Maximilian Biagosch of CPPI: “We also know what we don’t know”

leitwolf: Mr. Biagosch, the Canadian pension system is considered exemplary. What is special about the system?

Maximilian Biagosch : Canada faces the same problem with retirement provision as almost all countries around the world: the demographic pyramid is gradually inverting. Pension obligations can still be financed with contributions from the working population, but it has long been clear that we need to become more resilient. The Canadian government tackled this problem back in the mid-1990s with a quite unique approach. The basic idea was that Canada is a country rich in natural resources.

The returns from this wealth should not only benefit the current generation, but also serve as retirement savings for future generations. This represents a genuine intergenerational contract that Canadians established back then: The capital stock will be fed monthly with mandatory contributions from the working population. However, the full benefits of the pension fund are likely to be realized only by their children and grandchildren.

What role does CPPI play in this?

Biagosch : CPPI's mission is to invest these assets for retirement. We strive to maximize returns without taking excessive risks. The fund was launched in the late 1990s as a passive index fund with a very risk-averse portfolio, primarily invested in Canadian government bonds. In the mid-2000s, we transitioned to an active, higher-risk investment strategy, a true alpha fund with global diversification. This fund is now valued at 650 billion Canadian dollars, 440 billion of which was generated through active management.

We expect to exceed the one trillion mark in the next five to eight years. Our goal is to generate such a large capital stock over the next 15 years that we can finance any future shortfalls in retirement savings solely from returns, rather than having to draw on capital.

You've grown impressively in recent years. What's the secret of your success?

Biagosch : Over the last ten years, we have generated an annualized return of 9.1 percent, which is quite reasonable. We invest for the very, very long term. 58 percent of our assets are currently actively invested in equities and private equity. Added to that are 13 percent in credit, 12 percent in fixed income, 9 percent in infrastructure, and 8 percent in real estate. 88 percent of our investment strategies are global, across almost all continents; only 12 percent is currently invested in Canada. We know what we know. But we also know what we don't know. Where we are not among the best in the market, we work with partners who have particular expertise in those areas.

What time horizon are you planning for? How does this affect asset allocation?

Biagosch : We don't think in quarters, but in quarter-centuries. This prevents us from being pressured to sell, even in turbulent market times. Our chief actuary sets the long-term risk profile. We build a global portfolio that optimizes returns for this risk. We then attempt to outperform this benchmark portfolio using our active strategies.

We also invest in less liquid investments such as private equity, credit, infrastructure, and real estate. Since we can't always find suitable investments everywhere, a shortfall may arise from the perfect portfolio. We compensate for this with a liquid balancing portfolio. We typically hold 30 to 40 percent of our assets in liquid instruments, which allows us to react quickly to market changes.

How independent are you as a service provider for state pensions in your decisions?

Biagosch : We are independent because our mandate is purely investment. This is important because our sole task is to invest Canadians' money at optimal returns with acceptable risks. We do not serve any political agenda, we do not cover shortfalls in the public treasury, and we do not subordinate ourselves to the government's interests. Crucial in this context is also that we are organized as a private company. We have a professional board of directors without politicians or other officials. We pay our employees not like a state-owned company, but like a private asset manager. This allows us to attract and retain top-notch talent.

You mentioned cooperation with partners. How important are external managers in your strategy?

Biagosch : Around 20 percent of our assets are not managed by us, but rather by investment partners. Our global organization with offices worldwide gives us the expertise and capacity to select investments ourselves for all active investment strategies. However, we work with partners almost everywhere because we know we're not always the best in every situation. Our partners can provide us with expertise and access where we can't do it ourselves.

In the private equity sector, we prefer to use genuine strategic partnerships. We share control and invest jointly with our partners. A variety of partners are considered – family offices, corporates, local sponsors. Their expertise helps us limit risks, especially in difficult asset classes or regions.

Where do you currently see good opportunities for investments?

Biagosch : Our approach isn't sectoral or regional. What matters to us are major trends and societal issues. One of these is generative AI. Of course, the usual suspects benefit from this, like the big tech companies in the US, known as the Magnificent Seven. But we're also looking at how energy suppliers with large data centers can benefit. We're also looking at real estate developers who build these data centers, infrastructure investments in the power grids, investments in new energy sources, and players in the wider AI value chain. We're looking for attractive investment opportunities in all of these areas, without limiting ourselves to individual sectors or regions.

Europe's capital markets have had few fans recently. CPP Investments is an exception. What makes Europe attractive to you?

Biagosch : Europe's innovative strength is good. Numerous interesting companies and assets are based here, including many global champions. What interests us particularly about Europe is its complexity . This is due to its structure, with its numerous relatively small countries and different languages, cultures, and legal systems. Added to this is a capital market that is less homogeneous, mature, and transparent than in the USA. This puts many international investors off. But it doesn't put us off because we have had teams there for a long time and understand the structures. We have invested around 120 billion Canadian dollars in Europe, including the UK, and the portfolio has performed extremely well.

How does Germany stand in this environment?

Biagosch : We believe that investing in Germany offers appropriate, risk-adjusted investment opportunities . That's why we're invested here. Significantly more opportunities could arise in the future. We see a significant backlog in infrastructure in Germany, whether in energy networks, roads, communications, or transport in general. The government is aware of this and knows that it cannot be financed with public funds alone. I'm confident it will create the right framework to involve international investors in the financing.

The trade war between the US and China, the wars in Ukraine and the Middle East – geopolitics has recently pushed climate goals down in public perception. How important are net zero, emissions, and biodiversity for your investment strategy?

Biagosch : We have a clear investment mandate, not a climate or sustainability mandate. Regarding our governance, we have set ourselves uncompromising standards that apply worldwide. Sustainability also plays an important role for us in other ways , as we seek the best investment opportunities. These are typically assets that are climate-resilient. Real estate, for example, is an example: We actively scan our large portfolio for climate risks. In regions where extraordinary weather events are more likely, we either exit investments if in doubt or price in corresponding risks.

In Germany, a pension system with a stronger equity component has been discussed repeatedly for years. Canada has over 25 years of experience with its pension model. What are your recommendations to German policymakers for a revised pension system?

Biagosch : Size is an important factor; it means building a capital pool that allows for success in global competition. A large investment portfolio creates better access to investment opportunities. Global diversification also requires a global infrastructure, and that costs money. Independence from political influence is also very important. A certain level of financial resources is also essential; after all, we compete with the very large international asset managers for the best investment specialists. However, we are very aware that these requirements cannot be politically enforced in every country, and that a true intergenerational contract is not universally accepted.

About the interviewee:

Maximilian Biagosch has been with CPP Investments since 2015. For the past three years, he has been responsible for real asset investments and European business on the London-based Executive Board. A native of Bavaria, he holds a law degree and joined the Canadian pension fund from the private equity specialist Permira Advisors. Previously, he worked for BNP Paribas and Deutsche Bank, among others.

This interview was kindly provided by Lupus Alpha and is taken from the current issue of leitwolf magazine: (leitwolf-magazin.de)