Not many people need reminding that 2015 was a
terrible year for their investments. The main index in Toronto was down
11 per cent, and things only got worse in the New Year. Much worse, if
you owned energy stocks.
But a bright spot for 850,000 people in
Ontario’s public sector is that their pension funds bypassed the misery
and came out ahead. These funds returned 5 and 6 per cent respectively
last year, as revealed in their annual results released this month.
One is the Healthcare of Ontario Pension Plan
(HOOPP) with 390,000 members, which represents such groups as nurses,
lab technicians and hospital housekeeping staff. Its assets grew by 5.12
per cent to $63.9 billion in 2015, and its funded position increased to
122 per cent. That means it has $1.22 on hand for every $1 it needs to
pay out. A surplus, in other words.
The other is OMERS, the municipal employee
plan that has 461,000 members including police officers, firefighters,
paramedics and the non-teaching staff of school boards. Its funded
position rose to 91.5 per cent and its assets by 6.7 per cent to $77
billion.
Canada’s public pensions come under a lot of
fire. The main criticism is that the plans are too generous and get too
much support from all of us at a time when private-sector pensions are
disappearing.
You can certainly argue about the pros and cons of how the plans are set up, but you can’t argue with how they are managed.
As individual investors, we’d be lucky to
match their performance. We don’t have the scale, expertise, or the
long-term time horizon. But we can gain insights from the way they do
things.
Here’s what the big pension funds’ results reveal.
Risk management: Big funds spread their
holdings across different types of assets, types of businesses and
global locations. The TSX fell 11 per cent last year, but Japan’s main
exchange rose 17 per cent. Energy stocks did poorly, but technology
companies did well.
Only 8.6 per cent of HOOPP’s publicly traded stocks are Canadian. OMERS’ biggest single stock holding is Microsoft Corp.
Diversification: A friend recently
mentioned that her investments are 100 per cent in stocks, and those
stocks are all Canadian banks. Blue chip for sure, but that’s a very
high-risk approach.
The Canada Pension Plan Investment Board
splits its holdings: 65 per cent stocks and other investments and 35 per
cent bonds. The bonds may not offer huge returns, but they’re stable
sources of income.
Both HOOPP and OMERS had higher returns from bond-like and private investments in 2015 than from stocks.
Sticking to a plan: Small investors
often follow the news rather than a plan. If they don’t have a plan to
begin with, any investment that comes along seems good because there’s
nothing to compare it to. Or if they have a plan, they abandon it at the
first sign of trouble.
HOOPP’s plan has two pieces aimed at its main
goal, which is to have enough money to pay its pensioners. It has a
hedge portfolio that invests in bonds and real estate, providing a
stream of cash and inflation protection. It also has a growth portfolio
that invests in stocks and other assets to increase returns.
Watching fees: Fees come off the top of
your investments before you get a thing, and over time they really hurt
your return. The big plans rely on in-house staff to buy and sell
stocks, meaning they aren’t paying fees to brokers and investment
dealers. OMERS’ management expense ratio is 0.65 per cent; the average
Canadian mutual fund fee in 2015 was 2.2 per cent, which is paid before
you make a thing. Sticking to the plan, trading less frequently and
avoiding funds with high costs are a way to control your costs.
Patience: It’s the internet age, and we
get impatient if our browser won’t load in under a second. Pension
plans think decades or more ahead to make their bets to pay off. We’re
not so lucky, but we can stick to quality and a plan.
The good news is that after a rocky start to
2016, the TSX has gained 14 per cent since its Jan. 20 low. Like the big
pension plans, hopefully better things lie ahead for us too.
