Caisse Getting Ready for the Next Big Move?
The Caisse de Depot et Placement du Quebec, Canada’s biggest pension fund manager, isn’t ruling out selling more bonds after completing an C$8 billion ($7.8 billion) borrowing program three months ago, Chief Executive Officer Michael Sabia said.
The Caisse in June sold 750 million euros ($1 billion) in 3.5 percent bonds maturing in 2020 through its CDP Financial unit, the last step in a seven-month plan to replace short-term borrowings with longer-term debt. As of June 30, the Montreal- based Caisse, which manages Quebec’s public pension plan, had net assets of C$135.8 billion.
“We did the C$8 billion that we set out to do,” Sabia said Sept. 28 in an interview at Caisse headquarters in Montreal. “We dealt with the most pressing problem. Whether or not down the road at some point we decide to do something else, that’s possible. I won’t necessarily rule that out.”
The latest transactions mean that about 74 percent of the Caisse’s sources of financing have maturities of more than two years, while 78 percent of its assets are investments such as real estate that the firm will hold for more than two years, Sabia said. Before the refinancing, only 20 percent of the borrowings were due in two years or more, while 80 percent of the assets were long-term, he said.
“We had this really big mismatch between sources and uses of funds,” Sabia said. “That exposed us to a huge amount of refinancing risk. One of the things that this organization learned in 2008 was that we can’t always count on refinancing.”
During the global financial crisis that followed Lehman Brothers Holdings Inc.’s bankruptcy, the Caisse sold equities, closed out futures contracts and reduced its foreign-exchange hedging amid a fall in the Canadian dollar. It eventually reported a record loss of C$39.8 billion, or 25 percent, for 2008, including C$6.1 billion in hedging-related losses.
After posting a 10 percent gain last year, the Caisse reported a 2.3 percent return in the first six months of 2010, led by its infrastructure and private-equity units.
Sabia, 57, said he expects the refinancing to allow the Caisse to seize investment opportunities more quickly than in the past.
“We live in a period of exaggerated response and disconnection between fundamentals and short-term market reactions,” he said. “It takes very little to move markets. In this environment, what really matters is institutional agility. You need to be able to react to events and to do it quickly.”
Sabia, the former CEO of Canadian telecommunications company BCE Inc., joined the Caisse in March 2009.
Mr. Sabia is right, the Caisse being a mature fund needs to reduce refinancing risk and be as opportunistic as possible while minimizing risk, which is very difficult when you're managing billions.
[Important update: Mr. Sabia wrote me to clarify something: "we have absolutely no plans at this stage to issue more debt beyond the $8B that we have completed. Bloomberg's implication is wrong."]In another interview with Frederic Tomesco of Bloomberg, Mr. Sabia said the Caisse plans to increase investments in energy and minerals to benefit from an expected commodities boom:
“Natural resources, energy, those are areas where we think there’s an opportunity to play offense because of what the structural trends are and what our capabilities are,” Sabia said in an interview at Caisse headquarters in Montreal yesterday.
The Caisse oversees C$135.8 billion ($132 billion) in assets including stakes in Quebec gas distributor Gaz Métro LP and Suncor Energy Inc., the country’s biggest oil company. Energy and materials shares made up more than half of the Caisse’s U.S.-listed stock holdings of $11.3 billion as of June 30, according to an Aug. 11 regulatory filing.
Since his appointment last year, Sabia has tightened risk management standards, scaled back the use of derivatives and exited real estate loans that contributed to losses in 2009. Those moves, which Sabia calls “defensive,” helped the Caisse beat its benchmark in the first half of 2010 with a return of 2.3 percent. Two years ago, the fund manager reported a record loss of C$39.8 billion, or 25 percent.
“Defense is necessary but it’s not sufficient in the long term,” Sabia, 57, said. “We also need an offensive game plan.”
Analysts such as Daniel Yergin, chairman of IHS-Cambridge Energy Research Associates, predict that energy demand will climb 30 percent to 40 percent in the next two decades as incomes rise in emerging markets and the global economy expands.
“When the Marshall Plan was launched after World War II there was a 20- to 25-year run in natural resources and infrastructure and in our view we are right at the start of another period like that,” Sabia said.
By 2015, emerging nations will account for a bigger portion of the global economy than developed countries as middle-class populations from Southeast Asia to Latin America expand while public and private investment grows, according to a Sept. 27 World Bank report.
“You are going to see massive urbanization and the emergence of a very large middle class in places like China, Brazil and Turkey,” Sabia said. “Because of those things, you are going to see demand for natural resources, whether it’s iron ore or copper, and demand for products that enhance the productivity in agriculture.”
Sabia, the former CEO of BCE Inc., Canada’s biggest phone company, declined to provide details about his natural-resources strategy. He said the Caisse is “launching a bunch of work” to study the matter.
“If we came away convinced we needed to add people, we’d do it in a heartbeat,” he said. “Natural resources are an area of considerable interest.”
Excluding its real-estate operations, the Caisse has about 700 employees, including about 250 analysts and investment managers, said Denis Couture, a spokesman for the firm. About two-thirds of the Caisse’s net assets are in Canada.
“Because of our exposure to the Canadian economy, we have built a lot of capabilities around understanding natural resources and energy-related industries,” Sabia said.
Sabia said the Caisse would also consider investing in natural resources through its C$17 billion private-equity arm.
“If the right transaction comes along and we have an opportunity to play a role, would we be prepared to take it in a sector that interests us quite a bit? Sure,” he said.
‘Show me More’
Sabia singled out Gaz Métro, which the Caisse invested in six years ago, as the type of asset he likes. In the nine-month period ended June 30, Gaz Métro reported net income of C$189.1 million on revenue of C$1.7 billion.
“Gaz Metro is a very well-run utility that generates a lot of cash,” he said. “It’s a pretty nice investment for a long- term investor like us. Show me more of those.”
Sabia declined to say whether the Caisse has been approached or would be interested in playing a role in a takeover of Potash Corp. of Saskatchewan Inc., the world’s largest producer of the namesake fertilizer.
BHP Billiton Ltd. in August offered $40 billion to buy Saskatoon, Saskatchewan-based Potash. As of June 30, the Caisse held 3.51 million Potash Corp. shares.
“We don’t comment on particular transactions,” Sabia said. “We own positions in a great many companies, and we need to be prudent in terms of the comments we make.”
I'm glad to see the Caisse is overweight commodities and energy. One of my favorite strategists, Martin Roberge of Dundee Capital Markets went overweight energy, citing "sector undervaluation conditions". Martin also wrote an excellent comment recenty telling investors to focus on lagging, not leading indicators at this stage of the cycle.
I like energy too, especially renewable energy, and loaded up on Chinese solars long before they melted up. Some traders see solars as a leveraged play on oil. I simply love the sector's long-term fundamentals regardless of where oil is trading and strongly suggest that pensions take a very close look at the solar sector (some, like CalPERS, already have).
And how did I first notice solars? A while back, I checked out the holdings of a few top hedge funds that I regularly track, looked at solars and started trading them. They are volatile, manipulated to death through naked short-selling, high-frequency trading, but I knew the big hedgies and investment banks were bringing them down to load up on them (that's when you average down and load up some more). I continue to believe that we are in the early stages of a major bubble in renewable energy. Stocks that have now doubled will triple, quadruple and quintuple faster than you can blink. And if they dip, I will just load up more. The name of the game remains reflate and inflate.
There are plenty of opportunities in other sectors but I can't share all my secrets on my blog. All I can share here is that the game is rigged and the big hedgies are working in unison with major investment banks to rig it. If you know how to read wild swings in these markets, and stick to your guns (you need conviction and balls of steel to stomach wild gyrations), you can make a lot of money. But don't get too greedy because as my dad always tells me, what goes up fast comes down faster.
As for the Caisse, I like what I'm seeing. The focus now is not just on risk management but also on taking positions in public and private markets as opportunities arise. This is the way of the future and I hope all pension funds are taking notice. If you sit there, pondering your next move, discussing it ad nausea in front of some investment committee, you're going to be left behind. This wolf market is treacherous and funds that don't adapt will severely underperform.
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