How CPP is evolving risk management for a faster, more interconnected world

For an organisation with the size and investment horizon of Canada’s C$793 billion ($572 billion) CPP Investments, no single risk event will necessarily impact the portfolio in an outsized adverse way. But in an environment where multiple risks are emerging and compounding at the same time the fund’s approach to risk management needs to change, according to chief risk officer Priti Singh.

“It isn’t just that all these risks – geopolitical, AI, cyber – are happening, they are all reinforcing each other… and they are compounding at a speed way faster than two years ago,” Singh says in an interview with Top1000funds.com.

“Our main concern is the interconnectedness and speed of risks,” she says. “The focus for me has been these bundles of risk and the way they are changing.”

Singh spends a lot of her time dissecting the implications of these compounding risks. She cites Anthropic’s Mythos as an example: what started as an AI or cyber risk shifted to become a geopolitical risk. As risks evolve in strange and interesting ways – and their implications become harder to predict – focusing on preparedness and putting the right support structures in place is prudent.

“This risk-preparedness toolkit is what allows us to invest with a risk and return mindset. But it’s the judgment of the people that will matter. We make sure we train our people, ultimately they will make the decisions, and we also know we need the best crew, not just the best pilot. We need a coordinated team effort.”

Singh says the current investing environment means that the way the team has worked in the past will need to evolve and adapt, but that the fund has the right talent mix to be able to look through the portfolio.

“We are focused on that to make sure we are prepared,” she says.

The view of risk at CPP has evolved in two distinct ways. The first is from having a risk taxonomy for risk identification to genuine risk preparedness.

The second is a “shift left” so that risk is integrated further ahead in the investment decision-making and not as an afterthought or “handbrake” on decisions.

“The way we have been thinking about it is to widen the cone of [the] aperture of possibilities,” she says.

Singh is a voting member of the firm-level investment committee and is present when decisions are made. In cases where there are risks material to the firm the views from the risk function are incorporated much earlier.

“If we are only raising [issues] at the final decision then it’s too late,” she says.

Because CPP follows a total portfolio approach Singh says it is important that the risk and return functions – which are really two sides of the same coin – “think about things the same way”. Investors should think about how an action ties into assumptions, in the spirit of adaptive risk management.

“The cohesiveness makes it possible. When we make relative value decisions we are all operating from the same information,” she says. “My life would be a lot simpler if I didn’t have to worry about a total fund integrated approach. However, we do embrace the complexity that TPA brings.”

TPA: Will versus skill

CPP has produced an 8.8 per cent 10-year annualised return, and operating at the total fund level rather than in optimised silos has allowed for relative value to be placed at the centre of its approach to allocating capital.

“It’s one of the things that has worked very well for us,” she says. “I think about this as a will and a skill question. I know we tend to think a lot about the skill – how do we think about factors, or map risk of privates on to public assets etc. But the will is actually the bigger differentiator. Are you willing to move capital when you see opportunities?”

Singh has worked at CPP since 2008 in external portfolio management and, more recently, as global head of capital markets and factor investing.

She says that large portfolios carry complexity “whether you like it or not”, so the question is whether to deal with that complexity on a siloed or total portfolio basis

“For me, the advantage is from institutionalising the discipline of having that muscle that recognises that capital is fluid and we are making relative value decisions,” she says. “We look at factors, risk drivers and other dimensions, not just geography or asset class. We try to think about whether we are compensated for the risks we are taking. If there are certain assumptions that will not hold, are we comfortable with what the impact on the portfolio would be?

“From my perspective the thing that gives me confidence is that our portfolio is a resilient portfolio. When I put it through stress tests there are times we will lose money, but we ask ’are we willing to take that risk, and can we make the most of the opportunities?’. Resilience and preparedness go hand and hand.”

In terms of specific risks, Singh says geopolitical risk is now “table stakes” at CPP.

It’s been on the radar for some time and the organisation has been building out capability, jointly sponsored by the public affairs team, asset allocation team and the risk team, for diversity of thought, anchored in questioning the assumptions underlying the portfolio construction process, different scenarios and potential actions if anything changes.

AI is viewed as a risk across the portfolio from concentration in public markets, data centres in the real assets portfolio, exposures in private equity and credit.

Fixed income markets, USD exposures and the deglobalisation theme are all live discussion points for Singh’s team.

“We think about things in two different time frames. The immediate things that happen and impacts on the portfolio, and whether there are longer-term trends and how they feed in,” she says. “Let’s not get too reactive to the noise and miss the underlying longer -term theme that may arise.”

Taking this big picture view, and connecting the dots about how risks might be evolving or connecting across both the organisation and the portfolio, is a critical part of the risk function. Singh is very deliberate in making sure the risk function is not going over every deal and investment, but is focused on risks that matter to the total portfolio.

“If I think about the most fascinating part of a risk role, we cover all investment and enterprise risks, so we are one of the few functions that see the process end-to-end.

The role of risk is connecting the dots across the organisation and seeing the interconnectedness and surfacing things up for decision-making much earlier in the process,” she says.

“We can come up with the fanciest process and dashboards, but the one thing that makes the difference is that we all have a common purpose. Every day, every one of us comes in to work knowing we are managing assets on behalf of 22 million Canadians.”

Priti Singh will speak at the Top1000funds.com Fiduciary Investors Symposium at Harvard University, to be held between June 1-3. Register for the event here.