Tuesday, March 8, 2016

OMERS Gains 6.7% in 2015

Jacqueline Nelson of the Globe and Mail reports, OMERS posts 6.7-per-cent return, bolstered by infrastructure, real estate assets:
The pension plan for Ontario municipal employees earned a 6.7-per-cent return in 2015 as private market investments made gains.

The Ontario Municipal Employees Retirement System (OMERS) said Friday that its private equity, infrastructure and real estate investments performed especially well during 2015, cushioning the plan from volatility in the public markets.

Low interest rates and slower global growth contributed to a 0.7-per-cent return for public investments in 2015, down from 11 per cent a year earlier. Meanwhile, private investments showed solid performance with a 14.5-per-cent return in 2015, up from 9.1 per cent.

These results demonstrate “the importance of diversification, and investing in high-quality assets,” said Michael Latimer, chief executive of OMERS, in a statement. Net assets grew by $5-billion to more than $77-billion in 2015.

OMERS, which manages assets and administers pensions for 461,000 Ontario employees and retirees, continued to reduce its funding shortfall in 2015. The pension plan is now 91.5 per cent funded as a result of investment returns and member and employer contributions, compared with 90.8 per cent the year before. In 2010, OMERS said it planned to eliminate the deficit by 2025.

One year ago, OMERS said it would increase its exposure to infrastructure investments with stable cash flows in countries such as Canada and the U.S., as well as Australia. Over the course of last year the pension plan’s asset mix has tilted toward private investments, and infrastructure now makes up 16.4 per cent of the portfolio, up from 14.7 per cent a year before.

OMERS said its infrastructure holdings posted gains of 17.3 per cent, real estate earned 15.3 per cent and private equity investments earned 10 per cent in 2015.

Some of the pension plan’s largest deals of 2015 included infrastructure arm Borealis Infrastructure’s acquisition of Fortum Distribution AB, a large electricity distribution network in Sweden, along with a consortium. The deal was valued at about $7-billion (U.S.), according to data from Thomson Reuters.

OMERS also joined other pension funds on deals, including the $2.8-billion acquisition of toll road leading into downtown Chicago alongside Canada Pension Plan Investment Board and Ontario Teachers’ Pension Plan.

Mr. Latimer has also previously expressed plans to reduce the portfolio’s public market weighting to about 53 per cent. One year ago, it stood at 58 per cent, but this year public market investments such as stocks and bonds represented just 52 per cent of assets.

In 2015, OMERS received $3.8-billion (Canadian) in contributions from plan members and employers, and paid out $3.4-billion in benefits to the 141,000 people that receive an OMERS pension each month. About 18,000 people joined the plan as new members last year.
Yaldaz Sadakova and Jennifer Paterson of Benefits Canada also report, OMERS return drops to 6.7% in 2015:
As a result of slow global growth, low interest rates and market volatility, the Ontario Municipal Employees Retirement System (OMERS) saw its net investment return slide to 6.7% in 2015, down from 10% in 2014.

While the pension plan’s 2015 net return for public investments was 0.7%, down from 11% in 2014, it saw the net return for its private investments — which include private equity, infrastructure and real estate — grow to 14.5%, up from 9.1% in 2014.

Diversification is working for the fund, said Jonathan Simmons, chief financial officer at OMERS, during a presentation on Friday. “In a year where there were thin returns from fixed income … and poor returns from commodities, no one is surprised that our public investment returns were 0.7%, below the 11% return we enjoyed in the previous year,” he added.

“We had a solid return from our private equity group, held back a little bit by some of our exposure to a private equity asset we had in the Alberta oil and gas sector. But nonetheless, a respectable return for our private equity.”

Simmons added that it was an exceptional year for infrastructure – posting a return of 17.3% compared to 10.6% in 2014 – with strong gains across almost all assets in the portfolio, but most noticeably in its U.K. assets associated with the ports.

For real estate – which the results showed had a return of 15.3%, up from 8.7% in 2014 – Simmons said the pension fund experienced good returns in Canada, better in the U.S. and very strong returns out of its European portfolio.

The investor’s net assets grew to $77 billion in 2015, compared to $72 billion the previous year, “and we’re growing,” added Simmons.

“Where our exposures to our private investments in all of our asset classes have continued to grow, we are putting money to work.”

For example, in 2015, OMERS entered the Swedish market, buying Fortum Distribution AB and the Germany market through the purchase of Autobahn Tank & Rast Holding. It bought a UK consulting firm called Environmental Resources Management, and became the second largest landlord in Boston with three new office properties. It also expanded in Canada, with the redevelopment of Toronto’s Yorkdale mall just one example.

“We’re portfolio managers, not just aggregators,” said Simmons, “so while we have deployed $5.6 billion into the private markets, we’ve returned $5.5 billion to OMERS in terms of dividends, distributions and asset recycling.”

OMERS’ funded status climbed to 91.5% from 90.8% the year before as a result of investment returns as well as member and employer contributions.

“The good news is we exceeded our funding requirement,” said Simmons. “Our funding requirement for 2015 is 6.5%. That means we added $100 million of value above the funding requirement for the plan.”

In 2015, the pension fund received $3.8 billion in contributions from plan members and employers. It paid out $3.4 billion in benefits.

Approximately 18,000 new members joined OMERS in 2015 — an increase in active plan membership of 1% over the prior year. Almost 141,000 people receive pensions from OMERS every month.
OMERS put out a press release, OMERS Net Assets Exceed $77 Billion, Earns 6.7% Net Return in 2015:
In 2015, OMERS continued to make steady progress towards delivering secure and sustainable defined benefit pensions to the Plan's members. Its funded status improved to 91.5% as a result of investment returns and member and employer contributions, compared with 90.8% the year before. OMERS earned a net investment return of 6.7% (after all expenses), exceeding its long-term funding requirement of 6.5%. Net assets grew to more than $77 billion in 2015, a $5 billion increase over 2014.

"Strong returns from private equity, infrastructure and real estate helped to offset challenges in public markets, demonstrating the importance of diversification, and investing in high-quality assets," said Michael Latimer, OMERS President and Chief Executive Officer.

Public investments returned 0.7% (net) and private investments returned 14.5% (net). While private markets returns remained solid, financial markets are being challenged by slower global growth, continued low interest rates and increased volatility.

In 2015, OMERS received $3.8 billion in contributions from plan members and employers, and paid out $3.4 billion in benefits.

"We are pleased with the continued improvement of our funded ratio to 91.5% from 90.8%," said Jonathan Simmons, OMERS Chief Financial Officer. "We remain very focused on the long-term health of the Plan, including a return to full funding and delivering even better value for OMERS members and employers."

OMERS is an important part of Ontario's retirement system and the broader economy. Approximately 18,000 new members joined the plan in 2015, leading to an increase in active plan membership of 1.0% over the prior year. Almost 141,000 people receive OMERS pensions every month.

"Our top priorities are serving our members, retirees and employers, and achieving our vision to be a leading model of defined benefit pension plan sustainability," said Mr. Latimer.

About OMERS

Founded in 1962, OMERS is one of Canada's largest defined benefit pension plans, with more than $77 billion in net assets as at December 31, 2015. It invests and administers pensions for 461,000 members from municipalities, school boards, emergency services and local agencies across Ontario. OMERS has employees in Toronto and other major cities across North America, the U.K., Europe and Australia -- originating and managing a diversified portfolio of investments in public markets, private equity, infrastructure and real estate. For more information, please visit www.omers.com.
OMERS 2015 Annual Report will be made available later this month on its website here. For now, I highly recommend you read OMERS 2014 Annual Report for more details.

I will be referring to parts of the 2014 Annual Report and to the information above. One thing I like is OMERS's long-term graph and explanation of its funded status below (click on image from page 6 of the 2014 Annual Report):


You'll notice the Primary Plan's funded ratio fell to a historic low in 2012 but has turned the corner and is improving. At 91.5% in 2015, OMERS has yet to reach fully funded status but it's doing a lot better than it was four years ago and certainly a lot better than most U.S. public pensions which are chronically underfunded and pretty much doomed.

In terms of performance, 2015 was all about private markets. Unlike other large Canadian pensions, OMERS has a huge allocation to private markets (much bigger than everyone else) and those private investments really kicked in last year when public markets provided lackluster returns.

In particular, Infrastructure gained a whopping 17.3% last year, which is a testament to how OMERS Borealis is a global leader in infrastructure investments. But Real Estate and Private Equity also posted solid results, gaining 15.3% and 10% respectively in 2015.

And when almost half your assets are in private markets posting double digit returns, it helps explain why OMERS performed decently in 2015 even if its gains were not as strong as 2014 (click on image):


Now, the 2015 Annual report isn't available but on page 12 of the 2014 Annual Report, we see the benchmarks OMERS uses to gauge its results (click on image):

Basically, OMERS uses absolute return benchmarks approved by the OMERS Administration Corporation at the start of each year.

While I understand absolute return benchmarks for private markets, I'm a little surprised that OMERS is using an absolute return benchmark for public markets which can get killed on any given year making it virtually impossible for OMERS to beat its overall benchmark on a year where capital markets are very weak (like in 2015).

And even in private markets, setting absolute return benchmarks can introduce all sorts of risk taking behavior which is not captured by these benchmarks. OMERS needs to do a much better job explaining all its benchmarks and how they relate to the risks being taken at individual portfolios.

The other thing that helped OMERS's overall performance in 2015 was the decline in the Canadian dollar last year. Just like other Canadian pensions that defied volatile markets last year, OMERS benefited from direct investments in private markets and the decline in the loonie, which explains why its returns were marginally better than the 5.4% median return of other Canadian pension funds last year.

Still, OMERS didn't perform as well as the Caisse which gained 9.1% in 2015 and part of the reason why is the Caisse's Public Equities posted solid returns of 11.6% in 2015 vs its benchmark of 7.8% led by its Global Quality Equities and Emerging Markets portfolios (see my comment here).

Obviously OMERS Capital Markets dialed back risk in public equities and credit and I heard they invested a huge amount in Bridgewater's All Weather fund which was down 7%  last year. I don't know for sure but it's obvious that OMERS didn't take the same risks in public equities as the Caisse.

In terms of compensation, as you can see below from page 105 of the 2014 Annual Report, OMERS's top brass is paid in line with the rest of Canada's pension plutocrats (click on image):


One final note. I was very critical of OMERS, OTPP and AIMCo's decision to acquire the London City Airport at a very hefty premium. Every expert I spoke with is scratching their head trying to justify such an outrageous multiple for an airport, even if its a prized asset.

Please note I contacted Michael Latimer and Jonathan Simmons to discuss OMERS's 2015 results and ask them specific questions. If they come back to me, I'll edit my comment to include their views.

Below, Richard Steinberg, Steinberg Global Asset Management's co-founder and chief investment officer said that higher rates would provide a backdrop to stop the "crazy volatility" in markets.
"Traders in the short run have hijacked this market. You're seeing moves in crude or in equity prices, other commodities that could be the move of a year happening in a day or two," he said.

Tell me about it. Check out the stocks below I track on betting on a global recovery. The first was from Monday and the second is from Tuesday midday (click on images):



Oh what a difference a day makes in these volatile markets (told you to be careful trading countertrend rallies!). This helps explain why OMERS and other large Canadian pensions are scurrying out of volatile public markets into less volatile private markets and paying hefty premiums for this shift.

In the end, they justify this shift over the long-run and they might turn out to be right. Still, private markets are no panacea, especially when public markets get clobbered in a bear market, so take the diversification benefits of a shift out of public markets into private markets with a pinch of salt.

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