OMERS ended 2013 with $4 billion in total investment income, a $1.3-billion reduction in unfunded liability and an improvement in its funded ratio by three percentage points to 88%.
The total investment income of $4 billion reflected a 6.5% gross return, compared with a minimum target of 7% gross return to match assets with liabilities over the long term. Net assets grew to $65.1 billion in 2013 from $60.8 billion in 2012.
Public market equity returns in excess of 20% were offset by a significant market valuation reduction in the fund’s holdings of inflation-linked bonds and commodities, resulting in a 0.5% gross return from public markets. Private market investments continued to record strong results with a 15.5% gross return.
Public market investments, valued at $37.7 billion, or 57% of the total fund, earned $200 million as OMERS Capital Markets completed the transition to a more diversified risk-balanced portfolio designed to deliver more consistent investment returns than the traditional pension plan strategy of investing 60% in equities and 40% in bonds.
“The public markets portfolio put in place in 2013 is the last piece of our investment strategy to earn more predictable and stable long-term returns,” says Michael Nobrega, president and CEO of OMERS Administration Corp. “We now have a long-term strategy that balances portfolio risks to the drivers of capital market returns, namely growth and inflation.”
OMERS says that its evidence-based research shows—over rolling 10-year periods since 1970—that a risk-balanced portfolio has outperformed a 60/40 portfolio 75% of the time. However, in any one year, the risk-balanced portfolio may underperform the 60/40 portfolio 41% of the time.
In 2013, the total beta portfolio lost $407 million due to a sudden and unexpected spike in interest rates in the second quarter. As part of the prudent risk management of any beta strategy, portfolio hedges were used in 2013 that contributed $120 million of investment income.
The new public markets strategy includes an absolute dollar return portfolio designed to generate cash returns. Separate investment teams use proprietary research and skill to exploit market opportunities by taking long and short positions in global stocks, bonds, specialized credit products, currencies, commodities and macroeconomic trends. The alpha portfolio contributed $487 million in cash returns to the pension plan. Building additional alpha portfolios is a priority for OMERS in 2014.
“We have a high conviction that this public markets strategy is the right one for a prudent pension plan investor committed to paying retirement benefits to contributing plan members over the next six to seven decades,” adds Nobrega.
The March issue of Benefits Canada will have an interview with the OMERS president and CEO, who is retiring next month.
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