2016 Review

HEPP Investment Returns

The Healthcare Employees’ Pension Plan (HEPP) produced solid investment results in 2016, achieving a 7.3% return; an increase over last year’s return of 5.6%. All underlying portfolios had positive results, with a 10.2% return in equities, a 5.8% return in real estate, and a 2.5% return in fixed income.

We have had positive returns in 17 of 20 years since HEPP was established. Our annualized five-year return is 10.5%. A return of 6.15% is required to fund the Plan’s obligations. While interest rates have remained at historically low levels, the Plan’s exposure to equity-type investments has consistently generated strong returns over this period. Over the long term, equity-type investments are expected to outperform fixed-income investments, but their performance is more volatile. In this regard, the Plan’s investment policy has an exposure biased toward equity markets and real estate, as well as an allocation to infrastructure investments.

HEPP Investments Returns - Annual

2016 annual returns

HEPP Investment Returns - Annualized

2016 annualized returns

Major Market Returns

All the major markets that we invest in, with the exception of Developed International equity markets, produced positive returns in 2016.

The Canadian equity market had an excellent 2016, generating returns of over 21%. This is a bounce back from 2015, when the Canadian market had one of the lowest returns of all developed markets at -8.3%.

With Government of Canada bonds yields remaining low, we expect the returns in our fixed-income portfolio will not meet the discount rate required to fund the Plan’s obligations. The 2016 return for the Canadian bond market was 1.7%. The annualized five-year return for the Canadian bond market was 3.2%

The real estate market in Canada returned 5.7% in 2016. Signs of weakness remain evident in certain sectors of Alberta, with the balance of Canadian properties exhibiting stable growth.

2016 major market returns

HEPP Asset Mix

Relative to our 2015 year-end positions, our overall equity exposure is relatively unchanged at the end of 2016. Changes to exposures by region were largely a function of the returns realized during the year. As part of our overall risk management framework, we actively monitor our exposure to equities as well as our regional allocations to Canadian, US and International equity markets. Over time, these allocations change to reflect varying return expectations and risk profiles.

The Plan has been invested in Canadian real estate since its inception. In 2016 we funded our first non-Canadian real estate investment. We will continue to actively review real estate opportunities outside of Canada that can provide the expected returns that may compensate us for risks inherent in these types of investments.

We continue to commit funds for our infrastructure investment program, which is being funded from our fixed income assets.

2016 asset mix

Investment Management Fees and Custodial Costs

Investment management fees and custodial costs are usually paid based on a percentage of the market value of assets under management. In 2016, our investment management and custodial costs were $24.9 million, up from $23.0 million in 2015. Manager fees and custody costs as a percentage of average assets were 0.37% in 2016, as compared to 0.37% in 2015. Our five-year average cost is 0.35%.

Our average fee cost over the past several years has risen from the long term average as a result of the addition of fees for infrastructure and real estate investments, which are higher than fees for public markets.

Our investment management and custody fees are shown as incurred and include performance based fees. We do not net fees against income.

Pension Plan Investment Holdings

Pension Plan Investment Holdings as of December 31, 2016

© 2018 HEB Manitoba


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