Tuesday, March 4, 2014

Caisse de Depot Returns 13% in 2013

Frederic Tomesco of Bloomberg reports, Caisse de Depot Returns 13% in 2013 as Equities Soar:
Caisse de Depot et Placement du Quebec, Canada’s second-largest pension-fund manager by assets, returned 13 percent last year as publicly traded stocks in the U.S. and elsewhere pushed assets under management above C$200 billion ($180.1 billion) for the first time.

Net investment income climbed to C$22.8 billion in 2013 from C$14.9 billion a year earlier, the Montreal-based fund manager said today in a statement. Net assets rose to C$200.1 billion as of Dec. 31 from C$176.2 billion at the end of 2012.

While the results trailed the 14 percent average increase of Canadian pension funds as estimated in a January report by RBC Investor Services, they beat the fund’s own benchmark of 12.6 percent last year. Over four years, the Caisse said its weighted average annual return was 10 percent -- topping the 8.8 percent return of its benchmark.

“We’re exactly where we want to be,” Chief Executive Officer Michael Sabia said today at a press conference in Montreal. “La Caisse is solid, and our investment strategy is working.”

Equities were the best performing asset class for the Caisse last year, returning 23 percent on average. U.S. publicly traded stocks advanced 41 percent, compared with 16 percent for Canadian stocks and 20 percent for private equity, the Caisse said. Its C$17.2 billion “Global Quality Equity” portfolio -- which includes large-capitalization stocks that the Caisse considers to be world leaders -- climbed 32 percent.
Foster Growth

Inflation-sensitive investments returned 13 percent, driven by a 15 percent gain for the C$22.6 billion real-estate holdings. The return for the Caisse’s C$69.2 billion fixed-income assets was nil.

The Caisse oversees pensions for retirees in the French-speaking province of Quebec, with a dual mandate to maximize returns and foster economic growth in the province. With net assets of C$201.5 billion as of Dec. 31, Canada Pension Plan Investment Board is the country’s largest manager of public pension funds.

Ivanhoe Cambridge, the Caisse’s real-estate unit, is selling most of its C$1.8 billion collection of hotels, CEO Daniel Fournier said. Ivanhoe Cambridge has sold about 45 percent of its hotel assets in the past three years, and a pending transaction that could be completed in the next few weeks will take that proportion to 67 percent, Fournier said. He declined to identify the hotels or the buyer.

Proceeds from the sale of hotels will be reinvested in the purchase of office buildings, residential properties and shopping centers, Fournier said.
Head Offices

After acquiring a minority stake in the Port of Brisbane last year, the Caisse wants to add to its C$8 billion portfolio of infrastructure assets in the next few years, Sabia said. Infrastructure -- a category that also includes airports and gas-distribution networks -- returned 11 percent for the Caisse in 2013.

Sabia was careful not to criticize a plan by the Quebec government to keep head-office jobs in the province. Quebec Finance Minister Nicolas Marceau said Feb. 20 he would propose amendments to the province’s Business Corporations Act that would give public companies based in the province “adequate means of defense” against unsolicited bids.

Recommendations contained in a government-commissioned report on head offices are “like a toolbox,” Sabia said. “It’s are full of ideas, but you need to be selective. There’s always the risk that you could go too far. Some elements from the report have the potential to be part of a good solution.”
Rona Investor

Sabia also said the Caisse remains committed to Rona Inc. (RON), the Quebec home-improvement retailer that replaced its CEO last year. The company reported fourth-quarter profit last week that missed analysts’ estimates. With an equity stake of about 15 percent, the Caisse is Rona’s biggest investor.

Rona’s new management team is “doing what’s necessary to re-establish the strength of this company,” Sabia said. “The Caisse is a long-term investor, and we are there to accompany their turnaround. We are convinced of Rona’s potential.”
Ross Marowits of the Canadian Press also reports, Caisse de depot reports assets have grown to $200.1B:
The Caisse de depot et placement du Quebec had another strong year in 2013, led by growth in the value of its U.S. equities that helped generate a 13.1 per cent annual return on investments.

Quebec's largest pension fund manager said it beat its benchmark portfolio, which grew by 12.6 per cent, and the value of its assets rose to $200.1 billion from $176 billion in 2012.

Net investment results totalled $22.8 billion and net deposits were $1.2 billion as of Dec. 31, 2013.

The Caisse said stronger equity markets in the United States were the largest engine for growth last year, rising by 22.9 per cent. The $18.2 billion gain included $3.4 billion from its private equity portfolio.

Inflation-sensitive investments such as real estate and infrastructure grew by 12.5 per cent or $3.4 billion.

Fixed income investments generated a zero return because of a rise in interest rates.

At year-end, the Caisse's assets included $93.8 billion in equities, $69.2 billion in fixed income, and $31.8 billion in inflation-sensitive investments.

The Caisse's eight largest clients, which each had different return targets and risk tolerance, had returns ranging between 8.9 and 15.5 per cent.

Over four years, the weighted average return was 10 per cent as assets increased by $68.5 billion.

"With a 10 per cent annualized return over four years, we have exceeded our clients' long-term targets," said Caisse CEO Michael Sabia, who insisted the fund manager's strategy is working.

"In an economic environment characterized by major adjustments in emerging markets, a lengthy recession in Europe and the beginnings of a recovery in the United States, we have stayed focused on our strategy and continued to invest in quality assets anchored in the real economy."

The Caisse invested $3.6 billion in Quebec companies last year and $10.3 billion over four years. Quebec assets grew by $20.3 billion over four years to $53.8 billion, with $32.5 billion invested in the private sector.

In addition to increasing investments in Quebec, the Caisse said it is focused on supporting the development of entrepreneurship in the province that will drive future growth.

"In 2013, we were especially active with small and medium-sized businesses and we enhanced what we can offer to the manufacturing and mining sectors, two key drivers of the economy."

Early last year, the Caisse created the Global Quality Equity portfolio focused on large, established companies exposed to global growth that aims to generate more stable returns. The portfolio's assets reached $17.2 billion.

Its real estate subsidiary, Ivanhoe Cambridge, spent $5.2 billion on acquisitions last year by strengthening its presence in large U.S. cities, repositioning its European portfolio and increasing its investments in Montreal and Quebec City.
The Caisse's 2013 annual report isn't available yet (it will be in April) but you can read the press release here. You can also click here to gain more insights on their specialized portfolios.

The overall results were decent but below average. The 13% gain in 2013 trailed the 14% average increase of Canadian pension funds as estimated in a January report by RBC Investor Services, but they beat the fund’s own benchmark of 12.6% last year. Over four years, the Caisse said its weighted average annual return was 10% -- topping the 8.8% return of its benchmark, which is an added value of 120 basis points or 1.2% (not bad over a four yer period but hardly spectacular).

The Caisse's 2013 results, however, were much better than OMERS which returned a paltry 6.5% in 2013 (will cover their results tomorrow).

You can click on the image below to get a snapshot of the one and four year results of the Caisse's specialized portfolios:

Every pension fund should report results this way and include the benchmarks of each of their specialized portfolios. This way we can gauge who is delivering real added value, not just leveraged beta which what you often see in public, private and hedge fund investments.

Here are some of my observations on the Caisse's 2013 results. Take the time to read them because you won't find this in-depth coverage anywhere else:
  • First, as I stated above, the overall results for 2013 are decent but below average. To be fair, the risk tolerance of the Caisse's eight largest clients differs and they did point out in the press release that there was a 6.6% difference in return between the client with the highest risk tolerance and the one with the lowest one in 2013. Over a four year period, however, the difference between client returns is less pronounced (1.5%).
  • Second, the biggest gain came from U.S. equities which gained 41.3% in 2013. U.S. stocks were on fire last year, with the S&P posting a 30% gain in U.S. dollar terms. The fall in the value of the Canadian dollar boosted returns of the Caisse's foreign equity portfolios. 
  • U.S. equities are indexed so there was no value added there. Canadian equities, which are not indexed, outperformed their index in 2013 (16.3% vs 14.8%) but are still underperforming over a four year basis (6.4% vs 7.5%). Hopefully they can continue delivering alpha in this portfolio.
  • The Global Quality Equity Portfolio did return 32.4% vs 26.1% for its benchmark, which is a significant added-value of 6.3% or 630 basis points. But I need to understand the benchmark they are using for this specialized portfolio before praising them for this outperformance because as I've repeated plenty of times before, it's all about the benchmarks stupid! Any monkey can outperform their benchmark if it doesn't reflect the risks of the underlying investments (case in point, Luc Verville, Richard Guay and Henri-Paul who all are complicit in the biggest scandal the media is covering up).
  • The Caisse has one of the best real estate teams among global public pension funds. Ivanhoe Cambridge's CEO, Daniel Fournier, is excellent and so are many of the senior people working with him like Adam Adamakakis and Denis Epoh who I knew from my days at PSP (Denis is a great guy but he couldn't put up with Andre Collin's tyrannic management style. Of course,  Collin made off like a bandit at PSP and post PSP, buying himself a cushy job at Lone Star).
  • The Caisse's real estate portfolio returned 15.1% in 2013 and 13% over the last four years, under-performing its index which returned 15.6% and 14% over the same periods. But keep in mind the Caisse's real estate index is the toughest to beat among all of Canada's largest public pension funds and this asset class is the best performing asset class on a risk-adjusted basis over the last ten and twenty years at the Caisse.
  • I cannot comment on Daniel Fournier's strategy of getting out of hotels except to say that these are cyclical real estate investments. Blackstone made a killing off their hotel portfolio but the Caisse prefers to focus on residential and commercial real estate. One major concern I do have is that the Caisse (and bcIMC) is very exposed to Canadian real estate and I think Canada is cooked. In fact, as I wrote back in December, it's time to short Canada, and Pimco is now jumping on the bandwagon, stating Canadian home prices could fall as much as 20% over the next five years (so much for the Caisse's claim not to bet against boring Canada).
  • The Caisse's infrastructure portfolio returned 10.6% in 2013 and 16.8% over the last four years, grossly under-performing the benchmark which delivered 22.6%  last year but outperforming it over a four year period (15.3%). I will wait for the annual report to understand why infrastructure underperformed in 2013.
  • I did hear through my contacts that the Caisse hired an ex SNC Lavalin expert in infrastructure but I'm not impressed with the Caisse blowing another $500 million in the wind. I know who the best infrastructure people are and unfortunately, the Caisse, PSP, CPPIB and others keep hiring deal makers and nobody with actual operational experience. When the infrastructure bubble pensions are inflating pops, all these institutions will have nobody with operational experience to clean up the mess (if PSP is smart, they will hire my buddy as a Senior Director of Infrastructure and trust his judgment based on years of operational experience).
  • In private equity, the Caisse returned 19.7% in 2013, under-performing its benchmark which delivered 22.6% in 2013. Stock markets were on fire last year, which explains this under-performance. Over a four year period, private equity returned 16.5%, handily beating its benchmark which gained 11.3% over that period.
  • In emerging markets the Caisse hired someone new to run that portfolio but it remains to be seen how well this person will perform. The Caisse is betting big on emerging markets but that may come back to haunt them if an emerging market crisis develops.
  • I have no comments on the Quebec portfolio except to say that this is a monumental waste of time and money. The best entrepreneurs in Quebec don't need the Caisse or Desjardins. They compete on a global scale with everyone else. Rona is going to die and so will others competing with juggernauts like Home Depot. The Caisse has lost billions investing in Quebec companies and it's high time the government of Quebec stops meddling into the Caisse's investments in any way, shape or form.
  • Hedge fund investments delivered benchmark performance in 2013 (2.9%) and have slightly outperformed over the last four years (3.6% vs 3.1%). The Caisse invests close to $4 billion in hedge funds paying out enormous fees. I'm not that impressed with the performance of hedge funds overall and think they need to revisit their strategy in these investments.
  • Bonds were flat last year and but have outperformed over a four year period (5.9% vs 4.5%). Marc Cormier, the head of Fixed Income, lost his best analyst, Brian Romanchuk, who is now the author of a great blog called Bond Economics.
  • This brings me to my last point, and I won't mince my words here. The Caisse, Desjardins, the National Bank, PSP, CPPIB, Teachers, and the rest of Canada's great financial institutions are dropping the ball when it comes to promoting diversity in the workplace. You walk into the Caisse and it doesn't look anything like the streets of Montreal. It's still a racist institution which promotes French Canadians and leaves out real talented individuals for all the wrong reasons. I met Frédérick Charette, the EVP of "Talent Management" at the Caisse last year and think he's better than his predecessor but that's not saying much. These HR departments at the Caisse, PSP and pretty much everywhere else need to be bombed. When you got guys like Brian Romanchuk or Derek Hulley you keep them with everything you've got.
On that cheery note, I leave the senior managers at the Caisse to ponder all my points very carefully. I don't mince my words and I don't give a rat's ass what people think of me.

I will circle back to the Caisse's 2013 results once their annual report is made public in April. I am curious to see how much money they lost in currencies and will take a closer look at other investments.

You can click here to watch a report on the Caisse's results. Below,  Michael Sabia, Chief Executive Officer of the Caisse de dépôt et placement du Québec and Campus Montréal Co-Chair, discusses the importance of diversity on campus.