HOOPP sidestepped much of the volatility that impacted bond and money markets in 2007. It managed this through a series of proactive trading strategies, including:

• going into 2007 with an underweight position in credit and maintaining this position throughout 2007
• avoiding direct exposure to non-bank asset-backed commercial paper (ABCP) in favour of less risky investments
• positioning its portfolio to avoid turmoil in the sub-prime mortgage market that triggered a credit crisis
• stepping up bond-financing activities in response to higher financing spreads

For the purpose of reporting results, HOOPP divides its fixed income investments into four basic types:

• Canadian universe bonds
• Canadian long bonds
• real return bonds
• short-term money market

Canadian universe and long bonds

Despite volatility in the bond market, HOOPP’s universe bond portfolio, which includes exposure to derivatives, reported a value-adding gain of 0.61 per cent during 2007, while its long bond portfolio returned 3.41 per cent, 0.03 per cent less than its benchmark.

To manage its Canadian universe and long bond portfolios, HOOPP uses a two-step approach. In short, it:

1. constructs a portfolio that tracks a relevant index (the DEX Universe Bond Index for Canadian bonds and the DEX Long Bond Index for long bonds )
2. enhances returns through the use of active overlay strategies (strategies that use derivatives to change the Plan’s exposure to certain assets, without actually having to buy or sell those assets).

Real return bonds

HOOPP’s real return bond portfolio is a passively managed portfolio. (In other words, the manager does not actively decide which securities to hold; instead, the portfolio mirrors the make-up of a chosen index.)

Because real return bonds pay a rate of return equal to the rate of inflation plus a premium, this portfolio provides a hedge against any inflation- or interest-rate-related increase in the Plan’s benefit liabilities.

For 2007, the portfolio returned 2.12 per cent. The benchmark for this portfolio is its rate of return – in other words, it is benchmarked against itself.

Short-term money market

At December 31, 2007, HOOPP’s economic exposure to short term money represented 8.6 per cent of total assets.

HOOPP maintains a money market portfolio so that it:

• has cash on hand to meet liquidity needs (i.e., pay monthly benefits and Plan expenses)
• any non-direct investments made using derivatives are backed by money market assets

The returns on money market assets used to back derivative strategies are measured against the benchmark for the investment tactic being replicated.

During 2007, credit spreads widened significantly in response to the sub-prime crisis and the problems in the asset backed commercial paper (ABCP) market. HOOPP’s Investments team did not invest in ABCP; it was felt the sector was simply too risky, given the uncertain nature of the backing assets. As a result, market liquidity diminished significantly and the focus for investing shifted toward government securities, including provincial government bonds and Canadian government agency bonds.

To enhance returns, HOOPP made use of derivative overlays in higher quality credits and indices.