2024 Investments Review

HEPP Investment Returns*

The Healthcare Employees’ Pension Plan’s (HEPP) investments returned 16.1% in 2024, following a 10.8% return in 2023. We outperformed our benchmark return of 14.5% and this was the second highest return in the Plan’s history. Our five and ten year returns of 8.0% and 7.4% exceeded our benchmark returns of 7.2% and 7.0% respectively. Our Canadian, International, US, and Global equity portfolios returned 21.8%, 17.4%, 29.1%, and 28.2% respectively. Our other asset class returns were 0.4% in real estate, 6.6% in fixed income, 16.8% in infrastructure, 20.3% in private equity, and 31.4% in private debt. Since its inception, HEPP has had positive returns in 23 of 28 years.

As a result of strong markets in 2024, the fund’s value rose to $12.2 billion, the highest level in the Plan’s history, from $10.6 billion at year-end 2023. Over the past 10 years, our investment returns have added $539 million of value when compared to the Plan’s benchmark returns.

Currently a return of 5.9% 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. At the time of this report there is a high level of global uncertainty regarding policy initiatives in the US. On balance, we will maintain our long-term investment focus and asset mix, but will review opportunities that become available due to market volatility.

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

Major Market Returns

Public market equity returns were quite strong in 2024, with the US equity market up over 36% in Canadian dollars following a 23% return in 2023. A decline of over 8% in the value of the Canadian dollar vs. the US dollar in 2024 contributed to this return. The Canadian equity market returned almost 22% after a 12% return in 2023. Emerging markets more than doubled their 2023 return to earn 18% in 2024 vs. 7% in 2023. International equity markets were up in 2024, returning almost 14% compared to 16% in 2023.

At year-end 2024, Government of Canada 10-year bond yields were at 3.2%, largely unchanged from their 3.1% level at year-end 2023. Corporate bond returns were double the return of federal government bonds, with the fixed income market returning 4% for year.

Canadian real estate returned 3% for the year following a 0% return in 2023. Returns for Canadian real estate sectors once again had a wide outcome. Industrial properties rose 3%, Multi-Family Residential rose 3%, retail properties rose 6%, while office properties fell -1%. Infrastructure returns remained strong during 2024.

HEPP Asset Mix

Our overall public equity exposure at year-end 2024 was 57%; largely unchanged from 2023. Our public equity exposure, with a 23% return, contributed substantially to our very strong results. Within our fixed income portfolios, we hold roughly 1/3 each in government bonds, investment grade bonds and high yield bonds. Our high yield portfolio returned 9%, investment grade over 7%, and government bonds 3%.

Internally, we prefer to look at private market returns over longer periods due to the less liquid nature of these holdings. Our infrastructure portfolio returned 17%, up from 10% in 2023. Our private equity portfolio, now in its third year of investing, generated a 20% return. Our private debt portfolio, which is in its first full year, generated a 31% return. We have a 5% target allocation for each. All of our private market investments are invested over time, meaning that it will be several years before we reach our target allocation.

Real estate returns continue to be impacted by high interest rates, weak demand for office space, and recession concerns based on US policy uncertainty. Our Canadian real estate returned 1% while our non-Canadian real estate returned less than 1%. Our non-Canadian real estate has a larger exposure to office properties than we have in Canada. Office properties, particularly in the US, remain challenged.

We actively monitor our exposure to equities and our allocations to Canadian, US and International equity markets as part of our risk management framework. These allocations change over time, reflecting fluctuating return expectations and risk profiles.

We currently hold 6% of the fund in infrastructure, with a target weight of 10%. We continue to commit funds for our global infrastructure investment program, which continues to perform as expected. Our 11% real estate exposure is above our target at 10.0% and is slowly being reduced, as we are not committing any new funds to this asset class. 

Detailed Investment Commentary

Public Equity

We have just over 57% invested in public equities. We diversify our equity holdings by geography, sector, company size, and investment style. At a strategic level, we run Canadian equity, US equity, International equity, and Global portfolios. International equity portfolios invest in developed and emerging markets outside of Canada and the US. Global portfolios invest in developed and emerging markets including 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: 20%
• US equity: 21%
• Canadian equity: 16%

Sector exposure as % of total equites:

• Financials: 22%
• Information Technology: 19%
• Industrials: 16%
• Consumer Discretionary: 9%
• Health Care: 8%
• Energy 7%
• Consumer Staples: 5%
• Materials: 5%
• Communication Services: 4%
• Utilities: 3%
• Real Estate: 2%

Public Fixed Income

We have almost 24% of the fund invested in publicly traded fixed income securities. At year-end 2024, our credit exposure as a % of total fixed income was as follows:

• Government: 35%
• Investment Grade: 37%
• High Yield: 28%

We hold Canadian government bonds primarily for liquidity purposes. When equity markets decline we are able to access ready cash to rebalance the overall portfolio.

We hold investment grade and high yield securities as their yield is higher than government bonds, and provides increased return opportunities. We hedge our currency exposure for our holdings in non-Canadian high yield markets to reduce return volatility.

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

• BBB and higher: 64%
• B/BB: 29%
• Below B/Not Rated: 7%

Real Estate

We have approximately 11% invested in direct real estate investments. Our long-term target for real estate is 10%. These are private market transactions, which means that the assets are illiquid. In addition to our invested amounts, we have outstanding commitments of approximately 0.5% of total assets, which will be deployed over the next several years.

Geographic exposure as % of total real estate:

• Canada: 83%
• USA: 8%
• Europe: 4%
• Rest of World: 5%

Sector exposure as % of total real estate:

• Multi-Unit Residential: 34%
• Industrial: 23%
• Office: 20%
• Retail: 13%
• Other: 10%

Infrastructure

We have over 6% invested in 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” risk. In addition to our invested amounts, we have outstanding commitments of approximately 3% of total assets, which will be deployed over the next several years.

Geographic exposure as % of total infrastructure:

• Europe: 49%
• North America: 36%
• Rest of World: 15%

Sector exposure as % of total infrastructure:

• Energy & Utilities: 43%
• Communications: 26%
• Transportation: 22%
• Other: 9%

Representative industry groups within each sector include:

• Energy & Utilities: renewables, midstream/storage, integrated/multi utility, gas transmission/distribution, water and wastewater
• Communications: telecom, fibre and data infrastructure
• Transportation: freight logistics, toll roads, parking, ports, aircraft leasing, EV charging, airports and airport services, cold storage

Private Debt 

In 2023 we initiated our first investments in our private debt program. We have 0.6% invested in private debt investments. These are private market transactions, which means that the assets are illiquid. Our long-term target for private debt is 5%. In addition to our invested amounts, we have outstanding commitments of approximately 0.4% of total assets, which will be deployed over the next several years.

Sector exposure as % of total private debt:

• Financials: 26%
• Consumer Discretionary: 21%
• Health Care: 15%
• Information Technology: 13%
• Industrials: 11%
• Other: 14%

Private Equity

We have 1.5% invested in private equity investments. These are private market transactions, which means that the assets are illiquid. Our long-term target for private equity is 5%. In addition to our invested amounts, we have outstanding commitments of approximately 1.6% of total assets, which will be deployed over the next several years.

Currency Management

Our largest currency exposure is in Canadian dollars, representing just over 42% of investments. Our second largest exposure is vs. the US dollar, representing almost 39%.

We generally do not hedge foreign currencies for our public equity investments.

Our non-Canadian publicly traded fixed income portfolios 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, infrastructure, private equity or private debt holdings. We anticipate establishing a hedging program for our private debt holdings in 2025.

Costs

Costs for managing investments are typically presented as a percentage of assets under management. For 2024, our costs were 0.50%, down from 0.51% in 2023. This includes external management fees (direct and indirect) and custodial costs as well as operating costs. Our five-year average cost is 0.50%. Generally, publicly traded assets have lower fee structures than private market assets. As we increase our exposure to private assets over time, we expect our costs to drift upwards.

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.