view Ahead Feature

Perspective: What Matters When Investing for Generations

January 20, 2020

By Mark Machin, President and CEO

In the year 2000 the tech sector fell to earth after a period of historic growth, exorbitant expectations, and, yes, step-change innovation. By the end of the first quarter, the dotcom bubble had burst and the U.S. economy started its slide into a recession that would drag down markets around the world.

Just one year later, we made our first private market investment, acting on CPP Investments mandate to think long term, to put the lessons of the day through the lens of 20-year or longer horizons.

The economic pain of the year 2000 crash was real. Pets.com, with its famous sock puppet mascot, raised more than $80 million in an IPO in February 2000; in November, the company went belly up—all before it earned its first nickel. During a single month in that tumultuous year, nearly a trillion dollars worth of stock value vanished.

But for those of us who could look beyond the short-term effects, there was another story. For long-term thinkers, it was an opportunity to look at things differently. The first Internet boom (and bust) set the seeds for a level of disruption that would change everything and introduced trends that continue to inform investment strategy today.

But for those of us who could look beyond the short-term effects, there was another story. For long-term thinkers, it was an opportunity to look at things differently.

The pace of change in all spheres has only increased, from political upheaval and mass migrations to more frequent drought and flooding to ever faster technological change and beyond. With so much happening, it can be hard to tell the signal from the noise and easy to get caught up in short-term trends that promise a quick bump in a stock price.

At CPP Investments, it is essential for us to see beyond those short-term swings. We were created to invest Canadians’ pension contributions, and maximize returns without undue risk by gaining exposure to global capital markets. The money we invest today must be distributed to Canadians decades from now when they leave the workforce. While others may think in terms of quarterly returns, our mandate requires us to think in terms of quarter centuries.

To do this, we tune out the noise and the distractions and drill down to what really matters – truly disruptive trends that will change the world. We look for extraordinary ideas and game-changing innovations that will become the drivers of growth for the future.

To do this, we tune out the noise and the distractions and drill down to what really matters – truly disruptive trends that will change the world.

For the discerning, these opportunities are always available. Economic historian Alexander Fields found that even in the midst of the Great Depression, when the stock market lost almost 90 percent and 1 out of 4 people in the U.S. was out of work, the 1930s was the most technologically progressive decade of the 20th century, bringing us radar, nylon and the world’s first programmable computer.

The sock puppet might be gone, but the real innovations unleashed during the first Internet bubble in the 1990s are still reverberating around the world, impacting how we communicate, relate and learn, how business and governments work, how we buy and sell goods and services, stay healthy and treat disease, how society faces its biggest challenges, including climate change, inequality, and even how governments function. The digitization that we first saw in Internet 1.0 continues to have an impact on every aspect of our work and personal lives — and will for many years to come.

All of which begs the question: what do we think matters for the next twenty years or more?

We are paying close attention to several high-level themes that cut across every industry and every aspect of society. These are themes that promise to bring permanent shifts to the world at a shockingly fast rate. They include:

  • Technological innovation, particularly the collection, protection, and use of data as a transformational force across industries like healthcare, retail, and mobility;
  • Shifting demographics, especially the rise of an emerging middle class in emerging markets;
  • Climate change and the shift to a low-carbon economy.

The three are closely related, each impacting the others in surprising ways. As we gain a deeper understanding into each through our investments and partnerships, we develop insights that help us better understand them all. This is one way we separate what really matters from short-term distractions.

Take climate change. Our investment approach here must balance a complex set of forces. Our decisions must balance the world’s need for clean new energy sources and the infrastructure to support them with the ongoing need to ensure the reliability of traditional energy sources as the transition to a post-carbon world continues.

Population, economic, and demographic change is also profoundly reshaping our portfolio, as emerging market populations grow (and also age) and developed markets age. In response to these trends, we expect to invest up to one third of our portfolio in emerging markets by 2025. Why? The share of global GDP represented by emerging markets will reach 46 percent by 2025 and will surpass that of developed economies by 2031. Beyond the numbers, we value geographic and cultural diversity as a strength that brings both scale and exposure to new ways of thinking, new challenges, and new opportunities.

Finally, technological innovation will continue to drive changes, from automobility to new food sources, medical breakthroughs, and as yet unimagined solutions to climate change.

Our strategy is to make investments that will encourage thoughtful progress over the long haul. But that does not mean that we never change. We have evolved in line with the deeper changes happening across industries and geographies.

In our early years, we invested primarily in publicly traded equities, mostly in North America. Today our portfolio is far more diversified across geographies. The kinds of investments we make have expanded to reflect a wider scope of economic activity.

Our investments may include select venture funds that share our long-term orientation, or large infrastructure projects with a predictable revenue stream measured in decades, or real estate projects to serve a burgeoning urban population. And with these new kinds of partnerships, we have learned an essential skill for the 21st Century: collaboration. The world is moving too fast and is too complex for any of us to go it alone.

Still, some things do not change.

We remain an organization with a compelling public purpose, one that is sustained by our ability to drive high performance. We bring discipline and strict governance practices. We have a global mindset, which keeps us open to a diverse set of opinions, to new ideas, and to global trade.

While our ultimate success will be judged by generations to come, after 20 years our approach is working. When CPP Investments was created, the CPP Fund had $36.9 billion in assets. Today it has a value of $409.5 billion and has achieved annualized net nominal returns of 10.2 percent for the latest 10-year period.

Our investment mandate and professional governance insulate our decision-making from short-term distortions and gives us license to help shape the long-term future. It is a privileged position, one that keeps us focused on our ultimate goal: the security of Canada’s retirement fund. That security has never been stronger.

By Mark Machin, President and CEO

In the year 2000 the tech sector fell to earth after a period of historic growth, exorbitant expectations, and, yes, step-change innovation. By the end of the first quarter, the dotcom bubble had burst and the U.S. economy started its slide into a recession that would drag down markets around the world.

Just one year later, we made our first private market investment, acting on CPP Investments mandate to think long term, to put the lessons of the day through the lens of 20-year or longer horizons.

The economic pain of the year 2000 crash was real. Pets.com, with its famous sock puppet mascot, raised more than $80 million in an IPO in February 2000; in November, the company went belly up—all before it earned its first nickel. During a single month in that tumultuous year, nearly a trillion dollars worth of stock value vanished.

But for those of us who could look beyond the short-term effects, there was another story. For long-term thinkers, it was an opportunity to look at things differently. The first Internet boom (and bust) set the seeds for a level of disruption that would change everything and introduced trends that continue to inform investment strategy today.

But for those of us who could look beyond the short-term effects, there was another story. For long-term thinkers, it was an opportunity to look at things differently.

The pace of change in all spheres has only increased, from political upheaval and mass migrations to more frequent drought and flooding to ever faster technological change and beyond. With so much happening, it can be hard to tell the signal from the noise and easy to get caught up in short-term trends that promise a quick bump in a stock price.

At CPP Investments, it is essential for us to see beyond those short-term swings. We were created to invest Canadians’ pension contributions, and maximize returns without undue risk by gaining exposure to global capital markets. The money we invest today must be distributed to Canadians decades from now when they leave the workforce. While others may think in terms of quarterly returns, our mandate requires us to think in terms of quarter centuries.

To do this, we tune out the noise and the distractions and drill down to what really matters – truly disruptive trends that will change the world. We look for extraordinary ideas and game-changing innovations that will become the drivers of growth for the future.

To do this, we tune out the noise and the distractions and drill down to what really matters – truly disruptive trends that will change the world.

For the discerning, these opportunities are always available. Economic historian Alexander Fields found that even in the midst of the Great Depression, when the stock market lost almost 90 percent and 1 out of 4 people in the U.S. was out of work, the 1930s was the most technologically progressive decade of the 20th century, bringing us radar, nylon and the world’s first programmable computer.

The sock puppet might be gone, but the real innovations unleashed during the first Internet bubble in the 1990s are still reverberating around the world, impacting how we communicate, relate and learn, how business and governments work, how we buy and sell goods and services, stay healthy and treat disease, how society faces its biggest challenges, including climate change, inequality, and even how governments function. The digitization that we first saw in Internet 1.0 continues to have an impact on every aspect of our work and personal lives — and will for many years to come.

All of which begs the question: what do we think matters for the next twenty years or more?

We are paying close attention to several high-level themes that cut across every industry and every aspect of society. These are themes that promise to bring permanent shifts to the world at a shockingly fast rate. They include:

  • Technological innovation, particularly the collection, protection, and use of data as a transformational force across industries like healthcare, retail, and mobility;
  • Shifting demographics, especially the rise of an emerging middle class in emerging markets;
  • Climate change and the shift to a low-carbon economy.

The three are closely related, each impacting the others in surprising ways. As we gain a deeper understanding into each through our investments and partnerships, we develop insights that help us better understand them all. This is one way we separate what really matters from short-term distractions.

Take climate change. Our investment approach here must balance a complex set of forces. Our decisions must balance the world’s need for clean new energy sources and the infrastructure to support them with the ongoing need to ensure the reliability of traditional energy sources as the transition to a post-carbon world continues.

Population, economic, and demographic change is also profoundly reshaping our portfolio, as emerging market populations grow (and also age) and developed markets age. In response to these trends, we expect to invest up to one third of our portfolio in emerging markets by 2025. Why? The share of global GDP represented by emerging markets will reach 46 percent by 2025 and will surpass that of developed economies by 2031. Beyond the numbers, we value geographic and cultural diversity as a strength that brings both scale and exposure to new ways of thinking, new challenges, and new opportunities.

Finally, technological innovation will continue to drive changes, from automobility to new food sources, medical breakthroughs, and as yet unimagined solutions to climate change.

Our strategy is to make investments that will encourage thoughtful progress over the long haul. But that does not mean that we never change. We have evolved in line with the deeper changes happening across industries and geographies.

In our early years, we invested primarily in publicly traded equities, mostly in North America. Today our portfolio is far more diversified across geographies. The kinds of investments we make have expanded to reflect a wider scope of economic activity.

Our investments may include select venture funds that share our long-term orientation, or large infrastructure projects with a predictable revenue stream measured in decades, or real estate projects to serve a burgeoning urban population. And with these new kinds of partnerships, we have learned an essential skill for the 21st Century: collaboration. The world is moving too fast and is too complex for any of us to go it alone.

Still, some things do not change.

We remain an organization with a compelling public purpose, one that is sustained by our ability to drive high performance. We bring discipline and strict governance practices. We have a global mindset, which keeps us open to a diverse set of opinions, to new ideas, and to global trade.

While our ultimate success will be judged by generations to come, after 20 years our approach is working. When CPP Investments was created, the CPP Fund had $36.9 billion in assets. Today it has a value of $409.5 billion and has achieved annualized net nominal returns of 10.2 percent for the latest 10-year period.

Our investment mandate and professional governance insulate our decision-making from short-term distortions and gives us license to help shape the long-term future. It is a privileged position, one that keeps us focused on our ultimate goal: the security of Canada’s retirement fund. That security has never been stronger.