Leading pension plans report losses

(March 10, 2003) Two of Canada’s largest capital pools reported losses today. The Ontario Teachers Pension Plan Board is down 2% for 2002, about the same as last year. In Quebec, the Caisse de dépôt et placement lost 9.57%, more than double its loss in 2001.

The Caisse’s total loss of $7.59 billion is much heavier than what its benchmark would indicate. The Caisse’s benchmark, a composite measure of its exposure to different markets and assets lost 5.69%. “The financial markets were in turmoil for the third straight year. Toronto’s S&P/TSX index lost 12.4% in 2002 and New York’s S&P 500 index 22.9%. Such a situation had not occurred since the stock market crash of 1929,” Caisse chair and chief executive officer Henri-Paul Rousseau said in a statement today. “Most of the return for 2002, namely 59%, is due to the deplorable situation on the markets.”

What added to the losses, the Caisse conceded, was an overweight position in telecommunications, media and technology (TMT) stocks, particularly Quebecor, which handed Canada’s largest pension manager with $77 billion in assets, a $1.81 billion loss.

“The Caisse, like a large number of financial institutions, was involved in the speculative TMT bubble in the last years of the century. The Caisse stands out, however, because of its late entry into the sector and the scope and illiquid nature of its investments. This combination of factors accentuated the negative impact on the Caisse’s return when the bubble burst. Beginning in 1998, the Caisse increased its investments in equities and gradually acquired a substantial position in the TMT sector, mainly private equity holdings,” Rousseau said. The Caisse’s five-year return is 3.83%.

While Teachers beat its benchmark by 2.8%, for a loss of 2%, it said long-term results are what counts for the $66 billion fund, citing its 10-year rate of return of 10.4% and four-year rate of return of 5.3%. Teachers’ objective is to make more than inflation, plus 5%.

Teachers president Claude Lamoureux attributed the strong performance to bond and alternative investment returns. “Inflation-sensitive and fixed income investments, representing over half the fund, performed very well for us this year at 13.2% and 8.6%,” he said in a statement.

Teachers scaled back its stock exposure early in 2002. “Anticipating negative stock markets, we took action early in the year to reduce the plan’s exposure to stocks by 10%, cushioning the plan from $900 million in additional losses. We also shifted investments from the stock market to private equity and alternative investments in our continued search for value.”

The Caisse also said active management helped mitigate market losses.

“Contrary to what the overall return indicates at first glance, the contribution by the specialized management teams was generally positive. In fact, the massive losses that are due to overweighting TMT private equity investments and to centralized operations overshadowed the performance of the management teams. As usual, several of them beat their benchmark indexes in 2002. The analysis of our results confirms the high calibre of our teams, whose active management added 80 basis points to the annual return on the benchmark portfolio over five years,” Rousseau said.

Rousseau pointed to the performance of CDP Capital World Markets. Short-term investments, bonds and Canadian equities yielded 2.68%, 9.80% and -12.17%, beating their benchmarks by 0.16%, 1.07% and 0.27% respectively.

The Caisse fared better in alternative investments. Real estate was also a strong performer for it, with property investments returning 8.04% for an outpeformance of 1.03%, and mortgages 11.30%, adding 2.57% over the index. CDP Capital — Americas, which manages 60% of the Caisse’s private equity portfolio, had a positive return of 4.97%.

Teachers also has a extensive stable of alternative investments. Its inflation-sensitive portfolio includes real return bonds, commodities and real estate, while its fixed income portfolio includes relative value strategies — a synonym for hedge funds.

Filed by Scot Blythe, Advisor.ca, sblythe@advisor.ca.

(03/10/03)