Caisse de dépôt et placement du Québec (CDPQ) today released its financial results for the year ended December 31, 2019. The weighted average return on its depositors funds was 10.4% in 2019, which represents $31.1 billion in investment results. The annualized return over five and ten years was 8.1% and 9.2%, respectively.Alright, so CDPQ is the first of the major Canadian pensions to report its results, and there is a lot to cover.
The returns of CDPQ’s eight main depositors ranged from 9.5% to 10.8% for 2019, and from 7.2% to 8.9% over five years. Over ten years, the returns ranged from 8.6% to 10.0%. Across all periods, the returns generated by CDPQ exceeded its depositors’ needs.
CDPQ’s net assets totalled $340.1 billion as at December 31, increasing $114.2 billion over five years, with investment results of $106.0 billion and $8.2 billion in net deposits. Over ten years, investment results were $191.0 billion and net deposits were $17.5 billion.“We expect the next decade to be more challenging than the past one, during which all investors benefited from the longest bull market in history. In the context of a growing gap between real economic performance and market performance, and multiple indicators prompting us to be cautious, it will be important for our strategy to continue evolving while we manage responsibly and with agility,” said Charles Emond, President and Chief Executive Officer of CDPQ.Over five years, CDPQ has generated $11 billion in value added compared to its benchmark portfolio. Over ten years, it has produced over $18 billion in value added for its depositors.
“Overall, CDPQ’s portfolio is built to be more stable over the long term and less vulnerable to sharp market movements, so it is well positioned to take on the headwinds that await us. To date, it has delivered the expected long-term returns, with a level of risk that reflects the needs of our depositors,” he added.
For the one-year period ending December 31, 2019, CDPQ’s return is 1.6% below that of its benchmark, which largely stems from the Real Estate and Infrastructure portfolios whose assets are by definition oriented toward the long term. An analysis of the return generated by these portfolios is provided in the Real Assets section.
RESULTS HIGHLIGHTS
Returns by asset class
In 2019, CDPQ stayed the course on its investment strategy, which focuses on absolute-return management, the globalization of its activities, strategic partnerships and strengthening its impact in Québec. Within each of the main asset classes – Fixed Income, Real Assets and Equity – CDPQ’s teams have worked to advance these priorities, as shown by various achievements throughout the year.
Fixed Income: Accelerating deployment in private credit, a major performance driver
Over the last three years, CDPQ has made a strategic shift in its fixed income activities to increase exposure to corporate credit, real estate debt, specialty finance and sovereign credit. More specifically, it seeks business opportunities in private credit to generate superior returns and increase its impact on companies. In this asset class, which was, until recently, still concentrated in Canada, CDPQ also significantly raised its exposure to global markets.
Over five years, the Fixed Income asset class generated a 4.3% return and added nearly $4 billion in value compared to its benchmark index. This performance was almost entirely the result of corporate credit and sovereign credit activities. In 2019, credit activities also produced results that greatly exceeded expectations, with a 10.9% return, which significantly contributed to the asset class’s 8.9% overall return.
Real Assets: Accelerating the real estate portfolio’s transition toward the future, pursuing growth in infrastructure
CDPQ’s Real Estate portfolio posted a 7.2% annualized return over five years, which is in line with depositors’ long-term expectations, but below the benchmark index’s 8.8% return. Compared to its benchmark index, the portfolio is notably affected by the weak performance of Canadian shopping centres, in which Ivanhoé Cambridge, CDPQ’s real estate subsidiary, has historically been more present. The valuations of more traditional shopping centres are declining as a result of new consumer habits, and particularly the prevalence of e-commerce. Given these trends, the sector will likely continue to be challenged in the coming years.
In 2019, the real estate portfolio posted a -2.7% return. Even though current returns were steady and investments in funds, equities and the industrial sector offered good performance, the overall return was affected by falling valuations in the Canadian shopping centre sector and, to a lesser extent, residential real estate in New York, in light of new regulations to control rent increases. Long-term debt revaluation related to lower interest rates in the United States also reduced net asset values.
With the market continuing to undergo fundamental changes, Ivanhoé Cambridge will accelerate the transition under way, which aims to lower the weight of more traditional assets and prioritize opportunities in tomorrow’s sectors. Major structural trends such as urbanization, sociodemographic changes and new technologies will guide future investments and foster the development and revitalization of neighbourhoods, as well as the development of connected environments, incorporating cutting-edge industrial solutions.
Illustrating this transition, over $11 billion of acquisitions, capital investments and sales were completed in 2019. The acquisitions include investments in the industrial sector in the LOGOS platform in Asia Pacific and Prologis in Brazil, as well as the expansion of the platform with PLP in the United Kingdom. Investments were also made in several major development projects, such as Projet Nouveau Centre in Montréal, CIBC Square, a new-generation office campus in Toronto, and the Greenford Quay residential neighbourhood in London.
The Infrastructure portfolio, whose assets have almost tripled over the last five years, posted a five-year annualized return of 9.2%, which largely stems from the good performance and quality of the portfolio companies. The current return, an attractive aspect of this asset class, also made a significant contribution during the period.
In 2019, the portfolio produced a return of 7.1%, aligned with long-term expectations but below its benchmark index’s return of 17.7%. The benchmark index, which includes over 200 securities of publicly-traded companies, benefited greatly from surging stock markets. CDPQ’s Infrastructure portfolio, comprised of around forty private assets, targets a lower level of risk and more stable long-term performance. Because of their distinct profile, it is more meaningful to compare the returns of the portfolio and its benchmark index over the long term. The portfolio generated a value add of $153 million over the five-year period.
This year’s infrastructure transactions include the acquisition of a 30% stake in Vertical Bridge, the largest private owner and operator of communications infrastructure in the United States, the acquisition of a 31.5% stake in Brazilian company TAG, alongside ENGIE, as well as investments in various ports, including two in Chile, alongside DP World.
Equities: Active management for optimal risk-return
Absolute-return management, an investment approach that focuses on selecting assets based on their fundamental value, is today used in the vast majority of CDPQ’s portfolios. As a result of this management style, CDPQ’s Equity Markets portfolio considerably outperformed its benchmark index, adding more than $5 billion in value over five years. The Global Quality mandate, a pillar of the absolute-return management strategy, produced an annualized return of 11.7% and close to $3.7 billion in value added. Integration of active management within the Growth Markets mandate, which was entirely managed using an index-based approach six years ago, is also profitable over the period, generating an annualized return of 9.2% and $1.5 billion in value added.
In 2019, the Equity Markets portfolio posted a 17.2% return, which represents $17.7 billion in investment results. The difference with the benchmark index, which posted a return of 18.0%, reflects CDPQ’s strategy of prioritizing stocks with quality fundamentals, which are less sensitive to strong market swings, as well as value stocks, which are stocks that appear to be undervalued compared to their intrinsic value but will fulfill their potential over the long term.
In the Equities asset class, the Private Equity portfolio, whose assets today amount to $50 billion, continues to deliver strong annualized returns of 12.5% over five years. This portfolio outperformed its benchmark index, producing $4.8 billion in value added. Private Equity is central to CDPQ’s strategy that aims to build long-term partnerships with companies in Québec and around the world, as well as to support growth and operational excellence. In 2019 alone, CDPQ invested nearly $11 billion in various growing companies, including Hilco Global, a financial services company, Allied Universal, a leader in security services, Healthscope, a leading Australian health care provider and Constellation, a global insurance platform. In 2019, the portfolio posted a 10.5% return, resulting from the strong performance of direct investments, especially publicly-traded companies of which CDPQ is a major partner. The portfolio’s underperformance compared to its benchmark index is primarily due to the benchmark index’s strong weighting of public equities which benefited from the market’s exuberance in 2019.
Impact in Québec: Support growth, finance innovation and develop the next generation
In Québec, CDPQ continued to deploy its three-part strategy: supporting the growth and globalization of Québec companies, supporting innovation and the next generation of entrepreneurs, and implementing impactful projects. At the end of 2019, it had total assets in Québec of $66.7 billion, including $47.6 billion in the private sector. During the year, CDPQ made $3.3 billion in new investments and commitments. It remains a partner of over 650 Québec SMEs.
Growth and globalization
In 2019, CDPQ continued to actively support Québec companies’ growth in Canada and around the world. For example, CDPQ provided financing for Nuvei’s acquisition in the United Kingdom in the online payment sector, the growth of Alt Hotels, an acquisition by Cirque du Soleil in the United States, the expansion of Golf Avenue in Europe and the United States, as well as an acquisition in Western Canada by eStruxture, a Québec data centre operator.
Innovation and the next generation
Again this year, CDPQ invested in companies focused on the new economy, notably through the launch of a new $250 million fund for companies specialized in artificial intelligence. Of this amount, around $170 million has already been deployed in Element AI, Dialogue and Neuvoo (now known as Talent.com). CDPQ also invested in AlayaCare, a cloud platform in the health care sector, and in Amplitude, in the life sciences sector. It also served as a lead investor for Lightspeed, the first Québec unicorn that went public in 2019.
Over the last year, in addition to all the entrepreneurial activities it supports, CDPQ also put special focus on the development and growth of companies owned by women. This was reflected in commitments to various initiatives, including Technovation, Cheffes de file, Femmessor, Women Initiative Foundation and Réseau des femmes d’affaires du Québec.
Impactful projects
CDPQ Infra, a CDPQ subsidiary, continued to build the Réseau express métropolitain (REM), with multiple segments of the network under construction, including nine stations and several kilometres of tracks on the South Shore. The project is on track and the first rail tests should begin by the end of 2020.
Ivanhoé Cambridge continues to implement its Projet Nouveau Centre, which includes investments of $1 billion to revitalize downtown Montréal. The project involves two major transformations that are under way at the Eaton Centre and Place Ville Marie, which will enhance the quality of the commercial, gastronomical and public space offering.
Stewardship investing: Concrete actions for a low-carbon economy
CDPQ continues to take concrete actions to address climate change. Its objective is to reduce its carbon footprint by 25% per dollar invested by 2025 and add $14 billion in low-carbon assets by the end of 2020, compared to its 2017 levels. Today, CDPQ is one of the only investors in the world to adopt reduction targets and establish incentives for its teams on this front.
In 2019, CDPQ took part in the launch of the Net-Zero Alliance, an unprecedented initiative involving some of the world’s largest investors committed to constructing carbon-neutral portfolios by 2050. In pursuing its climate strategy, it also increased its investments in public transportation – the Barcelona and Sydney metros – and announced its participation in an investment fund for green real estate.
Details on CDPQ’s progress on its climate change strategy will be presented in its Stewardship Investing Report, which will be released in the spring of 2020.
FINANCIAL REPORTING
CDPQ’s operating expenses, including external management fees, totalled $757 million in 2019. The expense ratio was 23 cents per $100 of average net assets, a level that compares very favourably to that of its industry.
The credit rating agencies reaffirmed CDPQ’s investment-grade ratings with a stable outlook, namely AAA (DBRS), AAA (S&P), Aaa (Moody’s) and AAA (Fitch Ratings).
ABOUT CAISSE DE DÉPÔT ET PLACEMENT DU QUÉBEC
Caisse de dépôt et placement du Québec (CDPQ) is a long-term institutional investor that manages funds primarily for public and parapublic pension and insurance plans. As at December 31, 2019, it held CAD 340.1 billion in net assets. As one of Canada’s leading institutional fund managers, CDPQ invests globally in major financial markets, private equity, infrastructure, real estate and private debt. For more information, visit cdpq.com, follow us on Twitter @LaCDPQ or consult our Facebook or LinkedIn pages.
However, unlike the Ontario Teachers' Pension Plan and a few others, CDPQ doesn't release its annual report at the same time it releases its financial results.
This isn't done deliberately, the annual report is released in April after it gets approval from Quebec's National Assembly, but it is irritating because we don't have access to more detailed information (like how much currency exposure added or detracted from results) as well as the compensation doled out that goes hand in hand with long-term results.
Personally, I believe the CDPQ should release its annual report at the same time as it releases its financial results. The same goes for OMERS. It makes no sense drip feeding information, release everything at once!
Still, there is plenty to discuss even if the 2019 Annual Report isn't available yet (it will be in April).
The first thing I'd like to discuss is the article in Les Affaires which harps on the fact that CDPQ's 10.4% result in 2019, the weighted average return on its depositors fund, underperforrmed the 11.9% benchmark index return last year.
People reading that article will immediately jump to the wrong conclusion. My reaction: "So What?!?". I don't focus on annual results, I focus on 5-year results which is what compensation is based on. And over the last five years, CDPQ has gained 8.1% beating its benchmark portfolio by 90 basis points (8.1% vs 7.2%).
All you Quebec journalists reading my comments should stop harping on one-year results and start focusing on long-term results. Another example, over the last 10 years, CDPQ has returned 100 basis points above its benchmark portfolio (9.2% vs 8.2%).
And here is the real kink, CDPQ's benchmark portfolio is one of the most difficult to beat among Canada's large pensions and in my expert opinion, it needs major revisions in some asset classes.
A perfect example: Infrastructure. The press release states:
In 2019, the portfolio produced a return of 7.1%, aligned with long-term expectations but below its benchmark index’s return of 17.7%. The benchmark index, which includes over 200 securities of publicly-traded companies, benefited greatly from surging stock markets. CDPQ’s Infrastructure portfolio, comprised of around forty private assets, targets a lower level of risk and more stable long-term performance. Because of their distinct profile, it is more meaningful to compare the returns of the portfolio and its benchmark index over the long term. The portfolio generated a value add of $153 million over the five-year period.Why is CDPQ using a public markets benchmark (full of beta!) to evaluate such an important and very stable private market asset class?
I know, the opportunity cost of investing in private markets is investing in public markets but it makes zero sense to use this benchmark as it doesn't accurately reflect the risk/ return characteristics of CDPQ's Infrastructure portfolio.
Yes, the portfolio generated a value add of $153 million over the five-year period (9.2% vs 7.8%) which is what the focus should be on but that benchmark for Infrastructure really irks me, CDPQ and its depositors need to review it.
The other benchmark that irks me is the Real Estate benchmark. In 2019, the real estate portfolio posted a -2.7% return severely underperforming its benchmark which gained 8.8%. The press release states the following:
Even though current returns were steady and investments in funds, equities and the industrial sector offered good performance, the overall return was affected by falling valuations in the Canadian shopping centre sector and, to a lesser extent, residential real estate in New York, in light of new regulations to control rent increases. Long-term debt revaluation related to lower interest rates in the United States also reduced net asset values.Two comments. CDPQ's real estate subsidiary, Ivanhoé Cambridge, is way overexposed to Canadian shopping centers and it is slow to transition out of these into global logistics properties. In my opinion, it did not properly anticipate the fundamental shift that came along with the rise of e-commerce.
With the market continuing to undergo fundamental changes, Ivanhoé Cambridge will accelerate the transition under way, which aims to lower the weight of more traditional assets and prioritize opportunities in tomorrow’s sectors. Major structural trends such as urbanization, sociodemographic changes and new technologies will guide future investments and foster the development and revitalization of neighbourhoods, as well as the development of connected environments, incorporating cutting-edge industrial solutions.
The other thing I can say is Ivanhoé Cambridge could have done a better job with its existing shopping centers. I'll give you an example -- and these are my opinions -- when I go shopping, I look for ease of parking, getting in and out with as little distractions as possible.
This is why I prefer going to Marché Centrale (owned by QuadReal/ BCI) or Carrefour Laval (owned by Cadillac Fairview /OTPP and TD funds). Don't get me wrong, I avoid malls like the plague, especially during peak hours, but when I have to go, I like convenient ones where I can literally drive to where I need to go and get out as fast as possible.
In Quebec, Ivanhoé Cambridge owns some nice malls downtown which are not very accessible to most people, especially older people and people with disbilities.
Importantly, when it comes to shopping malls, you need to have good anchor investors which increase foot traffic and you need to make it easy, secure and enjoyable for people to want to leave their house to go there. You need different perspectives from people but take it from me, shopping malls aren't doomed if you know how to work the asset properly.
Let me give you another example near me, Rockland Center, an upscale mall located at Metropolitan Boulevard and De L'Acadie Boulevard. Ivanhoé Cambridge made the wise decision to sell it to Cominar Real Estate Investment Trust back in 2014 along with other malls and it's been a disaster mall, headed downhill fast.
Yes, they revamped the food court (who cares!) but the mall used to be fun and full of great stores, and it's become a shadow of what it used to be because of the horrendous traffic around that area during peak hours (this impacts QuadReal/ BCI's Marché Centrale) and lack of good choices (nothing compared to Carrefour Laval). Cominar is trying to spruce it up but it's not going to be easy.
Alright, enough ranting about Quebec's terrible malls, the only thing I want to say is be careful interpreting CDPQ's Real Estate results, especially relative to its benchmark, they don't reflect the work being done there and I have full confidence in Ivanhoé Cambridge's new CEO Nathalie Palladitcheff and her senior team.
More importantly, I looked at CDPQ's 2018 Annual Report and read this in the benchmark portfolio:
La Caisse’s benchmark portfolio corresponds to the weighted average of the asset allocation decisions made by each of the depositors when their investment policies are established.Unfortunately, there was no detailed discussion on this strategic review of the benchmark portfolio in the annual report and it makes me wonder why CDPQ can't be more transparent on this front (in the old days, they used to have a full discussion going over each portfolio benchmark).
In 2018, the depositors reviewed the composition of their respective benchmark portfolios, and this has influenced the composition of la Caisse’s benchmark portfolio. As at December31,2018, it presented increases in the weighting of the Real Assets class and, to a lesser extent, in the weighting of the Equities class compared to the previous year. In contrast, the weighting of the Fixed Income class decreased. These changes reflect la Caisse’s strategic directions (see Table 9, p. 38).
Again, I think CDPQ's senior managers and its Board need to review the benchmarks for Infrastructure and Real Estate more closely and explain in detail how they properly reflect the risks and return profile of the underlying portfolio (they don't, there is a mismatch).
In Equities, Private Equity underperformed its benchmark by 130 basis points in 2019 (10.5% vs 11.8%) but it delivered strong annualized returns of 12.5% over five years, significantly beating its benchmark by almost 400 basis points (12.5% vs 8.7%).
The press release states:
This portfolio outperformed its benchmark index, producing $4.8 billion in value added. Private Equity is central to CDPQ’s strategy that aims to build long-term partnerships with companies in Québec and around the world, as well as to support growth and operational excellence. In 2019 alone, CDPQ invested nearly $11 billion in various growing companies, including Hilco Global, a financial services company, Allied Universal, a leader in security services, Healthscope, a leading Australian health care provider and Constellation, a global insurance platform. In 2019, the portfolio posted a 10.5% return, resulting from the strong performance of direct investments, especially publicly-traded companies of which CDPQ is a major partner. The portfolio’s underperformance compared to its benchmark index is primarily due to the benchmark index’s strong weighting of public equities which benefited from the market’s exuberance in 2019.Well, so far in 2020, the market's exuberance continues (but it's getting rocky) and in this environment, Private Equity can underperform over any given year.
As far as direct investments, these are mostly co-investments and here I credit CDPQ's former head of Private Equity, Stephane Etroy, who recently joined Ares Management Corporation (NYSE: ARES) as a Partner and Head of European Private Equity.
Stephane did an outstanding job while heading CDPQ's Private Equity which is why he was recruited by Ares and why he was one of the best paid executives in 2018:
Even though 2019 figures aren't available yet, I'm quite certain Stephane Etroy, Macky Tall, Emmanuel Jaclot, Anita M. George and Claude Bergeron were all among the best paid senior executives last year (not sure if Charles Emond made the list since he wasn't there long enough but he might have).
By the way, along with Nathalie Palladitcheff who also gets paid big bucks (deservedly so), Anita M. George is the most powerful woman at CDPQ. I like what she said in a recent panel discussion in New Delhi on "Celebrating Success, Women in Investing": “Even if I had to work three times harder than the men, I was determined to achieve my goals in my private equity career".
Ms. George has a huge job at CDPQ developing its portfolio in growth markets like India, China and elsewhere, finding the right partners.
Speaking of growth markets, in Fixed Income, I note the following from the press release above:
Over the last three years, CDPQ has made a strategic shift in its fixed income activities toincrease exposure to corporate credit, real estate debt, specialty finance and sovereign credit. More specifically, it seeks business opportunities in private credit to generate superior returns and increase its impact on companies. In this asset class, which was, until recently, still concentrated in Canada, CDPQ also significantly raised its exposure to global markets.Translation: CDPQ has discovered the virtues of global private debt and I discussed some of the challenges when I went over the CAIP Quebec Atlantic conference at Mont-Tremblant and went over what Vito Dellerba, Director, Investments, Sovereign Debt, Fixed Income at CDPQ shared.
Anyway, the strategic shift toward private debt helped Fixed Income at CDPQ beat its benchmark in 2019 (8.9% vs 8%) and over the last five years (4.3% vs 3.4%).
Alright, let me wrap things up since I'm literally exhausted and definitely don't get paid enough to stick my neck out when covering these annual results.
If you have anything to add, feel free to reach me at LKolivakis@gmail.com.
Below, RDI Économie's Gérald Fillion recently interviewed Charles Emond, the new CEO at CDPQ, after he was appointed to the top job. This interview is in French.
I will add new interviews as I'm sure Mr. Emond will be in high demand tonight going over CDPQ's 2019 results. I also hope he does some English interviews with Bloomberg and other English media sources.
So far, the Caisse's new CEO is stressing caution after a 10-year bull market and the 2019 returns, and I think he's absolutely right.
He should also stress long-term results and explain a little what exactly went wrong in the real estate portfolio, although I think Nathalie Palladitcheff is better placed to discuss this and Ivanhoé Cambridge's growth strategy going forward (which includes selling a third of its shopping malls in Canada, probably at a deep discount).
Lastly, it should have been Michael Sabia explaining 2019 results, not Charles Emond. It's not really fair that Charles Emond and OTPP's new CEO Jo Taylor are left explaining results of their predecessors but I guess that's part of the job.
For those of you who want to read more on CDPQ, I invite you to read the 2018 Annual Report. Remember, the 2019 Annual Report won't be available till April, and when it is, you will find it here.