Head of CPPIB warns on rush to illiquid assets

The biggest global funds should all be monitoring their investments in illiquid assets, according to the head of Canada's largest pension fund.

"I do ring the alarm bell on not to be too invested in illiquid assets," Mark Machin, chief executive officer of the Canada Pension Plan Investment Board, said in an interview Monday at the World Economic Forum in Davos. "We are very comfortable with our risk models and what we would do in various lurches down markets, but I do worry about the expansion of a lot of funds like us around the world into private illiquid assets."

Lower-for-longer interest rates have pushed pension funds and asset managers to cast their nets far and wide in search for returns amid a slew of geopolitical risks and trade tensions. Investors looking to diversify their portfolios are seeking shelter in low volatility assets that tend to be illiquid like infrastructure investments.

But the rapid dash to alternative assets by the stewards of retirement cash comes with risks, and it's caught the attention of regulators. One major worry is that a downturn in funds would struggle to pull cash out of illiquid assets. While pension funds typically hold debt until maturity it doesn't mean they can't be hurt by mark-to-market losses.

The head of CPPIB said that while there's little to worry about in the near term, investors should be very careful about the huge shift of assets from public to private markets that could trigger steeper sell-offs and exacerbate a crisis.

"You have to be very careful to make sure that you truly understand the liquidity positions, that you truly understand if that thing turns out to not be liquid you can still cope, and if you can still pay the university, the pensioners," he said.

The Toronto-based pension fund manages C$409.5 billion ($313 billion) in assets for about 20 million Canadian pensioners. Half of that is in illiquid assets, Mr. Machin said. CPPIB reported a 2.3% return on investments for the quarter ended Sept. 30. Its 10 and five-year annualized net nominal returns were 10.2% and 10.3%, respectively.

"Our view is that these global trade tensions will continue and create some weight on global trading and supply chains and technology. There is nowhere to hide from that so you need to diversify," he said. "If you sell, you have to hold something. For us, you'd have to invest in something else either its cash or some physical commodities."

CPPIB, which currently holds about 85% of its assets outside of Canada, plans to boost exposure to better yielding emerging markets, lifting that allocation to a third of its portfolio in the next five years. The pension fund still sees private equity as a good asset class from a risk return point of view and is relying on venture capital to participate early in the next market trends.