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* Teachers notches 11.2 pct rate of return
* Net assets rise to record high C$117.1 bln
* Fund still faces C$9.6 bln funding shortfall
By Andrea Hopkins
April 3 (Reuters) - Ontario Teachers' Pension Plan, one of Canada's top dealmakers, said on Tuesday it had an 11.2 percent rate of return on its investments in 2011, bringing net assets to a record high C$117.1 billion ($117.9 billion) despite market volatility.
The third straight year of double-digit returns on its massive investment portfolio failed to close Teachers' funding shortfall, which narrowed to C$9.6 billion from C$17.2 billion in 2010. The funding gap measures the shortfall between the projected cost of providing pensions to Teachers' 300,000 active and retired teachers and its projected asset growth.
Strong returns in private equity, fixed-income and infrastructure drove 2011 gains while returns in commodities and real estate pulled overall returns lower, Teachers said in a statement accompanying its annual report.
"Our team's 2011 performance was especially impressive, given the market volatility and economic uncertainty that accompanied the euro-zone debt situation, and was compounded by the year's natural disasters," Jim Leech, Teachers president and chief executive, said in a statement.
Teachers, Canada's largest single-profession pension plan, has emerged as one of the world's most powerful dealmakers, investing in infrastructure and real estate projects around the globe and harnessing top-notch talent to manage its huge investment portfolio to ensure high returns.
It abandoned a passive investment strategy - which focused mainly on Canadian stocks and bonds - in recent years and has since put its money to work in global equity, seeking projects and assets that promise long-term income and gains.
The fund said active management has added C$53.0 billion to the plan's asset size since it was freed from government control in 1990. In a report released in 2011, CEM Benchmarking, the world's leading authority on pension plan benchmarking, said Teachers had the highest 10-year total fund and value-add returns of the pension plans they study around the world.
Still, demographic trends means Teachers must grapple with trying to provide benefits to an increasing number of retired teachers while the number of active educators paying into the plan declines.
Even with higher contribution rates and lower benefits, persistent low interest rates and longer retirements mean Teachers has not been able to close its funding shortfall.
"Accordingly, we are working with our sponsors, Ontario Teachers' Federation and the Ontario government, to advise them on the various options for closing this gap at a reasonable cost," Leech said.
The 2008 global financial crisis and economic downturn swung most big pension funds into deficit, as huge stock market declines erased the value of investments. In 2008, Teachers suffered an 18 percent investment loss.
Last year marked the third year of recovery for the plan administrators.
The combined value of public and private equity assets rose 8.8 percent in 2011 to C$51.7 billion. Private equity assets totaled C$12.2 billion at year-end, up from C$12 billion in 2010, and private investments returned 16.8 percent, Teachers said.
Fixed income assets rose to C$55.8 billion, up from C$45.9 billion at the end of 2010, and returned 19.9 percent, while commodities investments rose to C$5.7 billion from C$5.2 billion and notched a negative return of 2.3 percent.
Real assets, which comprise real estate, infrastructure and timberland, fell to C$25.8 billion at year-end from C$26.2 billion at the end of 2010.
Infrastructure assets returned 7.7 percent, while timberland investments returned 0.8 percent.
Real estate properties and investments managed by the plan's wholly owned subsidiary, Cadillac Fairview, were valued at C$15.0 billion at year-end, down from C$16.9 billion the previous year. The drop was mostly due to the issuance of new debt and sale of Teachers' stake in Hammerson Plc, offset by a rise in real estate assets values. The portfolio notched an 18.2 percent return.