OMERS CEO Michael Latimer is seen in this file photo.Donald Weber/The Globe and Mail
The pension plan for Ontario municipal employees is mapping out a strategy to invest in developing economies, after retooling its investment portfolio to produce a 10.3-per-cent return in 2016.
The Ontario Municipal Employees Retirement System (OMERS) said Friday that broad increases in both its public and private market portfolios strengthened the plan last year, narrowing its funding shortfall.
After rejigging its investment portfolio through the addition of more private assets such as infrastructure, as well as rethinking its public-market investment strategy, the pension plan is mulling the best approach for expanding into new markets.
"What we're undertaking today is thinking about just what do emerging markets mean to us," said Michael Latimer, chief executive officer of OMERS. Once the pension fund identifies the regions that hold the most opportunity, the next step will be to decide where to put people on the ground to source investments. It will also assess which asset classes the capital should flow into.
OMERS has built up an investment portfolio heavily weighted toward North America, with 40 per cent based in Canada, 37 per cent in the United States, 17 per cent in Europe and 6 per cent everywhere else.
That amounts to, "for now, a developed market strategy," said Jonathan Simmons, OMERS chief financial officer, adding that the fund is content with the investments that it has made in these markets. Now, OMERS is actively looking to expand globally.
OMERS is looking to diversify its investments geographically after undergoing a retooling of its public-markets portfolio in the past year. The fund's total returns got a boost from public market holdings, which produced a 9.5-per-cent return last year, up from just 0.7 per cent in 2015.
To achieve that, the fund reduced its investments in low-yielding government bonds, while boosting its stake in higher-yielding credit investments. It also zeroed in on stable individual stock investments that pay healthy dividends.
OMERS has also worked to spread its assets more evenly between public investments, which now make up 55 per cent of the portfolio, and private investments, which account for 45 per cent. Net assets grew by $8.1-billion in to $85.2-billion as of Dec. 31.
Private investments, including infrastructure, real estate and private equity produced a 12 per cent return in 2016, down from 14.5 per cent in 2015.
"There's no question that the flow of capital into alternative asset classes continues," Mr. Latimer said, adding he expects competitive conditions to persist.
OMERS, which manages assets and administers pensions for 470,000 Ontario employees and retirees, paid out $3.6-billion in monthly benefits last year.
The plan also continued to reduce its funding shortfall and is now 93.4 per cent funded as a result of investment returns and member and employer contributions, compared with 91.5 per cent the year before. In 2010, OMERS said it planned to eliminate the deficit by 2025 and this is the fourth consecutive year that the fund has moved towards closing the shortfall gap.