The Caisse de dépôt et placement du Québec office in Montreal.Ryan Remiorz/The Canadian Press
The chief executive of Caisse de dépôt et placement du Québec is expecting more volatility ahead as investors adjust to higher inflation and interest rates after the pension giant posted a 5.6-per-cent loss last year, erasing $18-billion from its assets.
Investment returns were battered by what CEO Charles Emond called the toughest correction in stock and bond markets in half a century, and one of the most volatile years on record. The Caisse posted its first loss and worst annual performance since the 2008 global financial crisis, but still outperformed several relevant industry benchmarks.
High inflation, rapidly rising interest rates and geopolitical upheaval from Russia’s war in Ukraine created turmoil in markets and an array of challenges for investors. And Mr. Emond predicted the coming year won’t be much different.
“Both rates and inflation are likely to be landing at a higher spot, or corridor, than what we’ve experienced or witnessed in the previous 10 years,” Mr. Emond said in an interview. Add in geopolitical tensions and persistent volatility in capital markets and “it creates more things to check for as an investor.”
The Caisse, which manages $402-billion of assets, is also still dealing with the fallout from two high-profile investments that soured last year: The write-off of a US$150-million investment after cryptocurrency platform Celsius Network Ltd. imploded, and the plunge in value of an Indian renewable-power company, Azure Power Global Ltd., that left the Caisse holding hundreds of millions of dollars of unrealized losses.
In spite of those headwinds, the Caisse returned a smaller average loss across its portfolios than its benchmark – a similar portfolio of assets used to compare its results – which lost 8.3 per cent for the year. On average, Canadian defined pension plans fared even worse, with an average annual loss of 10.3 per cent, as measured by a typical mix of publicly held stocks and bonds tracked by Royal Bank of Canada’s RBC I&TS All Plan Universe.
Though each of the Caisse’s eight largest clients had portfolio losses ranging from 3.9 per cent to 8 per cent, those returns still beat the respective benchmark the pension manager used in every case. It manages funds for 48 clients that have different tolerance for risk and timelines for their investment returns.
On Thursday, Mr. Emond addressed the two controversial investments in Celsius and Azure Power that attracted scrutiny last year, noting they are a small part of a huge portfolio of more than 4,700 investments. He told reporters the Caisse filed legal action two weeks ago against Celsius, the cryptocurrency lender that filed for bankruptcy last summer, alleging it made “false and misleading representations,” including about its financial situation. And he said Alexandre Synnett, the executive who oversaw the investment, left the company around the same time.
“We had good intentions. We did a lot of introspection about it afterwards, for sure, and there’s things you learn as you go along,” Mr. Emond said in an interview. “On the other hand, there’s things that we weren’t told about back then and … we feel that’s something that could have changed our decision.”
At Azure Power, where Ontario Municipal Employees Retirement System is also a shareholder, Mr. Emond said “the story is not over,” and it is too soon to talk about potential losses for the Caisse. The renewable-power company’s shares are down 66 per cent since August, when its CEO stepped down and a whistle-blower alleged there had been procedural problems and data manipulation by some employees at a plant belonging to a subsidiary.
The Caisse has not yet sold its stake, and could yet recover some of its losses if Azure’s fortunes turn around. A special committee’s investigation is “progressing well,” Mr. Emond said in an interview, adding that since it heard from the whistle-blower, “Azure did everything they had to do.”
“When these situations arise, which is an exception, we deal with it,” he said. “In the case of Azure, I don’t think there’s an issue with the way we do diligence.”
Last year’s investment losses dragged down the Caisse’s longer-term returns, which it considers important measures of performance because it invests over a long time horizon for pensioners. Over five years, its annualized return was 5.8 per cent, and over 10 years it was 8 per cent, both of which beat the relevant benchmarks. A year ago the five- and 10-year returns were 8.9 per cent and 9.6 per cent respectively.
The Caisse had net assets of $402-billion as of Dec. 31, down from $419.8-billion a year earlier, though its investments performed better in the second half of 2022. The year-over-year decline was mostly a result of a 14.9-per-cent loss on the Caisse’s bond portfolio, as well as a lesser 5.7-per-cent loss on stocks.
Investments in assets such as real estate and infrastructure generally performed well, returning 12 per cent for the year.