Ontario Municipal Employees Retirement System relied on steady returns from private assets, tailwinds from strong stock markets and a resilient U.S. dollar to earn a 4.4-per-cent return over a volatile first six months of the year.
The pension fund had solid returns from its portfolio of public stocks, which gained 10.4 per cent as of June 30, according to mid-year results published Thursday. But stocks make up only 19 per cent of the pension fund’s assets after it shifted billions of dollars from equities into government bonds and credit investments, seeking to take advantage of high interest rates. OMERS also benefited from currency gains on its U.S. dollar assets, which boosted its overall investment return by 1.7 percentage points.
OMERS’s bond portfolio was a drag on returns in the first six months of the year, posting a loss of 0.5 per cent as yields surged higher, making the bonds less valuable on paper. But that trend has since reversed, helping those bonds recover.
Chief executive officer Blake Hutcheson said the move toward credit and fixed-income has been stabilizing for the pension fund, yielding significant cash and bolstering the funds it has available to pay pensions.
OMERS invests on behalf of approximately 600,000 Ontario public service workers, including nurses, firefighters and police officers. It now manages $133.6-billion of assets, up from $128.6-billion at the end of 2023.
Over 10 years, OMERS has reported an average annual return of 7.1 per cent, adding $67.5-billion of investment income to the fund.
“We’re very happy with that outcome based on the volatility and the turbulence that we’re seeing in a global context,” Mr. Hutcheson said in an interview.
Two other Canadian pension funds, Ontario Teachers’ Pension Plan and the Caisse de dépôt et placement du Québec, reported strikingly similar mid-year returns this week, each gaining 4.2 per cent on their investments. Their results were shaped by the same themes: strong returns from stocks, partially offset by modest losses on bonds and real estate.
The weak spot in OMERS’s results was also its real estate portfolio, which lost 3.1 per cent in the first half of the year. That was largely owing to falling property valuations, and in spite of rising income from the properties OMERS owns.
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High interest rates have driven up capitalization rates – the ratio that measures the annual yield from an investment property, giving an indication of how risky it is. And a delay in anticipated interest rate cuts by the U.S. Federal Reserve, which has battled stubbornly high inflation, has left real estate investors waiting for relief.
Mr. Hutcheson, a veteran real estate investor who was previously CEO of OMERS subsidiary Oxford Properties Group, said he doesn’t anticipate a material change in real estate market conditions before the end of 2024.
“Do we expect a turn on a dime this year? No,” he said. But the higher-quality buildings that Oxford owns are proving relatively resilient, he said, and “when it turns, we expect to take advantage of that.”
The private credit portfolio at OMERS, which is made up of non-bank loans to private businesses, gained 7.8 per cent in the first six months of the year, continuing a streak of strong results. The market has become more competitive as banks have reasserted themselves in lending markets and high interest rates have increased pressure on borrowers. But Mr. Hutcheson said OMERS still sees a strong pipeline of attractive deals, adding that most loans have held up well.
“We’ve had very little delinquency and default,” he said. “Certainly for the foreseeable future, we believe in this business.”