On Friday October 14, 2022, CPP Investments President & CEO John Graham addressed the Canadian Chamber of Commerce at its Annual General Meeting. What follows is a transcript of those remarks.
Check against delivery.
Stephen, thank you for that kind introduction.
Good morning everyone. I am delighted to be back in Ottawa, my hometown, and delighted to be in such great company as we look ahead to the future of business success here in Canada.
Now, charting a path to the future, charting a path to success is anything but straightforward right now.
As I reflect, earlier in my career, I actually started out as a research scientist, not an investor. In those days – I won’t tell you how many years ago, volatility or volatile meant something very different for me as a scientist.
It trained me in the importance of handling volatility with care – the role of planning and the role of risk management. And, also showed me that if managed properly – volatility can lead to innovative outcomes.
Today, as we seek to manage volatility in the investing markets, we see many factors at play. It’s changing by the day, sometimes by the hour, or even by the minute, and this volatility is dramatically impacting the global economy.
While we at CPP Investments are paying very close attention to current events, we always keep an eye firmly fixed on the future.
As the investor of the CPP fund, the largest single pool of capital in the country, CPP Investments plays a vital role in the financial security of 21 million working and retired people in Canada. So thinking about the future, planning for the future, is what we do.
My message to all of you is this:
We are going to continue to face headwinds in the economy. But as always, those challenges, those headwinds will create new opportunities. As patient investors, by design, CPP Investments will continue to do our part, so our futures – and our children’s futures, will be well supported.
Today I will address three areas:
First, the current global macro-economic landscape;
Secondly, what we are seeing, as investors,
and finally, how we are navigating the volatility.
Then I will have an ask of you.
As leaders in the Canadian business community, you represent millions of employees and households from coast to coast. You know that confidence is the lifeblood of stable, dynamic commerce.
Now, unfortunately, we’re all hearing a lot of bad news lately.
But Canada has a healthy retirement foundation, one of the best in the world. It’s my hope that you will come away with a renewed sense of confidence in how we are investing the CPP Fund and in the future retirement outlook in Canada. And ultimately, that you could help share that story across this great country.
First, let’s talk about the global economy.
It’s been a choppy year. With wild swings in the markets, increased geopolitical tensions, persistent inflation, it’s looking like a radically different world post-COVID. You’ve already heard or know the facts and figures, but I will reference a few for context.
Last year when Tiff Macklem addressed this group, he said that at close to 5%, the rate of inflation was too high noting it was already well above Canada’s 2% target. Today, a year later, inflation is both higher, and more persistent.
In June we hit a 39-year high for inflation, and the Bank of Canada isn’t expecting a return to its 2% target until the end of 2024. Meantime the U.S. hit a 40-year high – also in June – at 9.1%. And in Europe, it doesn’t look good with many countries still dependent on Russian gas.
As different parts of the world try to tackle inflation, most central banks are aggressively increasing interest rates. Currencies are swinging wildly – the British pound is near the bottom of the list, with the U.S. dollar continuing to surge, triggering relative value lows for many other currencies.
All of this is further complicated by the continued supply chain challenges and geopolitical tensions. All signs point to slower global growth and speculation of a global recession next year.
One of the most dramatic drops is probably in China, where a combination of COVID lockdowns and systemic challenges in the economy have led to lower than anticipated growth.
Second area is what we are seeing as investors.
As investors, we assess the impact and forces behind these changes and events, and identify both the risks and the opportunities. And a number are surfacing. I will highlight a few.
Deglobalization is happening.
After decades of globalization, we are seeing the big shift to deglobalization. This is very much in response to some of the challenges I mentioned at the outset – ranging from fragility in supply chains to geopolitical factors – one of the major trends going forward is countries looking to align industrial policy with national security interests.
The result is that onshore, local investment opportunities in specific sectors are emerging, including semiconductors, battery technology, AI, big data and active pharmaceutical ingredients. The recent news with the CHIPS act and restrictions on semiconductors is a recent example.
In a somewhat related vein, the energy crisis in Europe is proving to be another catalyst for the energy transition. Really highlighting, that this will be a transition. While fuels such as natural gas will continue to be important. The world is investing heavily in the transition to a low-carbon future.
Last year, $755 billion was spent globally in energy transition. Within that, the United States was in second place, after China with $114 billion. Europe was close behind as Germany, the U.K. and France committed a total of $154 billion.
CPP Investments’ approach to sustainability and our net-zero commitment considers the important role we can play in assisting companies as they map their transitions, and support them through it.
We are investing in areas like stationary energy storage in an exciting, Toronto-based company called Hydrostor, and in the U.K. have a strategic partnership with Octopus Energy Group who delivers customer-focused affordable green energy services. Those of you who may be interested can find more details in our Sustainable Investing report released two weeks ago and available on our website.
And the transition isn’t just energy. This is an entire economy transition.
Climate-related spending and infrastructure investment are likely to continue growing too, aided in part by long-lasting federal spending programs, particularly in the U.S.
We’re also keeping a close eye on labour markets, and consumer spending, which is also changing in a post-COVID world. Within those broader themes, we know there are opportunities to make investments at attractive entry points.
Market volatility actually presents good opportunities for long-term investors like us.
As patient, active investors we are focused on identifying investment opportunities with the right capabilities that will succeed in this uncertain environment. Because when any market correction happens, and they will, strong individual companies emerge from the pack.
What is different in this downturn is that many investors have an abundance of dry powder – or unspent cash reserve that’s waiting to be invested. Capital is a somewhat of a commodity today. And CPP Investments works hard to differentiate itself like any other business operating in competitive markets.
Which leads me to my third and final message for you today:
CPP Investments is built for times like this.
We were set up to create value over the very long term, and to be resilient in the face of wide-ranging market and economic conditions. That doesn’t mean we’re immune to volatility in the markets, it means we’re well-positioned to weather the storm over the long term.
The key is active management and diversification.
We diversify across various asset classes and geographies, to mitigate concentration risk and to deliver a stronger and more resilient portfolio. We invest across a wide range of asset classes, expecting them to perform differently through the economic cycle.
Here’s a quick snapshot of how we are performing.
In the first quarter of fiscal 2023, ending June 30th of this year, the Fund achieved five-year and 10-year annualized net returns of 8.7% and 10.3%, respectively. For the quarter, the Fund returned negative 4.2%, outperforming returns for leading global indices that declined, on average, well into double-digit territory.
We continued to outperform the market adding over $40 billion of cumulative dollar value add from active management over the past 10 years, we also are constantly making sure we stay at our long-term risk target and constantly stay in market looking for opportunities through the cycle.
One of the most important investment decisions an institutional investor can make, is to not lose conviction in your long-term beliefs during a market selloff. That means buying equities when equities are selling off.
We also take a thoughtful approach in the investment ownership structures we adopt, especially on the private side and in our approach to governance. We invest a great deal of time up front with potential investments, allowing us to be an active and engaged partner through an investment’s entire lifecycle. We can be with a company from private through to IPO then continue on post-IPO.
This approach allows us to maximize value not only for the duration of our holding period, but brings value in how we approach our exits.
Perhaps we suffer from Canadian humbleness – but many Canadians are generally not aware that they have a very well-respected global investment firm successfully working for them – and their retirement. They should take comfort knowing that CPP Investments is viewed globally as one of the best in the world.
As one of the highest-performing global institutional investors, we do get a few headlines…whether it’s in The Economist and I’ll read you the headline… “Moose in the market that other countries seek to emulate” or as The Washington Post referred to us the “most popular pension fund in the world,” we continue to be one of the country’s best-kept secrets.
In conclusion, looking ahead, I remain cautiously optimistic.
Yes, we anticipate a continued bumpy road ahead, yet we are optimistic and frankly confident about CPP Investments’ ability to navigate the volatility in the markets and add value for 21 million workers and retirees across the country.
As investors – we continue to look for the big themes and opportunities that emerge – and I’m sure many of you are seeing similar opportunities for your own companies. While doing so – please rest assured that CPP Investments is dedicated to continuing to deliver the kind of sustainable value we all need to ensure peace of mind in the decades ahead.
I reiterate my hope that you will help spread that message to people who look to you for reassurance about the future. I’m grateful for people like you here today – who are gathering to do the thinking, the planning, and to create successful businesses – and real opportunities for Canadians. Ultimately, strengthening the role of Canadian businesses around the world.
*The Canadian Chamber of Commerce helps build Canadian businesses by influencing government policy, by providing essential business services and by connecting businesses to information they can use, to opportunities for growth and to a network of local chambers, businesses, decision-makers and peers from across the country, in every sector of the economy and at all levels of government, as well as internationally. You can learn more here.