Canadian Press

Canada’s largest pension fund is on the path to recovery from a disastrous 2008 after earning a 10.04% average return on its investments last year, the head the Caisse de dépôt et placement du Québec says.

With a strong second half of the year, the Caisse’s assets climbed to $131.6 billion by the end of 2009, up from $120.1 billion in 2008.

“What we managed to do in 2009 was we put the train back on the track and in 2010 and beyond we have to get the train back up to cruising speed,” CEO Michael Sabia told a news conference Thursday.

The Caisse still underperformed its peers and ended the year in the bottom 25% of large Canadian investors — but the fund manager considered 2009 a turning point.

In 2008, the Caisse lost 25% or roughly $40 billion.

The fund manager noted it did better in the second half of 2009, with returns in the last six months 1.4 percentage points above the benchmark index that it compares itself with. In the first half of the year, it was five percentage points below that measure.

While other large Canadian pension funds have not reported their results, the Caisse’s return is less than the 15.5% cited by RBC Dexia for investment funds over $1 billion.

The Caisse is one of Canada’s largest pools of investment capital and manages money primarily for public and private pension and insurance funds in Quebec.

Sabia, a former CEO of BCE who joined the pension fund manager last year as it was coping with the financial and political fallout from the 2008 results, described 2009 as a transition year.

He said the organization is restructuring its portfolio, simplifying its investment strategy, reducing its exposure to risk and seizing its competitive advantages.

It re-evaluated its real estate portfolio and exited complex financial instruments such as mezzanine loans that caused a big part of the losses over the past two years.

But nothing it does can eliminate the record losses that shook the confidence of Quebecers in 2008, he told reporters in the Caisse’s cavernous headquarters.

“We’re working all the time…to strengthen this organization so that 2008 becomes not a happy memory, because it never will be, but a distant memory.”

He said there is more work to do even though it is in better shape from a risk perspective.

Among the efforts will be to increase its investments among Quebec businesses and develop the expertise to eventually expand investments in emerging countries such as India, Brazil and China.

This year for the first time it will allow depositors to select investments outside Canada that are based on types of sectors rather than geographic areas.

During 2009, the Caisse reduced its liabilities by $27.7 billion including $14.5 billion in derivatives, to $39.1 billion.

It replaced short-term debt with $7.2 billion in longer-term debt. And it cut operating expenses and external management fees by $43 million or 13.7% to $271 million.

Ten of the Caisse’s 17 portfolios beat their respective benchmark indexes, while 15 of the portfolios representing three-quarters of its assets had positive returns.

Equity markets did the best of the portfolios, gaining 31.4% as the pension fund manager reinvested $9.6 billion. That included $2.5 billion on April 1, followed by $1 billion in each subsequent months.

The total value of its stock investments increased by about $20 billion in the year.

Sabia refused to directly criticize his predecessor’s decision to sell about one-third of the Caisse’s stocks in late 2008 to minimize losses.

Given the liquidity constraints and the market environment it faced last spring, Sabia said he and his team acted prudently in rebuilding its equity portfolio.

“We don’t have any sense that there’s an important decision or an important call that we didn’t make or that we made a bad call on,” he said.

“I suppose we would have invested a little faster than we did, but only with the benefit of hindsight.”