The Caisse de dépôt et placement du Québec posts a 13.6% return in 2010

The Caisse de dépôt et placement du Québec announced that its weighted average return on depositor funds was 13.6% for the year ended December 31, 2010. The Caisse’s net assets stood at $151.7 billion at the end of 2010, compared to $131.6 billion at December 31, 2009. This increase is due to net investment results of $17.7 billion, plus $2.4 billion in net deposits.

The three major asset classes contributed to the overall performance and net investment results: Fixed Income (9.7% return and $4.9 billion net result), Inflation-Sensitive Investments (16.3% return and $3.1 billion net result), and Equity (14.6% return and $9.2 billion net result). The Caisse outperformed its benchmark index by 4.1%. Of the 11 actively managed portfolios, representing approximately $122 billion and 81% of total net depositor assets, nine outperformed their benchmark index and added value.

"In a year marked by turbulence, Europe’s sovereign debt crisis and fears of a slowdown in the U.S., the Caisse generated strong results on many fronts," said Michael Sabia, the Caisse’s President and Chief Executive Officer. "Our teams successfully repositioned the Caisse to focus on its core business and select quality holdings, while managing the portfolios prudently to take advantage of hard-to-predict market conditions. Of course, we understand that, ultimately, the most important thing is our long-term performance," he added.

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

2010 ACHIEVEMENTS

During 2010, the Caisse implemented the five priorities of the strategic plan presented earlier in the year. "We kept our commitments and all the objectives related to these priorities, which called for major changes, were achieved on schedule," said Michael Sabia. "More importantly, though, our teams thoroughly and rigorously performed their duties to ensure the long-term strength of the Caisse’s foundations."

The main achievements are the following:

• Refocusing of investment strategies on the Caisse’s core business and in-depth changes to its portfolio line-up, making it more flexible and better suited to depositor needs.
  • Creation of three portfolios and changes to the mandates of 11 others.
• Establishment of a new client-oriented and efficient operational business model (including operations and information technologies) that will generate $25 million in annual recurring savings.
• Completion of several transactions in Québec, one of which, for example, increased the Caisse’s stake in Gaz Métro ($300M). During the year, the Caisse also announced seven investments stemming from its partnership with Capital régional et coopératif Desjardins, enabling the growth of companies in seven Québec regions.
• Continued progress in improving its risk management, including:
  • Reduction of more than 10% in absolute risk and more than 50% of the Caisse’s active portfolio risk.
  • Adoption of proactive strategies to mitigate risks in the context of the European crisis and period of rising interest rates.
  • Maintaining a robust cash flow level, at $48.9 billion at December 31, 2010.
  • Decrease of more than 50% of the overall leverage ratio (liabilities vs. total assets), which stood at 17% at December 31, 2010, compared to 23% at December 31, 2009 and 36% at December 31, 2008.
  • $3.7 billion reduction of debt of the Real Estate portfolio, which contributed to lower the leverage level from 55.8% at December 31, 2009 to 47% at December 31, 2010. In addition, the $6.7 billion leverage in the Private Equity and Infrastructure portfolios was completely eliminated.

"In 2010, we continued to build on our comparative advantages and take risks we can control. This allowed us to both reduce our risk and improve our performance. Maintaining a balance between risk and return is fundamental to our investment business," said Mr. Sabia.

MORE DETAILED RESULTS

"All in all, despite an uncertain environment, 2010 ended on a positive note, thanks to a significant rebound of stock markets in the fourth quarter spurred by the extraordinary measures of the IMF, European Union, European Central Bank and U.S. Federal Reserve," said Roland Lescure, the Caisse’s Executive Vice-President and Chief Investment Officer. "We managed to navigate this ever-changing environment well, concentrating on quality portfolio assets," he added.

Fixed income

The Bonds portfolio achieved an 8.4% return, 1.6% above its benchmark index. The drop in rates of government bonds, with maturities of five years or more, and the additional yield on corporate bonds, relative to government securities, accounted for most of these results.
The Real Estate Debt portfolio also benefited from declining rates, posting a 17.1% return. Falling mortgage rates in Canada, the U.S. housing market recovery and the sale of U.S. assets, conducted as part of the portfolio refocusing announced in 2009, largely explain the performance of the portfolio, which outperformed its benchmark index by 10%.

Inflation-sensitive investments

The Real Estate portfolio achieved a 13.4% return, outperforming its benchmark index by 1.8%. This performance is mainly due to the strong performance of retail properties in Canada and office buildings in Canada, the U.S. and Europe.

The 25.4% total return of the infrastructure portfolios for the year is due to the resilience of energy assets in the face of market turbulence and the recovery of airport service assets after the financial crisis. These portfolio assets possess strong fundamentals that have improved throughout the year.

Equity

The Equity portfolios had a positive absolute return, benefiting from the market rebound in the second half of 2010. Although the recovery has been uneven around the world, the diversification of the Equity portfolios enabled the Caisse to take advantage of the environment.

In total, the Equity portfolios represent $72.4 billion, approximately 48% of the Caisse’s net assets, including $19.3 billion in the Canadian Equity portfolio, $14.3 billion in our Global Equity and Québec International portfolios, $21.3 billion in international stock market index portfolios and $17.5 billion in the Private Equity portfolio.

The Canadian Equity portfolio generated a 15.7% return, 1.9% below its benchmark. This underperformance is primarily due to the portfolio’s overweight on large-capitalization companies with strong fundamentals and the dramatic outperformance of small-cap companies in 2010.

The Global Equity and Québec International portfolios slightly outperformed their benchmark indexes, with returns of 7.3% and 14.0%, compared to index returns of 7.0% and 13.7%, respectively. These results reflect the strength of international markets and timely active management picks in energy, industrials and consumer goods.

The index-managed U.S. Equity, Foreign Equity and Emerging Markets Equity portfolios produced returns in line with their benchmark indexes.

The Private Equity portfolio, which achieved a return of 26.7%, significantly benefited from the global recovery in mergers and acquisitions and the rebound of financings in this area. The sharp rise in asset valuations during the year mainly reflected improvements in operating performance, debt reduction and an increase in the profitability of Private Equity portfolio companies. Accordingly, more than two thirds of the 2010’s return is the result of activities in leveraged buyout and development financing.

Other

In 2010, the Caisse considerably reduced the risk attributable to the ABTN portfolio. At the same time, improving credit markets led to the portfolio’s $509 million positive contribution to the Caisse’s net investment results.

ASSET ALLOCATION

At December 31, 2010, the Caisse’s asset allocation was the following:

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

FINANCIAL FOUNDATIONS

The $8 billion refinancing program, completed in June, helped further improve the Caisse’s balance sheet. This financing was used to repay short-term debt and better match financing sources and financed real estate assets. This program did not increase the Caisse’s total leverage.

During 2010, credit rating agencies maintained their investment grade credit rating, with a stable outlook, namely AAA (DBRS), AAA (S&P) and Aaa (Moody's).

OPERATING EXPENSES

In 2010, the Caisse continued to improve its efficiency, paying close attention to its operating expenses and external management fees. As a result, it achieved its budgetary reduction goal of $20 million announced in spring 2010. Achieving this objective enabled the Caisse to continue to decrease total operating expenses and external management fees, which stood at $269 million in 2010. The ratio of operating expenses to total assets therefore decreased from 22 basis points (bp) in 2009 to 19.4 bp in 2010, a level that compares favourably to best-in-class manager standards

CONCLUSION

"There are many uncertainties remaining: the situation in North Africa and the Middle-East is evolving rapidly and the sovereign debt crisis in Europe has not been resolved. Moreover, in the United States, employment levels stagnate, the housing crisis persists and, at the same time, the exit strategy for expansionary monetary and fiscal policies is far from finalized," said Mr. Sabia.

"We posted solid results in 2010, but we know we have much work to do to provide good long-term returns to our depositors — given the current uncertainty and market volatility that will prevail in the coming years," added Mr. Sabia.

• Press Release
• Combined Financial Statements

Additionnal information to the 2010 financial results

FACT SHEETS

• Returns
• New Portfolio Offer
• Fixed Income
• Inflation-sensitive Investments
• Equity
• Valuation of Investments