Canada Pension Sees Emerging Markets, U.S. Consumer Credit Gains

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Canada Pension Plan Investment Board is bullish on U.S. consumer credit and sees good opportunities in emerging markets, despite the devastating toll the Covid-19 pandemic has taken on leading countries such as Brazil and India.

U.S. households are flush with savings and central banks will continue to prime the economy with easy money for a while, new Chief Executive Officer John Graham said in an interview. That’s positive for returns in consumer-oriented investments, he said.

“A year ago there was a lot of uncertainty with high unemployment, but with the stimulus that came in the U.S., consumer credit performed very well. Our investment in home improvement loans really exceeded our expectations,” Graham said Thursday.

CPPIB returned 20.4% for the year ended March 31, its best showing since it was created in the late 1990s, helped by base effects: Global equity markets were just starting their climb back from the crash of early 2020 as the new fiscal year began.

Canada Pension Sees Emerging Markets, U.S. Consumer Credit Gains

The fund’s holdings of Canadian stocks advanced 40.8% for the year and emerging markets stocks gained 34%, the fund said in a statement. Private-equity investments outside of Canada returned well over 30%.

The fund ended March with net assets of C$497.2 billion ($412 billion).

About one fifth of that, or C$104 billion, is in emerging markets. Graham continues to see a good case for putting more capital to work in places like Brazil and India, despite the humanitarian crisis that’s seen those two countries suffer more Covid-19 deaths than any other besides the U.S.

CPPIB aims to lift its emerging-markets allocation to one-third of its portfolio in the next four years, Graham said.

A former research scientist at Xerox Holdings Corp., Graham joined CPPIB in 2008 and took over the top job from Mark Machin in February. The former CEO resigned after flying to the United Arab Emirates to be vaccinated, defying guidance from Justin Trudeau’s government to avoid international travel and earning a public rebuke from the finance minister.

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The fund, which has eight offices outside of Canada, expanded its employee count in those locations by 8% to 486 people and plans to continue doing so, Graham said.

“We were really able to monetize all the effort we put into building this organization with a global footprint over the past 10, 15 years,” the CEO said. “We have the expertise internally on all the different asset classes. It allowed us to navigate through the early days of the pandemic and then turn our mind to being offensive and looking for opportunities.”

Canada Pension Sees Emerging Markets, U.S. Consumer Credit Gains

“The monetary and fiscal stimulus that came into the market really provided a lot of liquidity and was critical to having the robust, broader rally that we saw through most of our fiscal year,” Graham said. “These will continue into fiscal 2022.”

Credit investments returned 2.4% for the year and real estate lost 4.1%, while an energy and resources portfolio jumped 45.8%. Foreign exchange losses of C$35.5 billion, due to a strengthening Canadian currency against the U.S. dollar, curbed returns.

The overall 20.4% gain trailed CPPIB’s own benchmark portfolio, which jumped 30.5%. While the benchmark provides a comparable measure of the level of risk required to fulfill its long-term mandate, the pension fund’s holdings are “significantly more diversified,” CPPIB said.

At the beginning of the pandemic, the fund took advantage of doing more “thematic investing” and focused on asset classes that were “dislocated” or very cheap. Most of those easy opportunities are now gone, Graham said.

“The approach we are very much taking now is a deep diligence, roll up your sleeve, find those individual investment opportunities. It’s far more bottom-up,” he said.

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