CPP Investments’ John Graham on Rebalancing Its Portfolio

Summary

In 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

00:00

📈 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.

05:01

💹 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.

10:03

🌐 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.

15:04

📊 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.

Keywords

💡Emerging Markets

Emerging markets refer to countries with developing economies that have the potential for rapid growth. In the video, John emphasizes the importance of investing in these markets, particularly China, India, and Brazil, due to their large size and potential for significant returns. CPP Investments has a significant portion of its portfolio in these markets, recognizing the role they play in the global economy.

💡Asset Under Management (AUM)

AUM is a measure of the total value of assets that an investment manager manages on behalf of clients. It is a key metric for investment firms. In the context of the video, John discusses CPP Investments' AUM, which is around 570 billion, indicating the scale of the firm's operations and its responsibility to generate returns for its clients.

💡Global Investor

A global investor is an individual or institution that invests in various countries and markets around the world, seeking to spread risk and capitalize on diverse economic opportunities. John outlines CPP Investments' strategy as a global investor, highlighting the need to understand and invest in the world's largest economies, including those in emerging markets.

💡Private Credit

Private credit refers to the provision of debt financing by non-bank financial institutions, often in the form of loans to businesses that may not have access to traditional bank lending. In the video, John discusses the current excitement around private credit and CPP Investments' exposure to this sector through their ownership of Antares, a U.S.-based direct lender.

💡ESG (Environmental, Social, and Governance)

ESG criteria are a set of standards used by investors to measure a company's impact on the environment, its social responsibility, and the quality of its corporate governance. John discusses CPP Investments' approach to ESG, emphasizing that non-financial considerations like ESG can drive value and that the firm embeds ESG considerations into its investment decisions.

💡Inflation

Inflation is the rate at which the general level of prices for goods and services is rising, and subsequently, purchasing power is falling. In the video, John talks about the central banks' efforts to control inflation and the impact of inflation on investment returns, noting that positive real rates are beneficial for long-term institutional investors.

💡Diversification

Diversification is an investment strategy that involves spreading investments among various financial instruments, industries, and other categories to optimize returns and lower the risk of loss. John emphasizes the importance of diversification in CPP Investments' strategy, as it helps to manage risk and capture opportunities across different markets and asset classes.

💡Alpha

Alpha, in finance, refers to the excess return of an investment relative to the return expected given the investment's level of risk, as measured by beta. In the video, John discusses the expectation that beta returns (market returns) will be lower in the future, making the pursuit of alpha (excess returns) more critical for CPP Investments.

💡Risk-Adjusted Return

Risk-adjusted return is a measure of the return on an investment, adjusted for the risk taken. It is used to evaluate the effectiveness of an investment strategy. In the video, John mentions that CPP Investments does not expect to be compensated for risks in certain markets, like Russia, due to governance concerns.

💡Geopolitical Environment

The geopolitical environment refers to the political dynamics and relationships between countries, which can significantly impact global markets and investment strategies. John discusses the changing geopolitical environment and its implications for investment returns, noting that the benign geopolitical environment of the past is no longer the case.

💡Sponsorship Market

The sponsorship market in finance refers to the investment in transactions that are backed by sponsors, typically private equity firms, which provide capital for deals. John mentions that CPP Investments' focus on the sponsorship market has been less active due to high debt costs, and the firm is looking at other opportunities within the private credit space.

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