Caisse Earns 3.5% in First Half of 2012

Luann Lasalle of the Canadian Press reports, Caisse de depot et placement earns average return of 3.5% on first half of 2012:

Quebec's main pension fund manager says it earned an average return of 3.5 per cent on depositors' funds for the first six months of 2012.

The Caisse de dépôt et placement du Québec says its net assets reached $165.7 billion as the end of June, up $6.8 billion from $159 billion at the end of 2011.

The fund's investments contributed $5.4 billion to the increase and depositors made a net contribution of $1.4 billion.

Over a three-year period, the Caisse said it posted a 10.5 per cent average annual return.

It said all major asset classes had positive returns for this period, surpassing their benchmark.

"Despite turbulent markets and a global economic downturn, the Caisse generated a positive return in the first half, in line with the long-term needs of its depositors," president and CEO Michael Sabia said in a statement.

"Conditions will remain unpredictable for some time. Therefore, we will continue to focus on our long-term objectives as we're involved in a marathon, not a sprint."

Shortly before issuing financial report, the Caisse announced it has decided to sell part of its stake in U.K. airport operator BAA for C$393.6 million, as part of a larger transaction.

The Caisse will continue to have a 15.55 per cent stake in BAA, down from 21.18 per cent. The Caisse says the transaction will allow it to rebalance and further diversify its portfolio of infrastructure assets.

Earlier this summer, the pension fund manger said it would become more selective in its stock market picks and put more emphasis on private placements in infrastructure and real estate.

Caisse head Michael Sabia said in June that the Caisse has had better returns in recent years from private companies, real estate and infrastructure.

The changes would be made gradually as the pension fund manager does more in-depth study on its investments to keep volatility in check, he said.

More recently, the fund has become embroiled in the controversial $1.76-billion unsolicited takeover bid late last month by U.S.-based home improvement retailer Lowe's for Quebec-based Rona (TSX:RON).

Rona has said it isn't interested in the $14.50 per share offer, which would give Lowe's a bigger foothold in Canada, Rona says undervalues the company. The Quebec government has also criticized the bid as not in the best interests of either province or Canada and is examining ways to counter the Lowe's offer.

The Caisse, for its part, quickly announced it had increased its stake in Rona by two percentage points to 14.2 per cent as it noted the economic benefits of having Rona's head office in the province.

"As a significant Rona shareholder, and on the basis of these criteria, the Caisse will follow very closely the evolution of this file as well as the performance of the company," the Caisse said in a statement.

The powerful Caisse has acted before to protect interests it sees as vital to Quebec's economy. In 2000, the Caisse did not support a bid by Rogers Communications Inc. (TSX:RCI.B) to buy Quebec cable company Videotron and joined forces with Quebecor Inc. (TSX:QBR.B) to thwart the Toronto company's bid.

CTV reports that the Caisse wants Rona to perform better:

Quebec's pension fund manager said Friday that homegrown takeover target Rona Inc. needs to improve its performance, but wouldn't weigh in on U.S. retailer Lowe's $1.76-billion hostile takeover bid for the company.

Michael Sabia, chief executive of the Caisse de depot et placement du Quebec, noted the economic importance of Quebec-based Rona to the province and to Canada, but wouldn't be drawn into political questions about the Caisse and the retailer.

"There's value that needs to be created, there's performance that's got to be delivered, there's a series of other factors as well," said Sabia, after the Caisse announced a 3.5 per cent return for the first half of 2012.

Rona announced the closure of a dozen warehouse stores in Canada earlier this year following disappointing results, however, it said recently that a shift to smaller neighbourhood stores is paying off.

The Caisse increased its stake in Rona (TSX:RON) by two percentage points to 14.2 per cent after Lowe's made its hostile takeover offer of $14.50 per share in July.

As for further increasing the Caisse's stake, Sabia was mum.

"That's not in the interests of people whose money we manage to signal to the market that way," he said on a conference call to discuss the Caisse's financial results.

The Quebec government, which is examining ways to thwart the Lowe's bid, has said the Lowe's takeover offer is not in the best interests of either province or Canada. However, the Caisse isn't getting involved.

"We operate in complete independence of the government of Quebec. We take our own investment decisions," Sabia said.

Both the Liberals and the PQ have pledged if they win the Sept. 4 provincial election to allow a company's board of directors to repel a foreign takeover if it's deemed to be against the interest of workers or the greater community.

The Caisse manages public and private pension plans. It was formed in 1965 to manage the equivalent of the Canada Pension Plan for workers.

The money manager has a mandate to help Quebec's economy with the stated mission to achieve an optimal return for its depositors while also contributing to Quebec's economic development.

For the first six months of 2012, the Caisse said its net assets reached $165.7 billion at the end of June, up $6.8 billion from $159 billion at the end of 2011.

By comparison, the Canada Pension Plan Investment Board recently said the fund held roughly $165.8 billion in net assets at June 30, up from $161.6 billion at March 31, boosted by $800 million in investment income and $3.5 billion in net CPP contributions.

The Caisse said its weighted average return of 3.5 per cent for the first six months of 2012 was slightly under its benchmark of 3.7 per cent, despite difficult global markets.

"It's a number we think is very well lined up with the needs of our depositors and the performance of others and, indeed, . . . well lined up with our reference portfolio," Sabia said.

The fund's investments contributed $5.4 billion to the increase and depositors made a net contribution of $1.4 billion.

I won't comment on Rona except to say that its ultimate success depends on its senior managers and how they execute a turnaround, not how much money the Caisse or the Quebec government invest in it.

This cheap appeal to Quebec nationalism is tiring and our political leaders are all playing it up. Quebec premier Jean Charest recently pledged $1 billion fund to fuel Quebec company expansions, a proposal that has been vigorously opposed:

Quebec premier Jean Charest is vowing to create a $1-billion fund to help homegrown companies finance overseas acquisitions. The plan is being denounced by some as a waste of money for a province considered Canada’s biggest spender on corporate welfare.

The pledge, part of a series of economic measures unveiled by the Liberal leader Monday, shows Mr. Charest is trying to win support by appealing to those who believe in economic patriotism.

But the proposal stunned some observers, who argued it’s more evidence — along with a vow to block any foreign takeover of Rona Inc. — that the Liberals are taking a much more interventionist turn in the economy.

“I was shocked” to see the Liberals propose this, said Claude Garcia, a former member of the board at provincial pension fund manager Caisse de dépôt et placement du Québec.

“I really don’t understand this need to [appeal to this nationalism]. And I don’t see why people should accept that we risk their money in ventures that are very risky. If you [as a company] want to expand outside Quebec and the market cannot finance you, why should taxpayers take the risk?”

That sentiment was echoed by Claire Joly, director of taxpayer rights group Ligue des contribuables du Québec. She said the current system of handouts doesn’t work.

“It opens the door to favouritism and lobbyism,” Ms. Joly said of business subsidies. “We’re completely against the creation of another fund. There is enough state intervention in the economy already.”

According to an independent advisory committee of economists mandated by the Liberals as part of Quebec’s 2010-2011 pre-budgetary consultation, Quebec spent $3.3-billion a year in 2008-2009 on fiscal measures to help business. That includes tax credits and ownership stakes taken by government corporations like Hydro-Québec.

The economists concluded there is a pressing need to systematically review existing programs and tax credits to measure results and nix programs that have not achieved their goals.

“A fund of this scale will permit businesses from here to become international-calibre players,” Mr. Charest said during a campaign stop at a farm in St. François de la Rivière du Sud.

He added that nothing similar has been done before in Quebec, arguing that when local companies expand, overseas jobs are consolidated at home.

Money for the fund would be managed by Investissement Quebec, the province’s investment arm.

The proposal comes amid one of the busiest years for Quebec mergers and acquisitions as Alimentation Couche-Tard Inc., CGI Group and Genivar join several other local companies in bulking up by buying overseas.

Exactly how much difference a $1-billion takeover fund will make is also up for debate. The value of Canadian acquisitions into foreign markets hit $21.8-billion in the second quarter, one of the highest outbound tallies on record, according to PricewaterhouseCoopers.

Pension fund manager Caisse de dépôt et placement du Québec has been the biggest backer of local companies recently in their acquisitions, investing $1-billion in CGI to facilitate its purchase of U.K.-based Logica for $2.8-billion. The Caisse also hiked its stake in Quebec engineering firm Genivar Inc. to help the company buy British-based WSP Group PLC.

All three major parties battling in Quebec’s election campaign are proposing various policies to stir nationalistic sentiment. The Coalition Avenir Québec, for example, is pitching a $5-billion fund, managed by the Caisse, to invest in Quebec’s natural resources. Like the Parti Québécois, it wants the Caisse to take a bigger role in the economy and make more local investments.

“An economy of owners is the best way to become masters in our own house,” the CAQ states in its platform.

We're in the midst of tough election campaign. With his political career on the line, Jean Charest mounted an aggressive charge against his political foes during Sunday’s leaders’ debate to deflect criticism of his government, particularly on the key issue of corruption.

But while everyone is concerned about Quebec's economy, I can tell you from my own experience that Quebec's best entrepreneurs don't want or need any handouts from the government. They're succeeding the old fashion way by investing thousands of hours of sweat equity!

When my cousin came from Greece to do business with an agricultural dome maker right outside Joliette, Quebec, I saw with my own eyes a business started by a French Canadian entrepreneur who just had a vision. Nobody gave him any handouts. Entrepreneurship is in his blood. One of his sons told me he tried retiring but didn't work so he opened a new business at the age of 80. Good for him!

Back to the Caisse. First half results are in line with their reference portfolio and needs of their depositors. The sale of part of its stake in U.K. airport operator BAA makes sense. Ashby Monk (@sovereignfund) tweeted yesterday that the Qatar Investment Authority is set to buy a 20% stake of BAA for £900m (don't know if this is who the Caisse sold part of its stake to).

I do, however, have some differing views on public markets and the low risk the Caisse is taking. Spent my weekend going over top funds activity during the second quarter and think that many pension funds are too conservatively positioned on risk assets.

In my opinion, now is the time to crank up the risk scooping up US financials, energy, mining and tech shares. If the Caisse or any other pension fund wants insights on which companies to buy, I'll be glad to forward them my list for a reasonable consulting fee. -:)

Below, Bloomberg's Erik Schatzker reports that stocks have broken out against bonds as yields have been rising and looks at the reasons why and what role the Federal Reserve can play in both markets. He speaks on Bloomberg Television's "Market Makers."

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