Wednesday, March 5, 2014

OMERS Gains a Mere 6.5% in 2013

Katia Dmitrieva of Bloomberg reports, Omers Earns 6.5% Return in 2013; Index-Linked Bonds Weigh:
Ontario Municipal Employees Retirement System, a pension fund manager in Canada’s most populous province, reported a 6.5 percent return on its investments last year, below the 10 percent return in 2012.

Investment income slipped to C$4 billion ($3.6 billion) from C$5.2 billion in 2012, as assets rose to C$65.1 billion compared with C$60.8 billion a year earlier, the Toronto-based fund manager said today in a statement.

The fund missed the 14 percent median return for Canadian pension funds in the year ended Dec. 31, according to Royal Bank of Canada’s RBC Investor & Treasury Services unit.

“Public market-equity returns in excess of 20 percent were offset by a significant market-valuation reduction in the fund’s holdings of inflation-linked bonds and commodities,” according to the statement.

As a result, the pension manager’s return from its capital markets unit, which makes up 57 percent of the fund and comprises stocks, bonds, and other debt investments, returned 0.5 percent, compared with a 7.5 percent gain in 2012.

Omers finished implementing a new public markets portfolio in 2013 which includes a portfolio that places short and long positions on currencies, commodities, stocks and bonds. The new strategy is aimed at creating more stable investment returns in the long term.

“We have a high conviction that this public markets strategy is the right one for a prudent pension plan investor,” Chief Executive Officer Michael Nobrega said in the statement.
Private Equity

Omers’ private equity unit returned 24 percent last year and Oxford Properties, its real estate unit, rose 14 percent. Borealis Infrastructure returned 12 percent and Omers Strategic Investments, which oversees venture capital and Western Canadian energy assets, rallied 9.1 percent compared with a 10 percent decline in 2012.

“We now have a long-term strategy that balances portfolio risks to the drivers of capital market returns, namely growth and inflation,” Nobrega said in the statement.
You can read the press release on OMERS 2013 results here. OMERS also provides a background paper on their investment strategies. The annual report is not available yet.

What can I say about OMERS 2013 results? Thank god private markets came through for them because these are really terrible results, especially in public markets (heard they loaded up on real return bonds at the top of the market). And that 6.5% is a gross return, not net of all operating expenses (pensions should always disclose net returns, not gross returns).

And when I read an outgoing CEO stating "we have a high conviction that this public markets strategy is the right one for a prudent pension plan investor,” I roll my eyes and think to myself here is another overpaid pension prima donna who never managed money and has absolutely no clue of what he's talking about. You can put lipstick on a pension pig but it's still a pig!

I can only hope OMERS' new incoming CEO, Michael Latimer, will not take the same approach as his predecessor and put an end to this nonsense. OMERS really screwed up huge in their public market investments and it's better to fess up than blow smoke and mirrors at their stakeholders.

Mr. Latimer is keen on erasing OMERS' funding shortfall. He also has a big job shaping up the culture at OMERS. My contacts tell me it's a terrible place to work at. I heard the same thing about PSP recently from a lady who told me she took a pay cut to work elsewhere and she's much happier now. You pension leaders should make sure all your employees are happy and feel engaged. Importantly, it's not just about money, stupid!

This might sound harsh but I'm actually restraining myself. I think every organization, not just public pension funds, should take an internal poll to measure the happiness and level of engagement of their employees. Public pension funds should publicly report the turnover rate at their organization, one of the most important measures of employees' happiness (but not perfect).

In other news, OMERS has entered into a co-investment agreement with Japan's Government Pension Investment Fund (GPIF), the world's largest pension fund, and the Development Bank of Japan (DBJ):
The co-investment agreement sets out a framework under which GPIF and DBJ may participate in a range of investment opportunities that are sourced and actively managed by OMERS through its various investment arms.
"We are honoured and pleased to be partnering with GPIF and DBJ in the pursuit of high-quality investments under a jointly developed program which recognizes OMERS direct drive, active investment management expertise. We value this strategic relationship as we continue to build trusted partnerships and extend our reach to attract investment opportunities globally," said Jacques Demers, President and CEO of OMERS Strategic Investments.

The first direct outcome of the co-investment agreement is the participation by GPIF and DBJ, at a capital commitment of USD $2.5 billion, in the Global Strategic Investment Alliance (GSIA). The GSIA is a co-investment program developed by OMERS that deploys the expertise of OMERS infrastructure investment arm, Borealis Infrastructure, for the benefit of OMERS and its GSIA co-investment partners. The participation by GPIF and DBJ brings the total capital committed to the GSIA to USD $11.25 billion.

"The participation in the GSIA by GPIF and DBJ, alongside our other GSIA members including the Pension Fund Association of Japan and a consortium led by Mitsubishi Corporation provides a strong endorsement of both OMERS strategy of developing third-party capital relationships with like-minded institutional investors as well as the investing strength of our infrastructure arm, Borealis Infrastructure," said George Cooke, Chair of the Board of Directors of OMERS Administration Corporation.
I like Jacques Demers and was kind of rooting for him to be OMERS' new CEO but hear good things about Michael Latimer. This new agreement with GPIF and DBJ is one of many you will see in the future between Canadian public pension funds and global sovereign wealth and pension funds.

GPIF reported a 4.73 percent return on investments in the October-December quarter, thanks to gains in Japanese stocks and an increase in the value of its foreign assets due to the weakness of the yen. The fund's asset rose to a record $1.26 trillion

One little note on my last comment on the Caisse's 2013 results. I made a mistake on their infrastructure results and corrected it and added a comment on their Canadian equity performance, which is actively managed (not indexed):
  • U.S. equities are indexed so there was no value added there. Canadian equities, which are not indexed, outperformed their index in 2013 (16.3% vs 14.8%) but are still underperforming over a four year basis (6.4% vs 7.5%). Hopefully they can continue delivering alpha in this portfolio.
  • The Caisse's infrastructure portfolio returned 10.6% in 2013 and 16.8% over the last four years, grossly under-performing the benchmark which delivered 22.6%  last year but outperforming it over a four year period (15.3%). I will wait for the annual report to understand why infrastructure underperformed in 2013.
If you have any comments to add on the Caisse's and OMERS' 2013 results, feel free to contact me at LKolivakis@gmail.com and I will anonymously add your comments.

Below, from the World Finance forum, outgoing CEO, Michael Nobrega, discusses risk management and leadership at OMERS. This is a pretty good interview, listen to it carefully but keep in mind my comments above. Nobrega talks up a good game but long-term results are what ultimately count and on this front, OMERS is under-performing its large Canadian peers.