Investment objectives we are committed to achieving

PSP Investments’ mandate is described in Section 4 of the Public Sector Pension Investment Board Act:

1. To manage funds in the best interests of contributors and beneficiaries under the Plans; and
2. To maximize returns without undue risk of loss, having regard to the funding, policies and requirements of the Plans and the ability of those Plans to meet their financial obligations.

Based on these statutory objectives, PSP Investments’ Board of Directors established the following investment objectives:

1. Absolute Performance: Achieve a return (net of expenses) at least equal to the actuarial rate of return as used by the Chief Actuary of Canada.
2. Relative Performance: Achieve a target return exceeding the Policy Portfolio return and operating expenses.

An asset mix policy aligned with the Plans’ liabilities

The ultimate objective of any defined-benefit (DB) plan is to achieve and maintain a positive funded status - i.e. the difference between the market value of assets and the present value of liabilities - at the lowest possible cost to the plan sponsor. PSP Investments works closely with the Office of the Chief Actuary of Canada in order to better understand the liability structure of the four pension plans whose contributions it is responsible for investing. Among the key conclusions in that regard, it was established that:

1. The four plans are the youngest in Canada - and among the youngest in the world. They therefore exhibit specific features not attributable to more mature plans. The duration of their liabilities is around 20 years, compared with the average 12 - 15 year duration of typical and more mature DB plans in Canada, the United States and Europe;
2. Net contributions are expected to remain positive for the next two decades.

Such lengthy duration drives the need for inclusion in the portfolio of long-term assets with bond-like cash-flow structure, which will respond symmetrically to movements in real interest rates. Taking these points into consideration, the Board of Directors has approved an asset mix policy described as the 'Policy Portfolio' in PSP Investments' Statement of Investment Policies, Standards and Procedures (SIP&P). This document shows the market exposure of the various asset classes in the approved weightings. The management team at PSP Investments aims to achieve this market exposure by using both internal and external managers, investing in both physical and synthetic assets and employing both active and passive strategies.

An active management strategy that adds value

PSP Investments has an active management strategy designed to add value on top of Policy Portfolio returns, in accordance with an active risk budget - approved by the Board of Directors - which management can allocate to active strategies. Within this framework, management works to optimize its "roster" of active strategies, in order to meet the value-added investment objectives.

Active management activities involve both internal and external managers and are not limited to the asset classes of the Policy Portfolio. They include mandates in other spheres such as currency management and tactical asset allocation across countries and asset classes.

A focus on measuring and managing investment risk

A critical aspect of the revised asset mix policy and active management strategy is PSP Investments' focus on measuring and managing investment risk. A fundamental law in investing is that the search for returns necessarily involves taking on some level of risk. In this context, risk is not something to be avoided. Rather, it is something to be managed, intelligently and efficiently, in the quest for superior investment performance.

The risk management philosophy at PSP Investments has evolved constantly since the organization's inception. A rigorous process is in place, overseen by a dedicated team of professionals and supported by the appropriate systems. Risk is measured at all levels, from individual stocks up to total PSP Investments assets. The diversification benefits of investment in different asset classes and investment styles are also quantified as are credit risks incurred in both public and private market investments. By following the risk management process, PSP Investments is able to optimize its investment structure with a view to maximizing returns for a given level of risk.