2010 Review
HEPP Investment Returns
HEPP’s investment returns continued to show strong results in 2010, earning 10.3% following the 14.5% return from 2009. To fund the Plan’s obligations, we need to achieve a long-term rate of return of 6.5%, as determined by the Plan’s actuary. In the Plan’s 14-year history, we have enjoyed ten years of returns equal to or in excess of 6.5%, two years of returns that were positive but below 6.5%, and only two years of negative returns. Unfortunately, the impact of the 2008 financial crisis is still being felt as our five-year return of 4.7% is still below 6.5%. For the Plan’s investment return to equal 6.5% within the next two-year period, we will need double-digit investment returns in each year.
With long-term government bond yields averaging approximately 4% over the past five years, the Plan requires exposure to investments that will generate higher returns. Over the long-term, equity-type investments are expected to outperform fixed-income returns, but their performance is more volatile. In this regard, the Plan’s investment policy has an exposure biased toward public equity markets and real estate.
HEPP Investment Returns - Annual
HEPP Investment Returns - Annualized
Major Market Returns
Global equity markets enjoyed positive returns in 2010 following on the strong rebound in markets in 2009. Of the major markets we invest in, the Canadian market was the strongest with a 17.6% return as compared to a 9.1% return for US markets and a 2.6% return for international markets.
The Canadian dollar rose in value against most major currencies during the year, lowering returns from foreign equity markets when expressed in Canadian dollar terms. We continue to have the majority of our equity holdings in the Canadian market. The Canadian market has returned 6.6% over the past decade as compared to -2.7% for the US market and -0.3% for international markets.
Bond market returns were positive, largely due to favourable returns in the corporate bond sector and strong performance from longer-dated maturities as interest rates fell during the year.
The Canadian real estate market, as measured by the REALpac/IPD Canada Annual Property Index, returned 11.1% in 2010 as compared to the 2009 return of -0.3%, the first negative return since 1993. Income returns for the four main property sectors in the Index (retail, office, industrial, and residential) averaged 6.9% in 2010, largely unchanged from 2009. All four sectors experienced a positive valuation adjustment in 2010 following negative valuation adjustments for all sectors in 2009. The valuation adjustment for the retail sector was 8.4% for the year versus an average of 1.4% for the remaining sectors.
HEPP Asset Mix
At the end of 2010, our overall asset mix was largely unchanged from 2009 with 57% of the Fund in equities, 34% in fixed income, and 9% in real estate. We have been reducing our exposure in commercial mortgages for some time, adding the proceeds to our bond holdings. At year-end, we held 4% in mortgages, which we reduced from the 10% held several years ago to improve the overall liquidity in our fixed income holdings. We are maintaining our exposure to the real estate market, which has been one of our best and most consistent long-term investments.
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 2010, our investment management and custodial costs were $11.25 million, up from $9.62 million in 2009. The higher costs reflect the strong increase in our average assets over the past year. Fees as a percentage of average assets were 0.30% in 2010, as compared to our five-year average of 0.31%.
Pension Plan Investment Holdings
Pension Plan Investment Holdings as of December 31, 2010