The Caisse de dépôt et placement du Québec announces a -25.0% weighted average return on depositors' funds for the year ended December 31, 2008

    MONTREAL, Feb. 25 /CNW Telbec/ - The Caisse de dépôt et placement du
Québec today announced a -25.0% weighted average return on depositors' funds
for the year ended December 31, 2008. In comparison, the return on the
benchmark portfolio was -18.5% and the median return for the universe of large
Canadian pension funds was -18.4%.
    The year's net investment results of -$39.8 billion (of which 56% is
unrealized decreases in value) have cancelled out a portion of the $63.2
billion of returns earned in the preceding five years. Net deposits totaled
$4.6 billion. From January 1 to December 31, 2008, depositors' net assets
therefore declined from $155.4 billion to $120.1 billion.

    Table 1
    (as at December 31, 2008)

          Period                Annual return               Quartile ranking
           2008                     -25.0%                        4th
         3 years                     -3.2%                        4th
         5 years                      3.1%                        3rd
    The individual returns for the main depositors ranged from -17% to -27%
    in 2008.


    "As with all other investors, the first element that explains our return
this year is the global financial crisis that broke out in the fourth quarter.
In October 2008, in a matter of days, the world tipped into the worst
financial and economic crisis of the past 80 years. The markets became
disjointed. All asset classes - with the exception of the best government
securities - recorded steep and simultaneous losses. The lack of lenders and
buyers caused market values to plummet. The global crisis also drove the
Canadian dollar down sharply: on the year, it lost 20% against the U.S.
dollar, 16% against the euro and 35% against the yen," explained Fernand
Perreault, President and Chief Executive Officer of the Caisse.
    "These unusual events affected all investors, but certain factors had a
specific or more pronounced impact on our portfolio, such as our large
holdings of asset-backed commercial paper (ABCP) and the cost of hedging the
foreign exchange risk of our assets outside Canada, which increased
significantly as the Canadian dollar fell," Mr. Perreault added.


    In response to a global financial crisis and the significant likelihood
that it would intensify, as well as a Canadian dollar in free fall, the Caisse
took the precaution of changing its asset allocation last October to increase
its liquid assets and to reduce its stock market exposure. The Caisse's
actions included selling equities, closing out futures contracts and reducing
its foreign exchange hedging.
    "At no time during this period did the Caisse run short of, or come close
to running short of, liquid assets. Still, our analysis of the events prompted
us to anticipate a deepening of the crisis by preserving depositors' capital
and making a high level of liquid assets an important component of our
strategy for the months to come," Mr. Perreault explained.
    As a result of these changes, the weight of Fixed Income increased from
30% to 44% and the weight of Equity Markets fell from 36% to 22%. As at
December 31, 2008, the effect of these asset allocation changes on the 2008
return was positive.
    "Given the markets' volatility since the end of 2008, these decisions
significantly improved our overall positioning. The rebalancing of the
portfolio toward equities will take place gradually as a function of our
assessment of the various markets and in co-operation with our depositors,"
Mr. Perreault explained.


    Unrealized decreases in value, or paper losses, totalled $22.4 billion in
2008, or 56.3% of the net investment results of -$39.8 billion. Net investment
income, including interest income, dividends and rent, amounted to $5.8
billion. Realized losses on the sale of investments during the year totalled
$23.2 billion, including $6.1 billion for the realized portion of the cost of
foreign exchange risk hedging alone.
    "The financial crisis caused a substantial discrepancy between the market
value and the economic value of investments. In normal conditions, market
value is similar to economic value, and transactions take place on that level.
As a result of the financial crisis, a lack of reference transactions and high
rate spreads pushed market values down to an abnormally conservative level,"
Mr. Perreault explained.
    For example, the Real Estate portfolio generated more net rental income
in 2008 than it did in 2007, and a further increase is forecast for 2009. Even
so, the value of the portfolio declined by 21.9% as a result of the financial
crisis in the fourth quarter and the mark-to-market rule specified for
investment companies by Canadian accounting standards.
    "Valuing our illiquid investments as a function of the horizon on which
they will be held would give quite a different portrait of the situation, but
accounting standards require that they be valued as if they were available for
sale on December 31," Mr. Perreault pointed out.


    After five consecutive years of first-quartile returns, the Caisse's
return for 2008 (-25.0%) is significantly below the median for large Canadian
pension funds that have at least $1 billion of assets (-18.4%), with a
variance of 6.6%.
    Several factors distinguish the Caisse from other large Canadian pension
funds. Two stood out in 2008. The first is the cost of foreign exchange risk
hedging. The second is the additional provision for ABCP.

    First factor: the cost of foreign exchange risk hedging

    The first factor that explains the variance in relation to large Canadian
pension funds in 2008 is the cost resulting from foreign exchange risk hedging
policy. Hedging is not a currency speculation activity. It is a means of
mitigating risk, which has been in place for at least 15 years with the
objective of mitigating or offsetting an increase or a decrease in the value
of the Caisse's foreign investments solely as a result of fluctuations in the
Canadian dollar.
    Currency hedging is a characteristic of the various investment portfolios
offered to the depositors. The private equity, real estate investments and
hedge funds are 100% hedged. As for equity markets, the U.S. Equity and
Foreign Equity portfolios are partially hedged (an average of 29% as at
September 30, 2008).
    The cost of hedging was unusually high in 2008. The decline of the
Canadian dollar, which occurred mainly in October, increased the value of the
Caisse's foreign investments by $11.3 billion, once converted into Canadian
currency. The currency hedging policy, which is designed to smooth out the
currency effect, incurred a hedging cost of $8.9 billion. This is a record
amount, most of which, 78%, is due to 100% hedging of private equity and real
estate outside Canada.

    Table 2
    (in millions of dollars)

                    Increase in                                  Increase in
                   the value of                                 the value of
                    investments                                  investments
                    denominated                  Breakdown of    denominated
                     in foreign        Cost of        foreign     in foreign
                     currencies        foreign       exchange     currencies
                        (before       exchange           risk         (after
                        hedging)  risk hedging   hedging cost        hedging)
    Markets               2,578           (804)           9.0%         1,774
    Equity                3,490         (3,453)          38.6%            37
    Real Estate           3,462         (3,551)          39.8%           (89)
    Other(1)              1,755         (1,129)          12.6%           626
    Total                11,285         (8,937)           100%         2,348
    (1) Other: Fixed Income and Currencies, Hedge Funds, and Asset

    "By adopting a long-term policy of 100% hedging of private equity and
real estate, the Caisse enables its managers to concentrate on their
investment responsibilities without being concerned about currency risk. This
policy is also consistent with the fact that our depositors' commitments are
in Canadian dollars," Mr. Perreault explained.
    The annual effect of currency hedging was therefore highly unfavourable
in 2008. The long-term effect of this measure is neutral. Over 10 years,
including 2008, it is slightly positive.
    "This factor undoubtedly explains a good portion of the 2008 variance
vis-à-vis large Canadian pension funds of $1 billion or more, since the Caisse
has a much larger proportion of private equity and real estate outside Canada,
and does more extensive overall hedging," Mr. Perreault concluded.

    Second factor: An additional charge for ABCP

    The Caisse recorded an additional charge of $4.0 billion for ABCP in
2008. The charge had an impact of -2.5% on its overall return. With the
$1.9-billion charge recorded as at December 31, 2007, the cumulative effect on
the Caisse's results for 2007 and 2008 is $5.9 billion.
    The additional charge of $4.0 billion taken in 2008 includes an
unrealized decrease in value of $3.8 billion and a realized loss of $171

    Table 3
    (in billions of dollars as at December 31, 2008)

    Cumulative effect on results                                      (5.9)
    Less: Charge 2007                                                 (1.9)
    Charge 2008                                                       (4.0)

    Unrealized decrease in value 2008                                 (3.8)
    Realized loss 2008                                                (0.2)
    Charge 2008                                                       (4.0)

    As at December 31, 2008, a cumulative provision of $5.6 billion was
recorded against the ABCP investments. This cumulative provision represents
43.8% of the total cost of $12.8 billion.
    Given the low rate of actual losses for the ABCP structures as at
December 31, 2008, and the levels from which the losses may be charged to it,
the Caisse believes that a large portion of this cumulative provision will be
reversed in the years to come.

    Table 4
    (in billions of dollars as at December 31, 2008)

    Cumulative effect on results                                      (5.9)
    Less: Writeoff of assets and
     restructuring costs                                              (0.3)
    Cumulative provision                                              (5.6)

    Total cost of ABCP                                                12.8
    Provision rate                                                    43.8%

    "The ABCP episode is without doubt a difficult page in the Caisse's
history. Over the short term, its impact on the institution's return is
significant. In 2008, the impact was amplified by wide credit spreads in the
first and fourth quarters," Mr. Perreault explained.
    "In hindsight, we placed too much confidence in these securities. They
were rated AAA; our portfolio was highly diversified in terms of issuers; the
securities were short-term; the market had functioned adequately for nine
years; the risk management policy had not set overall limits on the amount of
AAA-rated money market instruments that could be held; and the level of the
Caisse's money market investments was increasing significantly along with the
growth of its assets."
    "All these factors explain how the situation developed, but they do not
change the conclusion: it was a mistake to accumulate so much ABCP."
    "Once the crisis broke out, we quickly brought together the Canadian and
international actors in this market so that they could develop an orderly
solution, under the Montréal Accord, to prevent significant, definitive
losses. Since then, the Caisse has spared no effort, with the support of its
depositors, to preserve the long-term value of these investments and to
provide the leadership generally expected of it in Québec and Canada."
    "This episode has accelerated the review of our risk management methods
and has led to new efforts in this area," he added.
    The agreement to restructure Canadian non-bank ABCP was concluded on
December 24, 2008, and closed on January 21, 2009. The ABCP has been converted
into long-term securities with an average maturity of seven years. On January
23, 2009, the Caisse received $389 million of interest income accumulated from
August 13, 2007, to August 31, 2008. Quarterly payments are now to be
    "Our efforts have paid off. The restructuring agreement is a success,
there are few realized losses and the securities are now generating interest
income. This outcome is positive and we are confident that we can recover most
of the provisions between now and the maturity of the securities. In this
context, we believe it is useful to exclude ABCP from the analysis of our
performance in relation to our peers so as to shed light on the five-year
return on the rest of the portfolio," Mr. Perreault explained.
    Without the ABCP factor, the Caisse's five-return year would be 4.1%,
which is above the median of its peers, namely 3.6%, and close to the
first-quartile threshold of 4.3%. Over the past 15 years, the Caisse has had a
second-quartile five-year return only twice, in 1992 and 1999. As a result of
ABCP, the five-year return is instead 3.1%, or 0.5% below the median of its

    Table 5
    (as at December 31, 2008)

                    Caisse return       threshold(1)       Quartile ranking
    With ABCP                3.1%                                       3rd
    --------------------------------     3.6% / 4.3%     --------------------
    Without ABCP             4.1%                                       2nd
    (1) RBC Dexia Investor Services - pension plans of $1 billion or more


    The unfavourable variance between the Caisse's return (-25.0%) and the
weighted average return on the indexes (-18.5%) is due to various factors, but
three stand out.
    The first factor is ABCP, with an impact of -$4.0 billion, or -2.5%, on
the overall return.
    The second factor is the return spread of the Real Estate portfolio in
relation to its index. Combined with the size of the portfolio, the difference
subtracted $3.7 billion, or 2.1% from the Caisse's overall return. The
five-year return on this portfolio is 17.0% and ranks in the first quartile of
large Canadian pension funds.
    The third factor is the Asset Allocation operations, which made a
negative contribution of $2.0 billion, or -1.1%, to the overall return. A
portion of its holdings were exposed to various risk factors (credit,
liquidity, volatility and inflation), which simultaneously pushed values down
during the crisis in the fourth quarter. The portfolio's operations were
suspended and are being re-evaluated.

    Value added over five years

    The return on the benchmark index is 4.1% over five years. The value
added by the specialized portfolios before ABCP is nil. After ABCP, it is -100
basis points.


    Depositors' net assets amounted to $120.1 billion as at December 31,
2008, depositors' total assets came to $186.9 billion and total assets under
management were $220.5 billion.


    Operating expenses for 2008 totalled $263 million, an increase of $2
million over 2007. External management fees were $51 million, down $18 million
from 2007. Expressed in cents per $100 of average net assets, operating
expenses and external management fees combined were 21.2 cents in 2008 versus
21.7 cents in 2007 and 21.6 cents in 2006.


    In accordance with the law, the Auditor General of Québec audited the
Caisse's books in 2008, and his report accompanies the combined financial
statements. Each year he conducts the financial audit and ensures that the
Caisse's operations comply with laws, regulations, policies and guidelines,
and with the systems and procedures used to monitor and to protect its


    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, 2008, it held $120.1 billion of net assets. As one
of the leading institutional fund managers in Canada, the Caisse invests in
the main financial markets as well as in private equity and real estate. For
more information:

    Table 6
    (for the period ended December 31, 2008)

    Specialized portfolio          1 year                    5 years
    (in percentage,      -------------------------- -------------------------
    unless otherwise     Return    Index   Spread   Return    Index   Spread
     stated)                  %        %      b.p.       %        %      b.p.
    Short Term
     Investments            3.7      3.3       35      3.6      3.3       29
    Real Return Bonds      -2.2      0.4     -260      5.5      6.1      -53
    Bonds                   4.8      6.4     -159      5.3      5.5      -21
    Long Term Bonds         4.6      6.2     -151      n.a.     n.a.     n.a.
    Canadian Equity       -32.4    -33.0       65      5.3      4.2      116
    U.S. Equity
     (hedged)             -45.2    -39.0     -620     -5.9     -3.3     -254
    U.S. Equity
     (unhedged)           -28.0    -21.2     -678     -5.3     -3.1     -226
    Foreign Equity
     (hedged)             -42.6    -41.8      -79      0.3      0.7      -37
    Foreign Equity
     (unhedged)           -29.8    -29.2      -61      0.5      0.7      -27
    Emerging Market
     Equity               -45.0    -41.6     -337      5.0      6.7     -168
     International        -41.2    -40.4      -82      0.0      0.2      -19
    Other investments
    Investments and
     Infrastructures      -44.7    -36.6     -807     -2.1      1.4     -350
    Private Equity        -31.4    -40.1      872     10.6     -3.0    1,354
    Real Estate Debt       -7.6     -3.0     -460      4.3      3.8       49
    Real Estate           -21.9     -3.4   -1,851     17.0     19.0     -195
    Hedge Funds           -20.9    -20.8       -7      1.1     -1.2      229
    Commodities           -25.4    -23.2     -216      n.a.     n.a.     n.a.
     Allocation(*)      -$2,013 M    n.a.     n.a. -$1,784 M    n.a.     n.a.
    Weighted average
     return on
     depositors' funds
     before ABCP(xx)      -22.3    -18.5     -380      4.1      4.1        1
    ABCP(xxx)              -2.5      n.a.    -255     -0.9      n.a.     -94
    Weighted average
     return on
     funds(xx)            -25.0    -18.5     -658      3.1      4.1     -100

    (*)   The return is on operations, net of expenses, including cash
          decisions. The results of the Asset Allocation portfolio are
          evaluated in absolute terms and in dollars. The results are
          combined for periods of more than one year.
    (xx)  Exclusion of ABCP increases the capital base and lessens the impact
          of the negative results on the return.
    (xxx) Impact of ABCP on the weighted average return on depositors' funds.

For further information:

For further information: Maxime Chagnon, (514) 847-5493

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