CPP Investments’ investment beliefs are collective well-grounded judgments, made in the context of CPP Investments’ legislated objective under Section 5(c) of the CPPIB Act, “… to invest with a view to achieving a maximum rate of return, without undue risk of loss, having regard to the factors that affect the funding of the Canada Pension Plan.” The Investment Beliefs provide clarity and consistency to CPP Investments’ decision-making, a guide to evaluate and select appropriate investment strategies globally, and a compass to stay the course.
Taking on risk is inseparable from maximizing long-term returns
Deliberately and prudently taking investment risk is necessary to earn long-term returns above the rate achievable on a minimum-risk investment. Risk characteristics of differing asset types and investment strategies vary over time but they are significantly more stable than return outcomes. Overall risk profile is the dominant influence on long-term Fund returns. CPP Investments must take on appropriate, measured risks to meet its legislated objective and to achieve the long-term returns that will best sustain the CPP for future generations.
Long-term investing can provide opportunities for greater rewards
Greater certainty of assets and predictability of cash flows allow truly long-term investors, such as CPP Investments, to resist the pressures of short-term market events, persist with soundly conceived strategies and await the rewards of patient investing. Long-term investors can profit from opportunities created by shorter-term investors, such as in times of distress, and from investments those investors are unable or unwilling to take on. Investors with longer horizons can also make greater use of longer-term indicators to better evaluate investment strategies and individual opportunities.
Capital markets provide opportunities for advantaged investors to generate superior returns
Global capital markets are never perfectly priced at any level – be it an asset class, geography, sector or security. Public market prices exhibit noise, shorter-term momentum leading to over/underpricing and some tendency for subsequent mean reversion. Private market prices show similar characteristics but generally with less observed volatility in their reported appraisal-based values. Individual markets, sectors, securities and investments can at times be significantly mispriced in the short term relative to longer-term intrinsic values. This creates opportunity for the skilled and well-informed investor to take positions (long or short) at favourable prices and ultimately reap enhanced value. Given its mandate and comparative advantages, CPP Investments can and should actively manage Fund assets to seek additional long-term returns that exceed the additional costs and risks of doing so.
Sound diversification of assets and exposures builds resilient portfolios
Diversification is the most powerful way to enhance investment returns at a targeted level of total risk. Returns on asset classes or types are largely driven by a limited number of underlying and more independent risk-return factors. Truly effective diversification goes beyond standard categories such as asset classes, countries and currencies. It requires looking at underlying risk-return factors, and combining exposures to them to build the most resilient long-term portfolios at the targeted risk levels. Participation in both public and private investment strategies substantially broadens the range of investable assets and available skills. Global diversification of both assets and currency exposures is appropriate to offset purely domestic risks to the sustainability of the CPP.
Active selection of individual investments can outperform passive market participation
Employing the expertise required to successfully select individual investments carries significant costs, especially in externally managed funds and private investments. However, in many markets superior strategy and focused investment selection can add material value, after all costs, relative to passive alternatives or risk-comparable proxies. A wide range of internal skills allows CPP Investments to add net value to the Fund by selecting superior active strategies, managing certain strategies cost-effectively in-house and accessing world-class specialist external managers. Multiple active strategies, drawing upon distinct investment theses, significantly increase portfolio breadth and risk-adjusted returns. Active management can be complemented by low-cost, index-based strategies to achieve the overall factor exposures required for optimal diversification.
Strategic positioning can create value and reduce risk
Conditions vary widely across global capital markets and over time, and market-implied returns and prospective risk/return trade-offs embedded in them correspondingly differ. The future direction of market movements can at times be predicted with some confidence, although the path and timing of movements are much less predictable, especially over short periods of time. CPP Investments can make risk-controlled shifts in market exposures in a material fashion to impact Fund-wide allocations, both to add returns by exploiting gaps between current market pricing and longer-term fundamental values, and to reduce risks when appropriate.
Incorporating non-market and emergent factors into decision-making creates more sustainable value
Corporations and organizations that better identify and appropriately manage environmental, social and governance factors and other long-term strategic issues are more likely to endure, and create greater value over the long term, than those that do not. Also, more diverse teams that harness the power of inclusion can deliver higher returns. Climate change may well radically change economies and capital markets. Managing the risks and opportunities created by these and other broad factors is an integral part of CPP Investments’ investment processes, to ensure the Fund is structured to create value and growth that is sustainable over the long term. CPP Investments engages actively with corporate managements to foster enhanced business practices, particularly in investments where it has a significant ownership position but also as a responsible steward for all holdings.
World-class governance, accountability and risk management strengthen delivery of maximized returns at appropriate levels of risk
A governance framework that is cited as a world-class model drives CPP Investments’ relentless focus on investment management and enhances Fund returns, while safeguarding CPP Investments’ commitment to act only in the best interests of CPP contributors and beneficiaries, and in accordance with our Guiding Principles. Clear accountability for decisions and results is critical to disciplined decision-making, without stifling innovation and appropriate risk-taking. Ongoing management of risks within stated appetites provides a well-defined environment within which to maximize returns.