The vast array of alternative investments in the C$268.8 billion ($204.3 billion) Canada Pension Plan Investment Board's portfolio makes its risk management very complex, requiring a look beyond asset class labels and into what the board's head of portfolio construction called “the economic essence” of each asset.
“That's our challenge,” said Geoffrey Rubin, managing director and head of portfolio construction and research for the Toronto-based board. CPPIB manages the assets of the Canada Pension Plan, Ottawa. “At some level, we discard asset-class labels and look at risk from a very high level. Where that level is varies by the individual asset being considered.”
“From our starting point, we looked at what kind of portfolio reaches our mandate” of providing pension benefits in Canada, Mr. Rubin said in an interview, “and with what collection of investment strategies. It requires us to balance our risk-return profile across our entire portfolio. It's not enough to have certain real estate, infrastructure, private equity investments, but what all of these are contributing to the overall portfolio.”
As of June 30, CPPIB had 17.7% of its assets in private equity, 11.4% in real estate and 5.6% in infrastructure, according to the board's second quarter report. For its fiscal year, ended March 31, private emerging markets equities returned 46.8%; private developed markets equities, 30.2%; infrastructure, 16.5%; real estate, 14.1%; and Canadian private equities, 10.1%.
Overall, the board returned 18.3% for its last fiscal year.
Mr. Rubin spoke as the board on Oct. 8 announced two co-investment deals, a $900 million joint venture with commercial property manager Broe Group to acquire the Denver Julesburg Basin, an oil and gas field in Northeast Colorado, from Encana Oil & Gas (USA), and a partnership with APG Asset Management, which manages the assets of the e344 billion ($385.6 billion) Stichting Pensionfonds ABP, Heerlen, Netherlands, and real estate investment manager Goodman Group, for U.K. logistics and industrial investments that could reach £1 billion ($1.5 billion).
They're the latest examples of the board's strategy to implement its real asset and infrastructure investment strategy. The use of joint ventures spreads the risk among co-investors, Mr. Rubin said, but it doesn't lessen the board's responsibility to make prudent investments. That's where he said CPPIB's governance structure, which allows the board to freely invest without government approval, comes in.
The model is “incredibly supportive, providing a clear mandate and ability to invest in asset classes and geographies where we can take all necessary steps from portfolio planning to construction and implementation,” Mr. Rubin said. “Everything we do, including assessing risk and return, ultimately stems from that developed governance model.”
With co-investments, “more governance issues are involved,” Mr. Rubin said. “We're huge believers in partnering with very strong firms, ones with similar investment beliefs and horizons as us, and with their own strong governance. That's particularly important in emerging markets and other investments, where the (investment) expertise we bring is supplemented by the understanding our partners have in these markets and these assets.”