Below is the transcript of a CNBC Exclusive interview with Mark Machin, CEO & President, Canada Pension Plan Investment Board. If you choose to use anything, please attribute to CNBC, Martin Soong, and Sri Jegarajah.
Martin Soong (MS): Mark, good to see you. Appreciate your time. Thanks for staying up to do this with us and hope you're keeping safe. 434 billion Canadian dollars being managed by yourself and your outfit, of course your pension fund on behalf of about 19, close to 20 million Canadians. Through this coronavirus, in other words since about, oh, I don't know, February or March or so, have you changed tactics at all? Or are you still sticking with the game plan?
Mark Machin (MM): Well I think the long-term game plan...we're in it for the long term, we're multi-generational so we're investing money for people's retirement over many generations. We're actually measured over a 75-year period by the country. So long term doesn't change that much. Although the one thing that's challenging even us is the zero bound - the fact interest rates are now zero bound. Does that change the diversification benefit of bonds in the long-term? I think we, like a lot of long-term asset owners, are looking at reviewing that. We have a lot of other fixed income alternative in our portfolios. We have things like infrastructure, power renewables, we have credit exposure, we have hedge fund exposure, we have a lot of other things in that space. But you know that holding government bonds in large size is something that we will continue to examine whether that's the right thing to do at the zero bound.
MS: Okay, we'll talk a lot more about asset classes in just a bit. But broadly in the geographical verticals, if I'm not mistaken, you've got 20% or less of your assets actually in Canada, the rest 80% is outside. Is that still the case?
MM: Yeah, there's probably a little bit less than that in Canada right now. So about 85% is outside of Canada. And that's because our mandate is to be a global investor. And in fact, all the inflows we have in the fund come from Canada, so it makes sense for us naturally to hedge by having a globally diversified portfolio and that continues to diversify. The biggest market we're invested in is the US by quite some margin. And then Asia Pacific overall is the second biggest market.
Sri Jegarajah (SJ): Mark, we were talking to Tony James earlier on the program from Blackstone, and he was making the case, as many have been doing, for tech and healthcare, one of the big beneficiaries of COVID and we've seen digital transformation as a major theme amongst investors, longer term investors, pre-COVID, that is only now just started to accelerate because of COVID and work from home and all those dynamics. How are you approaching those two sectors?
MM: Well, very much so it's about both of those sectors. We are heavily invested and we continue to invest internationally you know. Topically in Asia, we continue to invest in, we're seeing interesting opportunities across Asia, particularly in China and India, particularly in India at the moment and interesting opportunities across both the equity and credit side of the business. But this digitization is a massive theme across the world. It's being talked about, it's probably a five to 10-year acceleration across many sectors. And the adoption, though, is interesting. For example, take education, which is one sector we're invested in, in Asia, the experience in Europe and US on distance education and online education has been pretty poor. Whereas in Asia, consumers have really taken to it and parents have really taken to it. And I think that's probably due to there being much more specialized companies dealing with it in Asia, and in the US and in Europe, it's only an emerging opportunity. I think people will become more used to it and I think adoption will pick up over time in the West
SJ: Mark, let's get back to the ESG story and how it applies to minors and the oil majors. Because in our part of the world we've been following Rio Tinto and the Juukan Gorge destruction, absolutely near criminal destruction of 46,000 years of aboriginal heritage. Is it better for ESG-minded investors like yourselves to remain engaged and invested in those sectors and affect change from within or if the extractive industries are not living up to ESG standards, do you show them the door?
MM: I think ultimately we show the door if we can't impact change that improves ESG and we think no company can survive and thrive in the long term if they are not considering their impacts on the environment, and are not considering the impacts on the communities they're in, if they're not considering the quality of the governance that they're running their companies with. So, you have to have those strong ambitions to really survive and thrive as a company today. But we try to engage and we take our ownership very seriously. We engage around the world. In the last 12 months, we voted on about 44,000 issues in shareholder meetings across the world and particularly on the larger holdings spend a lot of time engaging to try and affect change particularly related to the carbon based industries where we will encourage in particular, methane, as a gas is 84 times more damaging to the climate than carbon dioxide. So, having companies really focus on reducing emissions is really powerful.
SJ: Mark, just for the record, is Rio Tinto part of the Canada Pension Plan portfolio? And if so, are you in any shape or form reviewing those holdings?
MM: I'm sure it is. And I have to, I'd have to check. I would image we have some nominal holding in one of our passive indices. But it's not a very direct position, I know that for sure. But I can check in a few minutes and tell you exactly how much we own. But it'll be somewhere in one of the major global equity indices that we have in our passive portfolio. And I'm sure that soon we'll be engaging with them.
MS: All right. Fair enough. Mark. The broader question, though, is with regards to ESG Investing, you're saying that you want to be engaged. Would you take that a step further? Because I mean, look, one of the things that happened, what four years ago when you took the helm at the fund is almost a sea change, right? You're investing globally now, and you're not just sitting back and clipping coupons, you are very active with cases like not just Rio, but whatever it is in your ESG basket. Are you willing to be activist as well? Because here we're not just talking about public markets, private ones as well.
MM: I say we actively engage, and we will, for example, I mean, I'll take up a related issue, which is gender diversity. So, we strongly believe that diversity on boards is correlated with long term investment returns. And we've done our own internal quantitative analysis on several thousand securities controlling all other factors. And we've shown that's the case. In addition, we've done analysis on 100 external studies and shown that's the case. So, it's quantitatively based. So, three years ago, we started voting against boards in Canada that didn't have women on the board. And that along with a lot of other efforts has had an impact on the number of women on boards in Canada. There's no major company now that doesn't have a woman on the board in Canada. And two years ago, we put that out. We continue to engage with companies around the world to push this theme. And we will vote, and we will engage, and we will have active dialogue with companies about why this makes sense. And we hope that we and others will have an impact because ultimately it will impact long term returns.
MS: Long term returns. You know, getting back to the backstory. When you took over the fund. I mean, this is after what 20 over years at Goldman, in Hong Kong, the China boom, those were rock and roll days, and you're bringing that kind of spirit or have brought that kind of spirit to the Fund, which is great to know. In these times, you know, a lot of money is going more into private equity and valuations are much, much harder to estimate. It ends up being almost guesstimation, which raises the issue of whether or not the fund has finally a dedicated chief risk officer. For many years you didn't, do you now?
MM: Yeah, it was one of the first things I did when I sat in the seat. And so we've had a dedicated chief risk officer for the last about three and a half years and, and gave me a lot of peace as we went through March, we had all the reports we needed, we had all the information we needed, we had all the controls and or liquidity we needed. So even in those stressful few weeks of, you know, March going into April, we were under control. And also, you know, he and I had spent a lot of time thinking about what could go wrong on our watch. So, it was nice to put in place, a lot of teams a lot of processes. So, we had that Information and all those leaders in place and we even had a financial crisis management team in place. We didn't predict it would happen. But, you know, we prepared and activated that as soon as things became very volatile, so yup we have one. So far so good.
MS: Okay. Fingers crossed.
SJ: Yeah, you got to be nimble. Stay ahead of these evolving trends and business models, especially in the tech space. Mark, great conversation. Thank you very much indeed for joining us sir - Mark Machin, the CEO and President of Canada Pension Plan Investment Board.
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