N.S. pension with big hedge fund exposure improves from summer results

Date: Tuesday, January 29, 2008
Author: The Canadian Press

HALIFAX - A Nova Scotia pension fund for 26,000 health workers is still falling short of its internal goals but has improved its results in the past four months since its performance was called into question during a summer market downturn.

The Nova Scotia Association of Health Organization posted results Monday on its website reporting its annual rate of return for 2007 was just over six per cent, or $151 million, on assets of $2.5 billion.

That is below the pension's internal goals of earning 6.95 per cent on this year's investments, but a significant rebound from a $110-million decline in asset value in August.

"At 6.04 per cent, it's not a terrible year, but it's a little less than what we need the rates of return to be for our current combination of contributions and benefits," Calvin Jordan, the chief executive of the defined-benefit pension, said in an interview.

However, he added that it was generally a difficult year for Canadian pension assets, and that the performance of his pension is ahead of industry benchmarks.

For instance, RBC Dexis (TSX:RY) recently reported that Canadian pension plans returned just 1.5 per cent on their investments on average last year after a punishing fourth quarter.

The Nova Scotia pension has an unusually large holding in so-called alternative investments, including hedge funds managed by Bedford, N.S.-based Keel Capital, a privately held fund manager that took over management of the pension assets in 2004.

Hedge funds are pools of capital that are generally only available to large investors and their managers typically use derivatives as part of their strategy.

Earlier this year, Jordan had met with journalists and the Opposition NDP to explain the pension's strategy after the weak results in August, which coincided with a credit crunch emanating from the U.S. housing and mortgage industries.

He also launched a review of investment strategy, including a look at whether the heavy weighting on hedge funds would continue.

Keel Capital had invested approximately 50 to 55 per cent of total assets in a diverse collection of 85 hedge funds at the time the review started.

Jordan suggests that some of his pension's improvement since this summer's struggles may be tied to currency contracts that limit damage wrought by the rising Canadian dollar.

"I think it's going to end up being a fairly big difference in terms of the explanation as to why some pension plans have done fairly well in 2007, and others will end up showing fairly poor rates of return," he said.

As the Canadian dollar increased in value, it meant that investments in other currencies tended to earn less than expected when they were translated back to the Canadian currency, he explained.

However, Jordan estimates his plan has 50 per cent of its foreign currency exposure hedged against major fluctuations.

Still, experts who advise on pensions note that the Nova Scotia pension's hedge fund exposure is unusually high.

Steve Bonnar, a principal at Towers Perrin Inc., said, "it's not typical for pensions to have a heavy hedge fund weighting."

He said the pension's performance may be linked to its hedging on currency - a separate issue from hedge funds themselves.

"Hedging currency certainly paid off last year," he said.

Meanwhile, Jordan said the review on whether there will be changes to the pension's investment strategy and manager is not complete yet.

"At this point I don't know if we'll end up with any changes or not," he said.