Canada’s massive pension fund is reviewing its bond holdings in light of near zero interest rates, CEO says

SINGAPORE — Central banks have slashed interest rates this year in an effort to revive economies ravaged by the fallout from the coronavirus pandemic. But low interest rates are proving to be a challenge for investors, even ones who have long-term, multi-generational views on investments such as Canada’s massive pension fund. 

While the Canada Pension Plan Investment Board’s (CPPIB) long-term game plan hasn’t changed much in light of the virus outbreak, the one thing that’s challenging the fund is the zero-bound, according to Mark Machin, president and CEO. 

“The fact interest rates are now zero-bound – does that change the diversification benefit of bonds in the long term? I think we, like a lot of long-term asset owners, are looking at reviewing that,” he told CNBC’s “Squawk Box Asia” at the Singapore Summit on Wednesday. 

Zero-bound refers to an expansionary monetary policy tool used by central banks to lower short-term interest rates to zero to stimulate the economy by reducing the cost of borrowing. But for bond investors that would mean they may receive less than their initial investment at maturity despite paying a large premium as bond prices and yields move in opposite directions.  

For example, a week and a half after the U.S. Federal Reserve cut its benchmark rate to near zero in March, yields on both the 1-month and 3-month Treasury bills dipped below zero.

“We have a lot of other fixed income alternative in our portfolio so we have things like infrastructure, power renewables, we have credit exposure, we have hedge fund exposure — we have a lot of other things in that space but that holding government bonds in large size is something that we will continue to examine, whether that’s the right thing to do at the zero-bound,” Machin added. 

CPPIB manages about 434.4 billion Canadian dollars ($329.75 billion) as of June 30 and a bulk of its investments are in North America — around 34% of total assets are allocated in the United States — followed by Asia. 

The fund is heavily invested in both the technology and health-care sectors and continues to invest, according to Machin. Companies in both industries have benefited from a change of consumption and corporate habits due to the pandemic. 

“Digitization is a massive theme across the world, it is being talked about — it’s probably a five to 10 year acceleration across many sectors,” he said. He pointed out how online education has taken off in Asia due to more specialized companies dealing with the changing trends and predicted that adoption would pick up over time in Europe and the U.S. 

CPPIB on its website says it factors in environmental, social and governance (ESG) risks and opportunities into its investment analysis and actively engages with companies to promote “improved management of ESG.” 

“We think no company can survive and thrive in the long term if they are not considering their impact on the environment, if they are not considering their impact on the communities they are in, if they are not considering the quality of the governance that they are running their companies with,” Machin said.