Following is the transcript of a CNBC interview with Mark Machin, President & CEO of the Canada Pension Plan Investment Board. The interview was broadcast on CNBC on 21 March 2017.
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Interviewed by Geoff Cutmore, Anchor, CNBC, at China Development Forum 2017.
Geoff Cutmore: Let me start by just asking you for a view on markets currently, how do you see the world in terms of investment opportunity?
Mark Machin: So the world today actually looks reasonably positive. We see if anything a fairly synchronized upswing in economic activity. So Europe seems to be inching out of a long-term depression that it's been in. Japan is in reasonably good shape. China's activity is remarkably strong, and the U.S. seems to be at relatively full employment and firing on, you know, most cylinders. So it's the first time in a long time that we've actually seen a synchronized upswing in economic activity. Markets are reflecting that in part, so U.S. markets seem very, very strong and valuations are quite high. Europe valuations are significantly cheaper and I'd say emerging markets on the whole are relatively more reasonably priced than the U.S. market.
GC: Nouriel Roubini, Dr. Doom himself, feels that investors are being very complacent at the moment about Donald Trump, and about his ability to deliver on a lot planned benefits for markets. The infrastructure fund and so on and so forth. Do you think he's right? Do you think that we are sleep walking a little into dangerous territory because valuations are very high in the U.S.?
MM: Well I think it's two...I mean one thing is valuations may be high may be pricing in a number of things. But secondly, I think that that there is still a lot of skepticism. I don't think these are markets, particularly in the U.S. market where if you do a general poll of what people think... a lot of people think valuations are stretched in the U.S. market and there is skepticism on policy delivery, people know it's hard. People know that tax reform is very hard. People know that deregulation is very hard. People know particularly that infrastructure everywhere in the world is very hard, it is very easy to talk about infrastructure, we are a substantial infrastructure investor in the world. We have about 28 billion in infrastructure and our challenge is finding a dependable long term pipeline of scale opportunities everywhere in the world. It's a problem that all governments wrestle with because it takes an enormous amount of time, not just to get the policies in place, but then to prepare each project and get it actually ready for institutional capital.
GC: So the message it seems to me is let's wait and watch at this stage. A lot of promises but let's see delivery?
MM: I think that that's the case in any case where a new government has a number of policies. I mean I think there's things that are relatively easier to do. Which markets are pricing in more and more certainties. For example on the regulation front, rather than rewriting a lot of regulation you can change the enforcement of various aspects of regulation, so I think one of the reasons why the financial sector has rallied so significantly is it's easier to ease up enforcement of some aspects of the regulation which can increase activity more quickly.
GC: Your slow money, your pension fund money. You look for real value. As you look around the world at the moment, where do you see real value that attracts you and excites you?
MM: Well that's right. You know we're not market timers. We think market timing is the hardest thing to do of all types of investing, so we're value investors and we're super long term. We like to say a quarter for us is 25 years not three months. So we're looking for increased long term investment in many markets. For example here in China, we have about four percent of our portfolio here in China, which for a globally diversified portfolio, if you look at it relative to GDP is substantially underweight. I mean relative to available market cap not so much, but relative to GDP substantially underweight. So we want to significantly increase our investment here over the long term. And I'd say emerging markets generally are interesting as well, we have a target of about 15 percent exposure to emerging markets, and we'll probably review and raise that over the years ahead. So that's another area where we see interesting value over time.
GC: Why are you so underweight here? What's the challenge with China? What will it take to convince you to move more aggressively to lift that weighting?
MM: I think China is doing a lot of things to open up its market. So I think that the recent bond connect is yet another aspect of opening up the capital markets so it's now by many measures the third biggest bond market in the world. Seven trillion dollars and allowing that to be more accessible to capital is yet another aspect of making this a more investable place. I say from our point of view, given the type of money that we are, we're super long-term, you know we invest and don't necessarily need our money back for immediate use, so I think we're seen as relatively friendly capital as stable capital, and therefore our access is reasonably good here. But I think for different types of money, the ability to invest more, have more capacity to invest onshore more and more available capacity whether through connects or other QFI mechanisms. And the same on the bond market are all good things.
GC: You've been a big investor into e-commerce here. How do you see the opportunity from here for Chinese e-commerce? It seems that we haven't seen too many new large companies in this space emerge in such a high-profile way maybe as Alibaba and Tencent and some of those businesses that we already understand. Talk to us a little bit about where the opportunity here is in that space at the moment.
MM: Those two companies are substantial companies with big dominant market share. I think below that, there is an ecosystem of many, many, many startup companies that are trying to find niches and aspects. So I think the ecosystem that is around those companies is part of the secret source of innovation in this country. I think there's much more innovation happening here than anybody anticipated 10 years ago. And part of it is the power of these companies to find new opportunities, invest in them and create a family of, you know, an ecosystem around them. So the cluster of innovation around the universities here whether it's in Beijing or Shenzhen or elsewhere, is you know is also an all-powerful aspect of innovation. And then you've got the government support as well. So I think China's been very thoughtful about creating the ingredients of innovation which is creating more of an opportunity for all types of companies whether it's e-commerce or others to bloom here. So it is an exciting time in China.
GC: So when you look at technology at the moment. Are you trying to buy IA type business or robotics companies? Where is leading edge for you that you think will become long-term a great provider of profit and revenue?
MM: Yeah. I mean this is something that as a long term investor that I worry about. I wouldn't say that we've cracked this. We don't invest in venture capital. One of the reasons for that is that it's very difficult to get scale, so with 300 billion dollars plus under management, to try and invest in a venture capital firm where we can get a 20 million dollar investment it doesn't really provide us with sufficient scale. So that's one of the challenges of figuring out what's really cutting edge. But we need to do more to identify these early stage trends because the speed with which things are disrupting from early stage company through to your real significant disruptive impacts on existing companies is incredibly fast now. It takes very little money to develop a company given the amount of cloud computing capacity that you can get a company some market for very, very little money very, very quickly and have a very disruptive impact. So it's something we're focused on trying to improve and anticipate the disruption that's going to happen to our own portfolio. I say that two places in the world that you have to have to be aware of are here in China and in Silicon Valley. They're two sort of major centers globally of innovation.
GC: Do you think things like the Snap valuation suggests that the market is still viewing the opportunities as too rich around some of these businesses?
MM: I think this is a constant all the time. In my previous life I worked in capital markets for many years and you get these times where there is a darling company that everybody wants or a darling sector that people will pay too much for and it was always a challenge to find the right balance of investor versus company expectations. So I think at the moment, you know there are little patches of extremely high valuation and where things are very sexy. But I think overall technology valuation or private valuations have eased off a little bit in some places around the world.
GC: Are you looking at any near-term asset allocation shifts on the basis of this pick-up in economic growth?
MM: So ultimately diversification is the most important thing for us, so we're gradually increasing our international diversification. I would say longer term emerging markets...we'll increase our weighting over time. I think what we're looking at top of house activity and where we might move our weighting over time. It's something we'll look at later this year, it's not something we're doing with any urgency and we're structurally also gradually taking up risk. But I think in response to your specific question...activity is very high in the U.S. right now. We continue to see private equity activity, real estate activity, we recently invested last week in a student housing portfolio. It's still the largest market in the world, it's still the largest economy in the world, and is still where we see the most actual direct investing activity as well.
GC: And neither Donald Trump nor the Fed starting to hike rates this year has you worried that there are going to be setbacks or pullbacks in this market near to medium term?
MM: I'm always worried...I'm always worried about setbacks, I'm always worried about risk. So I mean what our job is to make sure that we're pricing the risk accurately and not getting carried away. So our job is to maximize returns without undue risk of loss. So that's the key. At the moment it's OK in many aspects we're finding things... we're just about finding things.... a handful of things where we think risk is priced appropriately.