For Canada’s Public Sector Pension Investment Board, the fiscal year that ended on March 31 was its best in ten years, performance-wise.
According to a Wednesday announcement, PSP posted an 18.4 percent net return for the fiscal year 2021.
Now, as its most recent five-year plan comes to a close, the fund — and chief investment officer Eduard van Gelderen — have revealed the fund’s future priorities, which include taking a top-down investment approach, embracing big data, and considering what a hybrid workplace could look like.
PSP Investments is in a good position already: over the ten-year period, the 8.9 percent annualized return beat its benchmark by 1.1 percent per year. The five-year return — 9.3 percent — exceeded the benchmark by 1 percent per year.
“When you look at it, it was an interesting year in terms of performance,” van Gelderen said by phone. “That makes us very happy.”
Investing in the Land
Although it’s on the smaller side compared to the rest of the portfolio, PSP’s C$9.7 billion ($7.7 billion) natural resources allocation is beating its benchmark in a big way. Over the one-year period, it returned 10.6 percent, compared to the 7.7 percent benchmark. Over the five-year period, it returned an annualized return of 9 percent, as compared to the 3.7 percent benchmark return.
“Natural resources or commodities has always been considered as an interesting asset class because of the perceived inflation matching characteristics,” van Gelderen said, referring to the theory that the asset class could provide inflation protection. “That relationship is not that strong in practice. Especially when a lot of institutional investors entered the markets, the relationship was broken.”
PSP’s approach is “slightly different,” as the fund focuses on land, particularly where cattle are raised, he said. “The challenge going forward is that we’re already one of the bigger investors of natural resources in Australia,” van Gelderen said, referencing the fund’s farmland investments in the country. “Where do we find the best opportunities going forward?”
Vision 2021 comes to a close. Here’s what’s next.
This year also brought PSP’s Vision 2021, a strategic five-year plan, to a close. During the most recent fiscal year, that strategic plan contributed to over 50 transactions, according to the announcement.
Now, PSP is planning for the future. Alongside consultants, the pension fund’s staff considered about 40 different themes that they expect to impact the fund in the coming years.
The group landed on three specific initiatives. The first is to take a more top-down approach to investing. While Canadian funds are known for a bottom-up approach to investing that has defined their success over the years, van Gelderen said that PSP plans to start thinking about the total fund during decision-making.
“It’s where to invest in the world, but also related to what is the exact risk tolerance, and how can we express this?” he said. “We are in a good dialogue with our sponsor to fine-tune what they find important in our mandate in terms of risk.”
At present, PSP has risk and investment committees where “every deal is discussed.” The fund’s risk department also does independent assessments of potential investments. According to van Gelderen, this approach was particularly effective during the market turbulence amid the early pandemic.
“When March started and the fear came up, we had a very clear understanding of the underlying portfolio companies,” van Gelderen said. “We literally went through every single company to assess what was going to be the impact.” Although his team added more companies than usual to its “alert list,” he said they “never felt that we were not in control.”
PSP focused on keeping cash on hand during that period. “You run into trouble when you run out of cash,” van Gelderen said. “When there’s a margin call and you need to cough up cash and you don’t have it, you become a forced seller of assets and that will have an impact on performance. We made sure we had more than enough cash liquidity.”
Moving forward, van Gelderen said PSP will develop additional risk metrics to use on the total fund level to address the plan sponsor’s “greatest fears.”
PSP, Meet Big Data
The second initiative is to become a more “fact-driven investor,” van Gelderen said. And that’s not to say that the fund isn’t already, he noted.
“It’s not that we don’t have any data now, but we know that there is this data evolution going on,” van Gelderen said. “We want to shift our decision-making more in that direction.”
This means sourcing data to improve decision-making, building a system to use that data, and creating insights based on the information they receive. “Just having data is not enough,” van Geldern said. “You need to know how you can work with that data and make better investments.”
The third part of PSP’s plan is to ensure that the organization is agile, particularly in a world that is moving toward virtual work. According to PSP’s announcement, one of the expected permanent changes to the fund will be a move toward a hybrid work model, where employees don’t need to be in the office every single day.
“If people are becoming less dependent on specific location, it will change the competitive environment for talent,” van Gelderen said.