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PSP aims to boost collaboration as CEO warns of investor complacency

Corner of Bay Street and Adelaide streets in Toronto, on July 25, 2013. A seemingly unending tide of unexpected election results and geopolitical turmoil have started to feel like the new normal for investors, and that’s yet another thing for André Bourbonnais to worry about.

Gloria Nieto/The Globe and Mail

A seemingly unending tide of unexpected election results and geopolitical turmoil have started to feel like the new normal for investors, and that's yet another thing for André Bourbonnais to worry about.

The Public Sector Pension Investment Board's chief executive officer said he's paying close attention to the pervading feeling that unsteady global conditions – from uncertain political moves in Europe and the United States to oil's price drop and worries over Chinese debt – can co-exist with high-flying markets. Investors shouldn't get complacent about these conditions, Mr. Bourbonnais warns.

"We're trying to adjust our investment actions accordingly. It's difficult when you have such a large portfolio, but I'm absolutely convinced that at some point, the shoe's going to drop. There's going to be opportunity," he said in an interview. He added that this point of view has meant keeping more of PSP's cash and liquid investments on hand, even at the expense of some investment performance gains in the past year. The fund wants to avoid selling public equities at depressed prices in order to fund the private-market deals that could emerge in a market downturn.

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"What I want more than anything else is for our portfolio to be positioned to be able to access those opportunities when they come," said Mr. Bourbonnais, who has been reading up on the risks of complacency lately.

His cautious outlook comes on the heels of a good fiscal year for PSP, which invests on behalf of federal civil servants, including the Canadian Forces and the RCMP. The fund posted a return of 12.8 per cent after all costs, and assets under management climbed 16.1 per cent to $135.6-billion in the year.

PSP is working on a five-year strategic plan though to 2021 that will reorient investment teams toward working together and sharing information more efficiently across asset classes. The fund, which is set to reach $200-billion in assets by 2025, was built up by entrepreneurial asset managers who were focused on growth, Mr. Bourbonnais said. But that culture gave way to an overall strategy that is too-often broken up into silos.

Mr. Bourbonnais wants to collapse the old system. One way to do that is by changing the way people get paid, he said. PSP has moved to a new compensation system more focused on the fund's longer-term overall returns and the contributions of individuals, rather than on asset-class results.

"What you want is for the collaboration to be intuitive and spontaneous, not to be directed from the top. Although, at the beginning, that's really what we need to do," Mr. Bourbonnais said, adding that he's pleased with the progress that has been made.

At the same time, the fund's various investment teams largely performed well individually during PSP's last fiscal year. Most asset classes produced double-digit investment returns, including a 14.4-per-cent gain in the infrastructure portfolio, a 16-per-cent return in public markets and a 27.5-per-cent return in the relatively new private-debt portfolio.

A notable exception to those gains was the private-equity group, where returns fell by 3.4 per cent, even as the overall portfolio grew by $3.4-billion in the 2017 fiscal year to $15.9-billion. Private equity is going through a rebuilding phase at PSP, where underperforming legacy assets are being shored up with new investments.

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PSP's priorities for the coming year include attracting and retaining key staff, particularly in the build-out of the London and New York offices, as well as moving toward establishing a presence in Asia.

PSP has also boosted its focus on diversity and responsible investing. This year, it created a group to "identify and monitor environmental, social and governance (ESG) factors in investment decision making," according to the annual report. PSP plans to form more corporate views on ESG themes this year, which the fund will use to analyze future investments and review the current portfolio.

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