CANADA - The Caisse de dépôt et placement du Québec's real estate portfolio declined by 21.9% in 2008, contributing to a loss worth a quarter of the firm's total value.

The economic crisis, limited transactions and high rate spreads pushed market values down and caused depositors' net assets to decline by 25% from C$155.4bn (€96.8bn) to C$120.1bn. The pension fund's real estate portfolio was also affected by the mark-to-market rule set by Canadian Accounting Standards Board in October and dropped 21.9% despite generating more rental income than the year before.

Fernand Perreault, president and chief executive officer (CEO) of the Caisse, said: "The markets became disjointed. All asset classes - with the exception of the best government securities - recorded steep and simultaneous losses. The lack of lenders and buyers caused market values to plummet. The global crisis also drove the Canadian dollar down sharply."

The difference between the real estate portfolios' return spread and its index wiped 2.1% off the fund's overall return, while asset allocation operations contributed -1.1% to the total return and have since been suspended for re-evaluation. 

An additional charge of C$4bn for the pension fund's asset-backed commercial paper (ABCP) programme, which involves short-term investment vehicles, also affected the Caisse's overall return by -2.5%.

The Caisse's real estate, private equity and hedge funds are 100%-hedged to help mitigate risk, however the currency hedging policy designed to reduce currency risks incurred costs of C$8.9bn, of which 78% came from hedging real estate and private equity outside Canada.

The combined effects of theses factors caused the Caisse to significantly underperform other large Canadian pension funds, whose average return over the year was -18.4%.

"This factor undoubtedly explains a good portion of the 2008 variance vis-à-vis large Canadian pension funds of C$1bn or more, since the Caisse has a much larger proportion of private equity and real estate outside Canada, and does more extensive overall hedging," said Perreault.

The pension fund decided to change its asset allocation last October to increase its liquid assets and reduce its stock market exposure by reducing its foreign exchange hedging, closing out futures contracts and selling equities.

"Given the markets' volatility since the end of 2008, these decisions significantly improved our overall positioning. The rebalancing of the portfolio toward equities will take place gradually as a function of our assessment of the various markets and in co-operation with our depositors," Perreault said.

La Caisse decided to restructure the ABCP programme into long-term securities with an average maturity of seven years, to prevent significant losses and preserve the long-term value of investments.

"In hindsight, we placed too much confidence in these securities," said Perreault .

"They were rated AAA; our portfolio was highly diversified in terms of issuers; the securities were short-term. It was a mistake to accumulate so much ABCP," he added.

The pension fund last month appointed Rene Tremblay, currently chief executive of La Caisse's real estate subsidiary Ivanhoe Cambridge, as executive-vice president of real estate on an interim basis until 7 July 2009.

The Caisse de dépôt et placement du Québec manages funds for public and private pension and insurance plans and had $120.1bn of net assets at the end of 2008.