Canada’s CPP hits a record in India. But loses flavour for emerging markets

“As of 31 March 2024, our total assets in India reached C$28 billion ( ₹1.7 trillion or $20 billion),” the firm’s spokesperson told Mint, also indicating this was the fund’s highest ever assets under management (AUM) recorded for India. In FY23, its India AUM stood at C$20 billion.

Globally, the Canadian pension fund manager’s AUM increased to C$632 billion in FY24 from C$570 billion in the previous year, driven by strong performances across public equities, private equity, and sectors like infrastructure and energy.

Despite these gains, CPP Investments has reduced its allocation targets for emerging markets, which includes India.

The fund explained in its latest annual report that it observed an “overall weaker performance of emerging markets compared to developed markets” and a downturn in real estate assets. It attributed some of the lacklustre performance in emerging markets also to ongoing pandemic policies in China and currency depreciations.

It is not clear how its recent change in stance will reflect in CPP Investment’s investments into India going forward, although the firm said in a statement that India remained “an important market”.

As of April, foreign portfolio investors held an estimated $857 billion assets under custody in India, according to data provided by National Securities Depository Ltd. Of this, pension fund managers held around $64 billion in assets under custody.

Assets under custody are mainly meant for execution-related or safekeeping purposes, and are not considered assets under management.

Strategic realignment

“As part of our review of the strategic portfolios over the past year, we revisited our appetite for emerging markets and adjusted our long-term geographic allocations to reflect updated views,” CPP Investments said in its FY24 annual report published earlier in May.

“We also continue to diversify the strategic portfolios, making further use of leverage to add fixed income assets and reduce concentration in equities,” it added.

As part of the firm’s allocation review, emerging markets will now receive 16% of the base CPP fund and 11% from its additional CPP fund, a decrease from the one-third target set for 2025.

Canadians contribute annually to the base CPP Fund and have the option of making additional contributions to the firm’s extra CPP Fund. Following these contributions, CPP Investments deploys the funds globally, aiming to secure Canadian pension benefits through diversified investments

India AUM and investments

In FY24, a significant part of the Canadian firm’s new investments in India went into infrastructure, specifically into existing portfolio firms.

Notably, the fund invested ₹18.2 billion (C$297 million or $216 million) in the units of National Highways Infra Trust, an infrastructure investment trust sponsored by the National Highways Authority of India, bringing its total investment in the Trust to $447 million, an asset it has invested in since 2021, where it holds 25% of the units.

Through the year, it also invested an additional C$540 million in Interise Trust (formerly known as IndInfravit Trust), CPP’s Indian toll roads portfolio company, in which it now owns 60.8% stake. The investment would help fund the acquisition of four operating road concessions, it said.

CPP did not make direct private equity bets or co-investment bets in India in FY24. On the other hand, it made two new fund investments in FY24.

It invested $100 million in Kedaara Capital and said that it has committed $300 million into an “India-based asset manager that focuses on structured and private credit opportunities in the country”, according to its annual report.

Two people with knowledge of the matter said that the $300 million commitment was for Kotak’s Strategic Situations Fund II IFSC, which plans to raise a total corpus of $1.6 billion. Kotak announced in March 2023 that it had already raised $1.25 billion.

Kotak and CPP did not specifically comment on this investment, though the pension fund manager in the past has said that it is keen to improve its credit allocations in India and globally.

“India is one of the most important markets for us and we continue to invest across asset classes and sectors,” the firm’s spokesperson told Mint, without offering specifics.

From emerging to developed markets

CPP’s shift in exposure to emerging markets was largely a decision taken in FY24, according to its latest annual report.

Back in FY23, the fund manager had said it would increase its engagement with “select emerging markets”, anticipating that these markets would constitute 33% of its base CPP fund and 19% of its additional CPP Fund within the next five years.

However, CPP has now recalibrated its strategy towards developed markets, as reflected in the new projections set forth in the latest annual report. The fund plans to boost its long-term allocation to developed markets to 77% over the next five years, up sharply from the 59% target set in FY23.

This strategic pivot is likely the result of the more favourable returns observed in developed markets, particularly the US, where CPP reported a net return of 9.4% in FY24 and an average return of 8.9% over the past five years.

In contrast, its returns in the Asia Pacific region were modest, with a 1-year return of 0.1% and a 5-year return of 4.6%, adversely affected by underperformance in China due to pandemic-related restrictions.

“Our exposure to emerging markets was 20% of net assets in FY24, compared to 22% at the end of FY23. This decline follows the transition towards our revised long term strategic portfolio emerging markets exposure of 16%,” the firm said. It is invested in Asia Pacific and Latin American through its emerging markets portfolio.

In India, CPP’s commitment remains robust, with direct investments in a variety of sectors. Its portfolio includes stakes in social commerce platform Daily Hunt, education providers Byju’s and Eruditus, insurer Acko Technology, and logistics company Delhivery.

The fund also holds investments in Sajjan India, non-bank financier Kogta, and Kotak Mahindra Bank, demonstrating its diversified approach to capital deployment in one of its key emerging markets.