Moody’s Warns Canada’s Caisse over Infrastructure

Rating agency Moody’s has outlined concerns it has over a C$4 billion (US$3.2 billion) public infrastructure deal signed by one of Canada’s provincial pension funds.

“The pension fund will have greater exposure to operational and reputational risks associated with the performance of public infrastructure project.” – Moody’sThe Caisse de dépôt et placement du Québec faces new challenges after signing up to a deal with the provincial government to provide “major infrastructure projects”, which was announced this month.

“Although the province is responsible for identifying projects of public interest and has the right to select projects on the basis of optimal solutions provided by the Caisse, the Caisse will be responsible for the execution of the selected projects,” Moody’s said in its latest credit outlook.

Moody’s clarified that the Caisse itself was not rated by its analysts, but one of its subsidiary companies—CDP Financial Inc—currently held an Aaa stable assessment from the agency. The new company created to run the new project—CDPQ Infra—is not currently rated.

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However, the C$4 billion project is viewed as credit negative by Moody’s.

“The province could participate as an equity partner in projects, but will not have voting rights,” Moody’s said. “As a result, the pension fund will have greater exposure to operational and reputational risks associated with the performance of public infrastructure projects, risks that would have otherwise rested with the provincial government.”

Canadian pensions are some of the largest institutional investors in infrastructure, with the Caisse being one of the smaller players, Moody’s clarified. However, despite the liability-matching characteristics and the Caisse being a long-term investor, the rating agency said these assets were more opaque in terms of pricing and required heightened risk management oversight.

The Caisse had not responded to requests for comment by press time.

Investment managers have remained confident about their ability to capture alpha despite steady inflows to passive strategies, according to Northern Trust.

The firm’s fourth quarter survey showed nearly 70% of managers said they expect little effect of the growth of smart beta strategies on their ability to generate alpha.

Almost all respondents said their active management divisions have been unaffected or modestly affected by the uptick in passive strategies. Only about 4% of managers said they perceived significant damage.

Managers were also confident that the trend towards passive investing and smart beta would continue at a modest pace or decline over the next five years. The survey showed only 9% expected smart beta strategies to take hold of significantly more market share between now and 2020.

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Furthermore, only about 10% of managers believed the bump in asset flows into passive strategies would have “a long-term, systematic impact” on their ability to produce excess returns.

Northern Trust Survey (Source: Northern Trust)

Northern Trust also found managers were generally bullish about the US economy, while 80% said they anticipated increased volatility in the first half of 2015.

“Managers expect volatility to increase due to geopolitical instability, economic slowdowns in Europe and Japan, US equity valuations, and a dramatic drop in oil prices,” Christopher Vella, CIO for the firm’s multi-manager solutions, said.

However, the majority of respondents were positive about US corporate profits, job growth, and housing prices, reflecting positive views for 2015.

Nearly one-fifth of managers believed inflation would decrease over the next six months, largely due to drop in oil prices, the survey revealed.

Despite a volatile predicted market environment, about half of the managers were bullish on US large-cap equities, non-US developed equities, and more than 40% were positive about emerging market equities.

The majority of respondents, however, had negative outlooks for US fixed income and commodities.