The Rise of Total Portfolio Approach - 20

CPP Total Portfolio Investment Framework
Implementing Factor Investing in a
Total Portfolio Context
CPP Investments' Total Portfolio Investment Framework
(TPIF) is the realisation of our Total Portfolio
Approach, reflecting the full scope of our investment
activity, from how we assess plan sustainability to
how we manage the portfolio on a day-to-day basis.
Underpinning these components is our factor view of
the portfolio. At a high-level, the TPIF framework consists
of the following components:
Setting Risk Targets
The foundation of investment strategy for any portfolio
is to determine a prudent and appropriate market risk
appetite. We start our process by estimating the level
of market risk that optimises CPP Investments' contribution
to the long-term sustainability of the Canada
Pension Plan. Following each triennial review conducted
by the Office of the Chief Actuary (OCA) of Canada, we
use information contained in the OCA's Actuarial Report
along with our own internal risk and return expectations
to estimate and express this level of market risk.
Set Exposure Targets
As previously discussed, we have defined several key
return-risk factors that are relatively independent of
each other but underlie the returns of many types of
investments. Once we have determined our targeted
level of market risk, the next step in our framework
involves determining the mix of these factor exposures
that maximises risk-adjusted return over a long
horizon and is robust to different macroeconomic environments.
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Set
Strategy Targets
Once we have determined the broad factor exposures
we wish to target, we must translate these into the
actual building blocks of our portfolio, our set of investment
strategies. To this end, we model and map
our investment strategies onto our factor set, and
these representations are then consistently used
throughout our TPIF. For example, real assets such as
property and infrastructure investments have common
exposure to both economic growth and rates, in
addition to their own specific attributes. Private and
public investments may appear to be fundamentally
similar, but their liquidity profile is materially different,
as typically their internal financial leverage or
debt levels differ. Debt securities carry a wide range
of durations and credit risk. Equities vary in their geographic,
sector, and financial leverage exposures. Our
modeling captures these varying characteristics.
In this stage of the process, we also recognise the additional
expected risk and returns of active management.
The result is a portfolio of investment strategies that delivers
the best portfolio at our targeted level of risk that
considers the factor exposure delivery of our investment
strategies, their additional return contribution due to active
management, and organisational constraints and
preferences around leverage and liquidity.
Portfolio Execution: The Balancing Portfolio
and Security Selection
The final steps in our framework draw together our
strategic allocation and our day-to-day management
of the portfolio. Using our factor lens, we can analyse
The Rise of Total Portfolio Approach

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