Building A Portfolio for A Lifetime…

---

• Pension fund managers face a constant challenge: building a portfolio that can deliver consistent returns while withstanding inevitable market fluctuations.
• Strategic partnerships with external asset managers can provide access to specialized expertise and unique investment strategies, enhancing portfolio diversification and resilience.
• A long-term vision, meticulous due diligence, and a commitment to enduring relationships are key ingredients in crafting a successful external portfolio management strategy.

Imagine a portfolio built not just for today's market, but for whatever storms the future might hold. One that can withstand volatility, leverage specialized expertise, and deliver consistent returns over the long term.

This is the power of a strategic approach to external portfolio management — a philosophy that goes beyond simply chasing returns to build true resilience and enduring value.

"Our external portfolio management team is providing a return profile that is a little bit different. It is absolute return-focused and has more consistent volatility than some of the long strategies," says Amy Flikerski, Head of External Portfolio Management at CPP Investments, one of the world's largest and most respected pension funds with over C$600 billion in assets.

Since 2012, Amy has navigated the turbulent waters of global markets at CPP Investments, building a career spanning both direct investing and fund allocation. She leads a global team of 40 investment professionals who oversee a vast and diverse external portfolio encompassing a range of strategies: from fundamental equity and credit investments to discretionary macro, quantitative strategies and even commodities.

This global reach is essential to CPP Investments' "completion exposure" philosophy which focuses on a hands-on, collaborative approach to partner selection. "We endeavor to give direct quick feedback if it’s not the right fit or we prefer to monitor,” says Amy  “And then similarly, if it’s of interest, we start to progress in terms of triaging around the strategy and the people and the kind of the vision.”

CPP Investments' EPM philosophy

The "completion exposure" philosophy is put into practice through a carefully crafted external portfolio. CPP Investments' external allocations represent around 20% of the fund's total assets, encompassing diverse strategies and geographies. "As part of our private equity efforts, we have a large private equity funds program as well as venture investing," Amy explains. "So, collectively, those two external programs are about 20% of the total fund."

But it's not just about adding different investment flavors to the mix. CPP Investments takes a deliberate approach, meticulously selecting external managers who bring unique capabilities to the table. This also helps keep fund expenses down.

This strategic selection process is guided by a clear understanding of where external expertise can truly add value. "Externally we would probably look at more event-driven, catalyst-driven types of fundamental managers, with probably shorter duration investment horizon, whereas our internal active equities colleagues are looking with the longer horizon, larger positions," Amy points out.

This approach not only diversifies the overall portfolio but also allows CPP Investments to tap into specialized knowledge, gain access to diverse investment strategies, and carefully manage costs. It's a strategic partnership model, leveraging the strengths of both internal and external teams to achieve long-term investment success.

The changing dynamics of the hedge fund industry

The hedge fund world is marked by innovation, disruption, and, as Amy puts it, “a creative destruction element." Over her 20 years in the industry, she's witnessed these shifts firsthand, observing how managers adapt, strategies emerge and fade, and new players reshape the competitive terrain.

One of the most significant trends in recent years has been the rise of multi-manager platforms, often referred to as "pods." These firms have attracted significant assets and talent, offering portfolio managers infrastructure, resources, and often lucrative compensation packages.

However, Amy notes that "the bar is very high for us when it comes to the pods, just because of the pass-through." She says it's difficult to achieve true transparency into the underlying strategies and performance drivers within these complex structures, particularly in a "higher-rate environment where cash is pretty competitive."

Beyond the rise of platforms, Amy also observes a trend toward the "commoditization" of certain hedge fund strategies. This can lead to increased competition, fee pressure, and potentially diminishing returns for investors.

CPP Investments, however, remains agile, constantly evaluating and adapting its approach to manager selection and strategy allocation. As Amy explains, "There are lots of changes all the time, and seemingly, they come in different waves, depending on the market environment and where we’re at."

Building a portfolio for the long term: Manager selection and partnerships

At CPP Investments, the process of building a resilient external portfolio is as much about nurturing relationships as it is about selecting top-performing managers. Amy emphasizes a philosophy she describes as "mile deep, inch wide," prioritizing specialized expertise over broad market coverage. "We really are very deep specialists in the hedge fund field," Amy explains. "And that’s supported by the large team and the global breadth."

This means diving deep into specific strategies, understanding the nuances of different approaches and seeking out managers who are true masters of their craft. "So we look at managers of all kinds, and not just through the emerging manager, even on our core funds, portfolio exposures," Amy says. "Sometimes these are groups that people may not be as familiar with. They’re not necessarily always going to be the household brand name from a hedge fund perspective."

This commitment to specialized expertise extends to CPP Investments' unique approach to emerging managers. Recognizing that the next generation of talent often requires support and capital to flourish, they've established a dedicated emerging manager program, which allows them to invest early in talent.

This program not only helps promising managers get off the ground but also positions CPP Investments to benefit from their potential long-term success. Importantly, CPP Investments structures these partnerships for longevity. "We think of this as investing early in order to secure future capacity rights and early-stage performance," Amy says. "So, it’s very much a complement to the core fund managers in which we invest."

Transparency, meticulous due diligence, and a collaborative approach to portfolio construction are also central to CPP Investments' strategy. They're not just looking for short-term gains but for enduring partnerships built on trust, alignment, and a shared vision for the future.

Navigating volatility and drawdowns

Even with meticulous manager selection and robust portfolio construction, volatility is an inherent part of the investment landscape. Market swings, unexpected events, and periods of underperformance are inevitable.

The key, according to Amy, is to approach these challenges with a calm and considered perspective, guided by a long-term investment horizon. “We’re definitely longer hold investors,” Amy says, describing CPP Investments' approach. "So one way I like to describe it is we’re near-term monitoring. We’re really on top of what’s happening with markets or in the marketplace or with the managers themselves."

This "near-term monitoring" involves staying informed about market trends, manager performance, and potential risks. CPP Investment's team conducts quarterly portfolio reviews, analyzing data and engaging in deep discussions about each manager. However, monitoring doesn't translate to impulsive reactions.

Instead, CPP Investments favors a more deliberate and patient approach, particularly when faced with drawdowns. She acknowledges that while they have moved quickly on occasion, "on balance, we tend to give up more time rather than less for the managers to work out either performance or team issues or strategy, especially [since] some strategies kind of find themselves out of favor."

This commitment to working through challenges, rather than making hasty decisions, reflects a belief in the power of long-term partnerships and a deep understanding of the cyclical nature of markets. It also demonstrates a level of trust in their managers, recognizing that even the most skilled investors can experience periods of underperformance. "We have managers in the program who’ve been in there for over a decade," Amy points out.

The art of enduring partnerships

Building a resilient investment portfolio for the long term requires a strategic blend of vision, expertise, and enduring partnerships. It means embracing a "completion exposure" philosophy, seeking external managers who complement internal capabilities and offer specialized knowledge. It demands a commitment to nurturing emerging talent and recognizing the potential for future growth and innovation. It necessitates a patient, deliberate approach to navigating market volatility, favoring thoughtful analysis and strategic collaboration over impulsive reactions. In a world where short-term gains often overshadow long-term value, a steadfast focus on building strong, aligned partnerships can pave the path to sustainable investment success. True portfolio strength is built on a foundation of enduring relationships.

---

This is based on an episode of Top Traders Unplugged, a bi-weekly podcast with the most interesting and experienced investors, economists, traders and thought leaders in the world. Sign up to our Newsletter or Subscribe on your preferred podcast platform so that you don’t miss out on future episodes.