The Caisse de dépôt, its returns and its references are talked about. There is no doubt that the Quebec manager meets the expectations of its depositors, but there is no guarantee that it will obtain an optimal return.
From the outset, the report by the HEC Montréal Center for Productivity and Prosperity devoted to the Caisse de dépôt et placement du Québec (CDPQ), published Thursday, recalls the negative return of -5.6% generated in 2022 and the bonuses of 10.6 million shared by its senior executives on the pretext that compared to the -8.3% of the reference portfolio, this represents more than 10 billion in value added.
The report recognizes from the outset the limits or even the non-objectivity of comparing the Caisse to its peers, namely Teachers’, Omers and other leading fund managers in Canada, on the basis of performance. First, the Caisse manages plans from 48 depositors, using an adjusted or personalized portfolio management approach. Everyone has their return objective, their risk tolerance and their investment horizon, which differ depending on whether their name is Finances Québec, Retraite Québec, RREGOP, Commission de la construction du Québec, CNESST, Fonds des generations or SAAQ, to retain only the seven largest depositors. “Which inevitably influences the average return it manages to achieve […] and which necessarily limits its ability to generate added value”, underline the authors of the report.
According to data from the Caisse, for its eight largest depositors, the annual return varies between -8% and -3.9% in 2022. Between 4.2% and 6.7% over five years, between 6.4% and 9.1% over ten years. This says it all about the impact of each person’s investment objectives and policies. For the institution, the benchmark portfolio as well as the maximum and minimum limits are the result of a weighted average of the depositors’ respective benchmark portfolios.
In addition, the Caisse manages the assets, whereas four of the seven other major managers in Canada serving as a comparison oversee only one pension plan. Many of them also manage assets and liabilities, which subjects them to requirements of solvency, asset-liability matching and maturities matching according to a given time horizon. Risk-taking, diversification, the selection of the assets making up the distribution or even the use of leverage are influenced by this depending on whether or not one is a fiduciary of the actuarial commitments.
Unlike its peers, the Caisse has a dual mission. Added to that of generating a suitable return is that of participating in the economic development of Quebec. It stresses in its annual report that it is the most present institutional investor in its local economy. The Canada Pension Plan Investment Board (CPPIB) is often opposed to the Caisse in this game of comparisons. However, CPPIB only administers the Canada Pension Plan and its sole mandate is to invest assets for maximum return while avoiding undue risk of loss.
At the bottom of the ladder
We learn, in the report by the Center for Productivity and Prosperity, that by accumulating the value added by the Caisse’s active management between the trough of 2008 and 2021, and by comparing it with that of the seven other major fund managers Canadian pension funds, the institution ranks seventh, just ahead of the CPPIB.
If the calculation is restricted to the management of the Retraite Québec deposit, the Caisse has generated over this time horizon a cumulative return of 253% on the portion of assets under management associated with the Quebec Pension Plan (QPP), or approximately 27 percentage points more than that obtained on average for all assets under management. “If all of its depositors had had the same investment policy as the QPP, the Caisse would have placed fourth in the ranking, proof that the investment policy of many depositors influences the CDPQ’s ability to generate returns. »
This being the downside, the Caisse’s active management would not deliver an optimal return. The authors focused their analysis on the “passive” approach used as a basis for comparison by the CPPIB. Although imperfect, this benchmark is oriented towards the returns generated by a “classic” investment strategy rather than the average returns obtained on the markets in which the managers are active. This makes it possible to assess their ability to obtain optimal performance, explain the authors. In doing so, “we find that the active management of the CDPQ would simply not have generated added value compared to a “passive” strategy from 2009 to 2021”. But the Caisse is not the only one. Of the eight major managers selected, only two, including CPPIB, would have managed to generate added value based on this theoretical return.
To circumvent the challenge of managing multiple plans, the authors focused their attention on the portion of assets under management associated with the QPP. The conclusion remains the same. While the CPPIB has been in positive territory since 2014 in terms of added value, “the Caisse has not managed to stay there despite the peaks reached in 2014 and 2019”.
Without forgetting that according to the published analysis, most of the value added by the Caisse measured since 2014 is associated with the performance of the Private Placement portfolio, “investments for which it is difficult to establish a true market price and consequently to validate performance. And this, “at the cost of a significant increase in its operating costs and the size of its workforce”.
For the authors, the verdict therefore seems final: even taking into account most of the constraints specific to its operations, the Fund probably fails to demonstrate its effectiveness.
And the report concludes: “Rather than contenting itself with evaluating the performance of its managers on the basis of the average return obtained in the markets in which it is active, the Caisse should propose alternative measures in order to enable depositors to evaluate if its active management of their funds ultimately turns out to be more profitable than a passive strategy that minimizes transaction costs. »