(Montreal) Caisse de Depot et placement du Quebec (CDPQ) would have had higher returns if it followed a simple index strategy, according to a new study by the Center for Productivity and Prosperity (CPP) at HEC Montreal.
Caisse’s assets could have been 11% higher if the Quebecers’ woolen socks managers had reproduced a simple “classic” index strategy from 2009 to 2021, according to the report published Thursday. Thus, the fund ranks sixth in a sample of eight large Canadian public sector pension funds.
Caisse’s fund generates enough returns to meet its obligations to Quebec workers who contribute to the Quebec Pension Plan (QPP), but this poor performance still raises questions, CPP director Robert Janney believes. “I don’t understand why Quebecers should leave money on the table,” the professor lamented in an interview.
In comparison, CPP uses a different benchmark than the fund index to reach its conclusions. And he’s taking that from the Canada Pension Plan Investment Board, which is 85% stocks and 15% bonds.
The index differs from the portfolio of Caisse de dépôt which contains approximately 30% in fixed income, 25% in real estate assets (real estate and infrastructure), 25% in listed stocks, and 20% in stocks of private companies, on 31 December 2022.
Mr. Gagné believes that it is reasonable to take a reference index with a different weighting. The comparison makes it possible to “see what Caisse gives up by making the choices he makes”. “This is how it proves its suitability (of the strategy).”
In Caisse, the report is believed to be “oversimplified”. The risk of the indicator used by CPP has a risky risk profile. She said an index profile with 60% equity and 40% fixed income would be more appropriate. Compared to this indicator, the outperformance will be “steady” since 2009 to reach 44 billion. Therefore, the comparison made by the Center is not appropriate.
private placements
The CPP report notes that Caisse has generated added value since 2014. However, the difference can largely be attributed to private placements, assets that are more difficult to value than publicly listed stocks. “Private positions are not valued objectively by the markets because there are not many transactions,” explains Mr. Gagné.
However, this added value plays a role in evaluating the performance of Caisse officers. Its top executives shared 10.6 million in bonuses in 2022. “It allows Caisse to shoot from all the rooftops that it is a good thing and that it does its job well,” jokes Mr. Gagnier.
In addition, the weight of private equity in Caisse’s portfolio has nearly doubled since 2013. This change has been accompanied by significant operating expenses. Caisse’s workforce increased by 68% between 2013 and 2021.
In February, Caisse, for its part, confirmed that its portfolio had achieved the equivalent of $30 billion in added value over 10 years compared to its benchmark. Its annual return was 8% over 10 years, as of December 31, versus 7% for its benchmark.
At Caisse, we make sure that private placement valuation is done according to the rules. “The accuracy of this portfolio’s performance data is demonstrated by tracking the highest standards and is validated by external auditors and independent valuers.”
The institution also considers that operating expenses are not a good indicator if they are not compared to the total size of the assets. In total, Caisse’s costs represented 0.48% of its portfolio in 2022. “The average cost ratio of CDPQ over the past three years, from 2020 to 2022, was the average of its Canadian peers over the same period.”
Mr Gagné acknowledges that his report may contain errors, but believes Caisse’s “lack of transparency” complicates his work. “We think the job was done well. We think our conclusions are strong, but we’d obviously be more comfortable if we had access to more information to validate what we’re saying.”
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