The Caisse posts 10% return in 2009 - Growth of investment results to $11.8
billion in 2009
MONTREAL, Feb. 25 /CNW Telbec/ - The Caisse de dépôt et placement du Québec announced that its weighted average return on depositor funds was 10.04% for the year ended December 31, 2009. This result was fully achieved in the second half of the year. Caisse net assets climbed to $131.6 billion in 2009 from $120.1 billion a year ago.
The increase in Caisse's net assets is due to the performance of its equity, fixed income, and private equity portfolios and reflects an important unrealized decrease in value of the Real Estate group's investments.
For 2009, the Caisse underperformed its benchmark index return of 14.1% by 4.1%. Half of the return differential comes from the Real Estate Debt portfolio. The other half results essentially from the underweighting of equity markets at the beginning of 2009 and the performance of the private equity portfolio compared to its index.
In the second half of the year, the Caisse posted a return of 10.4%, 1.4% above its benchmark index, which returned 9.0%. During the first half, the Caisse recorded a neutral performance (-0.3%), compared to 4.7% for its benchmark index.
Comparative Performance (%)
Caisse vs. Benchmark Index
A chart is available at http://www.lacaisse.com/en/nouvelles-medias/Documents/Communique_RF2009_EN.pdf
"2009 was a year of transition for the Caisse. We rebalanced our portfolio investments and rebuilt our equity positions. We also re-evaluated our real estate portfolios and repositioned our operations in this sector that has been pummelled by strongly declining international markets. Ultimately, we are building solid foundations for the future. But this is just the beginning. Although returns were up in the second half of the year and significant progress was made, we still have more work to do," said Mr. Michael Sabia, President and Chief Executive Officer of the Caisse.
BETTER FINANCIALS
Over the past year, the Caisse strengthened its financial position, reducing its liabilities by $27.7 billion, including $14.5 billion in derivatives. Liabilities fell from $66.8 billion to $39.1 billion, a 41.5% decrease.
Under a new refinancing program, the Caisse recently replaced certain short-term debt with $7.2 billion in longer-term debt, better matching the duration of its financing sources and uses.
In 2009, the Caisse also reduced its operating expenses and external management fees by $43 million or 13.7% to $271 million in 2009 from $314 million a year ago.
SECTOR RESULTS
During the past year, 10 out of 17 Caisse portfolios outperformed their benchmark indexes. In addition, 15 of these portfolios posted positive returns in 2009. Equity Markets, where the Caisse reinvested $9.6 billion in 2009, recorded a 31.4% return. The Equity Markets group outperformed benchmark indexes by 0.6%. The total value of the Equity Markets portfolios increased by approximately $20 billion in 2009.
In Fixed income, the Caisse posted a 5.8% return. The four Fixed Income portfolios outperformed their benchmark indexes, resulting in a 0.9% return above the benchmark index overall. In 2009, conditions in the bond market gradually returned to near-normal. The Fixed Income group adopted a well-balanced approach to take advantage of market fluctuations in the Canada, provincial and corporate bond sectors.
The Private Equity group, which manages the Investments and Infrastructures and Private Equity portfolios, posted a 17.5% return in 2009, underperforming its benchmark index by 8.1%. The Investments and Infrastructures portfolio saw a 33.6% return, benefiting from a particularly favourable environment in the second half of the year. During this period, the portfolio recorded increases in value on both the debt and equity financing fronts. These increases in value are due mainly to a $1.2 billion upward re-evaluation of investments to fair market value (mark-to-market), as at December 31, 2009.
The Private Equity portfolio posted a 10.8% return against a backdrop of anemic deal flow throughout 2009 and increasing IPO activity in the fourth quarter.
The Real Estate group continued to face challenging international market conditions, resulting in negative returns. These results include a $4.8 billion unrealized decrease in value. Overall, the group saw a -15.8% return or -$4.1 billion in 2009, underperforming its benchmark index by 10%.
The Real Estate portfolio saw a -12.7% return, outperforming its benchmark index by 2.7%. In the first half of the year, this portfolio was hit hard by international and, to a lesser extent, Canadian market turmoil. Overall, the portfolio experienced a slightly positive second half, a sign of stabilizing market conditions.
Due to a weak U.S. market, the Real Estate Debt portfolio saw a -20.3% return, compared to 8.5% for its benchmark index. In Canada, portfolio performance was clearly better. In the future, the Caisse aims to favour the Canadian market over higher-risk exposure. Specifically, the Caisse ceased participation in subordinated debt and structured product originated by third parties outside Canada, which accounted for nearly 90% of the portfolio's loss provisions, as at December 31, 2009.
In addition, improving credit conditions led to $479 million in ABCP provision reversals, as at December 31, 2009 (renamed asset-backed term notes - ABTM). For 2009, the ABCP provision reversal combined with related costs and interests total $513 million. The Caisse has formed a team of experts dedicated solely to managing this portfolio and its risk profile.
"In 2009, we simplified and improved the way we work. We now have greater operational and financial flexibility to execute investment strategies. In 2010, we plan to vigorously pursue our five strategic priorities, making our depositors - our clients - our everyday focus. We want to lay the cornerstone for sustainable, long-term returns, that meet the needs of our depositors," added Mr. Sabia.
ABOUT THE CAISSE DE DÉPÔT ET PLACEMENT DU QUÉBEC
The 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, 2009, it held $131.6 billion in net assets. As one of Canada's leading institutional fund managers, the Caisse invests in major financial markets, private equity and real estate. For more information: www.lacaisse.com.
Returns(1)
(for the period ended December 31, 2009)
--------------------------------- --------- -----------------------------
Net assets Net
as at invest
Dec. 31, -ment
Specialized 2009 results Return Index Spread
portfolio $M $M % % %
--------------------------------- --------- -----------------------------
Short Term
Investments 2,715 41 1.1 0.6 0.5
--------------------------------- --------- -----------------------------
Real Return Bonds 653 95 17.1 14.5 2.6
--------------------------------- --------- -----------------------------
Bonds 37,645 2,494 6.4 5.4 1.0
--------------------------------- --------- -----------------------------
Long Term Bonds 3,102 63 2.1 1.2 0.9
--------------------------------- --------- -----------------------------
Fixed Income 44,115 2,692 5.8 4.8 0.9
--------------------------------- --------- -----------------------------
--------------------------------- --------- -----------------------------
Canadian Equity 17,050 4,567 36.6 35.1 1.6
--------------------------------- --------- -----------------------------
U.S. Equity (hedged) 656 125 28.7 24.1 4.6
--------------------------------- --------- -----------------------------
U.S. Equity (unhedged) 4,091 405 11.3 7.4 3.9
--------------------------------- --------- -----------------------------
Foreign Equity (hedged) 2,086 272 22.4 23.5 -1.1
--------------------------------- --------- -----------------------------
Foreign Equity (unhedged) 4,718 410 10.9 11.9 -1.0
--------------------------------- --------- -----------------------------
Emerging Markets Equity 4,943 1,678 50.9 51.6 -0.7
--------------------------------- --------- -----------------------------
Québec International 12,828 2,968 26.9 27.7 -0.9
--------------------------------- --------- -----------------------------
Equity Markets 46,373 10,425 31.4 30.9 0.6
--------------------------------- --------- -----------------------------
Investments and
Infrastructures 5,329 1,326 33.6 29.5 4.1
--------------------------------- --------- -----------------------------
Private Equity 11,256 1,082 10.8 24.0 -13.2
--------------------------------- --------- -----------------------------
Private Equity 16,585 2,408 17.5 25.6 -8.1
--------------------------------- --------- -----------------------------
Real Estate Debt 9,020 -2,311 -20.3 8.5 -28.8
--------------------------------- --------- -----------------------------
Real Estate 14,311 -1,800 -12.7 -15.3 2.7
--------------------------------- --------- -----------------------------
Real Estate 23,331 -4,111 -15.8 -5.8 -10.0
--------------------------------- --------- -----------------------------
Commodities 1,237 90 8.3 9.5 -1.1
--------------------------------- --------- -----------------------------
Hedge Funds 3,826 435 13.2 11.9 1.3
Asset Allocation(2) 499 16 n.a. n.a. n.a.
--------------------------------- --------- -----------------------------
Total(3) 131,588 11,752 10.0 14.1 -4.1
--------------------------------- --------- -----------------------------
(1) Dollar amounts are net of operating expenses.
(2) Net investment results indicated in the financial statements for the
specialized Asset Allocation portfolio amount to $33 million. This
amount includes $16 million from the 2009 operations and $17 million
from an adjustment retroactive to the opening balance of net assets.
(3) The total includes ABCP ($5.1 billion provision) and other
operations. For 2009, the ABCP provision reversal combined with
related costs and interests total $513 million. In addition, net
assets and net investment results include depositors' demand and term
deposits.
FIXED INCOME
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MARKET CONDITIONS
Massive intervention by monetary authorities and governments, from fall 2008 into 2009, restored market liquidity and contributed to the return of investor confidence, particularly in bond markets. This triggered a shift from risk-free investments (government securities) to higher-risk assets (corporate securities), leading to a dramatic decrease in risk premiums and a slight rise in government bond rates.
Evolution of rates in Canada in 2009
A chart is available at http://www.lacaisse.com/en/nouvelles-medias/Documents/Fact-sheet-FR2009_Fixed-Income.pdf
HIGHLIGHTS
- The overall return for the Fixed Income group was 5.8%.
- Overall, the four specialized bond portfolios outperformed their
benchmarks indexes by 0.9%.
- The portfolio managers adopted a well-balanced approach to take
advantage of market fluctuations and credit spreads, adopting an active
management strategy in line with market developments.
Return of specialized portfolios
Fixed Income
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(For the fiscal year ended
Dec. 31, 2009) Percentage
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Weight* Return Index Spread
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Short Term Investments 2.1 1.1 0.6 0.5
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Real Return Bonds 0.5 17.1 14.5 2.6
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Bonds 28.7 6.4 5.4 1.0
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Long Term Bonds 2.4 2.1 1.2 0.9
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* : As a proportion of the Caisse's net assets
SHORT TERM INVESTMENTS
- This portfolio posted a 1.1% return, 0.5% above the DEX 91-Day T-Bill
Index.
REAL RETURN BONDS
- The return on this portfolio was 17.1%, 2.6% above the DEX Real Return
Bond Index.
BONDS
- This portfolio returned 6.4%, 1.0% above the DEX Universe Bond Index.
LONG TERM BONDS
- This portfolio saw a 2.1 % return, 0.9% above the DEX Long Term
Government Bond Index.
EQUITY MARKETS
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MARKET CONDITIONS
Early 2009 saw a continuation of the equity sell-off that started in fall 2008. Fuelled partly by fears of another Great Depression, it gained momentum around the world. Between January 1 and the trough of March 9, 2009, Canadian and U.S. exchanges fell, respectively 15% and 25%.
The strong, coordinated policies of governments and central banks-such as the massive injection of liquidity into the financial system and the rescue of major financial institutions-contributed to the return of investor confidence. In the spring, fears of a depression receded and investors underweight in equities contributed to a market rally. All in all, the benchmark indexes climbed between 26% and 62% in local currencies, while equity markets overall returned 30.9% in Canadian dollars.
2009 Equity Market Evolution
January 1st, 2009 = 100
A chart is available at http://www.lacaisse.com/en/nouvelles-medias/Documents/Fact-sheet-FR2009_Equity-Markets.pdf
HIGHLIGHTS
- The group saw an overall return of 31.4%.
- The specialized equity portfolios as a whole outperformed their
benchmark indexes by 0.6%. This outperformance is due to active
internal management of Canadian and U.S. equity portfolios, which
exceeded their added value targets.
- The total value of the specialized equity portfolios rose 75% (or some
$20 billion) in 2009.
- In 2009, the Caisse invested $9.6 billion in equities to take advantage
of the market recovery.
Return of specialized portfolios
Equity Markets
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(For the fiscal year ended Dec. 31, 2009) Percentage
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Weight* Return Index Spread
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Canadian Equity 13.0 36.6 35.1 1.6
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U.S. Equity (hedged) 0.5 28.7 24.1 4.6
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U.S. Equity (unhedged) 3.1 11.3 7.4 3.9
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Foreign Equity (hedged) 1.6 22.4 23.5 (1.1)
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Foreign Equity (unhedged) 3.6 10.9 11.9 (1.0)
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Emerging Markets Equity 3.8 50.9 51.6 (0.7)
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Québec International 9.7 26.9 27.7 (0.9)
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* : As a proportion of the Caisse's net assets
CANADIAN EQUITY
- This portfolio returned 36.6%, 1.6% above the S&P/TSX Capped Index.
Value added is mainly the result of security selection in the materials
and consumer sectors.
U.S. EQUITY (HEDGED)
- This portfolio posted a 28.7% return, 4.6% above the S&P 500 Hedged
Index. The outperformance is due to the equity market recovery and
security selection in health care, media and telecommunications, energy
and technology sectors.
FOREIGN EQUITY (HEDGED)
- The return on this portfolio was 22.4%, 1.1% below the MSCI-EAFE Hedged
Index. External management mandates, financial sector security
selection and an underweight in Australia, a net result of various
strategies and different managers, detracted from performance.
EMERGING MARKETS EQUITY
- This portfolio recorded a 50.9% return, 0.7% below the MSCI-EM Index.
This underperformance is due to lacklustre Chinese investments.
PRIVATE EQUITY
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MARKET CONDITIONS
The private equity market idled until the last quarter of 2009, which saw an increase in transactions with a return to the high-yield loan market and a slow return of IPOs. Against this backdrop, large private equity fund managers focused on improving operational efficiencies and restructuring portfolio company balance sheets.
The corporate loan market saw a substantial narrowing of interest rate spreads, significantly increasing the value of portfolio securities.
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HIGHLIGHTS
- The Private Equity group posted a 17.5% overall return. In total, the
group's two specialized portfolios underperformed their benchmark
indexes by 8.1%.
- The Investments and Infrastructures and Private Equity portfolios
showed remarkable resilience in 2009 due to asset strength and exposure
to less economically sensitive sectors. For example, despite a very
challenging economic climate, 25 of the largest direct investments saw
profitability (EBITDA) remain healthy, increasing by 2% after rising 6%
in 2008.
- Unlike last year, the portfolios also benefited from the upward
revaluation of investments to fair market value (mark-to-market). The
rise in market was felt sooner in Investments and Infrastructures than
Private Equity.
Return of specialized portfolios
Private Equity
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For the fiscal year ended
Dec. 31, 2009 Percentage
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Weight* Return Index Spread
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Investments and Infrastructures 4.1 33.6 29.5 4.1
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Private Equity 8.5 10.8 24.0 (13.2)
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* : As a proportion of the Caisse's net assets
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INVESTMENTS AND INFRASTRUCTURES
- The return on this portfolio is 33.6%, 4.1% above its benchmark index.
- The market recovery during the second half of the year more than offset
the first half's unrealized decrease in value. Behind the portfolio's
healthy performance is its high concentration in less economically
sensitive direct investments and a relatively rapid response to liquid
markets.
- The narrowing of credit spreads has increased the market value of the
loan holdings, which represents more than 50% of the portfolio's gains.
- Listed securities also profited from the market recovery.
PRIVATE EQUITY
- The return on this portfolio is 10.8%, 13.2% below its benchmark index.
- This underperformance is largely due to the historic gap between
valuations of external private equity funds--heavily weighted in the
portfolio--and liquid markets that comprise its benchmark index.
- The difference is particularly significant, considering the market
rebounded only in the last quarter of the year.
- Valuations for leveraged buyouts, a significant weight in the
portfolio, rose on greater merger and acquisition activity, virtually
non-existent in 2009.
- As expected, investing in distressed loan funds was a profitable
strategy for the portfolio.
- Venture capital investments also saw healthy returns from favourable
exit strategies.
REAL ESTATE
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MARKET CONDITIONS
In 2009, the real estate market saw weakening fundamentals, such as rising vacancy rates and shrinking investments, against a backdrop of global economic recession. This environment led to significant decreases in value, particularly in the U.S. and Europe.
Financing conditions improved throughout the year, but credit spreads remain high by real estate standards. Within this climate, there were less non-performing loans in Canada than the U.S., where credit continued to deteriorate.
Although the impact was not as severe in the second half of the year, the real estate and commercial mortgage loan markets remain fragile.
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HIGHLIGHTS
- The Real Estate group saw an overall return of -15.8%.
- In total, the group's two specialized portfolios underperformed their
benchmark indexes by 10%.
- These negative results are due mainly to unrealized decreases in value
during the first half of the year-the result of a weak real estate
market Worldwide and certain mezzanine and subordinated loan
strategies.
- The two portfolios, nonetheless, experienced a slightly positive second
half, a sign of a stabilization of markets.
Return of specialized portfolios
Real Estate Group
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For the fiscal year ended
Dec. 31, 2009 Percentage
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Weight* Return Index Spread
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Real Estate 10.9 (12.7) (15.3) 2.7
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Real Estate Debt 6.9 (20.3) 8.5 (28.8)
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*: As a proportion of the Caisse's net assets
REAL ESTATE
- The return on this portfolio was -12.7%, 2.7% above the Aon - Real
Estate Index. The portfolio's decreases in value are the result of
challenging market conditions, rising capitalization rates and
declining commercial rental rate growth. Although the portfolio was
negatively affected by its international exposure, its Canadian and
U.S. positions outperformed the index.
- Cash flow from operations, before financial costs, held steady, on par
with 2008 - illustrating the quality of properties and tenants. The
occupancy rate remains historically high at approximately 95%.
REAL ESTATE DEBT
- The return on this portfolio was -20.3%, 28.8% below its benchmark
index. This underperformance is primarily due to participation in
third-party subordinated debt and structured products originated by
third parties outside Canada. The Caisse ceased these activities in
August 2009. The Canadian portion of the portfolio returned -2.0%,
while the international portion yielded -46.5%.
VALUATION OF INVESTMENTS
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The Caisse conducts a complete evaluation of its less liquid investments semi-annually, on June 30 and December 31. These investments represent nearly one-third of the Caisse's net assets. External appraisers and valuation committees composed of independent experts review the Caisse's investment valuations.
PRIVATE EQUITY
- Investments whose fair value exceeds a pre-established materiality
threshold are subject to independent valuation committee or external
appraiser review.
- Nearly 80% of the fair value of the portfolio is reviewed this way.
REAL ESTATE
- Chartered external appraisers certify the fair value of real estate
assets.
- 95% of properties are valuated this way.
MARK-TO-MARKET
What does "mark-to-market" mean?
It is the valuation of an investment at fair value--the price obtained from its sale on the market at a given date, under normal competitive conditions.
The Caisse and fair value investment valuation (mark-to-market)
Under today's Canadian accounting rules, the Caisse must set the fair value of its investments based on the assumption that they will be available for sale upon preparing its financial statements.
Private equity and real estate investments, with a long-term holding horizon, are no exception to this rule.
UNREALIZED DECREASE IN VALUE
What is an unrealized decrease in value?
It is a decline in the value of an asset relative to its acquisition cost or previous valuation. This decline stays unrealized as long as the asset remains in the owner's possession. This is what's called a "paper loss."
As long as the asset is unsold, its owner does not incur any actual financial loss. If the value of the asset increases while it is still in the owner's possession, the unrealized decrease in value could be offset, in part or in full, leaving room for profit.
For example, a homeowner who paid $100,000 a few years ago for his house, appraised at $250,000 as at December 31, 2008, must have his property assessed again at December 31, 2009. He learns that his house, at that date, is worth no more than $200,000. Compared to the appraisal as at December 31, 2008, fair value represents a $50,000 or 20% decline, but still represents a $100,000 increase in value compared to the price he paid initially.
However, if the owner does not sell his house immediately, this "paper loss" could disappear with a real estate market recovery. In the long run, the value of the house could even continue to appreciate.
What are the 2009 unrealized decreases in value for less liquid investments?
By year-end, some markets benefited from improved liquidity, leading to increases in fair value. In 2009, the illiquid specialized portfolios saw the following increases (decreases) in value:
Unrealized Increases (Decreases) in Specialized Portfolio Values
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$ billions 2009
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1st Half Year 2nd Half Year Total
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Real Estate (1.8) (0.6) (2.4)
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Real Estate Debt (2.2) (0.3) (2.5)
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Total Real Estate (4.0) (0.8) (4.8)
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Private Equity
Investments and Infrastructures (1.3) 2.5 1.2
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Asset Backed Commercial Paper* (0.4) 0.9 0.5
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Total (5.7) 2.5 (3.2)
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Note: Table data includes increases and decreases in the values of
conventional assets and liabilities and derivatives in each
portfolio.
* Now called ABTM (Asset-Backed Term Notes).
For further information: Maxime Chagnon, (514) 847-5493
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