OMERS Gains 11.5% in 2017

Ryan Murphy of Benefits Canada reports, Boosted by public equities, OMERS posts 11.5% return for 2017:
The Ontario Municipal Employees Retirement System saw its net investment return rise to 11.5 per cent at the end of 2017, compared to 10.3 per cent at the end of 2016 and a benchmark of 7.3 per cent.

Its investments generated almost $10 billion in net investment income during the year, with net assets increasing to $95 billion at Dec. 31, 2017, up from $85.2 billion at the end 2016. Also, OMERS’ funded status improved slightly, rising to 94 per cent from 93.4 per cent in 2016.

During a press conference in Toronto on Friday, Jonathan Simmons, the pension fund’s chief financial officer, said the double-digit returns have allowed OMERS to reduce its discount rate by a further 20 basis points in 2017. Though it will cost $2.7 billion, Simmons added it’s the right thing to do.

During the year, OMERS decreased its exposure to inflation-linked bonds, to four per cent in 2017 from six per cent in 2016, as well as government bonds, to seven per cent in 2017 from 11 per cent in 2016. Its credit assets increased slightly, rising to 18 per cent from 17 per cent. The greatest share of its asset mix was in public equity at 34 per cent, up from 28 per cent in 2016.

Indeed, OMERS’ public equity portfolio saw the biggest net return in 2017 at 14.7 per cent, compared to 7.1 per cent in 2016. Private investments held mostly steady, posting a 11.6 per cent return, compared to 11.8 per cent the previous year. And its infrastructure portfolio posted a return of 12.3 per cent in 2017, compared to 10.9 per cent in 2016.

At the end of January, OMERS expanded its presence in the cryptocurrency sector by creating a new company called Ethereum Capital Inc. Its objective, according to a news release, is to become the central business and investment hub for the Ethereum ecosystem, a technology touted as a backbone for enterprise applications developed using blockchain protocols.

During the annual results announcement, Simmons noted OMERS has no investments in cryptocurrency today and no plans to make them. “We’re certainly invested in the underlying technology,” he added.

The pension fund is also looking at emerging markets, added Simmons, with a team travelling to India in January to look at that market.
Matt Scuffham of Reuters also reports, Canada's OMERS fund seeks bargains after global equity selloff:
Canadian pension fund manager OMERS said on Friday a selloff in global equity markets provided a chance to pick up stocks on the cheap, after it reported an improved performance in 2017.

Investors have been left nervous after major world stock indexes slumped into correction territory at the start of the month but OMERS Chief Financial Officer Jonathan Simmons told reporters the decline provided a “buying opportunity.”

“We think it’s a bull market correction and, in underlying terms, the economies are doing well. We’re looking for good quality equities taking advantage of market conditions and we have real leverage in our pension plan right now,” he said.

Executives at Canada’s two biggest public pension funds - the Canada Pension Plan Investment Board and the Caisse de depot et placement du Quebec - have also identified opportunities created by current market conditions.

Simmons said valuations for private assets, such as infrastructure and real estate, remained prohibitive.

“We think it’s a very competitive market for those asset classes. We’ve seen prices continue to rise. That means we need to be prudent and careful as to how we put our money to work and take advantage of opportunities as we see them,” he said.

OMERS, or the Ontario Municipal Employees Retirement System, said it generated an 11.5 percent return in 2017, better than the 10.3 percent return in 2016 and ahead of a benchmark target of 7.3 percent.

Canada’s sixth largest public pension fund said its net assets rose to C$95 billion ($75 billion) at the end of 2017, compared with C$85 billion a year earlier.

OMERS said it achieved a 14.7 percent return from investments in publicly traded shares, more than double the return in the previous year.

Investments in fixed income assets such as bonds returned 4.3 percent. Investments in private equity, real estate and infrastructure produced returns of 11.6 percent.
Jacqueline Nelson of the Globe and Mail also commented on OMERS's 2017 results. You can read her comment here. I note the following:
In recent years, OMERS has made adjustments to its investment strategy, including buying up more private-market assets and adjusting its stakes in public-market assets. It has a multiyear plan to build a presence outside North America, where the vast majority of the pension plan's assets are invested. OMERS only has 9 per cent of its assets invested beyond Canada, the United States and Europe, up from 6 per cent last year.

That allocation to what OMERS calls "the rest of the world" will likely continue to tick up now that the fund has opened an office in Asia. It also made its first direct investment in South America in 2017, with a liquefied natural gas investment in Chile, and struck a real estate deal that gave it a new presence in Berlin.

Jonathan Simmons, chief financial officer at OMERS, said the fund is looking further abroad.

"We're looking at emerging markets," he said. "We had a group of people travel to India in January that were looking in that market."

The trip led to OMERS joining a group of institutions on a nearly $2.2-billion investment in Mumbai-based Housing Development Finance Corp. Ltd., and a major mortgage lender in the country. The consortium also included Singaporean sovereign wealth fund GIC and U.S. private-equity giant KKR.

Sourcing assets has become increasingly difficult for the pension fund amid the fierce institutional investor competition for private-market deals. That's showing up in areas such as renewable-energy deals, which are in high demand.

"Our infrastructure team has been very focused on that space for the past three or four years. We have not been successful on a point of entry," Mr. Latimer said, adding that while the fund would like to invest, prices have been high.
OMERS's CEO, Michael Latimer, also said the pension would not be investing in marijuana stocks (HMMJ.TO) but that it would invest in emerging technologies and start-ups through the OMERS Ventures platform:
"Think of all these themes that are playing out today with artificial intelligence and bio-science … it gave us a window into what else was going on," he said. "All of these businesses that were out there, young entrepreneurs trying to figure out how to disintermediate where probably 98 per cent of your balance sheet is, was really an opportunity for us to understand, to be sitting across from them, to be invested with them."
Now, I agree with Michael Latimer and Michael Sabia, pensions shouldn't be investing in pot stocks and bitcoin but there definitely are emerging technologies worth investing in.

As mentioned above, OMERS recently expanded its cryptocurrency presence with a $50-million Ethereum public company offering. And over the weekend, I learned PSP Investments invested $50 million in Vancouver-based D-Wave systems, a company that has developed a type of superfast processor that to date has largely been limited to use in research labs:

Clearly there are exciting opportunities in emerging technologies, however, making money isn't as easy as it sounds in this space. Take it from me, venture capital is fraught with risks but more established companies are a safer bet.

Anyway, back to OMERS's 2017 results. The pension put out a very simple press release which states the following:
OMERS, the defined benefit pension plan for Ontario’s municipal employees, achieved a net investment return of 11.5% (after all expenses), compared to a benchmark of 7.3%, and a net return of 10.3% in 2016. The combination of investment return and contributions led to an improvement in OMERS funded status in 2017, bringing it to 94%.

“All of our major asset classes performed well in 2017,” said Michael Latimer, President and Chief Executive Officer. “Our strategy is working. The investment return, combined with contributions from members and employers, improved our funded status. We are committed to meeting the pension promise over the long term.”

“OMERS funded status has improved for the fifth consecutive year,” said Jonathan Simmons, Chief Financial Officer. “Double-digit returns for two years in a row have also allowed us to reduce the discount rate on our pension obligations by a further 20 basis points in 2017.”

OMERS is an important part of Ontario’s retirement system and the broader economy. In 2017, almost 150,000 retired members received a monthly OMERS pension. In total, $4 billion in pension payments flowed back into the economy.

“Feedback from our members, employers and sponsors is important. We are reaching the halfway point in our 2020 Strategy with strong progress on our objectives,” said Mr. Latimer. “I want to thank all of our employees for contributing to a successful year.”

OMERS will publish its 2017 Annual Report in early March.


Founded in 1962, OMERS is one of Canada’s largest defined benefit pension plans, with more than $95 billion in net assets, as at December 31, 2017. It invests and administers pensions for almost half a million 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, Asia and Australia – originating and managing a diversified portfolio of investments in public markets, private equity, infrastructure and real estate.
As stated in the press release, OMERS will publish its 2017 Annual Report in early March.

Below, I embedded the net returns by major asset class for the two last calendar years (click on image);

As shown, Public Equity gained 14.7% which isn't surprising given the S&P 500 gained 22% in 2017 and there were equally strong gains across European, Japanese and emerging market stock exchanges last year but the performance of Canadian equities wasn't as strong because energy dragged down the returns of the S&P/ TSX (gained 6% in 2017).

Interestingly, the performance of Private Equity (11.1%), Infrastructure (12.3%) and Real Estate (11.4%)  was very much in line with the gains OMERS posted in private markets in 2016.

As far as asset mix changes, I noted that OMERS cut its allocation to Government bonds and Private Equity by 4% and 2% respectively in 2017 and increased its allocation to Public Equity by 6% (click on image).

So, a lot of the returns are explained by this tactical asset allocation decision to cut allocations in government bonds and private equity in order to increase the allocation in public equities.

A few other key points I’d like to highlight:
  • The funded status, the ultimate measure of success for any pension, has improved significantly over the last five years. For all effective pusposes, I consider OMERS is now fully-funded but despite the strong gains, they still lowered the discount rate by 20 basis points. 
  • It should be noted that unlike Ontario Teachers' Pension Plan (OTPP) and the Healthcare of Ontario Pension Plan (HOOPP), OMERS and OPTrust are pension plans that do not have a shared-risk model where benefits are cut when the plans are in trouble (typically full or partial removal of inflation protection). This makes the job of OMERS's and OPTrust's senior managers that much harder when it comes to achieving fully-funded status because the only lever available to them is to cut the discount rate and increase the contribution rate when their plan experiences a deficit.
  •  OMERS trounced its benchmark by 420 basis points in 2017. I will caution readers to take such an outsized outperformance with a grain of salt because it's based mostly on a tactical asset allocation decision (less goverment bonds and private equity and more public stocks) and second, it may signal that the benchmarks in private markets don't reflect the risks of the underlying portfolios.
Let me just pause right there because I'm not taking anything away from what OMERS achieved in 2017 and making a solid tactical asset allocation decision is part of adding value, but I just covered the Caisse's 2017 results which were decent but not as strong as those of OMERS and I'm going to get some reporters asking me why.

You need a lot of detailed information to make comparisons of the performances between Canada's large pensions but major tactical asset allocation decisions like the one OMERS did will explain a lot of its outperformance (Note: I wonder if the fact that the plan doesn't have a shared-rsik model leads it to take more risk in tactical asset allocation).

It's also worth noting some pensions (HOOPP) hedge currency risk while others don't and some use a lot more leverage (HOOPP, OTPP) than others, so making direct comparisons isn't as straightforward as you think.

But again, I want to emphasize, 2017 was another great year for OMERS coming off a very strong 2016. It's obvious OMERS is doing something right since Michael Latimer took over the helm. The OMERS advatantage has proven to be very fruitful over the last five years (solid markets also helped a lot).

Lastly, even though OMERS will publish its 2017 Annual Report in early March, I urge you to go read all the documents on OMERS's site going over 2016 results, including highlights, the 20/20 strategy, governance, management discussion and a full discussion on compensation and analysis.

All these documents are available here. Below a summary table of executive compensation based on 2016 results (click on image):

As you can see, Michael Latimer is one of the highest paid pension CEOs in Canada and the world, and his total compensation jumped by almost $2 million last year to reach $5.2 million and given this year's results, I'm pretty sure he stayed at or near that level. Again, read the compensation discussion to understand the factors explaining this compensation.

One other HR note on OMERS's senior ranks. Sebastien Sherman, the Head of the Americas region at OMERS Infrastructure (Borealis Infrastructure), left the organization to join Blackstone which is starting its new multi-billion infrastructure fund (click on image):

It's a testament to the quality of the people when you see someone leave OMERS to join Blackstone but I'm not sure if Canadian pensions are too happy when one of their strategic partners hires away talented individuals (although I heard some Blackstone folks left that firm to join OMERS which is pretty impressive if true).

Below, Warren Buffett's Berkshire has $116 billion to spend on a deal, but the investor can't find anything cheap enough. Sound familiar? There are opportunities but everything is expensive now.

Also, Sit Investment Associates' Bryce Doty believes investors are in "denial" over how high rates could go this year and the painful impact it could have on stocks.

"We didn't pierce 3 percent this time, but the next 10-Year auction in a couple of weeks is probably certain to do that," he said recently on CNBC's "Futures Now." "I think it's going to just keep going. 10, 20 basis points a month gets you to 4 percent in a hurry."

He must not agree with me that it's a bond teddy bear market. If he's right, stocks and other risk assets will get clobbered as rates rise much higher than anticipated but pension liabilities will decline signficantly more, so it won't be such a terrible scenario for pension plans like OMERS.

However, if I'm right that we have yet to see the secular lows on US long bond yields and that it might come in the near future, well, assets will get clobbered and pension liabilities will soar to record levels. Let's hope he's right because my doomsday scenario for pensions is a real nightmare.

Lastly, take the time to watch a Canadian Club Toronto pension panel from exactly two years ago, a panel which was moderated by Bloomberg’s Pamela Ritchie and featured Mark Wiseman (former CEO of CPPIB), Ron Mock (CEO of OTPP) and Michael Latimer (CEO of OMERS). The clip is available here and is well worth watching.