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Caisse de dépôt et placement du Québec chief executive Michael Sabia says the pension fund manager is facing an ‘unusual environment’ as it posted a return of 9.3 per cent last year, powered by strength in global equities amid a landscape of continuing geopolitical volatility.Ryan Remiorz/The Canadian Press

Asian stock market investments helped the Caisse de dépôt et placement du Québec post a return of 9.3 per cent last year as Canada's second-largest pension fund manager warns of a looming market correction.

Montreal-based Caisse de dépôt tallied net investment income of $24.6-billion for 2017, a 34-per-cent increase from $18.4-billion the year before, led by investments in companies such as China's Alibaba and Tencent. Net assets climbed to $298.5-billion as of Dec. 31, up from $270.7-billion at the end of 2016, the pension fund said Wednesday.

Global stock markets are currently out of sync with what's happening in the real economy, which is seeing growth across all major nations for the first time since the 2008 global financial crisis, Caisse chief executive officer Michael Sabia told reporters in a discussion of the results. In the U.S. market, for example, corporate earnings are not keeping pace with returns, which suggests investor expectations are way ahead of business fundamentals.

"Is it the end of the world? No. But a situation like this makes markets more fragile in the face of rate hikes or geopolitical events," Mr. Sabia said. "At some point, a correction will occur and we're well positioned to take advantage of it."

The Caisse has the means to marshal billions in cash to buy stocks in a repriced market, Mr. Sabia said. That's a much improved position from a decade ago, when the global financial crisis left it with a lack of liquidity to seize opportunities. "This time, we are prepared," Mr. Sabia said. "This time, we have the flexibility to move substantial capital in a highly liquid way from one or two asset classes into others."

Over nine years as Caisse boss, Mr. Sabia has helmed a sweeping strategic shift that has seen the pension fund expand its international investments while increasing its exposure to what it calls more concrete, "less liquid" assets such as real estate in a bid to generate more stable returns. At last count, about 60 per cent of the Caisse's asset exposure was outside Canada.

Emerging-market equities did particularly well for the Caisse last year, generating a return of 28.4 per cent. Chinese and South Korean markets made up the bulk of the gains, boosted by the information technology sector as smart selection by external investment advisers paid off. Big stock holdings for the Caisse in Asia include positions in Chinese internet giants Alibaba, Tencent and Baidu.

The Caisse's two equity portfolios generated combined returns of 13.6 per cent for 2017. So-called "real assets," like infrastructure and real estate, returned 8.7 per cent while fixed income returned 3.5 per cent.

Among Mr. Sabia's highest priorities right now is the renamed Réseau Express Métropolitain (REM), a $6.3-billion light rail transit system cutting across Montreal that the Caisse is shepherding as the project's manager and main financier.

The CEO has already met with a handful of U.S. state governors to explain the greenfield infrastructure project and promote the Caisse's model. That approach reverses the typical government-leads scenario for big public works projects and sees the pension fund take the helm while Quebec and Canada participate as minority investors.

"This is generating a lot of interest elsewhere," Quebec Premier Philippe Couillard said in the legislature Tuesday.

It's also generating criticism, particularly from people denouncing the Caisse's decision not to impose a local-content requirement on bidders to supply the project's trains. France's Alstom was selected over Canada's Bombardier Inc. to furnish the rolling stock, a decision that has raised alarms in political circles. Bombardier has one rail manufacturing facility in Quebec and the company says it has enough work to keep operating at current capacity for no more than a year, which could mean layoffs.

Mr. Sabia found himself on the defensive Wednesday over the matter. He said the Caisse did what was best for the REM project. As for Bombardier, he said that in making a $2-billion investment in Bombardier's rail business in 2016, the Caisse has already shown its support for the manufacturer and its employees.

"Honestly, thanks to that investment we saved the company," said Mr. Sabia, referring to Bombardier's brush with bankruptcy at the time. "During the most difficult period of Bombardier's history, we invested."

Last year's financial performance by the Caisse fell just short of the 9.7-per-cent average estimated return of Canadian defined-benefit pension plans in 2017, as measured by RBC Investor Services. Over the past five years, the Caisse has posted an average return on its investments of 10.2 per cent.

Mr. Sabia's mandate as Caisse president and CEO was renewed last year until March, 2021. No changes were made to his compensation.

The pension fund still hasn't hired a replacement for chief investment officer Roland Lescure, who left nearly a year ago to help Emmanuel Macron become president of France. Mr. Sabia said it was never his intention to replace Mr. Lescure with one person and that a broader shakeup of the senior ranks is coming as the Caisse seeks to build its capability. Mr. Lescure was elected to France's National Assembly and now sits as the representative of French residents living in Canada and the United States.

Follow Nicolas Van Praet on Twitter: @NickVanPraetOpens in a new window

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