OTPP and the Caisse's Mid-Year Results

The Canadian Press reports, Ontario Teachers’ Pension Plan earned 3.2% so far this year:
Ontario Teachers’ Pension Plan earned a return of 3.2 per cent on its investments for the first six months of this year.

The gain increased the pension fund’s net assets to $193.9 billion as of June 30, up $4.4 billion from the end of 2017.

The fund says that while financial markets have stabilized, volatility will likely continue amid global trade tensions, rising energy prices and geopolitical tensions.

Chief investment officer Ziad Hindo says returns in the first half of the year were driven mainly by the performance of the equity asset classes, both public and private, and the inflation-sensitive asset class — which includes commodities, natural resources and investments that provide protection against inflation.

Ontario Teachers’ invests and administers the pensions for Ontario’s 323,000 active and retired teachers.
As Ontario's teachers get set to go back to work, they can rest assured their pension plan is in good shape.

OTPP put out a press release, Ontario Teachers’ net assets reach $193.9 billion in first half of 2018:
Ontario Teachers' Pension Plan (Ontario Teachers') today announced its net assets reached $193.9 billion as of June 30, 2018, a $4.4 billion increase from December 31, 2017. The total-fund net return was 3.2% for the first six months of the year.

"At Ontario Teachers' we define success by our ability to pay pensions for generations to come, and we are continuously advancing and innovating on that mission," said Ron Mock, President and Chief Executive Officer. "Even in these uncertain markets, our balanced portfolio approach is delivering solid returns, and our investment teams continue to find opportunities for long-term growth."

Mid-year results provide a snapshot of the Plan performance over a six-month period, while historical returns underscore the long-term sustainability of our investment strategy. As at December 31, 2017, the last date for which there are full year figures, the Plan has had an annualized total fund net return of 9.9% since inception. The five- and ten-year net returns, also as at December 31, 2017 were 9.6% and 7.6% respectively.

Ontario Teachers' takes a long-term, disciplined approach to managing the portfolio through a variety of different market conditions. A forward-looking and inclusive focus across the organization helps ensure a diverse allocation of risk with appropriate and aligned interest rate, inflation, foreign exchange and equity exposures.

While financial markets have stabilized, volatility will likely continue amid global trade tensions, rising energy prices and geopolitical tensions.

"Returns in the first half were driven mainly by the performance of the equity asset classes, both public and private, and the inflation sensitive asset class," said Ziad Hindo, Chief Investment Officer. "The benefits of diversification and globalization are clear as different asset classes perform differently based on shifting markets." (click on image)

Total fund local return was 2.6%.The Plan invests in 35 global currencies and in more than 50 countries, but reports its assets and liabilities in Canadian dollars. In the first half of 2018, currency had a positive, +0.7% impact on the total fund, resulting in a gain of $1.4 billion that was mainly driven by the appreciation of the U.S. dollar.

About Ontario Teachers'

The Ontario Teachers' Pension Plan (Ontario Teachers') is Canada's largest single-profession pension plan, with $193.9 billion in net assets at June 30, 2018. It holds a diverse global portfolio of assets, approximately 80% of which is managed in-house, and has earned an average annualized rate of return of 9.9% since the plan's founding in 1990. Ontario Teachers' is an independent organization headquartered in Toronto. Its Asia-Pacific region office is located in Hong Kong and its Europe, Middle East & Africa region office is in London. The defined-benefit plan, which is fully funded, invests and administers the pensions of the province of Ontario's 323,000 active and retired teachers. For more information, visit otpp.com and follow us on Twitter @OtppInfo.
OTPP wasn't the only one reporting mid-year results. Earlier this month, the Caisse put out a press release, La Caisse posts a five-year annualized return of 9.9% and a six-month return of 3.3%:
Today, Caisse de dépôt et placement du Québec presented an update of its performance as at June 30, 2018. Over five years, the weighted average annual return on clients’ funds was 9.9%, representing net investment results of $111.3 billion and bringing la Caisse’s net assets to $308.3 billion. Compared to its benchmark portfolio, la Caisse produced $11 billion of value added over the period. For the first six months of 2018, the average return on clients’ funds was 3.3%.

Caisse overall return and benchmark portfolio


In the first half of 2018, la Caisse pursued its strategy to diversify its sources of returns by investing in credit and less-liquid assets. In these categories, it concentrated on the new economy, as well as on renewable energy and green technology. Investments made will contribute to reducing the portfolio’s carbon footprint and generate attractive returns for its clients.

In Fixed Income, la Caisse, jointly with Fonds de solidarité FTQ, signed an agreement with Boralex to invest up to $300 million by way of an unsecured subordinated loan in this Québec-based renewable energy leader in Canada and France. To date, la Caisse has invested $170 million under this agreement, which follows a nearly 20% stake taken in the company in 2017.

In Private Equity, la Caisse continued to apply its direct investment strategy with several transactions in leading companies in Québec and abroad. In technology and innovation, la Caisse supported the international ambitions of several Québec companies that each stand out in their sector, including Stingray, FX Innovation, Breather and Poka. It created, jointly with Agropur Cooperative, a co-investment platform to foster innovation in the dairy industry. La Caisse also financed growth projects at La Maison Simons, BFL CANADA and Metro Supply Chain Group.

In Europe, as part of a consortium with Partners Group, la Caisse announced the acquisition of German-based Techem, a global leader in the energy sub-metering market valued at around €4.6 billion. It also took a significant capital stake in Alvest, a French company specialized in electric airport ground support equipment, in partnership with Ardian. La Caisse also concluded an agreement with the Delachaux family to acquire CVC Capital Partners’ stake in the Delachaux Group, a French engineering firm that provides high-value-added industrial solutions.

In Real Estate, Ivanhoé Cambridge continued to focus on the industrial and logistics sector, which is benefitting from the continued rise of e-commerce. This subsidiary of la Caisse made a strategic investment in Peel Logistics Property, following the establishment of a logistics venture in the United Kingdom. In addition, it acquired 38% of Pure Industrial Real Estate Trust, which manages a portfolio of North American industrial properties. In Québec, Ivanhoé Cambridge announced major investments to redevelop its flagship shopping centres: $200 million for the Eaton Centre, as part of its $1 billion plan to revitalize downtown Montréal, and $60 million for Laurier Québec, to enhance customer experience.

In Infrastructure, la Caisse was active in the renewable energy sector. It acquired a significant additional stake in Invenergy Renewables, the largest private North American company in this sector, bringing its interest to 52.4%. It also recently increased its stake in Azure Power Global, one of India’s largest solar energy producers.

In addition, CDPQ Infra, la Caisse’s infrastructure subsidiary, concluded the planning phase of the Réseau express métropolitain (REM) in spring 2018. Construction of this public transportation network began shortly after, with the first trains scheduled to run in summer 2021. La Caisse’s investment in this $6.3 billion growth-creating project for Québec is $2.95 billion.


As at June 30, 2018, clients’ net assets totalled $308.3 billion, up $9.8 billion from $298.5 billion as at December 31, 2017. This growth is attributable to net investment results of $9.4 billion, in addition to net deposits of $0.4 billion.

Returns by asset class and benchmark index

Over five years, la Caisse generated an annualized return of 9.9%, outperforming its benchmark portfolio, which stood at 9.0%. This difference represents $11 billion in value added. Over the period, the annualized returns of la Caisse’s eight largest clients varied between 8.7% and 11.1%.

The Fixed Income asset class posted an annualized return of 4.1%, driven mostly by current yield and the contribution of corporate bonds. It benefitted from asset diversification and an increase in higher-performing credit activities, particularly private debt and mortgage loans. In Real Assets, the Real Estate and Infrastructure portfolios generated a combined annualized return of 10.5%, attributable to high current yields and the asset’s good operating performance. Among the asset classes, Equities recorded the highest return over five years with 13.5%, outpacing its index, which was 11.8%. Of the $8.1 billion value added by the asset class, $4.9 billion stem from the Equity Markets portfolio and $3.2 billion from the Private Equity portfolio. Their performance reflects both strong growth in global stock markets over the period and the strategies adopted. The selection of high-quality securities, exposure to the U.S. market and the weighting of Québec securities in the portfolio were major contributors to the return, as were Private Equity investment choices.

For the half year ended June 30, 2018, la Caisse generated a 3.3% return, compared with 3.5% for its benchmark portfolio. With rising yields in the bond market, the Fixed Income asset class produced a 1.1% return and net investment results of $1.0 billion, which are mainly explained by the current yield. Real Assets posted a 5.0% return and net investment results of $2.6 billion, resulting from the good performance of real estate and infrastructure assets. With modest equity market performance since January, the Equities asset class obtained a 4.0% return and net investment results of $5.6 billion, a large part of which is attributable to Private Equity. Of the mandates in the Equity Markets portfolio, Global Quality generated one of the best six-month returns and the highest return over five years. In contrast, Growth Markets slipped due to a downturn in certain countries caused by rate increases in the U.S. market and trade tensions that lured investors back to the United States. This mandate still posted high performance over five years with a good contribution from active management. Growth economies also present strong long-term potential. In general, the overall portfolio benefits from its exposure to global markets, both over six months and five years.


The liquidity of la Caisse’s overall portfolio remains robust, allowing it to meet potential commitments and contingencies, as well as providing the necessary agility to seize market opportunities. Annualized operating expenses were 23 cents per $100 of average net assets, a level which compares favourably with that of its industry.


Caisse de dépôt et placement du Québec (CDPQ) is a long-term institutional investor that manages funds primarily for public and parapublic pension and insurance plans. As at June 30, 2018, it held CAD 308.3 billion in net assets. As one of Canada’s leading institutional fund managers, CDPQ invests globally in major financial markets, private equity, infrastructure, real estate and private debt. For more information, visit cdpq.com, follow us on Twitter @LaCDPQ or consult our Facebook or LinkedIn pages.
As you can see, the Caisse (sorry, I hate calling it La Caisse in English) and OTPP have pretty much the exact same mid-year returns and I doubt returns will be much better in the second half of the year unless global public equities end the year with a bang.

In terms of reporting, the Caisse goes into more detail than OTPP in its mid-year update but one thing OTPP does which the Caisse doesn't is explain how not hedging foreign currency added to its total fund results:
Total fund local return was 2.6%.The Plan invests in 35 global currencies and in more than 50 countries, but reports its assets and liabilities in Canadian dollars. In the first half of 2018, currency had a positive, +0.7% impact on the total fund, resulting in a gain of $1.4 billion that was mainly driven by the appreciation of the U.S. dollar.  
Now, maybe I'm missing something but 2.6% + the 70 basis points gained from not hedging currency risk equals 3.3% total return for OTPP, not 3.2% total fund return (please correct me if I am wrong).

Last night, I was at a networking 5 à 7 that Lisa Lafave of HOOPP organized in Old Montreal. It was all real estate people and I met some former and current employees of Ivanhoé Cambridge there. I also met asset managers, property managers and someone who works Avison Young which the Caisse invested $250 to help grow its operations.

The lady from Avison Young was very knowledgeable and explained me the deal and how it's beneficial for both parties. She also  told me Avison Young has a "no assholes rule" in terms of their hiring policy (meanwhile, I thought it's unfortunate but there are assholes everywhere in every organization, you simply can't avoid them).

Anyway, there was a nice guy from Joliette Quebec who now works for Blackstone in London. He was there with his wife who also works in institutional real estate and is also very nice. He told me that Ivanhoé Cambridge is a great partner to co-invest with as they have an impressive team and specifically referred to this deal on a Canadian REIT which took place over the Christmas holidays:
Ivanhoe Cambridge is teaming with Blackstone Group LP on the planned acquisition of Pure Industrial Real Estate Investment Trust, a Canadian warehouse owner, according to two people with knowledge of the transaction.

The real estate arm of Canadian pension fund Caisse de Depot et Placement du Quebec has taken a roughly 40 per cent stake in the $2.48 billion (US$2 billion) cash deal to take the Vancouver-based REIT private, said the people, who asked not to be identified because the details haven’t been made public. Blackstone’s planned takeover of Pure Industrial was announced last week.

Blackstone has brought in Ivanhoe as a partner on other real estate deals, including the US$5.3 billion purchase two years ago of Stuyvesant Town-Peter Cooper Village, Manhattan’s biggest apartment complex. Representatives for Blackstone and Ivanhoe declined to comment.

Pure Industrial, Canada’s largest multitenant industrial landlord, has counted firms such as FedEx Corp. and Best Buy Co. among its customers. Chief Executive Officer Kevan Gorrie said last year that the company is depending on growth from e-commerce and, potentially, medical marijuana.

Peter Grauer, chairman of Bloomberg LP, is a non-executive director at Blackstone.
What else did I do yesterday?  I had lunch with Benjie Thomas of KPMG at their offices to discuss trends in private equity and that was an interesting conversation.

Benjie is the Canadian Managing Partner for KPMG's Advisory Services and he is well plugged into the Canadian private equity industry. He's super smart, very nice and very humble and he basically advises premiere private equity clients on deals.

Benjie loves deals and advising clients on deals. Sometimes they take his advice, sometimes they don't (and end up regretting it) but that is his strength and he has built a great advisory team.

We talked about trends in private equity. I told him institutions are pouring money into the asset class to prepare for the next downturn but with all that money flowing into private equity, the industry is bracing for a downturn and valuations with public markets are converging as valuations are being bid up.

He agreed and told me valuations are being bid up to extremes and some vintage years are at risk of really underperforming.

He also told me something interesting, in the heyday of private equity when 20%+ returns were common, "operational efficiency was nice to have but nowadays, it's a must."

Got that? Forget the good old financial engineering days when all you had to do is pile on the leverage as you asset-stripped a company. Nowadays, you really need to roll up your sleeves and do some good old fashion PE work to add value through operational efficiency.

The same thing goes for real estate. The good old days are long gone. Cap rates are at historic lows, assets are being bid up like crazy and some spaces (like retail) are really struggling.

That is the impression I got from my discussions with the real estate experts last night. There is still money to be made but you need to work a lot harder to improve an asset and add value.

Anyway, I don't usually go to networking events, try to avoid them like the plague, but at least I got to meet some nice people and learn a bit more about real estate and I also got to meet Lisa Lafave from HOOPP who is doing well and is super nice. I thank her for inviting me.

That's all for this comment, the Caisse and OTPP's mid-year results tell me it's going to be another single digit return year but we shall see how things play out in equity markets in the last quarter.

Below, the easy money is clearly in the rearview mirror, says Nuveen's Bob Doll. I agree, it's going to be a rocky fourth quarter, so hold on to your hats, should be an interesting end of year.