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John Graham, President & CEO of Canada Pension Plan Investment Board, speaks at the Canadian Chamber of Commerce's Annual General Meeting & Convention in Ottawa on Oct. 14, 2022.Sean Kilpatrick/The Canadian Press

With 2023 shaping up to be another volatile year for investors, Canada Pension Plan Investment Board chief executive John Graham is in a picky mood.

The CEO of the $529-billion pension asset manager is happy to see 2022 – marked by COVID-19 lockdowns, Russia’s invasion of Ukraine, supply chain upheaval, high inflation and soaring interest rates – in the rear-view mirror.

At its outset, the new year isn’t looking a lot easier. But in an interview at CPPIB’s Toronto office, Mr. Graham predicted 2023 could mark a pivot point to a different investing landscape where the pension plan asset manager can take advantage of its financial heft and global reach.

He’s calling it the beginning of “the decade of alpha” – a period when active investors with the luxury to pick and choose between countries, companies and assets should be able to beat benchmarks and stand out.

For most of the past 20 years, Mr. Graham suggests, investors of all stripes capitalized on a series of tailwinds helping the global economy. Those included cheap borrowing rates, low inflation and what seems in hindsight like a relatively benign political environment. In combination, those factors provided a rising tide for investors, and passive investing strategies gained hugely in popularity.

As each of those factors has inverted, investors are repricing risks, deals are harder to come by and financing isn’t always readily available. Suddenly, investors are taking more varied approaches to allocate their money. And with government bonds offering generous rates of return for the first time in years, “there’s options now,” Mr. Graham said.

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“We see the next decade as being the decade of value-added, the decade of alpha,” he said. “Just harvesting market returns has been a very successful strategy over the past 20 years because of these tailwinds. And right now, it is about picking your spots. It’s about picking the right geographies, the right asset classes and the right securities.”

Over the longer term, he added, “it actually is providing the opportunity for, in some ways, more interesting portfolio construction.”

CPP manages money for the Canada Pension Plan, the primary national retirement program for working Canadians, with about 21 million contributors and beneficiaries. Since it was created in 1997, CPPIB has increasingly embraced active management, shifting a greater share of its investments into assets such as real estate, infrastructure and private equity, in addition to public stocks and bonds.

The first six months of CPPIB’s fiscal year were challenging, with assets down 4 per cent as of Sep. 30 to $529-billion. That was a better result than some relevant benchmarks, as selloffs pushed some equity markets down by double-digit percentages

Over the past 10 years, CPPIB has returned 10.1 per cent annually, on average.

Before he was named CEO in 2021, Mr. Graham led CPPIB’s credit business, which includes private credit investments in businesses that are starting to feel the pinch of rising interest rates. Much has been made of the valuation gap between publicly traded assets, which have fallen sharply in many cases, and private assets that have been slower to adjust. But Mr. Graham said CPPIB has been “quite disciplined” about marking its portfolios to markets, and doesn’t expect big markdowns to come “based on what I’m seeing now.”

He also said many businesses are coping well with the higher borrowing costs that come with higher interest rates so far. “To date, we haven’t seen a lot of stress, to be frank. A lot of companies are doing well.”

In spite of the many challenges roiling markets, he also enumerated some positive signals that are buoying investor sentiment: A reopening in China after draconian COVID-19 lockdowns, inflation starting to come down, a comparatively warm winter in Europe easing pressure on energy supply and a decent start to the year in equity markets.

Yet Mr. Graham said the economic dynamics that shape the global investment landscape are more complicated than they were in recent years. “Now there’s a national-security lens, a domestic-interest lens that’s applied to economic policy and industrial policy. It’s not just a profit maximization. There are other factors at play,” Mr. Graham said.

In that context, he said, it will be especially important to be “somewhat surgical” about choosing which countries to emphasize and how to invest in them, including which sectors to prioritize. CPPIB has eight offices outside Toronto, from New York and London to Hong Kong and Mumbai.

“Our appetite for any given country will ebb and flow based on what opportunities we see at the time,” Mr. Graham said. “Right now, we’re quite comfortable with our exposure to emerging markets.”

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