Investment Analysis and Optimization
Specialized portfolio Asset allocation
Management mandate Strategic asset allocation Global tactical asset allocation
Management type Active
Internal
Active Internal
Active External
Management approach Discretionary and systematic Systematic Discretionary and systematic
Main analytical approach Top-down
Relative evaluation of financial markets and risk premiums
Top-down
Econometric modelling and optimization
Top-down
Relative evaluation of financial markets and risk premiums Econometric modelling and optimization
Investment horizon 0 to 3 years 0 to 18 months 0 to 18 months
Main management styles and investment strategies
Global macro Long-short
Specialized portfolio management by the Investment Analysis and Optimization group
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Analysis of asset allocation operations
The specialized Asset Allocation portfolio posted a net return of $9.1 million in 2005 (Table 69). Active manage- ment (asset allocation and asset rebalancing) generated $156.0 million of value added. Portfolio-rebalancing constraints resulted in a shortfall of $146.9 million, how- ever. This situation is due mainly to the lack of indexes or liquid instruments that can substitute for the real estate sector index.
Return on Asset Allocation table 69
(for the period ended December 31, 2005)
1 year Return $ million
Asset allocation and active rebalancing 156.0 Portfolio-rebalancing constraints (146.9)
Total 9.1
Asset allocation and active rebalancing
The value added by active management is due to a consid- erable extent to the external management mandates. The two internal management mandates initiated during the year, as well as active rebalancing, also produced excellent results.
Strategic Asset Allocation
After six months of operations, the Strategic Asset Allocation mandate posted a positive return. The managers took advantage of the outstanding returns on the interna- tional stock markets, especially in emerging markets as opposed to the U.S. equity markets, strong equity results in relation to the bond market in Japan and the rising mate- rials index vis-à-vis the industrials index. The position based on widening credit spreads subtracted value from the portfolio, however.
Global Tactical Asset Allocation
After three months of operations, the Global Tactical Asset Allocation mandate also generated a positive return. Generally speaking, the managers took advantage of equity returns, which were superior to bond returns. The structure of the positions in the country indexes favoured Canada, owing to its economic structure, and Japan, whose under- valued stock market presented appealing earnings growth potential. The market valuations and growth outlook tended to favour Continental Europe over the United States and Great Britain.
Lastly, the return on the externally managed portfolio exceeded expectations. The scope of the market’s trends and turns in 2005 tended to favour global macro managers, who form the majority of the IAO group’s external managers.
Asset rebalancing
Asset rebalancing operations involving private equity generated value added in 2005. To rebalance the Caisse’s overall portfolio, the weighting of the specialized portfolios is brought back within the specified upper and lower limits each month. This operation involves the sale or purchase of units of the specialized portfolios and derivatives.
Investment operations
The Caisse de dépôt et placement du Québec contributes to Québec’s economic development in various ways. It does so primarily through:
• Its financial return on depositors’ capital;
• Its impact as an investor involved closely with Québec institutions and companies;
• The spinoff benefits of its operations for Québec’s financial sector;
• Its social commitment and that of its employees.
Financial return on depositors’ capital
The return on depositors’ capital is the first contribution made by the Caisse to Québec’s economic development. The Caisse’s depositors are public and private pension funds and insurance plans. The contributors to these plans are exclusively individuals or companies from Québec. The funds in these plans come from deductions at source from the income of individuals in the case of pension plans (RRQ, RREGOP, CCQ and other pension plans) or insurance premi- ums paid by individuals and companies under obligatory plans (SAAQ and CSST). The Caisse manages the funds of these plans in order to generate a superior return on them in accordance with their individual investment policies. All these plans have real and actuarial liabilities, in other words financial obligations that they must meet over the, medium and long terms. To match its financial resources and its obligations, each plan uses assumptions of the real (after-inflation) return on its capital. With all else being equal, if the real return generated by the Caisse is in line with a depositor’s return assumptions, the plan will be able to pay retirement or insurance benefits and maintain contributions at the forecast level.
But if the real return generated by the Caisse exceeds a depositor’s return assumptions, the plan will have an actu- arial surplus and may eventually lower the level of contribu- tions, or increase retirement or insurance benefits. Finally, if the real return falls short of the depositor’s return assump- tions, the plan will have an actuarial deficit and eventually will have to increase the level of contributions or decrease the retirement or insurance benefits.
In economic terms, this means that when the Caisse produces returns that exceed depositors’ actuarial assumptions, it contributes directly to Québec’s economic development by ultimately increasing the disposable income of the various plans’ contributors or beneficiaries, whether they are indi- viduals or businesses. This increase takes the form of lower contributions, or higher pension and insurance benefits, or both.
Let’s take as an example the CSST, whose inflows of funds come from contributions on wages paid by employers and whose outflows and commitments are used to provide financial support to workers who are covered by the plan and sustain an accident. If, all other things being equal, the return on the CSST’s funds is higher than its actuarial assumptions over a long period, the CSST can lower the level of contributions made by Québec companies or pay higher benefits to its insured persons. In both cases, Québec’s economy becomes more competitive and prosperous. If, however, the opposite occurs, and the return on the CSST’s funds does not meet the level expected by the plan, all other things being equal, the CSST will have to raise its contributions or reduce insurance benefits. In both cases, Québec’s economy will be less competitive and less pros- perous. Moreover, if the situation persists, the plan’s viabil- ity could be compromised.
This analysis can be applied to all the Caisse’s depositors, and the same conclusion will be reached each time: value-added returns are the best way to contribute to Québec’s eco- nomic development.
Conversely, if the Caisse produces returns that are lower than the depositors’ actuarial assumptions, it will have a negative impact on economic development by ultimately decreasing the disposable income of the contributors to the various plans. This shortfall leads to higher contributions, which are comparable to a tax bite in the case of universal public plans, or to lower pension and insurance benefits, or both.
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