Canada Pension Plan Investment Board (CPPIB) has been building a portfolio in Asia for over a decade now and aims to heavily ramp up that exposure, most notably in China, where its approach is informative about its activities in emerging markets in general.

The C$367 billion ($281 billion) fund holds some $28 billion of Chinese assets, a figure that could triple by 2025 as part of ambitious plans to expand in emerging markets (see box below). CPPIB owns mainland bonds, private equity and real estate, and is among the biggest foreign holders of local stocks, with around $3 billion in A-shares. 

Yet like many other global asset owners, Canada’s largest pension fund still hasn’t put money into Chinese infrastructure. 

There are a couple of good reasons for this, Alain Carrier, London-based head of international at CPPIB, told AsianInvestor: Beijing has historically overspent on infrastructure to spur the economy, and the country’s projects lack a common regulatory framework that investors are familiar with.

Alain Carrier

“That doesn’t seem like the right context for private investors to deploy capital,” he said during a wide-ranging interview in September.

It’s a different story in India and Latin America, the other main target emerging markets for CPPIB. Both badly need infrastructure investment and they often have a regulatory backdrop that is more appealing to international capital, said Carrier. They are also markets where the Canadian fund can make and build up large investments, befitting its size. 

This also explains why CPPIB doesn’t invest in Africa or Russia. Africa is a difficult place in which to scale up, said Carrier. “It’s a lot of hard work to gain exposure which, from a risk/reward standpoint, is not really differentiated from other emerging markets – or not differentiated enough to justify the exercise.”

That’s why CPPIB focuses on the biggest emerging markets – notably China, India, some Southeast Asian countries and Latin America.

A key growth area for the pension plan in China – as for other institutional investors – will remain private equity. This is ones of the few asset classes for which CPPIB still uses external managers to gain exposure (in addition to in-house investments).

It had C$69.3 billion invested in private equity globally as of March 31, 2018 (around one-fifth of its AUM), up 18.5% year-on-year, and has relationships with around 100 private equity firms, its approach to which is evolving, as Carrier has set out to AsianInvestor

Meanwhile, CPPIB's private and public equity investments in emerging markets are rising particularly fast. As of March 31 this year, CPPIB had C$9.4 billion and C$26.4 billion respectively invested into them, up from C$5.8 billion and $17.9 billion a year earlier. When combined, they now comprise around a tenth of its portfolio.

ASIA GROWTH PLANS

CPPIB this year celebrated the 10th anniversary of its Hong Kong office, from where it directs its investment operations in Asia, and these are set to grow substantially.

The retirement fund invests 15% of its C$367 billion ($281 billion) assets into emerging markets (EM), but aims to raise this by up to 33% by 2025.

That said, it – and other Canadian pension funds, such as La Caisse de Depot et Placement du Quebec – is taking full account of the current volatility, geopolitical risks and uncertain macroeconomic situation when considering its entry points and the pace of investment into emerging markets such as those in Asia. 

China and India already account for most of CPPIB's emerging market investments ($44 billion), but CPPIB could end up adding more than $50 billion of exposure to the region in a relatively short period of time.

That makes sense; its EM stock investments respectively returned 18.6% and 18.9% in the 12 months to March 31, 2017 and 2018, respectively. EM private equity gained 19.5% and 15.4% over the same periods.

Ideally, a substantial portion of CPPIB’s new allocations will be done through private deals, said Alain Carrier, CPPIB’s London-based head of international. That will be quite a challenge, particularly bearing in mind the projected growth of the fund’s total AUM, he noted.

CPPIB will also add additional employees to its 120 regional staff. It intends to locate over half of its investment professionals outside Canada by 2025, up from one-third today.