Ontario Municipal Employees’ Retirement System almost quadrupled its stock holdings in Asia-Pacific last year and plans to keep boosting its exposure to the fast-growing region over the next several years.
“We’ve seen a rebound quicker there in a lot of the sectors and markets than elsewhere globally,” Blake Hutcheson, who became chief executive officer on June 1, said in an interview. The pension manager, known as OMERS, deployed almost $4 billion (US$3.2 billion) in the region, up from about $1 billion, he said.
Lower-for-longer interest rates have pushed pension funds to cast their nets far and wide in search for returns over the last several years. The $109 billion public-pension manager, one of Canada’s largest, plans to deploy about 20 per cent of its capital in Asia-Pacific over the next five to 10 years, with a focus on public equities rather than private assets, Hutcheson said.
OMERS, which aims to double in size in the next eight to 10 years, had less than 8 per cent of assets invested in the region in 2019, according to its annual report for that year. The fund has added 12 people to its Singapore office, which was opened three years ago.
The MSCI Asia Pacific Index handed investors 17 per cent returns last year and is up more than 7 per cent in 2021.
Falling Private Returns
In the private market, Hutcheson said he’s seen a wide gap in buyers’ and sellers’ expectations in sectors hammered by the pandemic, such as retail, hotels, and transportation. That’s making it harder to do deals, he said.
“An owner can stay at the table,” he said. Meanwhile, potential investors want “to be discounted because of current valuations and current cash flow,” he said.
In the bigger picture, “there’s a trend to go to privates, which on average had double digit returns for three, five, 10 years. And with this much capital in the system and with fixed income so low, it’s going to be really hard to keep them in the double digits in the future,” Hutcheson added.
Last year, the Toronto-based pension fund put together a team to analyze what the world would look like after the COVID-19 pandemic.
“We are deep students of the impact on those who succeed and those who will have a more difficult time on a forward basis, which has allowed us to sort of pivot some of our investment thinking,” he said.
The pandemic has had a major impact on property markets. OMERS, which has a real estate arm called Oxford Properties Group, is betting on an eventual rebound in demand for office space, Hutcheson said. About 40 per cent of Oxford Properties’ invested capital is in office space, according to the company’s website. Another 20 per cent is in industrial.
“Will employees have greater flexibility in the future? I think so. But most organizations which are designed around office cultures will maintain their space,” he said.
Retail real estate, on the other hand, won’t snap back as easily, Hutcheson said. Oxford has about 15 per cent of its portfolio in retail assets, including Yorkdale Shopping Centre and Square One, two large shopping centers located in the Toronto region.
“It’ll be tough for many to see through these cycles and come out the other side,” he said. Hutcheson sees a migration toward “the best retail properties” that can’t be replaced by online activity.