* Net assets rise to record C$140.8 billion
* Teachers' to focus on direct investing, new relationships
* Pension plan erases funding gap, notches C$5.1 bln surplus (Adds CEO comment on competition, deal opportunities, 50-year bond)
TORONTO, April 1 (Reuters) - The Ontario Teachers' Pension Plan, one of Canada's biggest investors, said Tuesday it had a 10.9 percent rate of return on its investments in 2013, bringing net assets to a record C$140.8 billion ($127.6 billion).
The strong 2013 returns erased Teachers' funding shortfall. Preliminary results showed a C$5.1 billion surplus, the plan's first in 10 years. The fund's rate of return since inception in 1990 has been 10.2 percent.
Having notched a fifth year of double-digit returns on its investment portfolio, Teachers' said it planned new relationships, direct investing and one-off transactions as competition from other pension plans, private equity and sovereign wealth funds made it harder to find good deals.
"The reality is we're finding most of our opportunities in direct investing and one-off investments globally," Teachers' Chief Executive Officer Ron Mock told reporters.
As low interest rates made it difficult to find good value, Mock said Teachers' would focus on individual opportunities rather than broad asset classes.
Teachers' did several big deals in 2013, including a $500 million investment in Hudson's Bay Co to help pay for its takeover of U.S. luxury retailer Saks Inc in July.
The pension plan and peers like 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.
Once focused mainly on Canadian stocks and bonds, Teachers' recently shifted its strategy to outside the country, seeking projects and assets that promise long-term income and gains.
Last year marked its fifth year of recovery since the 2008 financial crisis lopped 18 percent off its investments.
On the fixed income side, Chief Investment Officer Neil Petroff said Teachers' would be interested in a super-long bond.
"If the government came up with 50 year real return bond, we would love that, because it matches our liabilities," Petroff told reporters.
Demographic trends mean Teachers' must provide benefits to an increasing number of retirees while the number of active educators paying into the plan declines. The fund serves 307,000 active and retired teachers in Ontario.
EQUITIES, REAL ESTATE BOOST
The pension plan notched strong returns in equities, real estate and infrastructure. But negative returns in fixed income weighed on the overall results, Teachers' said in a statement.
In 2013, investment earnings were C$13.7 billion, down from C$14.7 billion in 2012.
The combined value of public and private equity assets rose to C$61.9 billion as of Dec. 31 from C$59.5 billion a year earlier. The equities portfolio had a one-year rate of return of 27.6 percent.
Teachers' Private Capital investments increased to C$14.8 billion from C$12.0 billion, posting a 26.9 percent return for the year.
Real assets, which comprise real estate and infrastructure, rose to C$30.9 billion from C$26.5 billion.
The real estate portfolio, managed by Teachers' Cadillac Fairview unit, totaled C$19.2 billion at year-end and returned 13.2 percent. The infrastructure portfolio was C$11.7 billion and returned 16.8 percent.
Fixed income was a weak spot, with net assets falling to C$56.9 billion from C$60.0 billion. The one-year rate of return was a negative 7.9 percent. ($1 = 1.1038 Canadian dollars) (Editing by Lisa Von Ahn and Bernadette Baum)