How the CEO of the $243.7-billion PSP Investments pension fund is navigating tumultuous markets

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Pension veteran Deborah Orida took over as CEO of the Public Sector Pension Investment Board (PSP Investments) in the middle of a tumultuous year for markets. Orida, who joined PSP in September after 13 years at CPPIB, helped navigate those choppy waters, guiding PSP to a 4.4 per cent net return for the fiscal year ending March 31. Orida spoke the Financial Post’s Barbara Shecter about how her strategy for the $243.7 billion fund will be shaped by turbulent times, both economically and geopolitically. This interview has been edited and condensed. 

FP: Now that you’ve been in the job for a bit, what’s your take on the road ahead, especially in this environment?

DO: Positive returns in challenging markets are good. And I think what it really reflects is the diversity of our portfolio, the deep expertise of our investors and the global nature of our portfolio. Our strategy (has been) to diversify beyond public markets into private asset classes, some of which have performed very well this year, as well as to expand internationally. As a result we benefited from, for example, exposure to safe haven currencies like the U.S. dollar, which performed their expected role of mitigating some of the downside risks in challenging environments.

FP: How did PSP benefit from currency exposure and areas such as infrastructure and private markets, which have outperformed public markets, stocks and bonds? Do you see that outperformance continuing?

DO: Let me start with infrastructure. The one-year returns are spectacular at 19 per cent. But I think what’s more indicative is the ten-year performance at 11.7 per cent. I do think it’s an asset class that will continue to perform well in this market because it benefits from inflation protection and stability. So we continue to see a lot of interest from other investors in that market.

FP: Where else do you see opportunities and/or a competitive advantage right now?

DO: The other one that I would talk about is natural resources. I think this is a pretty unique franchise that PSP has, with over 70 per cent of that portfolio based in agriculture, which gives us a diversified exposure that has served us very well this year and over the long term as well. We have built this business where we go out and we partner with families, we leverage their local expertise and their farming expertise to be able to build out their land base or accumulate more land and, in some cases, add post-farm processing capabilities that add to the value of the investment. It’s a unique franchise and it’s been performing well for us.

Inflation will be a bit more sticky than the market is anticipating and therefore rates will remain high

Deborah Orida

FP: Let’s talk about private credit, which has been a hot market and a hot topic lately, with many anxious to see how the asset class performs amid rising interest rates.

DO: Our private credit franchise is another one that I’m proud of. We established it back in 2015, and it has an (annualized) 11.2 per cent return since inception. And the portfolio performed well this year, even in a rising-rate environment, because about 85 per cent of the direct portfolio was floating rate. And we have the benefit of deep expertise. There’s a big team New York, a team in London, that have a track record of picking good businesses.

FP: How are the borrowers managing with floating rates? Any signs they are overstretched? Any areas of distress?

DO: Our team does pick good businesses but when you look at the underlying sector exposure, I think the portfolio is also well positioned. So, for example, we have good exposure to health care, to technology, to businesses that are well positioned, I think, even in an uncertain economic environment. But, as you might imagine, we continue to monitor the portfolio, we’re looking at the interest coverage of all the positions in our portfolio. And I think the exciting thing is that we’re seeing really interesting new investment opportunities in private credit (with) double-digit all-in returns, top of the capital structure, lower leverage, better terms — taking the opportunity to take advantage of when the banks are being more cautious.

The market is obsessed with the Fed interest rate pivot, but I think we're taking a more balanced approach to when central banks will switch from raising to lowering rates

Deborah Orida

FP: We’re hearing a lot about how credit is tightening at U.S. banks? So you are seeing business sort of booming, if I can put it that way?

DO: I wouldn’t say booming as the transaction volume in private equity (and) credit is lower. But it’s an uncertain market environment where only the best businesses, only the recession-resistant businesses are getting financed.

FP: And how does PSP make sure you get the other end of those transactions?

DO: I think structurally, we have the advantage of being long-term investors. Specifically, I think that the capabilities that we have in interesting markets like private credit, like natural resources and our platform strategy in infrastructure are real competitive advantages for us.

FP: Another area we’re hearing a lot about when people discuss vulnerabilities in the current macroeconomic environment is real estate. How is PSP positioned to handle that, particularly commercial real estate?

DO:  Real estate is a meaningful part of our overall diversified portfolio. This year, we took a hard look at the valuations reflected in the change in environment for some areas, like office, but we also have good exposure to some areas that are benefiting from the environment, like logistics, like multifamily. So it’s a balanced portfolio.

FP: What about your geographical diversification? Any changes planned there in light of some of the new and emerging geopolitical risks around Russia and China?

DO: About 60 per cent of our portfolio in North America, between Canada and the U.S., about 17 per cent is in Europe and 17 per cent in Asia Pacific, including Australia. We do recognize that geopolitical tensions have increased and I think our approach to Asia, in particular, will allow us to be selective across the entire region. So we made the decision this year to build off our existing presence and have the one regional hub (in Hong Kong) that will allow the team to be selected across the region. I spent six years in Asia for CPPIB, so my observation is it is interesting but a complex market that presents both risks and opportunities and the best strategy for that region is to position yourself to be selective and be able to choose the best risk-adjusted return opportunities across the broader region.

FP: Some Canadian pensions have announced pausing direct investments in China for now, given the risks there. Does PSP have a stated policy on China?

DO: We haven’t made a public announcement, but we do recognize that the risks have increased. China is a small part of our portfolio, it’s about three per cent, but as a result of the increased risks, we have elevated the requirements for new private investments. So any new private investment has to come up to the top (to the) firm-wide investment committee.

FP: But you could do a direct investment if it came to the top and the risk-reward was seen to be there?

DO: What I would say is that having a team based in Hong Kong and looking across the region for opportunities, frankly, we’re seeing better risk-adjusted return (private equity and carbon) opportunities in places like … Japan, for example, India, Australia. There are other markets that we can look and where we’re seeing interesting opportunities.

FP: Can you talk about where else geographically or what sectors you’d look for over the next year or so?

DO: We continue to be interested in what we call high inflation correlated assets (like infrastructure) and, in developed markets, we also continue to pursue and invest in the energy (and) renewables portfolio. One of the newer interesting areas that we invested in this past year is offshore wind.

FP: You’re adjusting to a new organization. Is there a big difference between CPPIB and PSP?

DO: I’d say there’s a lot of similarities, but PSP has some really unique franchises like the natural resources franchise, like the strength of our private credit, business, and this entrepreneurial spirit that I think is really valuable to the organization.

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FP: What are you expectations for the economy over the next year and how is that playing out in your investing strategy? Are you expecting more of the same volatility?

DO: We expect that there will be a mild recession in developed markets, in the U.S., maybe slightly in Europe, and stronger recovery in China. But overall, we’re positioned for thinking inflation will be a bit more sticky than the market is anticipating and therefore rates will remain high. You know, the market is obsessed with the Fed interest rate pivot, but I think we’re taking a more balanced approach to when central banks will switch from raising to lowering rates. And I think the diversification of our portfolio will continue to serve us well. Our view is that although inflation has come down, it will be a bit sticky because of some of the structural inflationary pressures and so as a result rates will stay higher for potentially longer than the market is expecting.

• Email: bshecter@nationalpost.com | Twitter: BatPost