* Pension fund 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
TORONTO, 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.
Still, 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. Tha t means the plan is 94 percent funded, with a shor tfall 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 a nd timberlands pu lled 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, the pension fund manager's chief executive, said in a statement.
The pension plan has also started 2012 off well, benefiting from rebounding equity markets as investor appetite for riskier assets recovered early in the year.
" Starting 2012, we have had some success already, not only because markets have seemed to be in risk-on mode for the last three months, but also because some of our investments are doing very well," Neil Petroff, chief investment officer, told a news conference.
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 - i n 1996 a nd has since put its money to work in pr ivate e quity, seeking gl obal p rojects and assets that promise long-term income and gains.
Petroff said the fund will continue to be an opportunistic investor, looking at both emerging markets and to debt-stricken Europe for assets that offer long-term investment income.
" If you look at Latin America and Greater China, those are areas that we're investing in now and we continue to do direct deals and/or co-invest deals with people who are on the ground," Petroff said, noting Teachers' emerging market exposure, at about 15 percent, still has room to grow but would not exceed 25 percent.
Opportunities are also bound to arise in Europe, he said.
"I believe the debt situation is not solved but they are going to solve it by selling European assets - infrastructure, maybe lotteries - and they have a lot of very strong great assets. And those are the opportunities we'll be looking at in the future," Petroff said.
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. Te achers' 10-year rate of return on its investments is 8.0 percent, well above global averages.
Still, demographic trends mean Teachers must grapple with trying to provide benefits t o more retiring teachers, who are living longer, wh ile the number of active educators paying into the plan declines. The plan has only 1.5 active teachers contributing to the fund for every retired teacher receiving benefits, a ratio that will continue to fall in years ahead.
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.
"This is not a crisis. What needs to happen is a small course correction now to ensure this plan solid and sustainable going forward," Leech said, adding that the teachers union and Ontario government, as joint contributors to the plan, will have to decide how to close the funding gap.
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 a s its biggest areas of investment - private equity, real estate, and fixed income - did well, while smaller exposures to commodities and timberland suffered.
"Where we had large dollars, we did well," Petroff said.