The Caisse de Depot et Placement du Quebec, Canada’s biggest pension fund manager, plans to increase investments in energy and minerals to benefit from an expected commodities boom, Chief Executive Officer Michael Sabia said.
“Natural resources, energy, those are areas where we think there’s an opportunity to play offense because of what the structural trends are and what our capabilities are,” Sabia said in an interview at Caisse headquarters in Montreal yesterday.
The Caisse oversees C$135.8 billion ($132 billion) in assets including stakes in Quebec gas distributor Gaz Métro LP and Suncor Energy Inc., the country’s biggest oil company. Energy and materials shares made up more than half of the Caisse’s U.S.-listed stock holdings of $11.3 billion as of June 30, according to an Aug. 11 regulatory filing.
Since his appointment last year, Sabia has tightened risk management standards, scaled back the use of derivatives and exited real estate loans that contributed to losses in 2009. Those moves, which Sabia calls “defensive,” helped the Caisse beat its benchmark in the first half of 2010 with a return of 2.3 percent. Two years ago, the fund manager reported a record loss of C$39.8 billion, or 25 percent.
“Defense is necessary but it’s not sufficient in the long term,” Sabia, 57, said. “We also need an offensive game plan.”
Analysts such as Daniel Yergin, chairman of IHS-Cambridge Energy Research Associates, predict that energy demand will climb 30 percent to 40 percent in the next two decades as incomes rise in emerging markets and the global economy expands.
“When the Marshall Plan was launched after World War II there was a 20- to 25-year run in natural resources and infrastructure and in our view we are right at the start of another period like that,” Sabia said.
By 2015, emerging nations will account for a bigger portion of the global economy than developed countries as middle-class populations from Southeast Asia to Latin America expand while public and private investment grows, according to a Sept. 27 World Bank report.
“You are going to see massive urbanization and the emergence of a very large middle class in places like China, Brazil and Turkey,” Sabia said. “Because of those things, you are going to see demand for natural resources, whether it’s iron ore or copper, and demand for products that enhance the productivity in agriculture.”
Sabia, the former CEO of BCE Inc., Canada’s biggest phone company, declined to provide details about his natural-resources strategy. He said the Caisse is “launching a bunch of work” to study the matter.
“If we came away convinced we needed to add people, we’d do it in a heartbeat,” he said. “Natural resources are an area of considerable interest.”
Excluding its real-estate operations, the Caisse has about 700 employees, including about 250 analysts and investment managers, said Denis Couture, a spokesman for the firm. About two-thirds of the Caisse’s net assets are in Canada.
“Because of our exposure to the Canadian economy, we have built a lot of capabilities around understanding natural resources and energy-related industries,” Sabia said.
Sabia said the Caisse would also consider investing in natural resources through its C$17 billion private-equity arm.
“If the right transaction comes along and we have an opportunity to play a role, would we be prepared to take it in a sector that interests us quite a bit? Sure,” he said.
‘Show me More’
Sabia singled out Gaz Métro, which the Caisse invested in six years ago, as the type of asset he likes. In the nine-month period ended June 30, Gaz Métro reported net income of C$189.1 million on revenue of C$1.7 billion.
“Gaz Metro is a very well-run utility that generates a lot of cash,” he said. “It’s a pretty nice investment for a long-term investor like us. Show me more of those.”
Sabia declined to say whether the Caisse has been approached or would be interested in playing a role in a takeover of Potash Corp. of Saskatchewan Inc., the world’s largest producer of the namesake fertilizer.
BHP Billiton Ltd. in August offered $40 billion to buy Saskatoon, Saskatchewan-based Potash. As of June 30, the Caisse held 3.51 million Potash Corp. shares.
“We don’t comment on particular transactions,” Sabia said. “We own positions in a great many companies, and we need to be prudent in terms of the comments we make.”