After the financial crisis, CPPIB took a hard look at its investment strategy and decided to re-vamp it , says Edwin Cass, senior VP and chief investment strategist for the CPPIB.
Cass spoke about CPP’s investment framework at the CFA’s 2015 Institutional Management Forum.
He said it wasn’t good enough that CPPIB didn’t lose as much money as other institutional investors in 2008-2009. So the pension fund’s managers decided to change its objective from relative returns to total returns.
For more from Cass, see our live tweets below. And, follow @advisorca for more news and event coverage.
Live tweets from Institutional Management Forum
We’re tweeting from @CFAToronto’s institutional #investing forum this afternoon. 1st speaker is CPPIB SVP Ed Cass.
CPPIB was established in 1976 when there were six workers per one dependant, says Cass. And, by 2020, there will be 1.5 workers for every CPP dependant.
Also consider that when CPPIB started, it had six employees, debts owed to it, and a fixed-income portfolio, says Cass. It then switched to managing 100% of the fund itself, and was benchmarked against a low-cost portfolio.
Then, for the three years following the financial crisis, CPPIB re-examined its investment priorities, says Cass; the fund decided to go from relative returns to total returns, and ditched the reference portfolio for a strategic one.
CPPIB can take more risk than defined benefit plans because CPP is pay-as-you-go, says Cass.
Three ways to make investment money are through good securities selection, diversification and strategic tilting, says Cass. And, what sets CPPIB apart from other investors is their long time horizon, says Cass. So the CPP can look at investments others ignore.
But, Cass says one problem with CPPIB’s strategy is more diversity means less risk. So how to take on more risk? The tools for this include: long-duration bonds and riskier assets; derivatives; and direct leverage.
CPPIB is now considering using leverage, which could get them +30bps of return and cover all its costs, says Cass.
Problem with relative value investing means there’s a default strategy, and management feels like deviation is a risk, says Cass. Should be that everything in a portfolio is wanted, rather than some things being there to match a benchmark, he adds; that’s what CPPIB is working on changing.
CPPIB’s current job is to change its investment culture to prioritize non-reference returns, says Cass. So the fund is changing its management pay structure.