Caisse Gains 13.6% in 2010

Bertrand Marote of the Globe and Mail reports, Caisse posts 13.6% return:

The Caisse de dépôt et placement du Québec posted a robust 13.6-per-cent return on its investments last year, solidifying its ongoing recovery from a disastrous 2008 loss.

The results for 2010 beat the 11.25-per-cent median return of large pension funds in 2010 as estimated by RBC Dexia Investor Services Ltd.

The Caisse - Canada's largest public pension fund - said it outperformed its own benchmark index by 4.1 per cent for the year ended Dec. 31, 2010.

At the end of 2010, the Caisse's net assets stood at $151.7-billion, up from $131-billion in the previous year.

The increase was due to net investment results of $17.7-billion plus $2.4-billion in net deposits.

The Caisse is now almost back to pre-2008 levels. It posted a staggering 25-per-cent loss - $40-billion - on its investments in 2008.

Last year, the Caisse had a 10-per-cent return, below the 15.48 per cent median return of its peers.

“In a year marked by turbulence, Europe's sovereign debt crisis and fears of a slowdown in the U.S., the Caisse generated strong results on many fronts,” Caisse chief Michael Sabia said in a news release Thursday.

“Our teams successfully repositioned the Caisse to focus on its core business and select quality holdings, while managing the portfolios prudently to take advantage of hard-to-predict market conditions.”

Real estate, infrastructure and bonds - one of three major asset classes at the Caisse - turned in a 16.3 per cent return in 2010, while equities delivered a 14.6 per cent return.

Private equity performed particularly well, with a 26.7-per-cent return.

Infrastructure alone posted a 25.4-per-cent return.

But Canadian equities underperformed. The Canadian equity portfolio generated a 15.7-per-cent return, 1.9 per cent below its benchmark. The results were largely due to the portfolio's being overweight in large-cap companies and the dramatic outperformance of small-caps in 2010, the Caisse said.

"The Caisse is back in good health. We have rejoined the race. But the race is a marathon. The race is not a sprint," president and chief executive officer Michael Sabia said at a news conference after the results were unveiled.

The Caisse provides a full press release and combined financial statements on its website covering the 2010 results. The annual report will be available in April but the press release contains all the relevant information on performance. A summary of the results is provided below (additional information is available here):

The performance in private markets was very strong, but so was that of public markets, especially Fixed Income. Key points from the release:
  • The Bonds portfolio achieved an 8.4% return, 1.6% above its benchmark index. The drop in rates of government bonds, with maturities of five years or more, and the additional yield on corporate bonds, relative to government securities, accounted for most of these results.
  • The Real Estate Debt portfolio also benefited from declining rates, posting a 17.1% return. Falling mortgage rates in Canada, the U.S. housing market recovery and the sale of U.S. assets, conducted as part of the portfolio refocusing announced in 2009, largely explain the performance of the portfolio, which outperformed its benchmark index by 10%.
  • The Real Estate portfolio achieved a 13.4% return, outperforming its benchmark index by 1.8%. This performance is mainly due to the strong performance of retail properties in Canada and office buildings in Canada, the U.S. and Europe.
  • The 25.4% total return of the infrastructure portfolios for the year is due to the resilience of energy assets in the face of market turbulence and the recovery of airport service assets after the financial crisis. These portfolio assets possess strong fundamentals that have improved throughout the year.
  • In total, the Equity portfolios represent $72.4 billion, approximately 48% of the Caisse’s net assets, including $19.3 billion in the Canadian Equity portfolio, $14.3 billion in our Global Equity and Québec International portfolios, $21.3 billion in international stock market index portfolios and $17.5 billion in the Private Equity portfolio.
  • The Canadian Equity portfolio generated a 15.7% return, 1.9% below its benchmark. This underperformance is primarily due to the portfolio’s overweight on large-capitalization companies with strong fundamentals and the dramatic outperformance of small-cap companies in 2010.
  • The Global Equity and Québec International portfolios slightly outperformed their benchmark indexes, with returns of 7.3% and 14.0%, compared to index returns of 7.0% and 13.7%, respectively. These results reflect the strength of international markets and timely active management picks in energy, industrials and consumer goods.
  • The index-managed U.S. Equity, Foreign Equity and Emerging Markets Equity portfolios produced returns in line with their benchmark indexes.
  • The Private Equity portfolio, which achieved a return of 26.7%, significantly benefited from the global recovery in mergers and acquisitions and the rebound of financings in this area. The sharp rise in asset valuations during the year mainly reflected improvements in operating performance, debt reduction and an increase in the profitability of Private Equity portfolio companies. Accordingly, more than two thirds of the 2010’s return is the result of activities in leveraged buyout and development financing.
Importantly, on operating expenses, the press release states the following:
  • In 2010, the Caisse continued to improve its efficiency, paying close attention to its operating expenses and external management fees. As a result, it achieved its budgetary reduction goal of $20 million announced in spring 2010. Achieving this objective enabled the Caisse to continue to decrease total operating expenses and external management fees, which stood at $269 million in 2010. The ratio of operating expenses to total assets therefore decreased from 22 basis points (bp) in 2009 to 19.4 bp in 2010, a level that compares favourably to best-in-class manager standards.
Finally, the press release quotes Michael Sabia, President and CEO of the Caisse:
"There are many uncertainties remaining: the situation in North Africa and the Middle-East is evolving rapidly and the sovereign debt crisis in Europe has not been resolved. Moreover, in the United States, employment levels stagnate, the housing crisis persists and, at the same time, the exit strategy for expansionary monetary and fiscal policies is far from finalized," said Mr. Sabia.

"We posted solid results in 2010, but we know we have much work to do to provide good long-term returns to our depositors — given the current uncertainty and market volatility that will prevail in the coming years," added Mr. Sabia.
This is the consistent message Mr. Sabia has been delivering ever since he took the helm after the 2008 disaster. Despite the solid performance, he knows there is a lot of work ahead and now is not the time for complacency. His senior team and the employees have been instrumental in helping the Caisse achieve these strong results in a year that wasn't particularly easy. 2011 will prove to be even more difficult.

The Caisse is the first of the large Canadian pension funds to announce their 2010 results. Others will announce in the weeks ahead. They got a tough act to follow. Below, a CBC-RDI interview (in French) with Michael Sabia.