Against Trend of Diversification, Caisse Boosts Investments in Local Companies

(March 15, 2011) — As funds pursue diversification, the Caisse de dépôt et placement du Québec, Canada’s largest pension fund manager, has pursued an opposing strategy.

The fund said that its investments in publicly traded Quebec companies grew by more than $800 million or 38%, over the past 15 months, giving a greater weighting to local firms and providing portfolio managers with more flexibility to make investments in Quebec than the broader Canadian benchmark, which is largely fueled by energy and materials stocks. Furthermore, the fund has integrated the new National Bank Quebec Index, which focuses solely on Québec-based companies, into its reference index for the Canadian Equity portfolio.

“When it comes to investing in Québec, the Caisse has an undeniable comparative advantage vis-à-vis its peers: close long-term relationships with the vast majority of companies and an excellent knowledge of the challenges they are facing,” said Jean-Luc Gravel, Caisse’s Executive Vice-President, Equity Markets, in a statement. “This comparative advantage has led us to target the Québec market, which holds many promising companies, to generate returns while contributing to Québec’s economic development. We believe the two go hand in hand.” He added that one of the fund’s priorities is to assist Quebec companies with growth potential domestically and abroad by sharing expertise and resources.

In November, Chief Executive Michael Sabia asserted that the Caisse wanted to help Quebec companies by identifying competent, dynamic small and medium-sized companies in Quebec that can benefit from its expertise and support to broaden their global presence.

Caisse’s decision to pursue investment in local companies contrasts with a recent survey by Deutsche Bank that points to a continued desire to focus on emerging markets and alternative strategies, such as long-short equity, macro funds and special situations, as opposed to US equity. “I think it’s one of the first times we’ve gotten proof of institutional investors leaving US equities, with data that confirms that trend,” commented an industry observer. “Here, we see proof that the money is going toward alternatives and emerging markets. The realization has come from the fact that strategic diversification alone is not sufficient to protect in downturns.”

The report — compiled by Deutsche Bank Pension Strategies & Solutions — discovered that hedge funds have emerged as one of the most popular areas for future investment, particularly among public and corporate defined benefit plans. While 46% of respondents anticipate increases to emerging markets and 41% for hedge funds over the next 12 months, 44% said they would like to decrease their exposure to US large-cap equities. Meanwhile, 38% said they would like to reduce exposure to small-cap equities.