Pension Giant CPPIB Raises Red Flag Over Private Asset Boom

(Bloomberg) -- Forget all the handwringing about ETFs, CLOs and Fed policy. Canada’s top pension manager says the huge shift of assets from public to private markets could trigger steeper selloffs and exacerbate a crisis.

Mark Machin, chief executive officer of the Canada Pension Plan Investment Board, said he’s worried that a growing sum of money is locked up in assets or investment vehicles that can’t be sold easily or quickly.

“If there’s a sudden dislocation in markets, a profound dislocation, people who need the money to pay pensions or to pay other obligations are going to have to sell the public stuff quite rapidly,” Machin, who oversees about C$370 billion ($278 billion), said in a Bloomberg Television interview from Davos, Switzerland. "People who have big chunks of private assets need to think very carefully about what they’re going to do when things dislocate."

That’s not the kind of vulnerability most investors and market strategists have been flagging. Lately, they’ve expressed more concern about central bank policies, the rise of passive products such as exchange-traded funds and the buildup of credit risk in collateralized loan obligations.

BlackRock Inc., the world’s largest asset manager, said more than half of its clients plan to reduce their allocation to stocks in 2019, and that the shift has been accelerating. Instead, they’re planning to invest more in real assets, private equity and real estate.

Machin drew a comparison to the sudden wave of subprime-mortgage defaults that cratered the safest credits in collateralized debt obligations a decade ago.

“You could see a dislocation in things that are meant to be very liquid and very safe,” he said. “Then you could see models and algorithms calculate that there’s something wrong with these liquid assets, like what happened with the AAA tranches of CDOs back in the financial crisis.”

Ironically, Machin said he plans to steer even more of CPPIB’s assets into private markets over the next few years, reducing the pension plan’s exposure to stocks. He said that will give it a more stable portfolio that can withstand the ups and downs of asset prices over time.

To contact the reporter on this story: Erik Schatzker in New York at eschatzker@bloomberg.net

To contact the editors responsible for this story: Sree Vidya Bhaktavatsalam at sbhaktavatsa@bloomberg.net, Ross Larsen, Keith Campbell

©2019 Bloomberg L.P.