OMERS' CEO on its First-Ever Interim Update

Paula Sambo of Bloomberg news reports OMERS posts 8.8% return as it faces down members’ complaints:

Ontario Municipal Employees Retirement System, one of Canada’s largest pension funds, reported mid-year results for the first time in an effort to reassure members who are growing increasingly frustrated with its performance.

The pension fund, known as OMERS, gained 8.8 per cent on its investments in the six months through June, pushing assets to $114 billion. That follows a 2.7 per cent loss last year -- its worst since the 2008 global financial crisis -- when the pension fund suffered big pull-backs in its private equity and real estate holdings.

“Our results during the first six months of 2021 were driven by strong returns across our asset classes and by the commitment of our global teams,” Chief Executive Officer Blake Hutcheson said in a report posted to OMERS’ website Friday. “Our diverse portfolio is actively participating in the global economic recovery and our investment strategy remains focused on enhancing value over the long-term.”

In the year ended in June, OMERS returned 18.2 per cent, he said. Last year the pension fund fell far short of its 6.9 per cent return benchmark. 

‘DESPERATE MOVE’

The union representing more than 40 per cent of OMERS’ members did not appear placated, instead renewing calls for an independent review of OMERS, saying the mid-year results aren’t enough to draw attention away from the pension fund’s “systemic underperformance.“

“Just like a single cold day doesn’t mean temperatures aren’t rising, half a year of investment returns tells us very little about the long-term performance of our pension plan,” Fred Hahn, president of the Canadian Union of Public Employees, said in a statement. “Clearly, this is a desperate move to mislead and distract in response to growing concerns about how OMERS operates.”

The union issued a report in May saying OMERS has underperformed its benchmarks, as well as seven other large Canadian pension plans, for at least the past decade.

“We heard from our broad member base who have asked for an update on investment results outside of our annual reporting process,” OMERS spokesman Neil Hrab said by email. “We value transparency and chose to provide this additional mid-year investment update.”

The Police Association of Ontario, another member of OMERS, said it was encouraged by the mid-year release and that the responsibility of the pension fund’s performance lies with its independent board.

“We are confident that this independent board – whose members are nominated by the plan’s primary sponsors, including the PAO – is the proper governance model for OMERS, and is appropriately positioned to determine what, if any, adjustments need to be made to investment personnel and strategies,” PAO’s president Mark Baxter said in a message. “We would encourage OMERS to continue its efforts to share information and build relationships with all plan sponsors, stakeholders and members.” 

PRIVATE EQUITY SURGE

OMERS’ private equity segment jumped 15.8 per cent in the first half of this year, helped by a recovery in its buyout portfolio, gains in its ventures and growth equity strategies and by the sale of sustainability consultancy ERM Group Inc. to KKR & Co. in May. OMERS sold a majority stake in ERM, with the Alberta Investment Management Corp., to KKR for an undisclosed amount. The deal values ERM at about US$2.7 billion, including debt, people familiar with the matter told Bloomberg at the time.

Last year, OMERS’ private equity portfolio had a negative return of 8.4 per cent. A movie theater chain and a recruiting company in Europe constituted about 90 per cent of the drop, Hutcheson said in February.

Public equities advanced 12.8 per cent in the year through June, earning more than $4 billion for the pension fund, while its real estate bounced back to gain 8.8 per cent, driven by its Oxford Properties’ industrial logistics and residential assets as well as returns in some office sectors, the pension fund said.

 OMERS provided an investment update for the first six months of 2021:

OMERS earned an investment return, net of expenses of 8.8% or $9.2 billion for the period from January 1 to June 30, 2021, while net assets increased to $114 billion.

“Our results during the first six months of 2021 were driven by strong returns across our asset classes and by the commitment of our global teams,” said Blake Hutcheson, OMERS President and CEO. “Our Board and senior leadership thank and commend those teams for their dedication. Over the twelve months ended June 30, 2021, the Plan earned a net investment return of 18.2%.”

“Our diverse portfolio is actively participating in the global economic recovery and our investment strategy remains focused on enhancing value over the long-term in service of our more than 525,000 members who are essential to the health, safety and strength of communities across Ontario,” he added.

“This first-time interim update provides insight into OMERS investment performance at the mid-year mark,” said Jonathan Simmons, OMERS Chief Financial and Strategy Officer. “We will provide our full-year financial results, and our detailed annual update, early in 2022.” 

Investment Performance Highlights as at June 30, 2021

• Our public equities earned more than $4 billion, reflecting strong gains across the high-quality value stocks that are core to our portfolio;
• Our private equity investments delivered a double-digit return, due to the continued recovery of the businesses in our buyout portfolio, the ongoing success of our ventures and growth equity strategies, and the gain we generated through our agreement to sell Environmental Resources Management, a global provider of sustainability consulting services which we’ve owned since 2015;
• Our infrastructure investments delivered consistent, strong performance, with stable operating income and higher valuations across our portfolio of large-scale businesses;
• Our real estate asset class recorded significantly improved performance, driven by strength in Oxford’s industrial logistics and residential assets, gains in select office sectors, and progress on development programs;
• Foreign currency movements had a negative impact on our results, and reduced our return by $0.9 billion, as the Canadian dollar strengthened relative to most of the other currencies in which OMERS invests. Our credit asset class return reflects most of this unrealized foreign currency loss for the period. 

Net Assets $ Billions

Annualized Net Return History to June 30, 2021

 

Asset Class Investment Performance

 Diversified by Geography and Asset Class

OMERS portfolio of high-quality investments continues to be diversified across asset type and geography. Our asset mix at June 30, 2021, reflects a slight increase in allocation towards private equity, primarily as a result of the particularly strong valuation increases in these investments. This increase was offset by a decrease in private credit.

During the period, we deployed $3.6 billion into our private asset classes, including into European logistics and warehousing real estate, into US solar energy development, and our growing, global platform of life sciences assets. We continue to target increased capital allocation to the Asia-Pacific region, with over $13 billion invested as of June 30 across each of our asset classes.

Recourse Debt

• We continue to use leverage prudently to enhance our investment returns and to take advantage of low interest rates. At June 30, we had $11.3 billion of debt outstanding, equating to a leverage level of 8.8%, down from 9.3% at December 31.
• In addition to this low leverage, we continue to maintain ample liquidity. At June 30, 2021, OMERS had $22.9 billion of cash and short-term deposits and $19.2 billion of marketable securities available to meet our pension obligations, to fund investment opportunities, to satisfy potential collateral demands related to our use of derivatives, and to fund expenses.

Long-Term Issuer Credit Ratings

This Investment Update presents certain non-GAAP measures. These measures are calculated on the same basis as those calculated and presented in our 2020 Annual Report. This Investment Update and the Condensed Interim Consolidated Financial Statements Opens new window (the “Interim Financial Statements”) are unaudited. OMERS Administration Corporation’s financial performance set out in this Investment Update is only for the period ended June 30, 2021. Past performance may not indicate future performance because a broad range of uncertainties (including without limitation the future course of the global pandemic) could have an impact on the performance of various asset classes. The financial information included in this Investment Update should be read in conjunction with the Interim Financial Statements.

Founded in 1962, OMERS is a jointly sponsored, defined benefit pension plan, with 1,000 participating employers ranging from large cities to local agencies, and over half a million active, deferred and retired members. Our members include union and non-union employees of municipalities, school boards, local boards, transit systems, electrical utilities, emergency services and children’s aid societies across Ontario. OMERS teams work in Toronto, London, New York, Amsterdam, Luxembourg, Singapore, Sydney and other major cities across North America and Europe – serving members and employers, and originating and managing a diversified portfolio of high-quality investments in public markets, private equity, infrastructure and real estate.

On Sunday morning, I had a chance to talk to Blake Hutcheson, President and CEO of OMERS.

Let me begin by thanking Blake for graciously taking some time to talk to me over the weekend and go over the mid-year results. 

As Jonathan Simmons, OMERS Chief Financial and Strategy Officer states in the press release:
“This first-time interim update provides insight into OMERS investment performance at the mid-year mark.” 

Have to be very upfront, even though I'm a stickler for transparency, I am not a big fan of mid-year or quarterly results for large pensions because what ultimately matters is long-term performance and comprehensive annual updates provide ample details to discern the long-term health of a pension.

Alright, back to Blake Hutcheson and our conversation.

Obviously, he's pleased things are going well this year but he's also very humble and told me: "We have three more months to go, anything can happen in capital markets, so we are keeping our head down and maintaining our focus on our objectives."

I told him I wasn't surprised OMERS is bouncing back nicely and even stated this publicly when I covered their 2020 results (which by the way, given the pandemic and ensuing lockdowns, aren't as bad as some in the media and unions would lead you to believe).

Like others, OMERS got hit hard in real estate and it also got hit in private equity as two important assets -- Vue International and Alexander Mann Solutions -- accounted for 90% of the losses in the private equity portfolio.

Not surprisingly, the pandemic and lockdowns hit some assets a lot harder than others but they have bounced back.

I asked Blake if distributions helped bolster the PE portfolio this year. He told me that the sale of the sustainability consultancy ERM Group which OMERS and AIMCo sold to KKR will provide "incredibly rewarding multiples" (the sale is being finalized). 

He also told me their ventures and growth equity strategies are producing 20%+ returns this year, which also helps the private equity portfolio.

But Blake was careful to state he's very proud of all the groups including capital markets for coming through this year. 

Real estate and infrastructure are also delivering solid results, gaining 8.8% and 4.9% respectively for the first six months of the year. Oxford's industrial portfolio, residential buildings and select offices led the gains and the infrastructure portfolio which is one of the best in the world is proving very resilient once again.

Also, during the first six months of the year, OMERS deployed approximately $3.6 billion into its private asset classes and of particular note, they continued to allocate capital into the Asia-Pacific region where Blake told me they now have approximately 10% of their assets.

It should be noted for the full year ending June 30, 2021, OMERS delivered a solid net return of 18.2%.

Why is this important? Because Blake revamped his executive leadership in January and you can see from the results, they are delivering on their objectives. "I'd put my leadership team against any other and I am very proud of them and all our employees."

Of course, there are the ongoing issues with Fred Hahn and CUPE Ontario and Tim Patterson, a former private equity executive suing OMERS for $65 million, alleging it made repeated cuts to its compensation plan for investment professionals over the past few years and fired him for refusing to sign on to the most recent changes.

I'm not going to say much about Tim Patterson except that I was totally flabbergasted when I read all the news articles (his lawyer, Howard Levitt, writes articles for the National Post) and think this is yet another example of egregious greed.

In fact, let me be clear about something, nobody working at any Canadian pension is worth $65 million. If you want to make that kind of money, start your own fund (some have left pensions to do so) or go work at Blackstone or Brookfield and really earn your keep grinding it out in the private sector.

I also prefer to wait and see OMERS' statement of defense which has not been made public yet.

As far as Fred Hahn, President of CUPE Ontario, I'm convinced this guy is toxic and damaging to OMERS' brand (again, these are my views).

In fact, CUPE Ontario sent me an email with their latest press release stating OMERS' mid-year results should not distract from an independent review of the organization:

A first-ever mid-year report by the Ontario Municipal Employees Retirement System (OMERS) can’t draw attention away from the systemic underperformance of OMERS investment returns, says the Canadian Union of Public Employees (CUPE) Ontario.

“Just like a single cold day doesn’t mean temperatures aren’t rising, half a year of investment returns tells us very little about the long-term performance of our pension plan,” said Fred Hahn, President of CUPE Ontario. “Clearly, this is a desperate move to mislead and distract in response to growing concerns about how OMERS operates. We can’t let them distract us from the fact that OMERS has undeniably underperformed compared to similar defined benefit pension plans and funds for over the last 10 years.”

A report issued by CUPE Ontario, Not Just One “Tough Year”: The Need for a Review of OMERS Investment Performance, examines how OMERS investments have performed compared to other large defined benefit pension plans and funds, also revealing how OMERS has underperformed compared to its own internal benchmarks.

OMERS’ claim that its 2020 return of -2.7%, or a loss of $3-billion, was due to the economic impacts of COVID-19 is unsupported in comparison to other major plans who were investing in the same economic climate and had healthy returns regardless. As well, though OMERS has publicly claimed its 2020 results weren’t indicative of its strength as a long-term investor, the report’s comparison of OMERS’ 10-year returns with those of eight comparable plans, in periods both before and including 2020, shows that’s untrue, according to the union.

Following the report, in July, the City of Toronto unanimously passed a motion calling on OMERS to significantly improve its disclosure and transparency about investment performance which would enable plan members and employers to better evaluate its performance. Also in July came the news that a former OMERS executive is suing OMERS in what is being described by some as the “largest individual claim in Canadian employment law history.” Finally, just this week, CUPE has filed a legal challenge about OMERS’ treatment of paramedic members accessing earlier retirement options.

“There are some undeniable, systemic, and long-standing issues,” said Hahn. “And, although we’re glad the mid-year results are positive, we’ll continue to stand by our position, increasingly supported by other stakeholders in the plan, that the serious longer-term underperformance of OMERS merits an expert, independent review, conducted by Sponsors and other representatives of plan members. We’ll keep pushing for an independent review of OMERS’ poor long-term investment record because solid returns are in the best interests of both plan members and employers. Increasingly it’s also clear that investment performance cannot be separated from governance and overall operations. It’s time for transparency and accountability if we want to ensure the decent retirement that front-line workers deserve.”

I've already gone over Fred Hahn and CUPE Ontario's call for an independent review of OMERS here.

There are so many holes in that CUPE report. I don't want to rehash the same arguments but going into the pandemic, OMERS had excellent 3 and 5 year annualized returns (8.5%) and more importantly, OMERS is still 97% funded, something Fred Hahn conveniently ignores. 

When I read statements from Hahn like “there are some undeniable, systemic, and long-standing issues” at OMERS, I know he's out to lunch, vengeful, toxic and doesn't have a clue of what he's talking about.

Worse still, he represents a small fraction of the union members that OMERS covers and he certainly doesn't speak for all union members, most of which are very happy with the governance at OMERS (Blake told me they they have a 93% approval rating from members).

In fact, CUPE Ontario has nominated 2 board members at OMERS SC Board and the Administration Corporation, so I really don't get all these negative attacks on OMERS from union folks who benefit from their pension plans' long-term success.

In essence, Fred Hahn is attacking his own union members who sit on OMERS' AC and SC boards. 

It's not just counterproductive, it borders on irrational and absurd and even though union people stick with each other through thick and thing, I'd advise shunning Mr. Hahn and maybe asking for a full and independent review of his leadership.

The only thing I agree with Mr. Hahn about is that half a year doesn't mean squat when looking at pension results, wait to evaluate the 5-year results of this new management team. 

But people like Fred Hahn won't wait, they will continue going after their pension plan, weakening its brand, and for some reason, journalists only cover one side of the story, not the OMERS side (David Milstead and company, give me a call, I'll set the record on OMERS straight).

Again, these are my views, not Blake's, he is more diplomatic in his response but I can tell he's irritated with the one-sided negative press coverage and I don't blame him (journalists have the obligation to report both sides of a story).

A lot of people who think they are experts on pensions have never worked at one and really don't know how to evaluate them properly. 

Comparing the performance at Canada's large pensions without understanding their asset mix, risk tolerance, different liabilities, leverage they use, objectives and fiscal years, is something very difficult and only trained experts can really do properly.

Most importantly, there are no “undeniable, systemic, and long-standing issues”at OMERS, that's just plain silly and patently false. And here, I am speaking as someone who is a trained expert and who actually worked a our large pensions across public and private markets.

Take the time to read OMERS' 2020 Annual Report, it provides great detail into all their activities.

More importantly, as Blake rightly noted, their liabilities are growing 6% a year and their investment returns are in line to grow a lot more, and that's ultimately what counts when you are evaluating the health of your pension plan.

Stop listening to people who claim they have your best interests at heart but in essence are weakening your pension plan's brand and doing great damage to your pension's health.

OMERS' mid-year results are great and didn't surprise me in the least. Other large Canadian pensions which suffered huge losses in real estate and other investments that got hit by the pandemic and lockdowns (like transportation infrastructure) will also come back strongly this year.

But like Blake said, there are still three months to go for this calendar year and anything can happen in capital markets.

Still, I can confidently report that OMERS is on track to exceed its objectives this year and its members should rest assured that the plan is healthy and managed extremely well. 

The only thing I shared with Blake is he needs to keep spreading the right message in the media and let the facts speak for themselves.

Once again, I thank Blake Hutcheson for taking the time to talk to me on Sunday morning, I always appreciate our conversations and think highly of him.

Below, an older interview (November 2020) with Blake Hutcheson, President and CEO of OMERS. I'd also recommend you take the time to watch the OMERS 2021 annual meeting here, it's excellent.

Update: KKR said on Tuesday it had agreed to sell a 14.5 million square feet industrial property portfolio for about $2.2-billion to Oxford Properties:

Oxford, the real estate arm of Canadian pension fund Ontario Municipal Employees Retirement System, expects the acquisition to help it expand into the U.S. market. 

The portfolio comprises 149 buildings across 12 major industrial markets including Dallas, Chicago and Houston. 

With the pandemic last year propelling a shift away from shopping at brick-and-mortar stores to online, retailers’ demand for industrial properties such as warehouses and logistics facilities has skyrocketed. Oxford and its portfolio companies manage about $70-billion of assets, according to its website. 

Another great deal for OMERS and its members.