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Our Investment Strategy

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Our Investment Strategy

Our investment strategy is designed to deliver a well-balanced and globally diversified portfolio that will maximize sustained long-term returns without incurring undue risk.

We developed our investment strategy with a long-term view in mind.

It is structured to be resilient in the face of wide-ranging market and economic conditions. It covers all major asset classes, controls significant risk factors and encompasses approximately 30 distinct investment programs.

With this approach we’re able to achieve the right balance of risk and returns while seeking to add significant additional value through active management. Our goal is to achieve sustainable returns over the long term for the benefit of Canadians.

In selecting investments to add to our portfolio, we always:

  • Maintain a long-term view;
  • Benefit from general economic growth by taking on an appropriate amount of equity risk;
  • Choose investment programs and asset types with distinct underlying drivers of return and risk;
  • Avoid being overly dependent on returns in any one country, currency or region; and
  • Invest strategically as economic and market conditions change.

Our approach is based on a carefully designed investment framework, the active management of the portfolio by our skilled internal and external portfolio managers and a disciplined total portfolio view.

Our investment strategy is designed to deliver a well-balanced and globally-diversified portfolio that will maximize sustained long-term returns without incurring undue risk.

Our Reference Portfolio, Target Portfolio and Strategic Portfolio are the key elements of the overall governance framework that guides our investment choices. Each one plays an important role in helping us to:

  • build and develop an optimal portfolio of assets and programs within a well-defined, overall risk target, and
  • continuously re-balance the return-risk exposures in the actual investment portfolio within an established set of parameters.

Reference Portfolio

When establishing the elements of our investment strategy we start with defining our risk appetite. Our strategy then outlines the mechanism by which we will work to achieve our desired risk target within our actual portfolio.

It is through the Reference Portfolio that we express this risk target.  As such it serves to form the risk-equivalent benchmark for the returns we achieve in the actual investment portfolio.

Our current Reference Portfolio is expressed as a globally diversified portfolio of publicly traded securities that could be invested in at very low cost. Our risk target as expressed in the Reference Portfolio is the equivalent of 85% global equity and 15% Canadian government bonds.

We review and adjust the Reference Portfolio every three years following the release of the triennial Actuarial Review of the Canada Pension Plan by the Chief Actuary.

Strategic Portfolio

The Strategic Portfolio lays out our aspirational plan for diversifying the investment portfolio over the next five years and beyond. It reflects the mix of six distinct asset classes and four geographic regions that we believe will deliver superior diversification and returns. It assumes the same total absolute risk as the Reference Portfolio.

We build the Strategic Portfolio by optimizing the underlying long-term return/risk exposures of the portfolio. We seek to generate significantly higher net long-term returns than the Reference Portfolio through broader diversification across asset classes, risk factors and active investment programs. We review and adjust this portfolio every three years at the same time as we review the Reference Portfolio.

Target Portfolio

The Target Portfolio defines the target asset class and geographic composition of the investment portfolio for the current year. Based on the underlying return-risk exposures we seek, this portfolio establishes the weight ranges we expect as we move towards the aspirational Strategic Portfolio within the practical business constraints of resources and costs.

With the relative weighting of asset classes and risk exposures of the actual Investment Portfolio fluctuating on a day-to-day basis, we use the Target Portfolio to guide the rebalancing of the Investment Portfolio so that it remains in line with our asset class and geographic targets. In this way we ultimately drive our current investment portfolio towards the long-term composition for which we’re aiming.

Asset class weights

Our investment strategy is designed to deliver a well-balanced and globally-diversified portfolio that will maximize sustained long-term returns without incurring undue risk.

Our role is to invest the funds of the Canada Pension Plan (CPP) to help ensure that it can provide benefits to Canadians over many generations. Because we don’t have to sell investments to meet our obligations and because we have a reliable income stream due to ongoing contributions, we can look beyond regular economic cycles when making our investment decisions. This ability to look well beyond the short term – one of our comparative advantages – means that we can benefit from opportunities in ways others can’t. We can take advantage of short-term market dynamics and hold assets whose rewards may take longer to emerge.

Accepting Volatility

In contrast to most pension plans that have short-term obligations or funding requirements, the sustainability of the CPP Fund is less vulnerable to volatility of both asset prices and current returns. Our long horizon and certainty of assets means that we can prudently tolerate and absorb short-term changes in investment values and look through market cycles.

The advantage of this is that, over the longer term, the benefit of higher returns progressively outweighs the impact of higher short-term volatility. So we can be patient, flexible investors who can take a higher level of long-term risk while also benefiting from volatility by capturing opportunities that arise during market downturns.

Embracing Risk

Risks and returns are tradeoffs. The more risk one is willing to accept, the higher the potential return – as long as that risk is priced and evaluated properly. We can prudently and carefully take on risk in the short term — in our asset mix, our strategies and our major investments

— and in turn increase the potential long-term returns. By embracing compensated risk for higher returns we can build a portfolio that supports the CPP and its members and beneficiaries over the long term.

Our investment strategy is designed to deliver a well-balanced and globally-diversified portfolio that will maximize sustained long-term returns without incurring undue risk.

We believe that an active and adaptive approach to managing the portfolio is essential to preserving and growing assets in ever-changing capital markets – and in achieving greater returns over the long term. This requires applying a high degree of skill and experience to managing the portfolio across diverse investment programs. It means applying rigor and discipline and proactively managing in order to outperform the results of what would otherwise be passive investing in market indices.

Our decision to manage all aspects of the portfolio actively is not made lightly. Many investors seek above-market risk-adjusted returns but few consistently achieve them. While active management does require specialized skills and additional resources, our operational excellence and world-class expertise — both internal and external — give us a greater capacity to manage risk and add value well above the associated costs over the long term.

Asset and risk diversification

We hold significant investments around the world in all the main asset classes, each with their own associated return-risk exposures. Our diversified portfolio is invested in public markets (public companies balanced by government bonds), private companies (both equity and debt) and real assets such as real estate, infrastructure, natural resources and agricultural land.

Investment selection strategies

Our managers use a variety of strategies for buying, weighting and selling individual investments – and can generate value in both rising and falling markets. The result is that:

  • We can profit from buying undervalued and selling overvalued public securities;
  • We can participate in some of the largest private transactions and opportunities in the world;
  • We can manage the pace of participation in private investments, both equity and debt, through disciplined evaluation rather than by having to fill quotas; and
  • Through Thematic Investing, we can identify long-term trends and capitalize on macro-economic changes.

Strategic management activities

We periodically adjust our portfolio to reflect shorter-term or mid-term market opportunities or investment views. For example:

  • We anticipate broad trends using market pricing and fundamental ratios and can make “strategic tilts” accordingly;
  • We anticipate relative price movements of currencies, equity markets, bond markets and commodities, and continuously make more tactical adjustments; and
  • We act as engaged and active owners of direct equity, real estate and infrastructure investments, as well as through our long-term holdings in many public companies to promote enhanced governance, environmental, social and operational corporate practices.

Our investment strategy is designed to deliver a well-balanced and globally-diversified portfolio that will maximize sustained long-term returns without incurring undue risk.

Diversification is our most powerful lever for ensuring the long-term resilience of our portfolio and is our main tool for managing overall risk. We diversify in four ways:

  1. Asset diversification : We invest across all major asset classes including public equities, private equities, bonds, private debt and real assets.
  2. Risk diversification : We balance and control the exposures to the distinct return-risk factors underlying areas of investment and active management.
  3. Geographic diversification : By investing in over 40 countries, both developed and emerging, we can avoid relying too heavily on any single market (including Canada with its relatively small capital markets and economy). Our global, on-the-ground presence established through our international offices strengthens our ability to achieve broad global diversification.
  4. Program diversification : Our portfolio is a collection of interrelated parts and strategies – approximately 30 distinct investment programs – that together form a coherent whole. Approaching investment decisions through a broad range of expertise and views lets the Fund take advantage of opportunities from almost every possible investment perspective.
diversification

Our investment strategy is designed to deliver a well-balanced and globally-diversified portfolio that will maximize sustained long-term returns without incurring undue risk.

When making decisions about what to invest in – and what assets to sell to fund each investment – we look at the total portfolio, not just specific asset classes. In other words we don’t aim to achieve targeted ownership levels of asset classes but rather look beyond those labels – like “equities” or “infrastructure” – and focus on maintaining our targeted levels for each of the critical underlying return/risk exposures in the total portfolio.

We do this by applying our disciplined Total Portfolio Approach through which we analyze the return-risk exposures of each investment along its foundational dimensions in the context of the entire portfolio.

To do this we map each investment’s sensitivity to equity and government bond markets, leveraged credit investment spreads and other underlying risk factors.

We believe that the total portfolio context matters. Because risks are rarely independent they should not be measured on a standalone basis alone but also in terms of how each contributes to the whole. By adopting the Total Portfolio Approach we can maintain both the component and the overall return-risk profiles of our total portfolio over time.

CPP Investments’ tax strategy is consistent with our mandate and with CPP’s status as Canada’s national pension plan. It is one of a number of considerations we take into account as part of our investment process. Our tax strategy is best considered in the context of how CPP’s 20 million Canadian contributors and beneficiaries are taxed on their CPP income.

CPP Investments is a global investment organization working to help ensure that the Canada Pension Plan (CPP) is there for generations. We do this by investing the funds of the CPP on behalf of its 20 million contributors and beneficiaries. We are guided by our singular mandate to maximize returns without undue risk of loss, taking into account the factors that may affect the funding of the CPP. Our investment strategy is designed to capitalize on our comparative advantages while ensuring we maintain our commitment to responsible investing.

Our investment strategy is structured to be resilient in the face of wide-ranging market and economic conditions and covers all major asset classes, monitors significant risk factors and encompasses approximately 30 distinct investment programs.

With this approach we are able to achieve the right balance of risk and returns while seeking to add additional value through active management. Our goal is to achieve sustainable returns over the long term for the benefit of Canadians.

As a long-term global investor, CPP Investments sees value in stable and predictable tax regimes. CPP Investments has actively supported the work of the OECD on the Base Erosion Profit Shifting project and understands the need for governments to address inappropriate tax practices. We engage with, and constructively contribute to, public consultation by tax authorities and policy makers to ensure our perspective is understood, in line with our mandate to maximise returns without undue risk of loss.

Tax Strategy

CPP Investments’ tax strategy is consistent with our mandate and with CPP’s status as Canada’s national pension plan and it is one of a number of considerations we take into account as part of our investment process. Our tax strategy is best considered in the context of how CPP’s 20 million Canadian contributors and beneficiaries are taxed on their CPP income.

For sound public policy purposes, income earned by CPP Investments and its subsidiaries is exempt from tax in Canada. This enables investment income to grow tax free in Canada during the investment period, and CPP beneficiaries are then taxed on receipt of their pension based on their tax rate at that time. This is similar to the treatment of Canadian registered retirement savings plans.

To ensure we create a well-diversified investment portfolio, we invest globally across a wide range of asset classes and nearly 85% of our assets are invested outside Canada. As a result, CPP Investments is subject to the tax laws of the countries where we invest. We honour our tax obligations around the world and pay taxes due on the income earned in those countries. Various types of taxes are also paid by the companies in our investment portfolio, as determined by the tax rules applicable in the jurisdictions in which those companies carry out their business activities.

To help ensure that our 20 million Canadian contributors and beneficiaries do not pay tax twice on income earned by CPP Investments, we employ judicious and prudent investment structures designed to maximize the after-tax investment returns available to CPP contributors and beneficiaries.

Risk Management and Governance

The foundation of our mandate and resulting investment strategy is to ensure prudent and appropriate risk management structures and processes are in place. This includes factoring tax risk directly into how we make investments.

CPP Investments’ Board has oversight of risk management, including tax risk. To that end, the Board, through its various committees and processes, reviews internal controls and systems designed to address key risks for the fund, including tax risk.

At the management level, CPP Investments’ Chief Financial and Risk Officer (CFRO) is responsible for CPP Investments’ tax strategy. Day to day management of tax risk sits with the Head of Tax who periodically reports to the Audit Committee.

As with any other risk, our aim is to mitigate tax risk, taking account of our investment mandate, through adherence to the controls and procedures embedded in our internal policies. CPP Investments considers tax risks in terms of:

  • Technical risk – the risk that our tax position is successfully challenged in whole or part by a tax authority due to uncertainties under relevant tax laws or regulations.
  • Operational risk – the risk that certain actions / operations do not happen as expected and the tax outcome is different to our expectation.
  • Regulatory (change of law risk) – the risk that our expected tax cost changes over time due to changes in tax law.

For each of these tax risks we have controls and procedures in place to mitigate potential financial and/or reputational implications, including when and how particular tax risks are escalated in the organisation.

The Head of Tax is supported by our in-house team of tax professionals located in our offices around the world. This team comprises appropriately qualified and experienced professionals, with specific tax responsibilities and accountabilities. They use their experience and judgement to assess the tax risk, working with our investment departments and core services departments to manage the risks of our investments. We supplement our in-house tax expertise through the use of local tax advisors to understand our obligations and associated tax risks in a specific jurisdiction.

Given the complex nature of tax legislation globally, we take professional advice to help us assess and manage tax risk and support our tax positions. We do not place any reliance on a low risk of detection of any position taken. When we encounter areas of tax law

which are unclear, we seek to take an approach which is consistent with well-established government policy and market practices and may seek clearances from taxation authorities.

The global tax environment is constantly changing. CPP Investments’ in-house tax team, with the assistance of our local tax advisors as required, regularly monitor changes of tax law to understand potential impacts and to remain in compliance with tax laws around the world. When we engage with tax authorities worldwide, we are transparent and disclose relevant facts regarding our investments and operations to the tax authorities.

The content on this webpage is regarded as complying with the duty under Schedule 19 of the UK Finance Act 2016 on behalf of all relevant entities within the CPPIB group for the year from 1 April 2019 to 31 March 2020.

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