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Investment Management Corporation of Ontario reported an average loss of 8.1 per cent on its investments in 2022 as the pension fund investor’s exposure to plunging values in public stock and bond markets punched a hole in its annual returns.

With inflation running at its highest levels in decades, a combination of steep losses on a broad array of public equities and fixed-income investments – which suffered a rare simultaneous decline last year – battered returns for core portfolios at many pension plans. That made for “a challenging year to say the least,” said IMCO chief executive officer Bert Clark.

Assets under management at IMCO fell to $73.3-billion as of Dec. 31, from $79-billion a year earlier.

IMCO, which invests on behalf of a number of pension plans for public-sector employees in Ontario, was more exposed to the public-market declines than many of its large pension-plan peers in Canada. More than two-thirds of IMCO’s investments are in publicly traded assets, with a comparatively smaller allocation to private assets such as infrastructure, real estate and private equity.

In part, that is because IMCO is a relatively new investor: It was created less than six years ago to consolidate investing for several public-sector pension funds. As it reports its third set of annual investment results, it is still reshaping some portfolios that it now manages for those various clients.

“Unfortunately when you have a mostly public portfolio, broad public market conditions are kind of like gravity: You can’t really escape it,” Mr. Clark said in an interview. “We’re disappointed by minus 8 [per cent returns] but we weren’t entirely surprised.”

IMCO is gradually shifting more of its clients’ assets to private markets, seeking to take advantage of its long-term investing horizon to make higher returns on illiquid assets. And it is “positioning portfolios” to suit a shifting investing environment marked by high interest rates and rising levels of global uncertainty, Mr. Clark said. With valuations for private assets taking longer to adjust than public markets, he said “there needs to be real caution” to avoid buying those assets at outdated, elevated values.

Among IMCO’s clients, which include the Workplace Safety and Insurance Board and the Ontario Pension Board, returns ranged from a loss of 9.1 per cent to a gain of 1.6 per cent, leading to a weighted average loss of 8.1 per cent for the year.

That still beat IMCO’s internal benchmark return of minus 8.4 per cent. Over three years, the annual return on its investments is 2 per cent, ahead of a benchmark of 1.6 per cent. Over the long term, IMCO aims to boost returns for clients by beating its annualized benchmark by 0.25 to 0.5 percentage points, “so we’re right on target,” Mr. Clark said. “But there are things that are frankly working better than others.”

Last year, IMCO’s investments in public equities and fixed income securities both missed one-year benchmarks. Public stock investments lost 13.5 per cent against a benchmark loss of 11.9 per cent, and are now worth $18.6-billion. Fixed income missed an internal benchmark by 0.1 percentage points with a loss of 19.2 per cent, reducing the portfolio’s value to $14.9-billion.

Returns from the $10.7-billion real estate arm were also weak with a loss of 0.3 per cent. That fell far short of a 12 per cent gain for its benchmark, though IMCO chief investment officer Rossitsa Stoyanova said in an interview that “we are reviewing our real estate benchmark” as it is not well matched to the plan’s portfolio.

By contrast, gains on some private assets blew past benchmarks and helped stem IMCO’s losses. Its $5.9-billion private equity portfolio gained 12 per cent, as IMCO closed 12 direct and co-investments. And its $8.6-billion global infrastructure returned 7.4 per cent.

This year, IMCO is “seeing a world of opportunities” in private credit as some banks pull back on lending, and activity in private equity and real estate has slowed, Ms. Stoyanova said. But in private assets, “you can’t build a portfolio overnight.”

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