Mark Wiseman is president and chief executive officer of the Canada Pension Plan Investment Board. Mark Machin is CPPIB's senior managing director and head of international; he will succeed Mr. Wiseman as CEO on June 13.
The Canada Pension Plan Investment Board is hosting public meetings on Monday in nine cities, along with our webcast at cppib.com. This is an opportunity for 19 million contributors and beneficiaries of the Canada Pension Plan to learn about how we are investing your hard-earned contributions.
We look forward to the opportunity to explain our financial results and for Mark Machin to introduce himself as he prepares to take over as chief executive officer. With the meeting of finance ministers in two weeks to discuss potential reforms to the Canada Pension Plan, we know that there is additional interest in how the CPPIB invests, and we welcome the public's questions.
It has now been a decade since the CPPIB decided to actively manage the CPP Fund, rather than pursue a passive strategy of simply mirroring public market indexes. It's not a decision we took lightly. Active management requires more resources, and therefore more expenses, than a passive strategy. But we firmly believe that it generates significantly higher risk-adjusted returns for you.
To understand the active-management rationale, you must start with our investment horizon. We were created to provide a foundation for retirement – not just for today's contributors, but for many generations to come. Because of the pooling of risk inherent in the plan and our multigenerational investment horizon, as an investor, you can think of the CPPIB as a 29-year-old with a good income – who never turns 30.
This means that we fully expect, and can withstand, future investment losses and market downturns. Indeed, downturns represent good buying opportunities for the fund. The work we do is focused on a horizon stretching decades, not years. And, while maintaining this focus is difficult because, as behavioural scientists have found, humans are hardwired to think, worry and act for the present, we can act differently than most investors.
We can say with confidence that our strategy is adding value. We measure our performance against a reference portfolio of public market indexes that represents a robust passive-management strategy – our "road not taken." Since adopting an active-management strategy 10 years ago, the CPPIB has generated $125.6-billion in net investment income; $17.1-billion (after all our costs) of that was purely as a result of our active management. That's $17.1-billion that would otherwise not be in the CPP Fund. Thanks to compounding, that extra money will continue adding to the fund for years to come. That's evidence that, so far, we have been right to pursue the active-management strategy.
We would not have embarked on active management but for a distinct set of structural advantages that the CPPIB possesses: investing for multiple decades; a stable and predictable flow of money into the fund; and size. These allow the CPPIB to seize investment opportunities most investors cannot. To ignore these advantages would be the sporting equivalent of benching Sidney Crosby, Connor McDavid and Steven Stamkos for an Olympic gold-medal hockey game.
The CPPIB is required by our legislation to pursue a "maximum" rate of return without "undue risk of loss." Yet there is no free lunch. The trade-off is accepting a level of investment risk that any one of us, as individual savers, might not be able to prudently accept on our own. This includes the expectation of a material economic loss at least one year in 10.
Another example is liquidity. Take, for instance, our investment in toll roads or commercial real estate – these are long-duration assets that are considered too illiquid for most investors. However, we earn higher returns because we are able to accept the risk of not being able to sell them on a moment's notice.
To be clear, our expenses have grown since we began building the skills, systems and resources to support our active strategy, and this naturally attracts scrutiny, given that we are investing Canadian workers' and retirees' hard-earned money. Active management is the best way to serve your interests over the long term, and we need to look at our costs (32 cents of operating expenses for each $100 invested) in the context of the additional long-term returns that we are able to generate for you.
Our strategy runs on two separate engines. In addition to the higher returns we described above, it also creates greater resiliency for the fund. We diversify to ensure that we are not overly exposed to any single investment, currency, asset class or region. This resiliency has been amply demonstrated by our 10-year returns, which include the worst global downturn since the Great Depression, and in our fiscal 2016 return, where we significantly outperformed our reference portfolio. Our diversification provided a safe harbour as public equity markets declined significantly.
Our decisions are made in the context of fulfilling our singular investment mandate on your behalf. It is also within this context that we address other issues that Canadians care about, such as climate change, which has been one of our four focus areas for engagement for a decade. Climate change poses economic risks that we weigh in our investment decisions, and we have created an internal working group to ensure that we're doing this optimally both in individual investments and at the portfolio level. We are also looking forward to the work that our head of sustainable investing is doing as part of the task force on climate-related financial disclosures that Mark Carney established as head of the Financial Stability Board. This group will improve disclosure about climate-change risks not only in the oil and gas sector, but beyond.
It is important that our contributors and beneficiaries understand our strategy and the key implications, such as occasional and inevitable short-term drops in value, the costs associated with running a globally competitive investment business successfully, and how we address difficult considerations such as the long-term implications of climate change on the portfolio. Our public meetings are your opportunity to "hold our feet to the fire" – and we are looking forward to it.