CPPIB CEO Mark Machin says the active management approach to investing has improved the plans worth by $29.2 billion over 12 years, compared with a passive approach.
Mark Machin may not be a household name, but as CEO of the Canada Pension Plan Investment Board (CPPIB), the Englishman probably has a greater influence on your retirement plans than any politician, bank executive or stock broker. He’s the guy ultimately responsible for how the $392 billion in our national pension fund is invested, after all.
So far, things seem to be going well. The CPPIB annual results showed the fund had grown by $36 billion in the fiscal year ending March 31, averaging an annual return of 11.1 per cent over the last decade.
After the release, Machin — a former Goldman Sachs executive — sat down with the Star to talk about what kind of shape the CPP is in, what keeps him up at night and whether the $3.2 billion the CPPIB spent on expenses this year were worth it.
Do Canadians need to worry about the CPP fund having enough money to meet its obligations?
MM: Don’t believe me, believe the chief actuary of the country. The office of the chief actuary does a report every three years to look at whether the CPP is sustainable, over 75 years into the future. And they project the demographics, how long people are going to live, how many people are going to be in the workforce, immigration — all these issues. And the answer is, based on their projections, that yes, it’s sustainable, and it’s very comfortably sustainable.
How has the CPPIB’s asset mix changed over in the years you’ve been there, and why?
MM: Part of it is just continuing to diversify. So we’ve gradually increased exposure around international markets, so away from Canada and the U.S., although Canada’s stayed pretty stable and the U.S. has stayed pretty stable. But Asia has increased, because of the economic growth in Asia, and Latin America has gradually increased, so we’ve put an office on the ground and diversified a bit into that. And then recently, we’ve been investing a little bit more into fixed income and to credit, and real assets. Real assets would be things like infrastructure, or power; renewable energy was a new strategy we started last year.
Real assets are generally less liquid than publicly-traded securities — they’re also harder to value, and it’s harder to assess risk. Given all those issues, is it worth investing in them?
MM: One of the ways of managing risk is to not have all your eggs in one basket. If all we did was invest in liquid, public equities, then that would be quite risky, versus having some of it in buildings, or some of it in toll roads. Generally, these things will perform even if the market crashes. Tenants will still pay money for rent in the building and people will still be driving on the road. We want multiple ways of investing, rather than just one bucket of investments. The challenge is that in the world today, there’s lots of money competing for these investments, so people are paying very high prices for them.
What keeps you up at night?
MM: The tensions between the No. 1 and No. 2 economies in the world, and how that can slow the whole world down. When people are nervous about where that’s going — companies are nervous about building the next plant, starting the next project, hiring the next bunch of people — it just slows everything down.
You were in the private sector before. What’s the biggest difference in being in a public sector investment role?
MM: My purpose before was making money for the company, and making money for shareholders. Here it’s about supporting retirement security for 20 million people. That’s what attracted me to the job in the first place — a chance to apply skills that I had before to something that I felt had a really sound purpose, that I could wake up every morning knowing that I was doing something worthwhile.
When the CPPIB decided 12 years ago to take an active management approach, there were plenty of critics, because active management costs more, and there’s a lot of evidence that it doesn’t do any better than passive management. Is it worth it?
MM: Ultimately, it’s $29.2 billion worth it — that’s how much more we’ve made over 12 years than we would have using the passive approach. Secondly, we have to be really honest with ourselves; if these numbers over a long period of time are not positive, then yeah, we should probably go back to a passive approach. And if you’re just average, then yeah, there’s no point.
Canadians contributed $3.9 billion to the CPP Fund this year, and the CPPIB had $3.2 billion in expenses, of which $1.6 billion went to external managers. How would you justify that to Canadians?
MM: The net income last year was $32 billion and the return is 8.9 per cent, after all expenses — internal, external, everything. And that’s the important thing. We have an obligation to invest in a fund that’s going to make extraordinary returns. The fees are higher, but we create net value for 20 million people, so we should do that.
Are there any lessons individual investors can take from the way the CPPIB invests?
MM: One is that it’s really, really hard. So think carefully about whether you really have the skills yourself. Because when you invest in the market, you’re competing against professional investors who have teams of people who are able to understand the situation. If you’re doing it yourself, it’s better just to do passive. The second thing is just to diversify. Don’t have all your eggs in one basket — or two baskets or three baskets.
Why Mark Machin — the man responsible for our national pension plan — thinks it’s okay to spend $3.2 billion on expenses. Josh Rubin - Business Reporter May 21, 2019
This interview has been edited for clarity and length - Read the full article here.
Josh Rubin is a Toronto-based business reporter. Follow him on Twitter: @starbeer
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