The video features a discussion with a senior fund manager overseeing one of the world's largest pools of capital, specifically focusing on the duties associated with being head of the total fund management group. The primary tasks involve helping with portfolio design and construction, making asset allocation decisions, and managing completion portfolios to targets in global equities, fixed income, and liquidity levels.

Debt issuance is a component of the fund's strategy to leverage and diversify its portfolio optimally, maintaining specific risk targets while introducing growth-enhancing assets such as credit, infrastructure, and government bonds. The manager explains the use of private credit, outlining its role in delivering better risk-adjusted returns and the fund's liquidity management crucial for rebalancing the portfolio and addressing cash flow requirements, while also considering geopolitical risks through scenario analysis.

Please remember to turn on the CC button to view the subtitles.

Key Vocabularies and Common Phrases:

1. leverage [ˈlevərɪdʒ] - (n.) - The use of borrowed funds to increase the potential return of an investment. - Synonyms: (gearing, borrowing, financing)

But from our perspective, leverage really goes hand in hand with how we think about asset allocation and in particular, how we think about adding diversity to the portfolio.

2. portfolio [pɔːrtˈfoʊliˌoʊ] - (n.) - A range of investments held by a person or organization. - Synonyms: (collection, range, compilation)

One is on behalf of the CIO to help with the portfolio design and construction.

3. diversification [daɪˌvɜːrsɪfɪˈkeɪʃən] - (n.) - A risk management strategy that mixes a wide variety of investments within a portfolio. - Synonyms: (variety, assortment, mingling)

And so, one of the things that we want to do is, when we think about leverage, is, is there a way to build a better portfolio? And we, you know, one of our core investment beliefs around building that better investment portfolio is to, is a belief in diversification, that a diversified portfolio will outperform over the long run, a more concentrated equity centric portfolio

4. geopolitical [ˌdʒiːoʊpəˈlɪtɪkl] - (adj.) - Relating to politics, especially international relations, as influenced by geographical factors. - Synonyms: (international, global, political-geographical)

Geopolitics is always one of those ones where you can observe it, you know, where the geopolitical risk, to a large extent, is coming from.

5. liquidity [lɪˈkwɪdəti] - (n.) - The availability of liquid assets to a market or company. - Synonyms: (cash flow, solvency, fluidity)

Let's talk a bit about liquidity and how liquidity considerations affect the active investment strategy.

6. scenario analysis [səˈnɛrioʊ əˈnæləsɪs] - (n.) - A process of analyzing possible future events by considering alternative possible outcomes (scenarios). - Synonyms: (case study, evaluation, examination)

We really think about it more from a scenario analysis lens, trying to ascribe a specific risk premium.

7. geographies [dʒiˈɑːɡrəfiz] - (n.) - Parts of the world with different geographical, political, and economic profiles. - Synonyms: (regions, areas, territories)

So really, all the asset allocation decisions, the decisions we make around geographies and which investing departments we want to ultimately invest in.

8. remittances [rɪˈmɪtənsɪz] - (n.) - Transfers of money by foreign workers to their home countries. - Synonyms: (payments, transfers, disbursements)

Including any remittances that we have back to the government.

9. risk target [rɪsk ˈtɑːrɡɪt] - (n.) - The level of risk a portfolio manager aims to achieve in their investment strategy. - Synonyms: (risk goal, risk level, investment objective)

That risk target, in the units that we tend to speak in is the equivalent of an 80 515 portfolio

10. operational impacts [ˌɑːpəˈreɪʃənl ˈɪmpækts] - (n.) - Effects on the day-to-day functioning of an organization or system. - Synonyms: (functional effects, procedural impacts, workflow disruptions)

But there's also operational impacts that could have vis a vis your investments within the region.

Inside CPP Investments’ Total Fund Management Group

All right, all set. Thank you for joining us today. You've got a big job. You're helping to manage one of the world's largest pools of capital. Maybe to start. I mean, your title is head of total fund management group. Explain what that means. What are the elements of the group? What are the elements of your job? Yeah, sure. Well, pleasure to be here and thanks, everyone, for attending. So, total fund management, essentially, you can think of total fund management as kind of having two broad mandates. One is on behalf of the CIO to help with the portfolio design and construction. So really, all the asset allocation decisions, the decisions we make around geographies and which investing departments we want to ultimately invest in. A lot of that research and engine comes from TFM. And then to complement that, the second half of what we do is really to then ensure that our portfolio is being managed to those targets. And so we have our completion portfolios, we call them our balancing portfolios, which invest across global equities and fixed income.

We have our financing program, including our term debt program, which acts like a. Very much like a treasury function, to ensure we're at our target level of liquidity and leverage. And all those pieces come together to, one, help the CIO design the portfolio, and then ultimately ensure that our portfolio is being managed to those targets. Underneath that, there's obviously a number of teams that kind of fit within each of those silos. We have teams that are focused more on treasury like functions. We have teams that are more focused on beta replication, and then we have teams that are really focused around sort of the tools and research and analytics that we need to ultimately inform our portfolio allocation decision.

Now, CBP and IB is in some respects, a privileged position. I mean, you've got a super long time horizon. You're getting contributions from most working canadians. So why does the fund issue debt? What's the purpose and how does it affect the overall sort of portfolio construct? Yeah, it's a question we get a lot, and I think you heard pieces of it in the prior panel in terms of the use of leverage. But from our perspective, leverage really goes hand in hand with how we think about asset allocation and in particular, how we think about adding diversity to the portfolio.

One of the things in terms of our investment framework, where we start is we very much start with what is the level of risk that we want to target from the fund that we think will allow us to best achieve our mandate of maximizing returns without undue risk or loss. That risk target, in the units that we tend to speak in is the equivalent of an 80 515 portfolio. So that's owning 85% equity and 15% fixed income. That portfolio, on its own, would be highly exposed to a large degree to kind of growth risk, and in particular economic shocks, like the things that stuff we've seen, whether it's Covid or GFC.

And so, one of the things that we want to do is, when we think about leverage, is, is there a way to build a better portfolio? And we, you know, one of our core investment beliefs around building that better investment portfolio is to, is a belief in diversification, that a diversified portfolio will outperform over the long run, a more concentrated equity centric portfolio. But when we diversify the portfolio away from a risk target that's very equity centric, and we start adding assets like credit or fixed income, that naturally lowers the risk of the portfolio. So as we diversify, the risk of our portfolio is actually moving further and further away from our ideal risk target. And that's where leverage comes in. We essentially seek to optimize a portfolio that we think is best diversified, and then we use leverage to get back to our original risk target of that 80, 515. So we're not taking on any incremental risk versus where we would want our portfolio to be. But we think we have a better portfolio as a result of the use of leverage that gives us access to cash flows and exposures that we otherwise wouldn't be able to obtain.

We think that that not only will be a portfolio that outperforms, but we also think over the long run, it's a portfolio that will be more resilient to economic shocks. So what types of assets does the leverage strategy afford you that you wouldn't have? Yeah, it's really assets that are kind of carry less risk than typical beta equity. And so that's stuff like credit infrastructure. And obviously, government bonds would be the three main categories of assets that we get to invest in. The benefit of that is, if you think about it, if you move away from that equity centric portfolio, the other nice feature of diversifying is that it gives us a wider breadth of assets that we could seek to monetize alpha or security selection on, that we otherwise wouldn't have the opportunity to do.

So. Credit is a great example. We likely would not have the credit allocation that we have without the use of leverage. And by having that credit allocation, we're able to then access markets like private credit that we otherwise wouldn't have had access to. And private credit has been a big growth area, a big focus. There's been actually lots of hiring by the fund there. Tell us a bit about what's appealing about that. And how does it look today versus when you embarked on the big private credit expansion a number of years ago? Yeah, I think we were probably one of the early leaders, so to speak, in private credit. But I think when you think about it, it kind of goes back to my original sort of answer, which was, credit on its own provides a diversifying cash flow to the, to the fund. And then the use of private credit, we just think, allows for better risk adjusted returns to the overall portfolio.

Let's talk a bit about liquidity and how liquidity considerations affect the active investment strategy. Obviously, the plan is nowhere near mature, but it does mature over time as the population ages. So liquidity comes into play. Yeah. So liquidity, from our vantage point, really, there's a few ways to kind of triangulate it, for lack of a better way of putting it. But liquidity, when we think about it, is liquidity for the needs of managing the cash flows of the fund, including any remittances that we have back to the government.

It's liquidity to ensure that we have enough funds available to rebalance the portfolio, to ensure that, or portfolio is as close as it can be to the targets that were originally setting through the design process. It's also liquidity for things like dry powder. And then ultimately, it's ensuring we have the liquidity to manage the amount of leverage that we have in the design portfolio. And that's a key link that sometimes folks don't necessarily directly think about. But every time you use leverage, it's partially dependent on the type of leverage that you're using. There is a natural demand then, on the balance sheet for liquidity, and you need to ensure that you have the right balance in terms of sizing your liquidity portfolio, not just for rebalancing and ensuring you can manage the cash flows of the fund, but taking into account the ALM considerations of your liability book.

I'm going to steal one of my colleagues. Question, as an issuer, what's the pitch for CPPD? Well, I think the pitch for us is really around, sort of. Again, we're an SSA issuer. It's really about being a high quality issuer in the space. AAA rated a diversifying credit, frankly, in terms of the nature of our institution, and obviously having a very, very strong balance sheet on the back of it.

So your group also handles research of a great variety of financial modeling and scenario based analysis, including geopolitical risk, that's a big topic in markets at the moment. So maybe you could walk the audience through how that process takes place. And with, I guess, a focus on the current state of geopolitical risk, state of the world. Geopolitics is always one of those ones where you can observe it, you know, where the geopolitical risk, to a large extent, is coming from, those that are the flash points in the market, as well as sort of, you know, general sort of views around sort of how those could, could evolve.

When we think about geopolitical risk, we really think about it more from a scenario analysis lens, trying to ascribe a specific risk premium that you need to generate because you're operating in a specific region. I think it's probably overly precise and is kind of missing a little bit of the forest from the trees. And so from our vantage point, it's really about taking a look at stuff from a scenario analysis perspective. And you can kind of think about that through two lenses. There's the financial impact that a particular geopolitical scenario can have, but there's also operational impacts that could have vis a vis your investments within the region, if you have folks in the region. And we try to think about it through both ways and from the financial side of things, one of the things that we try to do through that exercise of stress testing is not only exposing where you might be at risk or exposing things that you perhaps didn't think about in terms of hidden or second order effects that you won't naturally think about.

Those are always the benefit of any type of scenario analysis. But it's really about then taking the analysis and flipping it around and saying, what would you have done differently? So you're in the market today, you know what your portfolio looks like. Is there anything that you would do differently as a result of the scenario analysis that you've run? That could be one question. The second question is, what are the markers then that you're going to look for that would change your view on how you want to manage that risk? And we think through both of those lenses, whether it's the financial side or the operational side of things, that's where the value of scenario analysis can come in, because trying to think about a risk premium or trying to think about what the impact is from a, from a returns perspective is arguably kind of getting a little bit overly precise for something that is, frankly, hard to quantify.

But the value of scenario analysis can certainly help not only expose where you're at risk, but frankly help you think about what you would do if things worsen. Are you able to give us a specific example of how you use scenario analysis, for example, in evaluating geopolitical risk and if there were actions that the fund took as a result of it? I probably won't comment on actions that the fund has taken, but we have run a series of specific scenarios that relate to some of the flashpoints that are in the market today, as well as other scenarios just to sort of test the overall resiliency of the portfolio. Did it lead to specific actions? In some cases, yes. In some cases no. But we certainly, you can think of any of the scenarios that are out there that you're already reading about in the newspaper, and those are many of the scenarios that we've already, those are many of the situations we've already run scenarios against.

What's the biggest risk that you worry about? Well, geopolitics is certainly one of them, particularly you just have to pick up the newspaper, log into your local website or your Bloomberg terminal to see what's going on. I think that's certainly one. I think to, maybe it's not necessarily a traditional risk per se, but I think there's an interesting scenario around, I'll call it FOMo risk, for lack of a better way of putting it. We've seen a lot of AI in particular related run up in the stock market, continued us exceptionalism. The degree to which that continues, the degree to which there's a winner take all market is something that we certainly think about. And it goes, we naturally think about it because we have built a globally diversified portfolio. And when you build a diversified, globally diversified portfolio, you've moved away from some of the concentration risks that you see in the market today, whether it's the mag seven or whether it's just the continuing growth on a relative basis of the us stock market.

And so it's really thinking about sort of what are the, you know, what is the upside we're potentially giving up as a result of being diversified. Where do you sit personally on the thesis that perhaps the AI maybe is overblown and there will turn out to be a lot of burned investment capital at the end of this? It's, I'm certainly not the, not the expert in this, and I think many of us are still trying to navigate what AI means, not just in terms of AI in our day to day tasks, but AI more generally as it relates to our institution, and then AI as it is an investment opportunity and or risk.

It feels to me it's still very early innings and I think we're, you know, the pace of change that we're seeing with respect to AI in and of itself warrants a lot of attention. It does feel like there are aspects of it that could be truly transformational, not just from an investor use of AI, but from an overall economic growth perspective. And so it very much feels early innings. I think if you had asked, you know, asked this question a year ago, would we have seen some of the progress, would we have predicted some of the progress that we have seen? Likely not. And so it's really hard, it's one of these things that's so fast moving. It's really hard to kind of have a definitive view, frankly.

Can you talk at all about how your group or the broader fund is using it from an operational point of view as investors to do research to other aspects of risk management, for example? Yeah, there's a few uses. I think, unlike many others, I think we started the journey of AI in terms of the lower hanging fruit of sort of like making our day to day a little bit easier. So using AI to perhaps summarize an email or write an email for you, things like that. We've moved on from that. We've built internal tools that are specific to CPP that allow us to kind of pull up specific knowledge or research related to, to what we're doing. We have tools that allow you to kind of look and ask a question about is there somebody in the fund that knows XYZ?

Again, these are kind of ways that I think ultimately help not only with knowledge transfer, but frankly, hopefully make us a little bit more efficient in terms of our overall investing process. We are starting to think about what that next evolution looks like and we're thinking about ways in which we could potentially use AI to give us insights into the portfolio. We're thinking about ways that we could use AI in terms of giving insight in how we think about the application of some of our portfolio design tools. But again, those are very early innings for us.

Before we wrap up, we could talk about one more aspect of the sort of scenario based research that your group does, which is climate scenarios and how they. Huge topic for all large institutions and there's a good deal of societal pressure, sort of, sort of underneath it. So what does it look like from your point of view? What are the key factors that you focus on when you're doing climate scenario? Yeah, I think the biggest thing for us that we've found to some degree challenging is really the data. And it's, I think, getting the underlying data, whether you're looking at transition risk or whether you want to think about the implications of physical risk to your portfolio.

Having the necessary data in terms of how exposed your holdings are to those factors is frankly a difficult task. And so we spent a lot of our time just thinking about ways to get the necessary data to think about what transition risk looks like in the portfolio. To some degree that's available directly because we have large holdings in some of our private programs. To other degrees, we have to work on getting it through public proxies. But having that data, I think, is a necessary cornerstone to do this analysis. And frankly, that's where we've been spending a lot of our time.

In parallel to that, we've been thinking about how do we enhance our portfolio design to think about the longer term implications of what climate could have to the portfolio, namely those would probably fall more in the camp of physical risk. But again, it's one of these things that many of those risks are, one, hard to define, but two are pretty far in the future to some degree. And so we're just spending time to think about how do we incorporate some of those sensitivity analysis and scenarios into today's thinking about what we want the portfolio to look like.

As a manager who's managing other investors, what is your single biggest challenge as a people manager in an organization like this? As a people manager, you know, I think it's to some degree, it's about having alignment on sort of the purpose and goal of where we're trying to move. We've been an institution that's gone through a few evolutions. We're still relatively young as an institution where we've gone through a series of evolutions that have required us as an organization to continue to find alignment in terms of what's the key priorities. And I think that's probably true for any organization, frankly. But as we think about the next phase of CPP and our growth to a trillion, ensuring we have alignment in terms of where we're directing our resources to those highest priority items.

That's all the time we've got. Thank you very much, man Rub for joining us today. Thank you. Thank you.

Finance, Investment, Global, Geopolitical Risk, Portfolio Management, Leverage Strategy, Bloomberg Live