Focusing on innovation helps CPPIB thrive in tricky markets

While markets remain in the longest bull run in history, worries abound that the party has to come to an end.

“Interest rates have been so low for so long, they’ve become the new normal,” said Mark Machin, president and chief executive officer of the Canada Pension Plan Investment Board, at an event hosted by the Toronto Region Board of Trade on Tuesday. “The phrase ‘the inverted yield curve,’ which meant nothing to the general public, has become a popular search on Google.”

Looking back through market history, there have been silver linings, even in the darkest economic depressions, he said.

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“Economic historian Alexander Fields found that in the midst of the Great Depression, when the stock market lost almost 90 per cent, and when one out of four people in the U.S. was out of work, the 1930s was the most technologically progressive decade of the 2oth century.”

In heading up a fundamentally long-term institutional investor, Machin emphasized that a focus on innovation is one way to find profitable investment opportunities regardless of what the rest of the market is doing. He recalled the technology crash of the early 2000s, but pointed out the massive technological progress during the period, with innovations from the proliferation of GPS systems to the Human Genome project.

More recently, the 2008 financial crisis serves as another example of a low point in investment history, but growth was to be found then nonetheless, said Machin.

“Research from Bain Consulting revealed that downturns can actually present opportunities for businesses to grow and outpace competitors. Their work indicated companies that were performing well going into the financial crisis continued to perform well.

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“In fact, their average enterprise value grew three times more than the companies who weren’t performing before the crisis. The strongest companies were playing offence early on in the downturn. They kept the end in sight, cut their costs, trimmed their balance sheets and created new niches to nurture growth in markets that didn’t exist before. And at a time when their rivals were all cutting back on marketing, they doubled down on it. Their voice was heard much louder because fewer others were talking.”

The creation of the CPPIB stemmed from a deep requirement to innovate the system at the time, noted Machin. “In 1966, when the Canada Pension Plan was created, workers were able to pay for the pensions of retirees. There were almost seven workers for each retiree. But by the late ‘60s, you could already see the demographic changes that would make that structure unsustainable.”

Continuing to bolster a focus on innovation means working with a diverse team, in diverse settings, he said, noting the CPPIB, which is headquartered in Toronto, works across nine different offices in eight separate time zones, employing speakers of 60 languages.

“We are convinced that our future success depends on our capacity for innovation. That means engaging all backgrounds, skillsets and mindsets in this pursuit.”

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