CDPQ's CEO Charles Emond on Their Mid-Year Results
He said his team conducted extensive due diligence with outside experts and consultants. They were aware of management and regulatory issues at Celsius and underestimated the time it would take to resolve them, he said, adding the Caisse was keen on “seizing the potential of block chain technology” and perhaps the investment in Celsius had been made “too soon” in the company’s development.
He noted that the investment was a very small part of a large venture portfolio that has produced 35 per cent returns over the past five years.
“In these disruptive technologies, there’s ups and downs…. Some big winners and many losers,” Emond said.
Although the Caisse posted an overall return in negative territory for the first six months of the year, the performance exceeded that of its benchmark portfolio — which posted a negative return of 10.5 per cent.
Over five and 10 years, annualized returns were 6.1 per cent and 8.3 per cent respectively, also outpacing benchmark portfolio returns,” the pension manager noted.
Emond said the Caisse is managing the “turbulence” with a combination of asset diversification and strategic adjustments made since the COVID-19 pandemic began.
“For the past two years, we’ve been working in an environment of extremes characterized by particularly fast and pronounced changes. These unusual and unstable conditions will persist for some time,” he said.
“In the short term, we’ll be watching what central banks do to contain inflation and how that impacts the economy.”
During the first six months of the year, negative returns in equities and fixed income were partially offset by gains in the Caisse’s investments in real assets including infrastructure and real estate.
The pension giant posted a negative return of 13.1 per cent in fixed income, which beat the negative 15.1 per cent return for its benchmark portfolio. This represented nearly $3 billion in “value added” attributable to all credit activities, the Caisse said.
A negative return of 16 per cent in equities beat the negative 17.2 per cent return in the benchmark portfolio.
The Caisse’s real estate and infrastructure portfolios, meanwhile, generated a 7.9 per cent six-month return, “demonstrating their diversifying role which contributes to limiting inflation’s impact on the total portfolio.”
The real asset class performance also beat the benchmark portfolio’s return, which was 2.4 per cent.
“So that asset class played its role. The two portfolios are doing well,” Emond said.
He said it is challenging to compare the short-term performance of Canadian pension funds because they have e different mandates and investment models. The Ontario Teachers’ Pension Plan, for example, has less exposure to equity markets than the Caisse and more exposure to natural resources and commodities, which performed well in the first half of the year.
Clémence Pavic of Le Devoir also reports on CDPQ's net $28 billion loss for the first half of the year (translated from French):
Affected by the simultaneous correction of the stock and bond markets, the Caisse de dépôt et placement du Québec (CDPQ) posted a negative overall return of 7.9% for the first six months of 2022.
In total, the Caisse de dépôt's net assets now stand at $392 billion, a drop of $28.2 billion. "We never rejoice in a negative return, but we did better than the market," said CDPQ President and CEO Charles Emond in a press briefing.
For the first half of the year, la Caisse performed better than its benchmark portfolio, which fell by 10.5%. Its five-year and ten-year annualized returns, at 6.1% and 8.3% respectively, are also higher than this index.
The current unstable context “is a difficult situation for many people,” acknowledged Mr. Emond. “Not only is everything more expensive, but people are also seeing their savings drop,” he said. The CEO. of the CDPQ wanted to reassure Quebecers: “Their pensions are absolutely not at risk”.
He also recalled that the figures presented on Wednesday stop at the end of June, just before the rebound that the markets experienced in July. “If we took the photo today, a month and a few later, the portrait would be markedly different. In fact, we would have 15 billion more in our assets, which is about half of the decline of the first six months,” he pointed out.
However, the good performance in July is no guarantee for the coming months, he agrees, and the rest of the year is still likely to be “extremely difficult”.
Shares of listed companies were the asset class that suffered the most during the first six months of the year (-16.0%). “Investors had to navigate through the worst half of the last 50 years,” reminded Mr. Emond.
In an exceptional context of simultaneous correction of the stock and bond markets, the Caisse de dépôt also recorded a drop in yield in fixed income for the first half of the year (-13.1%).
On the real asset side, however, the real estate and infrastructure portfolios posted positive returns (10.2% and 5.8% respectively), “a sign that they are playing their role of diversification well by limiting the "impact of inflation on the overall portfolio", we detail in the Caisse's press release.
Moreover, even if oil assets have been increasing sharply for several months, boosted by robust energy demand and tight supply, the CEO. of the CDPQ says he has "no" regrets about the institution's complete exit from the oil sector.
"I would not like there to be an impression in the population that there have been losses [by selling our oil assets]", affirmed Mr. Emond, in reaction to an article in La Presse which amounted to nearly a billion dollars the money that the CDPQ could have collected if it had waited longer before disposing of the majority of these titles. “We sold at a profit,” he insisted, explaining that there was no perfect time to do so.
“We got six billion dollars of return, over a period of two to three years, in renewable energies and two billion dollars with natural gas, which is a transition energy source”, also underlined Mr. Emond to justify the strategy of the Quebec institution.
CDPQ put out a press release on its mid-year results stating it posted -7.9% six-month return and 6.1% five-year return, outperforming its benchmark portfolio over all periods:
At CDPQ, we invest constructively to generate sustainable returns over the long term. As a global investment group managing funds for public pension and insurance plans, we work alongside our partners to build enterprises that drive performance and progress. We are active in the major financial markets, private equity, infrastructure, real estate and private debt. As at June 30, 2022, CDPQ’s net assets totalled CAD 392 billion. For more information, visit cdpq.com, follow us on Twitter or consult our Facebook or LinkedIn pages.
Let me begin by stating these results are not surprising given the challenging markets in the first half of the year. As stated in the press release, the returns of CDPQ’s eight largest depositors ranged from -7.0% to -9.9% for six months depending on their risk tolerance.
I also want to correct something I wrote on Tuesday, putting CPP Investments' F2023 Q1 loss in proper context.
The CPP Fund experienced a loss of roughly 7% in the first six months of this calendar year (I don't have precise figures, just estimating based on public figures), which makes sense given the significant selloff in global bond and stock markets during that time.
Still, nothing changes in terms of my thoughts and analysis Just like CDPQ, CPP Investments is extremely well diversified globally and has more equity exposure than other large pension funds which helps explain the loss. However, the loss would have been a lot worse had it not been for its active management strategy and global diversification.
Both funds are similar but you can't compare them directly because they have different clients, liquidity profiles (CDPQ is more mature), asset class weights and mandates but they are both delivering meaningful added value over their reference portfolios over the long run and this is what ultimately counts for their contributors and beneficiaries.
As one senior pension manager told me earlier: "The key thing to understand is these portfolios are acting as they should by design, so it shouldn't be surprising to see losses when you have bonds and stocks selling off strongly during a period where inflation hit a multi-decade high."
Discussion with Charles Emond, President and CEO of CDPQ
Yesterday, I had a chance to talk to Charles Emond, CDPQ's President and CEO.Charles was kind enough to call me after I reached out and I want to thank him for taking the time to speak with me.
I told Charles that I am not a big fan of quarterly or mid-year results because pensions have a long investment horizon.
He told me it's all about "reassuring people" and he also told me since CDPQ and others issue bonds and are rated by credit agencies, they need to disclose information at least twice a year.
Charles began by stating some key messages he wanted to relay:
First, this is the worst first half of the year in 50 years for equity and bond markets which went down anywhere between 10-30%. So we are at -7.9%, we beat the market and our benchmark is at -10.5%. That's an important differential and what I was telling journalists is the average retail investor with a 60/40 stock/bond portfolio experienced losses of 15% during the first half of the year.
The second point is the six-month window is a very small window. We have been in a series of extreme market conditions for the past few years. The market goes up with tech and then the market went down and the only thing that went up is oil, rates go down to historic lows in a matter of weeks during the onset of the pandemic, then they go up quickly as inflation hits a 40-year high, then there is a war, the pandemic, etc. So as a theme, I am asking myself whether our strategy is working during this crisis of extremes?
And as a proof of that, the first six months we were down $30 billion and I told people since June 30th, 40 days later, we recovered half of that so don't freak out too much on taking a snapshot of the market as of now because market volatility will be with us for quite a while, get used to it and buckle up.
As a CEO, I am watching and talking to my depositors and Board and discussing whether the strategies in place are working. As you know, there have been some changes, we repositioned the real estate portfolio, we implemented changes in public equities, so how have we done during the last two years during this multi crises period?
I want to reassure people that pensions are safe. I told journalists, look at the last two years during this turbulent period, we had an annualized return of 7.3%, our assets are up $60 billion and that's twice better than our benchmark at 3.6%.
The goal is to build a portfolio that goes up more than the market and resists better when the market goes down. And it's important, there is value outperfomance, it's not just theoretical, we need absolute returns, we can't pick the environment, and if we had just followed our benchmark, the assets wouldn't be at $392 billion, they'd be at $364 billion, so it actually matters because you can rebound better and that's what happened in July.
I try to tell people to have some perspective. The assets went up $100 billion over the last two years, we lost $30 billion and are still up $60 billion (net) and our returns are there over a 5 and 10-year period.
And it's important because there was a trauma at the Caisse in 2008. It's completely the opposite now. The 60/40 portfolio was down 15% in the second hald of 2008 but the Caisse lost 24% back then during that time and now we lost 7.9% and are much larger ($120 billion to $400 billion). We are significanltly above our benchmark and it was quite the opposite the last time around.
I am trying to tell people not to get distracted by dollar figures, it's just a point of time and has nothing to do with the past which was a completely different environment.
I understand, these are big figures, so it was a matter of reassuring people and hopefully we accomplished that to a certain extent.
I completely agree, CDPQ now has noting to do with CDPQ in 2008, it's a much bigger and better run organization which is a lot better diversified across asset classes, sectors, strategies, geographies and there is a relentless focus on risk-adjusted returns.
It doesn't mean the organization can't experience a loss, it obviously will, but over the long run, it will add significant value over its reference portfolio and the proof is in the pudding.
We then chatted a bit about Teachers' positive performance for the first half of the year and Charles told me he was asked that question by a journalist and explained:
I'm not one to talk about what others are doing right or wrong, I have enough on my plate. As you know, Teachers' manages assets and liabilities so inflation matters more to them. They are a more mature plan. I told the journalist they have about 10% in public equities so obviously they didn't experience the downturn of the first six months of 2022 and they also have 15% in commodities and natural resources which performed great during this time. We have none and these two positions benefited them during this time.
The point is the following. We have different scope of mandates, different responsibilities, different levels of maturities, different levels of leverage, different number of depositors (with different risk tolerance), so I am always telling journalists, be careful because we all look the same but we are quite different and there are reasons why certain comparative studies are being taken and why others are not.
Personally, I hate when people compare pensions because they are not able to compare them properly starting by understanding their assets in relation to their liabilities and how it influences their asset mix and risk tolerance.
Again, OTPP is delivering on its mandate, performing exceptionally well, but it's not right to make direct comparisons with CDPQ and others for all sorts of reasons.
The other thing I noted with Charles is CDPQ provides a lot more details in its semi-annual update than other large Canadian pensions.
He agreed, told me they have detailed performance by asset classes and provide details relative to their benchmarks and have a big press review."This is another reason why it's tough to compare performances between pensions until they release their annual results."
We then briefly chatted about the whole Celsius fallout and Charles told me he got a lot of questions by journalists and reiterated some of the same points with me.
First, nobody is happy with this outcome at the risk of stating the obvious. But I told journalists this morning a few things. First, this is an exception in our venture capital portfolio. Our VC portfolio is high performing, delivering 35-40% returns over the last 5 years and we are very cautious. The loss rate in the industry due to external forces lasts several years and is in the vicinity of 40-50%. Ours is 10% so we are play this very cautiously.
Now, on Celsius, there have been a couple of lessons learned. Obviously we came in too early. The sector is in transition from a regulatory standpoint and the company was in hyper growth. It's a company that grew to a billion in revenues in a few years but it weakened itself financially just before there was some of the risk off in markets. We brought in a very experienced management team which included the former CFO at RBC (Rod Bolger) and people from Morgan Stanley's risk department but with the crisis unfolding so fast, it all happened too quickly for the new management team to execute the value creation plan they had in mind.
Our intentions were good, we are not the only institutional player in the space. BlackRock made announcements, as did some pensions and around 20 banks have all showed interest. What we were aiming for isn't the crypto, it's the potential on the blockchain and we actually also wanted to help on the regulation of the sector which we feel is important. But I think we underestimated the length of time and order of magnitude of the obstacles to get through that. We had a plan and ran out of time. The reality as I told the media is I have to restrain my comments as we want to preserve our right to recourse as we might be considering legal options.
I told Charles I don't want to focus too much on Celsius as it's such a grossly insignificant part of the total portfolio and writing off this investment will not make a difference to overall results.
He agreed but added: "It's important that we learned some lessons and if we make mistakes, they are not fatal."
Now, in terms of what went right, Real Assets came in nicely as Real Estate and Infrastructure together generated 7.9%, outperforming the benchmark of 2.4%:
In Real Estate we are continuing to reposition the portfolio. We were at -15% in 2020, +12% last year, +10.2% in the first half, a little bit below its index but it's because the index is lagging and includes a bit of 2021. Real assets did their job in an inflationary environment. Inflation is a negative but some assets react well to it contractually.
I think Ivanhoe Cambridge and CDPQ's Infrastructure team are doing an excellent job as are all the investment departments at CDPQ.
Lastly, I asked Charles if he sees tough times ahead:
Yes, absolutely, we have the foundations to get through it. The last two years' performance proves it because if we had to do a stress test to go over what we went through the last 24 months, I would have laughed at my team almost. But we are very cautious on markets here. Inflation concerns were the story the first half. Now we may move into economic slowdown concerns and it will be important to see how central banks land all that, so we remain cautious despite the positive upward move in the market over the past month and half. At the same time, if we move towards a slowdown or recession, we will start seeing some assets react the way we are used to, that is the bond mix will recover where equities will struggle a little bit depending on what's priced in whereas in the first six months, there was no place to hide, there was a rare and simultaneous correction in both bonds and equities and that impacted the overall portfolio. We feel pretty good about the overall portfolio but I feel there is a good 12 months of turbulence ahead of us. For the market and economy finding its balance after the big Covid trade, there is an unwinding all of that and we are trying to see where we land in all of these scenarios.
I thank Charles for getting back to me on short notice and graciously providing me with so many great insights.
Below, a Radio-Canada Zone Économie interview with Charles Emond which took place yesterday (in French). He addresses a lot of concerns, including exiting oil & gas and their investment in Celsius head on. He also touches on other issues including the REM and exporting CDPQ Infra's model to other places.
But the most important point he makes is that CDPQ's strategy is working over the last two years of extremes and the portfolio is a lot more resilient now and in better shape to confront any turbulence ahead.
I can't state this point enough times, I have zero concerns about CDPQ and CPP Investments experiencing losses during the first six months of the calendar year and think way too much media attention is being placed on way too short a time frame from a pension perspective.