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Globe Investor Caisse’s Sabia takes new tack in generating returns

Michael Sabia speaking to the media about the Caisse outlook for 2012.

Mario Beauregard/The Canadian Press

For Michael Sabia, there is something to be said about being boring.

The Caisse de dépôt et placement du Québec, over which he presides, is now embracing value investing wholeheartedly, with the launch of a $15-billion international stock fund and plans to invest up to $12-billion more in private investments.

The plans mark a shift for the Caisse, which is coming to terms with slow international growth, the rise of emerging markets, historically low interest rates and heightened market volatility.

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"We want to build a more stable and solid institution," Mr. Sabia, the Caisse's president and chief executive officer, told reporters Tuesday at the fund's Montreal headquarters.

The Caisse will reduce by roughly one-third the weight of its holdings in traditional stock markets, which should represent 30 per cent of its business investments by 2015 compared with nearly half (47 per cent) at the end of 2011. What is more, the Quebec pension fund manager will part, to a large extent, with index management, though it will retain it for emerging markets.

The Caisse is Canada's second-largest institutional investor. At the end of 2011, it held $159-billion in total net assets.

Noting the "excessive volatility" of stock markets, and deploring the Caisse's wildly swinging returns of the past few years, Mr. Sabia wants to distance the Caisse from excessive market cycles. He had hinted at this shift for the Caisse's outlook in a speech last June at the Canadian Club in Montreal, but gave few details at the time.

The new world stock fund, created earlier this month, will invest in companies with strong management, exposure to emerging markets, predictable returns and reasonable debt levels. In short, Mr. Sabia said, "companies that are almost boring."

The new fund now holds millions of dollars worth of stock the Caisse previously owned in Nestlé SA, Canadian National Railway Co., H.J. Heinz Co. and Proctor & Gamble. Overseen by the Caisse's chief investment officer, Roland Lescure, this fund should represent 10 per cent of the Caisse's global portfolio in two years time.

"Our target is to beat the stock markets on the long term," said Mr. Lescure. "But in the short term, our performance will be harder to measure as comparative measures are imperfect."

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The Caisse also intends to invest more in infrastructure, real estate and other private investments. The weight of these private investments in the total portfolio should rise to 30 per cent from 25 per cent by 2015. On Monday, the Caisse acquired the Woolgate Exchange, an eight-storey building in the heart of London's financial district.

Many institutional investors favour those asset classes, but

Mr. Sabia dismissed the possibility that the Caisse might overpay for such investments, adding:

"We will be disciplined, so we

may well miss the figures we set out as targets."

The Caisse's new strategy also relies on investing in Quebec companies, making use of its intimate knowledge of the province's businesses.

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Mr. Sabia defended the Caisse's investment in Rona Inc., the Boucherville-Que.-based company it invested in based on "value creation" and of which it is now the biggest shareholder.

"Everybody believes we built the position because the red phone was ringing, but that is nonsense," Mr. Sabia said, referring to rumours of Quebec government intervention when Rona was the target of a hostile takeover bid from North Carolina-based Lowe's Cos. Inc. "Frankly, Lowe's Cos.'s offer was so far below, we weren't comfortable."

Mr. Sabia is also standing by SNC Lavalin Group Inc., the Montreal engineering company facing in an international bribing scandal. "This is a time when a long-term investor like the Caisse needs to help that company build a bridge to a different future," he said. "If we didn't believe in the potential of the company, we would have exited."

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