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Teachers' Says 2005 Return Rose to 17% on Real Estate

Date: Thursday, March 16, 2006
Author: Bloomberg.com

Ontario Teachers' Pension Plan, Canada's second-biggest manager of pension funds, earned 17 percent on its investments last year, led by gains from holdings in real estate and private equity.

Investment income rose to C$14.1 billion ($12.2 billion) from C$10.8 billion a year earlier, the Toronto-based fund said today in a statement. Teachers' posted a return of 15 percent in 2004. The fund earned 21 percent on real estate such as Toronto's Eaton Centre and 31 percent on private equity.

Chief Executive Officer Claude Lamoureux, 63, spent more than C$2 billion last year on closely held companies because he expects gains from private equity to exceed those of stocks in the next decade. Lamoureux, who has led Teachers' since its creation in 1990, said today that he may retire within two years.

``My expectation is that I will be here again next year,'' he said in a telephone interview. ``But two years from now? Probably not.'' He declined to elaborate. His fund provides retirement benefits to about 264,000 current and former teachers in Ontario, and has posted an average annual return of 12 percent since its inception.

Teachers' results beat the 15 percent return reported by the Caisse de Depot et Placement du Quebec, Canada's largest pension- fund manager. They also topped the 12 percent median gain for Canadian balanced funds in 2005, as calculated by pension and benefits company Morneau Sobeco.

Canada `Got Lucky'

``Canada got very lucky last year because we had a lot of petroleum stocks in the index,'' Lamoureux said. ``Oil prices are very high, so it's hard to see Canadian stocks, especially in the energy and resource sectors, rising a lot.''

Canada's Standard & Poor's/TSX Composite Index climbed 22 percent last year, and energy stocks account for about a third of the benchmark. The advance was more than seven times the gain for the S&P 500 Index.

Earnings from real-estate investments rose four percentage points from 17 percent the year earlier, Teachers' said. Public and private equities climbed 18 percent, which includes the gain for the fund's C$6 billion private-equity portfolio.

Teachers' teamed up with an American International Group Inc. buyout fund to purchase a power-generating venture owned by Royal Dutch/Shell Group and Bechtel Group for $1.75 billion last year. Teachers' also bought Doane Pet Care Co., the biggest U.S. maker of private-label pet food, for about $840 million.

Real Estate

As of Dec. 31, Teachers' managed net assets of C$96.1 billion, up from C$84.3 billion a year earlier. Public equities amounted to C$40 billion, the fund's largest holding. Real estate was the third-biggest holding, worth about C$12.5 billion, spokeswoman Deborah Allan said in an interview.

``A lot of investors were trying to get into real estate and that increased the value,'' Lamoureux said. ``Real estate in Canada is a bit pricey these days, so chances are we won't go there that much. But you can build new buildings and still do very well.''

The fund also had C$6.2 billion in hedge fund assets. Teachers' may start cutting its hedge-fund investments because of rising fees and declining returns, Lamoureux said.

``Everybody wants to get in hedge funds these days, so you have to ask yourself if now is the time to scale back,'' he said. ``When your taxi driver starts asking you questions about hedge funds, then you have to wonder what you are doing there. And the fees sometimes are ridiculous for the return that you get.''

Investment gains haven't prevented the fund from facing a growing shortfall. Future pension benefits were 77 percent funded as of Jan. 1, down from 84 percent a year earlier.

Lamoureux said today that he would call on the fund's co- sponsors, the Ontario government and the provincial teachers' federation, to increase contributions and reduce pension benefits to help erase the shortfall. Teachers' paid out C$3.6 billion in benefits in 2005, up from C$3.4 billion a year earlier.

To contact the reporter for this story:
Frederic Tomesco in Montreal at  tomesco@bloomberg.net.