in my opening remarks—and in a minute I'll let Mr. Cass add in on this as well—we recognize that for the base CPP and additional CPP the risk profile will need to be different. There will need to be a more conservative asset mix for the additional CPP. That's due to its fully funded nature. We recognize that and we're working through the details, but I'll let Mr. Cass add to that.

[Edwin Cass]

The first funds are anticipated to be received in 2019, and I would anticipate that we'd have an investment policy for the additional funds at that time.