After 11 successive rate hikes in 17 months, interest rates made their presence felt on the Caisse de dépôt’s portfolio in the first half of 2023.
In some cases, the influence is positive, such as on the current yield of fixed-income securities, such as bonds. However, the impact is negative on the value of real estate assets and private investments.
The Caisse obtained a return of 4.2% during the period. Fixed income securities returned 3.9%, while real estate returned negative 1.5%. Private placements recorded a slight gain of 1.4% during the period, far from the 7.2.% achieved by the benchmark index.
The Caisse’s net assets reached 424 billion on June 30, a record.
By way of comparison, the Caisse’s benchmark index was 4.1%. Ontario Teachers’ Pension Fund (TEACHERS) returned 1.9% and Canadian pension plans listed by RBC Investor Services returned 4.8% in the first six months of the year .
Higher interest rates translate into bonds that deliver attractive current yields. “Today, in our fixed income portfolio, the yield to maturity is 6.5%,” said Vincent Delisle, Senior Vice President and Head of Liquid Markets. The current yield on our Credit portfolio [a subset of the Fixed Income portfolio] is 7.5%. »
The fixed income portfolio is valued at $130 billion out of total assets of $424 billion.
Let’s stop at the performance of the building portfolio.
When interest rates rise, property values fall, all other things being equal. The rule was broken last year when the real estate portfolio achieved a spectacular return of 12.4% despite monetary tightening. But reality caught up with the Ivanhoé Cambridge subsidiary this year.
“Interest rates have taken 500 basis points in just under a year. This is historic as a rate increase. Obviously, this is not favorable to real estate, whether in terms of values or the availability of debt,” explained the President and Chief Executive Officer of Ivanhoé Cambridge, Nathalie Palladitcheff, at a press conference.
Asked twice about the extent of the loss in value of the buildings, Ms. Palladitcheff did not answer the question directly.
Ivanhoe recently made a shift in the composition of its portfolio. It sold malls and offices and it acquired warehouses and rental housing, to the point where the latter two sectors, industrial and residential, now represent 56% of the portfolio and perform better than the sector in general. This pivot explains why Ivanhoé beat its benchmark index in the first half of the year despite its negative return.
“The second half of the year will be marked by a rather unfavorable economic situation. We will have to roll up our sleeves to deal with it in the months to come, ”she nevertheless warned.
For once, private placements weighed on the Caisse’s total return. “[The] performance was tainted by rising rates,” CEO Charles Emond said during the earnings presentation. It’s not a surprising slowdown,” he added, referring to the portfolio’s past outperformance over the past three financial years. The average annual return had reached 20% during this period.
According to him, the profits before interest of the companies in the portfolio continue to grow, but the increase in the cost of financing dampens the performance of some of them.
Mr. Emond did not discuss this, but a rise in rates also has a downward impact on the value of private placements since their valuation is based on the present value of future cash flows, which depends on the level long-term bond rates.
In 2022, the Caisse’s private equity portfolio outperformed its benchmark index by 280 points. We are witnessing a reversal of fortune in the first half of 2023, since the managers of the Caisse concede 580 points to their benchmark index.
In terms of equity markets, the portfolio posted a return of 10.6% in six months, in line with the market at 10.7%. The institution notes that “the performance of the portfolio thus reflects a comparable return, but more diversified than that of the markets”, which is concentrated in 7 securities such as Apple, Tesla, Microsoft, etc.
An update of the construction cost of the Metropolitan Express Network (REM) will take place during the first half of September, promised Charles Emond. He said he was proud of the network, which carried 25,000 passengers a day during the first three weeks of activity with a reliability rate of 99% over a total of 350 hours of operation. He pointed out that similar projects take up to 12 years overseas. The Caisse succeeded in commissioning the first branch in five years and three months.
The effect of repeated interest rate hikes is starting to kick in, says Emond. ” It takes time. There is a significant cushion that came to cushion the impact. There was a lot of money that had been injected during the pandemic. We see in the United States, 2 trillion [2000 billion or 2 trillion in English] of subsidies with the Inflation Reduction Act. But the shock is starting to thin. »
The boss of the Fund was invited to comment on the actions of his partner DP World, which concluded in June a partnership with a Russian company to develop the northern sea route. Ukraine considers that this initiative will facilitate the transport of goods to Russia by circumventing international sanctions, Le Journal de Montreal wrote on Wednesday morning. “La Caisse is not invested in DP World,” said Mr. Emond. We are not a shareholder. We are partners with them in ports [none of these ports are affected by the announcement]. We expressed to them our disagreement on this element in concrete terms. Not a dollar from Quebecers is used to finance Russia’s war efforts in Ukraine via DP World. »
Indian renewable energy producer Azure Power Global saw its auditor resign in mid-July. She is still unable to take stock of her finances, and the New York Stock Exchange shows her the door. “Azure’s management is focused on what matters: timely reporting of audited financial results. Out of 425 billion invested in 5000 companies, there are always a couple of less easy files. This one is one,” acknowledged Charles Emond. The 600 million she injected into it is only worth a fraction. “But we are not at the stage of considering anything other than having the company focus on publishing its financial statements. »
