Ontario pension plan OMERS posts annual gain as real estate and other assets offset falling stocks and bonds

Thestar.com
Feb. 28, 2023

One of Ontario’s largest pension fund managers said its investments in private assets, real estate and infrastructure helped save it from a wipeout last year as public stocks and bonds took big hits amid turbulent markets.

Ontario Municipal Employees Retirement System (OMERS) said Monday that it generated an investment return of 4.2 per cent in 2022, adding $4.9 billion in investment income to the plan, which had $124 billion in assets by the end of the year.

That still fell short of an internal benchmark targeting a gain of 7.2 per cent for the year, but it comes after other large pension managers, including the Caisse de dépôt et placement du Québec, reported losses in recent weeks.

“It’s an extraordinarily difficult year for any investor … So, on balance, we are pleased with the outcome,” OMERS CEO Blake Hutcheson told the Star.

“I don’t want to be cocky or overstate it. It’s only one data point, it’s only one year and we’re looking down the road. But I am proud of our team and I am confident (in) our strategy.”

The pension fund (which has 559,000 active and retired members, including union and non-union workers at municipalities, school boards, transit systems, electrical systems and other employers) said its investments in bonds fell by 3.8 per cent last year and its public equity assets lost 11.9 per cent.

But OMERS’ private equity holdings increased by 13.7 per cent, its infrastructure investments gained 12.5 per cent and its real estate assets were up by 13.6 per cent.

At the halfway point of 2022, OMERS actually posted a loss of $500 million amidst a rout of financial markets following the start of the war in Ukraine and central banks beginning to tackle runaway inflation with a string of interest-rate hikes.

By the end of the year, however, its real estate, infrastructure and private equity investments boosted the fund to a net gain.

Diversifying away from stocks and bonds and investing significant capital in alternative assets has become a hallmark of Canada’s big pension funds (though some critics say such assets can be more difficult to value and valuations are not conducted as often as investments that trade on public markets).

Hutcheson said the fund’s real estate assets (which generate a stream of rental income and tend to steadily increase in value) are also a good hedge against inflation.

Inflation itself has been a mixed blessing for OMERS. On the one hand, its funded ratio has decreased to 95 per cent, down from 97 per cent a year earlier, after it increased pension payments of its retired members by six per cent to reflect the higher cost of living.

But as central banks have raised interest rates, that’s made it easier for the fund to save money, said OMERS chief financial officer Jonathan Simmons.

And Hutcheson said the higher cost to borrow money also gives OMERS an edge when it comes to competition to purchase new private assets. Where other international investors may face capital constraints, the fund has a healthy balance sheet with about $8 billion ready to invest, he said.

The fund didn’t invest in cryptocurrency, which has been a headache for other Canadian pension funds (Ontario Teachers’ Pension Plan incurred a significant writeoff after the meltdown of crypto exchange FTX).

And while OMERS missed out on a boom in tech stocks in 2020 (contributing to a $3 billion loss that year), Hutcheson said Monday, “We try not to get distracted by short-term fads or shiny objects.”