The investment portfolio is designed first and foremost to minimize the principal risk to the Plan's stakeholders: the development of a deep, long term funding shortfall.
In investing, there is a direct relationship between risk and reward - simply, the greater the potential for investment gains, the greater the risk for investment losses. OPB invests in a risk-managed manner where we aim to improve the return/risk relationship with each investment decision we make - only taking risks when we believe it will be well rewarded.
For example, if a pension plan does not take on sufficient market risk - with the aim of earning higher returns - it could face a different risk: the risk that it will not generate the returns it needs to meet its long term pension obligations.
How does OPB manage risk?
OPB manages risk in a variety of ways. In our day-to-day management of the Plan's assets, we aim to:
- Minimize medium term volatility in the Plan's funded status;
- Diversify amongst asset classes;
- Take only rewarded investment risks;
- Use good judgment, supported by analytical tools that evaluate both quantitative and qualitative considerations; and
- Develop and follow practical, clear and rigourous investment policies and business practices.
Managing risk through diversification
Diversification through asset allocation plays a fundamental role in risk management and return enhancement. We invest in:
- Cash: The primary value of cash in the Investment Portfolio is as a tool to preserve capital in periods of market difficulty.
- Fixed Income: The primary purpose of fixed income within the Investment Portfolio is to serve as the principal risk management stabilizer.
Private Debt within Fixed Income: Direct private debt investing provides the opportunity to enhance investment returns and moderate risk through skilled investment management.
- Equities: The purpose of equities within the Investment Portfolio is primarily as a long-term return enhancement asset; equity is expected to provide returns in excess of cash, fixed income and real estate over the long term. Equities are a primary source of the volatility inherent in the Investment Portfolio which we seek to mitigate through Strategic Asset Allocation and through diversification of our equity holdings by region, sector, company and management style.
- Real estate: The primary purpose of the real estate portfolio is to provide current cash flow and a long term return profile with a high quality correlation to the Plan's inflation-based pension obligations. Properties are owned either directly or indirectly by our subsidiary OPB Realty Inc.