Wednesday, March 21, 2018

Ontario Pension Board Gains 10.8% in 2017

Benefits Canada reports, Ontario Pension Board returns 10.8% in 2017:
The Ontario Pension Board posted a return of 10.8 per cent in 2017, an increase on its return of 8.1 per cent in 2016.

The pension fund’s investment income for the year was $2.5 billion, up from $1.75 billion in 2016. Its net assets were $26.4 billion, an increase from the end of 2016 when net assets sat at $24.4 billion. The plan also maintained its funded status at 97 per cent.

“I am very pleased with our strong performance and investment return in 2017 — the first partial year our portfolio has been managed by the Investment Management Corporation of Ontario,” said , president and chief executive officer of the Ontario Pension Board. “We believe that pooling our assets under IMCO’s management will help us earn higher returns going forward than we could on our own and improve our direct access to a wider range of high-quality investment opportunities,

The pension fund also increased its exposure to private markets by about $1.8 billion in 2017. This included increasing its infrastructure portfolio by 15.8 per cent, private equity portfolio by 53.5 per cent and real estate portfolio by 18.1 per cent.

Its public market investments, including public market equity, fixed income and cash, returned 13.3 per cent in 2017, compared to seven per cent in 2016. Private market investments, consisting of real estate, private equity and infrastructure, returned 4.5 per cent, compared to 11.1 per cent in 2016.

The Ontario Pension Board’s full annual report will be available after its tabled with the Legislative Assembly.
The Canadian Press also reports, Ontario's public service pension plan logs 10.8% return in 2017:
Ontario's public service pension plan ended 2017 with an annual investment return of 10.8 per cent, which helped it maintain its funded status at about 97 per cent.

The Ontario Pension Board, which administers the plan, says net investment income during the year amounted to $2.5 billion and net assets grew to $26.4 billion by the end of the year.

The return came as OPB continued a strategy of shifting assets from public to private markets last year.

This included increasing its infrastructure portfolio by 15.8 per cent, private equity portfolio by 53.5 per cent, and real estate portfolio by 18.1 per cent.

Overall, public market investments, which include public market equity, fixed income and cash, returned 13.3 per cent for the year.

Private markets investments consisting of real estate, private equity and infrastructure, returned 4.5 per cent.

"I am very pleased with our strong performance and investment return in 2017 — the first partial year our portfolio has been managed by the Investment Management Corporation of Ontario (IMCO), said Mark Fuller, the president and CEO of OPB.

"We believe that pooling our assets under IMCO's management will help us earn higher returns going forward than we could on our own."

The defined-benefit pension plan serves about 44,000 active members and their employers, as well as more than 43,000 retired and former members.
In its press release, the Ontario Pension Board rightly notes that it has a strong funded status:
Ontario Pension Board (OPB), the administrator of Ontario's Public Service Pension Plan (PSPP), ended 2017 with an annual investment return of 10.8 per cent, a value add of 0.4 per cent over its benchmark. This solid return helped the Plan maintain its funded status at approximately 97% even after taking measures to protect the long-term health of the Plan. OPB added to the expected cost of benefits by increasing expectations regarding longevity and by lowering the expectations for future investment returns. Net investment income during the year amounted to $2.5 billion and net assets grew to $26.4 billion at year end.

"I am very pleased with our strong performance and investment return in 2017 - the first partial year our portfolio has been managed by the Investment Management Corporation of Ontario (IMCO). We believe that pooling our assets under IMCO's management will help us earn higher returns going forward than we could on our own and improve our direct access to a wider range of high-quality investment opportunities," said Mark Fuller, President and CEO of OPB.

OPB continued its strategy of shifting assets from public to private markets in 2017, increasing its gross exposure by approximately $1.8 billion. This included increasing its infrastructure portfolio by 15.8 per cent, private equity portfolio by 53.5 per cent, and real estate portfolio by 18.1 per cent.

Overall, public market investments, which include public market equity, fixed income and cash, returned 13.3 per cent for the year, while overall private markets investments consisting of real estate, private equity and infrastructure, returned 4.5 per cent.

OPB's full 2017 Annual Report, including Management's Discussion & Analysis and Audited Financial Statements will be posted on www.opb.ca after the President of the Treasury Board tables it with the Legislative Assembly.

About Ontario Pension Board

Ontario Pension Board (OPB) administers Ontario's Public Service Pension Plan (PSPP), a defined benefit pension plan serving approximately 44,000 active members and their employers, as well as more than 43,000 retired and former members. With $26.4 billion in net assets under management, the PSPP is one of Canada's largest pension plans. It's also one of Canada's oldest pension plans, successfully delivering the pension promise since the early 1920s. To learn more about OPB, visit www.opb.ca.
So, OPB's full 2017 Annual Report isn't available yet but it's nice to read that it's focus remains on its funded status which is what matters most for any pension plan.

Now, as stated in the press release, this is the first partial year OPB's portfolio has been managed by the Investment Management Corporation of Ontario (IMCO).

The way it works is OPB takes care of the plan's administration and liabilities and IMCO manages the plan's assets, and that is its sole focus.

You might recall I first discussed IMCO back in November 2016 when I covered Ontario's new pension leader, bert Clark, the fomrerhead of infrastructure ontario who now heads this organization.

IMCO's story is on its website and it's worth understanding how this organization came about:
In May 2012, the Ontario government began studying a new approach for managing the investments of Ontario's broader public-sector pension plans and other non-pension investment funds. An independent review was launched to examine the advantages of pooled asset management and how this model might be implemented.

In November 2012, following extensive consultations across industry stakeholders, a comprehensive report was released that would ultimately recommend a new investment model for public-sector pensions and investment funds, with assets of a specific threshold, in Ontario.

Creating a Pooled Asset Manager in Ontario

The report, Facilitating Pooled Asset Management for Ontario's Public-Sector Institutions, set out foundations for a new pooled asset manager. The Investment Management Corporation of Ontario (IMCO) would be created as an independent entity and would be implemented under the following principles:
  • Participating institutions would retain fiduciary responsibility and control over asset allocation decisions (given variations in the liability profiles across pension plans and investment funds);
  • Employees and retirees would remain members of their existing plans; the relationship between each pension plan and its members would not change;
  • The new structure would not affect plan design (e.g., benefit levels and contribution rates), funding policies or approaches to administration;
  • IMCO would have an independent, professional and representative board of directors, whose duty would be to serve and act in the best interests of clients and to ensure that investment decisions would be based solely on seeking the best returns without political influence;
  • World-class governance, professional investment, risk management practices and competitive compensation would be key characteristics; and
  • Assets under management would be sufficient to support investing in a broad range of asset classes at the most competitive costs.
  • At the time of the report, there were over 100 public-sector pension funds in Ontario. The expected benefits of the pooling framework would include:
  • Anticipated reduction in duplication and costs;
  • Ability to achieve economies of scale,
  • Broadened access to alternative asset classes for clients; and
  • Enhanced risk management practices.
To the extent that these advantages supported more diversified portfolios among participating institutions, the Report suggested that pooled asset management would help realize improved investment returns over the long term.

IMCO Launches

In July 2016, the Province announced the creation of IMCO through the Investment Management Corporation of Ontario Act. After six years of hard work and collaborative analysis to help establish the new asset manager, the Ontario Pension Board (OPB) and the Workplace Safety and Insurance Board (WSIB) became the new organization’s first clients.

In July 2017, IMCO began to manage approximately $60 billion in assets on behalf of its clients, becoming the ninth largest institutional fund in Canada.
A timeline featuring IMCO's main milestones is provided below (click on image):


As you can read, IMCO is the new kid on the block but it's already managing $60 billion in assets and growing fast. The Ontario Pension Board (OPB) and the Workplace Safety and Insurance Board (WSIB) became the new organization’s first clients.

As I understand it, IMCO is in charge of pooling assets and managing them in the best interest of their clients, investing across public and private markets all over the world.

It's important to note that IMCO is a pension fund like bcIMC, CPPIB, the Caisse and PSP, and not a pension plan like OMERS, OPTrust, OTPP, and HOOPP.

Still, just like its large Canadian peers, it has managed to adopt the very best governance principles to separate the organization from any undue political interference.

I invite to regularly read IMCO's news releases here and to keep in mind that even though it's a young fund, it's already huge and growing fast.

I would also tell you to carefully read over IMCO's investments here. Below, the fund's asset allocation as of September 30th, 2017 (click on image):


A couple of notes:

  • Public market investments are pretty straightforward. IMCO probably indexes most of this portfolio directly to reduce costs but it also outsources some of it to external absolute return managers.
  • Private markets which consist of real estate, private equity, and infrastructure as still being ramped up, most notably in private equity where IMCO has only committed roughly $1.2 billion ($1.7 billion if you include private debt). This is why you read above that OPB is increasing its infrastructure portfolio by 15.8 per cent, private equity portfolio by 53.5 per cent, and real estate portfolio by 18.1 per cent.
Importantly, IMCO is just ramping up its exposure to private equity so it's not appropriate to make comparisons with its larger Canadian peers which have a mature and much bigger private equity portfolio.

The only other thing I learned is that Jill Pepall leads IMCO’s investment program and is responsible for all aspects of its investment activities:
Prior to IMCO, Jill was the EVP & Chief Investment Officer of the Ontario Pension Board (OPB), where she was responsible for the oversight and management of the Plan’s $25 billion investment portfolio. Before joining the OPB, Jill was the Chief Investment Officer of the investment management division of a major Canadian chartered bank and SVP & Head of Investments at a Canadian life insurance company.
Late today, I tried reaching Bert Clark, IMCO's CEO, to get more investment information but he is traveling all week. I didn't reach out to OPB's CEO, Mark Fuller, which was my mistake but his plan is on solid footing as far as I can tell and the new arrangement with IMCO works in its favor.

Below, Ontario Pension Board 2016 AR video which I found on vimeo here. I look forward to covering OPB and IMCO in the future and if you have anything to share, feel free to contact me at LKolivakis@gmail.com and I will edit this comment.

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