2020 Investment Review

HEPP Investment Returns*

The Healthcare Employees’ Pension Plan’s (HEPP) investments returned 9.0% in 2020, following a 15.5% return in 2019. We exceeded our benchmark returns of 7.5% in 2020 and 14.0% in 2019. Our five and ten year returns were 7.5% and 8.0% and were also in excess of our benchmark returns of 7.2% and 7.5% respectively. All asset classes had positive returns with public equity markets showing very strong results. Our Canadian, International and US equity portfolios returned 5.4%, 10.4% and 17.5% respectively. Our other asset class returns were 0.9% in real estate, 8.0% in fixed income, and 13.7% in infrastructure. Since its inception, HEPP has had positive returns in 20 of 24 years.

The fund achieved its highest value at the end of 2020 at $9.271 billion, up from $8.552 billion at year-end 2019. 

Currently a return of 6.0% 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.

*Total fund returns are after external management, custodial, and performance fees, transaction costs and operating expenses. Asset class returns are after transaction costs and performance fees but before external management and custodial fees, and operating expenses.

Major Market Returns

After finishing 2019 with the second best return in HEPP’s history, the COVID-19 pandemic hit the capital markets in late February 2020 causing many dislocations, some of which lasted throughout the year. Despite this, public markets recovered and closed the year with competitive returns. Real Estate was the exception, as the timing of the recovery for this asset class remained uncertain with on-going lock-downs and work from home programs in effect, coupled with the impact of increased on-line shopping. Returns for Canadian real estate sectors ranged from +11.8% for industrial properties to -15.6% for retail properties.

The Canadian equity market returned 5.6% in 2020 following a return of 22.9% in 2019. The US equity market was up 16.3% following a 24.8% return in 2019. International and emerging equity markets also performed well in 2020, returning 6.4% and 16.6%, respectively compared to 16.5% and 12.9% in 2019. Canadian real estate returned -3.8% for the year following a 6.7% return in 2019.

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. While interest rates fell dramatically at the onset of the COVID pandemic resulting in an 8.7% return for the Canadian bond market, the annualized five-year return is 4.2%.

2020 Major Market Returns

HEPP Asset Mix

Our overall equity exposure at year-end 2020 was largely unchanged from 2019. We actively monitor 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. Our overall exposure to real estate will not change dramatically, but the allocation between Canada and other markets will shift.

We continue to commit funds for our global infrastructure investment program, which continues to perform as expected. The Board approved allocations to two new asset classes, private equity and private debt. All of our private market investments are invested over time, meaning that it will be several years before we reach our target allocation.

2020 Asset Mix

Detailed Investment Commentary

Public Equity

We have 60% invested in equities. At the end of 2020, all of our equities are publicly traded. We diversify our equity holdings by geography, sector, company size and investment style. At a strategic level, we run Canadian equity, US equity and International equity portfolios. International equity portfolios invest in developed and emerging markets outside of Canada and the US. Within those portfolios, we further diversify by sector, company size and investment style.

Geographic exposure as % of total fund:

  • International equity: 23%
  • US equity: 22%
  • Canadian equity: 15%

Sector exposure as % of total equites:

  • Information Technology: 19%
  • Financials: 18%
  • Industrials: 16%
  • Health Care: 10%
  • Consumer Discretionary: 10%
  • Consumer Staples: 7%
  • Materials: 7%
  • Communication Services: 5%
  • Energy: 3%
  • Utilities: 3%
  • Real Estate: 2%

Fixed Income

We have 24% of the fund invested in fixed income securities, the majority of which is held in publicly traded securities.

At year-end 2020, our credit exposure as a % of total fixed income was as follows:

  • Canadian Government: 34%
  • Canadian Investment Grade: 37%
  • US High Yield: 29%

We hold Canadian government bonds primarily for liquidity purposes. When equity markets decline as they did in the 1st quarter of 2020, we are able to access ready cash to rebalance the overall portfolio.

We hold Canadian investment grade corporate bonds and US high yield securities, as their yield is higher than government bonds, and provides increased return opportunities. Our holdings in the US high yield market are currency hedged to reduce return volatility.

Within our corporate bond holdings, our credit rating exposure is as follows:

  • BBB and higher: 62%
  • B/BB: 30%
  • Below B/Not Rated: 8%

Real Estate

We have over 11% invested in direct real estate investments. These are private market transactions, which means that the assets are illiquid. In addition to our invested amounts, we have outstanding commitments of over 1% of total assets, which will be deployed over the next several years.

Geographic exposure as % of total real estate:

  • Canada: 84%
  • USA: 9%
  • Europe: 3%
  • Rest of World: 4%

Sector exposure as % of total real estate:

  • Office: 31%
  • Multi-Unit Residential: 23%
  • Industrial: 20%
  • Retail: 16%
  • Other: 10%


We have over 4% invested in direct infrastructure investments. These are private market transactions, which means that the assets are illiquid. Our long-term target for infrastructure is 10%. As we do with all private market investments, we will invest a certain portion of our allocation each year to minimize what is known as the “vintage year” effect. In addition to our invested amounts, we have outstanding commitments of  over 2% of total assets, which will be deployed over the next several years.

Geographic exposure as % of total infrastructure:

  • Europe: 58%
  • North America: 25%
  • Rest of World: 17%

Sector exposure as % of total infrastructure:

  • Energy & Utilities: 57%
  • Communications: 23%
  • Transportation: 18%
  • Social: 2%

Representative industry groups within each sector include:

  • Energy & Utilities: renewables, midstream/storage, integrated/multi utility, gas transmission/distribution
  • Communications: telecom
  • Transportation: freight logistics, toll roads, ports
  • Social: social housing

Private Debt and Private Equity

We have a new 5% allocation to private debt and a new 5% allocation to private equity, which will be invested over time. Private debt and equity are illiquid and we will manage the rollout of this program over several years to manage our “vintage year” risk. This means that we will invest a certain portion of our allocation each year.

Currency Management

We generally do not hedge foreign currencies for our public equity investments. Our largest exposure is vs. the US dollar with 50% of equities denominated in USD. While only a generalization, the CAD typically falls against the USD when equity markets decline. By not hedging our US Dollar equity exposures, we reduce our downside risk when markets sell-off as seen below:

                                                 S&P500 USD          S&P500 Hedged          S&P500 CAD

Feb 19-Mar 23, 2020:                    -34%                           -36%                           -27%

Sep 20-Dec 24, 2018:                    -19%                           -20%                           -15%

Our non-Canadian fixed income returns are hedged as currency volatility adds unnecessary risk to our returns for an asset class which is generally defensive in nature.

At the present time, we are not hedging our non-Canadian real estate holdings.

At the present time we are not hedging our infrastructure holdings. The largest currency exposures for our infrastructure asset holdings are:

  • Euro: 30%
  • US Dollar: 22%
  • UK Pound: 17%


Costs for managing investments are typically presented as a percentage of assets under management. For 2020, our costs were 0.50%. This includes external management (direct and indirect) and custodial costs as well as operating costs. Our ten year average cost is 0.41%. As the fund’s exposure to private market assets has increased, our overall cost structure has risen, as fees for private market assets are higher than for public market assets.

Like all large plans in Canada, we have a forward-looking strategy to deal with changes to our business model as our assets grow over time. As part of this strategy, we have adjusted our staffing levels accordingly and have transitioned two public equity portfolios and one public fixed income portfolio from being externally managed to internally managed.

© 2022 HEB Manitoba


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