Return of 3.6% for the Caisse in first half of 2011 - A Caisse Better Positioned to Face Market Turbulence

The Caisse de dépôt et placement du Québec announced today that the weighted average return of the depositor funds for the first half of 2011 is 3.6%. The Caisse’s net assets stood at $157.9 billion as at June 30, 2011, up $6.2 billion from $151.7 billion as at December 31, 2010. Investment income net of operating expenses totaled $5.3 billion for the first half of the year, with a further net contribution by depositors of $0.9 billion.

“These solid returns in the first half of the year were achieved in a climate characterized by gradual market deterioration; they reflect a portfolio structure closely aligned with the environment,” stated Michael Sabia, Caisse President and Chief Executive Officer. “All of the Caisse’s investment sectors contributed positively to the half-year returns.”

“The recent market turbulence shows that the global economic situation is highly uncertain,” added Mr. Sabia. “In our opinion, the uncertainty will likely persist for some time. Thanks to the efforts taken to strengthen its risk management, refocus its portfolio on its core business activities and maintain robust liquidity levels, the Caisse is better positioned now than before to face this challenging climate. However, since the Caisse is not immune to market turmoil, it must continue to exercise caution while navigating through such conditions.”

“Although the current situation presents many challenges, difficult markets also bring investment opportunities for a long-term investor like the Caisse,” added Mr. Sabia. The progress we have made and the work done by our teams to strengthen our foundations have provided us with the flexibility we require to seize such opportunities. Ultimately, what matters is that our long-term performance meets the needs of our depositors.”

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The Caisse’s overall portfolio returns for the last two years ended June 30, 2011 is 14.0% per annum, outperforming the benchmark portfolio return by 2.7% per annum. The portfolio’s cumulative value added over two years stood at $6.6 billion. For the first half of 2011, the benchmark portfolio return was 3.7%, representing a variance of 0.1% from that of the Caisse.

FIRST HALF YEAR HIGHLIGHTS

New Real Estate Strategy

• A major strategic initiative was implemented within the real estate group to increase its efficiency and better prepare it to face global competition:
  • Consolidation of the subsidiaries specialized in shopping centres and office buildings under the Ivanhoe Cambridge banner is under way. The goal is to increase synergies between core business activities, operational expertise developed over the years and the entrepreneurial spirit that make the Caisse one of the 10 largest real estate investors worldwide.
  • This consolidation is accompanied by a repositioning of the portfolio, including the withdrawal from the hotel sector and a renewed focus on the multi-residential sector.
• Repositioning of the Real Estate Debt portfolio has been completed with the orderly sale of complex financing products outside Canada.

Increased Investments in Québec

• The Caisse made new investments in Québec companies totaling close to $800 million. These investments aimed to support infrastructure projects such as the CHUM, the international expansion of Québec companies and the growth of SMBs throughout Québec.
• Over the first half of the year, the proportion of the portfolio invested in publicly-traded Québec companies grew from 16.8% to 19.5%, an increase in investments of approximately $450 million.

Ongoing Risk Management

• The absolute risk of the Caisse's overall portfolio improved slightly during the first half of 2011.
• Overall portfolio liquidity, totaling over $45 billion, remains very robust.
• To support its investment decisions, the Caisse continued to refine its risk management tools, particularly credit risk measurement and stress tests intended to simulate market stresses triggered by the European debt crisis, upheaval in the Middle East and North Africa, the impact of natural disasters in Japan, and the financial situation in the United States.

Cost Control

• Total operating expenses and external management fees are consistent with forecasts and remain unchanged from 2010, reflecting the Caisse's efficient management compared with its peers (less than 20 cents per $100 in assets under management).

RETURNS

Returns and Net Investment Results

"The economic and financial climate, already precarious at the beginning of 2011, progressively deteriorated with the decline in household incomes in many developed countries and the adverse outcome of the earthquake and tsunami in Japan," said Roland Lescure, Executive Vice President and Chief Investment Officer of the Caisse. These challenges have been exacerbated by the political uncertainty in Europe and the United States concerning problems of sovereign debt and fiscal imbalance, further eroding investor confidence in already shaken markets."

"The following weeks will be important in determining how the markets will evolve," said Mr. Lescure. Businesses have restored their profitability throughout the world and emerging economies retain their vitality, however, budgetary and monetary policies have very limited leeway in the majority of developed countries."

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Returns and net investment results come primarily from Private Equity, Real Estate, Real Estate Debt and Infrastructure portfolios, which generated $2.8 billion of the $5.3 billion during the first six months of 2011. Liquid portfolios of bonds and equities generated an additional $2 billion.

Returns as at June 30, 2011

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The variance of -0.1% to the index is due primarily to the Private Equity, Real Estate and Infrastructure portfolios that performed below their respective benchmark indices during the first six months of 2011. These same portfolios outperformed their benchmark indices during the two-year period ended June 30, 2011. They account for the bulk of the positive variance of 2.7% per year over the Caisse benchmark portfolio index during this period.

Asset Allocation

As at June 30, 2011, the Equity asset class represented approximately 47% of the overall portfolio, 37% in public equities and 10% in private equities. The Fixed Income and Inflation-Sensitive Investment asset classes, which are much less sensitive to market fluctuations, represented 37% and 15% respectively.