Investment Performance

Like all major Canadian institutional investors, OPTrust faced challenging conditions in 2007 as increased volatility in global capital markets and changes in currency exchange rates generated mixed results in Canadian dollar terms.

Against this backdrop, OPTrust’s diversified investment portfolio performed well, with the Plan’s returns exceeding our market benchmarks for each major asset class and for the total fund. In 2007, OPTrust achieved a 5.6% return on a total fund basis, compared to a benchmark return of 4.2%.¹

Over the longer term, OPTrust has outperformed our weighted composite benchmark for the past eight years. Since the Plan’s launch in 1995, the fund has produced an average annual return of 10.3%, versus 9.2% for the benchmark.

Returns vs. Benchmarks, 1998-2007

OPTrust’s investment portfolio has outperformed the Plan’s market-based benchmark for the past eight years. Our 10.3% average annual return since the Plan’s inception in 1995 exceeds both our funding target and the 9.2% benchmark for the same period.

2007 investment overview
The following provides an overview of OPTrust’s investment performance for each of the Plan’s major asset classes. For more information please see our 2007 Annual Report.

Canadian equities – OPTrust’s Canadian equity portfolio returned a healthy 10.4% in 2007, outperforming the 9.3% return for our weighted benchmark index. The 1.1% difference is largely attributable to strong stock selection by the Plan’s active portfolio managers. Since 1995, we have achieved a 12.7% average return on Canadian equities, compared to 11.5% for our market benchmark over the same period.

Global equities – OPTrust’s global equity holdings include stocks from the United States, Europe, Asia and other developed and emerging markets. In 2007, our overall return on foreign equities was 2.5% in Canadian dollar terms, compared with 23.8% in 2006. This drop reflected both lower market returns and the impact of the rising Canadian dollar.

While sharply down from the previous year, our 2007 return exceeded the Plan’s weighted global equity benchmark return of 0.7% in 2007, which takes into account the effect of OPTrust’s foreign currency exposure and our currency hedging program described below. Since inception, our global equities portfolio has generated an average annual return of 9.6%, versus 8.8% for the combined foreign equity benchmark.

Fixed income investments – OPTrust’s Canadian fixed income investments returned 3.2% in 2007. This result bettered both the 2.2% return for 2006 and the 3.1% return for our composite fixed income benchmark. Fixed income investments include corporate bonds, government debentures and real return bonds.

With their lower risk profile, fixed income investments are expected to return less than equities over the long term. However, they tend to provide greater certainty of returns than stocks, pay predictable income and are an important source of diversification for the overall portfolio. Since the Plan’s inception, OPTrust’s fixed income investments have generated an average return of 9.0%.

OPTrust had no direct exposure to the U.S. sub-prime mortgage market, which triggered the global credit crisis in the summer of 2007. Our exposure to non-bank asset-backed commercial paper was less than $400,000, a level that is not material to the Plan, reflecting the high standards of creditworthiness OPTrust has set for the fixed income portfolio.

Currency management – Because OPTrust’s foreign equity holdings represent almost one-third of our total assets, changes in the value of the Canadian dollar versus other currencies can have a significant impact on the Plan’s investment returns. We have therefore put in place a strategic currency hedging program aimed at reducing the volatility of our returns from foreign markets.

This program involves passively hedging 50% of the currency exposure from global equities and 100% of the exposure from real estate and private market investments. We have also engaged an active currency manager to supplement this program through short-term tactical allocations designed to take advantage of shifts in major currency exchange rates.

In 2007, leaving our global equities portfolio unhedged would have resulted in a return of -2.1% for the year, compared to our positive return of 2.5%. In total, the passive currency management program added value of approximately $220 million for the year.

Real estate – OPTrust’s real estate portfolio posted very strong returns of 21.3% in 2007, compared with 12.5% in 2006 and 6.5% for the Plan’s real estate benchmark. This performance was driven by robust capital appreciation for several of our investments, and solid income returns from the portfolio.

In 2006, OPTrust adopted a policy of delaying real estate performance reporting by one calendar quarter to allow time to accurately determine the market value of the Plan’s holdings. Real estate returns for 2007 therefore include the 12 months from October 1, 2006 to September 30, 2007, whereas returns for 2006 include only the first nine months of the year. [More on real estate]

Private markets – Of the 12 separate investments made to date as part of this new program, all but one was completed in 2007. As a result, it is too soon to report meaningful returns for the portfolio. In future years, our private market returns, like those for our real estate program, will be subject to delayed reporting to allow for the accurate valuation of these assets. [More on private markets]

More information on OPTrust’s 2007 investment results is available in our 2007 Annual Report

2007 Returns vs. Benchmarks

OPTrust’s returns for 2007 exceeded our benchmarks for each asset class in the Plan’s portfolio. Strong results from Canadian equity and real estate investments were partly offset by the weak performance of global equities in Canadian dollar terms due to the rising Canadian dollar.

* Real estate returns for 2007 are reported for the 12 months ending September 30, 2007.

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¹In 2006, OPTrust adopted a policy of delaying real estate performance reporting by one calendar quarter to ensure greater accuracy in determining the market value of the Plan’s holdings. The total fund return for 2007 includes real estate returns from October 1, 2006, to September 30, 2007. For 2006, the total fund return includes real estate returns from January, 1 to September 30, 2006.