Canada Pension Plan Investment Board and Ontario Teachers Pension Plan are busy revising their portfolios amid rising interest rates and fears that inflation may rise faster than expected. They are also underlining the importance of Asia, and particularly China, to their business and investment strategies.
Canada’s two biggest state retirement funds, with C$561 billion ($430 billion) under management between them, have boosted allocations to private equity and cut exposure to listed equities since mid-2017.
Ziad Hindo, appointed in June as OTPP’s new chief investment officer, said last week on a media call: “We are well into a shift into our investment strategy that began two years ago.“With a shift to a total fund approach, we are building a portfolio able to withstand a variety of economic conditions.”
For example, OTPP said it had increased exposure to “inflation-sensitive” assets in the 12 months to June 30, with its commodities allocation more than doubling to 7% from 3%, and natural resource assets rising to 4% from 3%.
The C$194 billion fund’s aim is to gain protection against unexpected inflation, noted Hindo, “mindful that we are in a cycle of inflationary pressures”. The inflation-sensitive asset category – also including inflation-hedge strategies – was the fund’s top-returning portfolio in the first six months of 2018, he added.
Other particularly strong contributors to OTPP's 3.2% six-month total-fund net return were equity and real assets such as infrastructure and real estate, noted Hindo.
To realise some of those gains, it has reduced its listed equity exposure to 18% from 20% in the 12 months to June 30 and also cut its infrastructure allocation to 9% from 11%. (CPPIB's listed stock holding also fell, to 37.7% from 38.9%.)
During the media call last week, Ron Mock, OTPP’s chief executive, said infrastructure – particularly brownfield projects – is “very well bid”, hence the decision to sell some assets over the past 12 to 18 months.
Private equity, on the other hand, has been on the rise in both funds’ portfolios. OTPP’s private equity allocation stood at 17% on June 30, up from 16% a year before, while CPPIB grew its PE allocation to 20.9% as of June 30 from 18.3% a year before,
Meanwhile, Hindo suggested there are more testing times ahead for investors following “a strong, multi-year run of economic expansion”.
While global economic growth remains robust, it is “perhaps les synchronised than last year”, said Hindo. “A sustained rise in US interest rates is taking liquidity out of global markets. Global trade tensions have taken a toll, with a number of dislocations in recent months in emerging markets.”
EMERGING MARKETS AND ASIA
Nonetheless, emerging markets, and particularly Asia, clearly remain central to the investment plans of both CPPIB and OTPP.
Both have big exposure to the region. CPPIB has C$84 billion in Asia-Pacific assets, up from C$60.2 billion on June 30 last year, while OTPP had 9% of its AUM in Asia-Pacific assets as of December 31, 2017 (7% in Asia and 2% in Australia and New Zealand).
Moreover, CPPIB underlined its rising focus on emerging markets by increasing its EM equity exposure by nearly half – to 11.1% from 7.8% – across public and private markets combined in the year to June 30.
This is line with the C$367 billion fund’s plans to raise its overall EM exposure to as much as 30% of its overall AUM by 2025, with China central to this strategy. The country currently accounts for 7.6% of assets now, but CPPIB expects it to represent up to 20% by 2025.
Deal-wise, the fund last week unveiled it had committed an additional $1.4 billion of equity (alongside a further $350 billion from property investor Goodman) to the Goodman China Logistics Partnership, taking their joint commitment to $5 billion. CPPIB also said in July it had extended its partnership with Longfor Group Holdings with an $817 million venture to invest in rental housing programmes in China.
Mock stressed OTPP's own focus on China during the fund's media call. “Investing in China is obviously going to be a necessary component of any global investment managers’ returns going forward,” he said, noting that the fund has not set itself a target of doubling or tripling investments in the country.
"Clearly Asia and its contribution to global economic returns going foward is baked into the cake," he added. "So to not be there is probably a strategic mistake."
With a view to coping with the increasingly fierce competition for international assets and expertise, OTPP set up a new role in June to coordinate coverage and sharing of knowledge across all of its offices worldwide. Moreover, Mock cited the importance of building out OTPP’s partnership network when discussing the new position.
Jo Taylor was promoted to the role in question – executive managing director of global development – having previously run the international investment operations out of London and Hong Kong.
He said during the media call last week that he focuses on interaction on ensuring sharing knowledge across its partner network and sharing accessibility to the people we have making investment decisions.