Canada’s $25 billion OPTrust has maintained its fully funded status for the 13th consecutive year while the $114.4 billion Healthcare of Ontario Pension Plan (HOOPP) has just reported 2021 returns of 11.2 per cent and a funded status of 120 per cent – meaning that for every dollar owed in pensions it has $1.20 in assets.
In its 2021 Funded Status Report, OPTrust highlighted ongoing concerns to maintaining its funded status including the investment environment, plan maturity, longevity risk and low interest rates affecting the funding valuation. OPTrust returned 15.3 per cent led by return-seeking assets however noted that its liability hedging and risk mitigating assets did not perform as well.
The report notes that despite the challenges of the pandemic the last year also held investment opportunities. The pension fund has invested in innovative companies and real estate assets, and 2021 proved generally favourable for investment risk taking. Equities in developed markets did exceptionally well – although emerging markets were flat. Bond values declined drastically as yields jumped as much as 80 basis points for Canadian long-term bonds, highlighting the benefit of a diversified portfolio.
Strategy at OPTrust is structured around a total portfolio approach whereby total fund assets are divided into four sub-portfolios, each with a specific purpose: Liability Hedging Portfolio (LHP), Return Seeking Portfolio (RSP), Risk Mitigation Portfolio (RMP) and Funding Portfolio (FP).
The LHP helped keep the funded status stable in 2021 but was a drag on returns as interest rates increased from very low levels, notes the report. This movement coincided with the Bank of Canada beginning to normalize its monetary policy.
“Bond yields are highly correlated to the Plan’s discount rate over time; therefore, we would expect changes in the value of our bond portfolio to be offset by changes in our liabilities, helping to keep the funded status stable,” it states.
The return seeking portfolio is composed of a diversified mix of risky assets and is the main return driver for the total fund. It includes public equity, private equity, credit, public market multi-strategy investments, real estate, and infrastructure. OPTrust obtains public equity exposure through internally managed cash and derivative positions, as well as using external managers. The public equity portfolio is diversified across developed and emerging markets.
Private equity does best
OPTrust’s $4 billion private equity allocation generated a net return of 52.2 per cent in 2021. Strategy is focused on buyout investments and lower-risk private equity and debt investments. The fund invests directly into private companies, typically alongside partners and indirectly, through private equity funds. It committed $809 million of capital in 2021, including $775 million to 14 new investments despite “ongoing challenges” in developing new relationships and completing new transactions because of the pandemic.
Credit exposure is primarily implemented through external strategies complemented by passive internally managed strategies. Credit spreads narrowed meaningfully over the course of the year. Elsewhere 2021 saw a significant ramp-up in OPTrust’s real estate investment transactions globally as the fund sought to reposition and optimize portfolio exposures. At the same time, investment returns between the best and worst performing property types remain at unprecedented levels.
“As a long-term investor, we remain focused on building resilience in our real estate portfolio by targeting defensive sectors driven by consumer, demographic and technological changes, and by actively modernizing and improving the functionality of our properties, including their environmental performance.”
The real estate portfolio generated a net return of 18.5 per cent in 2021. The infrastructure portfolio, where investment is centred on a platform approach, generated a net return of 33.0 per cent in 2021.
HOOPP: low costs and sustainability wins
Meanwhile at HOOP’s Toronto headquarters, President & CEO Jeff Wendling attributes much of the success to the in-house team.
“HOOPP’s in-house investment team successfully navigated another year of challenges in the economy related to the ongoing effects of the pandemic,” says Wendling. “The result is a strong return and funded status that help make the Plan secure for the long-term benefit of the healthcare workers of Ontario.”
HOOPP delivered strong returns across many asset classes, including public equities (20.11 per cent) real estate (12.52 per cent) and where roughly 60 per cent of the assets are in Canada, and private equity (23.65 per cent). Those returns offset modest declines in its bond portfolio (-1.89 per cent) At the same time, HOOPP continued to evolve its investment strategies with more investment in infrastructure – a fairly new asset class at HOOPP, and the innovation economy.
Elsewhere, HOOPP expanded its commitment to sustainable investing including introducing a $1 billion allocation to climate change equities and becoming a founding member of Climate Engagement Canada, a collaborative engagement initiative focused on driving action at Canadian companies to deliver emissions reductions.
Notably, operating costs for the year represented just 0.32 per cent of assets, helping keep contribution rates low and affordable for members and employers.