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00:00Thank you all for joining us.
00:02As you've just heard, I'm Amanda Cantrell.
00:04I help run the U.S. investing team here at Bloomberg.
00:08And I'm here with Manrup Jehouti, the Senior Managing Director and Head of Total Fund Management for CPP Investments.
00:14Manrup, thank you so much for being here today.
00:17Thank you very much for having me.
00:18It's my second year here, so fantastic to be back.
00:21Great. Welcome back.
00:22Well, we don't have a lot of time, so let's get right to it.
00:26I would first love it if you could tell us a bit about CPP and then your role within it and what total fund management encompasses.
00:35Sure.
00:36So CPP, for those who don't know, or CPP Investments in particular, manages roughly $730 billion of assets on behalf of the CPP and the $22 million beneficiaries and contributors within Canada.
00:50Within the CPP, total fund management really has three main kind of pillars to its mandate, so I'll quickly go through those.
01:01The first is we're responsible for the portfolio design.
01:04So we do, in essence, all the research, the analytics, and the modeling that goes into all of our asset allocation decisions.
01:10So the decisions that are the backbone of our geography choices, our asset choices, all come from within TFM.
01:19The second piece of what we do is what we call the portfolio management piece.
01:23And really what that's intended to do is it's intended to ensure that once we've set those design targets, the total fund is actually getting as close as it can to those targets.
01:34So a lot of our investing teams will invest where they find the best opportunities, where they think they're going to get the best risk-adjusted returns.
01:42It's TFM's job to then take that bottom-up investing, compare it to those targets, and ensure that we are getting as close to those optimal design targets as we can.
01:52And then the last piece of what we do is what we call portfolio implementation, which really is around sort of ensuring the balance sheet is being managed prudently.
02:01We have the appropriate liquidity on balance sheet.
02:03We're managing all of the financing activities on behalf of the top of the house.
02:07And then we also do all the trading on behalf of the fund as well.
02:10Right.
02:11So I know that you all are long-term investors, but I would like to talk about the short-term for the time being.
02:18There's a ton to navigate right now between tariffs, geopolitical risks, the U.S. fiscal situation.
02:27How are you, with that in mind, how are you positioning the portfolio now to take advantage of any of the dislocations and also avoid some of the pitfalls?
02:41Sure.
02:41So, you know, one of the things that we always kind of remind ourselves, but frankly, when we talk about the portfolio or remind others, is that we are a long-term investor.
02:50Our objective is to maximize returns on behalf of the CPP over the long term to ensure planned sustainability.
02:57That's first and foremost our investing philosophy.
03:00What that means is that when we design the portfolio at the outset, we're really trying to design a portfolio that is able to withstand multiple types of economic shocks and is able to be resilient through multiple cycles.
03:13It's not about setting up a portfolio that we think is going to be the best portfolio for the next 12 months.
03:18It's really about setting up that portfolio that we think is going to maximize returns over the long run.
03:22Now, when it comes to the current investing context, it doesn't mean we don't take into account what's happening in the market.
03:28We certainly take into account what we're learning and what we're seeing, but we tend to view it through the lens of what is the impact over the medium to long term as opposed to what do we think tactically is happening.
03:39A lot of the tactical things that happen in the portfolio, frankly, happen within our investing teams,
03:43the ones that are out there looking for investments in private equity or credit or in real assets where they're really seeing the day-to-day opportunities from a bottom-up security selection perspective.
03:54From the top-down perspective, we're really more concerned about what are we seeing in the market today that perhaps changes some of our long-term views of what we think is, you know,
04:03sort of the equilibrium between asset classes, between FX, between various risk factors.
04:08And so that's philosophically kind of how we generally view the world.
04:12When we're thinking about the current context, to actually get to your question now that I've provided a big preamble, you know,
04:18when we think about the current context, there's probably a few themes that are on our mind.
04:22That's probably an easier way to kind of tackle it because there's many things that are, frankly, happening.
04:27I think the first is AI, by no surprise.
04:30We are thinking about AI both in terms of the immediate investing opportunity,
04:34and that's not just thinking about sort of the specific things around the MAG-7,
04:38but it's really things that are adjacent to AI as well as those things that are explicitly AI,
04:43whether that's power or energy, infrastructure and data centers.
04:46Those are certainly an aspect of the market that we think provides significant opportunity,
04:51and you're already, frankly, seeing it in terms of the degree of capex that's going into the AI space generally.
04:57We are also thinking about the implications of the world moving away from globalism, multilateralism,
05:04to something that looks closer to bilateral transactional relationships between trading partners
05:10and what that means not just for supply chains, but also what it means in terms of trading blocks
05:16and where the opportunities are going to be, what the opportunities are.
05:19As economies begin to sort of champion domestic champions, think about reshoring or friend-shoring,
05:26what does that mean in terms of the risks and opportunities that come?
05:29And then the last piece of kind of the core theme that we're thinking about is generally things around,
05:34let's call it the fiscal umbrella.
05:37And really, there's a few threads to it.
05:40Really, it comes down to longer term, how do we think about what's happening vis-Ã -vis fiscal deficits
05:46that are happening not just in the U.S., across the globe?
05:50And what does that mean for kind of our traditional views of assets in particular,
05:56our traditional views of the role of fixed income in portfolios that has typically been
05:59a very important diversifier when you're constructing a portfolio?
06:03And do we think those same diversification benefits that we've seen in the empirical data
06:07will hold up in light of some of the fiscal challenges that we see?
06:12Right.
06:12So what are some specific opportunities within those broad themes you mentioned,
06:17like AI and deglobalization, that you think are most attractive right now?
06:23Yeah, I think AI, on the one hand, I think it's, to some extent, it's really, you know,
06:30there's a really interesting opportunity set around the adjacencies.
06:34You know, I think there are constraints and limitations as it relates to power and energy
06:38that's going to be needed to continue to support the AI build-out, the data centers themselves
06:43and the requirements for chips, I think, do create interesting investment opportunities
06:47that we haven't seen, at least in the more recent past.
06:51So that's one piece.
06:52On the fiscal side, I kind of referred to it more from a medium-term lens,
06:56but there is a short-term lens to the fiscal, which is between fiscal and the move towards,
07:03let's just call it more bilateralism, perhaps reshoring and friendshoring.
07:08There is a new impetus for fiscal to be used in nation-building,
07:12and I think that creates a really, really interesting opportunity.
07:15You're seeing it in Europe.
07:16You saw Germany for the first time actually talk about running fiscal deficits
07:21to help support infrastructure, to help support defense,
07:24and we think those are really, really interesting opportunities for a fund like us
07:27that likes to deploy capital into infrastructure-like projects.
07:31Right.
07:32And, you know, I'm going to ask as a follow-up, the flip side,
07:36what's making you nervous right now, or at least what are you sort of avoiding
07:40for the time being or being cautious about?
07:42Yeah, I don't think there's anything that jumps out that we're avoiding in this market.
07:47And what I really mean by that is there's nothing, obviously,
07:51where we think that there's excessive risk in the market.
07:53We are, you know, in all these things, you know, being cognizant of the overall macro backdrop.
08:01So in one sense, you have a great degree of tailwinds as it relates to the capex
08:07and investment that's happening vis-a-vis AI, as well as the fiscal stimulus that we've been talking about.
08:13But you kind of have to look at the flip side of the macro equation,
08:16which is some of the headwinds that we see.
08:18And so we're starting to see some of the headwinds around sort of weakening labor markets,
08:22perhaps a bifurcation of the U.S. consumer, as an example,
08:28where, you know, upwards of, you know, 50% of consumer spending
08:32is actually being done by the top 10% of the consumer.
08:37And so you have, at the same time you have these tailwinds, there are headwinds,
08:43and you need to be mindful of those headwinds because it's not just, you know,
08:47in many cases it's really a balance between do you think it's the tailwinds
08:51or the headwinds that are ultimately going to dominate the investing landscape.
08:54And that's really the approach we're taking as opposed to staying away from particular markets or assets.
08:59Great. And shifting gears a little bit, we talk a lot about private market investing here at Bloomberg.
09:06You do a lot of both public and private market investing.
09:09How do you decide which approach to take for a given asset class?
09:14And how do you sort of adjust and rebalance when, say,
09:20the returns for public markets in one asset class appear to outstrip private and vice versa?
09:26Yeah. So when it comes to the design aspects of it,
09:29what we really try to balance between being public versus private
09:33is ensuring that we have enough liquidity on balance sheet,
09:38not just to meet liquidity needs, but to have enough liquidity on balance sheet
09:42to be able to move to where the opportunities are, to be able to rebalance your portfolio
09:47and ultimately be agile in a market that provides risks and opportunities on an ongoing basis.
09:54And that balance is really trying to find that right level of public market investments
09:59to create that agility while still ensuring we are deploying into the private assets
10:04that we think, at least from our own track record,
10:07have significant excess returns across private equity, credit, and real assets,
10:13that we want to ensure that we're deploying the right amount of capital
10:16to continue to generate those alpha and excess spread opportunities.
10:20But it's really about finding that balance from a top-down asset allocation standpoint.
10:24When we think about what's happening day to day,
10:28it really comes down to a question of how do you assess relative value.
10:32And it's an area that we spend a lot of time on in terms of assessing private transactions
10:36versus what we think the public market alternative is,
10:39so that we're always challenging ourselves, not just thinking about what's the headline IRR
10:44of a specific transaction, but trying to decompose that IRR to what do we think is,
10:49how much of that is systematic, how much of that is true security selection in alpha,
10:53and how does that compare to what we can do in public markets,
10:56which provide a greater degree of liquidity.
10:59And it's that relative value discussion that I think becomes critical.
11:03And it's fundamental to how we think about investing,
11:06where it's not just you have X amount of capital going deployed,
11:09it's really about where is that capital ultimately best deployed.
11:13And having that relative value lens is important to think about
11:15the day-to-day trade-off of what you do in public versus private markets.
11:20Right.
11:20I'd like to drill down a little bit on private equity.
11:23We've been writing a lot about the difficulty that some private equity firms have had.
11:28Well, a lot of them have had selling their portfolio companies,
11:31getting distributions back to investors.
11:34We noticed that you all reduced your private equity exposure slightly
11:39in the last fiscal year to 21 from 25%.
11:43How are you all thinking about private equity now?
11:45So we're very comfortable with our private equity allocation where it is around 21%, 22%.
11:53The reduction that you were referred to, I think,
11:56is perhaps a little bit of a construct of what I'll describe as market dynamics.
12:00I think coming out of COVID, opportunities to dispose of assets through traditional channels,
12:06whether it be IPOs or sales to strategic or what have you,
12:11we're limited for generally the private equity universe.
12:14We're starting to see some of that turn back on.
12:18And so you saw a natural growth of private equity in the portfolio as a percent of the portfolio
12:23being more reflective of market dynamics than anything else.
12:26It's not us reducing from 25% to 22% because of a view on private equity.
12:31It's frankly a consequence of what we're seeing from a market standpoint.
12:35But we do think where we are at 21%, 22% is appropriate.
12:43Yeah.
12:45And we talked about public versus private.
12:47I'd like to ask a similar question in terms of direct versus indirect.
12:51How do you decide when to outsource and when to invest in-house?
12:55Yeah.
12:56When it comes to direct, we have to continue to believe that when we go direct,
13:03we are doing so because we believe we have some form of edge.
13:07If we don't believe we have edge, we shouldn't really be going direct.
13:10But what's really important about that direct-indirect is that even when we go direct,
13:16going direct doesn't mean you go alone.
13:17And in many instances, we're working very closely with our partners across capital markets,
13:24in particular our GP partners in the private equity and real asset space.
13:28We're partnering with them to find those opportunities and working closely with them
13:33to originate transactions, structure transactions, and ultimately execute.
13:37But the beginning principle is that we go direct in asset classes and strategies
13:42where we genuinely believe we have edge.
13:45Okay.
13:46Well, I think I have time to ask you one more question.
13:49So I feel like this being the Canadian Finance Conference,
13:51I'd be remiss if I didn't ask you how you're thinking about investing in Canada.
13:56So we are very bullish about investing in Canada.
14:01You know, the backdrop is one in which we're starting to see strong momentum
14:07and a galvanization of political will to kind of consider major projects
14:14and nation-building in a way that we hadn't seen before.
14:16And we're genuinely excited about the opportunities that that presents,
14:21particularly for an investor like CPP.
14:23And we're bullish about that prospect.
14:26We're interested and engaged in those discussions.
14:29And so we're very excited about the prospects.
14:31So we have a significant portfolio in Canada,
14:34and we'd love to be able to add to it.
14:37Great.
14:38Well, I think that pretty much leaves us with, you know,
14:43not enough time to ask another question.
14:45So really appreciate you taking the time to be here.
14:48And, yeah, thanks very much.
14:49Great.
14:50Thanks very much, Amanda.
14:51Thanks.
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