Palash Gosh of Pension & Investments reports CDPQ posts 7.2% return in 2023:
Caisse de Depot et
Placement du Quebec, Montreal, delivered a net return of 7.2% in
calendar year 2023, slightly below the benchmark return of 7.3%.
For the five-year period, CDPQ
returned an annualized 6.4%, above the 5.9% of the benchmark, said a
Feb. 22 release. Over the 10-year period, the annualized return was
7.4%, compared with 6.5% for the benchmark.
As of Dec. 31, CDPQ's net assets totaled C$434 billion ($327.4 billion), up from C$402 billion at the end of 2022.
In 2022, CDPQ returned a net -5.6%, above the benchmark return of -8.3%.
For 2023, by asset class, equities,
which comprises equity markets and private equity, returned a net 10.1%,
below its benchmark of 14.3%.
For the five-year and 10-year periods,
equities returned a net 10.9% and 10.7%, respectively, compared with
benchmarks of 11.2% and 9.6%.
With respect to public equities, CDPQ
noted that since 2020, a "few large public U.S. tech companies have
dominated the performance of the main stock indexes, creating a
phenomenon of historically concentrated gains," CDPQ said in the
release. CDPQ's own public equities portfolio saw its performance
"driven by growth stocks, as well as by large positions in Quebec
companies, which performed well."
The private equity
portfolio was affected by interest rate hikes as well as by an increase
in financing costs, which affected certain private companies.
"This slowdown was expected after the
portfolio produced considerable returns in recent years," CDPQ noted.
"Some sectors were hit harder, including healthcare as it returned to
normal activities following years of high volumes related to the
pandemic. In contrast, private investments in Quebec generated good
returns."
Fixed income returned a net 8.1%, above its benchmark of 7.7%, in 2023.
For the five-year and 10-year
periods, fixed income returned a net 1.7% and 2.9%, respectively,
compared with benchmarks of 0.8% and 2.1%.
Regarding the pension
fund's bond assets, CDPQ said the fixed income market was characterized
by higher yields and the narrowing of corporate credit spreads.
"Volatility remained a highlight
during the year: 10‑year bond yields fluctuated between 3.3% and 5.0%,
finishing the year stable in the U.S. and down 0.2% in Canada," CDPQ
added.
CDPQ partly attributed the one-year
outperformance of fixed income to the portfolio's "positioning in
government debt, which benefited from lower rates in certain emerging
countries, good execution in corporate credit and premiums on private
debt that foster a high current return."
Real assets (which comprise the real
estate and infrastructure portfolios) returned a net 2.2%, but that
still beat its benchmark of -4.3%.
For the five-year and 10-year
periods, real assets returned a net 4.1% and 7%, respectively, compared
with benchmarks of 3.3% and 6.6%.
Concerning its real assets portfolio,
CDPQ noted that the real estate sector had to contend with structural
trends in its industry, while the infrastructure portfolio "sustained
its momentum of recent years by continuing to provide a good combination
of protection against inflation and attractive current returns."
Within infrastructure, assets in
essential sectors such as transportation and renewable energy were among
the performance drivers in 2023.
Mathieu Dion of Bloomberg reports Quebec pension hit with real estate loss as 'hostile' market persists:
Quebec’s public pension manager reported a
7.2 per cent return in 2023, as losses in real estate detracted from big
gains in its credit and stock portfolios.
Caisse de Depot et Placement du Quebec has restructured its real
estate business, shifting capital to apartments and industrial
properties, but it wasn’t enough to offset problems in the office
sector. The fund manager posted a 6.2 per cent loss on its $46 billion
property portfolio — the only asset class for which it had a negative
return last year.
Nathalie Palladitcheff, the head of Ivanhoe Cambridge, CDPQ’s real
estate arm, described last year’s environment as “hostile.” High
interest rates and low occupancy have created a difficult outlook for
office owners and their lenders, with more than $1 trillion in
commercial real estate loans set to mature by the end of next year.
“The increase in rates impacts both the valuation and the cost of
debt, and this resulted in a very significant drop in transactional
volumes on a global scale,” Palladitcheff said, referring to the broader
real estate market. “They have been halved in Europe, halved in the
United States, even an 80 per cent drop in transactions in Germany, for
example.”
In equity markets, Canada’s second-largest pension fund benefited
from its high exposure to the technology sector with a 17.7 per cent
gain.But CDPQ’s private equity portfolio recorded just a 1 per cent
increase, as rising financing costs impacted private companies.
The fund’s net assets grew by $32 billion to end last year at $434
billion. It’s a shift from 2022’s results, when the firm posted its
worst annual return since the global financial crisis.
CDPQ’s assets under management have grown by almost $100 billion since the beginning of 2020.
“We may reach a crossroads in the year ahead, with many central banks
likely to pivot, but the scope and sequence remain unknown,” CDPQ Chief
Executive Officer Charles Emond said in a statement. “With a backdrop
of downward but persistent inflationary pressure combined with lingering
volatility, our portfolio remains well-positioned to keep delivering
the long-term returns our depositors need.”
Earlier today, CDPQ issued a press release stating it posted a 7.2% one-year return and net assets reached $434 billion, up $32 billion:
CDPQ today presented its financial results for the year
ended December 31, 2023. The weighted average return on its depositors’
funds was 7.2% in 2023, in line with its benchmark portfolio’s
7.3% return. Over five years, the annualized return was 6.4%, outpacing
the 5.9% of the benchmark portfolio, which represents close to
$12 billion in value added. Over ten years, the annualized return
was 7.4%, also higher than its benchmark portfolio which stood at 6.5%,
producing over $28 billion in value added. As at December 31, 2023,
CDPQ’s net assets totalled $434 billion.
“The
year 2023 was marked by highly volatile bond markets and a historic
concentration of gains from a handful of U.S. tech stocks that drove the
main stock indexes. Faced with this context, our portfolio performed
well, and our depositors’ plans continue to be in excellent financial
health,” said CharlesEmond, President and Chief Executive Officer ofCDPQ.
“Since
2020, investors have had to weather market conditions that ranged from
one extreme to the other. In such environments, our portfolio has grown
by nearly $100 billion over the period. We may reach a crossroads in the
year ahead, with many central banks likely to pivot, but the scope and
sequence remain unknown. With a backdrop of downward but persistent
inflationary pressure combined with lingering volatility, our portfolio
remains well positioned to keep delivering the long-term returns our
depositors need,” concluded CharlesEmond.
Return highlights
In
the past few years, there has been a more pronounced variation in
returns, year over year, in most asset classes. This is particularly the
case for stock and bond markets, which, following a severe and
simultaneous correction in 2022, bolstered CDPQ’s performance in 2023.
Following a period of considerable returns, private equity was affected
by the sharp rise in rates and the economic slowdown. Impacted by the
same economic factors, the Real Estate portfolio—which posted the best
return in 2022—also had to contend with structural trends in its
industry. The Infrastructure portfolio sustained its momentum of recent
years by continuing to provide a good combination of protection against
inflation and attractive current returns.
CDPQ manages the funds
of 48 depositors and adapts investment strategies to meet their
objectives, taking into account their different risk tolerances and
investment policies. The portfolio’s one-year, five-year and ten-year
returns represent the weighted average of these funds. In 2023, the
spread in the returns for CDPQ’s eight main depositors was fairly wide,
ranging from 6.3% to 9.3% for one year. Over longer periods, the
annualized return on their funds varied between 4.9% and 7.3% over
five years, and between 6.2% and 8.3% over ten years.
CDPQ’s investment results totalled $28 billion for one year, $108 billion over five years and $207 billion over ten years.
Fixed Income: Bonds lifted by higher yields, outpace their index
The
2023 bond market was characterized by higher yields and the narrowing
of corporate credit spreads. Volatility remained a highlight during the
year: 10‑year bond yields fluctuated between 3.3% and 5.0%, finishing
the year stable in the United States and down 0.2% in Canada. For
one year, the asset class posted an 8.1% return, compared with 7.7% for
its benchmark index. This return is in part attributable to the
portfolio’s positioning in government debt, which benefited from lower
rates in certain emerging countries, good execution in corporate credit
and premiums on private debt that foster a high current return.
Over
five years, the asset class posted a 1.7% annualized return, which was
limited by the weaker performance in 2022 in the wake of historic rate
hikes, but remains above its index’s 0.8% return. Over the period, it
benefited from private credit activities, an important driver of
performance, thanks in part to the high current return on this kind of
debt and the favourable execution of all mandates.
Real Assets
Real
Assets is a class composed of the Real Estate and Infrastructure
portfolios, which have quite different industry challenges.
Infrastructure: Assets that continue to perform well against inflationary pressure
In
2023, the portfolio continued its good performance of recent years,
generating a 9.6% return against an index at 0.3%. Assets in essential
sectors such as transportation and renewable energy were among the
performance drivers, as was the current return. With slower transaction
activity in 2023, the team remained disciplined in managing its
portfolio, both in selecting acquisitions and in sales and syndication
activities.
Over five years, the annualized return was 9.5%, above
its index’s 5.9%, primarily due to investments in renewable and
transition energy and in port and telecommunications assets.
Real Estate: Lower performance, but above the index in a transforming industry
The
market was difficult for real estate in 2023, which is reflected by the
benchmark index’s -10.0% one-year return. Despite economic challenges
and structural issues in some sectors such as offices, the Real Estate
portfolio demonstrated more resilience, and the repositioning toward
promising sectors such as logistics that began in 2020 mitigated the
decrease in value. As such, the portfolio recorded a -6.2% return for
one year, above its index. In 2023, teams remained selective in the
slowest transactional market in 15 years, with acquisitions in promising
sectors of the future aligned with the portfolio’s evolution, as well
as disciplined dispositions.
Over five years, the annualized
return was -0.5%, compared with 0.8% for the index, notably due to the
portfolio’s overweighting in Canadian shopping centres at the beginning
of the period. The strategic repositioning over the last few years,
which represented around 300 transactions totalling over $50 billion, is
nevertheless bearing fruit: since the pivot, $5.5 billion in value
added has been generated compared with the benchmark index.
Equities
The
Equities asset class is composed of Equity Markets and Private Equity,
which have seen vastly different market conditions in recent years.
Equity Markets: High return, above the index in a hyper-concentrated market
Over
five years, the portfolio recorded an annualized return of 9.0%, below
its index’s 10.0%, due to lower exposure to large U.S. growth and tech
stocks at the beginning of the period. The current exposure enables
leveraging the potential of these stocks, while avoiding an
overconcentration as evidenced in the markets.
Private Equity: Following a period of strong returns, rate hikes affect theportfolio
Over five years, the annualized return was 14.0%, above
its index’s 12.4%, due to the careful selection of direct portfolio
investments in the technology, financial and consumer goods sectors.
An investment in Solotech,
a global leader in audiovisual and entertainment technology, to
facilitate its international expansion. This is the largest financial
investment in the company in 10 years, and a return by CDPQ as
a shareholder.
Most recently, support for Metro Supply Chain’s acquisition of SCI Group Inc., representing the group’s 10th acquisition since partnering with CDPQ in 2018.
Major real estate and infrastructure projects
Achievement of a milestone in delivering the REM
with the commissioning of the South Shore Branch between Gare Centrale
Station and Brossard on July 31, 2023. Once completed, the 67-km project
will represent the longest automated light metro line in the world.
In addition, CDPQ ranked first in the
world, alongside three other international investors, in the Global
SWF’s 2023 GSR ranking, a benchmark in assessing the governance,
sustainability and resilience practices of 200 sovereign wealth and
pension funds worldwide. CDPQ was also the first Canadian pension fund
to receive the Terra Carta Seal from the Sustainable Markets Initiative
in recognition of its leadership on sustainability.
More details
on CDPQ’s sustainable investing strategy, including its progress on
climate targets, the advancement of its commitments and initiatives in
terms of diversity, equity and inclusion, as well as governance, will be
presented in the Sustainable Investing Report published in the spring.
CDPQ incurs
costs to conduct its activities, including operating expenses, external
management fees and transaction costs. As at December 31, 2023, the
total cost for internal and external investment management was 59 cents
per $100 of average net assets, compared with 48 cents per $100 of
average net assets in 2022. This total is up from the prior year due to
fees associated with higher asset performance. Operating expenses
remained stable at 22 cents per $100 of average net assets. CDPQ’s cost
ratio compares favourably with that of its peers.
The credit
rating agencies reaffirmed CDPQ’s investment-grade ratings with a stable
outlook, namely AAA (DBRS), AAA (S&P), Aaa (Moody’s) and AAA
(Fitch Ratings).
ABOUT CDPQ
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 December 31, 2023, CDPQ’s net assets totalled
CAD 434 billion. For more information, visit cdpq.com, consult our LinkedIn or Instagram pages, or follow us on X.
Let me begin by apologizing to Charles Emond as I didn't reach out to him today for extra comments because I'm preparing for my second back surgery tomorrow and was on the phone with the hospital and preparing for that surgery.
Dr. Aoude did wonders back in April of last year as decompression surgery worked perfectly on my right side but the left side was a problem because it's foraminal lumbar stenosis and decompression doesn't work when that's the case as the nerve is difficult to reach without removing disc. Only fusion of my L3-L4 disc which Dr. Jarzem will perform tomorrow can help but there are risks as in any back surgery.
At least Dr. Jarzem made me laugh yesterday as he reviewed my case with Dr. Aoude to see if he can take me to OR on Friday and saw I was in distressing pain on my left side. I told him: "Dr. Aoude did wonders on my right side, no more pain there but the left side is crippling me."
Dr. Jarzem replied: "He's the right side specialist, I'm the left side one so you're getting two for the price of one," which made Dr. Aoude and me chuckle.
Alright, enough on my health issues, hopefully my back surgery goes well and I will recover and be able to walk, stand, sit and sleep again without any intense nerve pain on my left hip, buttock and thigh.
CDPQ's 2023 results were solid and in line with what I was expecting.
Let's begin with Real Estate since that is where everyone seems to be focusing on as there are issues there.
From the Bloomberg article:
Nathalie Palladitcheff, the head of Ivanhoe Cambridge, CDPQ’s real
estate arm, described last year’s environment as “hostile.” High
interest rates and low occupancy have created a difficult outlook for
office owners and their lenders, with more than $1 trillion in
commercial real estate loans set to mature by the end of next year.
“The increase in rates impacts both the valuation and the cost of
debt, and this resulted in a very significant drop in transactional
volumes on a global scale,” Palladitcheff said, referring to the broader
real estate market. “They have been halved in Europe, halved in the
United States, even an 80 per cent drop in transactions in Germany, for
example.”
Ms. Palladitcheff has done wonders repositioning that portfolio, diversifying out of retail into logistics and multifamily but offices remain a problem.
Also, as she correctly points out, the increase in rates impacts both the valuation and the cost of
debt, and this resulted in a very significant drop in transactional
volumes on a global scale.
Given the global backdrop in real estate and the lagged performance relative to publicly-traded REITs, I wasn't surprised Real Estate recorded a -6.2% return for
one year, above its index (-10%).
This has nothing to do with Nathalie Palladitcheff and her team at Ivanhoe Cambridge, all of Canada's major pension funds are going to post losses in their respective real estate portfolios in 2023 and I'll be calling out anyone who doesn't mark down assets.
The good news, or somewhat good news, it wasn't as bad as I feared.
Total real estate investments returned -2.0 percent for the first half and amounted to 3.9 percent of the fund at the end of the period. Unlisted and listed real estate investments are managed under a combined strategy for real estate.
Unlisted
real estate investments made up 58.4 percent of the overall real estate
portfolio and returned -4.6 percent, while investments in listed real
estate returned 1.7 percent.
The main driver behind the
negative return on unlisted real estate was the office sector, with US
investments in particular falling sharply in value during the period.
This was due mainly to increased vacancy, which means reduced income
for investors. The return on the listed portfolio was also affected by
the negative performance in the US office sector.
Why is this important?
Because as at the end of June, unlisted real estate was down 2% and at year-end, it was down 12%.
That
tells me the Fund's appraisers significantly marked down unlisted real
estate assets in the second half of the year as it became evident office
vacancies weren't getting better and other sectors also faced
challenges as rates hit financing (multifamily).
Importantly,
if Norway's Fund is posting -12% in unlisted real estate, it doesn't
portend well for the unlisted real estate portfolio at Canada's large
pension funds (to be fair, I suspect Norway's Fund has a bit more
exposure to offices but can't confirm this).
There were dramatic markdowns of unlisted real estate assets in the second half of the year and this is worth noting as Canada's large pension funds prepare to report their results.
I've already told people last week when I covered why CDPQ is integrating its real estate subsidiaries
that I expect a challenging time in real estate as assets were marked
down to reflect the clobbering publicly traded REITs took in 2022.
Why was Norway's unlisted real estate portfolio down 12% whereas CDPQ's real estate portfolio was down half that amount last year?
The answer is simple, Norway's unlisted real estate portfolio is made up almost exclusively of office properties which got hit hard last year (they are diversifying their unlisted real estate portfolio by sector and geography but given their enormous size, it takes time).
So, this just proves the repositioning that Nathalie Palladitcheff and her team have accomplished at Ivanhoe Cambridge is working and that's why they're beating their benchmark, adding $5.5 billion in value
added over their benchmark.
As far as CDPQ integrating its real estate subsidiaries, I posted a comprehensive post with my thoughts here.
Next, let's move on to Private Equity as high financing costs hit that portfolio too.
Again, nothing shocking to me, I'm expecting this at all of Canada's large pension funds but some may have fared better than others if their direct investments and distributions (selling assets) kicked in.
I noted in the press release that some sectors were hit harder, including health care as it returned to normal
activities following years of high volumes related to the pandemic.
CDPQ's new head of Private Equity Martin Longchamps has excellent experience coming over from PSP Investments and he and his team will maintain the focus on the long run where that portfolio continues to outperform its benchmark nicely.
Over five years, the annualized return in PE was 14.0%, above its
index’s 12.4%, due to the careful selection of direct portfolio
investments in the technology, financial and consumer goods sectors.
The Infrastructure portfolio had another solid year, generating a 9.6% return against an index at 0.3%.
From the press release:
Assets in essential
sectors such as transportation and renewable energy were among the
performance drivers, as was the current return. With slower transaction
activity in 2023, the team remained disciplined in managing its
portfolio, both in selecting acquisitions and in sales and syndication
activities.
Over five years, the annualized return was 9.5%, above its index’s 5.9%,
primarily due to investments in renewable and transition energy and in
port and telecommunications assets.
So far, so good, the insane concentration risk in a few megacap tech stocks hasn't collapsed but I would heed Stanley Druckenmiller's warning prior to the 1987 crash very seriously if this AI mania continues
As far as CDPQ's public markets, I would refer to my conversation with CDPQ's Head of Liquid Markets Vincent Delisle when I covered mid-year results back in August here.
Importantly, he explained the change in their quantitative strategy:
Not on the Fixed Income side. When I joined in 2020, the
Fixed Income strategy we have in Private Credit was launched in 2017.
It's been a great performer for CDPQ. We've made some minor adjustments
but it's a vehicle that has provided a very positive contribution so I
haven't been very active on that side.
In Public Equities, we have
made small adjustments. A lot of things were working but in some
aspects, the portfolio was a bit too concentrated in some defensive
mandates. So in terms of diversification, we diversified through broader
exposure to styles, and that included buying some technology names.
Just
to give you a sense of proportion, in 2020, we had 3.7% of the
portfolio exposed to large cap technology versus today, we are closer to
the 10%. So we are still underweight but we have introduced more
exposure to large cap tech.
Alpha generation was mainly
through fundamental stock picking strategies, both internal and
external. They still dominate the portfolio but we have introduced
quantitative portfolios as well whether it's internal or external.
We
currently manage north of $25 billion in internal quant strategies that
are doing very well. It's algorithmic, simple processes, math driven,
that I'm happy we introduced as they complement what we were already
doing very well with the fundamental equities bottom up teams.
The addition of more tech exposure obviously helped equities but knowing Vincent, he's looking intensely at the macro backdrop to see where the risks
He also spoke to me about emerging markets debt and how they played the long end well there and also explained why private credit remains a solid outperformer, helping the Fixed Income teams deliver solid returns last year (along with EM debt).
Also worth noting the Quebec portfolio rose significantly toward its ambition of $100 billion in 2026, with an
increase of $10 billion in one year, bringing the total to $88 billion.
I commend Kim Thomassin and her team for doing extraordinary work there, adding significant value to the fund and to the overall Quebec economy.
I'm not a huge fan of pension funds having dual mandates as I worry about governance issues but CDPQ seems to be doing it right.
All this to say that it was another solid year for CDPQ despite some challenges in the real estate and private equity portfolios which are affecting all funds.
Lastly, it is worth noting that Charles Emond’s mandate as President and Chief Executive Officer of CDPQ was renewed recently:
“We’re
facing tremendous challenges. The global environment has been volatile
and uncertain since 2020—and that will continue. To achieve our
ambitious objectives and keep striving to serve our depositors better in
these back-to-back extremes, we must continue to evolve as an
organization,” stated Charles Emond, President and Chief Executive Officer of CDPQ.
“We’re privileged to work for an institution whose unique
signature—constructive capital—is a great calling card that opens doors
to the best partners and best opportunities around the world. CDPQ is
also the pension fund most present in its local economy globally. I
would like to thank the Board for their trust and I’m extremely proud to
start this new chapter with the Executive Committee and all our teams.”
Mr. Emond’s second mandate is effective today.
As I stated in another post where I mentioned this,
I would have been shocked if Charles's mandate wasn't renewed
over the next five years because he's doing a great job at the helm of
this organization and it's not an easy job (probably one of the most
stressful jobs among Maple Eight CEOs because CDPQ has a dual mandate
and is always under the microscope).
One last note, it's not fair comparing Norway's 16% return last year to that of any Canadian pension fund simply because the asset mix there is heavily tilted toward public market beta and they have a much higher exposure to the Magnificent Seven stocks that significantly outperformed last year.
Canada's pension funds are a lot more diversified across public and private markets, they're not looking to shoot the lights out, they are looking to deliver consistent returns to meet their long-dated liabilities.
Alright, let me end it there, eat something light and go to sleep early to prepare for my surgery tomorrow (have to fast as it's general anesthesia).
Below, an older interview with CEO Charles Emond where he discusses the organization's unique "double mandate" - providing long-term financial returns for depositors and providing constructive capital to Quebec's economy.
Next, I added tonight's interview on Zone Economie (in French) where Charles goes over the results and more.
Lastly, Dr. Tony Mork talks about the problems of lumbar foraminal stenosis and how it can be treated in this 2 part series (he's talking up his book in treatments, so take that with grain of salt and listen to your specialist).
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