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Caisse Reports 10% Return for 2009
Submitted by Leo Kolivakis, publisher of Pension Pulse.
Paul Delean of the Montreal Gazette reports that the Caisse de Dépôt reports $11.5 billion gain for 2009:
It didn’t do as well as its peers or as badly as some expected.
Quebec
pension-fund manager La Caisse de Dépôt et Placement du Québec
generated a return from its investments of 10.04 per cent in 2009, a
sub-par number when compared to other Canadian pension funds but a
dramatic turnaround from its catastrophic loss of $40 billion in 2008.
“We
had a lot of issues to deal with at the start of the year. They’re
dealt with. We put the train back on the track. Now we’ve got to get it
up to cruising speed,” said president and CEO Michael Sabia, the former
BCE chief who’ll mark his first full year at the helm next month.
The Caisse ended the year with assets under management of $131.6 billion, up $11.5 billion from a year earlier.
Its
returns lagged its benchmark index by four points, but Sabia said it
actually beat the benchmark in the second half of the year, an
indication the many changes at the institution are having an impact.
All 2009 gains came in the last six months.“We believe that the
worst consequences of the (economic) crisis are behind us,” Sabia said.
“Ultimately, we are building solid foundations for the future, but this
is just the beginning.”.
According to
RBC Dexia Investor Services, the median return for Canadian pension
funds with assets of more than $1 billion was 15.4 per cent in 2009,
though comparative figures were nowhere to be found in the Caisse
documents released at its news conference Thursday. In the past it used
to highlight its performance relative to others, but it now says
short-term comparisons aren’t crucial.
“We’re long-term investors,” Sabia said. “What matters for us and our clients is long-term results.”
Michel
Nadeau, a former top executive of the Caisse who now serves as general
manager of the Institute for Governance of Private and Public
Organizations, said the 2009 results were “a bit disappointing,” but he
doesn’t fault Sabia and his team for the underperformance.
“He
(Sabia) had to complete the cleanup of the stables. He worked hard to
get rid of the derivatives and financial-engineering products. Risk
management has improved with Mr. (Roland) Lescure (the Caisse’s
newly-appointed chief investment officer). Next year will really be his
first full year and the Caisse appears to be on the right track for
2010,” Nadeau said.
Sabia effectively lowered expectations for
2009 in a round of media interviews a month ago, noting the Caisse was
still “in transition” last year and had been underweight in equities
when stocks began their spectacular recovery last March.
It
added to its equity position as the year went on and ended 2009 with
about 34 per cent of its assets in stocks, up from 22 per cent in the
spring.Stocks generated the best
return in its portfolio last year, gaining 31 per cent, paced by
emerging markets (up 50 per cent) and Canadian equities (36 per cent).
The fixed-income portfolio made 5.8 per cent and private-equity group 17.5 per cent.
Real estate was the weak link, plunging 15.8 per cent, with the European and U.S. markets particularly depressed.
Sabia
called 2009 a year of challenges, progress and evolution. He said the
Caisse has withdrawn completely from one of its main trouble spots,
non-Canadian real estate debt, which erased $2.3 billion from its
assets in 2009.
It has also reduced its derivatives exposure by
$15 billion, exited commodities and trimmed operating expenses and
external management fees by 14 per cent or $43 million.
The goal,
Sabia said, is to simplify the investment portfolio and refocus the
Caisse on its proven areas of expertise, which include Canadian stocks,
fixed income, private equity and real estate operations.
“Are we
done? No. Are we in much better shape (than a year ago)? Yes,
tremendously better shape,” Sabia said. “It (2008) will never be a
happy memory, but we’ll at least try to make it a distant one.”
You can read the full press release and following comments on the Caisse's 2009 performance:
• Fact sheet – Returns (PDF)
• Fact sheet – Fixed Income (PDF)
• Fact sheet – Equity Markets (PDF)
• Fact sheet – Private Equity (PDF)
• Fact sheet – Real Estate (PDF)
• Fact sheet – Valuation of Investments (PDF)
I
am actually surprised with the results because while they're subpar,
they weren't as bad as I thought. Just like CPPIB, the money in 2009
came came from riding the monster beta wave. And just like CPPIB and the rest of the pension herd, the Caisse was late to change gears and go long stocks in 2009.
The
Caisse was upfront about this and even provided
this chart in their press release (click on it to enlarge):
In private markets , the Caisse was clear that real estate was very weak:
In
2009, the real estate market saw weakening fundamentals, such as rising
vacancy rates and shrinking investments, against a backdrop of global
economic recession. This environment led to significant decreases in
value, particularly in the U.S. and Europe.Financing conditions
improved throughout the year, but credit spreads remain high by real
estate standards. Within this climate, there were less non-performing
loans in Canada than the U.S., where credit continued to deteriorate.Although
the impact was not as severe in the second half of the year, the real
estate and commercial mortgage loan markets remain fragile.
If you read the Real Estate fact sheet carefully, you'll see that the losses were concentrated in the real estate debt portfolio:
The
return on this portfolio was -20.3%, 28.8% below its benchmark index.
This underperformance is primarily due to participation in third-party
subordinated debt and structured products originated by third parties
outside Canada. The Caisse ceased these activities in August 2009. The
Canadian portion of the portfolio returned -2.0%, while the
international portion yielded -46.5%.
I also noted the following on valuations of private markets:
The
Caisse conducts a complete evaluation of its less liquid investments
semi-annually, on June 30 and December 31. These investments represent
nearly one-third of the Caisse’s net assets. External appraisers and
valuation committees composed of independent experts review the
Caisse's investment valuations.PRIVATE EQUITY
- Investments
whose fair value exceeds a pre-established materiality threshold are
subject to independent valuation committee or external appraiser review.- Nearly 80% of the fair value of the portfolio is reviewed this way.
REAL ESTATE
- Chartered external appraisers certify the fair value of real estate assets.
- 95% of properties are valuated this way.
Judging
by the underperformance relative to benchmarks, you can tell that the
Caisse uses the toughest benchmarks in private markets compared to
their peers. The benchmarks will be available when the annual report is
released next month. It's too bad the Caisse did not release the
benchmarks along with the fact sheets on specialized portfolios.
My only concern with the 2009 performance centers around foreign exchange hedging. Recall what was stated last year, when the Caisse lost 25% in 2008:
The
first factor that explains the variance in relation to large Canadian
pension funds in 2008 is the cost resulting from foreign exchange risk
hedging policy.Hedging is not a currency speculation
activity. It is a means of mitigating risk, which has been in place for
at least 15 years with the objective of mitigating or offsetting an
increase or a decrease in the value of the Caisse’s foreign investments
solely as a result of fluctuations in the Canadian dollar.Currency
hedging is a characteristic of the various investment portfolios
offered to the depositors. The private equity, real estate investments
and hedge funds are 100% hedged. As for equity markets, the U.S. Equity
and Foreign Equity portfolios are partially hedged (an average of 29%
as at September 30, 2008).The cost of hedging was
unusually high in 2008. The decline of the Canadian dollar, which
occurred mainly in October, increased the value of the Caisse’s foreign
investments by $11.3 billion, once converted into Canadian currency.
The currency hedging policy, which is designed to smooth out the
currency effect, incurred a hedging cost of $8.9 billion. This is a
record amount, most of which, 78%, is due to 100% hedging of private
equity and real estate outside Canada.“By adopting a long-term
policy of 100% hedging of private equity and real estate, the Caisse
enables its managers to concentrate on their investment
responsibilities without being concerned about currency risk. This
policy is also consistent with the fact that our depositors’
commitments are in Canadian dollars,” Mr. Perreault explained.The
annual effect of currency hedging was therefore highly unfavourable in
2008. The long-term effect of this measure is neutral. Over 10 years,
including 2008, it is slightly positive.“This factor
undoubtedly explains a good portion of the 2008 variance vis-à-vis
large Canadian pension funds of $1 billion or more, since the Caisse
has a much larger proportion of private equity and real estate outside
Canada, and does more extensive overall hedging,” Mr. Perreault
concluded.
The table below shows the losses from currency hedging in 2008 (click on image to enlarge):
If
the Canadian dollar came roaring back in 2009, you'd expect there to be
favorable gains from currency hedging activities but nothing was
mentioned in Thursday's press release. Why? Did the currency hedging
activities not make money in 2009? If not, why not?
Finally, if you read the press release, you'll see the Caisse bolstered its financials by cutting risk:
Over
the past year, the Caisse strengthened its financial position, reducing
its liabilities by $27.7 billion, including $14.5 billion in
derivatives. Liabilities fell from $66.8 billion to $39.1 billion, a
41.5% decrease.Under a new refinancing program, the
Caisse recently replaced certain short-term debt with $7.2 billion in
longer-term debt, better matching the duration of its financing sources
and uses.In 2009, the Caisse also reduced its operating
expenses and external management fees by $43 million or 13.7% to $271
million in 2009 from $314 million a year ago.
In
addition, improving credit conditions led to $479 million in ABCP
provision reversals, as at December 31, 2009 (renamed asset-backed term
notes – ABTM).
The Caisse's President & CEO, Michael Sabia, ended off by stating:
“In
2009, we simplified and improved the way we work. We now have greater
operational and financial flexibility to execute investment strategies.
In 2010, we plan to vigorously pursue our five strategic priorities,
making our depositors – our clients – our everyday focus. We want to
lay the cornerstone for sustainable, long-term returns, that meet the
needs of our depositors," added Mr. Sabia.
Mr. Sabia and
his team have their work cut out for them. In the coming weeks, their
performance will be compared to that of other large Canadian pension
funds which likely outperformed the Caisse in 2009.
I will be
examining these returns and comparing apples with apples, looking at
benchmarks, especially private market benchmarks where most of the
shenanigans take place. Before you slam the Caisse for underperforming
their peers, I will let you in on a little secret: they got the
toughest private market benchmarks in Canada. There is no free
lunch at the Caisse.
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Anyway all these funds are grasping at straws. They are all too big, chasing the same assets and expecting alternative investments to pay for future benefits.
They still have not grasped that to generate wealth, there needs to be underlying economic assets that are of future value, not ponzi scheme investments and other stuff based on money printing (i.e. credit based "Fonds des Générations") or betting that the other player is wrong (i.e. hedging/derivatives).
One day, soon enough, they'll understand that the equity markets are not deep enough to pay for all the promised benefits. When you've got 30% of your economy that is public and not investable but you're expecting 100% of people to invest in public equities, you're bound to hit a wall.
For example, in Quebec, over 30% of the workforce gets its pay from the government. These are the same employees with superb pensions investing in public equities. Essentially, they are expecting the private side to work their butts off to finance their plush retirements by generating good ROEs. Why should these public servants reap the profits generated by the private side when most on the private side have no pension?
So on top of having the private side pay taxes to pay for the salaries of the publis servants, the private side also works to generate corporate profits so they can make shareholders rich (i.e. the public servants).
They make money by marking up asset values, since they buy whole companies in most cases. With this style of investing it is almost impossible to make money in an economy with a credit crisis, because M&A is reduced and there is no tide to lift the ships.
Claiming a 10% return after a year of record losses is cheating. If you're investing for the long-run Sabia, why not tell us what the long-term return is?
To be fair to Mr. Sabia, he inherited a mess from his predecessor, Henri-Paul Rousseau, who invested billions in what turned out to be illiquid and worthless asset backed commercial paper. Rousseau was a master politician and self-promoter, while Sabia is quiet, shies away from the spotlight and is driven by results without taking stupid risks.
I would take returns from these colossal funds with a grain of salt. These are huge political machines which can be used as a tool for fiscal and social policies.
One of la Caisse's goals is to promote the Quebec economy. Therefore a good chunk of the returns come from Quebec businesses that have been bought up (often from people cashing out... peak value, retirement, etc.)
And this is not including all the other private equity and real estate in their portfolios. And honestly, who knows what these are truly worth when they aren't traded on any market?
Wrong - Caisse's investments in Quebec are peanuts and their first priority is risk-adjusted returns from global investments.
Benchmark weight was 10.2% in 2008. At the end of 2007 it was 9.4% but it dropped to 3.6%. Is it because they took their gains or because they lost? Methinks a 5% loss is not negligible.
Every time they promote Qc (which is part of the mandate) , they seem to lose money. So if the weight is low it is probably because they lost a lot of money. LOL
Remember Steinberg? Do I have to list all their other Qc promotions?
Quebec investments are not peanuts. At the end of 2008, their benchmark portfolio stipulated a weight of 10.2% in Quebec equities.
Including the Qc private equity, their presence in Qc is not negligible.
Furthermore, 37.9% of their portfolio was exposed to "other investments" which include infrastructure, private equity, real estate debt, real estate, hedging, etc.
37.9% with valuations based on appraisals.
Please provide me a link to this assertion. I defy you to provide us with concrete evidence that 10.2% weight in Quebec equities. As for their appraisals, at least they are independent and rigorous, which is more than I can say for the other large shops.
Here:
http://www.lacaisse.com/fr/Rapport%20annuel%202008/RA2008FR_008.jpg
And here:
http://www.lacaisse.com/fr/Rapport_annuel_fr/Pages/Rapportannuel2008.asp...
Quebec Mondial is not Quebec equities and there is no way those figures are as high in 2009.
I was quite disappointed with the tone taken in La Presse this morning, as writers lined up to take shots at the Caisse for a return of "only 10%" (including Pauline Marois with the obligatory political shot at Charest). Only 10%? What is this, a pension fund or a hedge fund? You'd think after everything that's happened in the past few years, people would think twice before chiding institutional money for not chasing inflated return expectations.
The French Quebec Press is merciless and in my opinion, some reporters are pure racists. When Henri-Paul Rousseau was at the helm, they all lauded him as the "brilliant savior". What a joke! Some fringe elements in Quebec's media still believe in the nonsense that only French "Quebecois de souche" should le leading a venerable institution like the Caisse. It's so backward thinking, and totally stupid to think this way in 2010 and yet this parochial mentality pervades far too many elites in Quebec.
Eye Leo, mange un gros crisse de char de marde, espèce de débile. Va donc boire un autre gallon de ton osti de fiat kool-aid, maudit pimp du système d'esclavage moderne...
Un vrai Québécois de souche.
A prime example of Quebec mediocrity! (T'as pas honte mon gros nul?)
This is what pisses me off. Everyone goes along with the concept that the way to make money is to take risks. When a pension plan takes on riskier assets and is rewarded, they all praise how smart they are and applaud. When the risk doesn't pay off, they whine and complain. Either we accept the risks of investing or we play it safe and receive modest returns. I have no sympathy for pension bullies but they are put in a difficult position. The Caisse got stung, took on huge losses and now they are wisely playing it safe to prevent futher potential losses. I wish the folks who are criticical would make up their minds on what strategy they would prefer it take. I'm with you. These are pension plans, not hedge funds. You would think everyone should be acutely aware of the downside to risk taking by now.
Too right.