The Ontario Teachers’ Pension Plan ended 2008 with assets totaling $87.4 billion, compared to its record $108.5 billion level at the end of 2007, the plan said Thursday.

The fund’s investment return was -18% compared to its composite benchmark return of -9.6%. Teachers’ is the largest single-profession pension plan in Canada.

“Our investment team fought hard against the downward pressure of the global credit freeze and subsequent stock, bond and real estate market crashes throughout the year; but market forces retained the upper hand at year-end,” said Jim Leech, president and CEO, in a release.

“It is small consolation to us that our results are consistent with the average of other large Canadian pension plans,” he added.

The fund’s 2008 returns largely reflect its exposure to equities, non-government fixed-income securities, externally managed hedge funds and real estate — diversity that has traditionally cushioned the fund in a downturn.

The current funding shortfall is $2.5 billion; however, $19.5 billion in losses have been held back in the smoothing adjustment and will be recognized over the next four years. Accordingly, the shortfall will grow unless the investment climate turns sharply positive.

Equities (public and private) were $34.9 billion as at December 31, 2008, compared to $50 billion at 2007 year-end. They returned -23.2% compared to a benchmark return of -26.4%, or $1.2 billion in value-add above market benchmarks.

The fund’s fixed income asset class lost $6.7 billion, largely due to credit products, externally managed hedge funds and the Canadian dollar’s decline against foreign currencies. This asset class has since adopted a more conservative fixed income asset strategy.

As a result of shift of fixed income assets to inflation sensitive assests, the fund’s fixed income portfolio was $5.3 billion as of December 31, 2008, compared to $18.7 billion at 2007 year-end; returns were -43.6% compared to a benchmark return of 12%.

Inflation sensitive assets grew to $44.9 billion as of December 31, 2008, compared to $39.3 billion at 2007 year-end. These assets, which include the increased investment in real return bonds, returned 0.2% compared to a benchmark return of 6.8%

This is the third time in the fund’s 18-year history that it has registered a loss, but the first time in nine years that it has underperformed benchmark overall.

“Although we know we can’t stop market downturns, we make every attempt to insulate the fund from these shocks when they do occur,” said Neil Petroff, executive vp and chief investment officer. “Our investment strategy remains defensive, but flexible enough to take advantage of market opportunities as they arise.”

The fund’s asset-mix policy was changed as of January 1, 2009 to 45% inflation sensitive, 40% equities and 15% fixed income. In 2008 it was 45% equities, 33% inflation sensitive and 22% fixed income.

IE