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Caisse on the Right Path?
I
haven't discussed the Caisse in a while but Thursday is Ste-Jean
Baptiste, a holiday here in Quebec, so I thought I would go over a
couple stories that appeared lately.
First, the trash media
coverage. The CBC reports, Caisse
PR chief's $355K pay too rich for PQ:
The
head of the public relations department at Quebec's largest pension
fund is paid $355,000 a year, plus benefits, and the opposition Parti
Québécois thinks that is just too much.
But the Caisse de
dépôt et placement du Québec defends paying that amount, saying
Denis Couture could make more money elsewhere and they need his
experience to help rebuild the fund's reputation after it lost $40
billion in 2008.
PQ spokesman
Jean-Martin Aussant said Caisse management needs to look at why its
communications department has three employees.
"I think they
should really look seriously into that division and ask themselves if
they really need that many people and such high salaries as well,"
Aussant said. But he fell just short of calling for Couture's
resignation.
"I think they have too many people in the public
relations and media and communications department at la Caisse,"
he said.
"They don't need good communications. They need good
management and good choices in terms of investments. And I think — in
this context of very strict public finances, when we're getting tax
rates that are being higher — I think this decision is a clear lack of
judgment," he said.
Aussant said he would like to see more
supervision of the Caisse de dépôt by the government. But
Liberal Premier Jean Charest said it is an independent institution.
He said the pension fund has an administrative board, whose job is
to decide if Couture's salary is a good idea.
Between
you, me, and the lamppost, I don't think anyone running a public
relations department in Quebec should be paid as much as an orthopedic
or cardiovascular surgeon in this province (or more than my
neurologists!).
Having said this, the Parti Québécois is once
again politicizing the Caisse. Jean-Martin Aussant worked with me at
another major pension fund in Montreal. He knows better than advocating
more government supervision of the Caisse. (As if more government
supervision would have prevented the Caisse's
$40 billion train wreck. It wouldn't have because they were all
convinced that they were managing risk, including liquidity risk
appropriately).
If you really want to know what led to that
disaster, you have to ask yourself why wasn't there clear segregation of
duties between investment professionals and risk professionals. When
the head of risk becomes the CEO, putting his boys in charge of
investments, it's a disaster waiting to happen.
The same goes
when there is no clear segregation of duties between finance and
investment departments. I once saw a senior investment officer at a
pension fund I worked for (not the Caisse) become interim CFO. It wasn't
for long, roughly six months, but even a day is too long. Can you
imagine a senior investment officer also running the team which is
suppose to be independently checking the way investment professionals
value their investments? Another governance blunder, but I don't blame
him, rather the Board for accepting such a silly arrangement.
Getting
back to the Caisse, a lot has changed since the disaster of 2008. Karen
Mazurkewich of the National Post reports, Caisse
on the right path:
For the past 15 months,
Michael Sabia, chief executive of Caisse de depot et placement du
Quebec, has had his hands full cleaning up the mess left by his
predecessor Henri-Paul Rousseau. Not only was there a tarnished image
to fix, but Mr. Sabia's been busy cleaning up its balance sheet
following the nearly $40-billion loss the Caisse suffered in 2008.
But if a series of recent debt offerings --
most recently in Europe--are any indication, it appears that things are
looking up for the institution that manages most of Quebec's public
sector pensions.
Although the bond issuance almost disappeared
after the sovereign crisis, CDP Financial, a subsidiary of the Caisse,
has successfully launched a program to refinance roughly $8-billion of
its debt. In addition to making a US$5-billion offering in November,
and a $2-billion one in January, the institution will complete a
750-million euro ($946-million) offering at an "attractive" coupon rate
of 3.5% later this week.
"It's recognition by the market of some
of the things [the Caisse] is doing in terms of simplifying the types
of securities we use ... lowering our leverage levels, [and] the
dramatic improvement in liquidity," Mr. Sabia said.
That and the
fact that "there's widespread recognition that Quebec and Canada
weathered the economic storm better than most developed countries," he
added.
The Caisse's debt offerings
were launched as a new means to reduce risk, particularly within the
Caisse's real estate portfolio. In the past, the Caisse used money
borrowed between 60 to 120 days to finance assets that had investment
time-lines of seven years or more, Mr. Sabia said.
"We weren't matching our sources of
financing with our use of financing," he said.
Mr. Sabia doesn't
want a repeat of what happened during the worst days of the financial
crisis when the markets were closed, and "we exposed ourselves to a
huge refinancing risk," he added.
By
issuing debt offerings in the three markets where the Caisse has
substantial real estate holdings, the institution is hoping to avoid
risk related to currency conversions. Now the cash generated by real
estate holdings will be used to pay off debt in the local markets.
The
debt offerings are only one pillar of the many changes Mr. Sabia is
overseeing. In fact, Mr. Sabia has made a management sweep. In addition
to hiring a new chief economist and new chief of investment, the
institution is on the verge of hiring a new chief financial officer and
head of risk.
"You need fresh eyes,
fresh perspectives and ideas, and so far that's gone well," he said.
Despite
the morale problem he faced when joining the Caisse in March 2009, Mr.
Sabia was surprised at the remarkable openness of the employees.
"That's
one of the reasons we were able to change so fast," he said.
"Motivating
those people, reigniting their pride in what they do ... that's a top,
top priority," he said.
Motivation is the top priority, and if I can be frank with Mr. Sabia,
more needs to be done to motivate the troops. It won't happen
overnight, it isn't going to be easy, especially in these volatile
markets, but the focus has to be on motivating employees so they feel
engaged and inspired to come into work ready to deliver and contribute
positively.
A lot of that motivation is a cultural issue
that permeates many levels, but the tone has to be set at the top. Mr.
Sabia,
his new CIO, Roland Lescure, and other senior managers have to
figure out a way to lift the morale at the Caisse. It's a lot better
than a couple of years ago, but nowhere near where it should be (Hint: It's not just about bonuses!)
But
for all the naysayers and skeptics who thought Michael Sabia wasn't up
for the job of running the Caisse, he has proven all of you wrong. And
I'm not just saying that to get on his good side. It's not going to help
me land a job at the Caisse. I'm saying it because I believe it. Mr.
Sabia has a reputation for being a tough boss. He expects a lot from his
employees but he also expects a lot from himself. I have personally
caught him working very late at night on more than one occasion.
Finally, take the time to read Mr. Sabia's recent
speech to the Canadian Club in Montreal. It's an excellent speech
which covers many topics, including risk management, how the global
economic order is shifting and how the Caisse is positioning itself to
capitalize on new opportunities. From the looks of things, the Caisse is
on the right path (I would, however, like to see the Caisse start
focusing more on idea
generation and investments and a little less on risk management).
Let me end by taking this
opportunity to wish all Quebecers a Happy St-Jean Baptiste. Bonne Fête Nationale!
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Leo, that speech really sucked. I think Chumpawumpa wrote it.
Leo just curious to know why so many execs at CDP have been on sick leave, resignations, etc.... With new style of management i see some oldies leaving ship but remember that Sabia has absolutely zero experience in the penfund business. This guy can take down this ship real fast, as i hear that the new risk parameters are even more Beta skewed than before! Look out below!
Very few execs have been on sick leave or have resigned. A few were fired, and rightly so, and a few others maybe saw the writing on the wall. Sabia doesn't have pension fund experience, but he is smart enough to learn quickly and surrounds himself with knowledgeable people who know what they're doing. I think he's focusing a bit too much on risk, but he needs to make sure they're prepared the next time markets get rocked. As for taking down the ship, if they survived 2008, they'll survive any other crisis. $40 billion evaporated...$40 billion...and the ship didn't go down!
If Caisse's macro view is overly optimistic and goes wrong (highly likely in a political environment), then even good management cannot avert another train wreck.
Mr Sabia was the previous CEO of Bell Canada and he literally destroyed this company by decentralizing customer service & other services to India (english clients) & Morocco (french clients). This decentralization is a total flop & nightmare as i have seen first hand as to the quality of customer service due to this ridiculous change.
This guy will bring the Caisse to the ground. God help those poor quebecers.
Jake, no offense, but Bell Canada was fucked way before Sabia got to the helm.
That EURO buying support has returned ...
http://stockmarket618.wordpress.com
http://www.zerohedge.com/forum/latest-market-outlook-1
The Caisse is a function of political masters. If they make money it's by accident not by plan.
exportbank,
You're being way too harsh. The Caisse has some of the best pension fund managers in the world, in all asset classes. Sure, politics is a concern, especially here in Quebec, but don't be fooled into thinking that politics dictates what's going on at the Caisse. Sabia is a result-oriented, no nonsense type of guy. Unlike his predecessors, he doesn't need the political limelight. He was hired for a specific job: clean house and put the Caisse back on track. I'm pretty impressed with what he's achieved so far, but he knows he has more to do. The real test for all these large pension funds is how they perform when markets head south again.
Leo... thank you for your opposing view.
Every pensioner in Quebec would be better off today if the Caisse had never existed and the funds were simply put into CD's instead. My comments are not meant to be harsh (I reserve that for Tenured Professor's) against any individual but it seems to me that the pension fund management business is not related to the best interests of the plan member's but more of an ego contest over who can make the most by blowing the most. Run the numbers over any ten year time-frame and compare the results against a the result a Certificate of Deposit would have delivered.
Here's one for you - in the public vs. private sector - about 20% of the broader population works in the public sector but will receive about 50% of all pension income over the next 20-years.
Leo - keep the light shining on the pension issue - that and health care will sink the ship.
four letters for Caisse de dépôt: A-B-C-P
12 billion plus baby