Fixed Income Weighs Down CDPQ to 5.6% Loss in 2022

Caisse de dépôt et placement du Québec, Canada’s second-largest pension fund, reported an investment loss of 5.6% for 2022, which lowered its total asset value to C$402 billion ($295.6 billion) from C$419.8 billion at the end of 2021.

The pension fund blamed the performance on what it called “the worst simultaneous stock and bond market correction in 50 years,” which weighed down its fixed-income portfolio in particular.

Despite the loss, the pension fund’s portfolio outperformed its benchmark, which lost 8.3% for the year, while all of its asset classes also outperformed their respective indices. Over the past five and 10 years, the pension fund had annualized returns of 5.8% and 8%, respectively, compared with its benchmark’s annualized returns of 4.9% and 7.0%, respectively, over the same time periods.

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“2022 presented many challenges: skyrocketing inflation, historic central bank interest rate hikes and heightened geopolitical tensions,” Charles Emond, president and CEO of CDPQ, said in a release. “Faced with this extraordinary context, all our asset classes managed to outperform their indices, while there were few places for investors to take refuge.”

The pension fund’s fixed-income investments were a significant drag on its earnings, losing 14.9% during the year. Nevertheless, it outperformed its benchmark index’s 16.4% decline and, over the past five years, gained 0.5%, while its benchmark is down 0.5% during the same time period. CDPQ also said it took advantage of the market environment in 2022 and made more than $15 billion in private credit investments and commitments during the year at attractive entry rates.

CDPQ’s real-asset investments, which are made up of its real estate and infrastructure portfolios, were its top performing asset class with a 12% return for the year, easily surpassing its benchmark’s return of 5.2%. However, over the past five years, the asset class’ annualized return of 5.4% falls short of its benchmark’s 6.2% annualized return over the same time period. CDPQ blamed the underperformance on the impact of the pandemic on its real estate portfolio, especially in the shopping center sector.

Within the real assets category, the pension fund’s buildings portfolio returned 12.4%, compared with its benchmark’s return of 9.2%, while the infrastructure portfolio earned 11.5% to easily beat its benchmark’s 0.8% return. CDPQ attributed the strong outperformance of the infrastructure portfolio to its renewable energy assets.

CPDQ’s equities investments, which consist of its stock markets and private equities portfolio, was down 5.7% in 2022, but ahead of its benchmark’s loss of 6.9%. Over the past five years, the equities category has returned 9.5% on an annualized basis for the pension fund, surpassing its benchmark’s 8.3% return over the same time period.

Meanwhile, the private equity portfolio earned 2.8% for the year and 17.3% on an annualized basis over the past five years, while its benchmark index was flat for the year and has annualized returns of 12.0% over the past five years. Among other things, CDPQ attributed the outperformance to the growth in profits of private companies and its “advantageous positioning” in the health and insurance sectors.

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Tags: Caisse de dépôt et placement du Québec (CDPQ), Canada, CDPQ, Charles Emond, investment losses, Pension Funds

Citing a 2021 state treasurer’s report that showed that Oregon’s investments are at “significant risk under current investment strategies,” state lawmakers have introduced a bill that would require the Beaver State to exit certain carbon-intensive investments, subject to fiduciary duties.

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However, the proposed legislation has received pushback from State Treasurer Tobias Read, who warns that some of the provisions of the bill would lead to lower returns and higher employer contribution rates for the state’s public pension funds.

HB 2601, the Treasury Investment and Climate Protection Act, would prohibit the state’s treasury from making any new investments in fossil fuel companies. It would also require the treasurer to sell all publicly traded stocks listed on the Carbon Underground 200, which is a compilation of 100 coal and 100 oil-and-gas publicly traded reserve holders worldwide, ranked by their reported reserves’ potential carbon emissions. The state treasurer would also be required to issue periodic reports on actual and planned progress toward the completion of duties imposed under the proposed bill.

If passed into law, the treasurer, with approval of the Oregon Investment Council, will have no more than one year to develop a plan to “protect investments held in investment funds from transitional and physical climate risks, including sea level rise, wildfires, flooding, drought, increased greenhouse gas emissions and energy transition impacts,” the bill states. The treasurer and OIC would also be required to solicit and consider public input given at public hearings when developing the plan, which would also have to be updated yearly.

But Read, who in November pledged to decarbonize the state’s retirement system by 2050, wrote in a letter to state lawmakers that the bill’s requirements, “no matter how well-meaning,” will almost certainly lead to a reduction in investment returns and benefits for the Oregon Public Employees Retirement Fund. He also noted that lower returns would mean an increase in the pension fund’s liability and could potentially erode its funding status.

“Legislation that imposes blanket or even targeted restrictions on how or where Treasury can invest will affect these numbers and would mean that funding retirement incomes is no longer the sole purpose of OPERF,” Read wrote in the letter. “Claims that limiting Oregon’s investment choices through statute will automatically or easily be revenue-neutral or yield higher returns are pure fiction.”

He also said that if the pension fund is not “investing for the sole benefit of OPERF beneficiaries,” that it will open the door to lawsuits and could threaten the retirement system’s tax-exempt status, “while breaking beneficiaries’ trust in our stewardship of their personal retirement dollars.”

The bill’s backers argue that factoring climate risk into investment decisions is, indeed, investing for the sole benefit of the pension fund participants.

“This bill is about ensuring the long-term health of our state’s investments,” State Rep. Khanh Pham, one of the bill’s three sponsors, said, according to the Willamette Week. “It’s about making our state and its residents more resilient to the climate crisis.”