CPPIB launches unique in-house analysis engine

Internalising its portfolio accounting system has given CPPIB full control of its own data for the first time. Capitalising on this advantage, its total portfolio management department is building the capabilities to enable a consistent framework to better manage a broad range of risks across the entire fund, including a unique integrated model of public and private assets. Amanda White spoke with chief investment strategist, Don Raymond.

A stronger investment and portfolio construction orientation to the portfolio design and investment research department, now renamed total portfolio management, were the impetus in appointing Don Raymond to the new position of chief investment strategist at CPPIB just over a year ago.

That past year has been a busy one, both for Raymond and the department, with a focus on top-down disciplines as the fund implements its total portfolio approach. (Raymond is also chair of the investment planning committee at CPPIB, and chair of the ICPM).

The fund’s portfolio accounting system, previously handled by State Street which remains the fund’s custodian, was brought in-house using the Simcorp technology, giving the CPPIB full control of its own data for the first time. You can practically hear the total portfolio management department rubbing its collective hands together at the prospect of how it can use that data to better manage the active risk positions across the total portfolio.

Now consistent with the CPPIB’s philosophy for investment innovation, that has been taken a step further.

The group is building analytical engines, and an integrated asset return model of public and private assets.

“To my knowledge it is the first time a fund has done this,” Raymond says. “We are calibrating betas, for example geography, sector, and liquidity risks that are common across all asset classes, and are building the tools to integrate public and private assets and strategies. We also aim to capture fat tails.”

In order to manage total portfolio risk, it is particularly pertinent to be able to compare and measure private and public assets in a fund such as this. Over the past five years the fund has increased its private asset holdings from C$7.8 billion (US$8 billion) to $47.8 billion or from 8.8 to 31.6 per cent of total fund assets.

The CPPIB, which at the end of the March 2011 financial year had a record $151.6 billion in assets, has been investing actively against a reference portfolio since 2006.

This CPPIB’s total portfolio approach is a unique structure which dictates that any move away from the policy portfolio must be funded by a corresponding shift in assets in that policy portfolio.

As with other funds, the CPPIB has a reference portfolio, which represents the low cost, low complexity investment strategy; and then its real portfolio is an active decision away from that reference. What makes it different is in the funding.

“The reference portfolio is the default, if we can’t find investments then we won’t sell components of the reference portfolio to fund them,” Raymond says. “We try to keep the systematic risk component of assets. Historically that has been fairly coarse but reflects the underlying risk.”

Now Raymond and the total portfolio management group are looking at a more finely-tuned dynamic funding, where sectors and geographies will be included in matching the funding decision to the investment.

“For example if we invest in a City of London office building, now we would sell equities and bonds across many countries, but in the new model we would look at perhaps selling UK equities and maybe even the financial services sector,” he says. “Underlying risks can change and risks in markets change too, being more dynamic in our funding will reflect that.

“We will disentangle assets and analyse them.”

Raymond says this will be a slow process, especially when it comes to the fund’s private assets, but will most likely start with infrastructure investments, of which it has about 14 assets worth about C$9.5 billion.

In the past year there has been a focus on reorganising the department, adding the portfolio management group which advises and manages the systematic risk and allocation of active risk across the total portfolio, to investment research, quantitative research and economic and research services groups.

For fiscal 2012, the Total Portfolio Management project is one of the key corporate priorities, with strong buy-in from the fund’s leadership.

While it is a multi-year project in the next 12 months Raymond is aiming for some “tangible actions” which include the more dynamic and fine tuning of funding infrastructure and expected forecasts for all systematic risks.

“We house fat tail risk, volatility risk for example, at the total portfolio management level. As a long-term investor we also look at how to extract the liquidity value from our reference portfolio.”

The CPPIB had another successful fiscal year in 2010 with a 12-month investment return to March 2011 of 11.9 per cent; this represents $15.54 billion of investment gains net of expenses, and a 2.07 per cent excess return above the reference portfolio.

CPPIB Asset Mix as at March 31, 2011

Public equities                                                 38.2 %

Private equities                                                15.3

Fixed income                                                  30.1

Real estate                                                       7.3

Infrastructure                                                  6.4

Inflation-linked bonds                                    2.7