2018 Review

HEPP Investment Returns

The Healthcare Employees’ Pension Plan’s (HEPP) investments returned -1.88% in 2018, a decrease from the prior year’s return of 9.95%. Our Canadian and International equity portfolios had negative returns last year, while our US equity portfolio produced a small positive return. Our equity portfolios returned -6.3% -6.31% in 2018, after returning 13.8% 13.78% in 2017. All other asset classes had positive returns in 2018 with returns of 9.8% 9.82% in real estate, 0.8% 0.83% in fixed income, and 15.3% 15.32% in infrastructure. Since its inception, HEPP has had positive returns in 18 of 22 years.

While volatility in equity markets is expected, 2018 was an unusual year. The fund achieved its highest invested value at the end of August at $7.9 billion, but finished the year at $7.5 billion. By the end of March 2019, our invested value exceeded the August 2018 figure.

Our annualized five-year return is 6.05%. Currently a return of 6.15% is required to fund the Plan’s obligations. The Plan’s exposure to equity-type investments has generated strong returns over the history of the fund. Interest rates remain at historically low levels, and over the long term, equity-type investments are expected to outperform fixed-income investments, but equity returns are more volatile. As a result, 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

2018 Annual Investment Returns

HEPP Investment Returns - Annualized

2018 Annualized Investment Returns

Major Market Returns

2018 proved to be a challenging year for equity market returns, as most markets sold off sharply in the 4th quarter. Most of the declines had been recovered by the 1st quarter of 2019.

Emerging and international equity markets performed poorly in 2018, returning -6.52% and -5.55%, respectively compared to 28.70% and 17.36% in 2017. The Canadian equity market returned -8.89% in 2018 following a return of 9.10% in 2017. The US equity market was up 4.23% in 2018 following a 13.83% return in 2017.

With Government of Canada bond 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 2018 return for the Canadian bond market was 1.41% compared to a 2.52% return in 2017. The annualized five-year return for the Canadian bond market is 3.5% 3.54%.

The real estate market in Canada returned 7.41% in 2018. Signs of weakness remain evident in certain sectors of Alberta, with the balance of Canadian properties exhibiting stable growth.

2018 Major Market Returns

HEPP Asset Mix

Our overall equity exposure at year-end 2018 was lower than at 2017 largely as a result of equity markets declining in the 4th quarter of 2018. We are actively monitoring our exposure to equities and our regional allocations to Canadian, US and International equity markets as part of our risk management framework. These allocations will change over time, reflecting fluctuating return expectations and risk profiles.

The Plan has been invested in Canadian real estate since its inception, and we continue to seek opportunities outside of Canada that can provide expected returns that may compensate us for risks inherent in global real estate investments.

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

In late 2018, the Board undertook a strategic asset liability modelling study, which was completed in early 2019. The study confirmed the overall asset mix of the fund in relation to evolving plan liabilities.

2018 Asset Mix

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