One of Canada’s leading portfolio managers told me something a week ago that keeps popping into my mind.
“One of the most important things a pension fund manager knows,” he said “is not to do anything that puts you on the front page of the newspapers.”
That makes sense. The only time you really see a pension fund in the news is when they “step on a rake”, either by making an investment decision that blows up, or, even worse, doing something that shows that political factors are part of the fund’s investment decisions.
So, as the Alberta government takes steps to maybe copy Quebec’s Caisse de dépôt et placement du Québec (CDPQ) and run an Alberta Pension Plan, let’s look at the Caisse’s track record of stepping on rakes.
There’s a lot to see. That’s because the Caisse often acts as an arm of the Quebec government and makes no bones about its role to defend Quebec businesses and step up in support of the government of the day’s priorities.
This is why many in global financial markets view the Caisse as a “sovereign fund”, open to political interference. As we highlighted previously in The biggest kid on the block, this potentially leaves the fund frozen out of many global private equity and infrastructure opportunities.
This “sovereign fund” perception and the impression that political factors will weigh in on pension fund investment decisions are usually bad news for the plan holders.
This appears to be the case for the CDPQ, as you look at its annualized returns compared to the Canada Pension Plan as at June 30 2022.
Keep in mind that the CDPQs net returns (what the plan holders get after deducting management fees) would likely be around 50 basis points (one-half of one per cent) lower than the gross returns for the CDPQ highlighted above, which is how the Caisse reports its returns..
There are some easily found examples of where it appears the Caisse has political motivations for investment decisions rather than looking for the best possible risk-adjusted returns for the pension plan.
- CDPQ acquired 30% of Quebec-based, Bombardier Transportation in 2015 and converted its $4.5 billion worth of Bombardier shares, instead of selling them, into shares of France-based Alstom which bought Bombardier Transportation in 2020. At the end of 2021 that stake was worth $2.96 billion, an unrealized loss at the time of more than $1.5 billion.
- In 2021, Quebec Premier Francois Legault said his government would force the Caisseto purchase trains made in Quebec as part of the extension of Montreal’s Reseau Express Metropolitan (REM) light-rail system. Any time a provincial premier forces a provincial pension plan to make an investment, plan holders should run for the hills.
- CDPQ has committed to divesting its portfolio of oil producing companies by the end of 2022, prohibiting investments in new crude oil pipelines, and even tying executive and staff compensation to the achievement of climate targets, not returns. Climate targets?
- Following the SNC-Lavalin scandal, CDPQ took a $700 million loss from its investment in the Quebec-based company. While SNC-Lavalin’s shares were plummeting to its lowest levels in 15 years, Caisse CEO Michael Sabia publicly stated that the Caisse will “be a rock” for SNC-Lavalin. Instead of being “a rock” for Quebec pensioners, the Caisse put SNC-Lavalin as a higher priority.
So, if an Alberta Pension Plan is rolled as part of a Sovereignty Act, wouldn’t this been seen as an instrument that could come under pressure on investment decisions from any future Alberta government?
And, make no mistake about it, if the Alberta Investment Management Corp. (AIMCO) serves as the investment manager of the proposed Alberta Plan, as is likely, the Alberta government has the authority to issue directives granting them the ability to influence investment decisions.
We already have a history of political interference in AIMCO, when you check out the track record of the Alberta Heritage Trust Fund.
Created in 1976, if the Heritage Trust Fund hadn’t served as a piggy bank for successive Alberta governments to shore up general revenues, and if it had instead followed the rules that Norway used for its fund — namely, contributing all of its resource revenues and only withdrawing 4% a year — Albertans would be sitting on a fund with $575 billion in assets. Instead, we have about $16 billion in the fund. That’s a $560 billion difference.
As we all know, “past performance is no guarantee of similar future returns”.
In this case, past performance of political meddling in provincial pension plans in Canada doesn’t necessarily mean that would happen in a brand, spanking new Alberta Pension Plan.
But, I wouldn’t bet on it.
(Next up – the third in this series of three: “An ugly divorce – how a split from CPP could be messy and painful for an Alberta Pension Plan.)
Rick Peterson is founder and chair of Peterson Capital, an Edmonton-based capital markets advisory firm with offices across Canada, in the UK and in Europe.