Unrest in commercial real estate that detracted from otherwise solid performance has settled, hopes IMCO CEO

The CEO of Investment Management Corporation of Ontario says he is hopeful that the turmoil in commercial real estate has bottomed out after losses on investments in the sector dragged down otherwise solid performance from the pension-fund manager last year.

IMCO reported an average return of 5.6 per cent in 2023, but missed its benchmark of 6.6 per cent, as its $9.8-billion real estate portfolio lost 13 per cent for the year, against a benchmark loss of 12.1 per cent. The pension-fund manager’s real estate investments suffered from the fact that 53 per cent of the portfolio is in office and real estate holdings, which have been hardest hit by changing habits such as remote working and online shopping.

IMCO has been gradually trimming its exposure to office and retail, redeploying the proceeds into multi-residential and logistics properties that are performing better. But with real estate deal-making at a low ebb, it is hard to revamp the portfolio quickly.

“We’re hopeful that the worst is behind us,” said Bert Clark, the chief executive officer, in an interview Thursday. “It’s still going to be an area that requires some heavy lifting on our part.”

In 2023, investing markets were volatile, as high interest rates and inflation put pressure on asset values and drove up borrowing costs, while economic and geopolitical uncertainty loomed over public markets. But the overall investing outcome was much better than in 2022, when IMCO’s investments lost an average of 8.1 per cent.

The pension-fund manager’s total assets increased to $77.4-billion, from $73.3-billion a year earlier, and IMCO also added four new clients. Its investments in public stocks and bonds returned 18 per cent and 5.8 per cent.

In 2023, IMCO “had very solid results” that are “in the range” of the pension fund’s long-term targets, Mr. Clark said. The returns better reflect the mix of assets and the investing strategy that the pension-fund manager has been building since it launched in 2017, by gradually replacing some of the investments it inherited when its clients joined with a more modern, lower-cost portfolio that takes advantage of IMCO’s larger size.

IMCO was created to consolidate investing for several public-sector pension funds and now has eight clients, the largest of which are the Workplace Safety and Insurance Board and the Ontario Pension Board. Last year, it set up new global credit and private equity pools, allowing it to combine funds contributed by different clients to make more concentrated investments in private companies and loans at a larger scale.

“We don’t have all of our clients in the asset mix that we would recommend, but we’re getting close and by the end of this year, we will be a lot closer,” Mr. Clark said.

About 31 per cent of IMCO’s assets are invested in Canada, slightly above the average for the country’s largest pension funds, which collectively manage trillions of dollars and are embroiled in a public debate about whether they should be incentivized or directed to invest more domestically.

Ottawa has said it intends to work with pension funds to encourage more investment in Canada, and Mr. Clark said it is “entirely appropriate” for government to convene a conversation about how to boost the range of investment opportunities in Canada.

“Creating more investment opportunities in Canada is a good thing for us, it’s a good thing for the country,” he said. “Having more investment in Canada in the same number of investment opportunities isn’t good for us, and I don’t know that it does anything from a public policy perspective either.”