Canada’s largest institutional investor, the Caisse de dépôt et placement du Québec, recently reported strong results for 2005. But CEO Henri-Paul Rousseau is doubtful the giant pension fund manager can sustain the profit levels reached in the past three years.

For the second year in a row, the Caisse broke into the ranks of first-quartile pension fund managers, with a weighted average return of 14.7% for 2005. Before 2004, the Caisse had not cracked the top group since 1999.

The return was almost two percentage points higher than the Caisse’s benchmark portfolio, and 2.7 percentage points better than the median return for Canadian fund managers. Such performance is making the Caisse’s dark days under former CEO Jean-Claude Scraire an ever more hazy memory.

“I’m satisfied with these results and, above all, the continuing improvement in our return over the past three years,” Rousseau says. But the former head of Laurentian Bank of Canada is nevertheless concerned about how the future will play out. The kind of returns that have produced an average annual 14% bump at the Caisse in the past three years can’t last, he says.

Over the next 10 years, Rousseau, who replaced Scraire in 2002, is looking for average annual returns of 7%. The more modest gains are expected despite an aggressive move by the Caisse into what it calls “high-potential” assets, such as real estate and private equity. Those asset classes contributed handsomely to the 2005 results.

The real estate group generated a 26.4% return, which was 5.7 percentage points better than its benchmark index. Private equity delivered a return of 22.3%, which was 14.1 percentage points better than its benchmark.

“The Caisse has made substantial asset-allocation changes over the past three years to place greater emphasis on high-potential assets such as real estate, private equity, infrastructure, subordinated real estate debt and hedge funds,” Rousseau says. “From 2002 to 2005, the proportion invested in these other investments increased to 28% from 24%.”

The solid performance in these asset classes bailed the Caisse out of a subpar showing in its key Canadian equity portfolio, which underperformed the index because of badly timed calls on oil and gas stocks late in 2005.

The Caisse’s Canadian stock portfolio returned 21%, underperforming the S&P/TSX capped index by 3.1 percentage points. “The portfolio was structured for a smaller rise in the price of oil than what actually occurred,” Rousseau told a press conference in February. “We profited from two-thirds of the increase. We forecast the rise, but at a certain point we found it speculative.”

The Caisse manages the portfolios of 20 provincial pension and insurance funds, led by the Quebec Pension Plan, the province’s version of the Canada Pension Plan. Net assets rose $15.2 billion in 2005 to $122.2 billion.

The Caisse has now come all the way back from the horrendous performances of 2001 and 2002, when it misfired under Scraire not only on investments but also on a grandiose international expansion strategy and the construction of hugely expensive headquarters near old Montreal.

In those years, the Caisse ran up a shortfall of $15 billion — including $8.6 billion in 2002, the worst showing in its history.

More recently, there have been questions about the Caisse’s willingness to become more active in shareholder rights causes alongside the likes of the Ontario Teachers’ Pension Plan Board.

Traditionally, the Caisse has preferred to keep a low profile. It has publicly voiced its displeasure with corporate moves a few times of late, yet it remains unclear how far Rousseau intends to push a shareholders’ rights or socially responsible investing agenda.

Last June, the Caisse voted its 2.8 million shares of Wal-Mart Stores Inc. in favour of a shareholder resolution calling for the company to publish a report on sustainable development. The move was widely seen as an expression of displeasure with Wal-Mart’s closure of a store in Jonquière, Que., which had become the first outlet in North America to unionize.

In the fall of 2004, the Caisse added its voice to those of the OTPPB and private pension manager Jarislowsky Fraser Ltd. in complaining about Molson Inc.’s tactics in ramming through its proposed merger with Adolph Coors Co. Rousseau wrote an open letter to chairman Eric Molson saying he was concerned about the company’s decision to give a vote on the merger to holders of more than five million stock options. Rousseau also complained about “excessive” bonuses that would be paid to senior executives as a result of a successful merger.

@page_break@On the other hand, the Caisse has yet to join the Canadian Coalition for Good Governance, a watchdog group composed of Canada’s largest institutional investors. The coalition was founded by OTPPB head Claude Lamoureux and investment counsellor Stephen Jarislowsky of Montreal.

Rousseau said recently that a key sticking point is the coalition’s support for a national securities regulator. Officially, the Caisse is neutral on the subject, but successive Quebec governments have been staunchly opposed.

Meanwhile, the Caisse has been tardy in making another shareholders’ rights-friendly move: putting up its proxy voting decisions on its Web site in the same way as the OTPPB and other major pension fund managers.

For his part, Rousseau defends the stance of the Caisse in promoting causes it finds are important. He draws a distinction between being activist and being vocal.

The Caisse’s results traditionally are compared with those of the OTPPB, which is scheduled to bring out its 2005 numbers in late March.

Montreal pension fund expert Jean Bergeron, an actuary at Morneau Sobeco, calls the Caisse’s 2005 results “good,” although, he notes, its performance in Canadian equities was below the median for Canadian pension fund managers. The advantage of fund managers the size of the Caisse or the OTPPB is that they have the resources to invest in assets such as real estate, private equity and hedge funds to add extra value, says Bergeron.

Rousseau is being prudent, Bergeron says, in warning the public that future returns should be lower than what the Caisse has produced over the past three years.

“We do a survey each year of managers; we have noticed that return expectations are more modest,” Bergeron says. “The principal reason behind that is reduced expectations for bonds, which make up 40%-50% of a pension fund. Here, the expectation is for 4% to 5% returns because of low interest rates. People are also being cautious about equity returns and are expecting less than what the historical rates of return have been.”

At the same time, Bergeron says, it is in Rousseau’s interest to keep expectations low: “The Caisse is trying not to set the bar too high. Its expectations for the equity portion of the portfolio are somewhat conservative. It isn’t taking any chances.” IE