Four-year annualized return reaches 10% - 13.1% return for 2013

Clients' net assets reach $200.1 billion

MONTREAL, Feb. 26, 2014 /CNW Telbec/ - La Caisse de dépôt et placement du Québec announced that the weighted average return on its clients' funds reached 10% over four years and 13.1% for the year ended December 31, 2013. La Caisse's net assets totalled $200.1 billion at the end of 2013, versus $131.6 billion as at December 31, 2009, increasing by $68.5 billion over four years. This growth is due to $61.2 billion of net investment returns plus $7.3 billion of net deposits.

"With a 10% annualized return over four years, we have exceeded our clients' long-term targets," said Michael Sabia, President and Chief Executive Officer. "Over that period, we also outperformed our benchmark portfolio by 1.1%, or $6 billion of value added. In an economic environment characterized by major adjustments in emerging markets, a lengthy recession in Europe and the beginnings of a recovery in the United States, we have stayed focused on our strategy and continued to invest in quality assets anchored in the real economy. The solid results of the past few years are evidence of the fact that our plan is working."

CAISSE NET ASSETS FROM 2009 TO 2013 (IN BILLIONS)
A chart is available on the Caisse's website

Equity markets advanced strongly in 2013, with a weighted return of 22.4%, while bond markets generated a -1.2% return. Asset allocation therefore had a particularly significant impact on our clients' returns for the year. Their allocation decisions depend on their target returns and risk tolerance, hence the significant differences in the returns of our eight largest clients which, in 2013, ranged from 8.9% to 15.5%. Over four years, this difference narrowed considerably, as returns ranged from 9.1% to 10.6%, showing, once again, the importance of a long-term outlook.

DIFFERENCES IN RETURNS OF THE EIGHT LARGEST CLIENTS
A chart is available on the Caisse's website

"Over the past few years, central banks have used exceptional monetary policies to stimulate the global economy," Mr. Sabia added. "That being said, we are entering a period of monetary policy normalization that will take us into uncharted territory and inevitably create uncertainty. With that in mind, we will continue to be selective and focus on an absolute-return strategy built on in-depth understanding of the companies and markets that we invest in to generate stable returns, while we distance ourselves from the changing mood of the markets."

MAIN ACHIEVEMENTS

La Caisse continued to deploy its new investment strategy in Québec and around the world. The priorities underlying the new strategy include absolute-return management, a focus on less-liquid assets, emerging markets and in-depth expertise.

Presence in Québec

La Caisse's new investments and commitments in Québec companies totalled $10.3 billion over four years, including $3.6 billion in 2013. Since 2009, they amount to $11.9 billion.

Over the past four years, La Caisse's assets in Québec rose by $20.3 billion, reaching $53.8 billion as at December 31, 2013, with $32.5 billion invested in the private sector.

"Since 2009, we have considerably increased our investments in Québec," Mr. Sabia said. "Beyond these dollar amounts, we continue to support the development of a new generation of Québec leaders and to provide expertise and tangible assistance to entrepreneurs in all regions of Québec. In 2013, we were especially active with small and medium-sized businesses and we enhanced what we can offer to the manufacturing and mining sectors, two key drivers of the economy."

For more information on La Caisse's presence in Québec, refer to the fact sheet provided with this press release.

Absolute-return management

Early in 2013, La Caisse created the Global Quality Equity portfolio, with assets under management reaching $17.2 billion as at December 31, 2013. As the cornerstone of La Caisse's approach to equity markets, this portfolio focuses on securities of large, established companies exposed to global growth, which will be held over long periods, instead of targeting indexes. This portfolio is central to La Caisse's investment strategy and aims to generate more stable returns with lower risk. It is therefore well suited to meeting clients' risk-return profiles.

Less-liquid assets

In line with its strategy, La Caisse continued to invest in private equity, infrastructure and real estate. Over the year, it invested more than $9.6 billion in less-liquid assets, including the Port of Brisbane in Australia and a dozen wind farms in the United States, Canada and Québec.

Ivanhoé Cambridge, a real estate subsidiary of La Caisse, was particularly active in 2013, with acquisitions totalling $5.2 billion. It strengthened its presence in the United States by acquiring a 51% stake in 1211 Avenue of the Americas in New York City. It also acquired the office towers at 10 and 120 South Riverside Plaza in Chicago's West Loop and it began construction of the River Point tower, Chicago's largest property development project of the past five years.

Ivanhoé Cambridge continued to reposition its European portfolio strategically by focusing on targeted markets and sectors. Notable acquisitions include interests in the Woolgate Exchange in London and in PointPark Properties, a logistics and warehouse company. Through this platform, La Caisse gains exposure to a growth sector linked directly to the thriving e-commerce trade.

Ivanhoé Cambridge is active internationally and is also deeply rooted in Québec, where it acquired AIMCo's 50% stake in Place Ville Marie, becoming the sole owner of this landmark property in downtown Montréal. It also stepped up its regional presence with acquisitions such as a 50% interest in the Carrefour de l'Estrie shopping centre.

Emerging markets and in-depth expertise

La Caisse strengthened its research teams and significantly increased its expertise in emerging markets in 2013, notably by establishing a team to oversee the development of an active investment strategy for these markets. La Caisse also obtained an additional $300-million quota (QFII) to invest in companies listed on the Shanghai and Shenzhen stock exchanges.

HIGHLIGHTS OF RESULTS

"In 2013, we saw signs of improvement in the global economy as interest rates rose and most of the world's major stock markets made strong gains," stated Roland Lescure, Executive Vice-President and Chief Investment Officer. "The only exception was emerging markets, which, in spite of their disparate realities and significant short-term challenges, will remain an important engine of the world economy over the coming years. The strong growth in the U.S. markets in recent years has confirmed its economic recovery and improved fundamentals. The exceptional advances recorded in recent months are due above all to investor confidence, but that confidence remains fragile."

In line with clients' long-term target returns, La Caisse's results are compared with benchmark indexes over a period of four years. For that period, La Caisse's annualized return was 10%, or 1.1% more than the 8.8% return on its benchmark portfolio. This difference represents $6 billion of value added.

DETAILED RETURNS BY ASSET CLASS VS. BENCHMARK INDEXES
A chart is available on the Caisse's website

Summary of four-year results

Over four years, each asset class contributed significantly to La Caisse's overall return. During that period, net investment results totalled $61.2 billion and net deposits were $7.3 billion.

The Fixed Income asset class generated a 5.9% annualized return, outperforming its benchmark index by 1.4%. All the portfolios in this asset class added value by surpassing their benchmark indexes, with the exception of the Long Term Bond portfolio, which is indexed. The Bond portfolio posted a 5.7% annualized return and alone generated $8.9 billion of net investment results. This solid performance is due mainly to active management of the portfolio's duration and overweight positions in provincial securities and bonds issued by public and private companies.

In the Inflation-Sensitive Investments asset class, the Infrastructure and Real Estate portfolios benefited from low interest rates. They recorded annualized returns of 16.8% and 13.0% respectively, and generated $11.9 billion of net investment results. The Infrastructure portfolio's return is due mainly to the sound operating results of the companies it holds. The performance of the Real Estate portfolio is mainly attributable to the rise in value of shopping centres and office buildings in North America and to the current return generated by the portfolio's assets. This asset class underperformed the index by 0.3%, mainly because of the weak performance of the hotels in the Real Estate portfolio.

Over four years, all specialized portfolios in the Equity asset class contributed positively to net investment results totalling $32.8 billion. The Private Equity portfolio returned 16.5% and generated $10.0 billion of net investment returns. Its high return, sharply exceeding its benchmark index (11.3% return), is due mainly to the solid operating results of its portfolio companies.

Summary of 2013 results

In 2013, La Caisse's 13.1% return exceeded that of its benchmark portfolio, which was 12.6%. This outperformance represents $851 million of value added. Net investment results totalled $22.8 billion, and net deposits were $1.2 billion.

There were large differences in the returns of the various asset classes over one year. The Fixed Income asset class, which was affected by the rise in interest rates during the year, generated a zero return, while Equity, which benefited from strong gains on the equity markets, especially in the United States, generated a weighted return of 22.9%.

The specialized portfolios in the Equity asset class generated $18.2 billion of net investment results, $3.4 billion of which came from the Private Equity portfolio. All the portfolios in this asset class generated returns in excess of 16.3%, with the exception of the Emerging Markets Equity portfolio (4.0% return), which suffered from significantly slower growth in the main emerging economies and from investors' waning interest. The Global Quality Equity portfolio, launched in 2013, greatly exceeded expectations with a return of 32.4%, mainly because of strong exposure to international companies established in the United States.

The fact sheets included with the press release provide detailed information on the portfolio returns and the economic and financial context.

FINANCIAL REPORTING

During the year, La Caisse continued to improve its efficiency and pay close attention to its operating expenses. Operating expenses, including external management fees, totalled $298 million in 2013. The ratio of expenses to average net assets was 17 basis points, compared to 17.9 basis points in 2012, and continues to place La Caisse among the leaders in its category.

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

ABOUT LA CAISSE DE DÉPÔT ET PLACEMENT DU QUÉBEC

La Caisse de dépôt et placement du Québec is a financial institution that manages funds primarily for public and private pension and insurance plans. As at December 31, 2013, it held $200 billion in net assets. As one of Canada's leading institutional fund managers, La Caisse invests in major financial markets, private equity, infrastructure and real estate, globally. For more information: www.lacaisse.com.

Returns
A chart is available on the Caisse's website

FIXED INCOME

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DESCRIPTION

The Fixed Income asset class constitutes a substantial source of liquidity in addition to helping reduce the level of overall portfolio risk and match clients' assets and liabilities.

It consists of four portfolios. The Bond portfolio and the Real Estate Debt portfolio, with net assets totalling $63.8 billion, are managed actively, whereas the Short Term Investment portfolio and the Long Term Bond portfolio, with net assets totalling $5.4 billion, are indexed.

MARKET CONTEXT

Interest rates essentially fell from 2010 to 2012, but the trend reversed itself in 2013. This shift could mark the end of the historic decrease in interest rates that began early in the 1980s. The prospect of monetary tightening, which became more likely as of May 2013, caused medium- and long-term bond yields to rise. Many investors therefore turned to other asset classes, which had an impact on the bond markets in some of the developed countries, including Canada, the United States and Germany.

Government of Canada 10-year bond yields ended 2013 at 2.8%, an increase of almost 1.1% since May and 1.0% since the start of the year.

Government of Canada 10-year bond yields
A chart is available on the Caisse's website

The corporate credit market benefited greatly from the economic conditions. Support from the Federal Reserve in the United States, as well as various measures put in place in Europe, including bank stability and oversight mechanisms, helped calm the markets. Yield spreads tightened significantly, enabling corporate bonds to outperform federal bonds.

Returns on bond indexes - 2013
A chart is available on the Caisse's website

HIGHLIGHTS
A chart is available on the Caisse's website

After taking advantage of the substantial decreases in interest rates over the past few years, the Fixed Income portfolios generated a lower return in 2013. Over four years, this asset class generated $12.9 billion of net investment results. The annualized return for that period is 5.9%, or 1.4% more than the benchmark index. For 2013, the Fixed Income asset class returned 0% but preserved capital.

BONDS

• This actively managed portfolio is the largest in terms of assets, with $55.0 billion, or 27.6% of clients' net assets as at December 31, 2013.
• Over four years, it has generated $8.9 billion of net investment results and a 5.7% annualized return, outperforming its benchmark index by 1.0%. Even though bond yields were up in 2013, active management made it possible to preserve capital and generate a return of 0.2% on the year.
• Consistent with the last four years, in 2013 La Caisse capitalized on improving economic conditions and, more recently, the normalization of interest rates.
• Each type of strategy used by the Bond portfolio contributed positively to the variance in relation to the benchmark index over the past four years:
• Positions that mitigated the impact of rising rates in developed countries;
• Overweighting provincial securities, especially Québec bonds, in the expectation of narrower rate spreads; and
• Overweighting the bonds of public and private companies, combined with a higher return on the portfolio's holdings.

REAL ESTATE DEBT

• This actively managed portfolio consists of first-ranking Canadian commercial mortgage loans on quality assets. Mortgage underwriting operations are carried out mainly in Québec but increased in Ontario and Western Canada in 2013.
• Over four years, the net investment results of the Real Estate Debt portfolio reached $2.7 billion. The annualized return is 9.1%, or 4.4% more than the benchmark index. The 2013 return is 0.1%.
• The portfolio outperformed its benchmark index over four years partially because of attractive credit premiums that made it possible to generate a higher current return. The value added is also due to the tightening of mortgage rate spreads and the realization of gains on the sale of foreign assets in order to refocus the portfolio on quality Canadian assets.

SHORT TERM INVESTMENTS

• This indexed portfolio had an annualized return of 1.0% over four years and 1.1% in 2013. These results reflect the extremely low levels of short-term interest rates.

LONG TERM BONDS

• This indexed portfolio generated an annualized return of 6.5% over the past four years. In 2013, it returned -6.5%.
• The falling interest rates of recent years contributed significantly to the relatively high return on long-term bonds over four years.
• The 2013 result is due essentially to the increase in interest rates, which lowered the price of the long-term bonds in the portfolio.

INFLATION-SENSITIVE INVESTMENTS

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DESCRIPTION

The Inflation-Sensitive Investments asset class consists of three portfolios: Real Estate, Infrastructure and Real Return Bonds. It consists of assets whose investment income is generally inflation-linked so as to partially hedge the inflation risk associated with the liabilities of many Caisse depositors.

The Real Estate and Infrastructure portfolios, which have $30.6 billion of net assets, are actively managed with an absolute-return approach. The Real Return Bonds portfolio, which has $1.2 billion of net assets, is indexed.

MARKET CONTEXT

In an environment of low interest rates, less-liquid assets, such as real estate and infrastructure, are becoming more popular because they offer a high, stable current return, while diversifying risk within an overall portfolio. Over the past four years, falling interest rates, combined with signs of an economic recovery in developed countries, have enabled this asset class to generate high returns.

As for real estate, the results depend on the region and sector. In Canada and the United States, shopping centres have offered solid returns for several years, notably because of strong rental income. These results are due to such factors as the economic upturn in the United States and a gradual decrease in uncertainty over macroeconomic conditions. Interest rates were in a downward trend until 2012, which caused discount rates for buildings to fall, also resulting in substantial increases in value. In Brazil, the performance of shopping centres has been sustained, partially because of the growing middle class and easier access to credit. Even so, the cyclical depreciation of the Brazilian real has affected the four-year return.

In 2013, the first increases in interest rates after a downward trend lasting several years did not have a significant impact on valuations because they were offset to a great extent by compressed risk premiums. In Canada, strong demand for real estate even lowered the discount rate for shopping centres.

In the infrastructure sector, global demand for new infrastructure, combined with the need to reduce government budget deficits, considerably increased the number of transactions involving private investors. Many large institutional investors expressed an interest in the sector. As a result, it is becoming more difficult to negotiate mutual agreements because many projects are auctioned, which pushes market prices up.

HIGHLIGHTS 
A chart is available on the Caisse's website

Over four years, the Inflation-Sensitive Investments asset class generated $12.1 billion of net investment results. This is the asset class with the best absolute results for the period, with an annualized return of 13.4%. This return is 0.3% below the benchmark index. The return for 2013 is 12.5%.

REAL ESTATE

• Over four years, the Real Estate portfolio generated $8.7 billion of net investment results and a 13.0% annualized return, underperforming its benchmark index by 1.0%. The return for 2013 is 15.1%.
• The absolute return over four years is due mainly to the increase in the value of shopping centres and office buildings in North America as well as the current return generated by the properties. The difference with the index is due primarily to the weak performance of the hotel sector, which is being reduced.
• Geographic and sector repositioning of the Real Estate portfolio resulted in a large volume of transactions over the past four years. Transactions since the end of 2009 totalled $23.1 billion, with $11.5 billion of acquisitions and $11.6 billion of sales.
• Various transactions were also carried out in 2013, including acquisitions totalling $5.2 billion:
• Investments in the United States, including an interest in 1211 Avenue of the Americas in New York City, the acquisition of the office towers at 10 and 120 South Riverside Plaza in Chicago, the purchase of 999 Third Avenue (Wells Fargo Center) in Seattle and additions to the multiresidential portfolio.
• The repositioning of the European portfolio continued. The acquisitions include interests in London's Woolgate Exchange and PointPark Properties, a logistics and warehouse company.
• In Québec, Ivanhoé Cambridge became, once again, the sole owner of Place Ville Marie, after acquiring its partner's share of the landmark property in downtown Montréal. The acquisition of a 50% interest in Carrefour de l'Estrie and the completion of renovations at Galeries d'Anjou are also among the achievements in 2013.
• The figures below show the increase in the weighting of the United States and the decrease in that of Europe, as well as the increase in the multiresidential portfolio and the impact of the sale of hotels since the end of 2009.

Real Estate by region
A chart is available on the Caisse's website

INFRASTRUCTURE

• Over four years, the Infrastructure portfolio has a 16.8% annualized return, outperforming its benchmark index by 1.5% and generating $3.3 billion of net investment results. For 2013, the absolute return is 10.6%.
• The four-year return is due mainly to the solid operating results of the companies in the portfolio as well as falling interest rates.
• Regulated assets and economic infrastructure generated most of the portfolio's increase in value in 2013. More than half of the results come from the current return generated by these assets.
• In 2013, the difference between the portfolio's 10.6% return and the 22.6% return on its benchmark index is due to the strength of the equity markets. The index consists of publicly traded companies subject to considerable volatility, whereas the portfolio comprises privately held assets and aims for more stable and predictable long-term returns.
• A repositioning of the portfolio began in 2013. Several major transactions were concluded, including the sale of the stake in Enbridge Energy Partners and the acquisition of interests in Invenergy's wind power projects and in the Port of Brisbane in Australia. The transactions improved the geographic and sector diversification of the portfolio, among other things.

REAL RETURN BONDS 

• This indexed portfolio generated an annualized return of 4.1% over four years. In 2013, the increase in real rates had a very negative impact on the prices of long-dated bonds. As a result, the return for the year is -13.1%.

EQUITY

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DESCRIPTION

The Equity asset class comprises seven portfolios. The Canadian Equity, Global Quality Equity, Global Equity (being wound down), Emerging Markets Equity and Private Equity portfolios, with net assets totalling $74.3 billion, are managed actively. The U.S. Equity portfolio and the EAFE (Europe, Australasia and Far East) Equity portfolio, with net assets totalling $19.5 billion, are indexed.

MARKET CONTEXT

Since their low point in 2009, the equity markets in developed countries have made strong gains. Monetary easing by central banks has whetted investor appetite for equities, especially on U.S. markets. Even in the context of a generally rising market, the differences in returns from one region to another are significant; over four years they range from 3.1% to 16.4% on an annualized basis.

Four-year annualized returns
of the main benchmark indexes in Canadian dollars
A chart is available on the Caisse's website

The economic fundamentals have improved significantly in the United States over the past four years as the excess supply of houses decreased and household balance sheets improved. The four-year return is due mainly to improved corporate earnings. In 2013, the advances in the equity markets were especially strong, despite modest growth in revenues and profits during the year.

In Europe, the initial recovery quickly ran out of steam because of inadequate structural reform and ineffective monetary policy. In 2013, the international markets benefited from the highly expansionary monetary policies adopted by the Japanese government, as well as the euro zone's emergence from recession, although its recovery continues to be anemic.

In Canada, weak commodity prices combined with a strong currency over a substantial part of the past four years held back the stock market in comparison with other developed countries. In 2013, disappointing employment and international trade data gave way to modest growth in the second half of the year. This renewed vigour is due to factors that include an increase in U.S. demand for Canadian products and the depreciation of the Canadian dollar. Over four years, as well as for 2013, the gains on the Canadian stock market fell short compared to the U.S. and international markets.

Narrower corporate profit margins and higher risk premiums detracted from the performance of emerging markets over the past four years. In 2013, the probability of monetary tightening in the United States caused capital to flow out of emerging markets and into the developed countries. Some currencies depreciated significantly, especially those of countries that rely on foreign capital to finance their large current account deficits, such as India, Brazil, South Africa and Turkey.

NEW INVESTMENT STRATEGY

In the deployment of its new investment strategy emphasizing absolute-return management, exposure to emerging markets and depth of expertise, La Caisse made three major changes to the active management of its publicly traded equity portfolios.

1. Global Quality Equity. In 2013, La Caisse launched this new portfolio whose investment philosophy is based on an absolute-management approach and in-depth fundamental analysis. The portfolio focuses on securities of large, established companies with considerable exposure to global growth and stable, long-term earnings. With a risk level lower than that of the equity markets of developed countries as a whole, this portfolio is designed to be defensive in down markets, consequently benefiting less when markets advance strongly.
   
   
2. Canadian Equity. In the past 18 to 24 months, La Caisse made significant changes to the management of this portfolio. It enhanced its security selection strategy by considerably strengthening its research capability and establishing major themes to guide its choices. The portfolio's positioning is based on convictions that include relatively weak economic growth in Canada, a more favourable outlook in the United States and a gradual increase in interest rates.
   
   
3. Emerging Markets Equity. This year, La Caisse strengthened its research teams and significantly enhanced its emerging markets expertise, notably by creating a team responsible for developing an investment strategy for these markets. In July 2013, it began adding active external management to the portfolio, which was previously indexed. The external mandates awarded to date cover China, Brazil and India.

HIGHLIGHTS OF RESULTS
A chart is available on the Caisse's website

Over four years, the Equity asset class is the one that has contributed the most to La Caisse's overall return, with $32.8 billion of net investment results, of which almost $10 billion was contributed by the Private Equity portfolio. The annualized return is 10.9%, outperforming the benchmark index by 0.9%. For 2013, the return is 22.9%.

GLOBAL QUALITY EQUITY

• The Global Quality Equity portfolio returned 32.4% in 2013. Even though this period is too short to draw conclusions, this result exceeded expectations, especially in the context of rapidly rising valuation multiples.
• The return is due mainly to substantial exposure to major international companies established in the United States, including a number in the health care and consumer products sectors. These companies include Colgate, Unilever, PepsiCo, and 3M.
• The net assets of the Global Equity portfolio, which is being wound down as a result of the creation of the Global Quality Equity portfolio, decreased from $13.8 billion as at December 31, 2012, to $3.5 billion at year-end. The portfolio should be fully wound down early in 2014.
• As a result of rising U.S and international equity markets, this portfolio returned 32.2% in 2013.

CANADIAN EQUITY

• This portfolio recorded $5.1 billion of net investment results and an annualized return of 6.4% over four years, underperforming its benchmark index by 1.1%. In 2013, the portfolio's significant repositioning bore fruit: it had a 16.3% return, or 1.5% more than its index.
• Security selection in the materials and industrials sectors, underweight positions in health care and telecommunications and under-representation of securities paying high dividends are the reasons for the variance vis-à-vis the index over four years.
• In 2013, the portfolio benefited from its exposure to companies in cyclical sectors that are not related to resources and have strong exposure to the United States, as well as underweight positions in the materials sector - specifically gold stocks - and the telecom sector.
• The Morningstar National Bank Québec Index, which was included in the portfolio index in 2011, posted a 32% return and significantly outperformed the S&P/TSX Index, which advanced 13% in 2013. At year-end, Québec securities accounted for 32% of La Caisse's portfolio, while on the Toronto Stock Exchange they represented 15.1%.
• The Canadian market advanced strongly in 2013 but underperformed the other global markets mainly because of the large proportion of companies in the materials and energy sectors, both of which underperformed.

EMERGING MARKETS EQUITY

• The annualized return on this portfolio, which was indexed until June 2013, is 3.1% over four years. The gradual introduction of active management starting at mid-year contributed to the 4.0% return for 2013.
• Emerging markets underperformed developed markets in the past four years, amid slowing growth in the main countries - South Korea, China, Brazil and India.
• In 2013, weakness in the materials sector as well as uncertainties surrounding the eventual tapering of quantitative easing by the U.S. Federal Reserve also detracted from returns in these markets.
• Nevertheless, emerging markets' transition to a growth model based on an increasing middle class should make it possible to take advantage of these expanding markets in the years to come.

U.S. EQUITY AND EAFE EQUITY

• The U.S. Equity portfolio and the EAFE Equity portfolio, which are both indexed, had annualized returns of 16.5% and 9.3%, respectively, over four years. For 2013, their returns were 41.3% and 31.5%.
• The United States, Japan, France, Germany and Switzerland were the markets with the best results in 2013.

PRIVATE EQUITY

• Over the past four years, the Private Equity portfolio generated a substantial $10.0 billion of net investment results, with an annualized return of 16.5%, or 5.3% more than its benchmark index. For 2013, the portfolio had a substantial 19.7% return.
• The excellent performance over four years is due to solid earnings by the portfolio companies as a result of their improved operational performance and reduced debt levels. The favourable valuations of a number of companies in the portfolio, as multiples increased on the markets, also contributed positively to the return.
• Both direct investments and those made through investment funds contributed positively to the portfolio's absolute return over four years.
• In 2013, La Caisse took advantage of the sharply rising stock markets to realize some of the gains on a number of investments it has held for several years. Private investments in publicly traded companies contributed a large share of the results. CGI Group made a notable contribution to the return as its share price rose considerably with the successful integration of Logica.
• La Caisse continued its strategy of adding to its direct investments. It is increasingly making relationship-based investments to establish long-term business partnerships with the promising companies in the portfolio.
• Investments in funds round out the portfolio's management strategy by allowing it to position itself with agility in the business cycle. During the year, the portfolio was repositioned to take advantage of opportunities that will arise in the years to come, especially in distressed debt funds.

PRESENCE IN QUÉBEC

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SUMMARY

Over the past four years, La Caisse has enhanced its commitment towards Québec companies by offering customized financing and assistance with their growth, at home and internationally. Whether the projects involve succession, modernization or expansion, La Caisse's network of financial and operational experts and experienced directors has contributed to the development of many businesses. Today La Caisse is a partner of more than 550 Québec companies.

La Caisse's new investments and commitments in Québec companies totalled $10.3 billion over four years, including $3.6 billion in 2013. Since 2009, they amount to $11.9 billion.

During that period, its assets in Québec increased by $20.3 billion to reach $53.8 billion as at December 31, 2013, including $32.5 billion in the private sector.

TOTAL ASETS IN QUEBEC
A chart is available on the Caisse's website

Customized support for Québec SMEs

In the past four years, La Caisse supported almost 400 small and medium-sized enterprises in all regions of Québec. In 2013 alone, its new commitments to Québec SMEs totalled close to $600 million.

Capital-Croissance PME

To more effectively meet the needs of entrepreneurs in the regions, La Caisse and the Desjardins Group announced in 2013 that they would launch phase II of the Capital-Croissance PME fund with $230 million. During the first phase of the fund, investments totalling $192 million were made in 186 businesses in all regions of Québec.

Companies in all sectors, including Les Cuisines G.B.M. (Saguenay-Lac-Saint-Jean), Abitibi Géophysique (Abitibi-Témiscamingue), Sherbrooke OEM (Estrie), Entreprises D'Auteuil et fils Bas-Saint-Laurent and Autobus Dufresne (Montérégie) were able to pursue their development thanks to this fund.

Publicly traded small caps

Since 2011, La Caisse has earmarked funds for investment in Québec's publicly traded small caps with a stock market capitalization of less than $400 million. In this way it helps develop Québec's equity market while serving as a stepping stone for companies that want to access global capital markets.

An investment in CVTech Group, a Drummondville company that manages and maintains power distribution and transmission lines, enabled it to continue its strategy of growth through acquisitions.

Solid support for mining and manufacturing

Québec Manufacturing Fund

To support the development of Québec's manufacturing companies by providing financing and operational expertise, La Caisse invested another $100 million in 2013 in the Québec Manufacturing Fund (QMF), in which it has been a partner since 2006. The amount invested in the QMF now stands at $200 million.

Over the past four years the fund has assisted the Liberty Spring management team with its plant expansion and automation projects. This Montmagny-based company has become a global leader in the manufacture of high-precision springs used primarily by the automobile industry.

Sodémex

In 2013, La Caisse created Sodémex Développement, a $250-million fund to support mining companies in the development stage. This fund complements the $75 million that La Caisse provided when it created Sodémex Exploration and enables the institution to be involved in all stages of the growth of Québec's natural resources companies.

Sodémex Exploration has interests in more than 70 mining companies, including Midland Exploration (gold, base metals and rare earths) and Ressources GéoMégA (rare earths, niobium and graphite). Sodémex Développement recently announced its first investment in Virginia Mines as part of the Coulon project in the James Bay region.

A prominent real estate presence in 14 Québec cities

Over the past four years, La Caisse's real estate subsidiaries - Ivanhoé Cambridge and Otera Capital - carried out more than $3.7 billion in financings and investments in Québec.

Ivanhoé Cambridge is Québec's largest owner of major shopping centres (in the 40,000 square feet and over category). With more than 40 properties in its portfolio, it has a strong presence in 14 of Québec's urban centres and generates substantial economic benefits.

In downtown Montréal, Ivanhoé Cambridge owns office and retail space totalling more than seven million square feet, including the following buildings:

Place Ville Marie 1000 de la Gauchetière Sun Life Building Place Montréal Trust

1500 University Complexe les Ailes Montreal Eaton Centre Fairmont Queen Elizabeth

In 2013, Ivanhoé Cambridge consolidated its presence in Montréal by investing more than $400 million to purchase a 50% interest in Place Ville Marie and become its sole owner. It also stepped up its presence in the regions by acquiring a 50% interest in Carrefour de l'Estrie, the largest shopping centre in the Eastern Townships.

During the year, La Caisse's subsidiary Otéra Capital, Québec's leading mortgage lender, provided almost $940 million in new loans for commercial real estate projects.

A bridge between Québec companies and global markets 

As a long-term partner with an international reach, La Caisse provides access to its network, experts and investments to Québec companies that want to strengthen their positions on global markets.

Over the past four years, La Caisse supported a number of companies in their international growth projects, including CAE, Cogeco Cable and Cascades.

It also invested $1 billion in an acquisition in the United Kingdom to enable CGI to become the sixth-largest player in the global information technology industry. As part of the acquisition of WSP Group by Genivar, La Caisse provided $100 million so that the company could strengthen its presence on the international scene.

It increased its stake to almost 30% in Camoplast Solideal, a global leader in rubber products used by the automobile sector, and continues to sustain the company's growth in Europe, Asia and North America.

Supporting entrepreneurship and developing a new generation of financial expertise

In 2013, La Caisse strengthened its partnerships with the École d'Entrepreneurship de Beauce, of which it is a founding partner, and the Fondation de l'entrepreneurship, of which it has been a partner for more than 20 years. It also continued to support the Prêt à entreprendre program which, since its inception, has enabled 56 new entrepreneurs from all regions of Québec to receive financing and support from a team of mentors and experts.

During the year, La Caisse also reviewed its entrepreneurship-related activities so as to maximize their impact and effectiveness. In this way, it can facilitate the emergence of a new generation of Québec leaders and strengthen Québec's entrepreneurial culture.

La Caisse also began to analyze themes such as entrepreneurial culture, business transfer and SME growth and planned a series of meetings involving stakeholders from the business community. The purpose of the meetings is to define concrete, innovative actions to stimulate the entrepreneurial ecosystem.

The Global Economy: Progress, but challenges remain

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The past four years have been particularly eventful for the global economy. During much of that period, the United States and Europe focused on correcting the imbalances that had developed in their economies before and during the financial crisis of 2008, mainly the excessive levels of debt that were limiting their growth. The United States relied on a series of unprecedented monetary policy measures, which reduced the long-term interest rate to a historically low level and supported the prices of risky assets, both in the United States and elsewhere. This strategy worked well and enabled it to make significant progress in solving its problems. In December 2013, the U.S. Federal Reserve (Fed) was able to begin reducing its stimulus program. Europe, in contrast, favoured an approach based on fiscal austerity which, far from having the desired effect, resulted in the euro zone's most severe recession since its inception, followed by only a timid improvement in the economic situation.

In the meantime, the emerging market economies, which recovered more quickly from the crisis in large part because of an extraordinary stimulus program introduced by China in 2009, took over as the engine of global growth.  They accounted for nearly three quarters of global economic growth between 2010 and 2013. Over the past two years, however, several emerging economies experienced a marked slowing of economic activity, owing to capacity constraints exacerbated by a lack of structural reform. In addition, the signal by the Fed in May 2013 that it might soon reduce its program of asset purchases, prompted investors to reconsider their risk tolerance in relation to these markets and exposed the vulnerability of some countries.

A chart is available on the Caisse's website

In sum, a global economic recovery is under way, but the economic situation varies widely by geographic area and country.

In this context, we are monitoring three themes that will shape the global economy in the coming years:

1. Normalization of monetary policy in the United States

After the steep recession in 2008-2009, the U.S. economy grew at an average annual rate of 2.3% between 2010 and 2013, a reasonable performance given the severity of the financial crisis it experienced. This result illustrates the appropriateness of the bold monetary policy measures that were adopted. Moreover, the government took the right approach to fiscal policy, waiting until the economy returned to a stronger growth path before reversing the easing of policy implemented in 2009-2010.

This approach helped revitalize the economy, pushing up housing prices and generating strong increases in equity prices. As a result, U.S. households improved their balance sheets significantly; net worth now exceeds the level before the crisis by about 12%, which has recently led to an increase in consumption.

A chart is available on the Caisse's website

The United States also benefited from increased domestic energy production as a result of technological innovations, as well as the lower prices of electricity and natural gas that ensued.  The strengthening of private domestic demand enabled private sector output to grow by 3.1%, on average, over the past two years, despite the tightening of fiscal policy in 2013 equivalent to about 1.75% of real GDP. As a consequence, the federal deficit fell from 8.5% of nominal GDP in 2010 to 3.3% in 2013. The improvement in the U.S. economy permitted the Fed to start the process of normalizing monetary policy in December.

This process, which is taking place after several years of unprecedented monetary policy stimulus, could lead to surprises not only in the United States - even if the growth dynamic is stronger - but also worldwide.

The strengthening of the world's largest economy is good news for Canada as it is becoming increasingly clear that the Canadian economy must be reoriented towards exports. Between 2010 and 2013, economic activity in Canada grew at an estimated annual rate of 2.3%, the same rate as in the United States. Canada emerged from the recession faster than most other developed countries. However, in the past two years, it has entered a regime of slower growth. This is attributable to the effects on growth of weak trend productivity growth and the development of certain imbalances that have limited the increase in domestic demand. In particular, the dramatic increase in Canadian household debt has forced consumers to reduce the growth of their spending.

A chart is available on the Caisse's website

In addition, the stagnation of commodity prices reduced the growth of investment in infrastructure. At the same time, the high Canadian dollar, reflecting the high prices of resources, weighed on exports of Canadian manufactured goods, which created a large current account deficit of 3.2% of GDP, on average from 2010 to 2013.

2. Evolution of the economic situation in Europe

In response to the series of crises in the euro zone between 2010 and 2013, EU leaders adopted an approach based on fiscal austerity, which had the effect of making the euro zone economy more fragile, without solving most of the fundamental problems that afflict it. They did not introduce the institutional reforms required to make their monetary union function well, or the structural reforms that, together with an aggressive easing of monetary policy, would have helped the countries in difficulty perform better economically and better control their debt levels. The European Central Bank (ECB) flooded the banking system with liquidity, but did not cut interest rates to a minimum and refused to take additional risks onto its balance sheet. Instead, the authorities relied on a process of internal devaluation to compensate for the lack of competitiveness of countries with significant current account deficits. As a result, the euro zone entered a severe recession.

A chart is available on the Caisse's website

The recession ended in the spring of 2013, after European leaders agreed to soften the fiscal austerity and after the uncertainty related to the debt crisis had cleared. The decisive moment was undoubtedly the declaration by the President of the ECB in the summer of 2012 that he was ready to do whatever it took to preserve the euro zone. Thus far, it has been mainly the strong performance of the German economy that has allowed the euro zone to return to growth, although recently, some indicators point to a strengthening of economic activity in other euro zone countries. Nonetheless, the recovery remains weak and fragile, and there is the specter of deflation.

In this context, we believe the ECB will eventually have to further ease monetary policy, member countries also need to strengthen their institutions and move forward with structural reforms to eliminate the dysfunctions that are undermining the potential of the euro zone. In this regard, the impending elections in Europe may manifest a rejection of European integration by many citizens, which would make it more difficult to adopt the needed reforms.

3. Policy in emerging markets

The turbulence in emerging markets in the wake of the Federal Reserve's signal in May 2013 that it would most likely reduce its program of asset purchases, demonstrates that these countries do not form a homogeneous group and that it is necessary to consider each country individually.

After the recession of 2008-2009, emerging economies rebounded strongly as a result of highly expansionary policies at the global level, a large influx of capital and the absence of serious imbalances. In 2011, however, several countries, including China, Brazil and India, began to encounter capacity constraints and inflationary pressures became evident. They responded by tightening monetary policy, which, together with the slow growth of productive capacity, owing to a lack of structural reforms in recent years, resulted in a deceleration in growth in emerging markets generally through 2013. The weak demand in developed markets for their exports further complicated the situation.

A chart is available on the Caisse's website

Countries with large current account deficits financed by portfolio investment were particularly affected by the Fed's announcement, and their currencies depreciated significantly. To avoid an acceleration of inflation, central banks responded by raising interest rates, which will result in slower growth. The fact that emerging markets have strong commercial links between them will likely exacerbate the situation.

While the long-term potential of these countries remains intact, their performance will depend on the willingness of their leaders to undertake the reforms necessary to improve the functioning of their economies. Moreover, the reorientation of the Chinese economy towards greater reliance on domestic demand will affect other emerging countries, as well as countries that produce raw materials, such as Canada. 

SOURCE: Caisse de dépôt et placement du Québec

Maxime Chagnon
Senior Director, Media Relations
Tel.: [phone]
[email protected]