The pension plan for federal government employees is ramping up its international expansion plan, reshaping its investment strategy as assets are projected to double within a decade.
The Public Sector Pension Investment Board (PSP Investments), which invests pension funds for federal civil servants including the Canadian Forces and the RCMP, said Thursday it was entering a new stage of development after earning a total portfolio return of 14.5 per cent in its fiscal 2015 year ended March 31. These results beat its investment benchmarks and pushed assets under management up by 20 per cent to $112-billion.
PSP Investments was started 15 years ago with assets of just $2.5-billion in public market equities and bonds. Now, the pension fund has private market investments in 35 countries and wants to grow its presence and portfolio around the world. Assets are expected to reach $200-billion by 2024.
Leading PSP Investments into this next phase is new chief executive André Bourbonnais, former head of the private investments division at Canada Pension Plan Investment Board (CPPIB), where he was responsible for a $65-billion portfolio.
"I think that we need to develop an international footprint in key markets for our activities so that we can benefit from local knowledge and local capital, and at the same time we can be closer and more responsive to our partners in an environment that, quite frankly, is becoming more and more competitive," said Mr. Bourbonnais, who has now been with the pension plan for four months.
Mr. Bourbonnais said PSP Investments will start by targeting major financial centres, planting offices in London, where private equity will be an initial focus, and in New York, where it will hire professionals with expertise in leveraged finance to help develop an illiquid debt and credit asset class. "In the foreseeable future I think we'll find we need a presence in Asia," he added. And PSP's head office in Montreal is also likely to expand.
It is a tough time to launch such a platform. "In my career as an investor, this is probably one of the most challenging times because it's very hard to find value anywhere," Mr. Bourbonnais said. But PSP is also wary of missing out on opportunities by sitting on the sidelines. "One of the errors we don't want to commit is an error of omission," he said. The solution is to be selective in making investments, and look for opportunities where PSP may be able to see a different angle than other buyers.
At CPPIB, Mr. Bourbonnais watched the fund grow from $100-billion to $200-billion in assets, and he hopes to implement many of the same strategies at PSP. That includes getting the right order of operations when it comes to building international offices, as well as lessons learned about hiring and developing employees. One of PSP's goals for the coming year is to put in place the foundation for a "total-portfolio management approach" to investing, which is also a key part of CPPIB's investment strategy. The approach focuses on using levels of risk and return streams to diversify a portfolio, instead of balancing investments by the allocation to different asset classes.
The goal isn't to replicate CPPIB, Mr. Bourbonnais said, but rather use what he's learned to build on PSP's own culture and improve the way employees from different departments work together.
"Historically the way the organization was built was very bottom up, so we would empower somebody to develop an asset class and therefore all the strategy and execution was in that asset class," Mr. Bourbonnais said of PSP. He's created a chief investment officer role to oversee different strategies and unite the different groups.
PSP will look to partner with other organizations to take advantage of the expertise and resources at other large pension plans and private equity funds. "In a period like the last one where, since 2008, there's only one direction in the market, people believe that it's always like this," he said. "But we will face another crisis, and when some of our investing companies are encountering difficulties, having a partner to help us in the management of those situations is going to be absolutely key."
Forging those partnerships will mean building up the brand of this notoriously tight-lipped pension plan, so expect to be hearing more from PSP. "It's got to be to our advantage to be better known among a select group of people who are influential and that can help us build our business," Mr. Bourbonnais said.
PSP Investments says it is coming off a successful year, having earned $1.5-billion in value above its benchmark return of 13.1 per cent last year.
Over a ten-year period, the fund has earned an average annualized investment return of 7.6 per cent, or 5.8 per cent after inflation. The return objective for federal pension plans outlined by the Chief Actuary of Canada was 6.0 per cent, or 4.2 per cent after inflation, over the decade.