The centre of gravity of the world's economy is shifting, and companies that recognise this emerging paradigm stand to gain the most. As one of the two big motors of growth, China is playing an increasingly important global role, and the Caisse de depot et placement du Quebec, already strategically perched in Beijing, intends to have more feet on the ground. "What China does is going to affect how the world economy operates," says Michael Sabia, the Caisse's president and CEO. "It could become the largest economy in the world, so whether you invest in China or not, it makes sense to have at least some understanding of the country." In terms of the big drivers of economic growth in the world, Sabia sees two poles. One is the United States, where he continues to be quite optimistic about growth prospects, and the other one is Asia, principally China. As a global fund manager, the Caisse has offices in New York and Beijing. One of the largest institutional fund managers in North America, the Caisse works closely with its 29 depositors, managing their funds and providing investment consulting. The Canadian firm holds a diversified portfolio that includes publicly listed shares, real estate investments, fixed-income securities and private equity. It manages just under US$200 billion in institutional funds - among the largest in the world - primarily from public and private pension and insurance funds in Quebec. For its financial soundness, the Caisse has earned the best credit ratings from Moody's Investors Service, Standard & Poor's and Dominion Bond Rating Service. Unlike US pension funds, the Caisse manages more than 80 per cent of its assets internally, farming out only some to external managers. It is one of a few companies that offer long-term capital in the market through teams running fixed income, public equities, private equities, infrastructure and other asset classes. With a sustained expansion plan, the company has invested 55 per cent of its assets in Canada with the rest invested around the world. Established in 1965 through the Quebec national assembly to manage the funds of the Quebec Pension Plan, the Caisse was described by then-Premier Jean Lesage as "an instrument of growth, the most powerful economic lever ever seen in the province". Almost half a century later, Lesage would be proven correct. "We have a very large Canadian public equities portfolio; we're a large holder of Canadian and Quebec government debt and Canadian corporate debt," Sabia says. "We invest in infrastructure and private equity, so we're active across every asset class in Canada." As the largest pension fund in Quebec, the Caisse offers significant support to local companies at crucial stages of their development. In addition to financing, it provides businesses with support for growth projects at home and abroad. Investing in real things with intrinsic value As an investor focused on the long term, it is surprising that the Caisse's investment philosophy is unbelievably simple. "We're not interested in financially engineered products," Sabia says. "Our focus is real stuff that people use every day, like toothpaste or razor blades." Bridges, pipelines and buildings are things that have an inherent economic value, according to Sabia. The Caisse invests over the long term in these assets, which retain value and even grow in value over time, and worries less about quarter-to-quarter performance. Selecting only high-quality companies, the Caisse invests based on strong convictions rather than stock-market indexes. It emphasises in-house portfolio management and continues to integrate risk management in investment decisions. The Caisse also fosters long-term relationships with promising companies and invests in assets whose values are directly linked to the real economy. "We think in five-year terms, 10-year terms, 15-year terms when we look to make investments," Sabia says. "That's important because there's a lot of short-term capital in the world today." The Caisse has about US$600 million invested in real estate across a few projects in China. It has a shopping centre venture with Chinese retailer Bailan Group in Changsha and a multiresidential development in Wuji. The fund manager is working on the development of a technology park in Shanghai and has investments in real estate and private equity funds that are active in China. These investments tap into China's enormous emerging middle class in line with the government's effort to encourage more domestic consumption. The Caisse was also among the first institutional investors to receive a QFII quota of US$200 million back in 2008. This QFII quota has recently been increased by an additional US$300 million to total US$500 million. Sabia believes that a country's rebalancing between investment activity and consumption creates a huge opportunity. He says China is a great example of this, but so are many Southeast Asian countries, where the secular trend towards more consumption makes the region of great interest to investors. Southeast Asia is seen as sharing an important role in global growth along with China. "Today, we have a little bit over US$3 billion invested in China, composed of just under US$2.5 billion in public equities," Sabia says. Another point of interest to the Caisse as it gains access to higher growth markets is how to invest to take advantage of the emergence and expansion of the Asian middle class. Unlike many years ago when there was a more "bipolar income distribution", Sabia says Asia's economic development has brought about a genuine middle class. Economic prosperity has also encouraged migration to these countries, further expanding the middle class. The Caisse is looking at investment opportunities that tap into this affluent market. Ivanhoe Cambridge building a global reputation The Caisse's world-class real estate subsidiary, Ivanhoe Cambridge, manages the group's real estate portfolio in more than 20 countries, including China. With a portfolio consisting of shopping centres, office buildings and multiresidential properties, Ivanhoe Cambridge leverages its high-level expertise in investment, development, asset management and leasing to deliver optimal returns to investors. In Brazil, the Caisse has become an important investor in the country's building landscape. Through Ivanhoe Cambridge, the company has made waves in Rio de Janeiro with the purchase of interests in Shopping Center Boulevard Rio Iguatemi. The transaction was carried out by Ancar Ivanhoe, a venture between Ivanhoe Cambridge and Ancar, a top Brazilian shopping centre manager. The partnership continues with the construction of a series of shopping centres in the suburbs of Rio de Janeiro and Sao Paulo. "We like shopping centres because they are part of a sector that we understand," Sabia says. "This is a way for us to benefit from the emergence of the middle class, which we think is a global trend in these higher growth markets." The Caisse also sees Australia as playing a part in influencing the shifting focus of global economic growth. It bought 28 per cent of the Port of Brisbane in a bid to participate in the long-term expansion of trade with Asia. With Southeast Asia's proximity to Australia and China, forming a link between the two countries, Sabia recognises the region's significant role in tipping the global trade balance. He also considers India, Mexico and Turkey as economies to watch. Global investments and profound partnerships Serving as a bridge between Quebec companies and global markets, the Caisse aims to understand emerging markets better by drawing from the expertise of local partners with in-depth understanding of their localities. It also plans to increase direct and indirect investments in these regions through various ventures and collaborations. The Caisse's concept of partnership has a more profound character, as this shapes how the company invests. For markets where the company does not have first-hand familiarity, it is even more reliant on local partners with local expertise. It puts a premium on information and understanding and considers these as equally important as the long-term value of tangible assets. "We'll study, we'll learn, we'll have people there, we'll do everything we can, but at the end of the day, there's no replacement for local partners who eat and sleep and breathe that market," Sabia says. "That, too, is an important principle of how we're going to invest." The Caisse is on the lookout for like-minded partners who are focused on the long term and want to invest in real things. These are investors who want to understand what the underlying fundamentals are and have a very deep understanding of the market where they're investing. "We want people who have a long-term perspective and, like us, want to invest in things that have intrinsic value," Sabia says. "We are looking for partners who think like we think, and hopefully there's more than one of them out there." Caisse de dépôt et placement du Québec www.lacaisse.com
