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Look before you leap into alternatives: Haggis

Date: Tuesday, June 6, 2006
Author: Don Bisch

The head of one of Canada’s largest pension plans issued words of caution to other funds looking to move into alternative investments.

The rush of money out of stocks and bonds into alternative investments such as private equity, real estate and infrastructure has been “enormous” since a combination of falling interest rates and weak markets put many pension plans into deficit earlier this decade, said Paul Haggis, president and chief executive officer of the Ontario Municipal Employees Retirement System (OMERS). But while these asset classes are meant to be stable and inflation sensitive, he warned that they also come with a catch.

“They’re illiquid. If you don’t like the way things are going you can’t just pack up the store and hit the bid,” said Haggis, speaking at the Canada Cup of Investment Management in Toronto yesterday.

Another barrier for large institutional investors looking to get into private equity is having the “right people in the right place with the right skills.”

“Doing the deal is the easy part . . . owning the business and being in this asset class over time is the hardest part,” said Haggis, pointing out that most public pension plans have their expertise focussed in stocks and bonds and are not organized to run an operating company. “There’s not too many people out there who have actually run businesses,” he said.

For its part, OMERS has 40% of its portfolio invested in alternatives—15% in infrastructure, 12% to 15% in real estate, and 10% in private equity. But for that to happen, Haggis says, the $41 billion plan had to significantly change how it operates.

“We had to fundamentally recast OMERS to look more like a corporation and less like a pension plan.” Those moves have paid off. The fund realized a return of 16% in 2005. The fund’s private equity portfolio returned 23%, while it’s real estate and infrastructure portfolios realized returns of 26% and 23% respectively.

To comment on this story, email don.bisch@bencan-cir.rogers.com.