CDPQ Announces 7.2% Return in 2023 | Chief Investment Officer

The Caisse de dépôt et placement du Québec has announced 7.2% annual returns for 2023. The Quebec pension manager saw its assets grow to C$434 billion ($321.72 billion).

The fund only slightly underperformed its benchmark of 7.3%, a result of underperformance in the fund’s real estate portfolio. For the past five years, CDPQ returned an annualized 6.4%, against a benchmark of 5.9%. The annualized return for the past 10 years was 7.4%, with a benchmark of 6.5% for the period.

“The year 2023 was marked by highly volatile bond markets and a historic concentration of gains from a handful of U.S. tech stocks that drove the main stock indexes. Faced with this context, our portfolio performed well, and our depositors’ plans continue to be in excellent financial health,” said Charles Emond, president and CEO of CDPQ, in the fund’s annual report.

“Since 2020, investors have had to weather market conditions that ranged from one extreme to the other. In such environments, our portfolio has grown by nearly C$100 billion over the period. We may reach a crossroads in the year ahead, with many central banks likely to pivot, but the scope and sequence remain unknown. With a backdrop of downward but persistent inflationary pressure combined with lingering volatility, our portfolio remains well positioned to keep delivering the long-term returns our depositors need,” Emond continued.

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Real Estate Weakness

CDPQ’s C$105.4 billion real assets portfolio, which includes the fund’s real estate and infrastructure investments, returned 2.2% in 2023, well above its benchmark of negative 4.3%. Infrastructure assets returned 9.6% against a benchmark of 0.3%, with performance drivers during the year being transportation and renewable energy assets.

For the past five years, infrastructure assets returned an annualized 9.5% against a benchmark of 5.9%. CDPQ attributed these returns to renewable energy, port and telecom assets.

However, the portfolios real estate assets did not perform as well and were the fund’s worst-performing asset class during 2023. The fund’s real estate assets returned negative 6.2%, although above the benchmark of negative 10%.

The fund’s office holdings, as well as the portfolio’s overweighting in Canadian shopping centers were some of the reasons for the fund’s lower returns from real estate.

“Despite economic challenges and structural issues in some sectors such as offices, the Real Estate portfolio demonstrated more resilience, and the repositioning toward promising sectors such as logistics that began in 2020 mitigated the decrease in value,” the report states.

For the past five years, real estate returned a negative 0.5% against a benchmark of 0.8%. While real estate returns were weaker, CDPQ notes that its teams were able to remain selective in its acquisitions in what the fund calls the slowest transactional market in 15 years.

Stocks Boosted Returns While PE Underperformed

Like many other institutional investors, a rally in large-cap tech stocks and growth stocks, in general, boosted returns for CDPQ, with its equity markets portfolio returning 17.7%, outperforming its 17.4% benchmark result.

Historically, the fund had underperformed its public markets benchmark, returning 9% over the past five years, compared to a benchmark return of 10%, which the fund attributed to once having lower exposure to large-cap U.S. growth and tech stocks.

Returns for private equity assets, which combined with public equities in the fund’s equity portfolio, were not as strong. CDPQ’s PE portfolio returned 1.0%, well below its benchmark of 10.5%. However, CDPQ says it expected a slowdown in growth in private equity, following returns of 39.2% in 2021 and 2.8% in 2022, a year when it expected neutral returns for that portfolio and when the overall fund returned negative 5.6%.

Combined, the public and private equity portfolios represent C$194.2 billion in assets.

Fixed Income: Returns Elevated by Higher Rates

CDPQ’s C$ 135 billion fixed-income portfolio returned 8.1% in 2023, outperforming its benchmark’s 7.7%. Higher yields and narrower corporate credit spreads, combined with a volatile bond market led to the portfolio outperforming its historical returns.

CDPQ attributes strong returns to “the portfolio’s positioning in government debt, which benefited from lower rates in certain emerging countries, good execution in corporate credit and premiums on private debt that foster a high current return.”

Over the past five years, the CDPQ’s fixed income portfolio returned an annualized 1.7% against 0.8% for the benchmark.

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Tags: Caisse de dépôt et placement du Québec (CDPQ), CDPQ, Charles Emond

Average funding levels for multiemployer pension plans improved by 10 percentage points in a year through 2023, due primarily to grants from the Pension Benefit Guaranty Corporation and improved investment performance, a study from Milliman shows.

Average funding for multiemployer plans stood at 89% at the end of 2023, compared to 79% at the end of 2022. The report estimates that Special Financial Assistance grants awarded by the PBGC made up five percentage points of the 10 points of growth, and asset performance accounted for the remaining five.

Milliman’s data is based on Form 5500 data from the previous year, which is then rolled forward using standard actuarial assumptions.

The aggregate shortfall in funding fell to $87 billion in 2023 from $166 billion in 2022, and the percentage of overfunded plans rose to 37% from 27%.

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A total of 69 plans have received $54 billion in grants from the PBGC to cover about 775,000 participants under the Special Financial Assistance program in order to ensure the pension funds’ solvency through 2051. According to Tim Connor, one of the authors of the report, as well as data from the PBGC, 35 received $9 billion grants in 2022 plus $2 billion in 2023 through supplemental filings and another 34 received $43 billion in 2023.

The PBGC median estimate is that 211 plans will require $80 billion in grants under the SFA program. According to the study, 110 plans remain less than 60% funding and many are expected to apply for grants in 2024 and 2025.

The study says that 30 out of 148 plans that are funded at 120% or more have received SFA money. Connor notes however, that this may not reflect unpaid loan and restored benefit liabilities that the grants are intended to cover. Such exclusions would inflate the plan’s estimated funding level.

Connor also explains that that the funding levels of SFA plans in general can be distorted by another factor. Many plans adjusted their actuarial assumptions to be in compliance with the assumptions used by the PBGC in order to obtain SFA. Those assumptions might not yet have been disclosed on available 5500 filings due to the lag in reporting. Upon receiving SFA, they may alter their allocation, especially if they had a more aggressive mix than the PBGC will allow with SFA money. No more than 1/3 of SFA grants can be invested in “return seeking investments.”

Lastly, Connor says that many pension funds that receive SFA grants have large outflows, which is how some became insolvent in the first place. This can “magnify the impacts of investment risk,” Connor says, because “the impact of a large investment loss can be devastating with little time or resources to recover.”

Tags: Multiemployer Pension Plans, PBGC, SFA