China and India look set to receive even higher allocations from the Canada Pension Plan Investment Board (CPPIB) in the coming years as the pension fund more-than-doubles its investments in emerging markets.
With C$356.1 billion ($274 billion) in total assets as of March-end 2018, CPPIB said in its annual report this month that it aims to raise its exposure to emerging market assets to a third of total assets by the end of March 2025 from 15.8% (or C$56.1 billion) now.
And Asia's two biggest economies, already integral to the CPPIB portfolio, look ideally placed to benefit from that.
"Select markets like China and India will become more meaningful parts of CPPIB’s portfolio in the coming years," Suyi Kim, CPPIB's head of Asia Pacific, told AsianInvestor on Monday.
As it is China already accounts for 40% of CPPIB's emerging market assets, which surged by 48% year-on-year to C$56.1 billion ($43.2 billion) in fiscal 2018. India accounts for just over an eighth, across private and public equities, infrastructure, real estate and credit investments.
"We will continue to increase our allocation in emerging markets like China, India and Brazil in the coming years but don’t have specific targets in the short term – we will continue to take advantage of investment opportunities when and where they arise, investing in those opportunities that we believe will deliver strong risk-adjusted returns for the CPP Fund,” Kim said.
The CPPIB invests the funds of the CPP (Canada Pension Plan) fund on behalf of its 20 million contributors and beneficiaries.
The appeal of emerging markets to CPPIB is understandable because of their long-term return potential, Wina Appleton, Asia-Pacific retirement strategist at JP Morgan Asset Management, said.
“Even though the volatility of [emerging markets] may be higher, pension plans have a long investment horizon, which means they have a higher capacity to take on risk," she told AsianInvestor.
In broad terms, said Adeline Tan, a wealth business leader at Mercer in Hong Kong, investors hope to eke out an extra annual return of three percentage points or thereabouts over the long term by investing in, say, emerging market shares.
CPPIB is no stranger to investing outside its home market; it has been steadily growing its investments overseas for more than a decade.
At the end of March, its investments outside Canada totalled C$302 billion ($232.5 billion), representing 84.9% of its total assets.
A large proportion, however, is invested in developed markets outside Canada, with the US accounting for the largest share of the overall portfolio at 37.9%, according to CPPIB’s annual report.
Asia accounts for around 23% but that includes both emerging markets in Southeast Asia, India and China and the developed markets of Japan, Korea and Australia.
That mix is in flux, though, as CPPIB improves its emerging markets know-how.
To help build its China-related expertise, for example, the Canadian pension fund last year hired Alison Chiew, former head of Greater China equity at Goldman Sachs Asset Management, as senior portfolio manager on the active fundamental equities team, which runs long/short strategies.
The pension fund's investments are split evenly between public and private investments, which include private equity, real estate and infrastructure.
According to Kim, one of the key tenets of CPPIB's investment strategy in emerging markets is to adopt a "smart partnership" approach by teaming up with local partners for the long-term.
Taking the example of India, she said that over the past 12 months the pension fund had found new investment opportunities with existing partners such as Kotak (a domestic financial services group) and KKR, and formed new partnerships with the likes of IndoSpace and Phoenix Mills Limited.
In April 2017, CPPIB and Phoenix Mills formed a strategic investment platform to develop, own and operate retail-led mixed-use developments across India.
In the following month, CPPIB teamed up with IndoSpace, India’s largest developer of industrial and logistics real estate, to establish a joint venture focused on acquiring and developing modern logistics facilities in the country.
Its most recent investment, she added, was as an anchor investor in India's first private infrastructure investment trust, Indinfravit, sponsored by L&T Infrastructure Development Projects. CPPIB invested C$200 million in the trust, which will focus on acquiring operational toll roads at a time when India is building out its road infrastructure.
CPPIB has previously said India is a key market for Asian infrastructure opportunities.