Ontario Teachers' Shifts Focus to Asia?

Armina Ligaya of the National Post reports, Ontario Teachers’ Pension Plan to open Hong Kong office:
The Ontario Teachers’ Pension Plan says it will open up an office in Hong Kong within months, as it pushes to increase their exposure to emerging markets from 15% to 20%.

Jim Leech, the chief executive of the largest-single profession pension plan in Canada, says the plan on Tuesday received notification that it received the appropriate licensing to open an office in Hong Kong to cover Asia.

“We will be opening up a Hong Kong office in the next couple of months, with some feet on the street there,” he said in remarks at Bloomberg’s Canada Economic Summit Tuesday. “And I think that signals what we’re doing. Most projections show something like 70 to 80% of world trade are going to be intra-Asian trade, and that’s where wealth is going to be created, and that’s where we’ve got to be to be able to take advantage of it.”

The plan, which had net assets of $129-billion as of Dec. 31, 2012, invests and administers the pensions of 303,000 active and retired teachers in Ontario.

But as more teachers retire and the number of teachers in the workforce dwindle, the plan is facing a demographic crunch and is becoming more risk-averse in its investments, said Mr. Leech.

There are 1.4 working teachers for every retired teacher — more than 2,900 of which are over the age of 90, he added.

As such, they have shifted their exposure to equities from 65% about 15 years ago to about 45% range today.

“We’ve just slowly been dialing it back, simply because we can’t afford the volatility,” said Mr. Leech.

In turn, it has shifted towards investments in infrastructure, real estate and emerging markets.

The plan’s view is Europe, as an investment market, has been “dead for a long time,” he said. And in the U.S., while there has been anecdotal evidence of a renaissance, Mr. Leech does not anticipate big growth.

“So, maybe we can get a couple points, 2.5 points growth out of the U.S., over a longer period of time, so that really just leaves you with the emerging markets,” he said.
Ontario Teachers' put out this press release:
Ontario Teachers' Pension Plan (Asia) Limited, a subsidiary of Ontario Teachers' Pension Plan, has been granted regulatory approval by the Hong Kong Securities and Futures Commission to conduct regulated activities, including dealing in securities, advising on securities, and asset management (Types 1, 4 and 9 regulated activities).

"I am pleased to confirm that our Asia subsidiary and its proposed responsible officers have received formal approval for these licences," said Jim Leech, President and Chief Executive Officer of Canadian-based parent Ontario Teachers' Pension Plan (Teachers'). "Asia has long been a region of interest to Teachers'. We look forward to continuing to build relationships with local partners and exploring new direct, co-investment and fund investment opportunities in the market."

The Asia office will be located in Hong Kong and staffed by local and Canadian equities staff from the fund's private capital and public equities departments. This office will be the fund's second major regional office. Teachers' European, Middle East and Africa regions private capital office opened in London in 2007.
Ontario Teachers' isn't the only (or the first) large Canadian fund opening up an office in Hong Kong. If you refer to the interview with Mark Wiseman, CPPIB's president and CEO, at the end of my comment on CPPIB's FY 2013 results, you will see the first foreign office they opened was in Hong Kong, not New York or London.

Does it make sense for these large funds to open offices in Asia and elsewhere? Yes and no. They can easily invest in large public and private market funds that already have offices in Asia but the truth is there are advantages to having eyes and ears on the ground to explore all opportunities in direct, co-investment and fund investments, as well as cultivate relationships with large Asian pension and sovereign wealth funds in the region.

As far as dialing back risk to deal with their demographic crunch, Teachers' has been shifting out of public equities into real estate, private equity and infrastructure over the last 15 years to dampen volatility but it also recently announced it is absorbing more investment risk. And while investing in emerging markets is volatile, there is no question that over the long-term this region will grow while the developed world struggles with low growth and high debt.

Finally, there was another article that caught my attention. Barry Critchley of the National Post reports that debt financing by pension funds is a steadily growing business:
One day after OPB Finance Trust raised $250-million of nine year debt at 2.90%, more information has emerged about the borrowings by some of the country’s leading public sector pension funds. For instance:

— According to DBRS, the total debt outstanding for OMERS is about $4.43-billion. That debt has been issued by three different entities: OMERS Realty Corp., OMERS Realty CTT Holding and OMERS Realty CTT Holding 2. In numbers provided by DBRS, the total debt for PSP Capital Inc., the financing arm for the Public Sector Pension Investment Board is about $11.8-billion. That debt has been issued through one entity, PSP Capital Inc.

— According to FTSE TMX Global Debt Capital Markets Inc. the entity that manages and publishes the country’s debt indexes, debt issues from five public sector funds have found a home in the all government index.

Of the five, Cadillac Fairview Finance Trust, a unit of Ontario Teachers Pension Plan Board, has three issues in that index: $1.25-billion (with a 3.24% coupon and a maturity date of Jan. 25 2016); $750-million (4.31% and Jan. 25, 2021); and $600-million (3.64% and May 9 2018.) Among the others the Caisse de depot’s CDP Financial Inc. has one issues that’s included ($1-billion, 4.60% and July 15, 2020); OMERS Realty Corp. ($200-million, 4.74% and June 4 2018); OMERS Realty CTT Holding ($170 million, 4.75% and May 5 2016) and OPB Finance Trust ($350-million, 3.89% and July 4, 2042). For its part PSP Capital has two issues included ($700-million, 2.94% and Dec. 3, 2015) and ($900-million, 2.26% and Feb. 16, 2017.) All those issues with the exception of OPB Finance Trust are AAA-rated OPB is split rated: AAA/AA(high). And all the issues are guaranteed by the pension fund.

So what’s the point of all the debt financing? When Cadillac Fairview last raised capital it explained it in these terms. “The Trust will lend the proceeds of the Offering to one or more of the entities comprising the real estate portfolio of Ontario Teachers’ Pension Plan Board referred to as the Cadillac Fairview Group.” In addition the release said that Cadillac Fairview Finance Trust “is a special purpose trust established under the laws of the Province of Ontario. The activities of the Trust are limited to the borrowing of funds from time to time, lending funds to the Cadillac Fairview Group, and holding funds in cash and cash equivalents and other ancillary activities.”

In an early 2013 ratings report by Moody’s Investor Services, it was stated that PSP Capital, a wholly owned subsidiary of the Public Sector Pension Investment Board (PSPIB). PSPIB “uses this subsidiary to add a moderate degree of leverage to increase the return of its investment portfolio by issuing medium term notes and commercial paper.”
You might wonder why large Canadian pension funds are engaging in debt financing but if the conditions are right to issue debt and they have the AAA balance sheet to borrow cheaply, why not borrow to fund investments? The increase in leverage is moderate and hardly something to be concerned about.

Below, Reorient Financial Markets' Uwe Parpart discusses the outlook for the Chinese economy and Federal Reserve monetary policy with Susan Li, John Dawson, Rishaad Salamat and David Ingles on Bloomberg Television's "Asia Edge."