Canada's largest pension fund possibly lost $38 billion, 26% of its portfolio

The Montreal newspaper La Presse is reporting that Caisse de dépôt et placement du Québec, Canada's largest pension fund, may have lost as much as $38 billion. The dollar amount seems very large but in percentage terms it is around 26%.

Canada's biggest pension-fund manager, Caisse de dépôt et placement du Québec, lost a staggering $38-billion last year, mainly because of falling stock prices, La Presse reported on Friday.

The Montreal-based newspaper said the 26 per cent loss in value in Caisse holdings was by far the largest suffered by the fund manager in its 45-year history.

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La Presse said preliminary figures showed the value of the Caisse's holdings dropped from $155.4-billion at the start of 2008 to $120-billion by the end of the year. The largest members of the fund pumped in an extra $3-billion during 2008, leading to the loss total of $38-billion, the newspaper said.

The Caisse's auditors have until Feb. 24 to sign off on the figures, which are due to be released on Feb. 26, the paper said. The losses mean that the annual return over the past decade will be a mere 4 per cent compared with the 7 per cent that the pension-fund manager needs to meet its obligations.

La Presse said the value of the Caisse's stock and bond holdings had dropped by $26-billion while the fund lost $5-billion by making bad foreign exchange bets.

It also said the fund had taken a $4-billion writedown on its $12.6-billion holdings of asset-backed commercial paper, the market for which froze up in August, 2007.

If this was a risky portfolio of an average investor, it isn't so bad. The market is down more than the loss that is being estimated here. But, given how this is a pension fund that is supposedly conservatively run, the numbers are going to set off a political firestorm in Quebec. I suspect there will be further losses over the next few years from illiquid private equity holdings, hedge funds, and commerical real estate (in contrast, small investors who almost only deal with liquid assets do not have similar "hidden" losses.) The shortfall in pension needs reported in the article (7% needed vs 4% returns in the last 10 years) illustrates the problems pension funds, endowments, and others, are going to face if we enter a long bear market.

I suspect that pension funds, endowments, and the like, are going to shift away from riskier assets (stocks, commodity funds, hedge funds) into less risky assets (bonds.) Such a move is bearish for the stock market and other risky assets like commodities.