Fully Funded HOOPP Gains 17% in 2019

On Monday, HOOPP announced its 2019 results amidst economic uncertainty, posting strong returns position Plan to weather current market environment:
The Healthcare of Ontario Pension Plan (HOOPP) announced today that it posted a return of 17.14% for 2019 (compared to 2.17% in 2018), with net assets reaching $94.1 billion, up from $79.0 billion at the end of 2018. HOOPP closed 2019 with a 10-year annualized rate of return of 11.38% and a 20-year annualized rate of 8.55%.

These results help position HOOPP to navigate the current challenging economic environment. “While concerns about COVID-19 have had considerable impact on financial markets and the economy, HOOPP has a track record of weathering market volatility and downturns,” said HOOPP President & CEO Jim Keohane. “As a pension delivery organization, we invest for the long-term, adapt our strategies and maintain a diverse portfolio. This serves us well in continuing to deliver on the pension promise.” Keohane is retiring at the end of March after announcing his retirement last year. His successor – current Executive VP and Chief Investment Officer (CIO) Jeff Wendling – was announced earlier this month. Wendling, who has been with HOOPP for more than 20 years, takes over April 1.

Wendling said: “HOOPP’s purpose of helping healthcare workers retire with dignity has never felt more important. We want to express our deepest thanks to all our members during this public health crisis. We see your commitment and your service and it is truly inspiring.”

He added: “Looking ahead, HOOPP continues to diversify our investment portfolio and pursue new strategies. In 2019, this included new programs such as infrastructure. Adding new areas to broaden the scope of our investments will build on the strategies that have served HOOPP’s members well.”

For 2019, the total Fund return of 17.14% exceeded the benchmark return of 15.06% by 2.08%, or $1,652 million. All investment classes performed well, particularly bonds, equities, real estate and private equity. Funded status at the end of 2019 was 119%.

HOOPP also provided the highest level of inflation protection offered by the Plan in 2019 as retired members saw their pensions increase by 2% on April 1, 2019. Contribution rates, which have remained at the same level since 2004, will remain unchanged for both employees and employers until at least the end of 2021.

More details on HOOPP’s 2019 performance can be found in our annual report.

About the Healthcare of Ontario Pension Plan

HOOPP serves Ontario’s hospital and community-based healthcare sector, with more than 590 participating employers. Its membership includes nurses, medical technicians, food services staff, housekeeping staff, and many others who provide valued healthcare services. In total, HOOPP has more than 381,000 active, deferred and retired members.

HOOPP operates as a private independent trust, and is governed by a Board of Trustees with a sole fiduciary duty to deliver the pension promise. The Board has representation from the Ontario Hospital Association (OHA) and four unions: the Ontario Nurses' Association (ONA), the Canadian Union of Public Employees (CUPE), the Ontario Public Service Employees' Union (OPSEU), and the Service Employees International Union (SEIU).
Let me begin by stating the obvious, this is an extraordinary difficult time for HOOPP's members, frontline healthcare workers battling the COVID-19 epidemic in Ontario:

And Ontario is lucky, their spring break was a week later than Quebec's where numbers are surging despite the government's valiant efforts to mitigate the propagation of the virus (they are reporting everything now, including regional lab results):

Given this background, it is reassuring to know that healthcare workers of Ontario have one of the best funded pensions in the country and the world with great long-term results delivered at one of the lowest costs in the investment management industry:

The Plan is currently more than fully funded, meaning it has more assets than it owes in current and future pension benefits. While the Plan is currently in a stable position, volatile markets can quickly change the funded status of the Plan. We constantly adjust our investment strategies to changing market conditions to guard against potential downturns.

The graph below illustrates the growth of our net assets.


Our past investment returns have kept the Plan sustainable and fully funded, while keeping contribution rates affordable, for our members and their employers. HOOPP has been able to maintain the same contribution rates since 2004.

Further contributing to the goal of meeting the pension promise, our investment strategies are implemented in a cost-efficient manner, with total investment expenses representing approximately 0.18% of net assets in 2019.
Please take the time to read HOOPP's 2019 Annual Report, it is excellent and very well written.

This afternoon, I had a chance to chat with Jim Keohane, HOOPP's outgoing CEO (he's retiring in a week!) and HOOPP's smartest guy in the room.

I want to thank Jim for taking the time to talk to me and thank James Geuzebroek, Senior Manager, Media and Public Affairs, for setting this call up on short notice.

As I told James, this isn't the best time to release results but timing these releases isn't easy in this environment where people are rightly worried about the pandemic.

Before I share with you my conversation with Jim, I think it's important to go over his message in the Annual Report (pages 3-5):
At HOOPP, we continue to be inspired by our members. Beyond our fiduciary duty to do what’s best for our 381,081 active, retired and deferred members, we operate with a mission to put our members first in every area of our organization, from investments to member services to communications.

That starts with having a financially strong Plan that allows us to deliver on our pension promise and provide our members with a solid foundation for their retirement. In 2019, our net assets grew to $94.1 billion, representing an investment return of 17.14%; this return is close to an all-time record for HOOPP. All of our investment classes performed well, with bonds, equities, real estate and private equity leading the way.

Prudent risk management

Our bond portfolio played a pivotal role in our rate of return. Our significant bond holdings served as a hedge to protect the Fund against one of the biggest risks that a pension plan can face – a decline in long-term interest rates. That’s exactly what played out in 2019, as yields on long-term bonds fell to some of their lowest levels on record.

The prevailing market perspective is that holding bonds provides very little value because of their extremely low yields. But our approach to risk management, through our liability driven investing (LDI) strategy, kept us invested in bonds, and those holdings saw a substantial increase in value as interest rates declined. These investments also helped offset the increase in the value of our pension obligations that resulted from the fall in interest rates.

We are pleased that our Plan remains more than fully funded as a result of our prudent risk management as well as the surplus in our Fund, built through many years of strong investment returns. As of the end of 2019, the Fund has $1.19 in assets for every $1 that we owe in pensions.

Keeping our focus squarely set on ensuring that we can pay pensions has again served our Plan and our members well. Our investment approach creates the right balance by earning enough return without taking too much risk to meet the obligation.

Though we are not intent on beating market indexes, we are pleased that our Fund’s recent performance ranks among the best in the world. A report from CEM Benchmarking shows that HOOPP has the third-highest 10-year return and highest net value-add globally among 158 pension plans worldwide for 2018. The survey also found that our investment costs and asset risk compare favourably to those of our peer plans.

Solid footing for the future

I am extremely pleased with our performance for the year, and I am very confident about our strategic position for the future. So it was with mixed emotions that in 2019 I announced my plans to retire in early 2020, after nearly 20 years at HOOPP. The last two decades have been a time of tremendous growth, with the Fund’s assets increasing more than sixfold. Our organization, too, has grown significantly. We have moved away from a traditional approach to portfolio management toward using more sophisticated tools that integrate technology into our investment decision-making process. We have developed much of this technology in-house to meet our specific investment needs. It has taken many years and substantial financial investments to lay the groundwork for these changes, but without them, we would not be in a position to use the LDI approach that has served us so well. In addition, we made changes to our pension administration system that have enabled us to grow our membership and serve our members and employers in a better, more cost-efficient way.

Alongside these major changes in our technology and our systems, we have been able to maintain and enhance the culture of our organization. I’m proud to have led a workplace that is united in our drive to serve our members while staying true to our core values. I am confident that the leadership team we have in place will continue to foster a respectful and high-performance work environment.

I also take great pride in the positive impact we have had on public policy by raising awareness and being a vocal advocate for retirement security for all. Our research and opinion surveys have shed light on how difficult it is for Canadians to save for retirement on their own and how anxious Canadians feel about not saving enough. Our research has also shown Canada-model plans share five key drivers that make them the most efficient and affordable way to achieve a secure retirement. Our efforts in this area help our members understand the value of their HOOPP pension while highlighting what can be done to improve retirement security for all Canadians.

Considering all these factors, we expect to continue growing our assets significantly. Our 2019-2023 Strategic Plan lays out details on how we will support this growth over the next five years and beyond, particularly in our investment strategies and our systems. Our Board and my successor will stay focused on these areas.

In closing, I would like to thank the Board for their confidence and support. I would also like to thank HOOPP’s leadership team and staff for their hard work and their unwavering commitment and dedication to doing what’s best for Plan members. I am extremely proud of all we have accomplished together, and I look forward to watching that continued success going forward.
I'm sure Jim Keohane put a lot of thought into this letter, his last message as President & CEO of an organization he has led for seven years and has been with for nearly two decades.

Jim and I spoke for 30 minutes so let me get to the gist of it referring to the table below describes what investment strategies contributed to changes in net investment income:

  • Jim told me that their large bond portfolio did very well last year but all asset classes performed well (nominal and real return bonds accounted for roughly 40% of total net investment income gains and public equities just over 50% ). 
  • He added this: "Our large bond allocation allowed us to outperform our peers and came in handy this quarter. We are getting hit but remain fully funded and are in relatively good shape despite the market turmoil".
  • I asked him if leverage played a role in the outperformance of bonds and he said "yes" and they continue to use leverage intelligently.
  • In real estate, he stressed they're faring better than other pensions which are more exposed to retail as they're focusing on industrial (logistics warehouses, see this comment on Waterloo's iPort Cambridge).
Here is HOOPP's Real Estate asset mix by region and product:

What else? We got into a discussion on bonds. I asked him specifically what HOOPP is going to do given the record low yields on long-term Canadian and US bonds.

In particular, I asked him if HOOPP will follow ATP and use swaps to hedge future liabilities.

Jim told me the nature of ATPs liabilities is different from that of HOOPP because ATP is more like a CPPIB2 and every individual is treated like a DC plan and swaps are used to hedge future liabilities.

Recall when I went over ATP's stellar results in 2019, what Jim Keohane and another contact of mine, Marc-André Soublière, stated:
Jim Keohane, President & CEO of HOOPP, was kind enough to share this with me on ATP:
"I know they had a very high return which has to do with how they manage their liability hedge portfolio. Their liabilities are different than a regular pension plan. Every Danish working citizen makes an annual contribution. They take 80% of that contribution and hedge it forward in the interest rate swap market and based on the yield they get on the swap they promise a future cash flow stream. So on the asset side of the balance sheet their entire liability hedge portfolio is long term swaps. Based on the move to negative rates in Europe they would have a huge gain on the swaps - hence the high return, but the present value of the liabilities would also go up by a similar amount so there is probably no change in their funded ratio. The asset return is only half the picture."
Jim added this: "I would also add that it is a good thing that they run a liability matched portfolio otherwise they would have gotten killed. It is a very well-run organization."

I agree, ATP is a well-run organization and I thank Jim once again for explaining ATP's spectacular results in detail.

Another explanation for ATP's record performance was provided to me by Marc-André Soublière, Senior VP Fixed Income and Derivatives at Air Canada Pension Fund (now Trans-Canada Capital):
"Another explanation is 30 bps move they made on 30 yr swap spreads! 30 year swaps spreads not swaps. They could have bought 30 yr German bonds, or futures. The spread between both was over 50 bps in January. To tie this in with what Jim Keohane wrote. If they discount their liabilities with a swap rate then there is no mismatch. However, in Canada, most liabilities are discounted using AA corporate yield. Using swaps to get your duration creates a mismatch or a basis risk. I am not familiar with ATP's LDI strategy...."
In essence, Jim explained to me why they cannot do what ATP is doing if bond yields go negative in North America and as bond yields approach zero, they have to think carefully about where to allocate capital to make their requisite return.

He admitted that it is challenging to figure out what to substitute bonds for as yields go to zero and they can't hedge interest rate risk but said they are discussing opportunities every day and that the current market dislocations are presenting great opportunities for liquidity providers like HOOPP.

Now that HOOPP is scaling up its infrastructure portfolio, I can think of one premier Canadian fund I would approach in this environment:

Still, it didn't help shares of Brookfield Infrastructure Properties today, they got clobbered (they have enough cash to weather any storm and can buy back their shares):

There are other great funds but interestingly, Jim Keohane told me: "Right now, dislocations are in public markets, not privates which lag in terms of valuations and are richly valued" so the focus is on public markets.

I asked him if they are looking at corporate bonds now that the Fed is looking to backstop this market:

He said "yes" they're looking at corporate bonds and other sectors which have been hit hard. On high yield bonds, he said "it's more of liquidity issue than a credit issue right now" which benefits long-term liquidity providers like HOOPP.

I asked him what he thinks of the energy sector which is getting clobbered by the double-whammy of coronavirus and OPEC's fallout. He said "we still need oil" to run our economies and is surprised "at how low oil prices" have plunged.

[As a side note, I asked him about pipeline companies like Enbridge (ENB) which got whacked as if it's an oil producer and he said "I think its dividend is 9% now, even if they cut it in half, it's still a compelling long-term investment, especially now that Canadians are staying home."]

We obviously talked about markets and the cornavirus pandemic. I asked him if this feels more like 2008, the tech implosion, or a combination of both. He responded: "The viciousness of the move feels a lot like the 1987 crash."

As to when all this ends, I told him that a friend of mine who is a doctor in Montreal shared this with me earlier today:
"This virus is everywhere now. They [Quebec officials] say a bit over 600 have it in Quebec but it’s probably more like 10,000 at least.

At the end of the day, when everything is said and done, the mortality rate will be more like 0.5% and the vast majority of the afflicted will be the elderly and the sick

A ton of people have it that are asymptomatic. You can’t put everyone in jail for a year, destroy the economy, create a depression with its consequences just to save the elderly. A depression will claim more victims and younger lives.

If this virus killed people of all ages in a significant way then it would be a different story but it doesn’t.

In six weeks, there will be a major shift in policy from the western powers. The US will not allow China to become the new superpower.

That’s my opinion. The only rich western country not to follow might be Canada because we have a very weak prime minister."
Now, my friends aren't pro-Trudeau in the best of times but my friend does raise interesting points, at what cost will the US and Canada fight the virus? Will the US allow another Great Depression to occur and let China take over the world without a fight?

If you read Trump's tweet overnight, you'll see he's not ready to let the US fall by the wayside and might announce a major shift in policy in two weeks, not two months:

And it's not just Trump. In his press release today, New York Governor Andrew Cuomo stated that at one point, the focus has to be on "getting the economy moving again" and that maybe it makes sense to have "young people and those that recovered from COVID-19 back to work" as soon as possible.

Goldman Sachs's former CEO, Lloyd Blankfein, shared this on Twitter AA(and he hardly tweets):

Jim Keohane agreed with me that they cannot indefinitely shut down the economy, but stopped short of saying a shift in strategy is imminent. Nobody knows and even Trump is getting pushback from powerful senators who are his allies:

I'm just providing you insights from a handful of doctors and other experts I'm in discussions with every day. Ask my 89 year old father and brother who are both psychiatrists the heavy mental toll this crisis is taking on people, it's unconscionable!

What else on the medical front? President Trump tweeted this article about a Florida man diagnosed with coronavirus who claims he was saved from certain death by an anti-malaria drug:

A friend of mine in Greece who talks to infectious disease doctors there shared this with me: "They use it here in Greece to all patients that enter ICU with the antibiotic Zythromax. People without other health issues like diabetes, high blood pressure and COPD do fairly well and get released from hospital after 14 days."

I caution you, however, without proper trials, it's impossible to know the real efficacy of this drug combination and other friends of mine who are doctors remain very skeptical.

Interestingly, Greece has so far escaped the COVID-19 carnage that has plagued Italy and Spain. Why? Greek PM Kyriakos Mitsotakis imposed extremely harsh measures, anyone who doesn’t respect the 14 day quarantine gets fined 5000 euros and you need papers to circulate even to buy groceries. The other reason? This man, Sotiris Tsiodras, an infectious disease expert who taught at Harvard medical school and is the most popular man in Greece at the moment, even though he has yet to say anything that sounds good:

Truth is they're not testing as much in Greece as elsewhere so the true numbers are higher but at least they have the right leaders to talk about the seriousness of this disease and are taking the right measures (no choice, Greece has an elderly population that will be wiped if they don't implement harsh measures).

Anyway, I'm rambling. Jim Keohane is a class act, we ended by chatting a bit on his successor, Jeff Wendling, HOOPP's new president and CEO.

Jim told me he has worked closely with Jeff over the last 20 years and he's a "thoughtful and smart guy" who will do a great job.

I asked him if it will be difficult to scale up HOOPP and he said "no, the opportunity set has just increased considerably."

I ended by asking him not to disappear and it's too bad he's retiring in the midst of a coronavirus pandemic. He told me he will be around promoting DB pensions and can't believe he's retiring with this global crisis going on.

I can tell Jim Keohane would love to stick around, it's in his blood, this is the type of environment where he thrives, but even the great ones need to hang up their skates at some point.

I want to end by reassuring Ontario's healthcare workers that their pension plan remains super strong, even after all this, and that it will continue to be well managed under the leadership of Jeff Wendling.

Below, at a Canadian Club panel in late 2017, HOOPP President & CEO Jim Keohane was asked to outline the risk management and investment strategies that allowed the successful pension fund to withstand the 2008 financial crisis. Listen carefully to how he responds, the same applies today.

More recently, Jim Keohane was interviewed by Ed Harisson of Real Vision, articulating his process in constructing HOOPP’s portfolio and he described how they use derivatives to manage risks and enhance returns for the Plan. Great interview, take the time to watch it.

Third, bond exchange-traded funds have been trading at notable discounts to their net asset values. Dave Nadig of ETF Trends and Todd Rosenbluth of CFRA Research share some ideas on the phenomenon with CNBC's Bob Pisani.

Lastly, watch President Trump speak at today's press conference along with the coronavirus task force. He reiterated the point: "We cannot let the cure be worse than the problem itself".