On a day when oil prices, energy stocks and broader global financial markets crashed, the president and CEO of CPP Investments offered two messages of comfort to a business audience at the Calgary Chamber of Commerce.
Mark Machin called Monday’s economic market events, sparked in part by fears of the spreading COVID-19 outbreak and disputes among global oil producers, an historic day. He also said people need to maintain a long-term view on the economy and investments, and reiterated CPP Investments remains “deeply committed” to the energy industry and its investments in Alberta.
Addressing what seem to be escalating coronavirus fears, Machin said “this too will pass” and when it does, economic growth will resume.
“People shouldn’t think it’s Armageddon forever,” he observed.
In the big picture, Machin said Canadians can relax about the status of CPP Investments.
As of Friday, its asset value was up more than 10 per cent for the fiscal year, one of the benefits of having a broadly diversified portfolio. The five- and 10-year returns are about 10.4 per cent. The annual rate of return up to December was over 12 per cent.
At the end of 2019, CPP Investments’ global real estate assets in office, retail, logistics and warehouse space, were valued at $46.1 billion, or 11 per cent of the entire portfolio.
Its Canadian real estate assets were valued at $5.5 billion or 1.3 per cent of the fund.
Real estate offers stability
“I think the world is always going to need office buildings. That’s sort of a constant,” Machin observed, noting current events could accelerate some other market trends.
“I think the world is evolving away from smaller shopping malls. In the U.S., probably about three-quarters of the shopping malls that exist today won’t be there in 10 years’ time.
“And this coronavirus may accelerate that as people move more online. But, if you’re buying stuff online you need warehouses, you need logistics. That’s an area we’ve seen a huge boom around the world.
“We’re a huge owner of warehouses in different countries in Asia, in South America, in North America. That’s an area that we’re pretty positive on.”
To some extent, real estate can cushion the blow in the energy sector. Assets with long-term cash flow become more attractive in a lower interest rate environment.
“What generally makes real estate attractive (in Canada) is an increasing population and a vibrant economy. Net migration to Canada and an increasing population is something that’s attractive,” Machin explained.
“It’s a growing workforce and therefore a growing need for office in various parts of Canada.
“On the logistics front, there’s probably an increasing need for more sophisticated logistics as more and more goes online.”
Would he say the industrial real estate market is the strongest sector in Canada right now?
“Yeah and the problem is everybody knows that, so it’s got quite expensive.”
CPP Investments committed to Alberta
On the Alberta front, Machin said CPP Investments continues to be a major investor.
“We know and we understand it because we have a direct interest in the prosperity of this province and our investments here,” he said.
“At CPP Investments, we’re convinced that the business of energy is everyone’s business.”
Maintaining a long-term look at investments is the key. CPP has a broad-based portfolio, including real estate, to cushion the blow from the downturn.
The CPP Fund has grown from $36.9 billion in 1999 to more than $420 billion today.
He said Canada makes up about two per cent of global GDP yet CPP has 15 per cent of its investments, or $62 billion, invested here.
Machin said investing in Canada and around the world is critical to the success of major pension funds because it reduces risk and enhances opportunity.
“In Alberta alone, we have 18 per cent of our Canadian assets. We are and we continue to be invested in Alberta. We see compelling opportunities here in the energy sector, in the Western Canadian Sedimentary basin,” he said.
“Alberta is an energy powerhouse. There is no doubt about it, which is why we are investing in innovation at the nexus of energy demand and responsibly produced fuels.
“Alberta will be well-positioned in decades to come to differentiate its product, as jurisdictions increasingly grapple with energy security policies, directing a spotlight on the premium brand of made-in-Alberta energy.”
Energy still global economic driver
Despite the changing face of the sector, energy plays a critical role in local economies and the global economic value chain.
Machin said CPP is committed to continue to invest and find great opportunities in the energy sector.
“We think there are terrific risk-adjusted returns and we can find those in the long term.
“Yes, we do think climate change is happening and it’s something that’s impacting our portfolio and yes we do think the energy sector will gradually move towards a de-carbonized world,” he said.
“Even the most aggressive predictors of that believe it’s not going to happen overnight. It’s not going to happen next year. It’s not going to happen in three years or five years. It’s going to take some time for that transition to happen.
“Our responsibility is to navigate this and figure out where the best possible risk-adjusted returns are,” he said, adding CPP Investments believes both Canada and Alberta remain good places to invest.