The Caisse de dépôt et placement du Québec announces a 9.6% return and net investment results of $14.9 billion in 2012

Depositors' net assets reach $176.2 billion

MONTREAL, Feb. 27, 2013 /CNW Telbec/ - The Caisse de dépôt et placement du Québec announced that it earned a 9.6% weighted average return on depositors' funds for the year ended December 31, 2012. This return is higher than that of its benchmark portfolio, which was 9.3% The Caisse's net assets totalled $176.2 billion at the end of 2012, versus $159.0 billion as at December 31, 2011. This growth is due to $14.9 billion in net investment results, plus $2.3 billion in net deposits.

"Our 2012 results contribute to the work we have done since we restructured our portfolios in the summer of 2009 to generate solid long-term results. Since the restructuring, we have generated a 10.7% annualized return despite an uncertain and volatile economic climate," said Michael Sabia, President and Chief Executive Officer. "Again this year, we increased our investments in Québec and focused on this market to generate returns by helping Québec companies grow, at home and abroad."

"These results reflect the efforts we've made in recent years, but one thing is certain: we still have more work to do. In a changing world economy that has begun to gradually recover, we will continue to pursue our new strategic plans, which aim for even greater long-term stability," added Mr. Sabia.

CHANGES IN THE CAISSE'S NET ASSETS 2007-2012 (IN BILLIONS)
A chart is available on the Caisse's website

2012 ACHIEVEMENTS

An increased presence in Québec

"In 2012, we continued to invest in Québec companies of all sizes, in all regions. In today's globalized world, it's critical to build strong companies that can succeed in international markets. By supporting our promising small, medium-sized and large businesses in their growth, we are making sound investments to benefit our depositors and Québec's economy," Michael Sabia said.

The Caisse's new investments and commitments in Québec reached $2.9 billion in 2012 and now total $8.3 billion since 2009.

The Caisse's assets in Québec rose by $5.9 billion in 2012, to reach $47.1 billion as at December 31.

CHANGES IN THE CAISSE'S TOTAL ASSETS IN QUÉBEC
A chart is available on the Caisse's website

Serving as a bridge to global markets
During the year, the Caisse provided support to CGI Group and Genivar for their acquisitions in the United Kingdom. With a $1.0-billion investment from the Caisse, CGI carried out an acquisition that made it the world's sixth-largest player in the information technology industry.

Investing in promising projects
The Caisse also contributed to the growth and positioning of several Québec companies in various sectors, with investments in Camoplast Solideal, Gildan, Innergex Renewable Energy, Laurentian Bank and Rona.

Ivanhoé Cambridge, the Caisse's real estate subsidiary, became the sole owner of Place Ste-Foy shopping centre in Québec City and Galeries Rive-Nord shopping centre in Lanaudière and invested in the redevelopment and modernization of some of its Québec assets, including the Château Frontenac hotel.

Active in the growth of Québec SMEs
In partnership with Desjardins Group, the Caisse financed the operations of more than 60 small and medium-sized businesses in the manufacturing and services sectors throughout Québec. In the spring of 2012, the Caisse also increased its investment budget for publicly traded small caps by $150 million.

Other achievements
Having solidified its foundations and reduced its level of risk, in 2012 the Caisse continued to simplify its operations and began implementing its new investment strategy.

• Creation of the Global Quality Equity portfolio
• An absolute-return portfolio focusing on quality securities that generate more stable returns over the long term
• Strengthened research capabilities 
• Recruitment of operational and sector-specific experts (geology, healthcare, mechanical engineering, etc.)
• Creation of a strategic research agenda to develop comprehensive expertise across the Caisse and strengthen the decision-making and investment process
• Greater direct exposure to emerging markets 
• From $9.6 billion at the end of 2011, to $12.1 billion at the end of 2012
• Real estate investments totalling almost $600 million in Brazil in co-operation with a local partner (Ancar)
• Consolidation and stronger presence of the Caisse's real estate platform in the United States
• More than $1.4 billion of investments in New York City, Chicago and California
• Better sector diversification of the Infrastructure and Private Equity portfolios and lower concentration risk
• Sale of stakes in Heathrow Airport Holdings (formerly BAA) and Quebecor Media

In 2012, the Caisse also added four new depositors, bringing the number of depositors to 29.

HIGHLIGHTS OF 2012 RESULTS

"In 2012 global growth ran out of steam and we had a slowdown in emerging markets, a sustained recession in Europe and a timid recovery in the United States. In this context, Canada and Québec also slowed. Even so, progress was made: the private sector recovered in the United States and an upturn began in China and certain emerging markets. These positive signs, combined with strong action by European policymakers to shore up the euro, enabled the equity markets to finish the year on a stronger footing. But the weak materials sector and pressure on the energy industry held the Canadian markets back. As for interest rates, they reached historic lows in the major developed countries," commented Roland Lescure, Executive Vice-President and Chief Investment Officer.

The Caisse's 9.6% return exceeded that of its benchmark portfolio, which was 9.3%, equivalent to a positive difference of $462 million.

ASSETS AND ONE-YEAR RETURNS VS. BENCHMARK INDEXES
A chart is available on the Caisse's website

In 2012, 15 of the Caisse's 16 portfolios recorded positive results.

Fixed Income generated $2.3 billion in net investment results with a 3.9% return. This return is mainly attributable to bond interest income.

Inflation-Sensitive Investments, which include in particular the Infrastructure portfolio (up 8.7%) and the Real Estate portfolio (up 12.4%), had an 11.1% return. This asset class generated $2.5 billion in net investment results.

With a 12.2% return, the Equity class made the most substantial contribution to the Caisse's overall results, generating $8.8 billion in net investment results, with $2.1 billion coming from the Private Equity portfolio. All the portfolios in this class generated returns of more than 13.5%, with the exception of the Canadian Equity portfolio (up 6.6%). The underperformance of this portfolio is due to a heavier weighting in the energy and materials sectors, which did not fare as well in 2012. Its performance is also due to a weaker rebound in the Canadian financial sector, particularly vis-à-vis the U.S. market.

Asset Allocation operations generated negative results of $422 million, mainly because of the overweighting and underweighting on the equity and bond markets during the year. Such decisions are based partly on the conviction that, given the current level of historically low interest rates, bonds will not perform as well as other asset classes in the years to come.

In 2012, the ABTN portfolio made a $1.7-billion contribution to the overall portfolio results, mainly because the notes' market values have increased with the passage of time (less time to maturity) and due to the narrowing of credit spreads of the underlying assets.

The fact sheets included with the press release provide detailed information on the performance of each of the Caisse's portfolios as well as on economic and financial conditions, investment valuation and the transition to IFRS.

LONG-TERM PERFORMANCE HIGHLIGHTS

In the first half of 2009, the Caisse reorganized its operations. In particular, it completed an extensive overhaul of its portfolio offering and risk management and it also repositioned the portfolios in the real estate sector. Since making these major changes, the Caisse has achieved an annualized return of 10.7%, equivalent to net investment results of $50.7 billion.

PORTFOLIO RETURNS SINCE THE REORGANIZATION OF PORTFOLIOS IN JULY 2009
A chart is available on the Caisse's website

Fixed Income generated net investment results of $14.7 billion with a 7.7% annualized return. The strategies implemented by the Caisse for this asset class enabled it to benefit from the significant drop in interest rates in recent years.

In the Inflation-Sensitive Investments asset class, the Infrastructure and Real Estate portfolios generated annualized returns of 26.7% and 10.7%, respectively. This asset class generated $10.3 billion in net investment results, of which $9.9 billion is attributable to these two portfolios.

During this period, the Equity asset class made the largest contribution, with net investment results of $22.8 billion. Of that amount, $8.1 billion is attributable to the Private Equity portfolio and its 18.3% annualized return.

The Caisse's 10.7% return exceeds that of its benchmark portfolio of 9.2%. This is equivalent to $6.9 billion in additional net investment income for depositors. All asset classes contributed to this value-added by outperforming their indexes during this period.

FINANCIAL FOUNDATIONS

During 2012, the Caisse's financial position remained solid. As at December 31, the Caisse's available liquidity totalled $41.0 billion and leverage (liabilities over total assets) stood at 18.0%.

The credit rating agencies reaffirmed the Caisse's investment-grade credit rating with a stable outlook, namely AAA (DBRS), AAA (S&P) and Aaa (Moody's).

OPERATING EXPENSES

In 2012, the Caisse continued to improve its efficiency and pay close attention to its operating expenses. Operating expenses, including external management fees, totalled $295 million in 2012. The ratio of expenses to average net assets was 17.9 basis points (18.0 basis points in 2011) and continues to place the Caisse among the leaders in its management category.

ABOUT THE CAISSE DE DÉPÔT ET PLACEMENT DU QUÉBEC

The Caisse de dépôt et placement du Québec is a financial institution that manages funds primarily for public and private pension and insurance plans. As at December 31, 2012, it held $176.2 billion in net assets. As one of Canada's leading institutional fund managers, the Caisse invests in major financial markets, private equity, infrastructure and real estate globally. For more information: www.lacaisse.com.

RETURNS
A chart is available on the Caisse's website

GLOBAL ECONOMIC AND FINANCIAL CONTEXT 2012

SUMMARY

In 2012, the developed countries, especially the United States, made progress in their efforts to resolve some of the imbalances that have beset their economies in recent years. Even so, the year was generally disappointing from the economic standpoint.

After recording growth of almost 4.0% in 2011, the global economy slowed perceptibly, barely expanding by 3.0%. This situation was partially due to a slowdown in the emerging economies after two years of spectacular but unsustainable growth. It was also the outcome of weak growth in the developed economies for the second consecutive year. A moderate recovery in the United States was not enough to offset the weakness in the euro zone, which slid back into recession. Fortunately, the encouraging signs that began to appear in emerging markets in the last quarter of 2012, especially in China, bode well for 2013.

Despite the subdued economic background, financial markets ended 2012 on a positive note. As in 2011, the major stock and bond indexes faced political and economic headwinds during the year, but were supported by further strong central bank actions. Toward the end of the summer, aggressive intervention by the U.S. Federal Reserve (Fed) and the European Central Bank (ECB) succeeded in restoring confidence in the markets.

Decelerated global growth in 2012
A chart is available on the Caisse's website

EUROPE

Europe found itself on the financial markets' radar screen for a large portion of 2012. The year began well with the success of the ECB's Long-Term Refinancing Operations. This program, announced in December 2011, injected massive amounts of liquidity into Europe's banking system and bolstered investor confidence. But the euphoria was short-lived.

By spring, it was clear that Spain's economy and public finances had deteriorated more seriously than previously thought. And in May, political uncertainty in Greece spiked and remained elevated for most of the summer.

These events, combined with the high level of public debt and economic weakness in several peripheral countries, revived concerns about the viability of the single currency. This contributed to a significant widening of the spreads in yields on Spanish and Italian bonds vis-à-vis German bonds.

As bond yields in the peripheral countries surged, the ECB pledged to do whatever was necessary to preserve the euro zone. In September, it unveiled its Outright Monetary Transactions program for open-ended purchases of indebted countries' bonds on specified conditions. This program significantly reduced the likelihood that the euro zone would break up.  It also caused European government bond spreads to narrow sharply and the world's equity markets to rally.

The positive developments in financial markets notwithstanding, the euro zone ended the year in the grip of a severe recession. The decline in the euro zone economy was largely attributable to the considerable tightening of fiscal policy in the peripheral countries and the high degree of uncertainty that prevailed from late spring until early summer. In December, the euro zone's overall unemployment rate exceeded 11.7%, its highest level since the monetary union was created. Unemployment reached more than 26.0% in Spain and close to 27.0% in Greece towards the end of the year.

Strong financial volatility in Spain and Italy in 2012
A chart is available on the Caisse's website

UNITED STATES

In the United States, economic growth and the financial markets were affected significantly by these global developments, as well as by domestic political uncertainty and the actions of the Federal Reserve. In particular, uncertainty related to the fiscal cliff¹ weighed on the economy for most of the year, with negative effects becoming apparent as early as spring 2012.

This prompted the Fed to take an even more accommodative monetary stance. Most notably, it launched two new programs of open-ended asset purchases, which were conditional on improvements in the labour market: the one for mortgage-backed securities and the other for long-term treasury bonds. The economy and the financial markets responded positively to these measures.

The economy grew at an overall rate of 2.2% and non-farm business-sector activity was up 3.0% in 2012. Even more important, households continued to repair their balance sheets, reducing their debt-to-assets ratio from a peak of close to 35.0% in 2009 to about 26.0% at the end of 2012.

As well, the housing sector entered a sustainable recovery. Housing starts increased significantly and house prices began to rise. This improvement is welcome because the real estate sector has a positive impact on household balance sheets and is a significant driver of growth. Finally, the federal government made progress, albeit modest, in improving its fiscal position. Government spending fell by 1.7% and the federal budget deficit went from 8.7% in 2011 to 7.3% in 2012.

Private domestic demand takes over in the United States
A chart is available on the Caisse's website

EMERGING MARKETS

Growth generally slowed in the emerging market economies in 2012, mainly because of internal factors, such as supply constraints and financial imbalances, but also amid weak domestic demand in the developed economies.

China's growth slowed significantly as a result of monetary tightening implemented 12 to 18 months earlier and a substantial decrease in the government's capital spending, which returned to a more sustainable level after the strong stimulus provided in 2009. Weaker external demand also contributed to the economic slowdown.

India's growth also flagged in 2012 amid the impact of previous interest rate increases, slow approval of new projects and timid structural reforms.

In Brazil, previous monetary tightening to counteract inflationary pressures resulted in a further decrease in growth, which reached only 1.0% in 2012. Brazilian policymakers adopted a series of monetary and fiscal measures to stimulate the economy but to little avail as it became increasingly clear that growth was curtailed by weaknesses in the supply side of the economy.

That being said, a broad range of production and demand indicators suggests that growth accelerated in the emerging economies in the latter part of 2012 in response to stimulative policies. Governments in emerging markets have limited remaining monetary and fiscal leeway, however. Policymakers must introduce structural reforms to ensure their economies are innovative and flexible and offer strong growth potential.

Growth down sharply in the main emerging markets in 2012
A chart is available on the Caisse's website

CANADA AND QUÉBEC

The difficult global economic environment contributed significantly to the slowing of the Canadian economy in 2012. Partially as a result of the increasing trade deficit in the first three quarters of the year, Canada's real GDP expanded by 1.9%² versus 2.6% in 2011. Growth of final domestic demand was solid in 2010 and 2011 but adversely affected by tighter fiscal policy, lower non-residential private investment and the onset of an adjustment period in the residential real estate sector in the second half of the year.

TSX again strongly dependent on commodity prices in 2012
A chart is available on the Caisse's website

In this context, the Bank of Canada held its key policy rate at 1.0% all year despite its concerns about high levels of household debt. Moreover, the slowdown in emerging markets, combined with increased energy output in the United States, caused prices to drop for many Canadian natural resource producers. As a result, the Toronto Stock Exchange underperformed the other major stock markets in 2012.

Québec's economy expanded at a rate slightly below 1.0% last year.³ The manufacturing sector and exports were constrained by the global slowdown in 2012 and the strong Canadian dollar. Household spending also fell significantly during the first half of the year, due particularly to a drop in consumer confidence. Moreover, after strongly supporting economic activity in recent years, government investment in infrastructure continued at a more moderate pace. The year's encouraging developments included a generally favourable labour market and a positive contribution by non-residential private investment.

CONCLUSION

Although disappointing in some respects, 2012 ended on a rather positive note. The tail risk in the euro zone appears to have been reduced considerably. The United States made substantial progress in addressing its fundamental problems and many emerging economies are showing signs of returning to strong growth. In this context, 2013 is looking like a year of transition toward a more robust global economy with a stronger rate of growth. But, to ensure such an outcome, strong policy implementation will be needed in many countries, especially the euro zone.

FIXED INCOME

DESCRIPTION

The Fixed Income asset class consists of four portfolios: Short Term Investments, Bonds, Long Term Bonds and Real Estate Debt. It helps reduce the level of overall portfolio risk and match depositors' assets and liabilities.

The Bonds portfolio and the Real Estate Debt portfolios, with net assets totalling $51.4 billion, are actively managed, whereas the Short Term Investments and Long Term Bonds portfolios, with net assets totalling $12.6 billion, are index-managed.

MARKET CONDITIONS

At the start of 2012, the exacerbation of financing problems for some European governments and the slowdown in the emerging economies weighed on the markets. Risk assets declined and the long-term growth outlook was revised downward. In the United States, the economy also slowed and the unemployment rate was slow to decrease as the impact of the earlier stimulus programs tapered off. In Canada, GDP growth was disappointing and the unemployment rate barely budged.

Government of Canada 10-year bond interest rates fell to a historic low of 1.57% in July before ending the year at 1.80%, down only slightly from their level at the start of the year.

Government of Canada 10-year bond yields
A chart is available on the Caisse's website

The credit market was more profitable in 2012. Various measures helped stabilize the markets: in Europe the Outright Monetary Transaction program was announced, the European Stability Mechanism was created and progress was made toward the creation of a single banking regulator, while in the United States the Federal Reserve announced new support measures. Investors gradually recovered their appetite for risk, which was especially beneficial to corporate bonds, with a 6.2% total return, but came at the expense of Canadian federal bonds, with a 2.1% total return.

Combined total return of the Canadian bond indexes - 2012
A chart is available on the Caisse's website

HIGHLIGHTS

Returns on specialized portfolios
For the year ended December 31, 2012

After benefiting from substantial declines in interest rates in recent years, the return obtained by these portfolios normalized in 2012. The overall return on the Fixed Income asset class was 3.9%; it generated $2.3 billion of net investment results and exceeded the benchmark index by 0.7%.

SHORT TERM INVESTMENTS

• This portfolio returned 1.1%, outperforming its benchmark index by 0.1%. Its performance reflects an environment of very low short-term interest rates.

BONDS

• The largest share of the assets held by the Caisse is invested in this portfolio: 24.9%, or $43.8 billion, as at December 31, 2012.
• The portfolio returned 4.3%, generating $1.7 billion of net investment results. The return was 0.7% above its benchmark index.
• The positive performance in relation to the benchmark is due essentially to:
• Strategies focused on the reduction of systemic risk related to the European crisis; and
• The higher return on corporate bonds.

LONG TERM BONDS

• This index-managed portfolio returned 3.4%.
• The result essentially reflects the interest income paid on bonds, while interest rates fluctuated very little during the year.

REAL ESTATE DEBT

• This portfolio returned 5.1%, for $342 million of net investment results, outperforming its benchmark index by 1.5%.
• The higher interest income return explains most of the positive return spread vis-à-vis the benchmark index.

INFLATION-SENSITIVE INVESTMENTS

DESCRIPTION

The Inflation-Sensitive Investments asset class consists of three portfolios: Real Return Bonds, Infrastructure and Real Estate. These portfolios provide exposure to markets offering investment income that is generally inflation-indexed so as to partially hedge the inflation risk associated with the liabilities of many Caisse depositors.

The Infrastructure and Real Estate portfolios, which have $24.3 billion of net assets, are actively managed. The Real Return Bonds portfolio, which has $1.2 billion of net assets, is index-managed.

MARKET CONDITIONS

In an environment of low interest rates, less-liquid assets, such as infrastructure and real estate, gained in popularity in 2012 because they offer a high, stable current return with a generally low risk profile. Despite the volatile credit market and the difficult economic recovery, projects and assets with excellent fundamentals were still able to obtain financing at low rates, which gave them an edge and enabled them to generate high returns.

Infrastructure

Global demand for infrastructure development, combined with governments' determination to reduce their budget deficits, should significantly increase the number of transactions in this sector in the years to come. Privatization of public assets in Europe and national infrastructure programs are driving the demand for capital in this sector. Institutional investors and sovereign wealth funds are acquiring minority interests in infrastructure projects and providing an appealing source of financing for industrial companies in the current economic environment. A number of large institutional players have expressed an interest in investing massively in this sector, which is causing prices to firm up on the infrastructure market.

Real estate

The real estate market was rather active in 2012 but the results varied from one region to another. In Canada and United States, investment in commercial real estate continued the good performance recorded in 2011, especially because of solid rental income. This performance is due mainly to the economic recovery, strength in the residential real estate sector and the gradual decrease in political uncertainty. In Europe, however, the performance was adversely affected by the economic situation and the cautious attitude of tenants who are reducing their space needs. Finally, Brazilian real estate continued to perform well, partly because of the burgeoning middle class and the availability of credit. Even so, the currency's significant depreciation limited the return obtained once it was translated into Canadian dollars.

HIGHLIGHTS

Returns on specialized portfolios
For the year ended December 31, 2012

The overall return on the Inflation-Sensitive Investments asset class was 11.1%, for $2.5 billion of net investment results. The return obtained in 2012 fell short of the benchmark index by 2.0%.

REAL RETURN BONDS 

• This index-managed portfolio returned 2.7%.
• The return is due mainly to inflation and interest income.

INFRASTRUCTURE

• This portfolio returned 8.7%, for $511 million of net investment results. It underperformed its benchmark index by 6.3%.
• Energy-sector assets contributed to most of the portfolio's increase in value since the beginning of the year.
• Large transactions were carried out to rebalance the portfolio, such as the partial sale of Heathrow Airport Holdings (formerly BAA), and to reduce its concentration risk.
• The benchmark index consists of publicly traded securities whose valuation is more volatile than that of the investments in the portfolio.
• For this type of less-liquid asset, performance has to be assessed over a longer period. Since the reorganization of the Caisse's operations in the summer of 2009, the Infrastructure portfolio has an annualized return of 26.7% and has outperformed its benchmark index by 10.4%. This return includes the results of the Investments and Infrastructure portfolio before July 1, 2010.
• This high return is attributable to the solid operational performance of the companies in the portfolio and the decline of interest rates in recent years.

REAL ESTATE 

• This portfolio is managed by Ivanhoé Cambridge, a company in which the Caisse has a 93% stake.
• This portfolio returned 12.4%, for $2.0 billion of net investment results. The return fell 0.8% short of its benchmark index.
• The return for the year is due mainly to investments in shopping centres.
• These results take into account the impact of the new IFRS accounting standard, which represents $637 million. This amount reflects the value of Ivanhoé Cambridge as an entity, taking into consideration the quality of it real estate portfolio and the value of its management platform as a whole.
• Repositioning of the portfolio continued in 2012 with acquisitions of shopping centres in Canada and Brazil, office buildings in Paris and New York and residential buildings in California and London.
• For this type of less-liquid asset, performance has to be assessed over a longer period. Since the reorganization of the Caisse's operations in the summer of 2009, the Real Estate portfolio has an annualized return of 10.7%, outperforming its benchmark by 0.8%.
• The high return obtained in the shopping centre and office building sector, primarily in Canada, also contributed a substantial portion of the return obtained in this period.

EQUITY

DESCRIPTION

The Equity asset class consists of six portfolios: Canadian Equity, Global Equity, U.S. Equity, EAFE (Europe, Australasia, Far East) Equity, Emerging Markets Equity and Private Equity.

The Canadian Equity, Global Equity and Private Equity portfolios, which have $53.6 billion in net assets, are actively managed. The U.S. Equity, EAFE Equity and Emerging Markets Equity portfolios, which have $28.7 billion in net assets, are index-managed.

MARKET CONTEXT

After getting off to a promising start, the stock markets lost steam in the second quarter, as Europe's difficulties came to the forefront, notably its deteriorating public finances, problems with Spain's banks and the impending election in Greece. Equities fell sharply in May, when a simple, co-ordinated resolution to the crisis seemed increasingly less likely. The diverging views held by euro zone governments and institutions, coupled with the slowdown in China, created concerns about a global recession.

Combined total return of the main benchmark indexes - 2012
A chart is available on the Caisse's website

Nevertheless, optimism returned to the markets and the S&P 500 Index reached a new peak in September after the European Central Bank vowed to do whatever it takes to preserve the integrity of the euro zone and the U.S. Federal Reserve announced a third program of quantitative easing (QE3), stating that it would continue as long as necessary. The recovery in the U.S. real estate sector as well as the improved employment picture also pushed the markets up. A degree of uncertainty remained about the approaching fiscal cliff. Even so, the markets performed well toward year-end when an agreement seemed imminent.

Despite the turmoil on the markets, most of the equity indexes were up in 2012. That being said, the Canadian market underperformed the other regions, mainly because of its sector composition.

HIGHLIGHTS

Returns on specialized portfolios
For the year ended December 31, 2012

For 2012, the Equity asset class generated $8.8 billion of net investment results and had the highest overall return of the asset classes, at 12.2%, underperforming its benchmark index by 0.2%.

CANADIAN EQUITY

• The Canadian Equity portfolio returned 6.6%, for net investment results of $1.3 billion, underperforming its benchmark index by 1.1%. 
• The underperformance is due exclusively to security selection in the materials sector. The portfolio is positioned to benefit from urbanization in emerging economies. Although it lagged in 2012, this investment theme has a promising long-term outlook.
• For 2012, the Canadian market underperformed the international markets mainly because of:
• The preponderance of companies in the materials and energy sectors, which generally underperformed.
• Canadian financial sector securities, which had a strong 17.6% return but significantly underperformed the financials of the other developed countries, which advanced about 30% as they rebounded much more significantly from their sharp declines of recent years.

GLOBAL EQUITY

• The Global Equity portfolio returned 14.0%, for $1.6 billion of net investment results. It outperformed its benchmark index by 0.4%.
• Its outperformance is due mainly to the security-selection strategies used by the portfolio management team for the various sectors, including energy and healthcare.
• A new management mandate geared mainly to companies offering a stable, predictable return on invested capital was introduced into the portfolio during the year. This mandate is designed to reduce the portfolio's volatility while maintaining a high return, and it served as the basis for the creation of the Global Quality Equity portfolio as at January 1, 2013.

U.S. EQUITY, EAFE EQUITY AND EMERGING MARKETS EQUITY 

• These index-managed portfolios returned 13.5%, 15.2% and 15.8%, respectively, all slightly outperforming their benchmark indexes.
• Of the 45 countries in this investment universe, 42 had a positive performance in 2012.
• In the developed countries, Germany advanced by a solid 28.0%, whereas Spain, which was hit hard by its public-finance problems, returned only 0.7% on the year.
• Five of the six main emerging markets, representing about three-quarters of the investments, had returns ranging from 14.1% to 23.2%. Only Brazil had a negative return (-2.2%), mainly because of the substantial devaluation of its currency.

PRIVATE EQUITY

• This portfolio returned 13.6%, for $2.1 billion of net investment results, and underperformed its benchmark index by 0.5%.
• Almost half of the increase in the portfolio's value is due to leveraged buyouts. Investments in development capital and distressed debt are the other main contributors to the return.
• During the year, the portfolio was repositioned, notably through the $1.5-billion transaction in Quebecor Media, which helped reduce the portfolio's concentration risk.
• For this type of less-liquid assets, performance has to be assessed over a longer period. Since the Caisse reorganized its operations in the summer of 2009, this portfolio has had an annualized return of 18.3%, outperforming its benchmark by 6.0%.
• The return is due mainly to the operational performance, debt reduction and strong earnings of the companies in the portfolio. Moreover, they carried out loan refinancing to take advantage of low rates and review their maturities.

INVESTMENT VALUATION

The Caisse values all of its illiquid infrastructure, private equity and real estate investments at fair market value. In accordance with current Canadian accounting rules, it must value them at the price it would obtain if they were sold on the market under normal competitive conditions. The Caisse also measures the value of the assets in its ABTN (Asset-backed Term Notes) portfolio.

Independent external valuators and valuation committees made up of experts in the field measure all major investments.

In addition, as part of their mandate to audit the Caisse's financial statements, the Caisse's co-auditors, the Auditor General of Québec and Ernst & Young, review the fair value of all the Caisse's liquid and illiquid investments.

INFRASTRUCTURE AND PRIVATE EQUITY

Investments whose fair value exceeds a predetermined materiality threshold are submitted to an independent valuation committee or an independent external valuator. 94% of the fair value of the investments in the portfolio was reviewed in this manner.

REAL ESTATE

The Real Estate portfolio moved to the new International Financial Reporting Standards (IFRS) in 2012.

In accordance with IFRS, the Caisse's real estate portfolio is now considered an investment entity. The assets and liabilities of the real estate subsidiaries are therefore no longer consolidated in the Caisse's Real Estate portfolio balance sheet.

Under the new accounting standard, Ivanhoé Cambridge has to be measured and recorded as an investment reflecting its enterprise fair value.

This enterprise value was determined by independent external valuators and reflects, among other things, the fair value of the properties held, of the quality of the portfolio and of the integrated management of the platform.

ABTNS

The fair value of the ABTNs was determined for each investment in the portfolio, taking into consideration the underlying risks.

Moreover, the Caisse retains an independent external firm to review the data and methodology used to establish the fair value of the ABTNs.

SOURCE: CAISSE DE DEPOT ET PLACEMENT DU QUEBEC