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July 21, 1997 01:00 AM

ONTARIO FUND MIGHT MOVE TO U.S. REITS

Phil Levine
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    TORONTO - In keeping with its move toward diversification, one of Canada's largest public pension plans is considering expanding into the U.S. securitized real estate market.

    "Our target for real estate is 5%, with a maximum of no more than 10%," said Lee Fullerton, a spokeswoman for the Ontario Teachers' Pension Plan Board, Toronto. "To this point, we've had 100% of our real estate holdings domestically, but we're now examining the option of entering the U.S. market, with REITs as a likely option."

    Steadily increasing diversification has served the plan well. Since its creation in 1990, the system has seen its assets grow to more than C$51 billion (U.S. $37 billion) from about C$17 billion (U.S. $12.5 billion) in 1990.

    Officials believe the growth is largely because of a reallocation of assets - to 75% equities, including real estate, and 25% fixed income, from 100% domestic fixed-income assets in 1990. And although all of its current real estate holdings are domestic, the Ontario Teachers' pension fund is examining the option of securitized U.S. real estate, with REITs as the most likely investment target.

    Ms. Fullerton added that "in 1990, the board was created with a mandate to diversify into the equity market. Prior to that date, we were entirely involved in the fixed-income side. As of last Dec. 31, we had about 13% of assets in U.S. equity, achieved through derivatives."

    The fund has about one-third of its assets in non-domestic markets; included in that amount is about C$3.2 billion (U.S. $2.3 billion) in active non-North American assets.

    Over the last several years, the fund has grown its equity investments. An illustration of that growth can be seen by comparing equity holdings between 1992 and 1996. In 1992, the board held 22% of assets in equities; by 1996, three-quarters of its assets were in the equity market.

    Ms. Fullerton added that the board was "very pleased with the excellent results" from its foreign investments.

    "In 1996, we saw a 19.7% return on those assets, compared to a benchmark figure of 6.6%," she said.

    "We also have representation in the European and Hong Kong markets, and are underweighted in the Japanese market." Ms. Fullerton said the board uses six external fund managers for its non-North American assets. None is based in the United States.

    Ms. Fullerton declined to name the Asian and European managers.

    As of Dec. 31, the Ontario board reported approximately C$5.5 billion (U.S. $4.1 billion) in Standard & Poor's 500 stocks. "That is about 13% of our assets, in keeping with our target asset mix," she said.

    That compares with the board's 1996 investment of approximately C$5.4 billion in the Asian and European markets.

    Despite being heavily weighted in the equity market, the board is not overly concerned with the possibility of a correction.

    "We are large enough that we can't easily shift our asset allocation mix," Ms. Fullerton said. "We also take a 40-year investment perspective, and see ourselves as long-term investors. Our index fund mirrors the TSE 300 and the S&P 500, and we aren't too worried about an inevitable short-term correction."

    The board serves approximately 53,000 retired teachers as well as 155,000 elementary and secondary school teachers.

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