It would be easy for hotshot individual retail investors to view the single-digit annual return generated by Canada’s PSP Investments as mediocre.
The investment management arm of the Public Sector Pension Investment Board reported a 4.4% annual return for fiscal 2023 (March 31 end) on June 7.
For those not familiar, PSP invests pension fund assets for those currently or retired from the Canadian Armed Forces, the Royal Canadian Mounted Police (RCMP), and others in the federal public service. It is one of Canada’s largest pension investors, with $243.7 billion in net assets under management (AUM). (All figures in Canadian dollars, unless specified.)
In that role, as steward of those public servants’ assets, PSP’s responsibility is two-fold:
“(1) manage amounts that are transferred to us in the best interests of the contributors and beneficiaries under the acts related to the Plans; and (2) invest our assets with a view to achieving a maximum rate of return, without undue risk of loss, having regard to the funding, policies and requirements of the Plans and the ability of the Plans to meet their financial obligations,” states pg. 10 of its 2023 annual report. (My emphasis, see below.)
So, considering “the best interests of the contributors” AND “achieving a maximum rate of return, without undue risk of loss,” PSP performed exceptionally well over the 12 months between April 1, 2022, and March 31, 2023. Its Total Fund Benchmark achieved a fiscal 2023 return of -2.3%, 720 basis points less than PSP’s stated return.
Anytime you can deliver this kind of outperformance while investing nearly a quarter of a trillion dollars in assets, you do a lot right. Investors of all stripes would be wise to read through its 274-page annual report to understand how it can do this.
For comparison, the average assumed rate of return for public pension funds dropped in 2022 to 6.86% from 7.07% a year earlier, according to a report from the National Conference on Public Employee Retirement Systems, the largest trade association for public funds in the U.S. and Canada.
In fiscal 2023, and likely in 2024, PSP will lean heavily on alternative assets, such as real estate, infrastructure, and credit, to deliver the maximum rate of return without undue risk of loss.
“Our strategy to diversify into private markets and expand internationally has been key to maintaining stability in exceptionally volatile financial markets,” said Eduard van Gelderen, SVP and chief investment officer at PSP Investments.
Excluding cash, the entire portfolio is $237.7 billion divided into seven asset classes: Capital Markets (40.4% of assets), Private Equity (15.3%), Real Estate (13.1%), Infrastructure (12.1%), Credit Investments (10.7%), Natural Resources (5.0%), and Complementary Portfolio (3.4%).
The four alternative asset classes are Private Equity, Real Estate, Infrastructure, and Credit Investments. Their returns over the past year were 3.3%, 0.2%, 19.0%, and 13.1%, respectively. They account for more than 52% of the pension manager’s assets.
Also helping with its outperformance in fiscal 2023 was its Natural Resources asset class. With $12.3 billion (5% of the total), they had a 10.9% return. The smallest of the asset classes is the Complimentary Portfolio. It invests in assets that don’t fit into any of the other six asset classes but are complementary to PSP’s various investment strategies. It had a -0.2% return in 2023.
PSP’s top-performing asset class in 2023 was Infrastructure, up 19.0%. Over the past five years, it had an annualized return of 10.5%, second only to Private Equity, which gained 15.6%. Over 10 years, Infrastructure’s annualized return was 11.7%, 40 basis points less than Private Equity.
It’s these two asset classes that will continue to help PSP outperform its Total Fund Benchmark in the future, as the fund braces for an economic slowdown.
The Infrastructure asset class saw its net assets under management grow by $5.9 billion in 2023. Acquisitions, less divestitures, accounted for $2.4 billion of the gains, with increased asset valuations accounting for another $1.8 billion, with currency gains of $1.7 billion.
A significant acquisition announced in March was Radius Global Infrastructure (US:RADI), a buyer of real estate leased as wireless telecommunication cell sites. It partnered with Swedish investment firm EQT Group to pay USD $3 billion (including the assumption of debt) for the company. PSP will own 40% of the venture, with EQT owning 60%.
Although Private Equity delivered a total return in 2023 below its historical norm, it’s grown net assets under management over the past decade by 18% compounded annually.
Retail investors can gain private equity exposure and infrastructure exposure here in Canada through Brookfield Asset Management (CA:BAM), Onex Capital (CA:ONEX), Power Corporation (CA:POW), Fairfax Financial (CA:FFH), and several other smaller companies such as Clairvest Group (CA:CVG) and Senvest Capital (CA:SEC).
(See Fintel’s recent coverage of Brookfield Asset Management, Fairfax Financial and Power Corporation.)
Message to Investors
While retail investors will have difficulty replicating the pension manager’s various investment strategies, it doesn’t hurt to read CEO Deborah Orida’s message in PSP’s 2023 annual report.
“To fulfill our mandate, we invest for the long term, with a view to delivering an investment portfolio that is resilient and well positioned to support pension plan obligations that run decades into the future,” Orida stated.
“Our strategy involves diversification by geography, sector, and investment products, which was key to maintaining stability in the exceptionally volatile financial markets of the past year. We take into account the need to protect against inflation and other risks that could threaten long-term returns.”
You might not be able to match the investment manager’s resources, but that doesn’t mean you can’t think like a pension plan CEO.
This article originally appeared on Fintel
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