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2006 Annual Report

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Schedule H - Report of Eckler Partners Ltd. Activities

Investment Summary as at March 31, 2006

Overview

  • Total assets consist of two main components:
    • An Investible Fund, split into two portfolios
      • Long Term Fund investing in real return bonds, equities and other bonds
      • Short Term Fund investing in short term bonds
    • A Notional Fund, consisting of amounts owed by the provincial governments
  • Investible assets are managed by TD Asset Management, either passively or on an indexed basis
  • Royal Trust are the custodians of the investible assets
  • Our analysis is based on statements provided by both Royal Trust and TD Asset Management as well as previous performance analyses done by Towers Perrin
  • In particular
    • All dollar amounts, including asset values and cashflows, are taken from Royal Trust accounts
    • Returns are derived from the TD quarterly statements and have not been independently verified
  • TD Asset Management is required to certify that it has complied with the investment guidelines specified by the trustees.  We have not verified that this has taken place or that the guidelines have been complied with.

Asset Summary ($,000's)

        Mar 06 Mar 05
       

Fund Portfolio Strategy Bench- mark Value Asset Alloc Fund Alloc Value Asset Alloc Fund Alloc
Long Term Real Return Bonds Passive 80.0% 725,815 83.0%   676,470 83.5%  
  Universe Bonds Index 6.0% 41,791 4.8%   41,930 5.2%  
  Canadian Equity Index 7.0% 63,069 7.2%   53,264 6.6%  
  US Equity Index 3.5% 18,212 2.1%   17,234 2.1%  
  EAFE Equity Index 3.5% 25,143 2.9%   21,432 2.6%  
  Cash   0.0% 26 0.0%   86

0.0%

 
      100% 874,055 100.0% 75.2% 810,417 100.0% 72.6%
Short Term                  
  Short Term Bonds Index   67,013     77,878    
  Cash     28     20    
        67,041   5.8% 77,897  

7.0%

                   
Total Invested Assets * 941,097  

81.0%

888,315   79.6%
Provinces Notional Assets (net of prepayments) 220,759   19.0% 227,986   20.4%
Total Assets 1,161,856   100.0% 1,116,301  

100.0%

             
* Total Invested Assets includes prepayments from Alberta and Ontario    

Split of Invested Assets between:              
  Long Term Fund 92.9%     91.2%
  Short Term Fund 7.1%     8.8%
  Total Invested Assets 100.0%     100.0%
Totals may not add due to rounding

Comments on Asset Summary

As of March 31, 2006

  • Weighting for real return bonds is currently 3% above their benchmark of 80% of the Long Term Fund
    • This is largely unchanged from March 31, 2005 (3.5% above benchmark)
  • Universe bonds are 1.2% below their benchmark of 6%
    • Weighting has dropped slightly since last year
  • Equities are below their benchmark by 1.8%.
    • In 2005 they were 2.7% below their benchmark – Canadian Equity weighting has increased.
  • PT Notional Funds are net of prepayments by Alberta and Ontario
  • As a percentage of the Invested Assets, the Long Term Fund has increased from 91.2% to 92.9%, while the Short Term Fund has decreased from 8.8% to 7.1% during the fiscal year

Asset Development ($,000's)

  Invested Assets 1    
 
   
  Real Return Bond Fund Other Long Term Funds Short Term Fund Invested Assets Provinces' Notional Assets 1 Total Assets
Initial, at April 1, 2005 676,547 133,870 77,897 888,314.65 227,986 1,116,301
Investment Income (realized and unrealized) 70,278 22,375 2,068 94,720.44 6,310 101,031
Inflow: Recoveries from Provinces - - 13,546 13,545.91 (13,537) 9
Outflow: Benefit Payments - - - 50, 215 - 50, 214.61 - (50,215)
Expenses - - - 5,270 - 5,269.78 - (5,270)
Transfers between funds - 20,994 - 8,021 29,015 - 0.00 - -
 





Closing, at March 31, 2006 725,832 2 148,224 2 67,041 941,096.61 220,759 1,161,856
             
1. Invested Assets include PT prepayments; Provinces' Notional Assets are net of prepayments  
2. These figures differ slightly from those on page 3 because of allocation of cash balances  
3. Based on Royal Trust statements  

Totals may not add due to rounding
 

Comments on Asset Development

  • Total invested assets (i.e. excluding PT assets) have increased over the year to March 31, 2006 by $52.8m
    • As a result of investment returns exceeding the “federal” 8/11ths share of  the total payouts
  • The notional PT assets have decreased by $7.2m
    • Interest credits are at T-bill rates and hence the returns are relatively lower than on the invested assets and did not exceed their 3/11ths share of the total payout
  • Total assets (i.e. including PT assets) have increased by $45.6m
  • Benefits are paid from the Short Term Fund
  • From June 2002 onwards all recoveries from the provinces were allocated to the Short Term Fund
    • This practice is expected to continue in the future
  • TD Asset Management made transfers from the Long Term Fund to the Short Term Fund of $29m
    • $21m from real return bonds in June and December 2005
    • $8m from other long term funds - $6.0m in January 2006 and the balance spread over the fiscal year

Expansion of PT Assets ($,000's)

  Less: Prepayments
 
  Gross PT Assets Ontario Alberta Net PT Assets
Initial, at April 1, 2005 230,873 9 2,878 227,986
Interest Credits 6,364 0 54 6,310
Additional Prepayments - - - -
3/11th share of benefits/expenses (15,230) (9) (1,684) (13,537)
 
 

Closing, At March 31, 2006 222,008 0 1,248 220,759

  • Ontario’s initial prepayments were largely used up by August 2002.  Ontario started making cash payments to cover their share of the benefits/expenses in September 2002; these subsequent amounts are included in the PT recoveries on page 5
  • Ontario’s opening pre-payment balance should have been zero, but prior to fiscal year 2006, about $9,000 was charged directly to Ontario, rather than to the pre-paid account.  In 2006, this error was corrected, and Ontario’s ending prepayment balance is zero.
  • Alberta continues to use its prepaid balance to cover its share of benefits/expenses.

Totals may not add due to rounding

Investment Returns

    Fiscal Year ending Quarterly Returns Fiscal 2006
   

Fund Portfolio 2003 2004 2005 2006        
Long Term Real Return Bonds 19.7% 14.6% 10.4% 10.5% 4.6% 4.4% 2.7% -1.6%
  Universe Bonds 9.2% 10.6% 5.0% 4.9% 4.5% 0.1% 0.7% -0.5%
  Canadian Equity -17.0% 37.5% 13.9% 28.7% 3.6% 11.6% 2.9% 8.2%
  US Equity -30.9% 20.2% -2.1% 7.4% 2.5% -1.9% 2.7% 4.0%
  EAFE Equity -29.5% 40.5% 5.9% 20.1% 0.4% 4.6% 4.8% 9.2%
   

  Total 12.6% 16.4% 9.9% 11.5% 4.4% 4.5% 2.7% -0.5%
                   
Short Term Short Term Bonds 7.0% 8.1% 3.0% 2.3% 2.3% -0.3% -0.2% 0.5%
Total Invested Assets   11.7% 15.3% 9.1% 10.8% 4.2% 4.1% 2.5% -0.4%
Notional PT Assets   2.6% 2.9% 2.2% 2.9% 0.6% 0.6% 0.7% 0.8%
Total Assets   9.4% 12.4% 7.7% 9.2% 3.5% 3.5% 2.2% -0.2%
Notes:
  • Quarterly returns for the component portfolios for the fiscal years 2003 onwards are as reported by TD Asset Management in their quarterly investment reports. EPL has not independently verified these.
  • Aggregated quarterly returns (Total Long Term, Total Invested Assets and Total Assets) are calculated by EPL taking into account the relative market values, cashflows and investment returns of the component portfolios.
  • Returns for the fiscal years 2003 to 2006 are calculated by EPL based on the quarterly returns shown above.
  • EPL returns are calculated on an approximate basis, using average cashflows; they may differ slightly from returns calculated by a performance measurement service using daily cashflows.

Comments on Investment Returns

  • The overall return of 9.2% for fiscal 2006 is the result of positive returns from all the component portfolios
  • Again, Canadian equity was the best performing category, with strong results from EAFE equity as well
  • U.S. equity return improved substantially over the negative return in 2005, but was adversely affected by the strengthening of the Canadian dollar
  • Real Return Bonds have continued to show very good returns, as a result of continued falls in real return bond yields
  • The PT notional fund is charged interest at the 3 month T-bill rate; in 2006, as in prior years, these rates were significantly lower than the returns on the invested assets

Tracking Error

    Fiscal Year ending 4 Years Target tracking error
   
     
    2003 2004 2005 2006 2003-2006 1 Year 4 Years
Universal Bonds Actual 9.2% 10.6% 5.0% 4.9% 7.36%    
  Index 9.1% 10.8% 5.0% 4.9% 7.42%    
  t/e 0.1% -0.2% 0.0% 0.0% -0.06% 0.20% 0.10%
                 
Canadian Equity Actual -17.0% 37.5% 13.9% 28.7% 13.70%    
  Index -17.6% 37.7% 13.9% 28.7% 13.58%    
  t/e 0.6% -0.20% 0.0% 0.0% 0.12% 0.30% 0.15%
                 
US Equity Actual -30.9% 20.2% -2.1% 7.4% -3.35%    
  Index -30.8% 20.4% -2.1% 7.4% -3.25%    
  t/e -0.1% -0.2% 0.0% 0.0% -0.10% 0.30% 0.15%
                 
EAFE Equity Actual -29.5% 40.5% 5.9% 20.1% 5.96%    
  Index -29.2% 40.8% 5.9% 20.0% 6.07%    
  t/e -0.3% -0.3% 0.0% 0.1% -0.11% 0.60% 0.30%
                 
Short Term Bonds Actual 7.0% 8.1% 3.0% 2.3% 5.05%    
  Index 7.0% 8.3% 2.9% 2.3% 5.09%    
  t/e 0.0% -0.2% 0.1% 0.0% -0.04% 0.20% 0.10%

  • Actual returns for the fiscal years 2003 - 2006 are calculated by EPL based on the quarterly returns reported by TD Asset Management
  • Index Returns for all years are calculated by EPL, based on quarterly index returns reportd by TD Asset Management
  • The annualized returns for the '4 years 2003 - 2006' are calculated by EPL, based on the annual returns shown above

Comments on Tracking Error

  • Canadian Equity had a positive tracking error outside the 1 year target range for fiscal 2003, but is inside the 4 year target range for the four years ending 2006
  • All other portfolios meet their tracking error target over both one and four years

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