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© Copyright 2000 Rogers Media. The following article first appeared in the April 2000 edition of
BENEFITS CANADA magazine.
The Top 100 Pension Funds of 2000
BENEFITS CANADA's 21st annual survey of the country's Top 100 Pension Funds is a story of
outperforming equity markets. Pension asset managers enjoyed a double-digit average investment return in
1999.
BY KEVIN PRESS
Claude Lamoureux called it "the best real estate portfolio in Canada." The chief executive officer of the
Ontario Teachers' Pension Plan Board in Toronto said so last Dec. 1--the day he announced Teachers' was
buying the 78.2% of Toronto-based Cadillac Fairview Corporation it didn't already own. "We think this
portfolio has great long-term value," Lamoureux said in his statement. "Quality real estate investments are
a good hedge against inflation."
Inflation was on a lot of money managers' minds in 1999, but not in the customary way. Inflation itself was
less a worry than interest rate hikes--designed to keep a lid on inflation--and what impact those might
have on red hot equity markets here and in the U.S. Those increases did come of course, but they weren't
enough to slow Canadian and U.S. stock markets from an extraordinary year-long climb. The Toronto Stock
Exchange 300 composite index rose 29.7%, the Morgan Stanley Capital International EAFE total return index
was up 25.3% and the Standard & Poor's 500 total return index increased 21% in 1999.
By December, pension fund executives like Lamoureux had good reason to be looking for more conservative
asset classes. "It's really a value play," says Bob Bertram, executive vice-president of investments at
Teachers' about the multi-billion dollar Cadillac Fairview purchase. "We were seeing stock markets
overvalued by the end of the year."
According to the results of BENEFITS CANADA's 21st annual Top 100 Pension Funds survey, equity
investments--particularly in Canada and outside North America--rose strongly during the year. In fact,
those bets went a long way toward providing the country's largest pension funds with an average
double-digit rate of return on investment.
That average rate of return was 13.2% for the year ended Dec. 31, 1999. This is up strongly from 1998's
average return of just 9%. Last year's numbers were on the weak side though. It was the first year Canada's
Top 100 had seen an average rate of return under 10% since 1994.
The average 13.2% return for 1999 is considerably stronger than expected. The average anticipated rate of
return on investment for the year was just 7.5%.
"It's astonishing when you think of the amount of money involved," says Donald Walcot, chief investment
officer at BIMCOR (a wholly-owned pension fund management subsidiary of BCE Inc.) in Montreal. "We are
surprised at how high people will push the prices of stocks."
Some Canadian pension funds had an extraordinary year. The highest reported return on investment was 24.6%
(compare that to last year's top return of 17.4%). The lowest reported was 4.3% (the low in 1998 was
-1.3%).
These healthy rates of return contributed to an overall pension asset growth rate of 10.1% for the
country's Top 100 Pension Funds. As of Dec. 31, 1999, there were $480.2 billion in pension assets held by
Canada's 100 largest funds. This is an increase of $43.9 billion over a restated Top 100 total for the year
ended Dec. 31, 1998.
That restatement is a result of new figures for the Quebec Teachers Superannuation Plan and Quebec Civil
Service Superannuation Plan, administered by The Commission administrative des régimes de retraite et
d'assurances (see "The Top 100 Pension Funds of 2000," page 24).
Ontario Teachers' remains in the No. 1 position nationally. This is the seventh year in a row in the top
spot for Teachers'. The fund held $67.1 billion on Dec. 31, 1999--that's a healthy increase of $9 billion
or 15.5% over 1998.
In fact the top five for 2000 matches exactly the five largest of 1999. Ontario Teachers', Quebec
Government and Public Employees, Ontario Municipal Employees Retirement System (OMERS), Hospitals of
Ontario Pension Plan and British Columbia Municipal Superannuation Fund all held on to their respective
rankings.
The top five hold $185.2 billion, or 38.6% of the total pension assets of the Top 100. These funds are up
$17.1 billion for the year ended Dec. 31, 1999. On average, the top five pension funds enjoyed a return on
investment just slightly over that of the Top 100--13.5%.
The remainder of the top 10 features Quebec Teachers', Ontario Electricity Financial Corporation Pension
Plan (formerly Ontario Hydro), BCE Inc., Canadian National Railways and British Columbia Public Service
Superannuation Fund in the No. 6 through 10 positions. Ontario Pension Board is the only fund to drop off
of the top 10 from last year to this. It is at No. 11 this year.
Canada's 10 largest pension funds account for $245.4 billion. That's up $21.4 billion from last year's top
10 total. As a percentage of the Top 100, the 10 biggest account for 51.1% of total pension assets.
Eight of these 10 biggest funds provided their rate of return on investment for 1999. The average is 13.2%,
matching exactly the average return of the Top 100.
Among the 46 funds that made a prediction, the average anticipated rate of return on investment for 2000 is
8%. Estimations ranged from a high of 17.5% to a low of 2%.
There are 12 names in the $10 billion pension fund club--British Columbia Teachers Superannuation Fund
(with $10.4 billion) broke that barrier for the first time in 1999. Quebec Teachers is at $13.3 billion,
and it has restated its Dec. 1998 assets at $13.3 billion (it reported $7.3 billion in last year's report).
Canada had 85 pension funds with $1 billion or more in pension assets by year-end 1999. That's up from 82
in 1998, and 79 in 1997.
THE TORONTO TWO
There was a renewed focus on Canadian equities in 1999. This did not come as a surprise of course. The
country's Top 100 Pension Funds had $127.3 billion invested in domestic equities at the end of 1999. That
is way up--20.1% from the $106 billion held in 1998.
As an average percentage of the Top 100 Pension Funds' asset mixes, Canadian equities returned to historic
norms in 1999. The class, on average, represented 33% of the asset mix in 1999. That rose from an average
of 29.8% in 1998 (a tough year for Canadian equities), but is consistent with 1997's average of 32.9%.
This was not a year without domestic stock market surprises though. The real Canadian equity story of 1999
was two Toronto Stock Exchange (TSE)-listed stocks--Nortel Networks and BCE Inc. By year's end, these two
high tech investment darlings represented 16.3% and 11.4% respectively of the TSE 300 composite index.
The challenge to Canadian pension asset managers was clear. These two high fliers weren't exactly
traditional value investments.
"It was very trying for us, and for others, to stick to the value philosophy," says Bertram. "We basically
put an outperformance option in for the last couple of months of the year, in order to keep the weighting
in the high tech stuff up to scratch."
Walcot says he's never seen a domestic equity market as "extreme" as the one in 1999. "This is really quite
remarkable," he says. "To a certain extent, it does give me a bit of the flavour of 1972/73 when you had
your nifty 50. This is strange, where you have very big blue chips down. There are a lot of really
good stocks out there that are cheap."
AN OVERVALUED MARKET
Are U.S. equities primed for a fall? More of Canada's Top 100 Pension Fund managers were asking that
question in 1999, according to the asset mix numbers. U.S. equities held by the country's 100 largest
pension funds, in dollar terms, has grown steadily for as long as BENEFITS CANADA has been tracking the Top
100 (the magazine reported on the Top 40 Pension Funds prior to that).
As of Dec. 31, 1992, there was $13.5 billion invested in U.S. stocks. That rose to a high of $38.9 billion
at the end of 1998. But the long, steep climb almost came to a halt in 1999--Canada's Top 100 held, in
aggregate, $39.9 billion at the end of the year. That's just a $1 billion increase.
As an average percentage of asset mix, U.S. equities dropped from 10% in 1998 to 9.3% in 1999. "We were
slightly underweight through most of the year," says Bertram. "We saw it as an overvalued market."
That wasn't the case across the board though. Ask Donald Walcot what he thought of U.S. equities in 1999.
"I loved them," he says. "The U.S. has the biggest market, the most liquid market, the most interesting
companies and I thought it was really attractive."
Some of those Canadian pension funds that reduced their U.S. equity holdings moved dollars into equity
investments in Europe, Australia and the Far East (EAFE). This asset class rose to $43.1 billion total,
from $37.1 billion the previous year. As a percentage of asset mix, EAFE equities averaged out at 8.7%, up
from 7% last year.
There was a strong increase in emerging markets investment too. Canada's Top 100 Pension Funds held $3.1
billion in emerging markets by the end of 1999. The class had remained constant at $1.8 billion between
1997 and 1998.
Global equity was up $1.6 billion over the previous year, to $11.5 billion.
On the fixed income side, there was $104.9 billion invested in Canadian bonds--this is down from $107.5
billion in 1998. International bonds are down slightly, from $4.9 billion in 1998 to $4.2 billion in 1999.
Remember though, international bonds ballooned from $1.1 billion to $4.9 billion between Dec. 31, 1997 and
Dec. 31, 1998.
Real estate investment among the country's 100 largest pension funds rose more than $3 billion. There was
$23.1 billion invested in real estate at year-end, compared to $19.9 billion in 1998. The Ontario
Teachers'/Cadillac Fairview deal was not the only one to make headlines. OMERS announced two major
purchases in 1999--one involving Square One Shopping Centre in Mississauga, Ont. and another involving a
number of Royal Bank properties.
"We got our real estate weighting to where we had been trying to get it for 10 years, which was up to 12.5%
of the fund," says Dale Richmond, chief executive officer of OMERS in Toronto. "You had a series of crown
jewels become available for bidding in the marketplace . . . Because there was more liquidity and more
properties available in the real estate market in Canada than ever before in the history of the market,
everybody was able to execute their strategies."
Not everyone's strategy was to increase their holdings though. "We are less interested in real estate,"
says BIMCOR's Walcot. "We really started to go into real return bonds. Real estate is supposed to be an
inflation hedge. But it's quite a labour-intensive area. And the real return bonds should give you the same
protection with a, perhaps, more liquid market."
Besides, how important is a hedge against inflation when equity markets are performing the way they did in
1999? "Exactly," says Walcot.
The rest of the asset mix went as follows: guaranteed investment certificates were at $388.2 million (up
$312.1 million); private placements reached $5.5 billion (up $1.6 billion); and cash rose to $11.1 billion
(up $3.9 billion).
$1B IN VC
Interesting news on the venture capital front--investment in venture capital among Canada's Top 100 Pension
Funds has broken through the $1 billion mark. As of Dec. 31, 1999, the country's largest funds had $1.1
billion invested in venture capital.
This comes at a time of increased attention on venture capital opportunities among institutional investors
nationally. Canadian pension funds, known historically for their conservatism, lag behind their U.S.
counterparts in venture capital exposure.
"Pension funds were burned 10 years ago on the venture capital side," says Richmond. "The returns were
really bad. The venture capital structure that we had in the country was not sufficient to support what was
going on. The skills sets were not there, the management training was not there, the accounting skills were
not there."
That may be changing. "We are consistently increasing [our exposure]," says Bertram at Ontario Teachers'.
"We probably doubled our weight to venture capital last year. It's a new program for us, it's only been
fully up and running for two years."
Did Canadian pension funds take a new approach to venture capital in 1999, or was this simply a matter of
money managers investing at a time of unique potential?
"Look at the tech market, then you can decide whether you want to be in venture capital or not," says
Bertram. "There's a lot more money in venture capital than ever before, but there's a lot more opportunity
too. Who knows? It is a cyclical business. The values will go up and down. But right now, there's a
tremendous number of opportunities."
Walcot agrees: "There are still opportunities. Canada has worked hard at venture capital. We're getting a
more mature venture capital community, and therefore we as investors are maybe getting a little more
confidence in these people."
So far, Richmond says OMERS is enjoying healthy venture capital returns. "We're in five or six areas, and
we try to make best-in-class investments. We try to pick those companies that we think will do well. We
have committed considerable money and activity to that, with a very different outcome than we had 10 or 12
years ago."
Venture capital still only represents 0.2% of the asset mix on average. Still, cracking the $1 billion mark
is significant. It is good news for the Canadian economy, for start-ups across the country and, if the U.S.
industry is any indication, good news for Canadian pension fund managers and plan members too.
*** ***
Top 100 in brief
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Top 100 pension funds report assets of $480.2 billion for the year ending Dec. 31, 1999. That
represents a 10.1% gain over the previous year.
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The average rate of return on investments for 1999 was 13.2%.
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Total market value of the Top 100 Canadian equity holdings as of Dec. 31, 1999 is $127.3 billion, up
$21.3 billion from 1998. That's a strong rebound after last year's drop of $7.7 billion (for the year
ended Dec. 31, 1998).
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U.S. equities grew much more slowly than in past years. The Top 100 report total market value of U.S.
equity holdings of $39.9 billion, up just $1 billion over 1998.
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EAFE equities rose strongly--to a total $43.1 billion among the Top 100 funds. In 1998, that number was
$37.1 billion.
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International bonds dropped slightly to $4.2 billion, from $4.9 billion last year.
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Total number of plan members--among the 78 funds that reported this information--is 2.2 million
Canadian workers, and more than 989,000 retired (or deferred) plan members.
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Most respondents spent less than three-quarters of their time working on pension issues. Of those who
answered the question, 17.4% report spending less than 25% of their time; 30.4% say between 25% and
50%; 8.7% say between 51% and 75%; and 43.5% say more than 75%.
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Among our Top 100, 78 reported their defined benefit (DB)/defined contribution (DC) breakdown--64 are
DB, four are DC and 10 are a mix of the two.
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Of our Top 100, 55 are public sector pension funds.
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New pension fund contributions in 1999 totaled $6 billion.
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The average total cost of running a pension fund was 23.5 basis points.
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The Toronto Stock Exchange 300 composite index rose 29.7%, the Morgan Stanley Capital International
EAFE total return index rose 25.3%, the Standard & Poor's 500 total return index rose 21% and the
Scotia Capital Markets Universe Bond Index dropped 1.1% during the year ended Dec. 31, 1999.
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