The Caisse de dépôt et placement du Québec announces a $7.2 billion increase in net assets and a 4.0% return in 2011

The Caisse de dépôt et placement du Québec announced that its weighted average return on depositor funds was 4.0% for the year ended December 31, 2011. The Caisse's net assets stood at $159.0 billion at the end of 2011, compared to $151.7 billion as at December 31, 2010. This growth is due to net investment results of $5.7 billion, plus $1.5 billion in net deposits.

“The Caisse delivered a solid performance in 2011—a year of many challenges in the markets,” said Michael Sabia, the Caisse's President and Chief Executive Officer.

The year 2011 was impacted by the European sovereign debt crisis which, combined with fears of a slowdown in emerging markets, heavily affected markets. Under these excessively volatile market conditions, the Caisse acted quickly by reducing its exposure to equity between the end of June and the end of September and by maintaining a high level of cash. It was also able to capitalize on its investments in Fixed Income, Private Equity, Real Estate and Infrastructure and generate a positive return for its depositors.

"Since 2009, we have worked on improving our ability to face turbulent markets. We have simplified our investment strategies, reduced our leverage and developed new tools, thereby enhancing our efficiency and agility. In 2011, these efforts served us well. Despite difficult conditions, we were able to adjust our asset allocation to protect our depositors' capital and notably grow our assets. After three years of hard work, the Caisse's net assets now stand at $159.0 billion, $3.6 billion above the level reached prior to the 2008 crisis," said Michael Sabia, the Caisse's President and Chief Executive Officer.

CHANGES IN THE CAISSE'S NET ASSETS 2007-2011 ($ BILLIONS)

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Since December 2008, depositors' net assets grew by $38.9 billion. This growth is attributable to net investment results of $35.2 billion, plus net deposits of $3.6 billion. For 2009, 2010 and 2011, the Caisse’s annualized return was 9.1%.

SUMMARY OF RESULTS SINCE 2008

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¹ Annualized return
² Average
 

"We still have substantial ground to cover, however our performance over the last three years shows that the changes we have implemented are bearing fruit with respect to returns, operational efficiency and risk reduction," commented Mr. Sabia.

2011 ACHIEVEMENTS

During 2011, the Caisse finalized the implementation of the five priorities of its strategic plan and completed an in-depth review of its investment strategies, particularly concerning equity markets and its investments in emerging markets. "We also made significant progress in each of the three components of our contribution to Québec's economic development, namely, investing in promising Québec companies, providing support to companies intent on expanding internationally, and developing entrepreneurship," added Mr. Sabia.

Strong Growth of the Caisse's Assets in Québec

The Caisse's assets in Québec grew by more than $4.5 billion in 2011, now exceeding $41 billion. During the year, we invested in approximately 100 different projects, which include, in particular:

• $400 million in the consortium which began construction of the new CHUM, a major project for the future of cutting-edge medicine;
• $800 million in many successful companies, including Cascades, GENIVAR, Industrial Alliance and Kruger;
• $160 million in the acquisition of Montréal's Rockhill complex and close to $50 million in a dozen real estate projects, including the renovations of Mail Champlain and Château Frontenac;
• $60 million to benefit 58 SMEs located in all regions of Québec, through the Fonds Capital croissance PME, a partnership between the Caisse and Desjardins Group.

Furthermore, the Morningstar National Bank Québec Index, focused exclusively on Québec companies, has been integrated in the Canadian Equity portfolio's benchmark index to better reflect Québec's economic weight. Accordingly, the weighting of Québec securities in the Canadian Equity portfolio grew from 17% at the end of 2010 to approximately 21% at the end of 2011, an increase of close to $600 million.

Finally, the Caisse continued working to forge closer connections with the business community throughout Québec. It also worked closely with Québec universities active in developing financial expertise.

Other Achievements

The Caisse made major investments in other sectors, thereby strengthening its international presence. It also continued to improve both its risk management and in-house expertise, which resulted in a number of achievements. In particular, the Caisse:

• Completed new investments during the year totaling $1.6 billion in the Infrastructure portfolio, including two major projects in the oil and gas sector, namely €360 million in Fluxys, in Belgium, and US$850 million in Colonial Pipeline, the largest pipeline network in the United States, serving 260 terminals in 13 eastern and southern states;
• Increased the number of commitments to emerging markets following the granting of management mandates in equity markets in Brazil, China and India and adopted a plan to invest upwards of $700 million in Brazilian real estate. These investments are made in collaboration with local partners and are in step with the Caisse's long-term strategy;
• Consolidated and reorganized its real estate subsidiaries, and implemented a new strategy focused on operational expertise and on holdings located in countries where the Caisse has a strategic advantage;
• Improved its ability to research and analyze economic and financial trends. The recruitment of international-calibre experts has enabled the Caisse to better understand the macroeconomic and financial climate, the global economic outlook and its potential consequences on the Caisse's holdings;
• Maintained a high level of liquidity, exceeding $45 billion at the end of 2011, allowing the Caisse to meet all its potential obligations, even in the event of a significant market correction. The Caisse uses different extreme scenarios to measure the adequacy of the liquidity it holds. These risk management tools have been developed over the last three years.

MORE DETAILED RESULTS

"The past year was a real roller coaster ride, and market conditions considerably deteriorated in the second half of the year," said Roland Lescure, the Caisse's Executive Vice-President and Chief Investment Officer. "Through our efforts and the tools we developed over the last three years, we were able to act quickly by reducing our exposure to equity markets in the third quarter amidst declining markets, and by subsequently rebuilding our position as systemic risks decreased," he added.

The Caisse’s return was 4.0%, slightly below its benchmark portfolio of 4.2%. Thirteen of the 17 specialized portfolios posted positive results. As such, the four Fixed Income portfolios generated $5.7 billion (10.4% return) while Inflation-Sensitive Investments, which include Real Return Bonds (18.4% return), Infrastructure (23.3% return) and Real Estate (11.0% return), generated $3.1 billion. The Private Equity portfolio (7.1% return) generated $1.1 billion. This return is considerably higher than that posted by Equity Market portfolios (-7.2% return) and limited reductions in value in the Equity category to $3.3 billion.

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¹ The total includes hedge fund, ABTN, asset allocation, overlay strategy and cash activities.
 

Fixed Income

The substantial decline in interest rates allowed the four portfolios in this sector to achieve strong gains with a return of 10.4%, outperforming its benchmark index by 0.9%.

In terms of net investment results, the Bonds portfolio ($4.0 billion) and Real Estate Debt ($1.0 billion) greatly contributed to the growth of depositors' assets. The initiative to refocus our Real Estate Debt activities, announced in the summer of 2009, was completed earlier than expected while generating returns of 17.1% in 2010 and 15.0% in 2011.

Inflation-Sensitive Investments

The three portfolios in this sector posted an excellent return of 13.9% in 2011.

The Real Return Bonds portfolio benefited from the appeal of Canadian bonds and from the lower expectations of real return to generate an 18.4% return.

The Infrastructure portfolio's 23.3% return stems from the robust operational performance of portfolio companies, and from the decline in long-term interest rates. Specifically, the return is in large part due to the performance of energy and airport service assets. This return is substantially above its benchmark index of 12.7%.

The Real Estate portfolio generated $1.8 billion in net investment results (11.0% return) due to a very strong performance in the shopping centre and office building sectors, especially in Canada and the United States. After two years of strong returns, managers have taken advantage of the strength of the Canadian market to sell certain assets and have accumulated cash to be able to reposition the portfolio in 2012.

The Real Estate portfolio return is below its respective benchmark index: 11.0% compared to 15.6%. The high level of cash in the Real Estate portfolio (close to $4 billion at the end of 2011) accounts for approximately half of this difference. The other half is due to the weak return of hotels, funds and other equity held by the portfolio—all non-strategic assets—compared to shopping centre, office building and multi-residential sectors that the Caisse expects to promote in the future.

Equity

After performing strongly for two years, Global Equity markets were unable to sustain the momentum without new monetary and fiscal stimulations by governments. Beginning in the summer, the European sovereign debt crisis, combined with fears of a slowdown in emerging markets and the precarious budgetary situation in the United States eroded investor confidence. Indexes plummeted on the majority of the major stock markets, particularly in the third quarter.

Throughout the year, Equity portfolios posted a negative absolute return of 4.2%, 0.8% below the benchmark index.

The Canadian Equity portfolio generated a -10.6% return, which is well below that of U.S. Equity (4.6% return) and confirms the strong correlation between Canadian Equity markets and Emerging Markets Equity portfolios (-16.4% return). It also falls short of its benchmark index which stood at -8.2%. Certain long-term portfolio positions, linked to the urbanization of emerging markets and the high demand for raw materials, underperformed in 2011. However, these positions have been successful over the long term and should persist accordingly into the future. Furthermore, the portfolio's insufficient exposure to high-dividend companies, which held up very well in 2011, accounts for much for the decline in value.

Now more than ever, the globalized world in which companies operate requires investors to deeply understand their strengths and overcome their weaknesses. The Caisse has initiated an in-depth review of the positioning of the Canadian Equity portfolio to ensure that it is well aligned with the new market conditions.

The Private Equity portfolio generated a 7.1% return. This performance is significantly above public market benchmark indexes and is due primarily to buyout activities. This portfolio continues to perform very well over time with annual returns of 10.8% in 2009 and 26.7% in 2010.

Value Added

Each year, the Caisse compares its performance with that of its benchmark portfolio. Since the reorganization of the Caisse's activities in the summer of 2009, the value added represents slightly more than $6.4 billion.

VALUE ADDED SINCE THE PORTFOLIO RESTRUCTURING IN JULY 2009

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¹ The total includes hedge fund, ABTN, asset allocation, overlay strategy, commodity and cash activities.
 

FINANCIAL FOUNDATIONS

During 2011, the Caisse's financial position remained solid with overall portfolio liquidity totaling over $45 billion and leverage (liabilities over total assets) remaining stable at 17%.

Credit rating agencies reaffirmed the Caisse's investment grade credit rating with a stable outlook, namely AAA (DBRS), AAA (S&P) and Aaa (Moody’s).

OPERATING EXPENSES

In 2011, the Caisse continued to improve its efficiency, paying close attention to its operating expenses. As such, total operating expenses, including external management fees, stood at $278 million in 2011. The ratio of operating expenses to total assets therefore decreased from 19.4 basis points (bp) in 2010 to 18.0 bp in 2011, a level that places the Caisse among best-in-class fund managers.

CONCLUSION

"Once again, in 2011, the Caisse posted solid results. We are now able to focus on the future; a future certainly ripe with challenges, but also business opportunities. Although we approach the global economy's high level of risk prudently, we are very well positioned to seize very attractive investment opportunities created by this climate of uncertainty and by the growth of emerging markets. For the first time in a long time at the Caisse, we have the financial flexibility to take advantage of such opportunities, both here in Québec and elsewhere in the world. This is essentially what we can expect in the years to come," concluded Mr. Sabia.