John Graham – Evolution of the Canadian Model at CPPIB (EP.465)

John Graham is the President and CEO of Canadian Pension Plan Investment Board, or CPPIB, which oversees $730 billion Canadian ($530 billion USD) making it the 7th largest pension fund in the world. Geoffrey Rubin, Chief Investment Strategist at CPPIB, was a past guest on the show describing the Canadian model and that conversation replayed a few weeks ago as part of our CIO Greatest Hits Summer Series. Our conversation picks up from my conversation with Geoffrey, discussing the evolution of the Canadian model, buzz about Total Portfolio Approach, onset of global competition, and its impact. We discuss John's leadership approach to leverage the benefits of CPPIB's size alongside the challenges of doing so across the internal team, external partnerships, global offices, and governance structure. From our sponsor, Morningstar Embrace the global language of investment data https://www.morningstar.com/business/campaigns/where-data-speaks?dclid=CMTbg_DasI8DFaE6aAgdWtUfiw&gad_source=7&utm_campaign=crp_gl_n_n_en_2509_tf_n_wds_capitalallocatorsscript2&utm_content=audio_240530177&utm_medium=audio&utm_source=capitalallocators&utm_term=420544243 Learn More Follow Ted on Twitter at @tseides https://twitter.com/tseides?lang=en or LinkedIn https://www.linkedin.com/in/tedseides/ Subscribe to the mailing list https://capitalallocators.com/ Access Transcript with Premium Membership https://capitalallocators.com/signup Editing and post-production work for this episode was provided by The Podcast Consultant (⁠ https://thepodcastconsultant.com/https://thepodcastconsultant.com https://thepodcastconsultant.com/⁠ https://thepodcastconsultant.com/)

Speaker names marked ? are inferred from speaking time and the show’s known hosts — they are not voice-verified.

• 0:00Speaker 00

  We're not just giving out an asset allocation and a bunch of benchmarks and managing active risk against it and trying to maximize the information, where we are actually trying to maximize a total return at a given level of risk over the long run. One of the challenges is we execute through a series of strategies, private and public, decisions get made bottom up, and we can get a collection of idiosyncratic portfolios. And then we blend them all together and see what we got, knowing that it's looking past the very simple asset class labels, looking what we have from a geography perspective, looking what we have from an asset class perspective. And I know what the team thinks a lot about is, how do we actually then have an optimal total portfolio? And that we have the right exposures in the total portfolio,

• 0:45Speaker 00

  we have the right allocations in the total portfolio. We still have a mechanism to get the alpha through security selection, but then we have an ability to manage the total portfolio so we have the right exposures we want.

• 1:01Ted Seides?

  I'm Ted Seides, and this is Capital Allocators. My guest on today's show is John Graham, the president and CEO of the Canadian Pension Plan Investment Board, or CPPIB, which oversees $730 billion Canadian, making it the seventh largest pension fund in the world. Geoffrey Rubin, CPPIB's chief investment strategist, was a past guest on the show describing the Canadian model, and that conversation replayed a few weeks ago as part of our CIO Greatest Hits Summer Series. My conversation with John picks up from my conversation with Geoffrey, discussing the evolution of the Canadian model, buzz about

• 1:44Ted Seides?

  total portfolio approach, onset of global competition and its impact. We discuss John's leadership approach to leverage the benefits of CPPIB's size alongside the challenges of doing so across the internal team, external partnerships, global offices, and governance structure. I hope you enjoy the show. And if you do, this week, if you're single and walking down the street while listening to Capital Allocators, and look up and see a beautiful woman or man coming your way, what better way to get the conversation going? Then saying, excuse me, but you happen to know about capital allocators? They might respond, that sounds amazing and start a really interesting conversation.

• 2:27Ted Seides?

  Who knows? It could be the beginning of a beautiful relationship. Thanks so much for spreading the word. Please enjoy my conversation with John Graham.

• 2:37Ted Seides?

  John, thanks so much for joining me.

• 2:38Speaker 00

  Thank you so much for having me.

• 2:40Ted Seides?

  Why don't you take me back to your background before getting into the investment business?

• 2:45Speaker 00

  I have a non-traditional background and having listened to many of your shows, I know that's probably a common theme. I have a PhD in physical chemistry. I actually worked as a research scientist for almost nine years, writing papers, probably have 25, 30 US patents, largely in photovoltaic solar cell area and worked in the Xerox Innovation Group, which at the time was one of the great industrial research labs in the world. And so spent the first part of my career as a true scientist.

• 3:19Ted Seides?

  How did that lead you to getting involved in investing?

• 3:22Speaker 00

  I started pre dot com in science, working in the, I guess, the technology world and did love it and still have a real affinity for it. But company obviously went through some tough times post dot com and some of it was idiosyncratic to the company itself. The company sent me to get my MBA and I started to work in strategy and alliances, which was involved more at how do you prioritize the technology portfolio? How do you allocate capital across the portfolio? How do you look at internal versus external? When do you license? When do you buy? When do you develop? So some really interesting challenges on how to allocate capital. I got a call one day from a headhunter saying, would you be interested in coming and talking about a role at a pension plan? And my first reaction was John Graham's a really common name.

• 4:06Speaker 00

  Are you sure you have the right John Graham? Yeah, we're pretty sure. We're pretty sure we got the right John Graham. So I went and I met with the team at CPPIB or CPP Investments. It was only a couple hundred people, still had a reasonably large asset base of probably around $80 billion, but they were one office in Toronto and just starting out. And I remember meeting them and being blown away and blown away by the organization and what it could be. The governance model it had, the ambition it had, and this organization had the capability to be great. And not just great on a Canadian scale, but great on a global scale. So here was an opportunity to get in very early without a traditional background in finance or investing, more at this point, a corporate executive.

• 4:51Speaker 00

  So I took a huge step backwards, said, what do I have to lose? Made the jump over to CPP Investments and started out as a mid 30s associate.

• 5:00Ted Seides?

  What was your path from that initial foray to later becoming CEO?

• 5:05Speaker 00

  I went into the group at the time, it was called Portfolio Design and Investment Research. And it was essentially the portfolio construction group. I was helping with the characterization of asset classes. Within a couple of years, I moved over to credit and helped the head of credit at the time, Mark Jenkins, build out the credit investments. And I focused quite a bit on royalty and maybe non-traditional type of credit investments. A little bit more esoteric based on my background, the ability to read patents, understand patents, but was given lots of opportunity to try other things, to try other parts of the credit markets. Spent quite a bit of time working on the portfolio of construction within credit. Had opportunities to work in strategy, in business management.

• 5:50Speaker 00

  So I did lots of lateral moves, always trying to expand my skillset, always trying to develop as a person and a professional. Then eventually was asked to take over the credit group. And this was the, I call it more the direct lending group, the non-investment credit, the non-investment corporate credit group. And then about eight, nine years ago, they brought all the credit together within CPP Investments. We had public credit, we had real estate credit, and they created a credit investments department, which I had the privilege of running. And I did that for a few years and was successful with that. And thanks to the great team I had. And then just over four years ago, came into the role of CEO.

• 6:26Ted Seides?

  As you go through that trajectory of learning the business, investing in credit, finding some esoteric credit, then running the credit group, becoming CEO, how did you distill what you learned either as a scientist or a credit investor along the way that formed your ability to go from analyst to a portfolio manager to leading teams?

• 6:47Speaker 00

  A few things I'd comment on. I did work as a scientist for about nine years, and there are very few things I know with certainty in my life. And one of them is I don't do science anymore. Because in science, there's an answer, where we can do an experiment, and someone in Japan, and the US, and Europe can do the same experiment and get the same answer. Investing is about, in some ways, predicting the future, because we don't have data on the future. So it's about inference, it's about judgment, and it's about making choices. And that was actually a very helpful thing for me, to have done science and know that this is different. I don't fall in love with the models. I don't fall in love with

• 7:29Speaker 00

  the quantitative outputs, because they are there to help guide what is ultimately going to be a decision and a choice. So, obviously, I had to learn more of the investing business, and I was very fortunate to have mentors and very fortunate to have people along the way. And investing is an apprenticeship business. You don't learn it in school. So I learned it on the ground. And one of the great things about CPP Investments is you see lots of opportunities. So we had lots of reps. And so you learned, made mistakes, and was able to get that on-the-ground training, and build portfolios, and do okay with that. One of the things that I also learned in my corporate life, and my corporate life was a company that was, at the time, between close to 100,000 people, a true multinational. It was complex.

• 8:13Speaker 00

  At CPP Investments, we're only 2,000 people. It's actually a pretty small place, relative. When I started, it was 200, 300 people. The learning you have of navigating a very complex organization has served me well. I probably had more training from the corporate world in managing people, in leadership, in some of these softer skills, which maybe they put more emphasis on in the early training. That also, I think, served me well as I went through my career at CPP Investments.

• 8:41Ted Seides?

  What are some of your favorite softer skills that you picked up along the way?

• 8:46Speaker 00

  The one I would like to say is being really effective at giving feedback. I'm still working on that. I can be more timely, and I can probably be more direct with my Feedback. The one area that I have learned is to be situational and to read the situation and know what type of leadership is required in that situation. There are times when the leadership's style needs to be a little bit directive, a little bit pace setting. There's times when the leadership's style needs to be pretty empathetic. There's times when people need to have their tires pumped and there's times when people need to be pushed a little bit in the back. And when I've watched great leaders, they have an incredible instinct for that situation. They all have a preferred habitat. They all have a style they would like to use, but they know that

• 9:31Speaker 00

  at times it'll be maybe ineffective or not as effective as it could be. And as one progresses through their career, one also realizes that as you become senior, you're leading leaders and you're leading very senior people and people who are leaders themselves. That takes a very different approach than managing new grads. So the softer skills that I've learned is to be situational and your leadership approach has to evolve as you evolve and grow through your career.

• 10:01Ted Seides?

  How do you describe the difference in leading leaders from managing someone who isn't leading a group?

• 10:08Speaker 00

  I'm a big believer in delegation. On the investment side, we delegate decisions into the people who are at the coalface with the sense they have the best intuition in the best sense of where markets are pricing and we should do everything we can to delegate down to the people who are actually in the trenches. We spend quite a lot of time thinking about decision making and thinking about delegation. If you ask my colleagues, they would say this is very much a work in progress. I think we're making progress. We are thinking about it and it's a priority. And we delegate also a belief that people make decisions because we need accountability for decision making. So we don't have committees that are making decisions other than, let's say, the investment committee. So if we're going

• 10:50Speaker 00

  to delegate, delegation without alignment is chaos. If one delegates decision making and people aren't aligned to what the organization is trying to achieve, it ends up in a real quagmire. So when I talk about leading leaders, it's about alignment. It's about ensuring that the people around the table with you are aligned with where the organization needs to go, are aligned with the objectives of the organization at that point in time. And without alignment, it's very difficult, almost damaging, to delegate.

• 11:19Ted Seides?

  I want to turn over the investment framework. And we talked some, like when Jeffrey was on the show, about the Canadian model, about total portfolio approach. As you step into the CEO seat, how do you think about the evolution of the approach as time has passed?

• 11:37Speaker 00

  A lot has been written about the Canadian model. It's been incredibly successful model. I know Jeff shared teachers was really the pioneer of the model. And then it's been replicated by others, such as us at CBP Investments. If you ask people to describe the Canadian model, people might have a slightly different description of what it is. So I'll share how I think about it. I think about it as being an active asset manager and making that decision about how to access different asset classes in different geographies around the world. Building internal teams where it makes sense, partnering with the best people around the world where it makes sense. Some of the fundamental beliefs in the model, partner with the best, internalize where one has a real cost advantage.

• 12:23Speaker 00

  And at the end of the day, we're solving for net returns. And so when everything shakes out, we'll have higher net returns. As I think about the Canadian model, it's been super successful. And it's why it's been replicated in many different sovereign wealth funds and institutional investors around the world. When the Canadian model was first being developed, I would say, the world was a different place. Think about some of the big asset managers, the Blackstones of the world, that are trillion dollar asset managers today. They were different 15 years ago. The rise of these mega asset managers across the alternative asset space, the accessibility of alternative assets, like the maturity of the private equity space compared to 15, 20 years ago. World's changed. And we do spend a lot of time thinking about how we have to change, how we also have to

• 13:08Speaker 00

  evolve with the market around us evolving. And almost a philosophical discussion we have at CBP Investments is this.

• 13:18Speaker 00

  Challenging ourselves on identity versus purpose. Our identity as an organization is to be a multi-asset class, active investor, global investor partnering with the best around the world. Our purpose is to contribute to the financial security and retirement of 22 million Canadians and doing that in a way which is consistent with the CPPIB Act, which is a piece of federal legislation in Canada that defines essentially the mandate of CPP investments, which is to maximize return without undue risk of loss. Everything we do is a choice. We've made a choice to be active. We've made a choice to be global.

• 14:00Speaker 00

  We've made a choice to have multiple strategies because we believe that is the best way to fulfill the mandate and the purpose. But we have to challenge ourselves to make sure that the identity is always aligned to the ultimate purpose of the organization and we aren't making decisions to preserve our identity as opposed to really being true and having high fidelity to the purpose of the organization. I have a very simple two-by-two matrix in my mind. And we try to be very disciplined about this as we think about just the structure of the organization. On one axis is active versus passive. And on the other axis is internal versus external. And for every strategy we run, everything we do,

• 14:42Speaker 00

  being very deliberate in which quadrant it falls into. Don't automatically default to everything being active and internal. Don't default to everything being active and external. There's some strategies where we feel we don't have an ability. We don't have an edge. We have no right to win. And so we should have a completely outsourced model on that. There's some strategies we don't think anybody has a right to win. And there we will invest that money passively. Now, we are a big fan of the partnership model where we invest with the best and then co-invest, co-underwrite. And that's been a very successful model. But it is important to be deliberate and on a going-forward basis to think about how we're allocating all the resources in the organization,

• 15:25Speaker 00

  not just the capital, how we're allocating our money, our time and our people.

• 15:29Ted Seides?

  I'd love to pick apart some of that two-by-two matrix. I think the passive stuff, a little less interesting to pick apart, other than where have you decided that it makes more sense to invest passively?

• 15:42Speaker 00

  Our passive portfolio has actually grown a little bit over the past few years. We've increased it slightly from probably four or five years ago. If we're just trying to get exposure to something, if we just want equities exposure, we'll do it passively. If we just want fixed income exposure, we largely do it passively. Now, the teams do have some ability around the edges to manage those portfolios, but the expectation is that it's largely passive. One example where I wouldn't say was necessarily an active to passive other than, because there's no real passive alternative, is macro. We had an internal macro team. It's challenging. We're not set up. We don't have the technology stack to do it. We really didn't have a right to win. So we do invest in a few external macro managers,

• 16:26Speaker 00

  but largely the capital that would have been allocated to that went passive.

• 16:31Ted Seides?

  On the internal management side, where are the areas that you've chosen to deploy capital internally that other people might think, why do you have a right to win relative to a great external manager?

• 16:45Speaker 00

  Probably important to spend a bit of time on the partnership model, because a lot of our internal is partnership. And this is where the matrix gets a little blurred, where strategies will sit on the axis of the two. Take private equity as an example, where we invest in who we consider to be the best general partners around the world, and then we will co-invest and co-underwrite alongside of them. And we think we have a right to win there in that I think we're a great partner. We're a reliable partner and we are quick, responsive, and can write a check of scale. So the partnership model is one where we think is really valuable for us. There's certain areas where we may be a little bit more direct than others,

• 17:30Speaker 00

  where we feel the duration of our capital, the time horizon of our capital could be an advantage, where we feel the scale of our capital could be an advantage. We have the Antares platform within our credit investments, and this was acquisition from GE about 10 years ago. And that fit right in where we are the majority owner of it, where we had a real understanding of the market and is very synergistic with our internal credit business. And that's where we felt we had essentially a right to win.

• 17:58Ted Seides?

  With the team you have set up in that partnership model, particularly in private equity, you can imagine lots of deals getting shown to you by your partners. How have you determined what are the right type of opportunities to size up through a co-investment?

• 18:13Speaker 00

  One of my personal investment beliefs is that you want to have a really wide funnel and see as many opportunities as possible. You want to have as many opportunities to say no as you can. The team will have a partnership model where they are asked to see a lot of opportunities from the co-investment and co-underwriting. Then they have a very broad mandate of what to say yes to. They are looking at lots of different industries, lots of different geographies. And often, when we say yes, it's not only that we like the asset itself, but we think the general partner has a real edge in that area. You're partnering with the best software general partner. You're partnering with the best industrials general partner,

• 18:55Speaker 00

  and they're doing those type of deals, best healthcare, and you're doing those type of deals. Another area that I do believe is a real differentiator for organizations such as CPP Investments is the breadth of the mandate. This, to me, is something that's really important. We have built up over 15, 20 years capabilities across, I think, the majority of the asset classes and the majority of the geographies. Private equity, infrastructure, real estate, credit, public equities, hedge funds across North America, Europe, and Asia. I always loved it in credit when we had a breadth of mandate and we had the ability to move capital to the areas that we see the best opportunities. And so, part of the value added is taking advantage of that breadth, of not being so dogmatic that you have to always be piling into one asset class, regardless of the relative value.

• 19:39Speaker 00

  That is, the ability to move capital around to the areas of greatest relative value.

• 19:44Ted Seides?

  How do you and the team determine what are those best opportunities from that wide opportunity set?

• 19:51Speaker 00

  It's not easy, and it is also not how most of the industry works. This starts to challenge people's personal identity also, because it's not how the industry works. In the alternative assets space, often just works on an absolute return model. But we're solving something different at CPP Investments. We're solving for the highest total return at the total portfolio level. And I've learned this in this job. When I speak to the key stakeholders around the country, they want to know what the total return is. They aren't as interested in what the sub asset class returns are. They want to know, is the total portfolio okay? And what's the return at the total portfolio level? So that's what we have to optimize. But the sell side is set up often by products. It's not really, they're not optimizing a total portfolio. So they're selling

• 20:35Speaker 00

  products and we're buying products. So to actually execute on almost a relative value framework where capital could move between asset classes, between public and private, where we don't have hard allocations into each one, it requires a huge amount of coordination across the organization. There's almost a tax that has to be paid in the coordination tax in the organization. It means people have to be pricing risk, maybe not exactly the same, but at least in some comparable way. Our CIO at CAS has to be able to look across the asset classes and see that asset class A is offering better relative value than asset class B. Then

• 21:18Speaker 00

  the department heads and the portfolio managers need to understand that this is how we're gonna operate, that capital can be a little bit fluid. The challenge of that is you build out internal teams and they need to be fed. Can't have a team sit on their hands. So you have to find that balance of you have a fixed cost, they need capital, they need to be relevant in the market. It's really hard to come in and out of markets. But at the margin, how do you get capital to be a little bit more fluid by geography and by asset class?

• 21:45Ted Seides?

  What have you found most effective on the team to figure out which opportunities are bubbling up that you can add incremental capital to?

• 21:55Speaker 00

  Carrots always work.

• 21:58Speaker 00

  Incentives always work. We really try to celebrate, to highlight, to reward areas where opportunities that don't fit neatly within an individual asset class are really highlighted. And rewarding the individuals who are thinking with that one fund or enterprise mindset. But also knowing that we're asking people within their asset class to deliver the best Returns they can within their asset class, but not to be so dogmatic and not to be so tunnel visioned into their asset class. That if they see something that might be interesting to another group or might even be a can share, then putting their hand up and say, we should look at it. We've seen great success between our private equity and our credit group, and there's a natural synergy there where they're in the same areas.

• 22:43Speaker 00

  You obviously have to be careful with information at times. The level of connectivity between our credit and our private equity team today versus even five years ago, when I ran it is just much better. We're seeing great connectivity across our real assets team, our infrastructure team, our energy team and our real estate team working together. Live examples are data centers. Is data center real estate? Is it infrastructure? The constraint is energy. So rather than having discussions about where it fits, the real assets team just does data centers and they staff it with people from each group.

• 23:14Ted Seides?

  When you get to thinking about how to align the team to work together for that common portfolio goal, you get right to incentives and compensation. There's always been an interesting question of in an internal pension model, how do you hire and retain the people you want? And how has that played out over the last several years?

• 23:35Speaker 00

  Yeah, nothing sharpens the mind like compensation.

• 23:40Speaker 00

  This will always be a challenge. We don't pay carry. We don't have the same pay structure as a general partner. We don't pay promote, so we don't have the same pay structure as a hedge fund, but people are compensated fairly and people are compensated well. And everybody's mother is proud of them for working at CPP Investments. That gets back to the right to win and where to play in areas where the constraints on the organization do not cause you to lose the game. It's why in the private equity space, we play a partnership model where we work with the best. We don't compete with the GPs. The private equity space is such a well-developed, large, mature market, and the partnership model works really well. Our private equity professionals have a great career and a super fascinating role, but they are solving for something slightly different than a GP.

• 24:25Speaker 00

  So we're eyes wide open that our compensation system, while people are paid in the Canadian model, fair. They aren't paid like they would be at a general partner or a hedge fund. And so ensure that the strategy that we run doesn't put us in a situation where we're fundamentally disadvantaged.

• 24:43Ted Seides?

  How does that look outside of private equity and the corollary? Real estate infrastructures in public markets on equity side or fixed income.

• 24:51Speaker 00

  It's a challenge we have and as markets become super hot and then sometimes not super hot and they ebb and flow. Take credit, credit's become really hot and our credit group was a little bit more direct than our private equity group. And they still do follow somewhat of a partnership model. And so that puts stress into the system. We always try to be competitive as competitive as we can, knowing that it's sometimes we're just not. I think people have an incredible career at CPP Investments. The senior people have an opportunity to be on a platform that has incredible breadth, scale, reputation, brand. For people with creativity, for people who want to innovate, it's incredibly motivating.

• 25:34Speaker 00

  For young people entering the investing space, you'll see tons of reps, tons of opportunities. But there's some people who really do want to have that opportunity to work at a general partner. And I say, God bless them. One of the things I have also a firm believer of at CPP Investments is once a CPP IB'er, always a CPP IB'er. And so we've really tried to cultivate the alumni network. We're only 2,000 people. Not everyone will spend their whole career here, but I want everybody to always feel like they're part of the CPP IB family.

• 26:03Ted Seides?

  In the situations where you've decided that you couldn't compete effectively internally, what does that look like? Both the decision process and then the process of finding who you want to partner with externally.

• 26:17Speaker 00

  The process is generally dictated by returns and realized returns. It's interesting because at the end of the day, you need to allocate to those programs. You think you're going to make money in the future, not just in the past. I'm always asking the teams two questions. How did you make money? And how are you going to make money? Might not be the same answer. There's a tendency in attribution and in all the great analytics people do it for it to always be backward looking. Now, the first clue that you're not going to make money going forward is usually that you didn't make money historically. But there are cases where you may want to scale back because you just are watching a decay in performance. And you know that freight train is coming at you. And so you have. To make the difficult decision, what we often try to do is move people around and put them into other groups.

• 27:02Speaker 00

  We typically have had focused groups that are external allocators. In the hedge fund world, it's our external portfolio management group, and that's a focus group. And they really allocate to external managers. And on the private equity side, we have a funds group that allocates to external. It's rarely commingled within the group that they're doing funds and direct. There are some instances, but they're usually separate groups. So the funds team, the external team, if we did want them to expand, we would give them that mandate to expand. And then they would go off and find the managers.

• 27:33Ted Seides?

  There's this interesting dichotomy between talking about how you want that cross fertilization of your internal teams improving and this separate team going out with external managers. How have you thought about the crossover and potential value creation between what you can learn from the external managers you selected and your internal teams?

• 27:55Speaker 00

  One thing I'd say, when I talk about the East West connectivity, it's exactly that. It is exactly taking the knowledge that is embedded in that funds team and driving it through the organization. Not only providing an access to opportunities, but also an access to knowledge, an access to information. Obviously partnering with external managers, we focus on the net returns, but we do pay fees and carry. And we have an expectation of partnership that we will learn things just about macro, that we will learn things about geopolitics. That's part of the reason we do it. You work with the best around the world. I will spend a lot of time with the leaders of these firms, not going through their portfolio, but trying to understand how they're thinking about, as I said, geopolitics.

• 28:38Speaker 00

  How they're thinking about the macro environment, how they're thinking these big mega trends in the industry. So that's a real focus of mine is the expectation that these teams, that our external portfolio management team and our funds team, that they are diffusing the knowledge and the information through the rest of the organization. It's hard, though. It's really hard.

• 28:57Ted Seides?

  When you look at that two by two matrix today, what types of strategies fill the box of active external?

• 29:03Speaker 00

  Active external on the public side, a lot of the quant strategies, they have some macro strategies. They do have some equity strategies in there. A lot of the strategies there, we may run some very small kind of programs on the side of it, but those are really where we're looking to the external managers. Coming back to the private equity model, I'm a big believer, it's worked really well. Partner with the best private equity managers and then do co-investing and co-underwriting with them. So that's what I meant by it starts to blur a little bit in private equity. That funds portfolios like the sun and the rest of the department rotates around it.

• 29:38Ted Seides?

  When you bring this all together in the portfolio approach for CPB, you have this total funds management approach, slightly different from asset allocation model. What's your way of thinking about how that works?

• 29:51Speaker 00

  We are solving for the highest total return at the total portfolio. And the total portfolio approach is solving for that. It's very consistent with trying to maximize the total return at the total portfolio level. We're not just giving out an asset allocation and a bunch of benchmarks and managing active risk against it and trying to maximize the information. We are actually trying to maximize a total return at a given level of risk over the long run. One of the challenges is we execute through a series of strategies, private and public. Decisions get made bottom up and we can get a collection of idiosyncratic portfolios. And then we blend them all together and see what we got, knowing that it's looking past

• 30:36Speaker 00

  the very simple asset class labels, looking what we have from a geography perspective, looking what we have from an asset class perspective. And I know where the team thinks a lot about is how do we actually then have an optimal total portfolio? And that we have the right exposures in the total portfolio. We have the right allocations in the total portfolio. We still have a mechanism to get the alpha through security selection, but then we have an ability to manage the total portfolio. So we have the right exposures we want.

• 31:01Ted Seides?

  How do you think about the process of moving capital around? You have teams, internal, selective managers, external, and it's a large portfolio. Things change in the markets.

• 31:12Speaker 00

  I describe it as a supertanker in that it's very hard to be nimble with a 700-plus billion-dollar portfolio. What we need to do is to build a portfolio that is resilient through a broad range of macroeconomic conditions. When it sees something it doesn't like, it just hits it and runs it over. We can't really move it that quickly. One of the messages I do try to deliver internally and having experienced this for the past 20 years, every asset class will have its moment in the sun. Every geography will have its moment in the sun. It'll also have its moment in the shade. And you can't kill a program every time it goes into the shade, or you won't have anything after so many years. So it is expected that capital may not always be uniform into a given area. There's a big cultural aspect to it on how

• 31:56Speaker 00

  to think about capital coming in and out. We build internal teams. We have people. It's their livelihoods, and they want to do transactions. And they were hired to do transactions. It's a very reasonable expectation. So moving capital around is a big cultural component to it. Where I see it working really well would be within the department. So credit. Credit is, they're really good at moving capital around. We're saying, we think structured credit is more attractive than corporate credit. We think European credit or Asian credit is more attractive than North American credit, so we're going to move capital around. They're incented to do that because they're incented at the credit portfolio level. So it's a lever they have to get more carrots. Within our real assets, between energy, infrastructure,

• 32:40Speaker 00

  and real estate, an ability for them to think about where they're seeing the best value within that. When you start to cross between asset classes, it's a little bit more challenging. But there is a opportunity for larger opportunities where you might be able to move capital in.

• 32:55Ted Seides?

  Just to add to the challenge, you've also expanded offices globally. What have been the challenges in making that work?

• 33:01Speaker 00

  We have a handful of offices outside of Toronto. And again, this was a choice. We made a choice to open offices because we believe it'll lead to higher net returns for the portfolio. The reason we believe that is it will give us access to markets, give us access to specifically the best partners and the best opportunities in those markets. That from even a risk management perspective, if you're going to build a reasonably-sized portfolio in India... You should have feet on the ground in India. Flying in and out is often not a recipe for success. So if we're going to commit, we'll commit and we'll have an office. We have the offices to get differentiated access. It's not to get beta. We can get beta from screens in Toronto.

• 33:45Speaker 00

  We can get beta through swaps and ETFs. We need alpha. We open the offices to get alpha, to get local knowledge, local relationships, local opportunities. It's not just about doing transactions in the country. It's about doing transactions that will ultimately add alpha. I think our footprint is very much a differentiator. I think it's a real asset we have, but one has to go into it eyes wide open. When we move into specifically a geography, our reputation at CVP Investments as a long-term, partnership-driven organization, we're getting married to the geography. We're committing to it. We can't come in and out. So we better have a lot of conviction that we're going to be able to scale that and we'll be able to get differentiated opportunities.

• 34:28Speaker 00

  And we also will bring in some people from other offices often to set it up. So similar to the asset classes, we put in a fixed cost, needs to be fed. So you have to be comfortable that you're going to have to feed it pretty much all the time at some level and then have that optionality to accelerate in when things look really attractive. So the more reps you get in any investment opportunity set, the more likely you are that something along the way won't work. As you've expanded geographically into different offices, how have you thought about measuring success? And what period of time would cause you to reverse a decision that you fully intended was going to be for a long term? This is something we have been spending quite a bit of time on.

• 35:10Speaker 00

  And when we do launch a new strategy, when we launch a new initiative, is at the beginning, trying to be very deliberate on what is the range of reasonableness? Because we all know that if we say we're going to do a review in two, three years to see how it's working, there's probably going to be some revisionist history on what exactly we are trying to do, probably going to be some new fact pattern on what the metrics of success will be, which is totally expected. It's also very hard within this business that there's There is a range of outcomes. Something could be working and you still have made money on it. So we have these quantitative range of reasonableness that this is the range of outcomes that we would actually expect. If it's outside of that, then it should really generate a question. We actually have it for almost all our programs.

• 35:54Speaker 00

  When something goes out of the range of reasonableness, saying that either we're super good at this or we're not. And we should have a discussion about it. We do try to pre-wire that discussion in three years. If we're going to make a go no go, what's the decision criteria going to be? Put them down on paper now, not in two years and 11 months as to what the decision criteria are going to be.

• 36:16Ted Seides?

  How have you thought about your participation over time in emerging markets?

• 36:21Speaker 00

  Emerging markets have always been a pretty big part of the CPB investment portfolio. And recently, we have scaled back over the past few years. We actually scaled back our allocation to emerging markets. It's still reasonably large compared to many funds. I think we're about 15%, but it's not as large as it once was. And a lot of our appetite for emerging markets historically was a larger appetite for China than we have today. And now you can debate whether the world's second largest economy should be fitting into the emerging market bucket. Because again, back to looking through just the asset class labels, we had an appetite for a allocation into the world's second largest economy.

• 36:59Speaker 00

  In general, all the reasons people like emerging markets of growth and convergence, the rationale people get for emerging markets. So we've been investing in it. We have an office in Sao Paulo, an office in Hong Kong and an office in Mumbai. So we've also been reasonably active. From a alpha perspective, the teams have done great. The beta returns probably haven't been exactly what people wanted over the past few years. They seem to be turning around a little bit now at this point in time. So we right-sized what we wanted for the portfolio.

• 37:28Ted Seides?

  When you have an overriding objective of trying to get the highest net return with a given level of risk, there are all these decisions that you can imagine would lean people to incrementally taking more risk. How do you manage that tension?

• 37:42Speaker 00

  We are risk targeters, so we can't build a portfolio and then just lever it up to beat a benchmark. That comes down to really discipline, build the best portfolio we can. The most diversified portfolio we can. And then we do use some leverage to tailor the risk in the portfolio. We're big believers in diversification. Diversification is an act of humility. We do want to be diversified across geographies, across asset classes. We continue to be a believer in diversification. Despite the fact that being invested in a handful of stock in the US equity markets would have been the best choice over the past 10 years. We continue to believe that going forward, we should be diversified.

• 38:23Ted Seides?

  One of the long-held strengths of the Canadian model has been the governance structure that allows a delegated authority for you and the team to go about investing. There have been a couple of incidents over the last few years where something in the governance structure, one of the plans, looked like, from the outside at least, it was going awry. I'd love to hear how you've thought about continuing to maintain a strong governance structure once it was set up that was very conducive for successful investing.

• 38:53Speaker 00

  One thing that I know I firmly believe in and the rest of the CPP Investments Management and Board believes in is we need to execute on the mandate as written in the CPPIB Act. It's not ours to apply a modern interpretation to. It's our job to maintain fidelity and discipline to the reforms that happened in 1997 to create CPP Investments. And that says to maximize return without undue risk of loss. It creates a governance construct where we are independent with respect to investment decision-making. So we don't have government involvement with respect to investment decision-making. We also have a professional board of directors, a board of directors that is largely composed

• 39:37Speaker 00

  of ex very senior business professionals from across Canada. It has been our experience that we operate with independence and we don't have political interference in our decision-making. That's a fact. And I've been there for 18 years and that's how it's operated. But we also take the perspective that we need to be accountable and we have really important stakeholders across the country. CPP Investments is a provincial federal One of the best examples of the provinces and the federal government coming together to solve a problem. We have stewards that are the provincial finance ministers and the federal finance minister, and they're really important stakeholders. And they care deeply about the plan and they take their role very seriously. So we spend a lot of time on stakeholder

• 40:22Speaker 00

  management. That doesn't mean we have influence in our investment decision making, but we understand that these are important stakeholders. And at the end of the day, the organization needs to be accountable for the decisions it makes, for the money it spends, and delivering on what's in the CPPIB Act. With respect to governance, you gotta know who your stakeholders are. And you're gonna have to spend time with them, a lot of time with them. I think about stakeholders for us are being, for me, in my role, I got the employees, the board, the stewards, and the 22 million Canadians that rely on the plan. And so you have to do stakeholder management. And even though you may be independent, ignore a stakeholder at your own peril.

• 41:07Ted Seides?

  I'd love to ask you about two very topical areas that have changed over time. One is climate investing, and the other, of course, AI. Climate that used to be, a couple of years ago, tip of the tongue for everyone, has receded a little bit in interest. How have you gone about thinking about the importance of the climate in your investment process?

• 41:31Speaker 00

  Yeah, it's a great question. And the short answer is nothing's changed. And nothing's changed in our investment process. And even getting back to our governance construct is, we have a sole fiduciary mandate. We're about value, not values. We don't do concessionary capital. We don't do impact funds. We're about value. We're about returns. So we continue to think it's important to incorporate climate considerations, right now specifically physical risk, into portfolio construction and security selection. And we ask every team to think through it. Just think about the impact on the insurance markets with physical risk, and how that's impacting the value of certain assets.

• 42:13Speaker 00

  And whether we think that's being priced properly in the market. We continue to invest in renewable energy around the world. We continue to see it as a interesting investment opportunity where it needs to stand on its own two feet. If it can only exist because of some type of subsidy, then we shouldn't invest in it. But the economics make a lot of sense in places around the world. And so we continue to invest in it. We also continue to invest in oil and gas. And we have a big oil and gas portfolio. The world, from our perspective, is going through an energy addition. Not necessarily an energy transition. And I think AI is really amplifying that in that we need more energy. And we should look to add sources of energy that are reliable, safe and ideally green.

• 42:57Speaker 00

  But we also invest in oil and gas and we recently announced a transaction with LNG. For us, what has been really important is let's just say what we're doing. Let's just focus on returns, focus on value, not values, and we'll be okay.

• 43:13Ted Seides?

  How have you thought about AI, both use cases internally and then investment opportunities externally?

• 43:20Speaker 00

  Like most companies, we're spending a lot of time on it. I would describe where we are is at that trying to build a literacy and a fluency in the organization. We've given everybody in the organization, all the tools. We have given them training and given them the expectation that we want everybody to be literate. We want everybody to be incorporated into their daily work. And I think we're seeing great examples of productivity at the individual level. Challenge now is that top down. What do we think could be a little bit transformative to the business? Are there certain areas where we think it could have a bigger impact than others? We're using it in the investment committee. We're doing all the, I think, all the right things. And now challenging ourselves a little bit on the top down. It's always that fine balance, right?

• 44:02Speaker 00

  A thousand flowers blooming, giving people the tools, or doing super cool things. At some point, you gotta have some way to herd it all together and see what it all adds up to. At some point, we'll probably hit diminishing returns. So really committed to it internally, really focused on it. On the investing side, we obviously have exposure in the portfolio. We have invested in a lot of the big AI companies and we have exposure to them. Net, though, we don't have as much AI exposure as the broader public markets. And that's a challenge from a relative performance perspective, but that's a deliberate decision we're making. Not that we don't think this is a transformer of technology, not that we don't think that it could change the world, but we are a little bit concerned about the potential concentration risk in the portfolio.

• 44:46Speaker 00

  And thinking about who we are and what our mandate is, we're not a wealth maximizing vehicle. There's times when a pension plan and a personal account may deviate, and this might be one of those times. Where we're thinking about over the 75-year time horizon, if we don't get it exactly right, it's okay. Because we're not going to imperil the fund by not being exposed at the market cap weighted level. If we're a little bit under, though, it's going to hurt our relative performance. But this is a case, we're getting back to who we are and what we're solving for. I think it's just important that we're going into this eyes wide open. Why many institutional investors around the world right now, on a quote unquote relative basis, can't keep up because they don't want to concentrate at the same level into the market. And I don't know, the market could be right.

• 45:29Speaker 00

  I ask the teams all the time and I get lots of different answers. It's a technology can change the world and still be overvalued.

• 45:37Ted Seides?

  You mentioned using AI in the investment committee. How do you do that?

• 45:42Speaker 00

  We can train the models on all of our historical investment recommendations and such, and then can ask the model to ask questions. We can do that. We can get the model to ask questions and just to prep, or people will use to summarize it. Personally, today I found it interesting. Not all that, I haven't been super impressed, I guess, by the quality of the questions. But that's okay, because part of the value, I think it makes the investment committee pick up their game a little bit. Because we can put the memo into the model and get 10 questions in about one minute. And so you can ask the investment committee members, and whatever we paid for that license is hundreds of dollars. And so we can ask the investment committee members, you better have a question better than these 10.

• 46:25Speaker 00

  Because we've got these questions in one minute and you're bringing 20 years of experience. I think it actually will help with the efficiency and the quality. I think we've still got to look to the experienced investors for having that intuition.

• 46:36Ted Seides?

  What are some of the risks and maybe particularly contrarian risks that you're worried about in the portfolio?

• 46:42Speaker 00

  I think we are worried about a lot of the same things as other people. I think we have a lot of the same concerns. Equity fixed income correlations. The institutional model is built on fixed income being a diversifier. The way we run the portfolio and the total portfolio approach, there's a lot of fixed income in there. So we think a lot about that equity fixed income correlation. That's been one of the take it to the bank correlations over the years for institutional investors. For Canadian investors, the US dollar. And one of the take it to the bank behaviors we've had is the US dollar strengthening against the Canadian dollar in periods of stress. And that's provided a lot of diversification

• 47:24Speaker 00

  into the portfolio. We've witnessed some times over the past year where it didn't behave exactly that way. And we have largely not hedged our currencies. We view them as diversifying assets. So while others might be more active in hedging, we haven't been as active. We still believe it's a diversifier. We think there's a tendency to think of things as black and white. Something goes from a reserve currency to not. And there's a lot of gray in between those two, but it's something we're thinking a lot about. These are the things that really move the portfolio. How we think about currencies and how we think about some of these fixed income equity correlations.

• 48:02Ted Seides?

  As you see things that are that important potentially changing, what actions do you take differently from where you've been positioned leading into it?

• 48:12Speaker 00

  Yeah. And maybe it gets back to the supertanker analogy. Because we don't move quickly. And even on things like this, we don't move quickly. And how many times have we heard in our career that this time is different? And then it turns out it's not. We spend a lot of time and money on moving portfolios around to just round trip back to where they were at some point. We actually try to be quite disciplined and maybe almost programmatic in how some of these get evaluated and move into the portfolio. We would not look at it and then overnight flip the portfolio dramatically based on currency. What you would see with us, and maybe this is incrementalism, maybe it has its own challenges, is things will slowly move.

• 48:55Speaker 00

  Allocations, you'll start to see them clicking down over time. Our China allocation went from about 12 to 7, but that, we didn't go 12 to 7. We slowly moved it down from 12 to 7.

• 49:06Ted Seides?

  As you look out over the next couple of years, having been in the seat for several, how do you think about continuing to make the imprint that you want onto CPPIB?

• 49:18Speaker 00

  I always say, I work at the pleasure of the board and for as long as they allow me to be in this seat. And as I think about the role and I think about CPP Investments, we need to be here 75 years from now. We can't fail. 22 million people rely on the plan, but we can't be complacent and we can't be a victim of like creative destruction in the market. So we have to create this like risk-taking at the grassroots level and this experimentation and risk-taking at the grassroots level with stability at the global level. I think it's one of the great challenges we have. And one of the ways that I think about it and we talk about as a senior team is because we have to be here 75 years from now, we're not a founder culture.

• 50:03Speaker 00

  We're almost the exact opposite of a founder culture. Our job is to... Put in place an organization that in many ways will be able to operate independently of the people who are there in the past. We can't become totally dependent on a few people. So it's not the right word, but we have to institutionalize because we have to be there in 10 years, there in 15 years, there in 20 years. And so I think that also that mentality of saying we're not a founder culture of a little bit of the discipline of when we make choices, we're not making a choice for us, we're making a choice for the people who are in these seats. Because the one inevitable future we know is we won't be in these seats forever.

• 50:45Speaker 00

  And there should be, if we've done our jobs right, dozens of people in these seats in the future. And we need to make choices for them. And we need to be in some ways forgotten to history at some point. And that's how we think about it is it can't be a cult of personality, which is interesting because investing is a people business. It can be very anchored into individuals. So how do you really think about the business of investing and creating an institution that invests that isn't so dependent necessarily on the individuals? John, I want to make sure I get a chance to ask you a couple of closing questions. Sure. What's your first paid job and what did you learn from it? My first paid job was I worked at a gas station. And what did I learn from it?

• 51:29Speaker 00

  I learned that people will try to rob you. It's important to lock the door at 9pm and it's important to put the extra cash in the safe. But that is what I learned from that job and I have carried that to this day. There are bad guys out there. What's the best advice you've ever received? It was a mentor who said, you're a hard charging, pace-setting person. And when people ask you to do something, you're going to say yes. Cause that's going to be your instinct is just to say yes. You're going to always have lots of balls in the air and somebody's going to ask you to put another ball in the air and you're going to say yes. And eventually one of those balls is going to fall and you're going to see it as a failure and they're going to see it as a failure. But the failure was putting that ball in the air the first time. So you will need to learn to say no in your career.

• 52:13Speaker 00

  What's your biggest investment?

• 52:15Ted Seides?

  Investment pet peeve.

• 52:16Speaker 00

  One of my biggest investment pet peeves is a belief, a tendency that you can diligence a bad investment into a good investment, that if you just do enough diligence and keep working at it, that you can figure out a way to make it work. You get too committed early on, maybe you fall victim to a familiarity bias and you just convince yourself that you can do it as opposed to just saying no early, just saying no, life's too short and we gotta step away. In credit, I would see it. And look, some people have been very successful at it and have done it well. I've also seen many examples where individuals convince themselves they can structure a bad opportunity into a good opportunity. And you end up spending

• 53:01Speaker 00

  an incredible amount of time. And in the end, you still have a structured turd.

• 53:09Ted Seides?

  What life lesson have you learned that you wish you knew a lot earlier in life?

• 53:13Speaker 00

  A slight variation on that question is one of the things I wish I knew when I came into this role, slight variation on the question, if that's okay, is sometimes stop and enjoy the moment. These roles, this career, this industry, it's amazing. And it provides incredible opportunity. And you get to do incredible things. You get to meet incredible people, but you're so focused on the next thing that you never stop and just marinate in the situation and just enjoy it. I've been trying to do more of that of sometimes just stop and reflect on how fortunate you are and what an amazing opportunity this is.

• 53:49Ted Seides?

  John, last one, if the next five years are a chapter in your life, what's that chapter about?

• 53:54Speaker 00

  The CPP Investments book needs to be a really big book. It's a really, really long book trilogy. It needs to have hundreds of chapters. We're still in the early chapters because we're only 25 years old. So what's the next chapter about? It's actually about setting up the chapter after it. There's no conclusion to that chapter. It is a chapter in a long story. It's not the last chapter. And what we have to do at CPP Investments is ensure that the next chapter starts out from a position of strength.

• 54:23Ted Seides?

  Well, John, thanks so much for taking the time.

• 54:25Speaker 00

  Thank you. It was great. Thank you.

• 54:27Ted Seides?

  Thanks for listening to the show. To learn more, hop on our website at capitalallocators.com where you can join our mailing list, access past shows, learn about our gatherings, and sign up for premium content, including podcast transcripts, my investment portfolio, and a lot more. Have a good one and see you next time.

• 54:50Speaker 02

  All opinions expressed by TED and podcast guests are solely their own opinions and do not reflect the opinion of Capital Allocators or their firms. This podcast is for informational purposes only and should not be relied upon as a basis for investment decisions. Clients of Capital Allocators or podcast guests may maintain positions in securities discussed on this podcast.