OMERS Gains 2.3% in 2018

Benefits Canada reports, OMERS posts 2.3% return for 2018:

The Ontario Municipal Employees Retirement System posted a 2.3 per cent return for 2018, pulling in $2.2 billion.

In 2017, the fund saw a return of 11.5 per cent for the year and boosted its funded status to 94 per cent. For 2018, the funded status saw further gains, landing at 96 per cent.

“The 2018 improvement in our funded status primarily reflects our five-year net investment return of 8.1 per cent,” said Jonathan Simmons, chief financial officer of the OMERS, in a press release.

During 2018, the fund deployed $10 billion toward new private investments. “A return of 10.7 per cent from private investments and positive returns on our credit portfolio buffered the impact of public markets in a year when all major indices were lower compared to where they were at the beginning of the year,” said Michael Latimer, chief executive officer of the OMERS.

The fund also opened a new investment office in Singapore last year, where managers in all asset classes will explore further opportunities in the Asia-Pacific region.

Breaking down the fund’s returns, fixed income saw a 1.8 per cent return, boosted by a three per cent return in credit, while inflation-linked bonds and government bonds yielded negative returns of 0.4 per cent and 0.6 per cent, respectively. Public equity returns dragged down the performance of the overall public segment of the portfolio, returning negative 8.3 per cent.

Private assets, on the other hand, performed much better, with private equity at 13.5 per cent, infrastructure 10.6 per cent and real estate at 8.7 per cent.

You can read OMERS's press release here.

Let me zoom into the releveant part (click on image):

As you can see Private Markets saved OMERS from experiencing a negative year. In particular, Private Equity had an outstanding year, gaining 13.5% in 2018, topping its 2017 results when it gained 11.1%.

But Real Estate and Infrastructure also posted solid gains, up 8.7% and 11.6% respectively in 2018 after gaining 11.4% and 12.3% respectively in 2017.

OMERS is the second large Canadian pension to report its results. Last week, the Caisse reported a net return of 4.2% for 2018 and there too private markets led the gains.

In fact, I specifically stated that most of the large Canadian public pensions will report anywhere between 5-8% for 2018 and I now realize I might have been too generous as Public Markets got clobbered during the last quarter.

OMERS posted solid gains in Private Markets but it wasn't enough to undo the damage from Public Markets. Yes, stale pricing in privates helps as these assets aren't marked to market but there's another argument for private investments apart from the seeming reduction in volatility, there are still some inefficiencies to be exploited and that's where you can still find some alpha.

But as the private versus public markets battle rages on, there's no doubt whatsoever that all asset classes are very expensive now and the spread over public markets has narrowed considerably.\

If you heard the Oracle of Omaha this morning on CNBC, he specifically referred to private equity at one point and said in the 70s, it made sense to use leverage and make a bundle of money in the asset class but nowadays that game is finished.

Buffett also said everything is expensive but he still likes stocks over bonds for the long run and is looking for deal in the private space.

Anyway, you can watch the full Buffett interview here and below, let me get back to OMERS.

What do I keep telling my readers? Forget one-year results, you need to look at net results over the last 5, 10 and 20 years (click on image):

As you can see, the long-term results are excellent, and more importantly, OMERS improved its funded status in 2018 and is now 96% funded, which is fully-funded for all intents and purposes.

And OMERS (just like OPTrust) guarantees full indexation, something which I firmly believe needs to change so it adopts conditional inflation protection just like OTPP and HOOPP.

The unions will scoff at my case for change at OMERS but I stand by it 100%.

What else? Are there more details? Unfortunately, not yet, because just like the Caisse, OMERS releases its financial report later in April so I cannot dig deeper.

There is other news. I already discussed how the Caisse's Ivanhoe Cambridge and OMERS's Oxford Properties teamed up to acquire US logistics developer, IDI logistics.

Very recently, OMERS announced it is investing in Indian toll-road concessions:

The Ontario Municipal Employees Retirement System’s infrastructure arm is taking on a 22 per cent stake in IndInfravit Trust, an Indian-based infrastructure conglomerate, for $160 million.

IndInfravit, which owns and operates toll-road concessions, already counts the Canada Pension Plan Investment Board and Allianz Capital Partners as investors.

“IndInfravit is a well-managed, world-class core infrastructure asset,” said Bruce Crane, managing director and leader of OMERS Infrastructure’s Asian interests. “This investment provides an attractive entry point into India, one of the most dynamic markets globally, alongside well-trusted partners. We look forward to working constructively with other unit holders, management and local stakeholders to grow this platform in the coming years.”

The investment marks OMERS’ first allocation to India and reaffirms its commitment to investing in the Asia-Pacific region, where it opened an office in Singapore in 2018, noted Ralph Berg, executive vice-president and global head of OMERS Infrastructure.

“Our investment in IndInfravit aligns with our strategy to diversify our portfolio and generate value for OMERS plan members. At the same time, we’ll participate in the expansion of the Indian economy by investing into crucial infrastructure.”

Unlike the develped world, there's still money to be made in infrastructure in emerging markets as long as you have the right partners.

What else? Randy Diamond of aiCIO reports, OMERS Ventures Opens California Offices:

OMERS Ventures, the venture capital arm of the Ontario Municipal Employees Retirement System, has opened two offices in Silicon Valley and San Francisco as part of an expansion aimed at investing in US startups.

The new offices in San Francisco and Palo Alto/Menlo Park for the more than CA$95 billion (US$72.5 billion) pension system’s venture program represents a shift from the program’s previous primary focus prioritizing investments in Canadian startups. Investments in Canadian startups have made up 80% of OMERS Ventures’ investments, show OMERS statistics.

“We are proud to operate on a ‘Canada-first’ mandate,” said John Ruffolo, former CEO of OMERS Ventures, in announcing the close of OMERS Ventures Fund III in May 2017.

Now the pension plan has not only opened the California offices, but also plans to have venture capital (VC) officials based in London to source deals in Europe.

Michael Yang, who is running the Silicon Valley office as a newly hired OMERS Ventures managing partner, told CIO that the US offices are part of a global expansion of the VC program. He said having two Bay Area offices puts OMERS Ventures in the heart of the tech-startup ecosystem.

“The advantage of being on the ground here is being closer to deal flow,” said Yang. He says this will allow OMERS Ventures to find promising startups not only in the Bay Area, but across the US.

Yang, a veteran VC investor, was a managing partner at Comcast Ventures, based in the Silicon Valley. Michelle Killoran, a principal at OMERS Ventures, will relocate from Toronto to California to join Yang.

It’s unclear how much money the US team will have to invest in startups. Yang said it will depend on the deals that are sourced.

OMERS Ventures was founded in 2011 and has raised CA$800 million through three funds. Yang said the latest fund, Fund III, has invested CA$150 million of the original CA$300 million.

Yang said that he and Killoran will first focus on finding potential investments for that fund before moving on to source new investments for subsequent funds.

Yang said OMERS Ventures will look for multi-stage investments in early venture, mid-venture, and late venture companies.

OMERS Ventures is unique in the world of pension plans. It is its own venture capital firm, acting as a general partner, then finding limited partners who act as co-investors in its funds. For example, Fund III co-investors include BMO Financial Group, CIBC, National Bank of Canada, Sun Life Financial, TD Securities, and The Wafra Group.

OMERS hasn’t disclosed the financial arrangement for OMERS Ventures, but normally venture capital firms get 20% of the profits for managing the venture funds even though they only put up a small percentage of the fund’s capital.

OMERS Ventures’ successes include its investment in Shopify, a Canadian e-commerce platform. It led a CA$100 million funding round in Shopify in 2013. The company had a valuation of CA$1.2 billion when it went public in 2015.

The OMERS connection to the US through its planned Silicon Valley office is an indication of the increased interest in venture capital investments by pension plans, Ben Meng, the new chief investment officer for the California Public Employees’ Retirement System (CalPERS) told CIO.

Meng said that interest is being spurred by increased opportunities in private markets.

“There are more and more companies staying private for longer and before they become public, so much wealth accumulation has already happened, and if you do not invest in private markets, you’re losing out the opportunity of capturing that,” Meng said.

CalPERS, the largest US pension plan with more than $345 billion in assets, is planning its own venture capital investment program. The pension plan, however, plans to limit its investment to late-stage companies in the tech, natural sciences, and healthcare sectors. Those investments are considered less risky because companies have already established themselves, though the opportunity for large-scale investment gains is more muted.

I have no doubt that Michael Yang is extremely qualified to run OMERS Ventures and he's right to focus on US startups but I can't forget what Sequoia Capital's Doug Leone told me back in 2004 right before I managed to persuade him to take a meeting with Gordon Fyfe and Derek Murphy: "My best advice to your pension fund is don't get into venture capital, you will lose your shirt!".

I have a buddy of mine in San Francisco who is a senior VP at a well-known tech firm and he tells me the same thing: "There's too much dumb (hedge fund) money chasing start-ups here, it's a big bubble on the verge of collapse."

Who knows. Bubbles tend to last longer than most rational people think, that goes for public and private markets.

I did find it interesting that OMERS Director of Strategic Partnerships Mike Woollatt departed the pension earlier this year to join Hamilton Lane and I'm not sure if it had to do with the change in direction at OMERS Ventures.

Anyway, take the time to read OMERS's press release here. The annual report will come out in April or even earlier and when it is made public, it will be available here.

Below, a couple of clips from OMERS's annual meeting which took place last April. I found it on YouTube and it's not the best quality but still worth listening to. I also embedded the Q&A where Michael Latimer had to answer some tough questions, including one on diversity at OMERS.

Lastly, CNBC's Becky Quick sits down with Berkshire Hathaway CEO Warren Buffett. The billionaire investor weighs in on Kraft Heinz, Apple, the financial sector and his own investment strategy. Great interview, listen closely to everything he covers here.