A Discussion With UPP's CIO on Their 2025 Results
Ontario's university sector pension plan closed 2025 fully funded with a surplus and $13.5bn in net assets, despite a year shaped by geopolitical tension, trade uncertainty, and elevated long-term interest rates.
University Pension Plan Ontario (UPP) posted a 5.2 percent total fund net return and a three-year annualized return of 8.5 percent, ending the year 103 percent funded on a smoothed basis with a $0.3bn surplus, according to its 2025 annual report.
Net assets grew from $12.8bn in 2024.
The plan paid $620m in pension benefits to members and applied a 1.49 percent inflation protection increase effective January 1, 2026.
The increase equals 75 percent of the 2025 Canadian CPI reading of 1.99 percent and applies to pensioner, survivor, and dependent pensions.
"Every decision we make is grounded in delivering secure and stable pensions for members across Ontario's university sector," said president and CEO Barbara Zvan, adding that continued growth is strengthening long-term pension stability.
Return-enhancing assets drove performance, generating an 11.9 percent one-year return and 15.1 percent over three years.
Public equities returned 16.2 percent and absolute return strategies returned 12.6 percent. Infrastructure returned 20.8 percent.
Fixed income weighed on results, returning negative 5.1 percent as elevated long-term government bond yields pushed bond prices lower.
Illiquid legacy holdings, reduced to roughly 10 percent of the total portfolio, had an approximate 1.0 percentage point drag on the 5.2 percent total return.
UPP-initiated active strategies totalled $5.2bn at year-end, roughly 38 percent of the total portfolio, delivering a three-year annualized net return of 16.6 percent against a benchmark of 14.6 percent.
In 2025, those strategies outperformed their one-year benchmark of 9.2 percent by 4.9 percentage points.
Chief investment officer Aaron Bennett said the portfolio is "built to perform across different market conditions," with diversification and private markets exposure supporting resilient outcomes.
Scale, he added, enhances the fund's ability to manage costs and access opportunities typically out of reach for smaller plans.
The plan surpassed $2bn in private market commitments and investments since 2022, including more than $1bn in infrastructure, approximately half deployed through co-investments.
The infrastructure program returned 20.8 percent in 2025.
UPP also reduced active public equities management fees by 67 percent between 2022 and 2025, avoiding approximately $10m in annual fees, and generated close to $1m in savings through in-house capital markets activities including foreign exchange and short-term cash management.
The plan committed an additional $104m to climate solutions in 2025, bringing total commitments to $762m against a $1.2bn target by 2030.
Portfolio greenhouse gas emissions intensity fell 55 percent from the 2021 baseline to 22 tonnes CO2e per $m invested.
Membership grew as Wilfrid Laurier University faculty and staff joined effective January 1, 2026, adding more than 3,200 members and approximately $1.1bn in assets.
UPP now serves over 46,000 members across six universities and 19 sector organizations.
Contribution rates have remained stable since the plan's founding and are expected to hold at current levels through at least 2027.
Matt Toledo of Chief Investment Officer also reports University Pension Plan Ontario posts 5.2% return in 2025:
The University Pension Plan Ontario reported Tuesday a 5.2% return for 2025, slightly underperforming its nominal discount rate—the fund’s long-term expected rate of return—of 5.6%.
Assets managed by UPP rose to C$13.5 billion ($9.78 billion), up from C$12.8 billion at the end of 2024, and the pension’s funding surplus rose to C$300 million for a funding ratio of 103%.
As of the end of 2025, UPP allocated 35.3% of its portfolio to fixed income, 33.1% to public equities, 11% to absolute return strategies, 7.6% to inflation-sensitive bonds, 7.5% to infrastructure, 4.8% to private equity, 4.2% to private debt and 2.5% to real estate.
“2025 was a challenging year for investors. Geopolitical tensions, trade uncertainty, and ongoing questions about inflation and government spending kept markets volatile throughout the year,” said Aaron Bennett, UPP’s CIO, in the fund’s annual report. “Against this backdrop, UPP delivered a 5.2% total fund net return in 2025, contributing to a three-year net return of 8.5%—results that support our funding objectives and help maintain strong, sustainable pensions for our members.”
Infrastructure was UPP’s best-performing asset class in 2025, returning 20.8%. It was followed by public equities, which returned 16.2%. Absolute return strategies returned 12.6%, followed by private debt with a 0.2% return.
All other asset classes within UPP’s portfolio reported losses, with real estate falling 6%, fixed income falling 5.7%, private equity falling 3.7%, and inflation-sensitive bonds falling 2.2%.
The plan serves more than 46,000 members across six universities and 21 sector organizations across Ontario. In 2025, UPP paid C$620 million in pension benefits to its members, and it has surpassed $2 billion in private market commitments and investments since 2022.
Last week, University Pension Plan Ontario (UPP) announced it delivered sustained growth and funding stability in 2025:
Toronto, ON – University Pension Plan Ontario (UPP) today released its 2025 annual results, highlighting continued growth and a stable funding position as the Plan scales. The Plan’s net assets rose to $13.5 billion, up from $12.8 billion in 2024, reflecting its growing size and maturity. In a year marked by evolving market conditions, it delivered a 5.2% total fund net return and 8.5% over three years, helping to keep pensions secure and stable for members over the long term.
UPP ended the year 103% funded with a surplus, demonstrating the Plan’s financial resilience and ability to meet pension commitments now and in the future.
“Every decision we make is grounded in delivering secure and stable pensions for members across Ontario’s university sector. That member focus shapes how we design our services and the overall member experience. As we continue to grow, we are strengthening the foundation that supports long-term pension stability so members can count on their pension when they need it most.”
Barbara ZvanUPP’s President and Chief Executive Officer
UPP continues to advance its long-term investment strategy, focused on building scale, enhancing internal investment capabilities, and increasing allocations to private markets. This disciplined approach strengthens the portfolio and supports the Plan’s objective of providing lifelong pensions while maintaining stable contributions and benefits for members.
“The Plan’s performance demonstrates how our portfolio is built to perform across different market conditions, including the volatility we saw this year. UPP-initiated strategies continue to show promise in driving long-term value creation and risk management within the portfolio. Diversification and increased exposure to private markets supported resilient outcomes, while our scale continues to enhance our ability to manage costs and access investment opportunities typically out of reach for smaller plans. This positions the portfolio to grow stronger over time and retain even more value for members.”
Aaron BennettUPP’s Chief Investment Officer
The Plan continued to enhance investment capabilities and member services to support pension security for the faculty, staff, researchers, and administrators it serves.
2025 highlights
- Provided pensioners, survivors, and dependents with a 1.49% inflation protection increase to the UPP portion of their pensions1
- Paid $620 million in pension benefits to members
- Welcomed more than 3,200 new members and approximately $1.1 billion in assets from the Wilfrid Laurier University Pension Plan2
- Delivered strong results from UPP-implemented active strategies, outperforming their one-year benchmark return of 9.2% by 4.9%.
- Surpassed $2 billion in private market commitments and investments since 2022
- Maintained a 55% decrease in our portfolio’s greenhouse gas emissions intensity from our 2021 baseline
- Named one of Greater Toronto’s Top Employers, recognizing the strength of our purpose-driven culture and the dedication of our people.
The Plan’s ongoing efforts to deliver lifelong pension benefits to members are published in its 2025 Annual Report.
1 Effective January 1, 2026. Pre-conversion inflation protection is based on the prior plan’s indexing formula, which varies by each plan joining UPP.
2 As of January 1, 2026.
About UPP
University Pension Plan Ontario (UPP) is a jointly sponsored defined benefit pension open to all Ontario university sector employers and employees. UPP manages $13.5 billion in net pension assets as of December 31, 2025, and proudly serves over 46,000 members across six universities and 21 sector organizations. The Plan invests to deliver secure, stable pension benefits for members today and for generations to come.
All universities are welcome to explore participation in UPP, regardless of their existing pension plan type.
For more information, please visit myupp.ca and follow UPP on LinkedIn.
Alright, I didn't get a chance to speak to UPP's CIO, Aaron Bennett, till earlier today but it was another great discussion on UPP's results.
Before I get to that discussion, let me go over some items from the 2025 annual report, which you can download here.
First, the 2025 highlights at a glance:
You can delve into these highlights here.
From my vantage point, the most important thing is the funded status of the Plan is very strong, standing at 103%.
Next, the message from UPP Chair Gale Rubenstein:
I note the following:
In 2025, the Board focused on strengthening the systems and safeguards that protect the Plan over time, ensuring that as UPP grows, our governance continues to evolve. This work is not always visible, but it is essential and requires ongoing vigilance, particularly in periods of volatility. We recognize the continuing challenges facing Ontario’s university sector and remain focused on providing steady leadership and oversight for our members
Also, Ms. Rubenstein will be stepping down as the (inaugural) Chair on December 31, 2026, when her seven-year term formally concludes.
The Joint Sponsors of University Pension Plan Ontario (UPP) recently appointed Peter Wallace as the next Chair of the Board of Trustees, effective January 1, 2027:
Peter Wallace brings extensive experience in public-sector leadership and governance, including senior roles across federal, provincial and municipal governments. He has served as Secretary of the Treasury Board of Canada, City Manager for the City of Toronto, and Secretary of the Cabinet and Head of the Ontario Public Service. He has also served as an independent trustee and director on several boards.
“We are deeply grateful to Gale for her leadership as UPP’s inaugural Chair,” said Colleen Burke, United Steelworkers, Co-Chair of the Joint Sponsors’ Board Chair Selection Committee. “She has played a foundational role in establishing the Board’s operational processes and guiding the Plan through its formative years, helping to position the Plan for the future.”
“Peter brings deep experience, a strong approach to Board oversight, and is well positioned to support the Board in the years ahead,” said Kelly Hannah-Moffat, University of Toronto, Co-Chair of the Joint Sponsors’ Board Chair Selection Committee. “We look forward to working with him as the Board continues its mandate in support of the delivery of a defined benefit pension.”
“It has been a privilege to serve as the inaugural Chair of the Board of Trustees and to help establish the governance practices that support the Plan today,” said Gale Rubenstein. “I am proud of the role the Board has played in delivering secure pensions for members. I look forward to continuing to serve through the end of my term and working with Peter, the Board, and the Joint Sponsors to ensure a smooth, orderly transition.”
I personally think Gale Rubenstein did a great job as an inaugural chair of this organization and want to highlight it publicly.
Next, the message from President and CEO Barbara Zvan:
I note the following:
In 2025, global markets were shaped by ongoing geopolitical uncertainty, with equity market returns remaining highly concentrated. In this environment, UPP’s disciplined and diversified investment approach delivered a net investment return of 5.2%, contributing to a three-year return of 8.5%, and helped ensure the Plan remained fully funded, while maintaining stable contribution rates. Our focus remains on managing risk across market cycles rather than relying on short- term market concentration, so that the pensions members are earning today are protected over the long term.
As UPP has matured, our focus has centred on execution, ensuring that strong governance, disciplined investment, and organizational capability translate into dependable outcomes for members and participating employers. One expression of this maturity is how we support organizations considering or joining the Plan. In 2025, we welcomed Victoria University and members of the Trent University Staff Plan into UPP and worked closely with Wilfrid Laurier University on its successful transition ahead of its official joining on January 1, 2026. With each new institution, we continue to refine our approach to onboarding and integration, strengthening our ability to manage transitions while maintaining continuity for members and predictability for employers.
The broader investment and regulatory environment continues to evolve in ways that strengthen long-term pension security. In 2025, the Government of Ontario announced measures to expand pathways for defined contribution plans to transition to jointly sponsored pension plans like UPP, modernizing the province’s pension framework and supporting broader access to predictable retirement income. UPP has contributed to these advancements through industry collaboration and advocacy, reflecting our commitment to strengthening Ontario’s retirement system and expanding access to secure and sustainable pensions.
In 2025, the federal government also signalled progress toward a voluntary, made-in-Canada green and transition taxonomy, a step toward clearer definitions and more consistent assessment of sustainability-related risks and opportunities. UPP has been involved in industry dialogue supporting these efforts, demonstrating our commitment to advancing practical frameworks that enhance transparency and disciplined investment decision-making. This means stronger tools to identify long-term risks and opportunities, helping us make more informed decisions and protect the pensions you are earning over time. It reinforces disciplined management of factors that influence long-term funding and contribution stability.
And the Q&A with Aaron Bennett, UPP's CIO:
I note the following:
What investment decisions mattered most in 2025?
Advancing UPP-initiated strategies A central focus has been diversifying our sources of return and deepening our internal capabilities. We continue to gradually complement the Plan’s public market exposure with alternative growth assets, such as infrastructure and absolute return strategies, with the goal of deriving returns from multiple, less correlated sources to reduce volatility while maintaining the long-term growth our members need. Some of our strongest outcomes of 2025 came from UPP-initiated active strategies, which have generated 16.6% over the last three years.
And this:
What should members and employers know as we look ahead?
Markets are likely to remain uncertain. Geopolitical instability, trade tensions, and evolving domestic policy will continue to test portfolios, but our fund is built for this environment. We will stay selective in how we deploy capital, recognizing that volatility can create opportunity, but only when risk and pricing are appropriately balanced. As the Plan has grown, so has our ability to invest with greater reach and agility. That scale strengthens our ability to navigate changing market conditions with confidence and pursue opportunities aligned with our long-term mandate. Members can expect our results to increasingly reflect the investment approach and capabilities we have spent years building.
Discussion With Aaron Bennett, UPP's CIO
Alright, long preamble, and there's more in the annual report, which you should take the time to read here.
As I stated above, this morning I had a chance to catch up with UPP's CIO, Aaron Bennett, to go over 2025 results and more.
I want to begin by thanking him and also thank Darya Eshaghi of UPP for sending me material last week and organizing the phone call with Aaron.
Aaron began by giving me an overview of the results:
2025 results reflect a challenging and volatile market environment where we're still able to maintain long term financial stability and pension sustainability for our members.
On the year, it was 5.2% in terms of annual net return. I think perhaps more important was the 3-year annualized net return of 8.5% and fully funded with a surplus.
In my mind, that means we're hitting the mark and. Terms of building a resilient portfolio that can support pensions over decades.
Some areas of note within the portfolio. On the positive side of things, you saw the work that we've been doing to really develop a more diversified portfolio, particularly in the private markets, and the absolute return strategies contribute positively to returns.
In particular, we saw some early very positive returns from infrastructure, where in the year we saw that allocation deliver a 20%, almost 21%, one-year return, and the absolute return strategies continue to generate double-digit returns. They were 12.5% on a one-year basis. As you would know, and others would know, public equities have continued to perform well, and that has contributed positively to the overall performance of the plan.
Now, as with any portfolio, there are areas that have been working really well, and areas that have not been working particularly well right now, although we still feel like there's a role for them in the future, because that's why you build a portfolio with multiple asset classes. So, examples of some things that were a drag on returns: fixed income holdings. You saw a lot of activity across the curve, and a lot of pressure on longer-term rates, and you saw yields in longer-term bonds spike up, so that drove returns overall total fund level down. We have a significant holdings in government bonds that are matched in terms of duration to our liability.
Importantly, those bonds play a dual role. First, we do expect some small returns out of them, they're very low risk. They also tend to provide diversification in some, in some circumstances, relative to public equities or return-enhancing assets, and they provide an important source of liquidity and an offset to the interest rate sensitivity of the liabilities of the plan.
We also have a shrinking pool of legacy assets. It's now about 10% of our portfolio. It used to be about 20% of our portfolio, and consists of illiquid assets that we've taken on from prior plans. Now, those, I think, in the past have done some positive things for the prior plans. They have been a drag on performance for us thus far, and in the year it was a significant drag on performance of about 1% on the returns.
They're generally performing as expected, they're illiquid, so we can't really do too much about them, but we're actively focused on trying to figure out how to maximize the positive impact and minimize the negative impact on members over time.
We would expect them to continue to roll off. As I said, they've been cut in half since we've gotten a hold of them, and we would expect them to become a smaller part of the portfolio, and then the overall results will increasingly reflect our current investment platform with our internally delivered capabilities and our long-term stretch.
I'll pause there and see where you want to dive in.
I asked Aaron whether their legacy portfolio is concentrated in real estate assets like retail and offices.
He replied:
There certainly is some office real estate in there, and we've seen some particular pressure in the US side of things. And in areas where it's outside of that kind of double A office real estate, although I would say that that's a fairly small percentage of the portfolio.
We had done some restructuring in 2024 that allowed us to get rid of some of that exposure in real estate, but in truth, we inherited a portfolio that had very little real estate, and we've been focused on growing that with our own strategies.
Where we see most of the drag (in legacy portfolio) is on the private equity side, and I think that you probably see this in other funds as well. There was a period where growth equity, venture capital, emerging market, or distressed private equity took off. Those are things that have done exceptionally well for folks over the last several decades. They have not done particularly well over the last several years, and that's where we see the largest drag, on performance from those assets.
I followed up noting that the bigger funds used the secondary market to shed some exposure in bad vintage years for private equity, so why didn't UPP follow suit?
Aaron replied:
It's a great question, and I think it's a nuanced. We see lots of activity around the secondary side of things, and we see growing activity on the secondary markets, and we've certainly been very active in looking at a number of these things. And in all of these transactions, we always think about what is ultimately best for members. We talk about these as inherited or legacy assets, but we spend the same amount of energy worrying about them and managing them that we do with assets that we've deployed on our own, because this is our members' assets, and we want to make sure that we do what's best for them.
Certainly, over the last several years, the activity in the secondary markets has picked up, but I would suggest that it's been a much better place to be a buyer than a seller. Some of that is starting to change as you see some of the dynamics of the private equity market in terms of exits and distribution shift a little bit, and we may see some opportunities going forward.
What we like to do is remain very active and connected to those markets, and if there is a transaction that makes sense for our members and provides us the opportunity to get that value now and deploy it in our own strategies, we will. We've not seen a lot of those thus far, but we may see more in the future, so it's certainly an area that we have explored and will continue to explore going forward, with the idea that if this makes sense for our portfolio, for our members, we will definitely be in the mix of that.
The one thing I would note is we are smaller than many of the large transactions that have been seen in the market, and that means that you're dealing at a different part of the secondary market as well, and so it's not quite as deep or as wide, and the discounts can vary relative to what you see for the folks that are doing big $4 billion swaths of a diversified portfolio private.
Fair point, the much larger funds like CPP Investments and La Caisse have more negotiating power on the haircuts they're willing to take in secondaries transactions.
I moved on to infrastructure, where I noted returns were outstanding in 2025 and asked Aaron if that was because of a distribution since typically in that asset class you expect anywhere between 8-12% return.
Aaron replied:
You're dead on there. We are very focused on core plus value add, but we're not deep into the opportunistic side of things, we're not taking things that look like private equity and calling them infrastructure.
I think what we saw here is the early fruits of all the work that the team is doing early on is when we started some of the first investments we made were in digital infrastructure and we were able to get into that market early on. We were also able to do some co-investments early on, and those co-investments in particular, once there is a distribution for one of them, and a markup based on a real transaction happened in the market.
Someone wanted to buy a significant piece of one of the co-investments in the data center space, and it was green power data center. We had been invested in a platform with one of our partners in that area, and someone came along and showed our partners a number they couldn't say no to, and that's driving a lot of the returns there.
But you're also seeing a lot of the benefits of us being able to be early, or in some cases even counter cyclical with regards to a focus on renewable energy in other areas where there's been lots of noise around the opportunity set for renewable energy being diminished because of some of the changes happening in in the regulatory environment or general preferences by other governments.
However, what we've actually seen is we've seen people move to the we just want power, it doesn't matter where it comes from, we just need power for data centers, for people, for all sorts of things, and that's really put us in a position where some of the early investments in that lower marginal cost, easier to scale renewable energy related investments.
The data center side of things, it's really enabled us to show some great early returns, but these are not returns that I would be expecting. I think exactly what you said is what we target, kind of that high single digit, maybe up to mid double digits for some of the value-add things, but certainly not 21%, but happy to see it in the year, and happy to see it based on an actual cash transaction. This is not marking it to model.
I asked Aaron if he can give me more of a breakdown of where private assets currently stand, which he did:
We are just under 20% on the private asset side of things. The goal is that we should be closer to high 20s, low 30s over time, and infrastructure is the largest proportion of that.
At the end of last year, infrastructure was 7.5%, real estate has remained low, but in infrastructure, we started with, as you may recall, very little infrastructure, and it was an area we wanted to deploy capital in, because we saw a lot of opportunities, and we had some great people that we thought had a great network and a really great framework for investing, and turns out we've been proven right thus far.
So we deploy capital very quickly in this area. Real estate has remained quite low, at about 2.5% on the year, and then private debt and private equity are both 4 to 5% so it all adds up in that range of just under 20%
We have restructured and decreased some exposure in the real estate and infrastructure side of things, and we've seen some of our private debt roll off. Our inherited private debt rolled off pretty quickly.
I would expect the overall exposure to grow from here to private assets, assuming we see the opportunity set, because we are investors, we're not allocators, we don't see a bucket and fill it up.
We've been working incredibly hard on real estate for a number of years, and the teams looked at a lot of assets, and to be frank, we just haven't seen a lot of interesting things until recently. So, the teams become increasingly active, so I'd expect that overall exposure to grow into the high 20s, low 30s.
We moved on to talk about private equity and private debt where I noted headwinds and negative media coverage were rampant all of last year.
I also noted dispersion of returns is very wide among funds and asked how they're approaching these asset classes.
Aaron replied:
I think that we're seeing a lot of a lot of noise, but also a lot of important signals that in parts of some of these markets there was perhaps excess capital deployed in a short period of time, so that tends to overcapitalize or increase valuations, a reliance on public markets for exits, which can be quite challenging, and in some cases reliance on different sources of capital to fund these.
By that I mean the retail side of things, so what do we look for in private equity and private credit to make sure that we're getting that right risk-adjusted return for our members, and how are we positioned relative to some of these seeds?
In private equity, we've intentionally focused on mid-market buyout, and it's sort of that mid to lower mid side of things, and that provides us with the unique opportunity where people can buy control positions, they can actively create value through a variety of different strategies, but not heavily relying on cheap leverage, which you saw in the past, and they have multiple exit opportunities.
In fact, many of the partners that we've struck some partnerships with they tend to focus on just about everything other than the public markets as a potential exit, and that's very compelling because then you're not reliant on the more volatile, the less certain public exits right now, and you're not relying on simple financial engineering, you're looking at true value creation within the business, and that's important to us.
On private credit, we have been ensuring that as we build this portfolio, it's not just another version of private equity, so sponsor-backed lending, direct lending has not been a big feature of what we've done thus far.
That's a very large part of the overall private credit market, but for us it wasn't as interesting in terms of pricing, and so we found a lot more in the asset-backed lending, asset-backed financing side of things, and some more heavily structured strategies that we think put us in a position to really pick our spots in terms of risk and return.
Importantly, in both private equity and, particularly, in private credit, we are very focused on ensuring that we are involved with partners where a large source of their fundraising strategy is not based on tapping into the emerging retail market for these things, not that we have anything to say in particular about those strategies, but our view is is that we want to be in these types of investments with folks that have liquidity profiles and expectations similar to ours, long-term investors that understand that private asset classes are illiquiquious, and that's why you get a little bit of an illiquidity preview.
I think it's more difficult for us to get involved in open-ended funds that are really targeting retail investors, because there may be a mismatch between the liquidity of the underlying assets, our expectations, and the expectations of the other investors in those funds. So, we've intentionally de-emphasized those and try and avoid those in our investments for these two strategies.
Great point. I told him I'd assume the underwriting is much deeper and stricter with those long-term partners and he added:
Yes and I think it's a, it's an excellent point, particularly in private credit, because what we found is people talk about private credit as if it's one thing. The truth is it's a lot of different things, and it's an area that really does require very focused underwriting of the partner, the strategy, understanding what they do and how they create value in these things.
We've just found greater complexity and more interesting risk-return profiles in those areas, where, generally speaking, as you said, you get longer-term investors with dedicated in-house teams like ours that can do that underwriting and make sure that this makes sense for our portfolio.
We moved on to public markets where I asked him if their absolute return portfolio is a portable alpha strategy and he replied:
No, we look at it as a completely separate strategy altogether, so not portable alpha, and we don't really run a portable alpha strategy. We look at this as a key diversification point within the return-enhancing assets, and we intentionally look for things that have very low or negative beta to the public markets.
I followed up and asked him if they also plan on initiating internal absolute returns strategies to whch he replied:
It's an interesting question, and I think it's one that we thought about on one hand.
I think, in truth, the opportunity set out there to partner with leading players in the space, both niche and larger scale absolute return strategies at a reasonable price in a construct, whether it's a managed account platform or an SMA or something like that, for a fund of our size is there, and the ability to move between those things is pretty valuable.
So, it's unlikely we'll do absolute return strategies internally at any point. We may look in the longer term as we improve our ability to look at certain types of derivatives internally. We may consider, how do you start using some of the more commoditized risk premiums to provide tactical or strategic tilts to the portfolio, but I think we're a ways away from that.
I then remembered to ask him why UPp doesn't publish a benchmark for the overall fund and by asset class.
Aaron replied:
It's a great question, and I think one that's becoming topical because of some of the other things going on outside in the market.
Our benchmark is funding pension returns, so we want the team and everyone focused on what's required to sustain the funding.
So, when we think about the primary metrics that we compensate people on, it's absolute return, net of external manager fees, as well as the funding ratio, so those are the two dominant metrics that we think about, and so we talk a lot about those things, because those are the most closely related to the long-term funding of our members' pensions.
Now, we still have benchmarks. We look at active management as a separate thing, so we apply the benchmarks to only the actively managed strategies, and so that's a portion of public equity.
Certainly, private equity, private debt, absolute return, infrastructure, and real estate are the actively managed, and we look at how we have performed relative to the relevant benchmark in those areas.
Now, we have been careful as we transition to ensure that we're providing the most relevant information, and as we transition the portfolio. As I'm sure you understand, the benchmarks that we use may not have been the benchmarks that some of the prior plans used, and therefore, some of the elements associated with that can get confusing and create a lot of noise around comparing at the asset class level, but we do look at total active management.
And we have seen that the overall active management program has been consistently adding value, and the same drivers that drive absolute return have been the drivers that have been adding value, and that's absolute return strategies infrastructure are the biggest drivers there.
I told him I read an article (see above) where it states "UPP-initiated active strategies totalled $5.2bn at year-end, roughly 38 percent of the total portfolio, delivering a three-year annualized net return of 16.6 percent against a benchmark of 14.6 percent."
Aaron explained:
Yes, it's not really a benchmark, it's more of the aggregate benchmark associated with all the active strategies. So, we don't really have one as our total fund benchmark is absolute return, so in many ways we've actually set the bar quite high for ourselves in making the overall fund benchmark an absolute return benchmark and a funding ratio target. That's where we focus, but we do have benchmarks for each active program to ensure that we're evaluating the team's ability to add value over time. And this takes a long time, I think as we get more years of information, we'll be disclosing more. And more detail about this, because I think it's an area of interest.
To be fair to UPP, they inherited a legacy portfolio, so it's hard to just slap on some benchmark at the fund level and by asset class without taking into account this portfolio which is a drag on returns.
We ended by discussing markets. I asked him if he read my Friday comment on FEMO powering stocks higher, a trend that continues this week. I noted it's a strange environment; some segments feel like 1999 but there are incredible earnings in many companies driving all this.
I asked Aaron about his thoughts and how he is positioning the portfolio, to which he replied:
I think it's something that I'm thinking a lot about, in terms of what are the intended and unintended risks that we're taking to get the required returns, and I think that you know, in a recent article that you wrote, you referenced the term FEMO, and that idea of earnings momentum being really dominant here. I think that's true, and I think we've seen that we think a lot about our factor exposure.
We also think about our sector exposure, and one of the things we've worked very hard at is implementing a risk system that allows us to get that cross portfolio view on country exposure, currency sector exposure, company exposure, theme exposure, and also allows us to create scenarios from history or our own scenarios around things like what happens if something goes wrong in private credit, what happens if something goes wrong with the AI trade, or some of these other elements have been growing tremendous earnings momentum in the public markets, and tons of capital and interest in the private markets on the private credit side as well. How do we process some of that?
I think that really allows us to create that portfolio that says we're being very intentional about the risks that we take, we're being aware about what we're doing, and we're trying to balance the risks that we're taking.
We're trying to avoid some of the extreme levels of concentration that you see in the public markets by diversifying into private markets and into absolute return strategies, still recognizing that the public markets are seeing an extraordinary run in earnings momentum, but always reminding ourselves that bad things can happen, and we think about the.com bubble, the global financial crisis, COVID, and all of these things, which are not great things to think about, because no one wants to remember them.
But for us, it's important because that's where you really secure your members' pensions in a way where you minimize those drawdowns, and you position yourself so you've got liquidity, so you can capitalize on the upswing that comes afterwards.
So, we're thinking a lot about those things right now, and being very careful about what we do in the public markets, but also across the portfolio.
We ended it there, another great discussion which I thoroughly enjoyed.
I thank Aaron for taking the time to share his insights with my readers.
Below, Bodhi's Founder and CEO, Ranjan Bhaduri, is joined by Aaron Bennett, Chief Investment Officer of UPP. Alongside discussing fiducuaryy duty, inflation risk, and responsible investing, Aaron shares stories of how the organization built its culture remotely and constructed the blueprint for a durable portfolio designed to support members for decades to come. Excellent discussion.
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