The Healthcare of Ontario Pension Plan (HOOPP) is opening a London office as part of its plan to diversify its geographical exposure and expand its holdings in alternatives.
The move is seen as a vote of confidence in post-Brexit reforms designed to boost capital inflow, despite Prime Minister Rishi Sunak’s pledge to roll back on net zero targets just as HOOPP looks to ramp up its green investments. The move follows the announcement in February by the C$233 billion (US$173 billion) British Columbia Investment Management Corporation (BCI) that its infrastructure and renewable resources team was opening an office in London as the base for its European operations.
HOOPP is likely to focus more on real assets than private equity. In 2022, its allocation to real estate outside Canada rose 11.4% to almost half the portfolio, with 12% allocated to Europe. For a Canadian public pension fund, HOOPP was relatively late to infrastructure, first investing in 2019. It has now deployed more than C$4 billion in the asset class, with a focus on digital and communications infrastructure, transportation and utilities. With a base in London, HOOPP is likely to raise its holdings in European real estate and infrastructure.
Yet, some funds have retreated from London, largely due to a more challenging environment in venture capital. OMERS Ventures, the VC arm of the Ontario public pension fund, announcing last month that it is closing its London program. The move is not completely surprising as the Venture Capital sector has significantly cooled down since 2021, especially in Europe. However, OMERS Ventures team were not paying rent (they sat with OMERS’s broader team in the Leadenhall Building in the City), and they were very active with US$1.1 billion raised in two funds and 18 investments in the past four years. Those investments will now be managed from NYC.
Other Sovereign Investors have set up VC teams in London without much success. In 2016, Malaysia’s Khazanah opened an expensive office in Qatar-owned The Shard to focus on VC, which it closed three years later. OTPP and GIC have very selected team members in London, despite having full-fledged VC programs (Teachers’ Venture Growth and Technology Investing Group, respectively). And Mubadala Ventures’ presence has mostly played an oversight function of the US$15 billion stake in Softbank Vision Fund.
Although it is the oldest of Ontario’s five major public pension funds at 63 years, HOOPP is also the least diversified with just 42% of its portfolio invested outside Canada and 29% of AUM in alternatives – a position it is seeking to balance, despite its confidence in its conservative asset allocation.
Yet, HOOPP has shown that a well-honed strategy in bonds and stocks and a good domestic market knowledge can pay good dividends and it is unlikely to move far from a strategy that has worked well. The fund has reported a robust performance with a 10-year annualized average return of 8.35% by end-2022, despite a dismal year with a -8.60% return. Its fixed income portfolio generated a 17.8%, while equities were down 12.5%. On the upside, it reported positive returns in private equity (11.4%), infrastructure (9.4%), real estate (4.0%) and credit (1.0%).
Despite the challenges, its 117% funded status is the envy of most peers across North America and the highest ratio in the Canadian province. It is run with a single office and 700 staff, very modest numbers when compared to OMERS and OTPP.
HOOPP’s success is often attributed to active management and a Liability Driven Investing (LDI) approach. The in-house team runs a liability hedge portfolio (bonds and properties) and a return seeking portfolio (credit, equities, Infra, PE and HF). Interestingly, the LHP generated 70% of the investment income in 2020.
CIO Michael Wissell said, “HOOPP remains committed to LDI and, as always, we take a dynamic approach, evolving our strategies to respond to changing markets.
“We reduced our bond holdings prior to last year’s rising interest rates, which helped mitigate the impact. Further, we continue to balance our portfolio with more capital in private equity, infrastructure and real estate. But the core approach of matching assets to liabilities, with a heavy weighting in fixed income, remains key to our investment strategy.”
