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Today, the Healthcare of Ontario Pension Plan (HOOPP) announced its 2021 results, posting a return of 11.28% and achieving a funded status of 120%:

The Healthcare of Ontario Pension Plan (HOOPP) announced today that it delivered an 11.28% return in 2021,
bringing its net assets to $114.4 billion, up from $104.0 billion at
the end of 2020. The Plan’s funded status is 120%, meaning that for
every dollar owed in pensions it has $1.20 in assets.


HOOPP has a 10-year annualized rate of return of 11.06% (as of Dec. 31,
2021)
. According to the most recent report (2020) from consultant CEM
Benchmarking, based on a global dataset of 218 pension funds, HOOPP’s
10-year net returns were in the top 10% and its 10-year net value-added
was the second highest. HOOPP’s value-add return for 2021 was 2.69%,
among the highest in the Plan’s history.


“HOOPP’s in-house investment team successfully navigated another year of
challenges in the economy related to the ongoing effects of the
pandemic,” said President & CEO Jeff Wendling. “The result is a
strong return and funded status that help make the Plan secure for the
long-term benefit of the healthcare workers of Ontario.”

HOOPP delivered strong returns across many asset classes, including
public equities, real estate and private equity, which offset modest
declines in its bond portfolio. At the same time, HOOPP continued to
evolve its investment strategies with more investment in infrastructure
and the innovation economy.

HOOPP also built upon and expanded its long-standing commitment to
sustainable investing. The Plan has committed to achieving net zero
carbon emissions in its portfolio by 2050. In addition, in 2021, HOOPP:

  • introduced a $1 billion allocation to climate change equities
  • was a founding member of Climate Engagement Canada, a
    collaborative engagement initiative focused on driving action at
    Canadian companies to deliver emissions reductions

These are just a few steps in an ongoing multi-year approach to sustainable investing.

Wendling added: “HOOPP will continue to purposefully and thoughtfully
diversify our portfolio through allocations to a wide array of
strategies, including building on our successes in private markets. Our
strong performance record puts us in a good position to seek
opportunities that will safeguard our members’ pensions, now and into
the future.”

Other highlights:

  • Member benefits: HOOPP’s Board of Trustees
    granted a benefit improvement in 2021 to increase lifetime benefits for
    active members. In addition, a full cost of living adjustment was
    granted in 2021 and again in 2022, to help retired members keep up with
    the cost of inflation.
  • Low operating costs: HOOPP continued to provide
    a high level of service to members while operating efficiently.
    Operating costs for the year represented just 0.32% of assets, which
    helps keep contribution rates low and affordable for members and
    employers.
1647477986 672 HOOPP Gains 113 in 2021 Achieves 120 Funded Status HOOPP Gains 11.3% in 2021, Achieves 120% Funded Status

 

About the Healthcare of Ontario Pension Plan
HOOPP serves Ontario’s hospital and community-based healthcare
sector, with more than 620 participating employers. Its membership
includes nurses, medical technicians, food services staff, housekeeping
staff, and many others who provide valued healthcare services. In total,
HOOPP has about 420,000 active, deferred and retired members.

HOOPP operates as a private independent trust, and is governed by a
Board of Trustees with a sole fiduciary duty to deliver the pension
promise. The Board is jointly governed by the Ontario Hospital
Association (OHA) and four unions: the Ontario Nurses’ Association
(ONA), the Canadian Union of Public Employees (CUPE), the Ontario Public
Service Employees’ Union (OPSEU), and the Service Employees
International Union (SEIU). This governance model provides
representation from both management and workers in support of the
long-term interests of the Plan.

Here are some of HOOPP’s 2021 highlights:

1647477987 50 HOOPP Gains 113 in 2021 Achieves 120 Funded Status HOOPP Gains 11.3% in 2021, Achieves 120% Funded Status

 

HOOPP Gains 113 in 2021 Achieves 120 Funded Status HOOPP Gains 11.3% in 2021, Achieves 120% Funded Status

 

1647477987 607 HOOPP Gains 113 in 2021 Achieves 120 Funded Status HOOPP Gains 11.3% in 2021, Achieves 120% Funded Status

 

1647477988 877 HOOPP Gains 113 in 2021 Achieves 120 Funded Status HOOPP Gains 11.3% in 2021, Achieves 120% Funded Status

 

1647477988 600 HOOPP Gains 113 in 2021 Achieves 120 Funded Status HOOPP Gains 11.3% in 2021, Achieves 120% Funded Status

Also, please take the time to read HOOPP’s 2021 Annual Report which is available here.

One chart worth bringing to your attention is on page 23 showing growth in assets and liabilities over the last 20 years:

1647477989 708 HOOPP Gains 113 in 2021 Achieves 120 Funded Status HOOPP Gains 11.3% in 2021, Achieves 120% Funded Status

HOOPP explains its approach to managing assets and liabilities:

Our primary approach to managing funding risk is through a liability-driven investing
(LDI) strategy, where our Plan’s liabilities are closely considered when investing Fund
assets. This approach focuses on ensuring that the growth of our investment portfolio
meets or exceeds the growth in our pension obligation to members. This differs from
more traditional investment approaches that primarily focus on asset growth beating
asset-based benchmarks.

LDI at HOOPP involves allocating our Fund’s assets between the two broad portfolios: the liability
hedge portfolio and the return seeking portfolio.

The liability hedge portfolio is designed to offset most of the risks associated with inflation and interest
rates, which are the major risks that can increase the pension benefits paid to members. It contains
investment assets that perform in a manner similar to those of the Plan’s liabilities.


The return seeking portfolio is designed for controlled risk-taking in investment assets and strategies
to generate incremental returns to the Fund to help ensure the Plan remains affordable, while providing
diversification benefits for the entire portfolio.

More detail on the performance of these portfolios can be found later in this section, starting on
page 28.

Even though HOOPP’s approach isn’t to beat some benchmark, but to meet and exceed the growth in its liabilities, it still delivered great value-added in 2021 (269 basis points) and over the long run:

1647477989 738 HOOPP Gains 113 in 2021 Achieves 120 Funded Status HOOPP Gains 11.3% in 2021, Achieves 120% Funded Status

I’m not sure if this is record added-value for HOOPP but it’s definitely up there.

Alright, earlier today, I had a chance to talk to HOOPP’s President and CEO, Jeff Wendling to go over these results.

I’d like to thank him for taking some time to talk to me and also thank James Geuzebroek and Jackie Emick for sending me material and setting up this meeting.

Jeff began by going over the important highlights:

  • 11.3% annual return which keeps the 10-year return over 11%, “so very solid long-term returns”
  • Net investment income of $11.6 billion  and growth in net assets to $114.4 billion from $104 billion in 2020
  • “But I would say the most important metric we focus on is the funded status which is 120% and that’s what it is all about for us, generating returns to maintain that strong funded status. As Jim Keoheane would often say, we are a pension delivery organization.”
  • He added: “Our funded status is also important to weather some of the challenges we may face and we have ample liquidity to take advantage of opportunities as they arise.”

On the funded status, Jeff told me the discount rate remains 4.65% nominal and 2.65% real (see page 22 of annual report for details).

We then talked a bit about HOOPP’s massive bond portfolio:

“In the last two years, we have been net sellers of bonds. We still have a sizable bond portfolio but it has come down. In terms of where we have been selling, it’s pretty much across the curve but mostly long-term and mid-term bonds as well.”

I asked him if they have any views on “inflation stickiness” or are agnostic:

“It’s interesting, obviously we have hot inflation numbers right now and with the war in Ukraine, it has only spiked further. But I do recall over the last 20 or 15 years, we had a disinflationary environment and we had challenges meeting that 2% inflation target from central banks. So, I don’t know, massive fiscal and monetary stimulus, supply chain woes and the war caused inflation to spike but I think some of those factors that caused disinflation will reassert themselves so we will get higher inflation than the past (north of 2%) but I don’t see it at 4-5% annualized for long. However, we have made some adjustments to our portfolio by selling nominal bonds, still have a very large real return bond portfolio, we are investing in real estate which has an inflation hedge embedded (leases are indexed to inflation) and we created an infrastructure program in 2019 and that’s moving along nicely, about $2.5 billion in assets now which will grow nicely over the next 5 to 7 years as opportunities arise.”

Now, given that infrastructure is a fairly new asset class at HOOPP, I asked Jeff how will they navigate scaling into these assets given current market conditions where valuations are on the high end:

“It’s a challenge but you can say the same about any asset, like public and private equities, credit, and real estate where they are at all time highs. Almost anything you look at is richly valued. In infrastructure, we have some key partners we are working with, key fund relationships and we are a large investor with a long investment horizon, so if there is volatility, that’s an opportunity for us. So, we are taking the long view, it will take us a number of years to get the capital out, we will invest and co-invest with our partners to get to the target allocation but we are patient and will invest as opportunities arise.”

Partnerships are critical to infrastructure right now but Jeff said direct investments are possible in the future, just like they did in private equity:

“If you look at Private Equity, we have roughly 65% of assets managed through funds but the balance is co-investments where we have a great team which can underwrite the.We also have some purely directs as well. So that’s what we will likely do in Infrastructure as well but right now, it’s co-investments.”

In Real Estate, roughly 60% of the assets are in Canada but they are looking to diversify more outside the country:

“Real estate is part of our LDI portfolio and at one point it was 95% Canada but we have taken it down considerably to under 60% and will take it down more. Generally in Canada, we are direct investors in real estate (some small niche funds) and in the US and Europe we mostly co-invest with our partners but do some directs as well. And we are developers too, our office in Toronto (One York) was developed.”

On Real Estate, he added:

“If you look at our portfolio, we were early in industrials, we are one of the biggest logistics landlords in the GTA. We have the second largest industrial park in the UK and have other industrial assets in western Europe as well. We are looking to do more multi-family in the US right now. As an interim goal, we are looking to bring our Canadian exposure in real estate to 50%.

Jeff mentioned they have a new head of Real Estate, Eric Plesman, who used to work at Oxford Properties and they recently hired Lori Hall-Kimm as head of global Private Equity so they will also have an important say on strategy (they report to Mike Wissell, HOOPP’s CIO).

I then mentioned a Bloomberg article I read today where US office buildings face $1.1 trillion obsolescence hurdle:

One of the tallest office towers in St. Louis lost 96% of its appraised
value. Denver’s former World Trade Center complex faces foreclosure. An
oil company’s vacant Houston workplace sold this year at a $67.4 million
loss to lenders.

Those properties are among the 30% of U.S. office buildings — worth
an estimated $1.1 trillion — that are at high risk of becoming obsolete
as tenants’ tastes change in the hybrid-work era, according to Randall
Zisler, an independent consultant and former head of real estate
research at Goldman Sachs Group Inc.

Some
companies are scaling back their space. Others are gravitating to newly
developed or recently overhauled offices that are environmentally
friendly, with plenty of fresh air and natural light, fitness rooms and
food courts. Left behind are older buildings that would be expensive to
renovate to today’s standards. As values for those properties slide,
some landlords are walking away.

“We’re not saying bulldozers are
arriving en masse,” Zisler said. “But you’re going to see a repricing
and, in some cases, reuse of these buildings.”

You can read  the rest of the article here but the point I made to Jeff is you’d better have the right assets in real estate or else you won’t attract the right long-term tenants.

Jeff commented:

“If you look at our three biggest holdings in office real estate, the building we are in right now, it was the most efficient LEED certified building in Canada when it was built. We have another great building down the street and another energy efficient building in London. We have good product and environmentally high quality product as well.”

That brought me to another important point, HOOPP was voted as one of the most responsible asset allocators last year, so they are obviously doing their sustainable investing right.

Jeff told me they have been doing sustainable investing for a long time, engaging with companies in public markets over many years and now it’s across private markets as well. He mentioned their real estate team are “leaders in this space”.

He also mentioned a couple of new initiatives:

  • introduced a $1 billion allocation to climate change equities
  • was a founding member of Climate Engagement Canada, a
    collaborative engagement initiative focused on driving action at
    Canadian companies to deliver emissions reductions

But, to be clear, HOOPP doesn’t believe in blanket divestment, it still has some oil & gas investments (small percentage) and they prefer engaging with these companies rather than passing the risk off to some other fund which doesn’t take sustainable investing seriously.

Lastly, I asked him about future challenges and he replied:

“We pride ourselves in our liquidity management and we want to be buyers instead of sellers when a crisis arises. We are in strong funded position and are always looking for opportunities. As I stated, we have new heads of real estate and private equity and are ramping up our infrastructure portfolio as opportunities arise. We have also allocated more to external hedge funds in a selective way as we still manage a lot of strategies internally and we are not paying up for beta.”

As for Russia, they had extremely negligible exposure through their emerging markets exposure which they get through futures but that’s gone now.

As far as foreign offices, they are looking into to but are not there yet and there’s “nothing imminent” for now.

Let me once again thank Jeff Wendling for a highly stimulating conversation, I really enjoy talking to him even if it’s once a year.

Below, Jeff Wendling, president and CEO of HOOPP, joins BNN Bloomberg to
discuss their 2021 annual results. The pension plan reported an 11.28
per cent return on investments for 2021 and grew net assets to $114.4
billion, up from $104.0 billion at the end of 2020.

Watch it here if it doesn’t load below. I’m happy that Ontario’s healthcare workers have a great pension plan run by top-notch professionals, they deserve it!

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