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Investment discipline vital in wake of market volatility
Maintaining discipline is key for pension funds in 2017
Bayani S Cruz 27 Jan 2017
Asian pension funds need to stick to long-term investment discipline when managing their portfolios amid the uncertainty and volatility plaguing markets.
 
“The market is very volatile. Making sure that you’re not only seeing the opportunities, but at the same time not getting excited when others are getting too excited is very important. Continuing to have discipline is very important,” says Suyi Kim, managing director and head of Asia Pacific at the Canada Pension Plan Investment Board (CPPIB).
 
In the case of CPPIB, it has grown its Asian portfolio significantly since it opened its first regional office in Hong Kong in 2008.
 
Asia accounts for about 20% of CPPIB’s total assets under management of C$278.9 billion (US$209 billion) at its 2016 fiscal year end.
 
Kim, an experienced investment manager and portfolio analyst who joined CPPIB in 2007, was tasked with building its Asian portfolio at a time when global markets were also racked with uncertainty and extreme volatility. The Hong Kong office was opened in February 2008, seven months before the collapse of Lehman Brothers that triggered the global financial crisis.
 
As a result of the crisis, the CPPIB lost a massive C$17 billion in 2009, it’s biggest lost in a single year, with assets plummeting by almost 20% to C$105.5 billion. Considering the CPPIB’s mandate to “maximize returns without undue risk of loss”, the massive loss was very painful.
 
As a long-term investor, CPPIB can weather the market’s ups and downs.
 
“It’s our long term (5 or 10 years) results that are key for us. At our 2015 fiscal year, our 10-year returns were 6.8%, while our five-year returns were 10.6%. So while we did lose C$17 billion in 2009 as part of the global financial crisis, we also gained exactly the same amount in fiscal year 2015, and we expect to see volatility in our financial results,” Kim says
 
At the time of the crisis, CPPIB’s portfolio was not very diversified, with 85% invested in Canadian assets. But the fund had since undertaken a massive diversification strategy.
 
Fast forward to the present, CPPIB now manages a highly-diversified portfolio both in terms of geography and asset class.
 
 
Investing in Asia
Developed markets in Asia Pacific, which Kim oversees, account for 9% of CPPIB’s total portfolio. The fund is invested in various asset classes, including direct equity, private equity, and joint ventures, as well as across sectors including financials, consumer, and logistics.
 

Suyi Kim

In the 2016 fiscal year alone, CPPIB’s principal investments in Asia include a US$1 billion commitment into Goodman China Logistics Partnership that owns and develops logistics assets in China. CPPIB also holds a US$500 million equity in Postal Savings Bank of China as well as a 20% equity in Homeplus, one of the largest multi-channel retailers in Korea.
 
CPPIB has also invested in leading Asian corporates including Chinese e-commerce giant Alibaba Group, India’s Kotak Mahindra Bank and Hong Kong broadband service provider HKBN.
 
These investments are part of an active strategy of global diversification into different asset classes and sectors.
 
“We have done quite well in Asia today. We have worked hard to identify good investments and we’ll continue to expand in this part of the world. We think Asia should have a higher proportion of our total portfolio than what we have currently, so we are doing more work with this objective,” says Kim.
 
According to Kim, CPPIB plans to invest in more key Asian markets, particularly in China.
 
“In China, we currently have about 4% of our portfolio, while in the US we have 40%. There are many reasons why there’s that huge gap, but going forward that should be reduced. The China percentage will have to go up. To grow our Asian investments further, we’ll have to focus more on Asian markets, work harder to identify deals, and find a way to expand our programme,” says Kim.
 
Another way of achieving this objective is to do more work within CPPIB’s investment framework, which has different investment strategies covering public market investments, investment partnerships, private investments, and real estate investments.
 
“We have more than 20 different strategies, about half of that is in Asia now. We’ll continue to expand the local presence of other investment strategies. For example, in some markets we have dedicated groups for looking at financial services or energy investments,” says Kim.
 
Investment strategy
It can be said that CPPIB is better positioned to boost investments than some pension funds because it still benefits from Canada’s pension fund reforms undertaken in the 1990s. The reforms have resulted in a structure that provides certainty in the fund’s flow of assets.
 
The impact of the reforms on CPPIB’s portfolio is that it currently has more cash flowing in than flowing out, resulting in substantial investible assets.
 
“This allows us to invest in less liquid, higher risk asset classes, that would give us higher returns. If you are in a pension structure where you have more money going out, you have to manage the portfolio with that in mind and would  invest only in more liquid, lower risk asset classes that give lower returns,” says Kim.
 

Quote-Kim

Considering that the global markets are stuck in a low-yield, low interest rate environment for the next five years, having the flexibility to invest in less liquid, higher risk assets that provide higher returns puts CPPIB in a strong position to weather this market condition.
 
“We’re in a much better position than other pension funds. It allows us to go more heavily into alternative investments and take more risk. Having said that we also manage liquidity on a more holistic level. We have a dedicated team called the Cash and Liquidity Management team who looks after the overall fund’s liquidity management including proactively planning the liquidity needs going forward” Kim says.  
 
On the other hand, CPPIB has a strict risk budgeting process that manages the risk profile of the different asset classes that it invests in. That allows it to generate the highest return without taking undue risk.
 
“For every single investment, when we allocate, we consider the asset allocation as well as the risk allocation,” says Kim.
 
CPPIB’s target portfolio is 85% in equities and 15% in debt because it can afford to take more risk. This is very different from the traditional 60% equity, 40% fixed income asset allocation model of conservative pension funds.
 
Challenges
One of the challenges of investing in Asia for a pension fund of CPPIB’s size is that most of the markets in the region are still at a relatively early stage of development. Since CPPIB makes investments involving huge amounts, ranging from hundreds of millions to billions of dollars, this means that there are relatively few deals or investment opportunities of the size that may meet its requirements.
 
“That’s the reason why we are hiring people with very long experience in any asset class, so that we can identify the attractive opportunities. But at the same time, we want to make sure that we have a long-term investment philosophy in any investment discussion, so that we are not rushing in when the market doesn’t make sense. This is where maintaining the investment discipline is very important,” says Kim.
 
In the recent case of Brexit and the election of Donald Trump to US presidency, for example, Kim says these market-shaking events will not change CPPIB’s long-term investment strategy, although both the UK and the US are very important markets for the pension fund.
 
“One thing that we realize through this experience is that we now have an extremely diversified portfolio in terms of asset class or geographic location. When these shocks happened, we saw our portfolio being very resilient. Even at the initial shock, before things bounced back after Brexit, we saw our portfolio doing quite well. It was actually proof that what we have been focusing on in the past, geographic and asset class diversification, that’s really important for a large investor like us,” says Kim.
 
Going forward, CPPIB plans to beef up its investment team in Asia by hiring more senior investment professionals. “Our strategy includes working with the right partners, and we now have established a large set of partners in the Asian markets. We have more than 40 partners on the ground and those partners and our investment strategy have helped us get to where we are today,” says Kim. 
 
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