* Net assets rise to record C$129.5 billion
* Pension plan 97 pct funded; shortfall falls to C$5.1 bln
TORONTO, April 2 (Reuters) - The Ontario Teachers' Pension Plan, one of Canada's top investors, said on Tuesday it had a 13.0 percent rate of return on its investments in 2012, bringing net assets to a record high C$129.5 billion ($127.4 billion).
With a fourth straight year of double-digit returns, the global dealmaker, which administers the pension plan for public-system teachers in Canada's most populous province, said it would expand its thrust into emerging markets as it seeks acquisitions across asset classes that will add long-term value and income to the underfunded pension plan.
Chief Executive Jim Leech and Chief Investment Officer Neil Petroff said Teachers' would boost its exposure in emerging markets from the current 15 percent to closer to 20 percent "over time" as the fund searches for alternatives to slow-growth Europe and North America.
"You look at Europe and if we get zero (percent growth) for the next five to 10 years we'll be lucky, and North America 1 to 3 (percent). So the emerging market, with China having a bad year at 7, doesn't look so bad," Leech told reporters at a news conference.
At 15 percent, Teachers' emerging markets exposure is already high relative to other global pension funds, which also lag Teachers' 13 percent rate of return for 2012.
Teachers' biggest emerging markets exposure is in Brazil, but Leech said the plan would open an office in Hong Kong this year to take advantage of acquisition opportunities in Asia.
Petroff said Teachers' has several deals that are undergoing due diligence, and acquisitions would likely continue at the steady pace seen in recent years. He also did not rule out deals in Europe, where the debt crisis has caused some assets to be undervalued.
"There are opportunities in Europe, but we believe as long as we are compensated for the risk we're taking, these are some real gems of investments," Petroff said.
Teachers' already owns two airports in the United Kingdom, one in Copenhagen, the U.K. national lottery and the U.K.'s largest gas distribution company, among other investments.
Leech, who turns 66 in June, said planning is underway to replace him, with the board looking at both internal and external candidates. Leech, who joined Teachers' in 2001 and became CEO in 2007, has said he will leave by the end of the year.
INVESTMENTS STRONG, STILL UNDERFUNDED
The fourth straight year of double-digit returns on the investment portfolio narrowed Teachers' pension plan funding shortfall to C$5.1 billion from C$9.6 billion in 2011.
The funding gap measures the difference between Teachers' projected asset growth and the anticipated cost of providing pensions to the 303,000 active and retired educators in the plan.
Teachers' and peers such as the Canada Pension Plan Investment Board and Caisse de dépôt et placement du Québec have been among the world's most active dealmakers in recent years, with major bets on real estate, natural resources and infrastructure.
Still, demographic trends mean Teachers' must provide benefits to a rising number of retirees while active educators paying into the plan decline in number. The average teacher in the plan draws a pension for 31 years after working 26.
The pension plan notched strong returns in equity and real estate. But lower returns in fixed income and commodities pulled overall returns lower, Teachers' said in a statement accompanying its annual report.
Even with higher contribution rates and lower benefits, persistent low interest rates and longer retirements kept Teachers' from closing its funding shortfall.
It abandoned a passive investment strategy, which focused mainly on Canadian stocks and bonds, in recent years and has put its money to work globally, seeking projects and assets that promise long-term income and gains.
The fund's value has nearly doubled since 2002, with 2012 marking the fourth year of recovery since the 2008 financial crisis lopped 18 percent from its investments.
It said active management had added C$60.5 billion to the plan's asset size since inception.
In 2012, investment earnings were C$14.7 billion, up from C$11.7 billion in 2011.
The combined value of public and private equity assets rose to C$59.5 billion as additional capital was deployed to manage the asset mix, and investments returned 14.2 percent, Teachers' said.
Real assets, which comprise real estate, infrastructure and timber land, rose to C$28.7 billion at the end of 2012 from C$25.8 billion in 2011, and returned 14.7 percent.
The real estate portfolio, managed by Teachers' Cadillac Fairview unit, was C$16.9 billion at yearend and returned 19.4 percent. The infrastructure portfolio was C$9.6 billion and returned 8.4 percent. Timber land assets were C$2.2 billion, with a return of 3.4 percent.
Fixed income assets returned 5.1 percent, while investments in commodities brought a loss of 1.9 percent.