Thursday, February 28, 2013

Caisse Gains 9.6% in 2012

Nicolas Van Praet of the National Post reports, Caisse racks up 9.6% return despite slowing economy:
The Caisse du dépôt et placement du Québec tallied a 9.6% return for its depositors last year as the global economy slowed, building more credibility for Caisse chief executive Michael Sabia in his effort to put the institution on solid footing and beat back critics.

Riding a strong performance in its stock holdings, which generated $8.8-billion in net earnings including roughly one quarter from its private equity portfolio, Canada’s second largest pension fund manager slightly beat the median 9.4% return for the country’s defined benefit pensions as estimated by RBC Investor & Treasury Services.

Net assets grew to $176.2-billion as both returns and deposits increased.

“[Equity markets] were buoyed by the actions of central banks everywhere” last year, Caisse chief investment officer Roland Lescure told reporters during a lockup to discuss the results. “It was like an oxygen ball,” for foreign-based banks in particular, he said.

Mr. Sabia, who was brought in by the former provincial Liberals to help reverse a crushing $40-billion loss for the Caisse in 2008, has managed to build $56.1-billion worth of new wealth since his arrival by simplifying investments, reducing leverage and maintaining a high level of cash. The pension fund plans to increase private equity investments, notably real estate, by $10-billion to $12-billion by the end of 2014.

Mr. Sabia has also managed to keep the new Parti Québécois government on side, largely by ramping up investments in Quebec-based companies.

Premier Pauline Marois has vowed to tighten the Caisse’s legally-instituted mandate in order to heighten its nation-building role, but the pension fund seems to be doing that on its own.

Mr. Sabia has spent $8.3-billion in new money on Quebec-based investments since 2009, and $2.9-billion last year alone, highlighted by a $1-billion investment in CGI Group. Plans for future Quebec investments include a new railway to serve the Labrador iron ore mining trough, together with Canadian National Railway Co (correction: the CNR project was abandoned).

Roughly 27% of the Caisse total assets are Quebec-based, representing $47.1-billion (correction: 22% of Caisse's total assets are in Quebec; reporter used net assets).

“We don’t have a quota for our Quebec investments,” Caisse executive vice-president Bernard Morency told reporters Wednesday. “We approach it as the opportunities present themselves.”

Mr. Lescure noted that global growth ran out of steam in 2012 as emerging markets slowed, Europe sustained continued recession and the United States staged a timid recovery. Canada and Quebec also slowed while the private sector recovered in the United States and an upturn began in China and certain emerging markets. Positive movement in those two areas, combined with stronger action by European policy makers to shore up the euro, allowed equity markets to finish the year on a stronger footing, he said.

The Caisse’s Canadian equity portfolio returned 6.6%, hampered by weakness in materials and pressure on Canada’s energy producers. The Caisse is heavily weighted in energy and materials investments, with stakes in companies such as Enbridge and Suncor.

There was a big gap in investment results between the Caisse’s different asset classes, Mr. Morency noted, which means different depositors also saw different returns as their portfolio mixes are different. At the low end, fixed income returned only 3.9% as interest income from bonds remain weak by historical standards. Towards the higher end, real estate returned 11.1% (correction: inflation-sensitive assets returned 11.1% and real estate 12.4%).

The pension fund controls real estate company Ivanhoe Cambridge, which has been rejigging its portfolio of assets over the past five years to focus on shopping centres, office buildings and residential complexes. Ivanhoe has sold 40% of its hotel assets so far. Plans to sell the entire portfolio of hotels are being delayed by weak market values at the moment, Ivanhoe president Daniel Fournier said.

“It will take a few more years” to sell them all, Mr. Fournier said. “We’ll be very patient.”
You can read the Caisse's highlights here and get all the details in the press release the Caisse issued here. I will focus on the press release as it contains the details on their performance. The full annual report comes out in April.

My overall impression was that 2012 results were good but not spectacular. They slightly underperformed OMERS, which gained 10% in 2012, and marginally beat the median 9.4% return for the country’s defined benefit pensions as estimated by RBC Investor & Treasury Services.

Once again, the bulk of the gains came from real estate and private equity, returning 12.4% and 13.6% respectively. A full breakdown of the results by specialized investment portfolio is available below (click on image):


A few things to note just looking at the returns of specialized portfolios:
  • First, Fixed Income outperformed its benchmark by 70 basis points (3.9% vs 3.2%), which is excellent.
  • Inflation-sensitive investments gained 11.1% led by Real Estate (12.4%) and then Infrastructure (8.7%). I spoke to a reporter yesterday and told him the Caisse has the best real estate team in Canada, which says a lot because there are other excellent teams.
  • Nonetheless, Real Estate underperformed its benchmark by 80 basis points and Infrastructure underperformed its benchmark by a whopping 6.3%. This tells me their benchmarks in these portfolios are extremely tough to beat (go back to read an older comment, It's All About Benchmarks, Stupid!)
  • Equities returned 12.2% led by gains in Private Equity (13.6%). But Private Equity also underperformed its benchmark by 50 basis points. Again, no free lunch in the Caisse's private market benchmarks.
  • In public markets, Global Equity slightly outperformed its benchmark (14% vs 13.6%) but Canadian Equity underperformed its benchmark (6.6% vs 7.7%) due to its overweight position in materials and energy.
  • Hedge Funds outperformed by 70 basis points (4.7% vs 4%)
  • I'm not sure of the $422M loss in Asset Allocation. Think this is an overlay TAA strategy but details were not provided in the press release.
  • The ABTN portfolio (old asset-backed commercial paper where they lost billions) was revalued up, adding $1.7B to overall results. Stéphane Rolland of  Les Affaires noted that without the gains in ABTN, the Caisse would have underperformed its overall benchmark. He also noted that the Caisse underperformed the median 9.9% return for the country’s defined benefit pensions managing over $1 billion as estimated by RBC Investor & Treasury Services.
That last point on the ABTN portfolio is contentious because cynics will claim it's a valuation call, not an actual mark-to-market gain. But the truth is these assets have gained in value since getting crushed during the crisis. Moreover, the Caisse retains an independent external firm to review the data and methodology used to establish the fair value of the ABTNs.

The Caisse also emphasized long-term results since revamping their portfolios in 2009:
In the first half of 2009, the Caisse reorganized its operations. In particular, it completed an extensive overhaul of its portfolio offering and risk management and it also repositioned the portfolios in the real estate sector. Since making these major changes, the Caisse has achieved an annualized return of 10.7%, equivalent to net investment results of $50.7 billion.
All true but I think they should have provided results relative to benchmark over a one, five and ten year period just like OMERS did. This is disappointing but I understand why they want to place the emphasis on results post-2009 after they implemented these changes (note: Caisse's Communications informed me that the 10-year return including 2008 was 6.7%, which is in line with depositors' target return).

One thing the Caisse did state is that operating expenses slightly declined in 2012:
In 2012, the Caisse continued to improve its efficiency and pay close attention to its operating expenses. Operating expenses, including external management fees, totalled $295 million in 2012. The ratio of expenses to average net assets was 17.9 basis points (18.0 basis points in 2011) and continues to place the Caisse among the leaders in its management category
This is a point most reporters completely ignore but it's crucial to understand overall performance by tracking the ratio of expenses to average net assets. The Caisse uses its clout to lower external fees and lowers costs by engaging in direct investments and co-investments.

Also, during 2012, the Caisse's financial position remained solid. As at December 31, the Caisse's available liquidity totalled $41.0 billion and leverage (liabilities over total assets) stood at 18.0%. It's important to note that the Caisse doesn't take on as much leverage as some of its large Canadian peers.

On investments in Quebec, Bertrand Marotte of the Globe and Mail reports that the Caisse puts its trust (and cash) in Quebec Inc. but one area which is dying in Quebec is the good old investment management industry and I blame the Caisse,  PSP Investments and a few other venerable financial institutions in Quebec for this sad sate of affairs.

Francis Vailles of La Presse wrote an article a couple of weeks ago discussing this issue, Le cri du coeur d'un vieux prof de finance:
Il a enseigné la finance pendant 33 ans, formé 4000 étudiants et géré des fonds de retraite pendant 17 ans. L'argent, il connaît ça. Mais aujourd'hui, Jacques Bourgeois s'inquiète avant tout d'une chose: le déclin de la finance à Montréal.

Au fil des ans, l'homme maintenant âgé de 72 ans a observé la lente érosion de la finance montréalaise au profit de Toronto, de New York ou de Londres. «Si on ne se réveille pas bientôt, c'est fini», dit le vieux prof, que nous avons rencontré à son bureau de HEC Montréal.

Il y a trois ans, Jacques Bourgeois a fait le tour des caisses de retraite du Québec pour savoir qui gère l'argent des Québécois. Résultat de son sondage: la part des fonds gérés par des gestionnaires québécois a fondu entre 2005 et 2009, passant de 63% à 53%.

Comme le total des fonds québécois était d'environ 400 milliards de dollars, il estime que ce sont 40 milliards de dollars de fonds qui ont échappé aux gestionnaires québécois sur cette période. Et depuis 2009, la saignée se poursuit, croit-il.

«Aujourd'hui, certains régimes de retraite d'université ont 0% de leurs avoirs placé entre les mains de gestionnaires québécois. Zéro pour cent! Tout est géré par Toronto, Boston, New York ou Londres. Ce sont pourtant des régimes cotisés à même les salaires des profs, payés avec l'impôt des Québécois», dit-il.

Selon lui, le déclin est généralisé. Il touche aussi les services de recherche des maisons de courtage du Québec, qui ont réduit le nombre de leurs analystes au Québec au profit de Toronto et Calgary. «Ce sont des jobs payants. Pas des jobs à 75 000$», dit-il.

Il n'y a pas de doute, les scandales des dernières années, Norbourg et Norshield en tête, ont ravagé les petites boîtes de gestion au Québec. Plusieurs particuliers et fonds institutionnels se sont dit: plus jamais je ne confierai mon argent à de petites boîtes. Vive les grandes firmes! Vive les banques! Vive les Fidelity, Trimark et autres fonds étrangers!

Ces scandales ont marqué l'inconscient collectif et ont nui à la finance montréalaise. Mais il faudra tôt ou tard tourner la page.

Pour tourner cette page, Jacques Bourgeois travaille dans l'ombre. «Dernièrement, j'ai finalement réussi à faire bouger un gros fonds de retraite pour l'inciter à donner des mandats de gestion au Québec. Une affaire de 200-300 millions. Mais ça m'a pris cinq ans», dit-il.

Les gestionnaires québécois sont-ils moins bons? Est-ce la raison du déclin? «Moins bons? Pas du tout. Aux HEC, notre fonds de retraite a obtenu le meilleur rendement des fonds universitaires au Canada sur 10 ans entre 2001 et 2011. Premier au Canada. Et 90% des fonds y sont gérés par des Québécois.»

Bien sûr, il y a une question de taille. Au Québec, les firmes capables d'accepter un mandat de 10 à 100 millions de dollars d'une caisse de retraite ne sont pas légion. Il y a Fiera Capital, Jarislowsky Fraser, Letko Brosseau et Hexavest, entre autres, mais après, la taille diminue rapidement.

Jacques Bourgeois croit que les grands investisseurs institutionnels devraient encourager la relève, comme aux États-Unis. Dans certains états au sud de la frontière, dit-il, les caisses de retraite sont encouragées à confier 1% de leur actif sous gestion à des gestionnaires émergents.

Ce n'est pas nécessairement le cas au Québec. À la Caisse de dépôt et placement, par exemple, environ 91% des fonds sont gérés à l'interne et le reste est géré par des gestionnaires externes établis au Québec (environ 0,8%) ou hors Québec (environ 8,2%), nous indique l'institution.

La Caisse a recours aux services de firmes externes du Québec pour gérer des investissements boursiers, des placements privés et des fonds de couverture, essentiellement. Il ne s'agit pas nécessairement de gestionnaires émergents, cependant.

Selon le porte-parole Maxime Chagnon, la Caisse connaît très bien le marché du Québec et du Canada, qu'elle gère donc à l'interne. C'est ce qui explique qu'elle a davantage recours à des gestionnaires hors Québec pour ses besoins, dit-il. «Notre choix est fonction de l'expertise, des besoins et des marchés qu'on couvre.»

Mais Jacques Bourgeois n'en démord pas. «Toutes les semaines, je reçois l'appel d'une jeune firme de gestion de fonds qui tente d'avoir des mandats institutionnels. Mais il n'y a rien à faire», raconte l'ex-professeur.

C'est clair, il y a des risques. Il y aura toujours des risques. Les fonds institutionnels devront faire leurs devoirs et enquêter avant de décaisser les fonds. Toutefois, favoriser des gestionnaires d'ici forme la relève et crée des emplois payants sans qu'il n'en coûte un sou de subvention au gouvernement. Et il met des PME locales sur le radar, explique M. Bourgeois.

En effet, le financier de Toronto à qui l'on confie la gestion des petites capitalisations a nécessairement une meilleure connaissance des entreprises locales. «L'univers du gestionnaire, c'est davantage son patelin. On connait mieux ce qui est proche. En faisant gérer les petites capitalisations à Toronto, nos PME retiennent moins l'attention et leur valeur boursière finit par être moindre», dit-il.

Bref, Jacques Bourgeois lance un cri du coeur. L'objectif n'est pas de faire gérer 100% de nos fonds par des Québécois, mais chaque pourcentage additionnel représente 4 milliards. Convaincu?
I wouldn't put a fixed amount of assets managed inside Quebec but kudos to professor Jacques Bourgeois for warning of the erosion of Montreal's investment management industry. The Caisse and others have to step up to the plate and support our home grown talent, investing in established and emerging managers. They should also support local brokers and force global banks to open up more offices here.

Below, for those of you who speak French, watch Michael Sabia's interview on Radio Canada last night. Michael rightly put the emphasis on long-term results when the reporter pressed him on one-year results and said there is still a lot of work ahead.

Michael also responded to a reporter's question, "Is there any kind of role for the Caisse in terms of financing things right here at home?", when he met the media to unveil the annual results (watch below).