'Have to continue to protect that nest egg': AIMCo chair on Canadian pension model and the economy
Ontario Municipal Employees Retirement System, one of Canada’s largest pension funds, posted its worst result since the global financial crisis after suffering big losses in its private equity and real estate holdings.
The pension fund, known as OMERS, lost 2.7 per cent on its investments last year, pushing assets to $105 billion (US$84 billion). It’s the worst result since 2008, when it lost 15.3 per cent.
“We have been hit very hard by COVID and we’re not making excuses, but the fact is most of our difficulties this year were directly related to COVID,” Blake Hutcheson, who became chief executive officer on June 1, said in an interview.
The pension fund fell far short of its 6.9 per cent return benchmark, and also trailed the average 20 per cent increase of Canadian pension plans, as estimated by Bank of New York Mellon Corp.
Losses in its consumer-facing investments, including retail properties and transportation and entertainment holdings, explain more than half of the overall performance gap versus the benchmark, Chief Financial Officer Jonathan Simmons said.
OMERS’ 20-company private equity portfolio had a negative return of 8.4 per cent, compared with a gain of 4.6 per cent in the previous year. The lion’s share of that loss came from two holdings, Hutcheson said -- a movie theater chain and a recruiting company in Europe. Together, they constituted about 90 per cent of the drop.
“These companies have delivered double-digit returns consistently, and all of a sudden there are these COVID-related losses,” Hutcheson said.
OMERS’ portfolio of “old economy” public equities, which includes significant allocations to dividend-paying financial services and energy companies, also weighed on performance, according to Simmons.
“We had a positive return in our equities this year, but they didn’t rise quite as much as some of the new-economy stocks,” he said. “Some of our other private investments are very new-economy oriented, but the equity portfolio has been very focused on dividend-producing income stocks.”
Looking ahead, the pension fund will focus on increasing allocations to new-economy stocks and expand its investments in the Asia-Pacific region, where demographics and economic growth are attractive.
The pension fund is also making changes to its hedging strategy.
“After a year like this one, the big lesson is it’s the balance sheet you have to preserve and protect as opposed to the shorter-term fluctuations,” Hutcheson said. “We took off about 30 per cent of our hedges, and we’re going to have a long-term program to get us down to closer to maybe 20 per cent of the portfolio hedged at any given time.”