Tuesday, April 30, 2013

Caisse's 2012 Annual Report


The Caisse de dépôt et placement du Québec released its 2012 annual report in English late last week. Among other things, this report includes analyses of performance, risk management, and changes in assets. It also discusses the Caisse’s contribution to the economic development of Québec and its responsible investment activities.

Readers can click here to learn more about the following:
I've already covered the Caisse's 2012 results but the annual report provides a lot more details. It is excellent, well written and very informative.

Would like to first draw your attention to the message from the Caisse's president and CEO, Michael Sabia:
In my mind, 2012 is not important in and of itself. The year is important because it is part of a series of years. A period during which we have repositioned la Caisse so that we achieve our
mission in a world that is very different than the one of even five or six years ago. A few themes come to mind.

Balance. The new balance that we have struck between returns and risk. The simple but important idea of understanding thoroughly the assets that we invest in. To have the right tools and to master risks so that we can take the decisions needed to meet the expectations of our clients, our depositors.

Performance. The performance that we have delivered in a volatile and turbulent environment, thanks to an overall portfolio that is today better aligned with the world economy. Since we restructured our portfolios in 2009, our average annual returns: 10.7%. Proceeds from our investment activities: $50.7B. Which bring our assets to $176.2B.

Flexibility. The flexibility that we have built, which gives us the agility we need to seize the interesting investment opportunities that are available in today’s world – always with the goal of producing long-term returns for our depositors. This same flexibility is now permitting us to put in place new investment strategies to take advantage of changes in the structure of the world economy – once again, to the benefit of our depositors and Québec’s businesses.

Québec. Where we have significantly increased our investments, always prioritizing promising businesses and always with an eye to their development and expansion. In terms of numbers, over the last four years, we have undertaken $8.3B of new investments and investment commitments.

Beyond all of that, in my judgment, nothing demonstrates profound change better than when a group of people change how they think about themselves and the work they do. That’s what happened at la Caisse in 2012. And collectively, that’s the thing that we are most proud of.

A Broad Collaboration

We posed this question to our people: given the importance of the changes that are under way in the economic and financial environment, what are the guiding principles for our work in such a world?
Through a series of meetings over a period of many months, in small groups, large groups, in workshops and online, our people thought about and debated which convictions and which behaviours would best serve la Caisse.

Several hundred of our employees participated actively in this broad collaboration. The result is not a directive from top management. It is not a “little red book.”

It’s the affirmation of what our people are, of how they define themselves, and of what they aspire to be.
I took part in some of those meetings as an external consultant and can tell you it's exactly as Michael states above. There was a concerted effort to get input across all the groups at the Caisse to understand the major themes impacting the financial environment and how the Caisse should position itself in this volatile and fragile global environment.

In terms of portfolio changes, in 2012, working with the depositors, the Caisse made changes to the selection of portfolios offered to depositors to deploy the new components of its investment strategy in the years to come. The main changes include:
  • Refocusing the Hedge Fund portfolio on strategies that complement the traditional asset classes, starting July 1, 2012.
  • Creation of the Global Quality Equity portfolio to focus on companies with a stable, predictable return on invested capital, as of January 1, 2013. 
  • Addition to the Private Equity portfolio of a relationship- investing mandate geared to development of long-term relationships with promising companies, as of January 1, 2013.
  • Gradual closing-out of the Global Equity portfolio, starting July 1, 2013.
  • A gradual transition from indexed management to active management for the Emerging Markets Equity portfolio, starting July 1, 2013.
In addition, in November 2012, the Caisse completely closed out the Québec International portfolio, which had begun on April 1, 2010.

For each specialized portfolio, with the exception of the Asset Allocation portfolio and the ABTN portfolio, a benchmark index is used to compare the portfolio managers’ results with the corresponding market. The following changes were made to the portfolios’ indexes:
  • On January 1, 2012, the DEX Adjusted Long Term Government Bond Index was modified to increase the weighting of the Long Term Bond portfolio in provincial bonds.
  • Since January 1, 2012, the benchmark for the Real Estate Debt portfolio has been the DEX Universe Bond Index. The sale of the international component of the portfolio was completed in 2011, which justified removal of the Giliberto-Levy portion (10%) of the benchmark index.
  • On July 1, 2012, the Adjusted Aon Hewitt – Real Estate Index was modified to add the DEX 30 Day T-Bill Index, to reflect the cash held by the Real Estate portfolio.
  • Since July 1, 2012, the benchmark of the Hedge Funds portfolio has been in transition. When the transition period ends on July 1, 2013, the benchmark index will go from 10 strategies to three: futures management, market-neutral and global macro.
  • On January 1, 2013, the index of the Private Equity portfolio was changed to reflect the portfolio’s composition more accurately. The change was due to the addition of the relationship-investing mandate and the higher proportion of direct investments in companies. The index now consists of 50% State Street Private Equity Index (Adjusted) and 50% MSCI World Hedged.
  • The Global Quality Equity portfolio was created on January 1, 2013. Its index consists of 85% MSCI ACWI Unhedged and 15% DEX 91 Day T-Bill. The benchmark index is intended to reflect a traditional equity market investment, but adjusted for the level of portfolio risk.

(Note: Table 10, p. 25, gives a list of the benchmark indexes of the specialized portfolios and the changes made over the past four years.)

The Caisse should be commended for clearly presenting the benchmarks for each specialized portfolio and providing a history of the changes made over the last four years. Don't think anyone else in Canada provides these details (if  I'm wrong, correct me).

The annual report provides a detailed discussion on performance by specialized portfolio. 15 out of the 16 specialized portfolios posted positive results and the expense ratio for these results was 17.9 cents per $100, which is among the lowest in Canada for the large funds.

In terms of evolution of risk measures, noted the following:
The substantial support provided by central banks, and the gradual reduction of systemic risks prompted the Caisse to reduce the rather defensive bias of the overall portfolio. The overall portfolio’s relative exposure to the equity markets went from an underweight position of more than $4 billion at the end of 2011 to an overweight position of $1.5 billion at the end of 2012. This change is the main reason for the evolution of the risk profile of the Caisse’s overall portfolio between the start and the end of 2012 (see Figure 32, p. 44).

In addition to greater relative exposure to the equity markets, the Caisse’s portfolio maintains its protection against an increase in interest rates. Despite this slightly procyclical positioning of the overall portfolio, its level of market risk continues to be moderate, from both  active and absolute standpoints.

Urge my readers to take the time to go over the Caisse's 2012 Annual Report. There is simply too much material to cover in one blog entry but this report is excellent.

Finally, The Canadian Press, in a dispatch published on April 16th, wrongly suggests that Michael Sabia's total compensation and performance-related incentive compensation increased in 2012:
The total amount of the incentive compensation (paid and co-invested) granted by the Board of Directors to Mr. Sabia is exactly the same as that granted in 2011. As Mr. Sabia's salary also remains unchanged, the total amount of his total compensation also remains the same
Given the enormous responsibilities of this high profile job, can tell you Michael Sabia remains underpaid relative to his peers. The media should focus their attention where it counts and be more careful when reporting compensation. Think Michael and the rest of the employees at the Caisse are doing an outstanding job delivering strong risk-adjusted returns and they should be commended for this.

Below, for those of you who speak French, watch Michael Sabia's interview on Radio Canada. 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.