Caisse and OMERS's 2018 Annual Report

The Caisse and OMERS recently published their 2018 annual report. Since I already went through their respective results here and here, I wanted to follow up and go over their annual reports to highlight some key investments and other noteworthy topics.

Let me begin with the Caisse. Last week, it published its 2018 Annual Report and put out a detailed press release going over the main highlights:

Caisse de dépôt et placement du Québec today released its annual report for the year ended December 31, 2018.

In addition to a detailed analysis of the financial results announced on February 21, 2018, the report provides a review of its activities. Below are the highlights:

TEN-YEAR PERFORMANCE

• Annualized return of 9.2%.
• Net assets grew from $120.1 billion in 2009 to $309.5 billion in 2018, with $171.6 billion in net investment results.
• The proportion of assets in international markets increased from 36% in 2009 to 64% in 2018.

FIVE-YEAR PERFORMANCE

• Annualized return of 8.4% and net asset growth of $109.4 billion from net investment results of $98.7 billion and net deposits of $10.7 billion.
• Each of the three asset classes contributed significantly to la Caisse’s overall return, which exceeded its benchmark index. This difference represents $16.7 billion in value added.
• The returns of the eight main clients ranged from 7.6% to 9.2%.

2018 PERFORMANCE

• Overall return of 4.2% in 2018, higher than the benchmark and representing $5.3 billion in added value.
• Net assets increased $11.0 billion due to net investment results of $11.8 billion, offset by net depositor withdrawals of $0.8 billion.
• The returns of the eight main clients ranged from 3.7% to 4.4%.

LA CAISSE’S IMPACT IN QUÉBEC

• Assets in Québec’s private sector total $44.3 billion, up $11.8 billion in five years.
• Partner of over 775 companies, including some 685 SMEs.
• New investments and commitments of $21.2 billion over five years, including $7.3 billion in 2018.
• 40% of transactions in 2018 were in new economy sectors.
• Several concrete achievements under each pillar of la Caisse’s strategy in Québec, including:
• Growth-creating projects: Beginning of construction on all branches of the REM; continued revitalization of downtown Montréal with the Projet Nouveau Centre (a $1-billion investment).
• Growth and globalization: Investments in AddÉnergie, Ocean Group, Plusgrade and Transcontinental, in addition to the launch of Cheffes de file, an initiative to support the growth of companies owned by women.
• Innovation and the next generation: Investments in Breather and Hopper, and support for BFL Canada and Frank And Oak to implement technology solutions that support their growth.

GLOBALIZATION

• Globalization of la Caisse’s activities, one of the pillars of its strategy, which is reflected in:
• Diversifying assets on a global scale, with exposure to international markets representing 64% at the end of 2018, up around $116 billion from December 31, 2013.
• Higher annual returns of over 2%, which represent over $25 billion in additional returns over five years.
• Increased and beneficial exposure to the United States, increased investments in Asia Pacific and Latin America, including in infrastructure in Mexico and Colombia.
• Strengthened approach to strategic partnerships in development and growth markets with the implementation of a dedicated team.

LESS-LIQUID ASSETS AND CREDIT

• Transactions valued at over $31 billion were concluded as part of the strategy to increase our investments in less-liquid assets and credit:
• In infrastructure, investments totalled $5.8 billion, including increasing our stake in renewable energy leaders in North America and India.
• In private equity, over $9 billion deployed internationally, with major investments in sustainable industry in Europe and the United States, as well as in commercial real estate services in Canada.
• In real estate, transaction volume totalled $16.6 billion and portfolio repositioning accelerated with a significant increase in investment in the fast-growing industrial and logistics sector.
• In credit, increased and diversified activities through loans for the construction of telecommunication towers in the United States, the acquisition of solar energy assets in Spain and optimizing the capital structure of a Québec insurance leader.

RISK MANAGEMENT

• In 2018, market risk was stable and slightly below that of the benchmark portfolio.
• During the year, several stress tests demonstrated the portfolio’s resilience relative to the market under various scenarios.
• Market movements at the end of the year showed that the portfolio is as resilient as expected and that the strategy protected depositors’ assets.

STEWARDSHIP INVESTING

• To accompany its Annual Report, la Caisse recently published its second Stewardship Investing Report, which sets out its vision and commitment to priority topics:
• Climate Change: Strategy to address climate change that aims for a transition toward a low-carbon economy
• Governance
• Women in Business
• International Taxation
• Community Involvement
• With regard to the fight against climate change, la Caisse outperformed its target with the addition of $10 billion in low-carbon assets in 2018, prompting it to raise the target for 2020.
• The portfolio’s carbon intensity decreased 10% in 2018, which is on track to achieve the 25% target for 2025.
• The electronic version of the Stewardship Investing Report

Yesterday I went over 2019's most responsible investors and discussed why Canadian pensions are at the forefront of sustainable investing and why the Caisse is leading the pack here in Canada.

The Caisse's CEO, Michael Sabia, has some firm views on doing sustainable investing right and to his credit, he has put this as a top priority of the organization and has been very vocal on climate change and why investors need to understand the risks and opportunities it presents.

Now, the Caisse's 2018 Annual Report is available here. Unfortunately, it's only available in French for now but the Caisse's website states it will soon be available in English here.

Still, below I embedded the three most important tables, 7, 8 and 9 (click on images):

Table 7 shows you the performance relative to the benchmark in each asset class. Fixed Income outperformed by 120 basis points last year mostly because the Caisse has decent credit exposure where it is overweight (see table 9). Equities outperformed the benchmark by 320 basis points, mostly owing to the stellar results posted by Private Equity which gained 17% last year. Real Assets (Real Estate and Infrastructure) posted a combined performance of 9% which is solid.

Table 8 shows how the Caisse is increasingly shifting its attention to emerging markets, effectively doubling its exposure from 2013 to 2018 (from 7% to 14%). In that timeframe, it also increased its exposure to the United States (from 21% to 30%), decreased it in Canada (from 53% to 36%) and maintained it in Europe (14%).

Why is this important? For two reasons. First, currency gains. The annual report states at the end of 2018, the Caisse's currency exposure was 55%, a gain of 6% since the end of 2017 and it notes that over the last five years and last year, the Caisse benefitted from exposure to foreign currencies via its investments in public and private markets all over world (it doesn't hedge F/X exposure).

Second, the importance of emerging markets is only going to increase in the coming years. I recently covered why the Caisse invested in India's financial services industry.

Well, it turns out that Anita M. George, Executive Vice-President, Strategic Partnerships – Growth Markets, has a huge job at the Caisse:

Her mandate is to implement a key pillar of CDPQ’s strategy, which aims to increase its international exposure in targeted growth markets by sourcing the best investment opportunities and developing the organization’s network of sustainable and high-quality local partnerships. She is responsible for growth markets partnerships, and sits on CDPQ’s Executive and Investment-Risk Committees.

Very impressive lady which is why she figured among the top highest compensated senior managers at the Caisse in 2018 (click on image):

Anita George's compensation is in Indian Rupees but it's just shy of $2 million Canadian dollars. Stephane Etroy, the head of Private Equity, has his compensation in British pounds but he made $3.75 million Canadian dollars last year. And Emmanuel Jaclot, the EVP Infrastructure has his compensation published in euros but he made a little over $2 million Canadian dollars last year.

Macky Tall, Head of liquid markets and head of CDPQ Infra, earned a total compensation of $2.5 million Canadian dollars last year.

Then there's Michael Sabia, the President and CEO. Lately, he has been forced to take some compensation and he earned $ 3.87 million Canadian dollars last year. Not bad but he's still underpaid relative to his peers in Toronto and that isn't right (on principle, not because he needs or wants it).

The Caisse had stellar results last year relative to most of its peers and yet compensation is still lagging. It's gotten a lot better but only after a lot of struggle over the last five years. A full discussion on compensation is available in the 2018 Annual Report and some key highlights on compensation are available in the press release here.

Anyway, the key thing to remember when thinking about compensation is long-term performance (click on image):

You have to pay up for long-term performance and it takes people with a special skill set.to deliver solid long-term results.

Now, let me move to OMERS and begin with its 2018 highlights (click on image):

The Plan achieved a net investment return of 2.3% against a challenging backdrop, in a year when virtually all major public markets were down. Our five-year net return was 8.1%.

While returns were below our absolute return benchmark of 7.3%, our diversified portfolio of high-quality assets protected OMERS from capital loss during a period of market stress.

In 2018, our smoothed funded ratio increased by two percentage points to 96%, reflecting improvement for the sixth consecutive year. On a fair-value basis, the funded ratio declined by four percentage points from 101% to 97%, as the net return was below the discount rate of 6%.

We undertook a rigorous assessment of the challenges that will influence the long-term health of OMERS, providing an opportunity for further dialogue on the risks facing our Plan.

In 2018, we made progress toward our 2020 Strategy:

• We deployed $10 billion in private market assets, in pursuit of our asset mix targets.
• We directly engaged our stakeholders on the challenges facing our Plan. Based largely on the feedback received, the SC Board made two changes that will address issues of fairness and equity.
• We opened a new investment office in Singapore to support our objective of gradual deployment of capital into higher-growth, Asia-Pacific markets.
• Member satisfaction remained high at 91%.

Since the first year of our 2020 Strategy in 2015:

• Our investment teams have generated $4.1 billion of net returns above our discount rate.
• Net assets have grown by $20 billion to $97 billion.
• We have reduced our discount rate by 0.25% to 6% – three years ahead of the schedule set out in the Strategy.

And below are the highlights from the 2018 Report to Members (click on image):

Remember OMERS is a pension plan which still guarantees inflation protection so it is remarkable that it's fully funded (96% is fully funded for all intents and purposes). I still maintain it needs to adopt conditional inflation protection like OTPP and HOOPP to ensure the plan's long-term sustainability.

Now, you can download OMERS's 2018 Annual Report here. It is packed with great information so take the time to read it carefully.

Page 8 of the Annual Report is critical (click on image):

As you can read, since launching its 2020 Strategy, OMERS has generated $4.1 billion of  investment income above its discount rate.

However, in 2018, the plan did not return its absolute return target of 7.3% because of the negative 8.3% return in public equities.

Still, the strong performance in private markets (Private Equity, Real Estate and Infrastructure) and the fixed income exposure buffered the impact of drawdowns in equity markets.

Here is something else worth noting in terms of OMERS's strategic asset mix (click on image):

Unlike the Caisse, OMERS is more exposed to the US market (44%) but it too is looking to Asia for long-term growth.

The Annual Report contains a good discussion on sustainable investing, diversity and inclusion, growing responsibly and being committed to their communities.

The discussion on the funded status is a must read and I note the discount rate remained at 6.0% at the end of 2018 (4.0% real net of a strategic margin of 0.25% which was taken prior to 2018).

In terms of results, I note the following on page 34 of the 2018 Annual Report (click on image):

Again, OMERS shifted out of government bonds and increased its exposure to real assets, private equity and credit, all part of its long-term strategy.

Lastly, the summary compensation table available on page 93 of the 2018 Annual Report (click on image):

As you can see, compensation at OMERS is higher than the Caisse but I encourage you read the anual report to get a full discussion on compensation to really understand the details.

That wraps up my discussion going over the Caisse and OMERS's 2018 annual report. I wish they released their annual report at the same time they release their results, just like OTPP does.

Below, Bill Ford, chief executive officer of General Atlantic, and Michael Sabia, president and chief executive officer of Caisse de Depot et Placement du Quebec, talk about the role of alternative investments with Bloomberg's Christine Harper at Bloomberg Invest in New York (June 2018).

Great discussion, listen to what Michael says in his opening remarks and how they are "not just looking at buying assets but building businesses."  Take the time to listen to the entire discussion.