Canadians are earnest, and we take pride in things like our picturesque mountains, our medicare system and the Canada Pension Plan. Until the 1990s, all of the plan’s assets were invested in domestic government debt. Then, Ottawa gradually loosened the strings, allowing the Canada Pension Plan Investment Board (CPPIB) to invest in any assets in any jurisdiction around the world. Now, a third of its $400 billion in holdings are in stocks and another quarter in so-called real assets, such as infrastructure, private equity and property. Over the past decade, the CPPIB has posted an impressive average annual return of 11.1%. But global economic growth is waning, and Machin expects the board’s returns will slow over the next decade. We spoke with him about investment strategy and how other countries have trouble emulating Canada’s approach.
Unlike most of us, you can invest in everything and anything. What is your investment approach?
We have some inherent advantages. We have a super-long-term time horizon. We also have the certainty of assets—we won't get redemptions when markets drop. We have some scale too. For the last decade, we've been trying to develop advantages, like hiring talented people and working with the best partners—real estate developers, hedge funds, private equity investors and others. We also have a total portfolio approach. We don't just fill traditional asset buckets. We see returns as coming from three sources: diversification, security selection—making sure you pick the good deal from the bad deal—and medium-term strategic tilting away from our long-term portfolio construction.
Why invest in so many different things?
The nirvana of investing is having multiple uncorrelated return streams—so one thing can still do well when others are falling. That’s hard, because markets and asset classes are synchronized around the world. We start by looking outside of Canada. We have 85% of our assets abroad. Then we diversify across asset classes.
You’ve had great returns over the past decade. Can you repeat that over the next 10 years?
It's always difficult to make predictions, but yes, we were in the super-long cycle of U.S. growth, and so we had 10 fabulous years. But we have to stay humble, and let's certainly not predict those types of returns over the next 10 years. There are tensions between the first- and second-largest economies in the world. That's causing significant uncertainty, particularly in manufacturing. Businesses don't have confidence to build the next plant. It hasn't spilled over to the U.S. consumer, but it's rippling through the world.
How does that affect what you’re doing?
Diversification is really important, but major markets are slowing, and central banks are trying to stimulate. We’re at the end of a short-term and a long-term debt cycle, so you have an astronomical amount of debt around the world. We’re trying to pick our spots, but there’s really nowhere to hide. We have to be able to deal with things, no matter what happens.
What will you do if things slow down?
The first thing we do is ask ourselves, what's the worst conceivable thing that could happen to the markets, to the geopolitical situation and so on? We stress-test our portfolio to make sure we have sufficient liquidity, and that we can rebalance and continue our portfolio construction no matter what. The second thing is having the capability to take advantage of situations when others are under considerable stress. We have teams and partners who can judge whether something really is a good investment at this time.
Where are you seeing opportunities today?
Nothing's cheap. There's still plenty of money that's chasing the most interesting things. We've continued to find good opportunities in private equity, and we've done a number of interesting deals this year, like Merlin Entertainments, the global theme park company. We did that with Blackstone and [the family that founded] Lego. We're also in renewable power. While there's lots of money chasing renewables, we've found some decent investments because it's a growing asset class.
Are there any unusual areas that you can go into given who you are?
A landmark transaction for us this year was in royalties. We have a team that specializes in drug royalties, where we buy future cash flows from pharmaceuticals developed by companies or research institutes. We bought the royalties off an organization called LifeArc in the U.K. for Keytruda, an anti-cancer drug, for $1.3 billion. They have a lump sum they can put back into research today, and we get what we think will be solid returns over the long term.
Are there areas you avoid?
We don't invest in Africa, Russia, the Middle East or Central Asia. We're only in the big liquid markets where we can build real expertise. It's the same thing with assets—we stay away from areas where we don't think we have a significant edge, like agricultural land.
People talk about the Canadian pension model as something for other countries to emulate. Why is it hard for them to do that?
Other pension systems are more complicated. We have a mandate to maximize return without taking undue risk. It’s a simple mandate. Other countries might include social and economic purposes. We also have an independent board of directors who are all seasoned professionals, with a variety of backgrounds. Other governance systems have representatives from politics, labour or other interested parties. They may be well meaning, but they all have different objectives. We’re protected from the political pressure to do things, like sell when the market is falling. In other countries, you have nonfinancial people on the board saying, “Oh my God, everything’s down. You’d better sell.”
What attracted you to this job?
I was at Goldman Sachs in Asia for 22 years, and I’d get calls from headhunters asking if I’d be interested in joining another investment bank. I would tell them that I’d love to do something that helps me put something back into the world. One day someone called and asked, “How would you feel if you could wake up every morning knowing you’re doing something worthwhile for 20 million people?” She mentioned CPPIB, and that it is ambitious and global. It seemed like a really purpose-driven organization. I really do wake up every day feeling like I’m doing something worthwhile for 20 million people.