Evidence of meeting #36 for Finance in the 43rd Parliament, 1st Session. (The original version is on Parliament’s site, as are the minutes.) The winning word was portfolio.

A recording is available from Parliament.

On the agenda

MPs speaking

Also speaking

Mark Machin  President and Chief Executive Officer, Canada Pension Plan Investment Board
Clerk of the Committee  Mr. Alexandre Roger
Michel Leduc  Senior Managing Director and Global Head of Public Affairs and Communications, Canada Pension Plan Investment Board
Michael Carter  Executive Vice-President, Canada Development Investment Corporation
Troy Lulashnyk  Director General, Maghreb, Egypt, Israel and West Bank and Gaza, Department of Foreign Affairs, Trade and Development
Ted Gallivan  Assistant Commissioner, Compliance Programs Branch, Canada Revenue Agency
Evelyn Dancey  Associate Assistant Deputy Minister, Economic Development and Corporate Finance Branch, Department of Finance
Elisha Ram  Associate Assistant Deputy Minister, Skills and Employment Branch, Department of Employment and Social Development
Andrew Marsland  Senior Assistant Deputy Minister, Tax Policy Branch, Department of Finance
Soren Halverson  Associate Assistant Deputy Minister, Financial Sector Policy Branch, Department of Finance
Nicholas Leswick  Assistant Deputy Minister, Economic and Fiscal Policy Branch, Department of Finance
Frank Vermaeten  Assistant Commissioner, Assessment, Benefit and Service Branch, Canada Revenue Agency

3:30 p.m.

President and Chief Executive Officer, Canada Pension Plan Investment Board

Mark Machin

Yes. This has worked for about a thousand calls, but it just died on me, so I apologize to you and the committee.

Where did I lose you? Where would you like me to recommence?

3:30 p.m.

Liberal

The Chair Liberal Wayne Easter

You were just talking about the actuarial reviews. You were getting pretty close to the end, I think.

3:30 p.m.

Senior Managing Director and Global Head of Public Affairs and Communications, Canada Pension Plan Investment Board

Michel Leduc

Mark, you were very close to the end. You were just completing the part on the office of the chief actuary, and then ESG.

3:30 p.m.

President and Chief Executive Officer, Canada Pension Plan Investment Board

Mark Machin

Okay, then maybe I will thank the committee for its patience.

I think it's important to re-emphasize that point. You don't have to believe me necessarily on the sustainability of the CPP. It's important to recognize that every three years the office of the chief actuary conducts an independent review of the sustainability of the CPP over the next 75 years. The most recent actuarial review of the CPP was released in December 2019. That report concluded that the CPP will be sustainable over the next 75 years. While the report was produced prior to the COVID-19 pandemic, it does account for financial market volatility and changes to long-term demographic trends, as well as other factors.

A key assumption in the report is that the base CPP will earn an average annual net real rate of return of 3.95% over the 75 years covered by the report. The corresponding assumption for the more conservatively invested additional CPP is an average annual net real rate of return of 3.38%. As of this year, our average annual real rate of return over a 10-year period is 8.1%.

The review also showed that investment income in the base CPP account was 107% higher than expected over the three years since the previous review. Of the total $41 billion by which the fund's assets grew more quickly than expected, $39 billion came from higher than expected investment income.

I may just turn to one last topic. I will skip over part of my prepared remarks, given the delay, but the last thing I want to touch on is our approach to environmental, social and governance factors, or ESG.

We're always looking for ways to evolve as an organization, and this extends to our approach to ESG. We consider ESG factors when calibrating a portfolio over the long term and evaluating investment opportunities, understanding the approach of our partners, and engaging with companies to seek improvements in business practices and disclosure. Being an engaged owner can enhance the long-term performance of the companies in which we invest.

Climate change and the gradual transition to the low-carbon environment will also continue to influence the world we live in. We have committed to being a leader among asset owners in understanding the risks posed and opportunities presented by climate change. We've developed and continue to improve our systems and processes to ensure we fully understand the risks and opportunities presented by climate change. We do this in accordance with the existing legislative provisions in the CPPIB Act and our investment objectives.

With that, I will conclude my remarks. Both Michel and I welcome the opportunity to discuss how we invest the funds entrusted to us and our role in helping to ensure that the CPP remains sustainable for future generations.

We look forward to your questions.

Thank you.

3:35 p.m.

Liberal

The Chair Liberal Wayne Easter

Thank you very much, Mark, and also thank you for the report you sent us earlier.

We'll go first to a six-minute round. I'll lay out who's on the list.

First up is Mr. Poilievre—

3:35 p.m.

Liberal

The Chair Liberal Wayne Easter

I don't see him. Are you starting, Michael?

3:35 p.m.

Conservative

Michael Cooper Conservative St. Albert—Edmonton, AB

Yes, I'm going to start.

3:35 p.m.

Liberal

The Chair Liberal Wayne Easter

Okay, first we have Michael Cooper and then Ms. Koutrakis. Mr. Ste-Marie, did you say Mr. Barsalou-Duval was taking the first round? Just let me know when we get there. Then we have Mr. Julian.

Mr. Cooper, you're on.

June 11th, 2020 / 3:35 p.m.

Conservative

Michael Cooper Conservative St. Albert—Edmonton, AB

Thank you, Mr. Chair.

I want to thank the witnesses and also acknowledge the time that Mr. Leduc spent with me about a week or two ago. I appreciated going over some of the issues respecting the CPPIB.

I want to ask a question around some of the points I raised with Mr. Leduc during our meeting. In that regard, I understand that at present about 11% of the CPPIB's portfolio is invested in China. I have seen some projections of how this is set to increase to 20% of the portfolio as soon as 2025. In light of the current geopolitical climate and having regard for China's blameworthy conduct in the COVID pandemic, coupled with the fact that other pension funds are doing exactly the opposite—for example, the Federal Retirement Thrift Investment Board, which administers the Thrift Savings Plan, the largest pension plan in the U.S. has recently halted all investments in China—what is the position of the CPPIB going forward vis-à-vis China?

3:35 p.m.

President and Chief Executive Officer, Canada Pension Plan Investment Board

Mark Machin

Thank you for the question.

There are really two reasons that we invest in China. The first is that it is a very large market. It is the second-largest capital market in the world, and therefore it is one that we can diversify into. It's one that is, in many ways, uncorrelated with the rest of the world and, arguably, increasingly uncorrelated with the rest of the world.

From a portfolio construction point of view, that is quite valuable because when there's turmoil in other major markets, there may not be turmoil in that market, and vice versa. The diversification benefit is the most powerful factor that encourages us to continue to have some exposure to that market, given that it's the second biggest market.

The second reason that we invest is alpha, or what we call outperformance relative to an index. That's very hard to come by, but it's incredibly valuable for a portfolio. If you can pick the right stock over the wrong stock, if you can pick Alibaba over Luckin Coffee—which some of you will have seen was a debacle and faced delisting from the U.S. exchange just recently—the right building over the wrong building, the right company over the wrong company or the right fund over the wrong fund, there's a huge amount of value. There's a lot of research showing how much alpha, how much value, there is in that, and it's much more than in developed markets.

Those are really the two reasons we invest in the market, and so far it has performed well for us. The Chinese investments over the fiscal year were up almost 10% and performed well. Again, if you look at the performance, just in March for example, the Chinese market was essentially flat in comparison to where the U.S. markets and North American markets were trading at that point. There are the reasons.

Having said that, we have two sides to our mandate, maximizing returns without undue risk. It's very important for us to thoroughly understand all the risks of investing in any market, not just at an individual security level or an individual company level but also the risks of the market overall and where they might be going. We spend a lot of time understanding those risks.

3:40 p.m.

Conservative

Michael Cooper Conservative St. Albert—Edmonton, AB

Thank you for that.

I would acknowledge that the portfolio is well managed, and I don't question that diversification plays an important role in that regard. Nonetheless, you did cite Alibaba, for example. CPPIB's investment is in Alibaba Group Holding Limited. Is that correct?

3:40 p.m.

President and Chief Executive Officer, Canada Pension Plan Investment Board

Mark Machin

Yes. It would be the company that's listed in New York and Hong Kong.

3:40 p.m.

Conservative

Michael Cooper Conservative St. Albert—Edmonton, AB

Okay. It's set up atop a variable interest entity, is it not?

3:40 p.m.

President and Chief Executive Officer, Canada Pension Plan Investment Board

Mark Machin

That's correct.

3:40 p.m.

Conservative

Michael Cooper Conservative St. Albert—Edmonton, AB

Does that cause you some level of concern in terms of how the regime may approach a variable interest entity? We know, for example, that the Chinese Supreme People's Court declared VIE structures to be illegal. In fairness, that's a court of civil law of limited jurisdiction, but does that cause you some concern?

3:40 p.m.

President and Chief Executive Officer, Canada Pension Plan Investment Board

Mark Machin

Contractual structures like that are important to analyze and reach a really thorough understanding of the potential risks that are involved. That is absolutely one of the factors that is taken into consideration when the teams invest in any company. For a company of the size and importance of Alibaba, I think it's unlikely there's going to be some radical change to those contractual structures, but it's certainly not something that we're naive to, and it's something that we've studied very carefully.

3:40 p.m.

Conservative

Michael Cooper Conservative St. Albert—Edmonton, AB

We have seen that in the past with other international investors. For example, with China Unicom, back in the 1990s the central government forced certain structures to be unwound, which disadvantaged international investors.

I saw that there was recently an investment in Ant Financial, which is a company that about two years ago was blocked by the U.S. from acquiring MoneyGram in a $1.2-billion acquisition, on the basis of national security concerns.

Can you tell me a little about CPPIB's investment in Ant Financial?

3:45 p.m.

President and Chief Executive Officer, Canada Pension Plan Investment Board

Mark Machin

Sure.

We invested in Ant Financial a couple of years ago. It is partly owned by Alibaba. It is the largest fintech company in the world. They provide financial services, mainly from very small investors, smaller investors, medium-sized investors and SMEs. It has increased financial inclusion in China. It is, by some measures, the largest fintech company in the world and one of the most successful so far, and an investment we are quite comfortable with.

They, like many Chinese companies, have had challenges making acquisitions, particularly in the U.S., but increasingly in other countries around the world due to concerns over national security. I imagine they were disappointed by their inability to complete that transaction. However, I understand that MoneyGram has a number of different functions, and so they probably should not have expected to be able to acquire it in the first place.

3:45 p.m.

Liberal

The Chair Liberal Wayne Easter

We'll have to end it there. We're substantially over.

Next is Ms. Koutrakis, followed by Mr. Barsalou-Duval.

3:45 p.m.

Liberal

Annie Koutrakis Liberal Vimy, QC

Thank you, Mr. Chair.

Thank you to our witnesses today.

I am pleased to hear about CPP Investment's rates of return and your performance, given the economic uncertainty we are facing today. Canadians can be confident knowing that the CPP will remain solvent for at least 75 years, and I commend you on your efforts to create a sustainable pension plan for Canadians. That being said, there is always more that can be done to support Canadians in retirement. I look forward to our discussion on CPP Investment's investment strategy and sustainability as we emerge from the pandemic.

I understand that your investments in real estate and infrastructure represent 20% of your assets. With COVID-19, we see potential for a real shift away from business air travel, commuting, in-store shopping, use of offices, etc.

One would expect that your real estate and infrastructure portfolio, which includes assets such as airports and office buildings and which was worth about $80 billion, will be affected by the long-term impacts of COVID. Has this been reflected in your latest results? Do you see these as potentially permanent shifts, and what do you plan to do about it?

3:45 p.m.

President and Chief Executive Officer, Canada Pension Plan Investment Board

Mark Machin

Thank you for the excellent questions and ones that we wrestle with all the time.

I think it's really interesting. If you look at the real estate portfolio and the real estate industry, there are certain parts of it that have really benefited in some ways from the pandemic. For example, I hesitate to say this seeing as I was cut off on another go, but data centres and broadband have been an area that has really benefited. Anything involved with e-commerce and home delivery and logistics has really benefited. Those areas are booming. At the other end of the spectrum, you have hotels and hospitality and also shopping malls, and they've been really hard hit. In the middle you have offices, which I'll come back to.

On the hospitality side, we have very little exposure to hospitality. We don't invest in hotels and the equity of hotels. We've had that as an investment strategy for many years. We never liked hospitality as an area to invest in.

Shopping malls we do have exposure to in Canada, North America and Europe and around the world, and they have been hard hit. We tend to invest with very strong partners and in what we think are the destination malls rather than smaller malls, but I would say for the North American shopping mall industry that this is going to be a really tough time if there is going to be a requirement for social distancing rather than the best strategy, which is to try to get as many people through the malls as possible.

In addition, arguably in North America, shopping malls have been very overbuilt. By some estimates there are four times the number of malls that are needed in the U.S., so it was always an expectation that these were going to decline. This has probably accelerated that decline as more people have gone to e-commerce rather than going to a physical store. That's probably going to accelerate this transition to the use of those shopping malls towards other things, such as performance centres or entertainment centres.

On offices, I'd say that it's interesting. The jury is out among smart people right now. On the one hand, as long as there is a requirement for social distancing, then arguably people are going to need bigger floor plates if you can get the people into the offices. On the other hand, yes, the work from home environment generally has been one that most companies in the knowledge industries have been able to cope with and it has worked, so there is probably going to be some stickiness in not needing people to commute all the time and in their being able to work remotely and work from different centres. I personally hope that does stick, to some extent.

That being said, it's still not clear what human behaviour will revert to. Generally, when we went through what was a much shorter episode of SARS back in the day, which a number of the committee members will remember, there was a lot of talk back then about people working remotely permanently. It didn't happen, so it's possible that people will revert to the behaviour of wanting to work together in teams, seeing each other and being physically close to each other. It's not clear yet. We are watching that behaviour very carefully.

Sorry, I didn't mention infrastructure. We don't own any airports, and that's not necessarily from a strategy point of view. I wouldn't like to say that we were really smart in not owning airports; we couldn't find one that we could buy at what we thought was a reasonable price. We were consistently outbid over the last 10 or 12 years around the world on airports, so we have zero airports in our infrastructure portfolio.

We do have other assets, which I'd be happy to talk about, some of which have been impacted and others of which have been less impacted.

3:50 p.m.

Liberal

Annie Koutrakis Liberal Vimy, QC

Are there any long-term trends that the CPPIB has observed as a result of the pandemic, and do you see any buying opportunities that these trends may present, like a once-in-a-lifetime buying opportunity as a result of COVID?

3:50 p.m.

President and Chief Executive Officer, Canada Pension Plan Investment Board

Mark Machin

We'll see whether once-in-a-lifetime opportunities come back again. I mean, there may have been some in the depths of that crisis, and certainly we took advantage quickly of some opportunities, particularly in the credit markets.

On the long-term trends, in a short answer, I think what's happened here is an acceleration of a number of trends that were going to happen, particularly accelerations online, so that's anything fintech related, referring to my previous answer. The stickiness of people moving to home banking and doing their finances online, seeing as they've been forced to, particularly in older age groups, is something that is likely to stay. It's the same with telemedicine. People who've used telemedicine have really enjoyed the experience and are likely to keep going in that direction.

On home education, I'd say there are mixed views. What we've found is that in the east, people in India and Asia who have used home education have had a really good experience. People in the west, in Europe and North America, have had a really unsatisfactory experience and really haven't enjoyed it. We're trying to dig into why. There's some speculation that in the east there are much more specialized apps and that companies have been very creative in designing a particular online experience that really engages and is tailored to students, whereas in the west, people have just generally had the traditional teacher get online and try to teach a class, which has not worked so well.

There are a lot of trends like this that we're trying to analyze and be ahead of. One other one that I'll mention, which is going to be a longer-term trend, is I think the move to autonomous vehicles. I think a lot of us, if there had been an autonomous vehicle to jump into to get us between one place and another, would have done that, rather than being next to another pair of lungs. That's something where we would continue to invest, and we've made a number of investments around that area.

3:50 p.m.

Liberal

Annie Koutrakis Liberal Vimy, QC

Thank you so much for that.

Mr. Chair, it brings me back to my CIBC Wood Gundy days and speaking to our analysts.

Thank you so much for that response.

3:50 p.m.

Liberal

The Chair Liberal Wayne Easter

Thank you very much, both of you.

We'll turn to Mr. Ste-Marie. I believe he's up on the first round.

Go ahead, Gabriel.