CDPQ CEO touts light rail as a return generator

Officials at Caisse de Depot et Placement du Quebec, Montreal, plan to further export to other countries their concept of direct infrastructure investment through the building of light-rail systems.

That was one of several topics in a wide-ranging Jan. 9 interview with Michael Sabia, president and CEO of the C$308.3 billion ($230.4 billion) CDPQ, which manages the assets of the C$78.5 billion Quebec Pension Plan and other public pension and insurance funds in the province.

Among other subjects were:

• The investment impact from strained Canada-China relations following the Dec. 1 arrest of Meng Wanzhou, the chief financial officer of Chinese tech giant Huawei Technologies Co.
• The state of investment in the U.S. after successful renegotiation of the former North American Free Trade Agreement with its southern neighbor and Mexico.
• The lessons CDPQ has learned from recent geopolitical turmoil.
• CDPQ's interest in cannabis, cryptocurrency and technological advancement.

Mr. Sabia said the progress made in CDPQ's light-rail project in Montreal, Reseau Express Metropolitain, has attracted the attention of other institutions that are considering helping build transportation infrastructure in their countries. He cited a joint project with the NZ$39.3 billion ($26.5 billion) New Zealand Superannuation Fund, for a light-rail system in the superannuation fund's home base of Auckland that's "in the planning stage. For them and ourselves, this will pay out returns, and we can manage the greenfield risk."

Montreal's REM construction, which will connect the downtown area with the city's Pierre Elliott Trudeau International Airport along with the west and northwest suburbs, began in April with a scheduled completion in 2021. "Here in Montreal, this is no longer a plan — it is happening," Mr. Sabia said.

Of the C$6.3 billion total REM project cost, half is being covered by CDPQ, with the other half split between the Quebec and Canadian governments, Mr. Sabia said.

"There's also been interest in the U.S." for a similar partnership, Mr. Sabia said, although he would not say which U.S. entities have approached CDPQ. He added that CDPQ wouldn't rush into those projects. "We need to walk before we run," Mr. Sabia said. "People have been skeptical. But will we export this? Absolutely. We think this is a differentiator for us."

Some of the skepticism Mr. Sabia referred to involves the view that such an investment, part of CDPQ's C$22 billion in infrastructure, is potentially divergent from the manager's role as a responsible fiduciary of retirement assets. But Mr. Sabia said that's not the case — not only with REM but also with other sustainable investments that CDPQ has done.

"For us, (REM) will pay us 8% to 9% every year," Mr. Sabia said. "That's not cyclical, not affected by business cycles; that's 8% to 9% every year. Our target return for our overall portfolio is (annualized) 6% to 6.5% long term. There's no way this asset offsets our fiduciary responsibility. It allows us to do two things: get a significantly higher return than our long-term rate of return, and it gives us returns that are more stable, more countercyclical."

Mr. Sabia called claims that such investments are contrary to fiduciary responsibility "kind of a paper tiger."

Exporting investment ideas like REM has drawn attention to CDPQ as a global investor, Mr. Sabia said, but as a Canadian money manager, it's not immune from recent geopolitical events such as the arrest of Huawei's CFO in December and the recently concluded renegotiation of NAFTA, now called the United States-Mexico-Canada Agreement.

Mr. Sabia said the Huawei arrest has had "no impact" on CDPQ's investments in China, which are part of its overall 10.7% of assets in growth markets. "Our view of China is, it's the largest economic purchasing provider in the world," he said. "With an eye to the future, it's economically logical that the center of the world is moving south and east. That's an indisputable fact. We will continue to invest there. ... The situation with Huawei, I hope, is a temporary circumstance and won't happen to hurt relations (with China), which have been good."

Meanwhile, the trade agreement with the U.S. and Mexico, he said, was expected and will allow CDPQ to continue to look at its closest southern neighbor for investment. As of June 30, CDPQ had 28% of its assets invested in the U.S.

The Canadian and Mexican economies are "especially integrated with the U.S.," Mr. Sabia said. "The degree of integration is why, to be honest, I was confident that NAFTA talks would end up putting us in a good place, and it did. (Failing to agree) would have been so hurtful to the U.S. economy itself that I thought cooler heads would prevail. All that turned out the way it should have."

But, Mr. Sabia said, there was a lesson learned as a result of those recent geopolitical issues for both the Canadian government and CDPQ: the danger of being overly reliant on one or two economies.

"The NAFTA negotiations have shown that (Canadians) make a mistake to count on the U.S., that the U.S. will always be there," he said. "We need to think broader across the globe. That's certainly the same with us. And if growth in China is down to 4.5%, growth at that size is an immense amount. So the point is absolutely right — the same logic for the Canadian government to look globally is the same for us."

What doesn't appear logical to CDPQ officials, according to Mr. Sabia, is investment in cannabis and cryptocurrency.

"As an industry to invest in, it's way too early," he said of cannabis, which is now legal to use in Canada. "It's too hard to do a risk analysis where it will be five years from now. We have no plans in the near term to invest. Maybe over time, but not now."

He had more pointed comments on cryptocurrency. "Bitcoin is a casino," he said. "We don't see people putting billions of dollars in what really is a roulette wheel. We would not touch that, period."

What is attractive to CDPQ, however, is cryptocurrency-related blockchain technology, as well as the growth in artificial intelligence and machine learning, Mr. Sabia said. And that's not only for future investment but also in the reassessment of CDPQ's current investments, specifically in financial services.

"It's very important to draw a distinction between bitcoin and blockchain," he said. "We have considerable interest in blockchain, and we're likely to find opportunities in that. Blockchain will touch a lot of different sectors from an investment and risk management perspective, both with upside and downside risk. We think the same thing about business opportunities with artificial intelligence, machine learning. We're very interested in these areas and are actively looking at those (investment) opportunities."

Mr. Sabia added: "We're looking at both the positive and negative impacts (of financial technology) and how firms are reacting to the changes. This is particularly with financial services. When our folks talk to financial institutions, we ask what they're doing around these technologies. How are they protected against the fintechs of the world? That can make banks more or less attractive. If they aren't keeping up or advancing on technology, they could get eaten up. It's a significant factor in our evaluation of investments."