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

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.

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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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Tags: Canada, Funded Status, Healthcare of Ontario Pension Plan, Returns

More than half of divestments have lost shareholder value since 2010, according to new research released by Willis Towers Watson and London’s Cass Business School.

The Willis Towers Watson’s Divestment Performance Monitor (DPM) looked at companies selling portions of a parent company to both listed companies and private equity buyers, and analyzed the share price performance from six months before the divestment announcement to up to six months after the divestment was completed.

According to the data, there were more than 5,500 divestment deals completed worldwide from 2010 to 2018 worth over $50 million each, with a combined value of $3.9 trillion. Of these deals, 54% underperformed market indices as measured by the study, while the remaining 46% outperformed.

Divestitures offer “real potential to achieve higher profitability from better capital allocation, improved focus on core activities, and more funds to invest in and support growth,” Willis Towers Watson’s Jana Mercereau said in a release. “Yet our data shows sellers continuing to struggle to create shareholder value from deals, as investors punish companies whose strategies and execution they disapprove of.”

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The research also showed that based on share price performance, companies actively engaged in divestment deals underperformed the MSCI World Index by an average of 2.1 percentage points. And at the same time, the buyers of those divested assets saw their deals outperform the market by 3.1 percentage points.

The difficulty of achieving value from divestments affected all geographic regions, according to the report. Since 2010, Asia Pacific divestitures have shown the worst performance among all regions, with an average underperformance of 2.8 percentage points, followed by North American divestitures, which underperformed their non-divesting rivals by 2.1 percentage points, and European divestitures, which underperformed by 1.2 percentage points.

However, not all divestments struggled. Many of the better-performing divestments have been spin-offs, according to the report. This was at least partially attributed to the fact that spin-offs are often done with a successful business in a move to take advantage of its value separately from the parent company. According to the data, spinoffs outperformed the MSCI World Index by a wide margin—18.2 percentage points—since 2010.

Mercereau said that in difficult market conditions, the amount a company can gain or lose depends heavily on taking a more thoughtful approach.

“Investing the right resources to perform sell-side due diligence, preparing the business for sale, and constructing a clear articulation of the rationale before a sale is critical to attracting better suitors,” said Mercereau. “Buyers will make stronger offers for a deal they can see will create more value and will be less able to negotiate against a seller where detailed preparation has been completed.”

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Tags: Divestment, MSCI World Index, Willis Towers Watson