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“In a difficult environment, our portfolio and the team behind it have performed very well,” said OMERS chief executive officer Blake Hutcheson in a prepared statement.Handout

The chief executive officer of the Ontario Municipal Employees Retirement System sees opportunities for pension fund managers in a difficult environment marked by higher interest rates after returns from private assets helped keep the plan’s returns buoyant at 4.2 per cent in 2022.

OMERS reported $4.9-billion in investment gains last year and boosted its assets in spite of losses on public-market investments. After a volatile year for economies and markets that the pension fund’s leaders described as “exceptionally challenging,” CEO Blake Hutcheson said in an interview Monday that 2023 is likely to remain “a complicated time.”

But he said that a period of high employment and elevated interest rates also offers some possible upside for pension funds that can invest in securities such as bonds or in private credit at higher returns than have been available for many years. And with billions of dollars of investable capital on hand, Mr. Hutcheson said OMERS is poised to “take advantage of dislocations” as competitors that have lost access to cheap sources of capital become forced sellers of assets.

“Over the course of the year, we think that there will be some terrific buying opportunities with less competition because of our strength of our balance sheet,” Mr. Hutcheson said. “Historically, we’ve been competing against a lot of players whose cost of funds is almost nothing. That’s over.”

The return OMERS reported for 2022 fell short of an internal benchmark of 7.2 per cent that was set at the end of 2021, when market conditions looked rosier. But it compares favourably with widespread investment losses across the sector after stock and bond prices plunged in the first half of last year.

Last week, Quebec-based pension giant Caisse de dépôt et placement du Québec reported a 5.6-per-cent loss in 2022. On average, Canadian defined pension plans performed much worse, with an average annual loss of 10.3 per cent, as measured by a typical mix of publicly held stocks and bonds tracked by Royal Bank of Canada’s RBC I&TS All Plan Universe.

The varying returns of pension funds are hard to compare directly as they are driven by differences in their portfolios and the makeup of their membership and liabilities.

Over 10 years, OMERS has averaged returns of 7.5 per cent, after expenses, which beat its multiyear benchmark of 7.4 per cent. The fund had assets of $124.2-billion as of Dec. 31, up from $119.5-billion at the end of June.

High inflation, rapidly rising interest rates, and the continuing fallout from the war in Ukraine as well as the COVID-19 pandemic combined to drive sharp declines in global stock and bond markets last year. Though OMERS suffered losses in its equity and bond portfolios, which fell 5.4 per cent for the year, they were offset by returns from its investments in private assets, which include infrastructure, real estate and private equity.

Private equity investments returned 13.7 per cent, ahead of an internal benchmark of 11.2 per cent, and the companies OMERS invests in through the portfolio broadly held their valuations during the year. Infrastructure investments gained 12.5 per cent, beating a 7.7-per-cent benchmark. And real estate investments gained 13.6 per cent, topping a 7.1-per-cent benchmark.

Mr. Hutcheson said that dynamic could reverse in the coming year: Capital markets and equities in particular “could surprise on the upside,” he said, while “certain valuations on the privates could surprise on the downside.”

In that context, OMERS has been shifting billions of dollars more of its investments into fixed-income and credits, and is evaluating how much more money to pour into those assets.

“You can get equity-like yields without taking equity risks,” Mr. Hutcheson said. “And I haven’t seen that literally in 30 years.”

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