National Post (National Edition)
HOOPP takes hit but remains fully funded: CEO
Working off solid returns from last year
TORONTO • The Healthcare of Ontario Pension Plan, which reached nearly $95 billion in assets last year, remains fully funded even after the market carnage of the past couple of weeks, chief executive Jim Keohane told the Financial Post on Monday.
Though Keohane tends to keep the downside in mind at all times, he acknowledges that the near economic shutdown in response to the coronavirus pandemic gripping the world is beyond anything he imagined even in worst-case scenarios.
“Things have gone way further than I would have thought,” he said in an interview, adding that the market appears to be pricing in two years of an extreme economic slowdown, with growth slipping by about five per cent in the first year and then some recovery in the second.
“It’s more severe than any stress test we would’ve come up with,” Keohane said.
HOOPP’s current position — fully funded with a very small surplus — is on the back of double-digit returns last year.
The fund posted a return of 17.4 per cent for 2019, and its funded status at the end of December was 119 per cent.
HOOPP has a 10-year annualized return of 11.38 per cent and a 20-year return of 8.55 per cent.
Keohane, who is retiring next week, said there was one lesson from earlier downturns, such as Black Monday in 1987, that informed him about the current crisis.
“That experience showed me however bad things are already, they can get worse,” he said.
But earlier market disruptions also showed that there is opportunity when uncertainty makes valuing assets difficult.
Keohane said HOOPP has already picking up investments dropped by other institutions seeking liquidity or forced to sell due to capital rules for banks that don’t apply to pension funds.
With uncertainty about the length and long-term impact of this downturn making it difficult to put a value on assets, Keohane said price “dislocation” — an echo of the 2008 financial crisis where the price of assets was separated from its underlying value — is playing out to the pension manager’s advantage.
HOOPP is being paid “a significant return” for taking on such investments that move the fund up the risk curve, with collateral provided daily on financial instruments like credit default swaps to reduce counterparty risk, he said.
“It is very tightly managed,” Keohane said, adding that the only downside risk for the pension fund in one such investment that involves a bond hedged by a credit default swap is if both the issuers went bankrupt on the same day.
Late last year, HOOPP lightened up on its equity holdings, and though it was not by design for the current crisis, that decision along with the pension manager’s fondness for bonds “cushioned the blow” of this year’s stock market downturn into correction territory, though it did not entirely offset it, Keohane said.
Equities were sold in part because of a view that valuations had gotten high, he said, and partly to free up funds to boost investments in asset classes such as infrastructure and insurance-linked securities.
The prices for these asset classes were also somewhat lofty, but should be less so in current circumstances, he added.
One investment scenario HOOPP was preparing for — for about a year — was the move toward lower interest rates. Though rates at close to zero were not expected in North America, Keohane said HOOPP’s board was weighing negative interest rates in Europe and considering how investments in bonds that no longer provide sufficient yield should be reallocated.
In the midst of this planning, “the last two weeks have been really extreme,” he said, adding that, with so much uncertainty, the twoyear downturn priced into the market “may or may not occur.”
THERE WILL NOT BE A V-SHAPED RECOVERY. BUT THERE WILL BE
RECOVERY, AND THE STOCK MARKET WILL BOTTOM AHEAD AS IT ALWAYS
DOES, TYPICALLY THREE MONTHS AHEAD OF THE (GROSS DOMESTIC
PRODUCT) TROUGH. — DAVID ROSENBERG