Montreal - The fragile global economic recovery will ensure that markets remain volatile for the foreseeable future, Canada's largest pension fund manager said Thursday.

"Overall our outlook is one that is cautious and very focused on the degree of turbulence we are going to see over the coming period," Michael Sabia, chief executive of the Caisse de depot et placements du Quebec, said after releasing half-year results.

The large pension fund manger said it doesn't expect the volatility that heightened in May and June to dissipate quickly because of lingering concerns about the strength of the recovery in Europe and the United States and a possible slowdown in China.

The Caisse said it continued to slowly recover from the dismal results of the past as its assets grew 2.33 per cent to $135.8 billion in the first half of 2010.

The Montreal-based institution added $4.1 billion of value in the period ended June 30.

The Caisse said the four main factors behind the gain were a 14.7 per cent return in its private equity portfolio, a six per cent return in its fixed income portfolios, a 10.1 per cent return from large investments in its infrastructure portfolio and a proactive underweight in equity portfolios.

Sabia said the improvement was achieved even though markets were volatile, with sharp declines in global stock market indicators and significant concerns about European and U.S. economic outlooks.

The 2.33 per cent average return on depositor funds compared with a negative 0.74 per cent for its overall portfolio's benchmark index. It outperformed the markets by 307 basis points or 3.07 per cent.

In February, the Caisse said it earned an average return on its investments of 10.04 per cent in 2009 thanks to a strong second half of the year.

Its assets climbed to $131.6 billion at the end of 2009. In 2008, the Caisse lost 25 per cent or roughly $40 billion as its assets fell to $120.1 billion.

A survey by RBC Dexia has estimated that the assets of Canada's pension fund managers fell by 1.4 per cent in the first six months of 2010 due to faltering global equity markets.

A 3.2 per cent decrease in the second quarter followed four quarters of positive returns.

Sabia said the Caisse's performance this year indicates that its portfolios are "more robust and stable than before."

"We are happy with the progress that we have made but obviously there's a lot of work to do," he said during a conference call.

He noted that the goal is to provide consistent, long-term returns to depositors.

The Quebec association representing retired public and parapublic sector workers said the results were "surprising" but positive if confirmed at year-end.

"For now, however, we are rather skeptical about the accuracy of these figures with the current financial situation of the funds managed by the Caisse," stated Roch Perreault, the association's first vice-president.

The equity asset class had an overall loss of 1.70 per cent as a strong performance in private equity holdings helped to offset a 5.5 per cent drop in public equity markets. The loss was better than the benchmark reduction of 5.37 per cent.

New York's S&P 500 dropped by 7.2 per cent in Canadian dollars in the first half of the year while Toronto's S&P/TSX Composite fell 2.6 per cent.

In May, the Dow Jones Industrial also experienced its largest monthly decline since 1940.

The Caisse said it was able to minimize the impact of the stock market declines by adopting a defensive strategy to proactively sell down its equity portfolios due to increased market risk, particularly related to the European crisis.

That doesn't mean it will continue to do so in the future as it will take opportunities to both buy and sell shares, said chief investment officer Roland Lescure.

"We'll be flexible and pragmatic and I think we've shown that over the last six months," he told reporters.

The real estate portfolio had a slightly positive return following a gradual recovery in sector fundamentals since July 2009 and a "meaningful improvement" since 2008. The recovery was strongest in Canada and Britain.

The shopping mall and office building sector returns were positive in the first half of the year. The hotel sector, however, continued to decline.

Sabia also said the Caisse continues to favour private equity holdings in the infrastructure sector to help meet its goal of providing long-term returns for its depositors.

During the first half, the Caisse conducted some hedging on its asset-backed commercial paper, which reduced the portfolio's attributable risk by about 45 per cent.

The Caisse eliminated its private equity portfolio debt and continued its strategy of reducing it in its real estate portfolio.

It completed an $8-billion financing program announced last fall, some of which was used to repay short-term debt. The program did not increase the Caisse's total leverage.