CNSSE DE DEPOT

ET pLACEMENTDU( ILIEBEC

PROFILEThe Caisse de dépôt et placement duQuébec, a totally autonomous institutionin its investment management operations.was formed in 1965 to manage the fundsarising from various public pensionand insurance plans. Its mandate isto ensure that the funds under itsadministration generate a profit throughsound investments and also to supportQuebec's economic development.To achieve these objectives, it uses thebest investment vehicles available.including bonds. shares and convertiblesecurities, mortgages and real estateinvestments. The Caisse is one ofNorth America's major financialinstitutions. Its principal place ofbusiness is located in the heart ofMontreal. a first-class financial center.

TABLE OF CONTENTSHighlights of the YearThe Chairman's MessageThe Economic Environment

The American EconomyThe Canadian EconomyThe Québec Economy

Depositors

9Total FundsGeneral FundIndividual Funds

Asset Mix

15ReturnInternal ReturnTime-Weighted Returc

Fixed Income Securities

19SituationBond InvestmentsMortgage InvestmentsMoney Market Investments

Variable Income Securities

25SituationReturnCanadian EquitiesPrivate and Corporate InvestmentsMedium-Sized BusinessesForeign EquitiesReal Estate Investments

Administration

32Administrative ExpensesHuman ResourcesHealthInformation SystemsCommunicationsSenior Management and Management

Combined Summary Financial 36StatementsBalance SheetStatement of Income

1

2

5

lin millions or dollarsi 1987 19E16i DER MANAGEMENT

value $27.459 $ 25.1173Excess market value over book value of investments 1.455 3.007Total market value $ 28.914 28.080

BRE3DOA OF ASSETS L'NDER MANAGEMENT

InvestmentsBonds S 15.7611 5 15.704Shares and convertible securities 9,187 8.474‘lortgages 1.699 1.486Real eStaIP investments 598 531Short -terni investments 1.173 1.405

lutai investments 28.417 27.600later assels 497 480

Total market value S 28,914 $ 28,080

DEPOSITORS HOLDINGS

Régie des rentes du Québec S 13.500 $ 13.558Commission administrative des régimes de retraite

et d'assurances 6,883 6.332Régie de l'assurance automobile du Québec 4.051 3,843Commission de la santé et de la sécurité du travail 2.235 2,287Commission de la construction du Québec 2,100 1.915Other depositors 30 13Total depositors' holdmgs 28.799 27.949Liabilities 115 132

Total market value $28,914 $ 28,080

NET DEPOSITORS' INCOME $ 2.868 $ 2.965NET DEPOSITORS' A ITHDRAAALS S 465 415

!VERNAL RATE OF RETURN ON TOTALDEPOSITORS ' HOLDINGS 4.7% 13.5%

The portfolio haswithstood theimpact of the plunge

1987 proved to be a period of turmoilFor financial markets and investors.On the international scene, as well asin Canada and Quebec, markets werevolatile: on the one hand. interest ratesclimbed and then dropped slightly atyear-end, and on the other hand, stockmarkets plummeted in October.

In spite of this difficult environment,the Caisse obtained a 4.7% financialrate of return for 1987, which wasslightly above inflation. For the currentsix-year economic and financial cyclebegun in 1982, the average annual rateof return reached 16.9% compared withan inflation rate of 5%. Performancewas equally good for the longer ten-yearreference period for which the rateof return totalled 12.8%, or 5,7% abovethe inflation rate for the same period.

The Caisses domestic stock marketinvestments portfolio has withstood theimpact of the October 19.1987 plunge.Our portfolio managers. although theyhad not anticipated the full extentof the correction. noted its impendingdanger and consequently implementedstrategies to limit the overall riskassociated with the Canadian stockportfolio and protect the underlyingcapital. The 4.6% return is a positive

result. The positioning of this portfolio,which was intentionally prudent anddefensive, appears to have suffered fromthe underweighting of golds sectorstocks in the short term. The Caisse'sstrategy in this instance was not totake part in a movement which it thoughtwas exclusively speculative.

However, the major stock marketcorrection allowed the Caisse to investin primary issues made in connectionwith the Quebec Stock Savings Plan(QSSP) and produced more realisticprice-earnings ratios. permitting theacquisition of quality stocks atattractive prices in the medium and longterms. The Caisse was also much moreactive on the secondary QSSP marketthan in previous years when. accordingto our analysts, the pricing of thesestocks seemed overly optimistic.

Furthermore, bond markets which hadbeen rather sluggish before Octoberrallied somewhat as a result of fallinginterest rates and the general climate ofuncertainty prevailing in the marketfor variable income securities, andparticularly Canadian and foreignequities.

Mortgages and real estate investmentswere stabilizing elements as usual,offering the highest yields at 9.3% and14.5%. respectively. It is noteworthythat our Institution completed the largestmortgage investments program ofits existence in 1987. with loans grantedtotalling over $500 million.

At year-end, the Caisses totalinvestments, at book value, included$15,627 million in bonds (58%).$7.957 million in shares and otherconvertible securities (29.5%).$1,714 million in mortgages (6.3%).$491 million in real estate investments(1.8% ) and $1,173 million in moneymarket securities (4.4%). At marketvalue, bonds represented 55.5%,shares and convertible securities,32.3%, mortgages, 6%, real estateinvestments. 2.1%. and money marketsecurities. 4.1%.

The total net income generated bythese investments and paid to depositorstotalled $2.868 million and notablyincluded $613 million in gains on saleof investments.

In 1987, the Caisses objective tocontribute to Quebec's economicdevelopment and. more specifically, itspreoccupation with geographicallydistributing its investments led tovigorous mortgage lending operations inall regions of the province as well asactive and sustained transactions withQuebec medium-sized businesses.A total investment budget of $81 millionwas allocated to these transactions in1987. compared with $36 million in1986. Moreover, real estate developmentprojects were carried out andacquisitions were made throughoutQuebec in cooperation with SocieteImmobilière Trans-Québec. of which

the Caisse is the major shareholder, andvarious partners (Groupe immobilierSt-Jacques. Prével, Cadillac Fairview,Devencore and Groupe RueII.

Our Institution also firmly maintainedits position of providing support tolarge and medium-sized businessesand offering quality assistance to theirowners and management in theirprojects and visions for development.here and abroad.

During the year. the Quebeclegislature amended the investmentauthority provisions containedin the act governing the Caisse.Provisions concerning the eligibilityof investments in corporate shareswere broadened and updated and thepercentage related to the generalinvestment authority was increasedfrom 7% to 10%, thus removing certainrestrictions which limited our portfoliomanagers room to manoeuvre.

Major changes also occurred in theCanadian stock brokerage industry, withCanadian and foreign banks acquiringownership of over 65% of brokeragefirms. As a result, sources of financinghave become increasingly concentrated.Owing to its size and the diversity of itsoperations, the Caisse will continueto play a major role in North American

financial markets and ot kg. additional.yet original, funding to entrepreneurs.This availability of funds will alsobecome important in the free-tradeenvironment to ensure the growth andcornpetiti‘eness of Quebec enterprisesthrough appropriate capitalization.

Please allow me at this point toexpress our grief concerning the deathsof two members of the Board ofDirectors during the year: RaymondBlais, president of the Confederationdes caisses populaires et d'économieDesjardins. and Fernand Pare.president of La Solidarité. Compagnied'assurance sur la vie. Their service toQuebec society, the institutions theyheaded and our Board of Directors wasgenerous. consistent and productive.The Board wishes to pay tribute to theircontribution and their memory.

Furthermore, 1 am sorry to reportthat Andre Marier, a pioneer of ourInstitution, and Robert Normand have

completed their terms. The Board nowrelies on the support and cooperationof four new members. They are

Gisèle Desrochers, Claude BêlantMarcel QV' and Claude Seguin,

Finally, on behalf of the Board ofDirectors. I would like to thank allemployees for their efforts in pursuingour Institution's objectives. Whether interms of support to the developmentof our environment or in terms offinancial return, the Caisse de dépôt etplacement du Quebec assumes majorresponsibilities and continuallystrives for excellence. In day-to-dayoperations. the Caisse has a competent.experienced, dynamic and efficientteam of men and women. But it is mainlya team of devoted people who takeseriously their role in contributingto the improvement of Québec societyfor their fellow citizens.

Jean CampeauChairman of the Boardand General Manager

Montreal. March 14,1988

NNE

3

With increases inemployment, manu-

facturing shipments.

retail sales andinvestments, Quebec's

economic performance

exceeded the national

average in 1987.

Overall, economic

growth in NorthAmerica as a whole

was very impressivein 1987.

ImpressiveNorth Americaneconomicperformance

Other than in North America, economicgrowth among major industrializedcountries was disappointing in 1987.Despite signs of a recovery in domesticdemand. strong local currencies reducedthe competitiveness of these countries,affecting external trade and hence out-put. This is a reversal from previousyears when Europe and Japan had bene-fitted extensively from increased salesto the United States. On the other hand.

strong domestic currencies andmoderate growth rates kept the inflationrate very low, especially in Japan andWest Germany.

THE AMERICAN ECONOMYIn contrast to overseas developments.U.S. economic growth clearlyaccelerated in 1987. Compared with anannualized growth rate of only 1.2% inthe last nine months of 1986. the GrossNational Product increased at anaverage rate 01 3.8% during 1987. Thisreversal — the result of an earlier easingin monetary policy and of the dollar'ssubstantial decline over the previoustwo years — occurred despite a markedslowdown in the consumption andhousing sectors. which had beenextremely strong since the beginningof the recovery in 1983.

A rebound in exports triggered a revivalin the U.S. industrial sector whichaccounts for much of the 1987performance improvement. Investmentshave also picked up since last winter.partly as a result of the recoveryin industrial activity and partly fortax-related reasons.

The economic recovery and rising oilprices led to a higher inflation rate than

in 1986. This sparked serious concernsin financial markets and eventuallyresulted in a tightening of monetarypolicy aimed at curbing inflationaryexpectations. However, after the Octoberstock market debacle, concernabout a possible financial crisis ledthe authorities to push interestrates lower.

REAL GNPGROWTHIN THE U.S.

i per centagt.Chant' overprevious quarterannualized)

54

4.44.2

2 5

I 4 1.5

0.6

Source: DataResources Inc.

87

5

2.6

0.4

0.0

4.2

Even though net export volumes rose in1987 due to the dollar's decline, thetrade deficit deteriorated further as aresult of a major increase in importprices. This imbalance and the still veryLarge federal government deficit remaintwo serious problems which were notresolved last year, in spite of the strongeconomic performance.

THE CANADIAN ECONOMYIn Canada. the reversal from 1986 to1987 was even more impressive. Afterregistering little or no growth in thesecond half of 1986, the Canadianeconomy achieved an average perform-ance of 5.5% for the first nine monthsof 1987, clearly surpassing expectations.Very rapid growth in consumer spendingand investments was accompanied bytruly exceptional activity in housing. TheCanadian economy's sound performancein 1987 was mainly the result of aconsiderable drop in interest rates from1985 until last winter, and a morefavourable international environment.particularly for the natural resourcesector. Given the exceptional strength ofdomestic demand in 1987, it is nosurprise that imports rose rapidly andoutput lagged somewhat behind demand.

Inflation accelerated at the beginningof the year which, jointly with therapidly-growing economy, led to a tightermonetary policy. The Canadian dollar

gained versus the U.S. dollar, especiallyduring the second and third quarters andas a result of increases in somecommodity prices. The higher dollarand moderate wage growth eventuallybrought Canada's inflation rate belowthe U.S. rate towards the end of 1987.

2 HEAL GNPGROWTHIN CANADA

percentagechange overprevious quarterannualized)

6.2

,43

Source: ConferenceBoard Di Canada

B6 87

6.1

6

3 EMPLOYMENTIN QUEBEC

in thousdni:

3100 reflection of its diversified industrialsegment, a favourable international

3000 climate for natural resources or the factthat Quebec has a low percentage of the

2ovi weakest industries (such as automobiles,grain and °ill. but it was also due to

2soo Quebec's a::ressive business communityand the high level of confidence

TiOo prevailing over the past few years.

HIJII1II IL I L I I I I I II I IIILLLI85 86 87

SWINT:ConferenceBoard of Canada

THE QUEBEC ECONOMYQuebec's growth rate was well above thenational average. All available economicindicators show a higher level ofemployment, manufacturing shipments.retail sales and investment spending.The most remarkable result was forhousing starts which reached anall-time provincial high.

The good relative performance ofthe Quebec economy was not only a

7

In their everyday life,most Quebecers

participate in severalways in the growth ofthe Caisses assets.

Through their con-tributions to the

Regime des rentes du

Quebec or to variouspublic pension or

insurance plans and the

purchase of drivers'licences, over

3.900,000 Quebec

citizens contribute tothe various funds

under management.

4.844

3,830

Deposits from1900.000Quebecers

TOTAL FUNDSAs at December 31, 1987, the marketvalue of depositors holdings with theCaisse reached $28.8 billion, anincrease of $0.8 billion during the year.The book value of these holdings totalled$27.3 billion, up $2.4 billion over 1986as a result of the partial reinvestmentof income which amounted to$2.9 billion. However, net withdrawalsof $465 million were recorded. In thisregard. net contributions of $351 millionmade by some depositors did notentirely offset the effect of withdrawalstotalling $816 million made by others.including $673 million by the Régiedes rentes du Quebec alone.

The Caisse is entrusted with the fundscontributed to various public pensionfunds and insurance plans by over3.9 million Quebecers. under legislationadopted by the National Assembly.

While the administration of theseplans is assumed by the organizationsconcerned. the Caisse has the legalresponsibility and the mandate tooversee the investment, protection andgrowth of their respective assets. TheCaisse receives funds in the form ofdemand. term or participation deposits.at the depositor's option. Demand andterm deposits constitute indebtednesstowards depositors and bear interest.Participation deposits give the holder ashare in the net equity and net incomeof a particular Fund. Their value variesaccording to the value of the Fund towhich they are allocated.

The Caisse has nine Funds: the GeneralFund and eight Individual Funds. TheGeneral Fund is a pooled fund whichincludes several depositors. while eachIndividual Fund has only one. Of itseleven depositors, seven accumulatereserves to meet future commitmentsand the other four entrust the Caissewith liquid assets.

The Caisse meets periodically with itsdepositors in order to be betterinformed of their needs and to updatethem on results obtained.

4 EVOLUTIONOFINVESTMENTS

as al December 31at book value —

in millionsof dollars)

18,51217.633

16.727

14.901

14,022

• Fined incomesecurities (bonds.mortgages. depos-its and short-term investments)

• Variable incomesecurities(shares, convert-ible securities,real estateinvesUnents)

8.392

6.890

5,340

87

9

5

DEPOSITORS

as at December 31.1987at market value— in unions of dollars1

AbbreviationFirst

depositNumber of

contributorsI hpositors .

holdinp

Régie des rentes du Quebec R.R.Q. 1966 2.900.000 13.499.8Commission administrative des regimes de retraite

et d'assurances CARRAGovernment and Public Employees

Retirement Plan RREGOP 1973 375.000 6,834.7General Retirement Plan for Mayors and

Councillors of Municipalities 1975 680 19.6Individual plans 1977 125 28.7

Régie de ['assurance automobile du Quebec RMQ 1978 3,900,000 4.050.9Commission de la same et de la sécurité du travail C.S.S.T. 1973 165.534 2.235.8Commission de la construction du Quebec C.C.Q.

Supplemental Pension Plan for Employeesof the Québec Construction Industry 1970 105,000 2.099.8

Fonds d'assurance-prêts agricoles et forestiers FAPAF 1978 1,451 10.7Régie des assurances agricoles du Québec 1968 40,900 7.1Régie des marchés agricoles du Quebec 1967 69 1.5Régie de l'assurance -denôts du Quebec 1969 1,422 106

' eshmate

GENERAL FUNDRégie des rentes du Québec fThe principal depositor to the Caisse'sGeneral Fund. the R.R.Q., manages theuniversal pension plan for Quebecers,created in 1965.

Despite an increase in its holdings of$684 million at book value during theyear. the Régie des rentes du Quebechad to withdraw $673 million from its$1.357 million in income to meet currentrequirements during the year. In 1986.$556 million was withdrawn. At year-end, its holdings deposited with theCaisse , standing at $13.5 billion atmarket value, accounted for 46.9%of total depositors . holdings. As a resultof the 0.2% per annum increase incontributions implemented in 1987 for afive-year period, the contribution rateor 1988 will rise from 3.8% to 4%

of contributory earnings. Thisincrease will slow down the rate ofwithdrawals expected to be made bythe Régie during future years.

10

BREAKDOWN OF THE FUNDS' ASSETSACCORDING TO TYPE OF INVESTMENTdS ai Deccrnber 31,1987in milhans of dollars)

At book alueAt market

value

TotalGeneral

Fund'Individual

Funds Totaltio oftotal

Netchange

Investments

Ronds 10.745.5 4.828.9 15.574.4 56.9 850.0 15,706.8Mortgages 647.0 1,120.3 1.767.3 6,4 261.5 1.752.1Shares and convertible securities 4.131.5 3.811.3 7.942.8 29.0 1,401.0 9.166.0Real estate investments 259.6 189.9 449.5 1.6 101.7 564.1Short-term investments 704.9 433.5 1,138.4 4.2 (210.8} 1,139.0Deposits in the General Fund 31.6 31.6 0.1 (20.5 1 31.6

16.488.5 10,415.5 26.904.0 98.2 2,382.9 28,359.6Other assets 326.8 163,4 490.2 1.8 17.3 490.2

1987 16,815.3 10.578.9 27,3942 100.0 2.400.2 28.849.81986 15.686.7 9.307.3 24.994 ,0 100.0 2.492 ,1 28.001.6

Net change 1.128.6 1.271.6 2.400.2 848.2

The assets ni the General Fund have been reduced by total demand deposits of the Individual Funds and accrued interest.

Régie de l'assurance automobile duQuebec (RAAQ)The RAAQ, formed in 1977, is the secondlargest depositor to the General Fund.It manages the general plan whichprovides insurance against injuriescaused by traffic accidents. Premiumsare levied yearly to allow benefits to bepaid out to victims. As provided by law,the Régie must entrust the funds

received from insured participants to theCaisse. As at December 31, 1987, themarket value of the Régie de l'assuranceautomobile du Quebec's holdingsreached $4.1 billion, or $3.8 billion atbook value. The increase in book valueof $431 million over the previousyear is due to income of $397 millionand $34 million in new contributions.The plan represents 14.1% of totaldepositors' holdings with the Caisseand 22.8% of the General Fund atmarket value.

Other DepositorsThe Régie des assurances agricolesQuebec. the Régie de [assurance-dépôts du Quebec and the Régie desmarches agricoles du Quebec are notincluded among the unitholders in theGeneral Fund. However, they entrustthe Caisse with liquid assets inthe form of demand or term depositstotalling $19 million.

Fonds d'assurance-prêts agricoles etforestiers (FAPAF)The FAPAF is also one of the unitholdersin the General Fund. It maintainsa minimum reserve of $10 million ascollateral for the loans it secures.

MIME

1 I

1.772

INDIVIDUAL FUNDSGovernment and Public Employees(ZREGOP)The Government and Public EmployeesRetirement Plan was set up in 1973 forpublic sector employees including civil

DISTRIBUTIONOF TOTALDEPOSITORS'NET INCOME ANDCONTRIBUTIONS

Cm millions ofdollars)

2.965

2,680

1,964

• Net income(investmentincome lessadministrativeexpenses)

• Net contributions(deposits less(withdrawals)

servants as well as employees of theeducation and social affairs sectors.It is managed by the Commissionadministrative des regimes de retraiteet d'assurances (CARRA). Since itscreation, the plan has accumulated$6.4 billion, representing 23%of the total holdings of the Caisse'sdepositors and making the RREGOPthe second largest depositor with theCaisse. At market value, this amountsto $6.8 billion, or 24% of depositors'holdings. During 1987, the plan'sholdings increased by $920 million atbook value, of which $233 millionarose from new contributions and thebalance from reinvested income.The RREGOP, the plan which brings inthe largest amount of contributionsto the Caisse, features two accounts:one for unionized employees andanother for non-unionized employees.The respective holdings of theseaccounts are included in IndividualFunds 301 and 302.

Mayors and Councillors ofMunicipalities and Individual PlansCARRA also administers otherplans, including those mentioned above.Assets are invested in IndividualFunds 304 and 303 and total $19.6and $28.7 million respectively, atmarket value.

Commission de la constructiondu Quebec (C.C.Q.)The Caisse also manages the holdings ofcertain other supplemental pensionplans, including the plan for employeesof the construction industry. The typeof benefits paid out by this planand the source of contributions whichcharacterize it make it rather special.As at December 31, this plan's assetstotalled $2,1 billion at market value,allocated among three accounts: theactive participants' account (Fund 311—which includes all non-retiredemployees), the retired participants'account (Fund 312— which includes allretired employees of the industry) andthe additional contributions account(Fund 313— which includes non-retired employees who pay additionalcontributions). During the year, a$265 million increase was recorded forthe plan, based on contributions of$68 million and income of $197 million.

With an increase in the contributionrate to the basic plan for employees andemployers (Fund 311) up from $1 to$1.45 per hour of work 111 1987, the

2,868

(415)

0651

83 87

=MI12

684

265

197

68

(1431

(673)

lin millions ordollars)

1.357

• Net contributionsI deposits lessuttlidravvaim

• Total

CARRA RAAQ C.S.ST kit() C C

• Net income(investmentincome lessadministrativeexpenses)

8 BREAKDOWN OF TOTALDEPOSITORS HOLDINGSaN ai Decemberlai market alue - in percentagei

1987 1986 1985 1984 1983

Régie des rentes d d Québec 46.9 48.5 49.6 50.9 51.9Commission administrative des régimes

de retraite el d'assurances 23.9 22.7 21.7 20.3 19.5Régie de l'assurance automobile du Québec 1-1. 1 13.7 13.2 12.2 11.1Commission de la santé et de la sécurité

du travail 7.8 8.2 8.7 9.5 10.1Commission de la construction du Québec

and other depositors 7.3 6.9 6.8 7.1 74

Commission will now be able to bring inneu funds and consequently reversethe withdrawal situation which prevailedfrom 1983 to 1986.

DISTRIBUTIONOF EACHDEPOSITOR'S NETINCOME ANDCONTRIBUTIONSIN 1987

Commission de la santé et de lasecurite clu travail (C.S.S.T.)Since 1973. the C.S.S.T. has entrusted tothe Caisse the funds it accumulatesto meet workmen's compensationand occupational illness benefits itis required to pay. The Commission 926receives contributions from ailemployers for insurance against 692

accidents occurring in their sector ofactivity. As al December 31. 1987, theC.s.s.T. had assets of $2.2 billion atmarket value, representing closeto 7.801) of total depositors' holdings.The Commission's holdings at bookvalue increased by $80 million despitewithdrawals of $143 million from incomeof $223 million. Changes made to theplan have limited the growth of theseholdings. but increases in contributionrates from $2.05 to $2.50 in 1987and $2.50 to S2.75 in 1988 will helpto partially offset this trend.

431 397223234

so34

13

/4.7frid',„doe>.

In allocating assets,

the Caisse strives toachieve a good balancebetween the various

levels of risk associatedwith each type of

investment vehicle onthe various markets,investing in the short,

medium or long termwith a view ta meetingits objectives ofyielding a profit andpromoting Quebec's

economic development.

This asset mixdepends on a number

of parameters, includ-

ing the economicsituation. whichis one of the mostimportant factors.

Returnsaboveinflation

To obtain a maximum return oninvestments, the fund manager mustmake three major decisions. The firstconsists of determining in the longterm and for each plan he manages. thedesirable proportion of shares, bonds,mortgages and real estate as well as

other types of investment vehicles.The portfolio must take into accountthe particular aspects of the variousplans under management and theirneeds for liquid assets, while complyingwith the Caisse's mandate to achieveprofitability and encourage Quebec'seconomic development. This is what wecall the Caisses investment policy.

10 EVOLUTIONOF INVEST-MENTS FORTOTAL ASSETSUNDERMANAGEMENT

as at December 31fat hook value—in percentage)

808

75 .5

i I83 7 881

71 , 9 72.4

68.8

78,6 81 . 3

15.8

82.4

at market value —in percentage)

The second decision consists ofincreasing or reducing the percentageof shares. bonds or other assetsaccording to returns anticipated in theshorter term. This investment strategyis periodically revised to keep abreast ofeconomic forecasts. The last step isthe individual management of each typeof investment, the selection ofsegments and securities, as well as the

82.2 determination of maturities, etc.

72.8

71.0677

65.7

34.3

32.3

29.024.2

19.2

31.228.1 27.6

24 521.4

18.7 17.811 17.616.3

11.9• Variable

income securities• Fixed income

securities

• Variableincome securities

• Fixed incomesecurities

/ I \\\ /// I \69 74 79 83 84 85 86 87 69 74 79 83 R4 85 86 87

15

SUMMARYII OF OPERATIONS IN 1987

(in millions of dollars)

tanoars Ito October 16

October 16to December 31

Bonds 1.265.9 406.1Mortgages 369.9 179.1Canadian equities (231.31 712.7Corporate investments

small and medium-sized businesses 90.9 15.9large businesses (40.0)

Foreign equities 205.6 8.8Real estate investments 92.9 10.0

1987 offers a good example of howimportant it is to have an investmentstrategy which allocates funds amongthe various types of investments.The year can easily be divided into twoperiods: before and after the October19 stock market correction. Table 11shows that during the months whichpreceded the correction. our Canadianstock market portfolio managersrecorded net sales of over $230 million.Subsequently, the positioning of theCanadian equities portfolio wasrestructured and over $700 millionwas reinvested in Canadian securitiesduring the last two months of the year.

Moreover, the Caisse accumulatedconsiderable amounts of bonds duringthe period which preceded October 19.as their rates seemed unusually high.It also granted the largest amount ofmortgages of its existence. Finally, thegeographic distribution of stock marketinvestments was continued in orderto reduce the overall risk of portfolios.

RETURNTable 12 shows the internal rate ofreturn obtained on total depositors .

holdings for the year just ended, for theinflation rate slowdown period of 1982to 1987 and for the last ten years.

It also indicates the time-weighted rateof return for each type of investment,which helps evaluate the fundmanager's contribution to the growth ofFunds. This does not take into accountthe timing variable for the receipt ofdeposits over which the fund managerhas no influence,

INTERNAL RETURNThe Caisse obtained a 4.7% internalrate of return for total funds under itsadministration in 1987, which, in spite ofthe difficult. period, was 0.5% higherthan the inflation rate.

16

12

RETURN

tat market aloe - in percentage'

1987

Corn pound average annualrate for the period

1982-1987 1978-1987Internal rate of return

Total depositors . holdings 47 169 12 8

Time-weighted rate of return

Financial assetsBonds 4.2 18.8 11.8Mortgages 9.3 15.6 11.8Canadian equities 4.6 13.6 15.8Foreign equities (0.5) 20.8 1

Real estate investments 14.5 14.42

Short-term investments 9.1

I Based on the last four years. when the foreign equities portfolio was created.= Based on the last three years. when the specific real estate investments portfolio was created.

RETURNOF FINANCIALINDICES

1987 1982-1987 1978-1987

Indices

%MI Bond - Medium Term 3.89 16.151.1. Mortgage 8.73 15.28 11.91

TSE 300 5.88 12.37 16.01C.1.F. World Stocks 10.18 24.74 20.94MYW Commercial pa pers (30 days' 8.53 10.85 11.96

Over a longer span however. whichis in fact a more adequate way to trulygauge a pension or insurance plan'smanagement, the internal rate ofreturn during the inflation rate slowdowncycle which has been prevailing for thelast six years was 16.9%. representingan 11.9% positive return differentialcompared with an average inflation rateof 5% for the same period. Over a ten-year period, the 12.8% return representsa 5.7% positive return differential.

TIME-WEIGHTED RETURNThe bond portfolio yielded a return of4.2%. which is 30 basis points higherthan the McLeod. Young. Weir (MYW)medium-term index. But returns for1987 did not exceed those of marketindices in all categories of investment.For Canadian equity investments. a4.6% return was recorded, comparedwith 5.88% for the TSE 300 index.Foreign equity investments yielded arate of return of - 0.5%. The totalcumulative annualized return obtainedfrom the time the portfolio was set upfour years ago reached 20.8%. Thisperformance is 12.1% higher than thatrecorded by the Canadian equitiesportfolio over the same period.

As for the money market investmentsportfolio, it yielded a 9.12% return,compared with 8.53% for the MYW30-day commercial papers index.

The mortgage portfolio's 9.3% returncompares favourably with 8.7% for theMYW mortgage index.

Finally, the specific real estateinvestments portfolio generated a verysatisfactory 14.5% return.

17

Irk_ ArAllritetik •

The public and para-

public sectors, includ-

ing the government,government corpora-

tions such as Hydro-

Quebec, schoolboards, cegeps and

universities, as well

as municipalities and

health care establish-

ments, issue quality

bonds to fund a portion

of their requirements.Purchases made by the

Caisse in these sectorsduring 1987 amounted

to over $1 billion.

Through its activity,

the Caisse contributesto maintaining a quality

secondary market forthis type of investment.

Participating ina qualitymarket

SITUATIONThe strong economic performance andgreater inflationary expectations inCanada. as well as the United States.caused interest rates to fluctuatemostly upwards during the year.

The yield on long-term gouvernementlu Quebec bonds rose by 270 basispoints from the beginning of the yearlintil Iust before the stock marketcollapse, from 9.65% in early Januaryio 12.35% by mid-October. Thisprogressive increase was followed by adrop of 160 basis points in just a few, lays. The bond yield then startedclimbing again, closing at 11.20% asthe year ended.

The management of bond investmentportfolios requires constant andcareful attention to economicfluctuations. Furthermore, theglobalization of markets is increasinglyaffecting Canadian bond markets.which partially explains their greatervolatility.

BOND INVESTMENTSA large portion of the Caisse's annualbond investment program focuses onhigh quality issues such as gouvernementdu Quebec and many other publicsector issues that are guaranteed by thegouvernement du Quebec.

The Institution also contributes tomaintaining a quality secondary marketfor securities issued or guaranteed bythe gouvernement du Quebec. As it isconstantly active in this market andholds a large portfolio of bonds of thisnature, the Caisse can ensure that thelevel of liquidity is sufficient to meetsupply and demand,

The bond portfolio's profitability mainlydepends on the overall management ofthe duration factor as a means ofmeasuring the risk associated withbond investments. This is achieved withhigh liquidity securities and bycontrolling the impact of interest ratevariations. As regards the overall fixedincome securities portfolio, interestrate management therefore principallyconsists of establishing and controllingthe global level of risk desired inrelation to these rates. and of takingadvantage of market opportunities tooptimize the return.

19

13 SUMMARY OF BOND AND MORTGAGE PORTFOLIOSACCORDING TO ISSUERS

as at December 31.1987

Securities At market value Average Average Modified

(in millionsof dollars)

(%) nominalrate (%)

maturity(years)

duration(volatility)

Permanent investment basisIssued by the

gouvernement du Quebec 8.507.2 48.7 11.08 9.47 5.06Government guaranteed 2,263.4 13.0 10.19 9.73 5.06Guaranteed by grants 699.9 4.0 11.13 5.40 3.63Municipalities and school boards 1,146.5 6.6 11.09 5.49 3.56Corporate and other 210.1 1.2 11.32 4.59 2.80Mortgages 1,752.1 10,0 10.91 4.84 3.02

Temporary Investment basisGovernment issued

or guaranteedCanada 1,232.1 7.1 9.94 8.95 5.09United States 1,457.2 8.3 6,94 9.07 6.83Others 190.4 1.1 9.75 11.12 2,68

lutai 17,158.9 100.0 10.47 8.51 4,80

14 SUMMARY OF ACQUISITIONS OF NEW BONDSISSUED BY THE GOUVERNEMENT OU QUEBECAND QUEBEC PUBLIC SECTOR IN 1987tat par value - in millions of dollars)

Amounts of Issues Acquisitions by the Caisseon the Canadian marketCanadian

marketOther

marketsTotal

mou ni

Gouvernement du QuebecRegular issue 1.476.7 737.0 2,213.7Refunding 627.9 627.9

1.476.7 1.364.9 2,841.6 900.0 60.95

Hydro-Quebec and othergovernment corporationsRegular issue 1,075.6 1.447.0 2.522.6Refunding 427.0 415.4 842.4

1.502.6 1.862.4 3,365.0 100.0 6.66

Municipalities and guaranteedby grantsRegular issue 1 861 7 599.6 2,461.3 172.2 9.25

Total 4.841.0 3,826.9 8,667.9 1.172.2 24.20

The bond portfolio includes a majorityof securities held on a permanentinvestment basis and a minority ofsecurities acquired on a temporarybasis. The Caisse is active on theU.S. and Canadian bond markets as itpursues its operational investmentpolicy whose objective is to acquire andmanage on an active trading basisvery high liquidity securities ofapproximately 15% of fixed incomeinvestments in order to protect theoverall flexibility of the bond portfolio.At the end of 1987, those securitiesreached 16.5% of total bond andmortgage investments.

Bond purchases from the gouver-nement du Québec. Hydro-Québecand other government corporations onthe primary market aggregated $1 billionin 1987. Acquisitions of new municipalbond issues and of issues guaranteed bygrants totalled $172 million.

As at December 31. 1987. the marketvalue of bond investments in the Caisse'sportfolio was $15.7 billion, whilethe average maturity totalled 8,9 years,the average coupon was 10.42% andthe modified duration was five years.

Total bond investments provided a4.2% rate of return in 1987.

20

15 EVOLUTIONOF YIELDIN 1987)11 percentage)

Mortgage rates remained relativelylow during the first three months ofthe year and began rising moderatelyafterwards. The rise continuedthroughout the last nine months but rateswere still maintained at an acceptablelevel for lenders as well as consumers.

All of the above factors contributed tointense activity for mortgage lenders.This intense activity was favourable for

! , , _i_ borrowers in terms of interest ratesJ F \I A MJJ A S ON D and loan amounts. As in previous years.

this phenomenon was accentuated• 91-day Treasury' 91-day Treasurybills —Canada bills — Quebec Sources: Bank of by the large availability of funds for

• 10-year bonds • 10-year bonds Canada and C.D.P.O.—Canada —Québec this market.

MORTGAGE INVESTMENTSHome buyers. investors and businesspeople. motivated by the economy'sstrength and good performance, werevery active in real estate marketsduring 1987. Moreover, sales volumesand housing prices rose substantially.In addition. commercial real estateactivity picked up considerably,particularly in Montreal. Confidencecontinued to be high among developersand the leasing of office. commercial.

and especially retail, as well asindustrial space was most vigorous.

El=

21

12

11

10

9

8

7

6

57.4

36.5

6.1

Concerned with interest rate fluctuationsand the high level of stock markets, theCaisse decided to allocate the highestamount ever to its mortgage investmentoperations in 1987. A new record wasconsequently established as totalmortgage loans aggregated $520 million,divided among the residential.commercial and industrial sectors.

16 BREAKDOWN OFMORTGAGEINVESTMENTS

as al December 31, 1987(at marketvalue —in percentagel

OW.

The Caisse continued to favour newconstruction projects and ensure that itsloans were available across Quebec.Major investments were made during theyear, including Place du Royaume inChicoutimi, Mail Champlain in Brossardand Les Promenades de la Cathédralein Montreal .

A major portion of the Caissesmortgage investments in the residentialsector was made through fourrepresentatives: Fiducie du Quebec,Fiducie Prêt et Revenu. SherbrookeTrust and Trust General du Canada. Withtheir business network and variousbranches, these trust companies arebetter placed Io serve this market.

The Caisses mortgage investmentsportfolio amounted to $1.75 billion atmarket value at year-end. representing6% of the Institution's overall portfolio.The Caisse is therefore considereda major intermediary in the mortgageloan business. The breakdown of theseinvestments was as follows: residentialsector. 57.4%. commercial sector.36.5% and industrial sector, 6.1%.

MONEY MARKET INVESTMENTSMoney market interest rates fellgradually from the beginning of the yearuntil April. reaching slightly more than7% for 91-day Canada Treasury bills.A progressive increase then followed. asEl result of the Bank of Canada's tightermonetary policy. Rates had reached9.6% at the time of the stock marketcorrection. then dropped sharplyby 200 basis points and rallied again,although the increase was moderateduring the last quarter.

The development of the Caisse'smoney market operations is based ontwo objectives: meeting needs forliquid assets and generating stableinvestment income.

• Residential• Commercial• Industrial

Also. as at December 31, 1987. theaverage interest rate for mortgage loanswas 11%, while the average maturitywas 4.8 years. During the year. theCaisses total mortgage investmentsyielded a 9.3% return.

NMI

22

89.1 8.4

13.5 90

First. the management of the needs forliquid assets obeys variations in thecash flow and consists of keeping a goodbalance between inflows and outflowsof capital. Using daily forecasts, portfoliomanagers try to match the inflows andoutflows of the various assets andliabilities with needs for liquid assets.These operations are intended to hedgeneeds for liquid assets without takingunnecessary risks regarding interestrate fluctuations.

17 BREAKDOWN OFSHORT-TERMINVESTMENTS

as at December 31, 1987at par value —

in perremagel

Second. earning stable investmentincome from its short-terminvestments is also one of the Caissesoverall investment strategy objectives.In fact. money market investments offerm inimum credit risk. They also providea stable return that is sometimes alsoquite attractive. as was the case in1987. Money market investmentportfolios accordingly include highquality securities offering a minimumcredit risk. Quebec and CanadaTreasury bills account for almost 70%of the Caisses overall money marketportfolio structure and carry no risk.They are also highly liquid, whichmeans that they can be readily cashedin because of frequent governmentissuances and the large volumesavailable on the markets.

Moreover, aggressive management ofmoney market investments alsoresults in increased returns on theseinvestments, as portfolio managersmake the necessary adjustmentsto meet objectives and adapt to themarket situation by modifying variousparameters including liquidity. maw rii n

and the structure of the portfoliosaccording to issuers.

Total money market investments in theCaisses portfolio yielded a 9.12% returnin 1987 and reached $1,2 billion at parvalue as at December 31. while theaverage maturity was 93 days.

Also during 1987. the Caisse invested insecurities of Québec issuers and itsstrong activity in this sector indicateshow appealing these issues are.

In its foreign exchange activities. theCaisse. due to the increasinginternationalization of its operations.took the necessary protective measuressuch as hedging its short-termforeign exchange risk. The aggressivemanagement of hedging operations alsoallows the Institution to earn a premiumin addition to the return provided byits portfolios.

Treasury bills• Bank papers• Commercial papers• Other

El=

23

Stock markets fluc-

tuated widely during

the last quarter of 1987

and the severe 3rd-

Monday-of-Octobercorrection was theclimax. Despite this

situation, the total rateof return on investments

was positive and above

inflation. Strategies

implemented permitted

to limit the overall risk

associated with theCanadian stocks port-

folio and to protect theunderlying capital.

Cf)

Positiveresultsdespite anunstablestock market

SITUATIONDuring the first part of 1987. major worldmarkets recorded excellent results.Falling long-term interest ratesin West Germany as well as Japan.substantially higher profit expectationsand the abundance of liquid funds werethe principal reasons for the generalizedeuphoria.

The rise in interest rates which followedand the dropping U.S. dollar, resultingfrom the slowness of the improvement ofthe [S. budget and trade deficits aswell as the very high valuation levels ofleading markets. caused a major andparticularly steep correction. marked bythe October 19 downturn.

The Tokyo Stock Exchange posted thehighest return, in local currency.followed by North American stockexchanges which managed. despite thedifficult circumstances, to show slightgains over 1986 year-end results.

On the Canadian market, cyclicalcomponents performed particularly well.spurred by the increase in gold pricesand most other metals and forestproducts, as well as a general increasein the profitability of the manufacturingsector. The consumer goods sector,however, suffered from strongercompetition and lower consumerspending while the financial sector wasaffected by continuing problemsassociated with loans to developingcountries.

RETURNIn 1987. the Caisse's Canadian equitiesportfolio yielded a 4.6% return,including dividends.

Since the beginning of the currenteconomic and stock market cycleover six years ago, Canadian equityinvestments have provided a totalannualized return of 13.6%.

18

STOCK MARKET INDICES

(growth in percernagei

Indices Location 1987 1982-1987XX!‘1 Montreal 3.35 68.16TSE 300 Toronto 3.06 61.71Standard & Poors • 500 United States 2.03 101.62CommerzBank Germany 136.49) 92.49F.T. Industrials 100 England 2.01 150.28Nikkei Dow Jones Japan 14.58 180.71

In local currencies, excluding dividends.

MIN25

19 XXM INDEXIN 1987

2200

2000

1800

1600

1400

J AMJJ A SOND

XXM: Montréal

The foreign equities portfolio recordedan overall return 01 -0.5% in 1987.This performance is mostly the result ofthe prudent and conservative strategywhich was pursued by our portfoliomanagers and outside managers. whichincluded, among other characteristics,an underweighting of Japaneseinvestments.

CANADLAN EQUITIESThe market value of the CaissesCanadian equities portfolio totalled$7,959 million at the end of 1987,an increase of some $507 million overthe previous year.

Various methods are used in managingthis portfolio, each with its ownobjectives and characteristics andcontributing, on the whole, to meetingthe Caisses obiectives of obtainingmaximum return from its investmentsand encouraging Quebec's economicdevelopment.

At the end of 1987. regularly tradedshares on the stock market,representing 80% of total Canadianequities included in this portfolio, weregrouped according to three types ofmanagement. The first is based on aselection of sectors according

to stock market cycle fluctuations($4,792 million), the secondis based on a selection of stocksincluded in each stock market sector($1,035 million) and the third, mainlyinvolving highly liquid securities, isbased on efficient changes in the assetmix ($518 million). The remaining 20%of the total Canadian equities portfoliowas made up of corporate investments.

The overall structure of this portfoliohas become increasingly defensive andallowed the Caisse to pull through lastOctober's correction, without equallingmarket performance, however, overthe entire year.

26

PRRATE AND CORPORATEINVESTMENTSThe Caisses corporate investmentsfavour the development of Quebeccompanies or Canadian companiesoperating in Quebec. which are already'or are becoming leaders in theirrespective business segments. Theseinvestments consist of large ownershipinterests in the common sharecapital of each company, withoutexceeding 30% however. They areusually concluded in close cooperationwith the company's management andmajor shareholders. The Caissegenerally seeks representation on thecompany's board of directorsproportionally with its investment.

Despite a particularly' volatile market,the corporate investments portfoliopertaining to large companies brought$220 million in investments in twelvecompanies during 1987 and sales ofinvestments amounting to $200 million.These partnership associations wereconcluded to help fund expansion oracquisition projects contemplated bycompanies such as CDC Life Sciences,Memotec Data and Sceptre Resourcesthrough additional share capitalsubscriptions. The Caisse also tookadvantage of the strong marketsituation which prevailed before thestock market correction to reduce itsinterest in matured investments.

MEDIUM-SIZED BUSINESSESOne of the most remarkable features of1987 was certainly the great difficultyfor small and medium-sized businessesto gain access to one of the mostpopular sources of capital offeredduring the past few years. Indeed, publicfinancing under the Québec StockSavings Plan IQSSP) was disrupteddespite the generally favourableeconomic climate which continuedto prevail for new investments.Consequently, a number of companiescontemplating major expansion oracquisition projects were forced to relyon other sources of capital to completetheir financing programs.

As at December 31. 1987. the marketvalue of this portfolio totalled$1.470 million and included investmentsin 31 companies operating in 10 of the14 stock market sectors.

Since the year-end. the Caisse hasdecided to offer private financing inaddition to its corporate investmentsrespecting large businesses. Thistype of investment, which is aimed atproviding domestic commercialcompanies with tailor-made financing,will translate into a better diversificationof the portfolio and help generatehigher returns than for the overallmarket in the medium and long terms.

EOM

27

Since 1981, the Caisse has been activein supporting the funding requirementsof Quebec medium-sized businessesthat are profitable and offer sustainedgrowth potential. This type of financing,which consists of acquiring sharecapital or debentures in a givencompany. has proven to be a goodalternative to public financing,permitting the Caisse to extend itssupport in 1987 to investments of some$81 million in 40 Quebec enterprises,including 15 located in various regionsof the province.

Of this number. 24 investments consistedof private financing, aggregating$73 million, while a total of 34 financingoffers were concluded. This amountincludes two financing offers totalling$3 million which were still undernegotiation as at December 31.1987.Furthermore. the Caisse allocated$8 million to the purchase of sharesof 16 medium-sized businesseslisted on the stock exchange and tookpart in the first two OSSP issues madeafter October 19, involving GroupeGoyette in Saint-Hyacinthe and CoverIndustries in Quebec City.

The stock market situation in general,and particularly medium-sizedbusinesses eligible for the QSSP,provided interesting investment op-portunities during the last few monthsof 1987. especially for an institution likethe Caisse whose investments are madewith medium- and long-term objectives.

In 1987, reimbursements of maturedfinancings and redemptions totalled$9 million. In addition, four investmentsof a market value of $57 million as atDecember 31, 1986 were transferred tothe corporate investments portfolio forlarge businesses.

At year-end. the portfolio of investmentsin small and medium-sized businesseshad a market value of $195 million andincluded 31 term loans, for commitmentsaggregating $52 million, as well as67 investments in the form of equityor convertible debentures. amountingto $143 million. Furthermore. thedisbursement of a total of $15 millionearmarked for investments was stillpending.

The Caisse took part in financingprojects which generated over$273 million in investments from thecompanies it was associated with.It is noteworthy that our Institution'sinvestment in Financiere Entraide-Coopérants brought together two majorparticipants of the financial sector,with business operations throughoutQuebec.

NNE28

20 EVOLUTION OF FOREIGNEQUITY PORTFOLIO INCOMPARISON WITH MARKETS

(In Canadian dollars)

78 79 80 81 82 83 84 85 80 (1 7

• TSE 300: Toronto Stock Exchange Index (Canadian market)• MSCI: Morgan Stanley Capital Index (International market)• Caisse portfolio at market value — in millions of dollars)

POREIGN EQUMESWorld trade developments have led tothe globalization of the market forgoods and services. Moreover, the factthat macroeconomic policies at theworld level have been diverging forseveral years has resulted in budgetsurpluses in certain areas and deficits inothers. causing major exchange andinterest rate fluctuations and massiveinflows and outflows of capital betweencountries. This phenomenon wasaccentuated by telecommunicationsdevelopments, resulting in the speedingup and intensification of the volume oftransactions as well as the increasingintegration of financial markets,

In this perspective, the Caisse beganinvesting in foreign equities a few yearsago. This policy is a long-term one withthe dual objective of yielding maximumreturn on investment , given thepotential risk, by diversifying sourcesof income and of takingadvantage of theinternational situation to develop asynergistic approach in the managementof Canadian equity investments. Theevolution of foreign equity investmentsstands as proof of this orientation. Atthe end of 1987. total investments of thisnature amounted to CA $1,228 millionat market value , compared with$1.022 million. $410 million and$148 million at the end of the threeprevious years.

The management of foreign equityinvestments, which was forthe most part entrusted to outsidemanagers. failed to meet expectations,

as they performed well below thecorresponding market index. Duringthe year. the role of these outsidemanagers was reevaluated, resulting.among other things. in the Caissesetting up an internai managementteam for a major portion of its U.S.equity investment operations.AL year-end, the market value of thisU.S. equities portfolio under internaimanagement reached $256 million andgenerated a higher performance thanthat of the corresponding market index.

29

In view of their close relationship withthe Canadian market and their highliquidity, U.S. shares are one of themost important areas in the overallmanagement of foreign investments.These investments in U.S. shares arealso managed in conjunction withCanadian operations as this permits theCaisse to implement better asset mixstrategies and to benefit fromopportunities offered by the increasingintegration of Canadian and U.S. markets.

Consequently, a portion of theinternally managed U.S. equitiesportfolio, representing $122 million atmarket value, is associated withCanadian equity investments ratherthan international equity investments.

As at December 31. 1987, the geographicdistribution of the foreign equitiesportfolio, excluding the $122 millionportion of the U.S. portfolio,was as follows: 39.3% in the U.S..30.7% in Asia and 30% in Europe.

The foreign equities portfolio alsoincludes corporate investmentsallowing long-term associations withforeign enterprises setting upbusinesses in Québec or expandingtheir operations here or with Quebecenterprises with similar projects outsideof Canada.

REAL ESTATE INVESTMENTSThe Caisse's real estate investmentsportfolio increased by 25.8% in 1987.At year-end, real estate assets totalled$529 million, compared with $420 millionin 1986. and had a market valueof $671 million. A total rate of return of14.5% was recorded for this portfolio.including 8.01% in terms of currentyield and a 6.49% increase in value.

In 1987. investments in companiessuch as IN-COM. Pallas Group S.A.and an Asian venture capital fund wereconcluded as part of the Caisse'sinternational corporate investmentsprogram,

30

In 1987. the sectorial diversification ofinvestments was marked by thepurchase of residential and commercialbuildings and the divestment of anoffice building in downtown Montreal.As at December 31. 1987. the breakdownof real estate investments among thevarious sectors, at market value, wasthe following: office buildings. 48.1%,commercial, 33.5%, residential,7.2%. industrial, 4.3%, hotels. 3.1%,and undeveloped land. 3.8%.

BREAKDOWN OFREAL ESTATEINVESTMENTS

In addition, the Caisse developed itsregional operations by acquiring amajor residential complex in Quebec Cityand interests in shopping centersLocated in Magog, Lac-Mégantic andRoberval. An agreement in principlewas also concluded for the acquisition offour large shopping centers in theSaguenay. Lac-Saint-Jean and LowerSaint Lawrence regions with Westcliff,Les Coopérants and Societe ImmobilièreTrans-Quebec. The Caisses real estateinvestments portfolio was also givena new dimension as a result of aninterest acquired in Cadillac Fairview.This $65 million investment ensuresdiversification on the Canadian andAmerican markets.

in addition to interests in regionalshopping centers on behalf of a realestate fund it manages. The develop-ment of this company is based on itsreputation as a specialized manageroffering a high quality of service.The real estate assets it manages arenow valued at over $600 million.

As at December 31. 1987. the marketvalue of real estate properties in whichthe Caisse had an interest exceeded$1 billion. This valuation was confirmedby an external scientific appraisal whichwas performed in keeping with theInstitution's policy to obtain a fairvaluation of its real estate investments.21

48.1

as at December 31. 1987at market salue -

ir percentage i

3.1

3.8

4.3

7.2

- Office buildings• Commercial• Residential• Industrial• I_ odes eloped land• Hotels

The Caisse maintained its interestin real estate development projectsin cooperation with several partners.In this endeavour, it associated withMontréal para-municipal organizationsand Dey encore in the acquisition of thecity block bordered by Saint-Jacques.Saint-Antoine and Saint-Pierre Streetsas well as McGill Street. It alsoparticipated in promoting the MontrealWorld Trade Center, a project valuedat over $100 million.

Moreover, the Mouvement Desjardins'pension fund joined the Caisses other

partners in Société ImmobilièreTrans-Quebec. This company enjoyedcontinued growth and acquired industrial

buildings in Montreal and Quebec City

33.5

31

Qualified andexperiencedhumanresources

ADMINISTRATIVE EXPENSESThe Caisses administrative expensestotalled $17.4 million in 1987 andwere allocated among the variousFunds based on the market value ofinvestments. Salaries and employeebenefits remained the highestexpenditure item of the year,representing 51.7% of total expenses.Other items included rent. totalling11.7%. professional fees. 11.5%,depreciation of fixed assets, 7.1%,and other charges, 18%. Furthermore,expenses that are directly relatedto investment management servicesperformed by other financial institutionswere charged against the incomegenerated by these investments asfollows: $3.4 million to the GeneralFund and $2.6 million to the variousIndividual Funds.

HUMAN RESOURCESRegardless of the instability of employ-ment in the financial sector and theresulting pressure exerted on all of ourhuman resources. the Caisse success-fully pursued its efforts to obtain thequalified and experienced resourcesneeded to carry out its various invest-ment programs.

These efforts. combined with employeetraining activities, have increased thequality of our team. Regardless of aconsiderable staff turnover situation.fund managers and investmentspecialists have, on the average. over10 years of market-acquired experienceeach, which we are proud of consideringthe average for most companiesengaged in this field. In addition,professional and managementpersonnel as a whole have acquired anaverage of over 12 years of experienceeach. half of which was with ourInstitution.

INFORMATION SYSTEMSDuring the year. the Caisse continuedto upgrade the quality of its informationsystems.

The conversion program applying toall systems and information constituteda major activity following thereplacement of the central computer.Furthermore, the step-by-stepimplementation of the new stock marketinformation system was launchedduring the year.

The Caisse also pursued its micro-computer acquisition program in orderto provide efficient work tools for itsemployees. A training program has beendeveloped to help employees operatecomputer equipment efficiently and makeappropriate use of software.

HEALTH1987 also marks the coming into force ofthe Act respecting the protection ofnon-smokers in certain public places.The provisions of this act are graduallybeing implemented at the Caisse.

32

Almost all of the Caisses employees nowuse office automation equipment whichhelps them to enter. process. interrogateor use the data they have access to.This equipment can be operated on anindividual or centralized basis.

A security and emergency contingencyplan was also set up. The first partof the plan has been completed andsubsequent steps are being implementedto make sure that all informationsystems will be better protected.

COMMUNICATIONSThe Caisse developed a variety of newpromotional tools in 1987 to support itsinstitutional and marketing operations.They include a corporate brochure.a video and an exhibition booth. It alsopursued its communications policywhereby it strives to provide moreinformation on its operations than mostfinancial institutions, while keeping inmind the private nature of negotiationsleading 1.0 financial transactions.

In addition. the Caisse activelyimplemented its information programrespecting medium-sized businesses.It published a quarterly bulletin.organized various business meetings,was associated in seminars andsymposiums on corporate financing andgave interviews to the media. Further-more. the Caisse continued to promotea series of conferences entitled "Entrepartenaires". These conferences areintended for the executives of thecompanies in which the Caisse invests.They are held three or four times ayear and topics such as strategicplanning and the economic situationare discussed.

In addition. the Caisse continued topublish Cycles et tendances,an analysis of economic trends andforecasts prepared by its team ofeconomists. This increasingly popularpublication is published twice a yearin June and December and is availableupon request.

The Caisse also sponsored the Savingsand Investments Marketplace againthis year, the largest event of its kindin North America, and contributedto holding Network. the first world

convention of fast-growing companieswhich gathered over 900 congressmenand women from some 50 countries.in Montreal.

33

The Caisses Board of

Directors is represen-tative of Quebec's socio-economic structure. It

includes representatives

of employers, coopera-tives and unions, as

well as civil servants.

In the usual order,

Claude Seguin, Gaston

Pelletier, Benoit Morin,

Jean Campeau, Claude

Legault, Louis La berge

and Marcel Côté...

Gisèle Desrochers,

Judge Richard Beaulieu...

Claude Beland andPierre Péladeau.

MEMBERS OF THE BOA RI)OF DIRECTORS

Jean CampeauChairman of the Board and General ManagerClaude LegaultPresidentRégie des rentes du Quebec

Judge Richard BeaulieuPresidentCommission municipale du Quebec

Claude [WandPresidentLa Confederation des caisses populaires

et rfeconomie DeSjaf dins du Quebec

Marcel CôtéPartnerSECOR

Gisèle DesrochersAssistant Deputy MinisterMinistère du Loisir , de la Chasse et de la PècheLouis LabergePresidentFederation des travailleurs du Quebec

Benoit MorinGeneral Secretary and ClerkConseil exécutif

Pierre PeladeauPresidentQuebecor Inc.

Gaston PelletierVice-PresidentCorporation financière du Saint-Laurent

Claude SeguinDeputy MinisterMinistère des Finances

SENIORMANAGEMENTChairman of the Board and General ManagerJean CampeauSenior Vice-Presidents:

Claude FerlandFixed Income Investments

Michel GrignonVariable income Investments

Michel NadeauPlanning and Depositors- Affairs

Jean-Claude ScraireLegal and Corporate Mfairs

and Real Estate Investments

Jean TrudelAdministration and Control

SecretaryMarcel Cain

MANAGEMENT PERSONNELAlain AuclairHuman Resources

Wes BenoitAdministration and Data Processing

Normand BernierInter-Corporate Relations

— International Sector

Pierre BousierBond Portfolio

Jean-Claude CyrReal Estate Investments

Serge DesjardinsInternal Audit

Real DesrochersInternational Corporate Investments

Andre DuchesneMoney Market Investments

Pierre FbrtierCorporate Investments — Large Businesses

Philippe GabelierCommunications

Lucien GouletMortgage Investments — Quebec City

Claude L. LangesinCanadian Stock Market Investments

Frederic LecoqCanadian Stock Market Investments

Richard LesageEconomics

Gody LienhardSecurities

Normand LoiselleResources and Supplies

Yves MoquinAsset Mix

Walter MurkensDepositors . Affairs

Serge PiquetteMortgage Investments

Normand ProvostCorporate Investments — Small and Medium-Sized

Businesses

Adel SarwatInternational Stock Market Investments

Main lessier.Accounting

CI)

CI ›- J 2LU LLJ CC Ct

L.) MCC LiuEEctia= u-

BALANCE SHEET

as at December 31 , 1987On millions of dollars) 1987 1986

ASSETS

InvestmentsRonds $ 15,627 $ 14,724Shares and convertible securities 7.957 6.593Mortgages 1,714 1.467Real estate investments 491 954Short-term investments 1.173 1.405

26.962 24.593Other assets 497 980

$ 27.459 $ 25.073

LIABILITIES $ 115 $ 132

DEPOSITORS' HOLDINGS

General Fund 16,774 15,643Individual Funds 10.570 9.298

27.344 24.941$ 27,459 $ 25.073

STATEMENT OF INCOME

tor the year ended December 31. 1987(in millions of dollars) 1987 1986

INCOME

Investment income $ 2.271 $ 2.189Gams and losses on sale of investments 613 790Other income 1 1

2.885 2.980

EXPENDITURE

Administrative expenses 17 15NET DEPOSITORS' INCOME 2.868 2.965

ALLOCATION OF INCOME

Interest on demand and term deposits 16 13Net income allocated to participation deposit holders $ 2,852 $2.952

Note: Combined financial statements are provided in the FINANCIAL STATEMENTS ANDFINANCIAL STATISTICS bookiet of the 1987 Annual Report.

36

Far information: (5141 842-3261CommunicationsInter-Corporate Relations -

Quebec/Canada and International Sector

Should you wish to obtain an additional copyof this report. please contact Communications.

Ce rapport peut aussi être obtenu en françaissur demande.

Legal Deposit -1988Bibliothèque nationale du QuebecISBN 2-550-18411-4ISSN 0835-2143

Design and production:Belanger. Legault Designers Ltée

CAI SSE DE DEPOT

ET PLACEMENTDU( UEBEC

1981, AVENUE McGILL COLLEGEMONTREAL (QUEBEC) H3A 3C7

(514 ) 842-3761 TELEX; 055-61874