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Caisse de depot expects volatile 2014 as Fed withdraws monetary stimulus

MONTREAL - The Caisse de depot et placement du Quebec expects 2014 will be a year of market volatility as the improving U.S. economy adjusts to the gradual decrease in massive monetary stimulus by the Federal Reserve.

"The normalization of monetary policy will be a big headwind," chief investment officer Roland Lescure said Wednesday after Quebec's pension fund manager reported "solid" results in 2013.

Led by the value of its investments in U.S. equities, the Caisse generated a 13.1 per cent annual return on investments, beating its benchmark portfolio by 0.5 percentage points as the value of its assets exceeded $200 billion for the first time.

The Canadian investment giant said 2013 was marked by extremes as investor confidence and corporate profits propelled stock markets to new heights, while fixed income investments had zero returns as rising interest rates hurt the performance of long-term bonds.

Equities rose 22.9 per cent, producing an $18.2-billion gain, including $3.4 billion from its private equity portfolio.

Inflation-sensitive investments such as real estate and infrastructure grew by 12.5 per cent or $3.4 billion.

Lescure said it's highly unlikely that the S&P500 will match the nearly 30 per cent gain of last year.

"That happened four times over the last 50 years. We're not going to have a fifth time this year," he said at a news conference to discuss its results.

Caisse CEO Michael Sabia said the institutional investor is not going to substantially alter its plan designed to look at investments in the long term.

Unlike short-term investors that chase market changes, the Caisse will continue to invest in quality assets, including big name companies like Colgate and CGI (TSX:GIB.A) that deliver consistently strong results.

The Caisse added $6 billion of additional value above the performance of the markets over the last four years as it achieved an average 10 per cent annual return as assets increased by $68.5 billion from $132 billion at the end of 2009.

"I think we've more than met the requirements of our depositors," he said, characterizing the performance as "solid," which Quebecers can rely on for their retirement.

"Despite the ups and downs, the roller-coaster of the markets, we're trying to build an institution that just keeps on going through the ups and the downs, that doesn't get too preoccupied with the short-term but just keeps on going."

Net investment gains last year totalled $22.8 billion and net deposits were $1.2 billion as of Dec. 31, 2013.

At year-end, the Caisse's assets included $93.8 billion in equities, $69.2 billion in fixed income and $31.8 billion the inflation-sensitive investments.

The Caisse's eight largest clients, which each set different return targets and risk tolerance, had returns ranging between 8.9 and 15.5 per cent. The Quebec Pension Plan had the highest returns.

The Caisse invested $3.6 billion in Quebec companies last year and $10.3 billion over four years. Quebec assets have grown by $20.3 billion over four years to $53.8 billion, with $32.5 billion invested in the private sector.

Sabia said the financial returns from its Quebec investments were among the best it enjoyed last year, but declined to provide details.

In addition to increasing investments in Quebec, the Caisse said it is focused on supporting the development of entrepreneurship in the province that will drive future growth.

"We're going to keep on continuing to look for those opportunities and continuing to make those investments be it in a CGI, Bombardier Recreational Products (TSX:DOO), or other companies that are going through a tough time but companies that we're convinced have great potential like SNC-Lavalin," Sabia added.

Early last year, the Caisse created the Global Quality Equity portfolio focused on large, established companies exposed to global growth with the aim of generating more stable returns. The portfolio's assets have reached $17.2 billion.

Its real estate subsidiary, Ivanhoe Cambridge, spent $5.2 billion on acquisitions last year by strengthening its presence in large U.S. cities, repositioning its European portfolio and increasing its investments in Montreal and Quebec City.

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