Higher returns possible if CDPQ followed classic index strategy, new HEC study finds

Underperformance of Quebec's public pension fund raises questions

Higher returns possible if CDPQ followed classic index strategy, new HEC study finds

The Caisse de dépôt et placement du Québec (CDPQ) would have gained higher returns if the investment firm followed a classic index strategy, according to a new study conducted by the HEC Montréal’s Centre on Productivity and Prosperity (CPP).  

The study found that the assets of the CDPQ would have been 11% higher if it had adopted a "classic" index strategy from 2009 to 2021. The study also showed that the CDPQ ranked sixth among a sample of eight major public pension funds in Canada over this period.  

While the CDPQ’s returns were enough to meet its obligations to the pension's contributors, the fund’s underperformance was still a cause for concern.  

“I don’t see why Quebecers should have to leave money on the table,” said Robert Gagné, HEC Montréal professor and head of the Centre on Productivity and Prosperity. 

To reach these conclusions, the CPP utilized a different benchmark than that of the CDPQ. They employed the benchmark of the Canada Pension Plan Investment Board, which consisted of 85% equities and 15% bonds.  

In contrast, the CDPQ’s portfolio was 30% fixed income, 25% real assets, 25% publicly traded equities, and 20% private equity as of December 31. 

Gagné defended the selection of a different benchmark, asserting that it allowed for a comparison to highlight the impact of the CDPQ’s investment choices.  

The CDPQ responded to the report and stated that it was “oversimplifying” the matter. 

The CDPQ further argued that a benchmark with 60% equities and 40% fixed income would have been more appropriate. The CDPQ stated that its outperformance, when compared to this index, has been consistent and has generated $44 billion since 2009. 

“The Centre on Productivity and Prosperity’s comparison is therefore inappropriate,” said the CDPQ. 

Although the report acknowledged that the Caisse has created added value since 2014, it attributed this difference primarily to private equity investments, whose value is more challenging to determine.  

“Private equity isn’t valued by the markets objectively because there aren’t as many transactions,” said Gagné. 

The CDPQ’s senior executives received $10.6 million in bonuses in 2022, which is partly based on this added value. The increased emphasis on private equity in the CDPQ’s portfolio has led to significant operating expenses, with the number of employees growing by 68% between 2013 and 2021. 

The CDPQ reported in February that its portfolio had generated an added value equivalent to $30 billion over a 10-year period. Its annualized return over 10 years was 8% percent as of December 31, higher than the 7% return of its benchmark index. 

The CDPQ maintained that private investments are rigorously valued, following strict standards and utilizing external auditors and independent appraisers. The CDPQ also argued that operating expenses should be considered in relation to the total asset size.  

According to the CDPQ, total costs represented 0.48% of the portfolio in 2022, and its average cost ratio between 2020 and 2022 was approximately 35% lower than its Canadian peers. 

Gagné acknowledged the potential for errors in his report and expressed the challenge posed by the CDPQ’s lack of transparency.  

“We think the work is well done,” said Gagné. “We think our conclusions are solid, but obviously we’d be more comfortable if we’d had access to more information to validate what we’re saying.”