Caisse de dépôt sees more economic pain ahead as it reports first investment loss in more than decade

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Canadian pension fund giant Caisse de dépôt et placement du Québec has seen a loss on its investments for the first time since the financial crisis more than a decade ago, hit largely by its exposure to shopping centres amid the coronavirus crisis. Its chief executive sees more pain ahead.

The Montreal-based institution, Canada’s second-biggest pension fund, on Friday disclosed a negative return of 2.3 per cent for the first half of the year – its first decline since the $40-billion, 26-per-cent loss of 2008. Net assets fell to $333-billion at the end of June from $340-billion at the end of December.

In the months to come, the Caisse said it would speed up a pivot to more promising real estate holdings and boost investments in technology companies, in which the pension fund has been underinvested of late. It is also writing down to zero the US$170-million invested in Cirque du Soleil since 2015, but declined to say whether it could come back with partners and make an offer for the insolvent company.

“This is a historic crisis that is not done yet,” Caisse CEO Charles Emond told reporters on a conference call. “We have difficult months ahead of us. We are hoping for the best but we are ready for the worst and for any situation.

“The markets will remain difficult to predict. We will have to be prudent, rigorous, selective because the next year will be difficult given this economic crisis that is going on and we are not immune to it. If it lasts, good companies could go under.”

The results highlight the scope of the challenge ahead for Mr. Emond, a former Bank of Nova Scotia executive who took over as CEO of the pension-fund manager in early February as global stock markets were climbing to record highs. The coronavirus pandemic has altered the picture completely since, creating deep problems in many sectors of the global economy even as it opens up private-equity buying opportunities.

Exceptional central-bank monetary policies coupled with historic government assistance programs have prevented the recession from becoming a depression, but there is a growing dichotomy between the real economy and financial markets, Mr. Emond said. The pandemic has accelerated certain trends that were already under way, particularly in technology and retail, he said.

Trouble in the Caisse’s shopping-centre investments, intensified by the COVID-19 pandemic as many malls were shut down, contributed to an 11.7-per-cent loss for the real estate portfolio, the pension fund said in a statement Friday. The Caisse said it would speed up plans for each of those assets and shift resources to other market segments, such as warehousing and logistics. The bulk of its shopping centres are in Canada, including Vaughan Mills in the Toronto region and Market Mall in Calgary.

Like other major real estate players, the Caisse’s Ivanhoé Cambridge property arm is facing an extraordinary economic crisis, with malls suffering and the future of office towers coming into question as tech giants such as Shopify and Twitter embrace permanent work-from-home arrangements. Ivanhoé head Nathalie Palladitcheff is trying to whittle down the company’s stake in malls, but she told The Globe and Mail in June that she still has faith in office buildings and wants to increase investments in residential and industrial real estate.

Infrastructure, private equity and credit investments were all bright spots for the Caisse in the quarter. The pension fund has sufficient liquidity to meet the needs of its depositors while supporting Quebec companies and investing opportunistically, Mr. Emond said. He said the pension fund came into the coronavirus crisis with a “defensive position.”

It might have been too defensive. The Caisse took a major hit in the first half of the year from a loss of 5 per cent in equities, which it pinned on its limited exposure to technology stocks that punched to record highs.

To illustrate the dynamic, shares of the world’s five tech giants – namely Google, Apple, Facebook, Amazon and Microsoft – soared 31.4 per cent during the first half of the year while some 3,000 other stocks tracked by the MSCI All Country World Index fell by a combined 4.8 per cent, the Caisse said. The five companies together now make up about 20 per cent of the S&P 500 index, a concentration not seen since the 1990s, it said.

“Caisse analysts are used to evaluating companies based on historical modelling, weighing things like past cash flow,” said Michel Nadeau, a former vice-president at the pension fund who now works for Montreal’s Institute for Governance. “Now they’re going to have to make a leap of faith. When these companies are such huge fixtures in the index, it’s hard to say ‘I won’t [own them].’ "

Given the tech sector’s increasing economic importance, the Caisse has to “look at it through a new lens, open our minds,” Mr. Emond said.

The Caisse, which operates under a dual mandate to generate returns and contribute to Quebec’s economic development, in March created a $4-billion fund to help Quebec businesses affected by the COVID-19 pandemic. The aid includes loans and lines of credit. About 45 per cent of the funds have already been allocated, the pension fund said Friday.

The pension fund was a 20-per-cent owner in Cirque du Soleil, which filed for bankruptcy protection in late June. A court-supervised process to sell Cirque is now under way, with a credit bid worth about US$1.2-billion from the company’s lenders approved by the court as the offer to beat.

To succeed in the future, Cirque needs “a strategic operator” among its owners in order to reinvent itself as well as a reasonable level of debt, Mr. Emond said. Whether the Caisse puts more money in play and makes a bid for the company will depend on how things unfold, he said.

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