Mark Machin, CEO of the Canada Pension Plan Investment Board, wants the 20 million Canadians whose savings are invested with the fund to know that their retirements will be fine. CPP Investments, which manages $409.6 billion in net assets, reported its 2020 financial results on Tuesday, and the picture is just that: fine. For the year ended March 31, the pension fund posted $12.1 billion in net income, $5.5 billion in net contributions and delivered a 3.1 per cent return on its investments. That return is 6.2 per cent higher than they would have been had the fund passively let the markets run their course on its portfolio. But they’re also the lowest they’ve been since 2009, amid the last financial crisis, and less than a quarter of the 12.6 per cent rate of return the fund clocked for the 2019 calendar year—just before COVID-19 began shaking the global markets. 

In an interview with The Logic, Machin discussed the fund’s years-long pandemic preparations, why it’s staying the course on its China investments and when he expects the economy to return to its pre-pandemic state.

This interview has been edited and condensed for clarity.

CPP Investments’ financial report notes significant writedowns in private equity assets in the fourth quarter, which virtually erased gains in the first three quarters. Do you expect this trend to continue throughout the pandemic and into recovery? Do you anticipate writedowns on other assets?

We looked across the whole portfolio, all the private assets going as of March 31, and we were really disciplined on getting to a fair market value as of that date. We didn’t anticipate this particular event would happen, but again, it’s one of the things that I and our chief finance and risk officer had been working on for some years to make sure we had absolutely first-class market valuations in place. The [writedowns] were on all private assets, not just private equity. Will they continue? If valuations of related assets change, then we will change the valuations on the assets that we own. As of this second, markets have come back as of March 31, so if anything, those values have gone up a little bit. But who knows what happens over the next year or two. We expect a protracted and slow economic recovery back. We don’t expect overall output from economies to be back at pre-COVID-19 levels until the second half of 2022.

The report refers to pandemic preparedness measures that helped the fund respond to this current crisis. When did the threat of a pandemic become a concern for the fund? 

We thought about how a pandemic might hit our operations back maybe seven or eight years ago. I was aware of the seriousness of this particular pandemic, as I think a lot of other people were, back at the time of [the World Economic Forum in] Davos in the last week of January. It was just before the shutdown in China, and we realized that this was something that we needed to watch really carefully. I think the thing most people didn’t anticipate was the degree to which the Western health-care systems would not get to grips with it quickly, and also the incredibly radical shutdowns of economies. 

Being a physician by trade, did that influence how you thought about the potential impact this health crisis could have on the global economy? 

I wish I could say we were brilliant and we sold everything in February. But there wasn’t a lot known about the virus in early January. The mortality rate wasn’t clear; it was difficult to translate what happened in the Chinese context to the West; I think people presumed the mortality and infection rates would be lower in the West. Those assumptions were a little too optimistic. What I think was surprising was the degree to which public health-care systems in [Western] countries allowed the virus to spread before they took significant action. 

Compounding the economic impact of this health crisis are ongoing trade tensions between the U.S. and China—a market in which CPP Investments has been increasing its exposure for the past 10 or so years. Is the fund reevaluating its strategy in China? 

The way the pandemic has rolled through the world, it means that China is relatively outperforming now; that diversification is really critical. When we look at China, there’s two reasons for investing: one, it’s a huge market that we can invest in that is relatively uncorrelated with the rest of the world, and that’s quite valuable from a portfolio construction point of view. And then secondly is there are big differences between picking the right investment versus the wrong investment. If you have the right insights, then you can make a lot of money relative to just passive investing, so that’s why we invest in China, and in the big emerging markets. 

At this point, there’s no plan to change the investment strategy in that market? 

Well, I think we have to be completely clear-eyed about the tensions between China and a lot of the Western world, and clear-eyed about where policy changes could go and make sure we stay clear of things that could impair value for the portfolio.

Real estate is another sector that’s taken up a greater share of the fund’s portfolio in recent years. This pandemic has raised questions about the future of office and retail space—is the fund factoring that into its strategy?

I think the jury is still out as to how that plays out in the long term. When you look at the spectrum of real estate, certain trends have been accelerated by this virus. For example, data centres, logistics and warehouses are doing incredibly well. But at the other end of the spectrum, you have hospitality. Fortunately, our real estate team doesn’t invest in hotels, but we do have some other indirect exposures, and that end of the spectrum is the most impaired at the moment.

With office spaces, I think in the shorter term, people need bigger [spaces] because they need more spacing between people, but on the other hand, people are finding it efficient working remotely, and I don’t think these spaces will be fully occupied for quite a while. But once the pandemic is over and we have widespread immunity, I still remain skeptical that we, as human beings, don’t just love being next to each other. We love going to the crowded restaurant even if you can hardly hear yourself speak; people want to go to the movie and share an experience with a whole bunch of people you’re never going to talk to, because they like the shared experience. Ultimately, we’re social animals and we want to be back together.