‘We can’t just match cash flows’: OPTrust takes risks to shore up returns

Frustrated by poor returns, OPTrust chief executive Hugh O’Reilly is moving into riskier investments as contributors to the retirement pot age.

“We can’t just match cash flows, we have to take risks,” said O’Reilly, whose company oversees $19.2 billion of investments for Ontario government workers. “We don’t want to increase contributions or reduce future benefit accruals where the active members will bear the whole risk.”

OPTrust is starting a $300 million venture-capital portfolio and is considering derivatives linked to insurance risk, O’Reilly said.

The firm has allocated 1.5 per cent to these riskier assets and three per cent in hedge funds, though the latter is under review, O’Reilly said without elaborating. The fund more than doubled assets in hedge funds in 2016 compared with the previous year, according to the 2016 annual report.

“We want to allocate relatively small amounts of capital into new and different investment areas,” O’Reilly said. OPTrust will then “see if they’re viable, see if they make sense, see if we can incubate them and bring them back and put

them where they best belong on the investment team.”

OPTrust, which manages pension assets for almost 90,000 former and current members of the Ontario Public Service Employees Union, generated a return on investment of six per cent for last year.

That was down from eight per cent in 2015 and was less than half the 2016 return of Canada Pension Plan Investment Board, the country’s largest pension plan.

“Investment returns are unpredictable and can result in a wide range on any one-year basis,” O’Reilly said. “We know that our portfolio can deliver on our pension sustainability objectives over the long run.”

O’Reilly declined to say what OPTrust targets in returns, saying the company is focused more on the amount of risk exposure it can tolerate.

The new venture-capital fund, known as the Incubation Portfolio, will target late-stage startups that are mostly already profitable, O’Reilly said. Another large Canadian pension fund and a venturecapital firm, which he declined to name because the details are still being worked out, will help fund and guide some of the investments, he said.