Tuesday, April 13, 2010

Running HOOPPs Around the Competition?


CBC reports Healthcare of Ontario Pension Plan makes gains:

Finally, some really good news on the pension front.

The Healthcare of Ontario Pension Plan (HOOPP) recorded a 15% rate-of-return for the year ending Dec. 31, 2009.

Not only has the plan hit a record high of $31.1-billion of assets-under-management, but it is now 102% funded, which means its 250,000 employees and retirees can breath a sigh of relief that they won’t see any benefit cuts or contribution increases for the foreseeable future.

“When you put the two years together, 2008 and 2009, we are probably one of the few funds that are ahead,” says John Crocker, president and chief executive of HOOPP.

The pension plan can chalk up its good performance to timing. In late 2007, the pension plan reduced its weighting in equities, which limited its losses in 2008.

“We had been in the process for several years, to carefully match our assets to our liabilities,” said Mr. Crocker.

In 2007 the team decided it had too much exposure to equities, and as a result sold $6-billion worth of them.

“That dampened down our volatility in 2008,” added Mr. Crocker. “While other pension plans lost 18%, we lost a touch under 12%, so it saved us a couple billion of dollars,” he said.

Then in 2009, the pension fund took advantage of the poor liquidity and the high spreads in the credit markets. When other lenders were frozen, “we strapped a bunch of once-in-a-generation deals on,” said Mr. Crocker.

HOOPP’s strong results makes it a poster-child for the defined benefit plan, and Mr. Crocker is not going to let all this good press go to waste.

“Defined benefit pension plans hasn’t had people out there publicly defending it, but we will make the case that large multi-employer defined benefit plans pension plans ... is the way to go; it’s the best way to deal with the inadequacy of retirement income for Canadians,” said Mr. Crocker, who is giving a speech at the Conference Board of Canada/Towers Watson Summit on the Future of Pensions this week.

“We operate at a fraction of the cost of banks and others, mutual funds, group RRSPs, defined contribution plans, and we are delivering pretty good results,” he said.

“It’s never too late to pitch government,” he added. With the federal government launching yet another round of town hall meetings across Canada to discuss pension reform, Mr. Crocker is hoping to make an impact. “It’s on the public agenda now,” he said.

Pretty good results? Mr. Crocker is being way too modest. The fact is that HOOPP is consistently delivering solid results at a fraction of the cost of other private and public pension plans with a much stronger focus on asset-liability matching. In effect, they are running HOOPs around the competition.

Unfortunately, HOOPP doesn't garner the media's attention like CPPIB or Ontario Teachers, but it should. Giovanni Legorano of Global Pensions reports, HOOPP returns 15% in 2009:

The C$32.6bn (US$32.5bn) Healthcare of Ontario Pension Plan (HOOPP) posted a 15.2% profit for 2009 on the back of gains in North American equities, according to its 2009 annual report.

This result offsets the losses of 12% the fund incurred the previous year and brings its funding level to 102% from 98% at the end of 2008.

HOOPP president and chief executive John Crocker said: "At a time when many other pension plans are looking at benefit cuts or contribution increases, HOOPP has been able to provide stability to our more than 250,000 members and retirees.

"HOOPP's contribution rates have not increased since the start of 2004, and will stay the same until at least the end of 2011."

In 2009, the pension plan's investments in Canadian equities returned 34.4%, while US equities returned 30% and non-North American equities returned 13.2%.

Canadian long bonds and universe bonds returned 6.3% and 5.1% respectively, and real return bonds gained 14.5%. HOOPP's corporate credit portfolio returned 4.4%.

In addition, private equity returned 5.6% and real estate was down 5.1%.

HOOPP uses a liability driven investing (LDI) approach, according to which it calculated it has to achieve a nominal return of at least 6.5% per cent - or a real rate of return of 4.2% - to meet its estimated pension obligations.

You can go to the HOOPP website and read the press release on 2009 results:

The Healthcare of Ontario Pension Plan (HOOPP) announced double-digit gains of 15.18 per cent in 2009, closing the year fully funded and beating its investment benchmark of 9.77 per cent by 541 basis points.

Ending 2009 at 102 per cent funded means HOOPP has enough assets to meet all of its liabilities – the benefits owed to current and future pensioners.

"At a time when many other pension plans are looking at benefit cuts or contribution increases, HOOPP has been able to provide stability to our more than 250,000 members and retirees. HOOPP's contribution rates have not increased since the start of 2004, and will stay the same until at least the end of 2011," said John Crocker, President and CEO.

One of the main reasons for 2009's success was an asset mix decision to increase the weighting in equities, credit and provincial bonds, which allowed the Plan to take advantage of the recovery in the markets after March 2009. In late 2007, HOOPP reduced its weighting in equities, a move that limited its losses at the end of 2008.

In 2009, HOOPP's Canadian equities returned 34.42 per cent while U.S. equities returned 27.98 per cent, and non-North American equities returned 13.23 per cent. There was also strong growth in fixed income – Canadian long bonds and universe bonds returned 6.31 and 5.06 per cent respectively, and real return bonds returned 14.5 per cent. HOOPP's corporate credit portfolio returned 4.41 per cent.

Private equity returned 5.65 per cent, and while real estate was down 5.09 per cent, it was the portfolio's first negative return since 1993.

"HOOPP is one of the few pension plans reporting positive results for the two-year period of 2008/2009 – our 15.18 per cent returns this year more than offset last year's losses of 11.96 per cent," said Crocker.

HOOPP remains fully committed to preserving the pension promise that once members start receiving a pension, they receive it for life.

HOOPP's liability driven investing approach, which uses the Plan's liabilities as the primary reference point in assessing risk and return objectives of a particular investments, helps to ensure that the most important measure of success is met – and that's to meet the Plan's pension obligations.

The complete details of HOOPP's 2009 performance can be found online in HOOPP's Annual Report, 50 Years of Serving our Members.

You can download and review the complete HOOP 2009 Annual Report by clicking here. You should carefully review this annual report as it is very well written.

Importantly, all the relevant information is there, including benchmarks in public and private markets. They outperformed in public markets, delivering solid returns in both stocks and bonds.

Private markets underperformed their benchmarks as private equity and special situations returned 5.83% (approx. 11% before foreign exchange impacts), just 67 basis points below the 6.5% benchmark (plan funding target) and real estate was down 5.09%, underperforming the real estate IPD Canada benchmark by 411 basis points, and delivering its first negative return since 1993.

I had an interesting discussion on private market benchmarks with Andy Moysiuk, Managing Partner at HOOPP Capital Partners. Andy doesn't benchmark his portfolio based on spreads over public markets, and prefers to use the plan's funding target because such an approach is a "better alignment of interest" with the plan.

Andy had this message to share with me:

Over the two year crisis period HOOPP actually made money (as did private equity). Note we talk about making money, and being in surplus, more than talking about the ever nebulous value add which dominates the industry talk.

... just more HOOPP perspective. Below is the web site extract for my area. We remain the only institution that actually consistently discloses how private equity does, including over the long term (and in my case average annual return is about the same as IRR, the scale decision is also really important), and without adulteration (leaving out, eg. venture, or discontinued activities or other such long forgotten things). Since there is so much promotion going on in institution land these days, you might find it interesting that we have done well, in part due to much more of a growth capital/near venture approach than most, with about ½ of the $1.5 billion invested being in Canada (the balance in Europe and the US). And, as both our limited partnerships and direct investments have performed well over the long term, we remain agnostic to the manner of execution.

Looking at the asset mix below, you'll notice that HOOPP is not allocating aggressively in private markets - roughly 5% in private equity and special situations, and almost 11% in real estate.


Andy thinks that private equity should remain as private as possible, so he looks at a limited number of deals that make sense. He agreed with me that the flood of money pouring into private equity has diluted returns and made private equity at the larger funds far more correlated to public markets (this is why I think bigger funds aggressively weighting their portfolios into PE should still use a spread over public equity indexes as a benchmark, with an appropriate lag).

Where are HOOPP's externally managed hedge funds? As far as I can tell, there are none. Instead, HOOPP manages absolute return strategies internally, which added 1% to the fund's overall return in 2009.

You might have noticed something else. As I wrote last year, HOOPP survived the 2008 financial storm by allocating more into good old government bonds and they were quick to take advantage of the financial markets recovery which took place after the lows in March 2009.

All you "super sophisticated" pension funds out there, take notice. No huge allocations to private equity, hedge funds, real estate or exotic structured products, just good old common sense, and quick response to change their strategic asset mix, protecting against downside risk in 2008, and taking advantage of the recovery in 2009.

Are the folks at HOOPP geniuses? No, they are simply smart and humble investment professionals who take their fiduciary duties very seriously and avoid taking stupid risks.

Larger public funds should take notice and learn from HOOPP's approach. In my opinion, they're running HOOPPs around the competition.

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