Fast-growing pension funds cite returns from alternatives for solid performance in 2016

Alternative investments have been the name of the game for many of the leaders on Benefit Canada‘s list of the fastest-growing pension funds for 2016.

Both the Ontario Municipal Employees Retirement System, ranked third on the list of fastest-growing plans at 10.65 per cent growth, and Alberta Teachers’ Retirement Fund Board, ranked fourth at 10.6 per cent, saw robust performances from most of their alternative assets classes, including their real estate, infrastructure and private equity portfolios.

At OMERS, private equity returned 12.6 per cent, with real estate following closely at 12.4 per cent and infrastructure at 11 per cent. The Alberta fund saw a 16 per cent return for infrastructure, 10 per cent for real estate and five per cent for private equity.

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“These numbers reflect consistently strong returns over a number of years now,” says OMERS chief financial officer Jonathan Simmons.

Fully half of OMERS’ assets are in the alternative market, with the remainder in traditional stocks and bonds.

“All cylinders fired well for us last year,” says Simmons. “The results are partly driven by market performance, with the TSX up 21 per cent and good performance from the other main exchanges, and partly by the strategy we followed.”

Simmons is particularly happy that the growth from traditional markets came more or less equally from “high-quality, blue-chip” equities and fixed-income investments.

“The fixed-income book is a very good story, achieved by taking money out of longer-term fixed-income securities and moving it into the credit portfolio,” Simmons says. “We see better risk-adjusted returns from credit vehicles than government securities.”

OMERS’ credit portfolio expanded to $15 billion from $9 billion, while the government book shrank to $10 billion from $16 billion.

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The increase in the credit portfolio is part of OMERS’ strategy, refreshed just over a year ago, that emphasizes a continuing commitment to alternative investments; high-quality, resilient equities; building the credit portfolio; and keeping liquidity abundant to take advantage of opportunities.

“That strategy is set to take us to 2020,” says Simmons.

Ultimately, OMERS measures its success by its funded status, which has now improved for four consecutive years.

“Our ratio is currently at 93 per cent, and we expect to be fully funded by 2025,” says Simmons.

The Alberta fund has also seen good returns for the last several years. Infrastructure has loomed large, with returns at about 16 per cent. Real estate also scored well at 10 per cent. But private equity was somewhat disappointing, yielding only five per cent.

“Private equity has been over 20 per cent for the last few years,” says chief investment officer Derek Brodersen. “Returns tend to be fairly well correlated with private markets, but that wasn’t the case last year because of differences in valuation correlations.”

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Fortunately, an 11 per cent performance by long-term bonds, caused by interest rate drops in 2016, went a long way to offsetting the diminished returns from private equity.

Demographics also contributed to the strong performance. To begin with, under Alberta law, liabilities accruing before 1992 are the responsibility of the provincial government.

“Demographically, that means we’re a very young fund, so we collect a lot more than we pay out,” says Brodersen. “Our plan would grow almost $500 million annually, even without the investment returns. Our demographics also mean that we don’t need as much liquidity as some of the more mature public funds, which leaves us with more options for investment.”

The strategy for the future, according to Brodersen, will be to stay on the same path.

“There are no huge changes in the works,” he says. “We’re focusing on building out our illiquid assets, growing our internal team of 40 investment professionals — up from eight only seven years ago — and focusing how growth will give us the scale to do more things internally, both better and at lower cost.”

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Julie Landin, pension investment manager at Bell MTS, says it’s important to take the rankings in context. She notes her fund has moved to 89th place from 106th among Canada’s largest funds, even though its growth was flat last year.

“We’re a closed fund, so we’re not expected to increase assets,” she says.

Bell MTS’ jump in the ranking, she concludes, is due to external factors.

“It could be that other plans have moved toward fixed-income investments in the last few years and so failed to take advantage of the recent strong equities market,” she says. “Another factor may be that there has been more funding relief available to employers of late. And finally, it may be that employers are using things like letters of credit instead of cash to meet their funding obligations.”