Charles Emond, president and CEO of the Caisse de dépôt et placement du Québec, speaks on Aug. 14 during a press conference in Montreal on the pension fund manager's results for the first half of the year.Graham Hughes/The Canadian Press
Caisse de dépôt et placement du Québec booked a 4.2-per-cent gain on its investments in the first half of the year, carving out a middle path amid market swings as the largest U.S. tech stocks soared, bonds tumbled and real estate continued to struggle.
The Montreal-based pension fund manager’s first-half results fell short of the internal benchmark of 4.6 per cent it uses to measure performance. But chief executive officer Charles Emond said the difference can largely be chalked up to the unusual dominance of the Magnificent Seven stocks – an informal collection of major U.S. tech companies, such as Apple Inc., Microsoft Corp., Google parent Alphabet Inc. and chip maker Nvidia Corp.
Shares in those companies accounted for a remarkable 73 per cent of the S&P 500′s returns in the first six months of 2024, according to the Caisse, and that level of concentration “is not going to last,” Mr. Emond said in an interview. In the meantime, however, pension funds with mandates to control risks on behalf of pensioners by diversifying their investments are in a tough spot, often watching the broader market’s returns outpace their own.
“The portfolio delivered exactly as we would expect in this kind of environment,” he said.
The Caisse has added to its exposure to the Magnificent Seven in recent years. Mr. Emond said the companies are so ubiquitous that they have become like utilities, but also have “a lot of growth potential.” It now has about $15-billion invested in those companies. But to match their weight in the S&P 500 index, the Caisse would have to invest a further $25-billion.
“We can’t even do that from a risk perspective, with our clients,” he said. “If you look at our public equities portfolio, we’ve managed to beat our [benchmark] in a more, from my perspective, healthy way.”
The Caisse’s portfolio of public stocks gained 13.6 per cent in the first half of the year, beating a 13.2-per-cent benchmark.
It was a different story for the pension fund’s bond portfolio, which lost 1.7 per cent – equal to its benchmark – after inflation proved stubborn, delaying anticipated interest-rate cuts from the U.S. Federal Reserve and causing bond yields to spike. In recent weeks, however, “a major U-turn in the market” has helped the Caisse rapidly recoup that lost ground, Mr. Emond said.
With interest rates expected to settle at higher levels than they had been before the COVID-19 pandemic, the Caisse is sitting on a bond portfolio with attractive yields that, if held long term, “might be the engine that actually gets us to where we want,” he said.
Mr. Emond cautioned that markets are likely to stay volatile in the second half of the year, with the U.S. economy slowing amid an uncertain presidential election campaign, the potential for imminent rate cuts and geopolitical tensions running high. Meanwhile, activity in private markets remains at a low ebb, as high interest rates have dampened investors’ appetites for deal-making.
The Caisse’s real estate holdings lost 3.6 per cent in the first half of the year, driven in part by falling values for office buildings, especially in the U.S., and a higher cost of financing. Private-equity investments gained 6.9 per cent, and infrastructure investments were up 5.3 per cent.
Over 10 years, the Caisse has earned an average annual return of 7.1 per cent, ahead of its 6.3-per-cent benchmark.
Total assets increased to $452-billion as of June 30, up from $434-billion six months earlier.
At a Wednesday press conference, Mr. Emond fielded questions about how Héroux-Devtek Inc., the Canadian maker of landing gear for Boeing airliners and U.S. Navy fighter jets, fell into American hands. The company was acquired by U.S. private-equity firm Platinum Equity Advisors LLC in a $1.35-billion deal. The Caisse owned 14.3 per cent of Héroux-Devtek and had backed the Quebec-based company for nearly 40 years.
But Mr. Emond said there was no Quebec buyer to team up with at the table, and the Caisse learned late in the negotiations that it would have created major tax issues for Héroux-Devtek if the Caisse stayed on as a large Canadian shareholder, making it untenable to keep its stake.
“We got into negotiating mode while we had some leverage,” he said. “We had some concrete commitments that were significant, without a timeline, to keep management here, keep the head office here and the R&D here.”