The Ontario Health Pension Turns in 2% Return for Tough 2018

Fund’s performance last year was driven by active management decisions.

Although its 2018 returns weren’t as hot as previous years, the Healthcare of Ontario Pension Plan has plenty to celebrate.

The Canadian retirement fund for the province’s health sector returned 2.17% in 2018, growing its assets to $79 billion thanks to value added from “active management decisions,” it said in a release. A combination of increased obligations, lower investment results, and a reduced discount rate lowered its already overfunded status by one percentage point, to 121%.

Nonetheless, in a tough year, the fund couldn’t match the 10.88% performance logged in 2017, a great year for the stock market.

The secret to the fund’s success: a non-traditional portfolio with an “extremely long-term approach,” wrote CEO and President Jim Keohane in the organization’s 2018 annual report.

The Ontario health plan’s asset mix is split between two sections: the inflation and interest rate risk offsetting liability hedge portfolio, made up of real estate and fixed income strategies; and a “controlled risk-taking” return-seeking portfolio, which holds public and private equities, corporate credit, short-term money and foreign exchange, and other absolute return strategies. It also uses derivatives to help manage its risk.

The strategies and their contributions to 2018’s return (1.73% from the return-seeking portfolio and 0.43% from the liability hedge portfolio) puts its 10- and 20-year returns at 11.19% and 8.52%, which have beaten their 8.43% and 6.88% benchmarks.

“Our approach allows us to preserve value even during turbulent and challenging investment environments,” said Keohane.

Keohane said results were “pretty positive across the board,” with the exception of stocks and bonds. “We did put a significant hedge against our public equity position, which cushioned the bullet quite a bit, especially in the third quarter,” he said,  adding that without that, the fund would have had a negative year. 

“Being defensive turned out to be the right thing to do,” he said.

Private equity and real estate were two of the drivers for the positive performance, yielding 13.7% and 8.88%, respectively. This helped battle the poor results from equities, which returned an aggregate -8.4%. 

Challenges the fund faced were stock volatility and central bank tightening. Some plans, such as the health care plan and the Australia Future Fund, were able to do well regardless, but others, like Norway’s Government Pension Fund Global, felt a painful sting by year-end.

In addition to various indexes falling, Canadian bonds also dropped while US Bonds increased. The 10- and 30-year Government of Canada Bond yield slipped 9 and 10 basis points, respectively, from their 2017 performances (from 2.27% to 2.18%, and from 2.05% to 1.95%), and the US’s 10- and 30-year notes both rose by 27 basis points from the year prior (from 2.74% to 3.01%, and from 2.41% to 2.68%).

“Despite market challenges, the investment team was successful in positioning the Fund defensively in a year when missteps could have resulted in significant losses,” said the Fund, which also announced a 2% cost-of-living adjustment increase for its members and beneficiaries, effective April 1.

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Why Canada’s Pension Plans Are in Such Good Shape

Canada Launches Pension Enhancement Plan

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