Monday, January 25, 2010

New Focus at the Caisse?

CBC reports that Sabia lays out Caisse turnaround plan:

The head of Quebec's public pension fund vowed a return to "plain old common sense" in its investments Monday as it tries to come back from an underwhelming investment performance.

Michael Sabia, who has been president and CEO of the Caisse de dépôt et placement du Québec since last March, set out a list of priorities the fund aims to meet in the next 18 months.

In a letter published Monday on the Caisse's website, Sabia said he wanted to provide Quebecers with a progress update on his plans to revamp the Caisse's operations and improve its financial results.

"The Caisse has just lived through the most difficult time in its history," Sabia wrote. "The economic and financial environment has changed radically. As a result, we have had to make important changes."

Sabia, previously chief executive at BCE Inc., said the Caisse will now invest only in financial instruments that it understands and has mastered. In recent years, the pension fund lost billions on asset-backed commercial paper and other securities that turned out to be riskier than expected.

The Caisse reported a $40-billion loss in 2008, a drop of 25 per cent in the value of its assets to $120.1 billion. That compared with an average return of minus 18 per cent for its rivals during the same timeframe.

Sabia said the Caisse needs solid financial foundations that can weather market turbulence, and it has doubled its liquidity and reduced its financial exposures.

"Some basic principles have guided our work. They are based on the value of `plain old common sense' — simplicity, rigour, performance and a focus on the client," he wrote. "It is on the basis of these principles that we are building solid foundations for our long-term success."

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

Official data for the full year has yet to be released, but an association representing public-sector retirees has sounded the alarm over the Caisse's performance in the first 11 months of 2009, saying it compares poorly with other Canadian pension funds.

Slack 2009 return

In a recent letter published on the website of the Association Québécoise des retraité(e)s des secteurs public et parapublic, the group said it has obtained a document that indicates the Caisse will have a total return of six to seven per cent on funds it managed in 2009.

"Once again this year, it would seem the Caisse will not do as well as others," the letter said.

The Caisse has drawn fire for sitting on the sidelines during the stock market rebound which has driven the benchmark TSX index up by roughly 50 per cent from its trough in March. The Caisse did not hire a new chief investment officer until July, months after the market revival had begun.

"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," Quebec Finance Minister Raymond Bachand acknowledged in November.

Sabia's letter downplays those concerns, saying the Caisse has rebalanced its investment portfolio by progressively buying $9 billion in equities.

And instead of withholding results until the end of the fiscal year as it currently does, from now on the Caisse will issue an overview of its investment returns at mid-year, Sabia said.

Mr. Sabia has his work cut out for him as his clients remain skeptical of the Caisse's new focus:

An association representing retired public employees has complained about the returns generated by the Caisse for the first 11 months of 2009, saying they compare poorly with other forecasted returns from other Canadian pension funds.

Association president Madeleine Michaud said she's not entirely satisfied with Sabia's public declaration.

"We are still skeptical about the change in direction for the Caisse," said Michaud of the Association quebecoise des retraites des secteurs public et parapublic based in Quebec City.

As for Sabia's pledge to return to the basics, Michaud also questioned why it's being stressed at this time.

"Plain old common sense, it still has its place. But why is it being done now?" she asked.

"Yes, the intentions are good, yes it's interesting. But will it really translate to concrete, good, satisfactory results. I doubt it because we don't know what happened."

Michaud said she would like some representation from her association on the Caisse's board and a full public inquiry into how the Caisse lost $40 billion in 2008.

A recent letter published on the association's website expressed concern about the Caisse's expected returns.

The group said it obtained a document under access to information laws that indicates the Caisse will have a total return of six to seven per cent on funds it managed in 2009.

"Once again this year, it would seem the Caisse will not do as well as others (pension managers)," the letter said.

Like other fund managers, the Caisse was hurt by the global financial crisis, though it took the biggest hit from the collapse of Canada's market for third-party asset-backed commercial paper in August 2007.

It remains to be seen how well the Caisse did relative to its peers in 2009, but it's unlikely to have performed as well. The Toronto Sun reports that pensions claw back to pre-crisis levels:

Canadian pension plans recouped most of their recession-time losses last year, according to a new RBC Dexia Investor Services study.

Improving global equity markets helped boost pension assets in the fourth quarter, the survey released Thursday found.

Pension plans in this country earned 1.9% in the final three months of the year, bringing year-end results to 16.2%.

“The speed of the rally, particularly in the second and third quarters caught pensions by surprise, as many remained under-exposed to equities," said Don McDougall, director of Advisory Services for RBC Dexia.

"Then again, after last year's brutal 15.9 % drop, it is reassuring to see pension plans claw back to a pre-crisis state."

Helping matters was the S&P/TSX Composite Index’s outstanding performance in 2009. The index posted its best gains in three decades last year, soaring 35.1%.

Foreign markets also made a comeback last year, lifting world indexes 25.7%.

"Unfortunately for unhedged Canadian-based pensions, a stronger loonie against most world currencies slashed the foreign equity returns to 12.6%,” McDougall said.

Domestic bonds also outperformed the DEX Universe index by 2.5%, paving the way for a 7.9% advance in Canadian pensions.

RBC Dexia Investor Services offers a range of investor products including Canadian pension funds. The company, equally owned by RBC and Dexia, manages $2.3 trillion US in client assets worldwide.

I doubt any pension plan clawed back to pre-crisis levels (do the math), but it's certainly true that the sharp rally in global equities provided much needed relief to pension plans that were reeling after suffering devastating losses in 2008.

As for the new focus at the Caisse, I went over Mr. Sabia's open letter and honed in on the fourth and fifth priorities:

And we will continue improving our risk management capabilities: our fourth priority. To be clear: risk management is not about avoiding risks — risk is an inherent part of investing. Instead, we believe risk management is about understanding the risks we take and chosing them with judgment and precision. When we can do that, we can take and manage the risks that are necessary to generate the returns expected by our depositors over the long haul.

Our fifth priority: changing the culture of the Caisse — changing how we work. While this starts with understanding the needs of the client, it touches many other things: having our portfolio managers balance returns and risks in all their decisions; putting an emphasis on collaboration and teamwork; setting high standards; and perhaps most important, understanding that our expertise is at the service of our depositors and of Québec.

Risk management is about understanding all risks, including investment, operational, legal and reputation risks. It's funny how it took a crisis to refocus on risk management when the reality is that pension funds should be taking more risk at the market bottom and playing closer attention to it when everyone seems to be shooting the lights out.

As for changing the culture at the Caisse, it will never happen as long as the same individuals are running certain departments (leadership risk). Piecemeal changes won't cut it; the Caisse needs wholesale changes and a lot more diversity. People need to come into work every single day with one and only one thing on their minds: how are we going to work as a team and make money?

The rest is just bullshit. Trust me, I've been around long enough and seen how a few ruthless egos can destroy the culture at these large pension funds. And if anyone tells you otherwise, they're lying to your face.

[Hint: Is information being properly shared among private and public markets? What about information from external hedge fund/ private market managers and private research outfits? Is that being properly shared with investment staff to prepare for the challenges ahead? If not, there is a serious gap.]

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