Wednesday, November 11, 2009

Caisse Lagging its Peers?

I was going to wait for CPPIB to post their quarterly results, but I am going to go ahead and discuss some of the articles that came out on the Caisse today.

Bertrand Marotte of the Globe and Mail reports that Quebec's Caisse lags its peers:
The Caisse de dépôt et placement du Québec will likely lag other major pension funds this year because it missed out on the stock market rebound, says the province's Finance Minister.

“I don't expect the Caisse to outdo the markets this year,” Raymond Bachand said Wednesday in an interview with Radio-Canada television.

“The Caisse was underweight in stocks, and given that stock markets have rebounded considerably, the Caisse's results will certainly not exceed those of competing pension funds or industry peers,” he said.

The comments were made after La Presse reported Wednesday that the Caisse is in line to post a return on investments of about 5 or 6 per cent for 2009, compared with an average increase of 10 to 12 per cent for Canadian pension funds. The article cited unidentified sources.

The Caisse reported a staggering $40-billion loss on its investments last year, equal to a negative return of 25 per cent, compared with an average return of minus 18 per cent for its rivals.

Stung by its sizable exposure to currency and futures contracts, as well as the decimated third-party commercial paper market, the Caisse under new chief Michael Sabia moved to install more stringent risk management systems.

It also made major management changes and did not hire a new chief investment officer until July of this year, months after the big rebound in the stock market.

In August, the Caisse reported that it suffered a difficult first half of the year, with $5.7-billion in writedowns related to risky commercial real estate loans and private equity bets.

The writedowns wiped out the 5 per cent return the Caisse had earned on other investments to June 30, resulting in a “neutral” performance overall up to that date.

Mr. Bachand said he continues to have full confidence in Mr. Sabia and the corrective measures he has taken at the pension fund giant.

The Caisse is expected to report its 2009 results in February.

Bloomberg also reported that the Caisse’s 2009 Return Set to Trail Canadian Funds, adding:

Stock markets have climbed this year amid growing investor optimism that the world economy is poised to emerge from recession. As of the close of trading yesterday, the Dow Jones Industrial Average gained 17 percent this year, while Canada’s benchmark Standard & Poor’s/TSX Composite Index rose 27 percent.

Canadian pension funds earned an average 14 percent on investments in the first nine months of 2009, according to a survey by RBC Dexia Investor Services. Pension funds polled by RBC Dexia manage a combined C$310 billion.

As of the end of 2008, the Caisse had about 22 percent of its net assets invested in stocks, or C$26.4 billion, and 12 percent in private equity. Caisse spokesman Maxime Chagnon didn’t immediately return a message today seeking comment on Bachand’s remarks.

Finally, this evening the CBC reported that the Caisse denies it missed market rebound:

Canada's largest pension fund manager rejected criticism Wednesday that it's lagging behind the rest of the country because it missed out on the strong stock-market rebound.

The Caisse de dépôt et placement du Québec had 34 per cent of its assets in the market at the end of September, compared with 22 per cent at the end of 2008, a spokesman for the Quebec-based manager said.

Maxime Chagnon declined to divulge the Caisse's yield up until Sept. 30 but denied a report in the La Presse newspaper that said it is expected to pull in a five or six per cent return on investment for all of 2009 while other Canadian pension funds are on target for an average of 10 to 12 per cent.

"We have rebuilt our position on the stock markets," Chagnon said of the pension fund manager's approach since the arrival of CEO Michael Sabia in mid-March.

Chagnon said the Caisse transferred $8.5 billion of its fixed-income investments, primarily bonds, into shares between the end of March and the end of September.

In August, the Caisse announced it would revamp its real estate arm and abandon riskier commercial loans after $5.7 billion in losses wiped out other gains during the first half of 2009.

The pension fund manager said $4 billion of the losses were in real estate, including $1.7 billion in other less liquid, riskier, investments.

As of June 30, it also lost $1.3 billion from private equity and $400 million in asset-backed commercial paper.

Chagnon also brushed off La Presse's argument that Sabia's tighter risk management style is to blame for the losses.

Here are my comments. I read the article in La Presse (Caisse delivers mediocre results in 2009) and it was pathetic. This is a perfect example of sloppy reporting which totally distorts what is really going on at the Caisse.

The article cites Mr. Sabia's focus on risk management as the reason behind its "lagging performance". True, Mr. Sabia is focusing on risk. But what the article neglects to mention is that the Caisse is focusing on risk-adjusted returns and looking carefully at how all their internal and external portfolio managers are correlated, stress-testing their portfolios for liquidity events.

Mr. Sabia is also cutting risk in private markets. It's hardly surprising to see the bloated private equity team being trimmed down. You can't pay people if they're not delivering the results. They're regrouping and focusing their attention on making money without taking stupid risks.

As far as overall results, I don't know how the Caisse will perform relative to its peers, nor do I really care. In order to properly compare pension funds' performance, we need transparency in benchmarks and risk budgets.

I've said it before and I'll say it again, there is this parochial mentality in some segments of Quebec's establishment that is just anachronistic and self-destructive. I was there when Quebec's media made a huge splash about Henri-Paul Rousseau and how he was going to "save the Caisse". The "savior" ended up getting roasted at Quebec's pension hearings.

What's truly mediocre in Quebec is the media's pathetic coverage of the Caisse under Michael Sabia. If he isn't having second thoughts, it means he's ready to deliver on his promise and deal with his critics, which includes Quebec's media mafia.

I wish him all the best. He's going to need nerves of steele to put up with all the bullshit they're going to throw his way.

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