* Suffered 18 percent investment loss last year
* Warns C$2.5 bln shortfall will grow unless market turns
* Target lowered for equity, fixed income exposure in '09
* Target raised for inflation resistant investments (Adds details on asset allocation plans)
By Frank Pingue and Jeffrey Hodgson
TORONTO, April 2 (Reuters) - The Ontario Teachers' Pension Plan, one of Canada's largest investors, said on Thursday it suffered an 18 percent investment loss last year, with equity and other holdings slammed by the global financial crisis.
The organization, which serves 284,000 active and retired Ontario teachers, said the C$19 billion ($15.3 billion) investment loss meant it now has a funding shortfall of C$2.5 billion.
But it said this is because C$19.5 billion in losses have been held back and will be recognized over the next four years in a "smoothing adjustment". It warned that the shortfall will grow unless the investment climate turns "sharply positive."
In a bid to reduce its risk, the highly influential pension fund manager said it has already lowered its target allocations for equities and fixed income.
It has boosted its target exposure to inflation-resistant assets such as real return bonds, property, infrastructure, timberland and commodities.
Ontario Teachers' said its net assets under management fell to C$87.4 billion for the year ended Dec. 31, 2008. That compared with net assets of C$108.5 billion a year earlier.
It said its 18 percent investment loss compared with an average 18.4 percent loss for large Canadian pension plans in 2008, according to RBC Dexia. But it also noted the return was worse than the 9.6 percent fall in its composite benchmark.
"The fund's 2008 returns largely reflect its exposure to equities, nongovernment fixed-income securities, externally managed hedge funds and real estate - diversity that has traditionally cushioned the fund in a downturn," it said in a statement.
Pension fund returns have become a hot-button issue in Canada after the country's biggest pension fund manager, Caisse de depot et placement du Quebec, reported it lost C$39.8 billion last year as its investments suffered a 25 percent loss.
Ontario Teachers' said it held C$34.9 billion of public and private equities at the end of 2008, down from C$50 billion a year earlier.
Its fixed-income holdings were C$5.3 billion at the end of December, down from C$18.7 billion at the end of 2007. The fixed-income portfolio suffered a 43.6 percent loss, massively underperforming a benchmark return of plus 12 percent.
The loss was due to "credit products, externally managed hedge funds and the Canadian dollar's decline against foreign currencies. This asset class has since adopted a more conservative fixed-income asset strategy", it said.
Inflation sensitive assets -- which include real estate, real-return bonds, infrastructure, timberland and commodities -- grew to C$44.9 billion at the end of 2008 from C$39.3 billion a year earlier.
The pension fund manager said its asset-mix policy was changed as of Jan. 1, to target 45 percent inflation sensitive investments, 40 percent equities and 15 percent fixed income. This compared with 45 percent equities, 33 percent inflation sensitive and 22 percent fixed income in 2008.
Its actual asset mix at the end of 2008 was 53 percent inflation sensitive assets, 41 percent equities, and 6 percent fixed income
$1=$1.24 Canadian Editing by Peter Galloway