The pension plan for Ontario municipal employees took advantage of a hot market for private assets like real estate and infrastructure last year, selling down stakes and generating cash that helped bolster an 11.5-per-cent investment return.
The Ontario Municipal Employees Retirement System (OMERS) said on Friday that parting ways with buildings, a railway and other private businesses, as well as strong gains across public markets, were major contributors to the fund's performance in 2017, and helped get OMERS closer to being able to meet its future pension obligations to 482,000 members.
But with equity markets turning volatile in recent weeks and private asset prices climbing ever-higher, the fund continues to tweak its investment approach as it prepares to deploy more capital in the market.
"We're a long-term investor so we have to see through these very short-term cycles," Michael Latimer, chief executive officer of OMERS, said, adding that he hopes market dislocations will create new investment opportunities. The fund generated $9.7-billion in net investment income in 2017 and had assets of $95-billion as of Dec. 31.
Success at OMERS is measured not only on portfolio returns, but also by its ability to reduce the funding shortfall. In 2017, OMERS funded status ticked up to 94 per cent as a result of both investment returns and member and employer contributions. That compared with 93.4 per cent in 2016, and marks the fifth consecutive year OMERS has tightened the gap. The pension fund said on Friday that it is still on track to eliminate the deficit by 2025, a goal set in 2010.
In recent years, OMERS has made adjustments to its investment strategy, including buying up more private-market assets and adjusting its stakes in public-market assets. It has a multiyear plan to build a presence outside North America, where the vast majority of the pension plan's assets are invested. OMERS only has 9 per cent of its assets invested beyond Canada, the United States and Europe, up from 6 per cent last year.
That allocation to what OMERS calls "the rest of the world" will likely continue to tick up now that the fund has opened an office in Asia. It also made its first direct investment in South America in 2017, with a liquefied natural gas investment in Chile, and struck a real estate deal that gave it a new presence in Berlin.
Jonathan Simmons, chief financial officer at OMERS, said the fund is looking further abroad.
"We're looking at emerging markets," he said. "We had a group of people travel to India in January that were looking in that market."
The trip led to OMERS joining a group of institutions on a nearly $2.2-billion investment in Mumbai-based Housing Development Finance Corp. Ltd., and a major mortgage lender in the country. The consortium also included Singaporean sovereign wealth fund GIC and U.S. private-equity giant KKR.
Sourcing assets has become increasingly difficult for the pension fund amid the fierce institutional investor competition for private-market deals. That's showing up in areas such as renewable-energy deals, which are in high demand.
"Our infrastructure team has been very focused on that space for the past three or four years. We have not been successful on a point of entry," Mr. Latimer said, adding that while the fund would like to invest, prices have been high.
One sector that doesn't hold interest for OMERS is cannabis stocks.
"We're quality investors. We like to invest in companies with good track records of paying and increasing their dividends," Mr. Simmons said. He added that OMERS also wouldn't be interested in bitcoin, although it has made investments in cryptocurrency and related technologies.
Still, Mr. Latimer said the fund has valued its investments in emerging technologies and start-ups through the OMERS Ventures platform beyond just returns.
"Think of all these themes that are playing out today with artificial intelligence and bio-science … it gave us a window into what else was going on," he said. "All of these businesses that were out there, young entrepreneurs trying to figure out how to disintermediate where probably 98 per cent of your balance sheet is, was really an opportunity for us to understand, to be sitting across from them, to be invested with them."