CPP Investments’ John Graham on Rebalancing Its Portfolio
Summary
TLDRIn this interview, John Graham from CPP Investments discusses the firm's global investment strategy, with a focus on emerging markets like China, India, and Brazil. Despite political complexities, CPP Investments remains committed to investing in China, seeing it as a key to understanding the world's second-largest economy. Graham also addresses the importance of diversification, active investment, and the role of ESG considerations in driving value. He acknowledges the challenges of the past decade and anticipates more subdued returns in the coming years, emphasizing the need for alpha generation in a changing investment landscape.
Takeaways
- 🌍 John Ehrlichman, from CPP Investments, emphasizes the importance of investing in emerging markets, particularly China, India, and Brazil, despite political complexities.
- 📈 CPP Investments, a Canadian pension plan, manages around $570 billion in assets and has allocated about 20% of its portfolio to emerging markets.
- 🇨🇳 Despite regulatory changes and other investors pulling out, CPP Investments maintains a 9% allocation to China, recognizing the significance of the world's second-largest economy.
- 🔍 The firm's investment strategy in China is asset-by-asset, focusing on public markets, with some private investments in real estate and equity.
- 💡 Private credit is a significant focus for CPP Investments, with a majority ownership in Antares, a U.S.-based direct lender.
- 📉 The firm is cautious about the current state of private credit, noting that the market is more active when credit becomes more affordable.
- 📊 John Graham, CEO of CPP Investments, expects lower returns over the next decade compared to the past 10-20 years due to the absence of the secular tailwinds that previously boosted markets.
- 🌐 Diversification across asset classes and geographies is a key strategy for CPP Investments, aiming to outperform passive alternatives.
- 🚫 CPP Investments has avoided direct investments in Russia for the past 10 years due to governance concerns, which has proven beneficial in light of recent geopolitical events.
- 💰 The firm has a single fiduciary mandate to maximize returns for the 21 million Canadian contributors and beneficiaries, with political independence and a focus on long-term financial security.
- 🌿 ESG factors are integrated into CPP Investments' decision-making, with a belief that good governance and respect for human rights and the environment drive value.
Q & A
What is John Ehrlichman's perspective on investing in emerging markets, particularly China, India, and Brazil?
-John Ehrlichman sees a future in investments in emerging markets, including China, India, and Brazil. Despite the political issues, he believes it's important to continue investing in these regions as they represent significant growth opportunities and are part of the world's largest economies.
How does CPP Investments approach investing in China?
-CPP Investments has a 9% allocation to China in their portfolio. They believe in understanding the role of the world's second-largest economy and have decided to continue investing in China, focusing on building assets one by one and ensuring comfort with each investment.
What is the size of CPP Investments' portfolio, and how much is allocated to emerging markets?
-CPP Investments manages around 570 billion in assets, with approximately 20% of the portfolio allocated to emerging markets.
How does John Ehrlichman view the current interest in private credit investments?
-John Ehrlichman acknowledges the excitement around private credit investments but cautions that there is a lot of capital in the market, and the historical opportunities in private credit were sponsor opportunities, which have not been as active recently. He anticipates the market will become more active when credit becomes more affordable.
What is CPP Investments' stance on investing in Russia?
-CPP Investments decided about 10 years ago not to invest in Russia due to governance concerns. They prioritize other large countries and do not engage in direct investments in Russia.
How does John Ehrlichman view the role of ESG in investment decisions?
-John Ehrlichman believes that non-financial considerations such as ESG drive value and are integral to investment decision-making. He emphasizes the importance of investing in companies with strong governance and respect for human rights and the environment.
What is the expected return for CPP Investments over the next decade compared to the last decade?
-John Ehrlichman expects returns over the next decade to be subdued compared to the past 10-20 years, as the last decade was above average due to secular tailwinds. He believes in a diversified approach and active investment to outperform passive alternatives.
How does CPP Investments maintain its independence and focus on its fiduciary mandate?
-CPP Investments operates with political independence, free from government involvement in investment decisions, and has a single fiduciary mandate to maximize returns without undue risk, considering factors that impact the plan and contributing to the financial security of its contributors and beneficiaries.
What is John Ehrlichman's view on the current rate situation and its impact on investments?
-John Ehrlichman believes that central banks will get inflation back to target and that rates will be higher for longer. As a long-term institutional investor, CPP Investments is comfortable with the current rate environment, which offers positive real rates and a better place for investment returns.
How does CPP Investments approach the investment in public and private markets?
-CPP Investments' portfolio is predominantly in public markets, with some exposure to private markets, including real estate and private equity. They continue to look for opportunities in both sectors, ensuring they are compensated for the risks they take.
What is John Ehrlichman's outlook on the future of the private credit market?
-John Ehrlichman anticipates that the private credit market will become more active when credit becomes more affordable and when the broadly syndicated loan market and high yield market return. He sees room for both public and private credit markets to function effectively.
Outlines
📈 Global Investment Strategy and Emerging Markets
Matt Miller interviews John Ehrlichmann, discussing CPP Investments' global investment strategy, with a focus on emerging markets like China, India, and Brazil. John emphasizes the importance of being a global investor and the decision to allocate a significant portion of the portfolio to emerging markets. Despite political complexities, John sees a future in these investments and believes in the need to understand the world's second-largest economy. The conversation also touches on the challenges faced by other Canadian investors in China and the decision-making process behind CPP Investments' approach to risk and return.
💹 Private Credit and Market Opportunities
The discussion shifts to private credit, with John sharing insights on the current state of the market and CPP Investments' involvement. He acknowledges the excitement around private credit but also notes the challenges in the market, such as high debt stack costs and the need for a more active M&A market. John also addresses the importance of public credit and private credit markets and how CPP Investments is adapting to the changing landscape. The conversation includes reflections on past investment decisions and the impact of the Bank of Canada's rate hike on the market.
🌐 Diversification and Ethical Investing
John Graham talks about CPP Investments' approach to diversification and active investing, emphasizing the importance of adding alpha to the portfolio. He mentions the decision not to invest in Russia due to governance concerns and the avoidance of direct investments in cryptocurrencies, which saved the portfolio from significant losses. The conversation also delves into the role of ESG considerations in investment decisions, with John explaining how CPP Investments embeds ESG factors into their strategy without buying off-the-shelf ESG products.
📊 Future Returns and Investment Outlook
In the final paragraph, John Graham reflects on the future of investment returns, expecting them to be subdued compared to the past decade. He discusses the benefits of positive real rates and the challenges of generating returns without taking on additional risk. John also addresses the impact of geopolitical tensions, inflation, and growth rates on the investment environment. He concludes by sharing his views on the importance of diversification, active investment, and the role of non-financial considerations like ESG in driving value.
Mindmap
Keywords
💡Emerging Markets
💡Asset Under Management (AUM)
💡Global Investor
💡Private Credit
💡ESG (Environmental, Social, and Governance)
💡Inflation
💡Diversification
💡Alpha
💡Risk-Adjusted Return
💡Geopolitical Environment
💡Sponsorship Market
Highlights
John Ehrlichman, a guest on Bloomberg TV and BNN, discusses his interest in Emerging Markets, particularly China, India, and Brazil.
CPP Investments, a Canadian pension plan, manages around $570 billion in assets and has a significant investment in Emerging Markets.
CPP Investments has 20% of its portfolio in Emerging Markets, with a focus on the larger economies.
Despite political issues, CPP Investments continues to invest in China, which accounts for 9% of their portfolio.
The firm's investment strategy in China is cautious and involves careful consideration of each asset.
CPP Investments has a good track record in China and believes in the importance of understanding the world's second-largest economy.
The firm is also interested in private credit, with a majority owner stake in Antares, a U.S.-based direct lender.
John Graham, CEO of CPP Investments, believes that private credit opportunities are currently more challenging due to high debt stack costs.
CPP Investments has avoided direct investments in Russia for governance reasons, a decision made 10 years ago.
The firm also avoided investing in crypto, which saved them from significant losses in the latter half of the previous year.
CPP Investments has a strong focus on diversification and active investment to outperform passive alternatives.
The firm expects beta returns to be lower than historical averages and emphasizes the importance of adding Alpha to the portfolio.
CPP Investments has a political independence and a single fiduciary mandate to maximize returns without undue risk.
The firm believes that non-financial considerations such as ESG (Environmental, Social, and Governance) actually drive value.
CPP Investments calibrates ESG considerations according to their mandate and does not buy off-the-shelf ESG products.
John Graham anticipates that the next decade will see more subdued returns compared to the past 10 to 20 years.
CPP Investments has a history of successful returns, with a 10% return over 10 years and a portfolio of $570 billion.
The firm's success is attributed to political independence and a single fiduciary mandate, focusing on maximizing returns for 21 million Canadian contributors and beneficiaries.
Transcripts
all right I'm Matt Miller from Bloomberg
TV and Bloomberg Radio I've been looking
forward to interviewing John for a
couple of weeks now and actually
um John you've proven to be a very
popular guest I've had so many people
write in with questions uh and some
comments so hopefully I can do them
Justice today we talked a couple of
weeks ago on Bloomberg television and
BNN with my buddy John ehrlichmann and
you made news in that discussion because
of your interest in Emerging Markets
you've been focused on that now for a
couple of years
um and uh
not just in broader Asia but
particularly in in China India and
Brazil and I asked you if that would
change at all it's become a very
political issue and uh your your comment
was that no you're there because you see
a future in those investments in that
market
um tell us how important it is to you
and and what kind of size we're talking
about
yeah and we do continue to invest in
emerging markets and just for people's
benefits so CPP Investments is a pension
plan based in Canada we have around 570
billion of assets under management and
we made the decision years ago that it
was important to be a global investor
that you know the Canadian economy is is
not that big and we knew that we were
going to have a sizeable amount of
capital to deploy and we need to build
the relationships the infrastructure to
invest in the biggest economies in the
world
started out in the U.S and Europe and
started to build our capabilities into
the emerging markets and focusing on the
bigger Emerging Markets China India and
Brazil and some other Latin American
countries
and built up now I think about 20 of the
portfolio into Emerging Markets which is
where we're very comfortable uh where we
are but you know it's certainly gotten
more complicated and it's certainly
gotten more complicated and the world's
changed over the past five years
and we do believe it's important to
continue to invest in China we have a
nine percent of the portfolio uh in
China
and just have a view that as a global
investor we need to understand the
world's second largest economy we need
to understand the role that that the
second largest economy has and so we've
kind of made the decision that we still
need to be investing in China but we
spent a lot of time thinking about how
to do it well I just we've seen others
British Columbia Investment Management
said it was halting direct investments
in China Ontario teachers Pension Plan
cited regulatory changes
um in China for his decision to pause
private asset deals in that country so
others
um you know in Canada uh not just you
know American investors are pulling out
what gives you the conviction to stay
yeah and what gives us the conviction is
that it it is a big Market
it does present interesting
opportunities we actually have a pretty
good track record of investing in in
China but I'll get back to the how I
mean the how is really important and we
spend a tremendous amount of time
thinking about how to do it and that
portfolio is really built asset by asset
thinking about what asset we want
exposure to what company do we want
exposure to what sector do you want
exposure to and making sure we're
comfortable with every asset that we
have uh in the portfolio
our portfolio is predominantly public
markets we do have some private we have
some real estate some private Equity but
it is predominantly public and the teams
continue to look and the other question
we ask ourselves all the time is how
much and at the end of the day we're a
global investor we need to get paid for
the risk if the risk change changes we
need to get a better return
and so we're always asking ourselves are
we getting compensated for the risk and
if we're not then we'll we'll adjust our
portfolio
it's interesting uh the majority of your
portfolio is public but
um when I was looking into CPP and and
researching your career
um a lot of
there were a lot of comments about how
private Investments and specifically
private credit was the future as to
where retirement savings
um the investment process for retirement
savings needs to go and I actually you
know in the last six months I've heard
more about private credit than I have in
the previous 20 years in my career here
at Bloomberg it's really exploded
um are you still as focused on private
credit as you were you know before you
took over the top job at CPP yeah I used
to run our credit department so
obviously I'm very constructive on uh on
credit and I agree I mean just the the
world is right now really excited about
uh private credit I don't want to throw
cold water on it but the world is very
excited and and I've heard more about
private credit and had more inbounds
from other institutional investors on
private credit and how we're thinking
about private credit uh we're the
majority owner of Antares which is a U.S
based direct lender so a lot of exposure
in big one yeah yeah and it's been a
fantastic uh investment and a lot of
exposure into the sector
um but there's a lot of money in private
credit right now and look at the the
activity and talking to the team
there are opportunities but a lot of the
historical opportunities in private
credit were sponsor opportunities and we
really haven't seen the m a activity
come back to where it was so when an
opportunity does come to Market there's
a fair amount of capital that'll that'll
move in
um and Chase it
and I anticipate that you know we'll
start to see the m a market get more
active
when you actually start to see probably
credit get a little bit more affordable
I mean I'm not just not sure the model
works when the debt stack costs over 10
percent
and in time we will need the broadly
syndicated loan Market to come back
we'll need the high yield Market to come
back there'll be plenty of room for the
private credit but I think in the steady
state that's really where you need to be
is have both a public credit and the
private credit markets uh functioning
but you're not as interested in it right
now I mean when I talked to people over
the last couple weeks I say hey I'm
interviewing John Graham they were like
oh you should ask him you know when
private credit is going to get unstuck
right because for at least a year now
we've been in a situation where sellers
aren't willing to let go of assets at
the prices it's very opaque Market
there's not really a secondary market so
um are you not as interested now as you
you were in your previous job
yeah no we're still interested for sure
and and it's really what's the
opportunity set and what are the
opportunities in the market and there
are opportunities for sure
um our bread and butter at CBP
Investments was the sponsor market and
really helping and investing in the the
actual uh transactions
and that that just hasn't been as active
and part of it is again if the debt
stack is too expensive there's not going
to be a huge amount of of uh
transactions now there's another part of
the market of more special situations or
transitional capital or rescue capital
or
um and that that certainly people are
are interested in that
um it hasn't historically been a big
Focus for us we've been more in the in
the sponsor side
um and I just say there that you know
that's not a place that you want to
probably be a tourist in if to get into
really the the special situation side I
mean that's a very there's some very
capable funds out there and we would
probably look to partner with them
how do you see the the rate situation
right now
um you know when I came in this morning
to plan for my one o'clock I do a
program with with BNN
um and we were expecting the Bank of
Canada to be on hold and my producers
were saying you know this is a good
story because the Bank of Canada is one
of the few central banks that seems to
precede the FED everybody else is a
follower so when they came out with a
surprise hike you know the markets went
haywire I looked over the 10-year and it
was up 13 basis points the U.S 10-year
right yeah um what do you make of the
rate situation in particular from from
the Canadian perspective after what
happened this morning I've been in the
view that the central banks are going to
get inflation back to Target and and do
not want to almost tame inflation that
they want to tame inflation and in
Canada we had inflation coming down and
then essentially stalling out and Tiff
in the Bank of Canada decided that they
needed to to hike rates again
um so in in some ways I think it's
actually consistent with what they've
been saying that they're they're they
will get inflation back to back to
Target
the market seemed to well the markets
for a long time didn't seem to believe
central banks and I still if you look at
the warp function on the Bloomberg uh
we're pricing in I think two cuts before
the end of the year for the FED even
though Jerome Powell comes out time and
time again and almost explicitly says
we're not going to cut rates this year
why do you think why do you think a
market that you know don't fight the FED
is one of the oldest adages in
investment and yet everyone's fighting
the fed this year and when I talk to
other investors other institutional
investors and you ask for their view on
on rates and what I hear
consistently is we think rates will be
higher for longer
but that's not what the market actually
says is happening right that they think
there'll be a cut so there's definitely
a disconnect in what people are saying
and what the markets are pricing in our
portfolio we actually have viewed it
that rates will be higher for longer and
as a long-term uh Institutional Investor
and thinking about returns over the long
run we're actually comfortable with
where rates are today it was a painful
path to get here but with positive real
rates we're in a better place right now
I was going to ask you about that so I
mean
um you're in a in an incredibly
important position for the people of
Canada you know you have how many people
have their retirement savings with you
21 million 21 million so you've got to
generate returns yeah which has been
uh very difficult without
going out on the risk Spectrum until
until recently are you in a much better
position now well
I would say this is It's a good question
and
like many people you know I I would
think we view that returns over the next
10 years will will probably be subdued
compared to the past 10 20 years
and but I think where we are today is a
little bit better than where we were a
year ago
um but we have you know positive real
rates we have nominal rates higher we're
we're in a better place to stay than we
were a year ago well but in in the past
couple few years you've had to take
risks to generate returns and now you
have more risk-free return than you had
in the last decade you have yield right
yeah yield in government bonds which we
haven't had for a while and I think
about past 20 years and we had just so
many Tailwinds into the markets right we
had really the secular decline in rates
we had globalization
um pretty benign inflation really benign
geopolitical environment really all
constructive and putting a lot of
Tailwinds into risk assets and across
the board right into risk assets we sit
here today and rates are higher
um the geopolitical environment is is no
longer benign inflation is is not
something that uh people are ignoring
and look at anticipated growth rates
over the next few years and and growth
can hide a lot of sins in the economy
and look at growth rates over the next
three four years so you think about as
an investor
um how are you going to drive returns
over the next five ten years
so how will you yeah the that's what I'm
here it's definitely the uh the really a
few things that we're focused on one is
diversification we've spent the last 10
years building out our capabilities
across asset classes and geographies and
continue to believe in the value of
diversification important to have our
Capital invested in different countries
around the world and in different asset
classes around the world we are also an
active investor and we have built the
organization
to outperform the passive alternative as
uh pension plans do and so every dollar
we spend is trying to drive Alpha into
the portfolio you say Alpha will not
walk in the front door you have to
actually go find it and so right now we
expect kind of the beta returns to be a
little bit lower than they have been
historically and it's really going to
come down to Alpha and and trying to add
off into the portfolio there's certain
places though you're not willing to go I
mean we talked about emerging markets
and uh I can't remember
who coined the term bricks Jim O'Neill I
think right but there was an r in that
term and you're about to be the I and
the C when you look internationally yes
yeah you don't invest in Russia even
before the invasion of Ukraine why was
that yeah we uh We've made the decision
about 10 years ago that uh we wouldn't
invest in Russia and we wouldn't invest
in Russia from a governance perspective
and we weren't making a big statement
other than it's a big world we have
limited resources and we're going to
prioritize
other large countries so we didn't do
direct investments in Russia so when
Russia invaded Ukraine we had no direct
investments in Russia to to deal with
the portfolio which was you know a great
place to be and sometimes the best
decisions you make or what you decide
not to do and the other kind of Pitfall
we avoided last year was was crypto and
we'd spent a tremendous amount of time
trying to understand crypto we had a lot
of our colleagues who were really
enthusiastic but we'd never taken that
leap of doing direct investments in in
crypto which I think saved us a lot of a
lot of time through the back half of
last year
um even though you had the legal ETFs to
do it you know it's funny to me what
you're allowed to do in Canada that
you're not allowed to do in America I
think about weed I think about crypto
um but we won't talk about that the
interesting thing is that uh
you you didn't go into Russia and I
would think that it's a it was a value
judgment
um not in terms of valuations but in
terms of ethical values right and was it
was it all related to you know the lack
of the rule of law the problems in
investing in a country that had you know
annexed Crimea already yeah and this was
long before that I mean we're talking 10
years ago
um before the the annex of Crimea and it
certainly was through a governance lens
you know and I know ESG is a very
politicized term but
I know I figured that's where you're
going it was certainly through a uh a
governance lens of
um you know from a risk-adjusted return
we're just not going to get compensated
for the risks here and plus again you
know we saw better opportunities in
other places so
um you know this morning when I came in
we had a bunch of protesters outside uh
it was kind of an ESG thing they were
angry that Tia I think uh owns fossil
fuel assets how do you how do you look
at ESG which there's been an amazing
backlash on this side of the Border over
the last year
but it was it seemed like something that
was going to drive the investment
environment still May yeah um in the
Years preceding that it's been
interesting to watch and it's been
interesting to watch the the backlash
and maybe I'll just share a little bit
about CBP Investments on that we were
created and we actually created through
an act of Parliament
but there's people often ask me what are
what's the secret to your success and I
think the organization's been very
successful we have a 10 return over 10
years so a 10 kagger and the portfolio
is 570 billion
and the two components that I think are
most uh the two key kind of contributors
to Our Success is first we have
political Independence
we have no government involvement in our
investment decision making we operate
completely independent of governments
and two we have a single fiduciary
mandate we are there to maximize return
without undue risk of loss taking into
account the factors that impact the plan
and we do it in the best interest of the
21 million Canadian contributors and
beneficiaries we're there to contribute
to Financial Security and retirement at
a time when people may be in their most
vulnerable part of their life and that
that's what we're there to do
um and as we think about
the return of the portfolio
um we do think non-financial
considerations such as ESG actually
drive value
uh governance right we should invest in
companies that have board of directors
that's there's
we think on the S side companies that
respect human rights respect
um you know the environment uh E I think
there's actually a tremendous
investment opportunity as the economy
tries to transition to Net Zero and
we've looked at ESG and say based on who
we are what we're trying to accomplish
let's calibrate this to who we are and
so I think most investors incorporate
ESG into their investment decision
making we certainly do but we calibrate
it for who we are and what we're solving
for
um we don't buy a product and I think
it's very hard to buy a product called
ESG but we certainly embed it into how
we make decisions let me finally ask you
about the kegger that you you mentioned
I was looking over the numbers and um in
a lot of quarters you were much higher
that I was tracking 11 11.3 percent
is
this decade gonna be worse you think
than the last decade are they gonna are
those numbers going to be lower
it's a the and that's what I was
alluding to earlier I mean we we
certainly benefited
um over the past 10 years from some of
these secular Tailwinds and as we look
we still see you know interesting
opportunities
but I think our we would expect are the
returns over the next decade to get back
to more longer term
um averages we think probably the last
decade was actually a little bit above
average
all right John thanks so much thank you
I appreciate it John Graham from the CPP
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