Fully Funded OTPP Gains 10.4% in 2019

The Ontario Teachers' Pension Plan (OTPP) just released its 2019 results, gaining 10.4% for the year as net assets reach $207.4 billion at year-end 2019:
Ontario Teachers’ Pension Plan Board (Ontario Teachers’) today announced a total-fund net return of 10.4% for the year. Net assets reached $207.4 billion as of December 31, 2019, a $16.3 billion increase from December 31, 2018. Ontario Teachers’ earned $20.2 billion in investment income in 2019, the most in the organization’s history.

“Ontario Teachers’ diversified, high-quality portfolio achieved a total-fund net return of 10.4% and our net assets reached $207.4 billion to end the year,” said Jo Taylor, President and Chief Executive Officer. “The investment world since then has changed dramatically due to COVID-19, which is having an impact on all of our activities. We are highly focused on the wellbeing of our members and employees, and our team has demonstrated remarkable agility as we adapt the way we work while maintaining our high levels of service.”

As of January 1, 2020, the plan was fully funded using prudent assumptions for a seventh consecutive year, with 100% inflation protection being provided on all pensions.

As at December 31, 2019, Ontario Teachers’ has had an annualized total-fund net return of 9.7% since inception. The five- and ten-year net returns, also as at December 31, 2019, were 7.8% and 9.8%, respectively.

“Each of our asset classes achieved positive returns during the year, showing the value of a well-constructed and diversified portfolio. We had particularly strong returns in equities and fixed income,” said Ziad Hindo, Chief Investment Officer. “This year was a transformational year, with a number of significant transactions conducted globally, the launch of Teachers’ Innovation Platform to invest in disruptive technology, and the creation of Koru, an incubator that partners with our portfolio companies to design and build new digital businesses.”

As often is the case in years when public equity markets have exceptional returns, Ontario Teachers’ diversified portfolio trailed its benchmark. Strong returns in private assets did not keep up with robust public equity markets, many of which were up more than 20% during the year. In 2019, Ontario Teachers’ underperformed its benchmark by 1.8% or $2.7 billion.

Total fund local return was 12.8%. Ontario Teachers’ invests in dozens of global currencies and in more than 50 countries but reports its assets and liabilities in Canadian dollars. In 2019, currency had a negative 1.8% impact on the total fund, resulting in a loss of $3.5 billion. The currency loss was mainly driven by the appreciation of the Canadian dollar relative to various global currencies, particularly the U.S. dollar.

About Ontario Teachers’

The Ontario Teachers' Pension Plan Board (Ontario Teachers') is the administrator of Canada's largest single-profession pension plan, with $207.4 billion in net assets (all figures at December 31, 2019). It holds a diverse global portfolio of assets, approximately 80% of which is managed in-house, and has earned an annual total-fund net return of 9.7% 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 329,000 active and retired teachers. For more information, visit otpp.com and follow us on Twitter @OtppInfo.
This afternoon, I had a chance to speak with OTPP's CEO, Jo Taylor, to discuss last year's results and to go over the current crisis.

I want to thank Jo for taking some time to speak with me, as well as thank Lori McLeod, Director External Communications, for fixing a little Webex glitch and calling into me and Jo so we can chat.

Our time was limited but we went over the important points.

Before I begin, however, I think it's important to go over Jo Taylor's report to members in the 2019 Annual Report:
It is a prodigious time to step into the role of CEO at Ontario Teachers', as we celebrate our 30th year of successfully delivering a secure retirement to plan members. As its fourth CEO, I am honoured to be trusted with this important position, and grateful to have benefitted from the accumulated wisdom of those who have held the job previously. This is particularly true of our past CEO, Ron Mock, who gave strong guidance to me and shared reflections on how best to shape Ontario Teachers’ future priorities. Each CEO of Ontario Teachers’ has focused on specific areas during their tenure. This initially included setting up the right governance model to invest and deliver the necessary returns, and then managing through market fluctuations and a global financial crisis. For my role today, there are some challenging dynamics around funding cash flows, member demographics, a low-growth environment, climate change, highly competitive investment markets and now the COVID-19 pandemic.

I plan to focus on three key areas:
  • Growth and International. Assets are growing significantly, and we will have a large amount of capital to manage in a competitive environment. It will be crucial to find the right opportunities, and to expand our international footprint into the right territories.
  • Partnerships and Relationships. This has been one of our key strengths, involving the thoughtful selection of partners who we can learn from, and who value what we bring to the table. This extends to the huge importance placed on working with our stakeholders to deepen these relationships.
  • Talent and Culture. Ontario Teachers’ has to look far into the future, ensuring it has the right skills in place. This means encouraging our agility in thinking and decision making, developing talent and integrating inclusion and diversity at all levels.
Growing assets, expanding our international footprint

I have set the challenge to colleagues to build a strategy to grow the plan’s assets under management to $300 billion by the end of 2030. Investing this capital in a low-interest and lower-growth environment will require the team to have a bold and ambitious mindset. In 2019, we were able to design a clear international road map for our investment activities and identify where we needed to build execution capabilities. The expected outcome of this effort will be to rebalance our portfolio and returns more evenly between North America and the rest of the world.

The value of local expertise can’t be overstated, which is something I can attest to, having formerly led both Ontario Teachers’ London and Hong Kong offices. Careful consideration has been given to the value of having another office in Asia-Pacific, and given the uncertainties and challenges in Hong Kong, it is the right time for us to open a Singapore office, which we currently expect to be operational in the third quarter of this year. Latin America also remains an important region, and we will be exploring models to enhance our local execution capabilities there.

Selective partnerships and deeper relationships

Ontario Teachers’ is distinct from most other investors in the way it approaches partnerships. This is because our model is highly focused with a select number of partners that we choose to work with. This allows us to be an active, value-added partner in each situation. Whether working with professional fund investors, corporates or family offices, Ontario Teachers’ looks to take an active role. Our very careful approach to asset and partner selection means a preference for working with aligned investors and management teams where mutual value is placed on one another’s skills, knowledge and expertise.

Our other important stakeholders include members, sponsors and regulators. Last year, Ontario Teachers’ attained the rank of number one globally for member service, and received very high member satisfaction scores. Our team is still looking to build on these strong results, and is actively working to anticipate the future needs of our membership. Ontario Teachers’ will continue to work closely with the plan’s sponsors and regulators to ensure transparency and collaboration, and to bring value to those relationships wherever possible.

Agility, diversity and opportunity

Having a high-functioning team means encouraging agility in our thinking and decision making. The board has decisively supported this goal in many ways. One meaningful development is giving more delegated authority for investment decisions to the executive team. At the same time, we are pushing ourselves to have the right balance between building consensus while still maintaining agile decision making and appropriate accountability. A subset of this will be to evolve more of a “test and learn” culture designed to stimulate innovation.

Developing internal talent is of huge importance, and last year there were 46 promotions to senior positions. Giving employees a great experience means investing in a learning culture and better onboarding programs. Ontario Teachers’ is also investing in mobility that allows our people to gain international experience and develop new skills. The health and performance of the plan depends on finding diverse voices and then ensuring that they are heard. This is a priority in our new recruitment efforts. Ontario Teachers’ has also made significant progress on the diversity of the boards of our private, controlled investee companies. In 2020 and beyond, our focus will include reviewing the retention and progression of our senior women as a measure of the progress that we are making in this regard.

In conclusion

We are fortunate to have a very clear mandate, which is to serve current and retired teachers in the province of Ontario. It provides us with a laser focus in these uncertain times, in which COVID-19 is dramatically impacting the financial markets and all of our activities. We continue to have rigorous processes in place, shaped by robust governance and risk frameworks, and a team dedicated to serving the needs of our members. By sticking to our fundamentals, including strong liquidity, aligned partnerships and excellent talent, I am confident we will continue to deliver on our goals of first-class service and retirement security for our members over the long term.
Equally important, Ziad Hindo, OTPP's CIO, answered questions on page 22 of the Annual Report:
How did Ontario Teachers’ asset classes perform this year?

We saw positive returns across our asset classes in 2019, showing the benefit of a diversified portfolio including a mix of public and private assets. We saw particularly strong returns in equities and fixed income.

Ontario Teachers’ made several investments in technology companies this year – why the increased focus in this area?

Technology is an area with a lot of potential for us. The opportunity set is large, and with the growth of cleantech, artificial intelligence, healthcare and other areas, we expect it to continue to grow in the coming years.

Accordingly, 2019 was a transformational year for Ontario Teachers’. We launched Koru, an incubator that partners with our portfolio companies to create, test and build scalable new digital businesses, and Teachers’ Innovation Platform (TIP), which focuses on late-stage venture and growth equity investments in disruptive technology.

We’ve already seen TIP investments in everything from digital healthcare to space exploration and smart infrastructure, while Koru is generating new ventures in sectors including healthcare, utilities and transportation. It’s great to see how both have hit the ground running.

A low interest rate environment is especially hard on pension funds. How will you continue to make your return targets if rates stay low?

Low interest rates are a reality for all investors – today and for the foreseeable future. Our main defence against low interest rates is solid portfolio construction with a focus on diversification and risk management. It is important to note that we are investing from a position of strength with a funded ratio of 103%, meaning that we can prudently manage through this period without the need for undue aggressiveness.

Our skilled global investing teams are focused on deal origination, execution and strong asset management and value creation, which positions us well to navigate any challenging investment periods.

It has been a tumultuous year around the world, with trade wars intensifying. Is now the time to be investing more outside of Canada?

Being global is more important than ever – it’s an essential element of us being able to meet our long-term investment objectives. We monitor short-term trends and pressures, but our long-term view is that the bulk of future global growth will come from outside of North America, which means we must look abroad for investment opportunities.

Many stakeholders have been vocal about wanting Ontario Teachers’ to do more on climate change. What are you doing in this area to protect the plan’s long-term sustainability?

Climate change is a major area of focus. Our approach has four strategic elements: invest in climate-smart opportunities, integrate climate into our investment process, engage with companies and use our influence to catalyze change.

One example of how we’ve been doing this is our investment in Cubico Sustainable Investments: a global renewable energy platform that invests in wind and solar electricity generation. Since Ontario Teachers’ first invested in Cubico in 2015, the company has grown from 19 facilities located in seven countries to 87 assets in different stages of development located in 12 countries in the Americas, Europe and Australia.

While I’m proud of our progress with portfolio companies such as Cubico, we are not content to stand still. We constantly evolve our practices with the long-term sustainability of the plan in mind.

What is the one thing you would want to tell members about their plan?

We’re operating in a challenging economic environment and many of the challenges we face today are uncharted. How we deal with this uncertainty is by having the right talent, strategy and risk management practices in place, with our focus fixed on achieving the returns needed to ensure that the plan remains sustainable over the long term.
I think very highly of Ziad Hindo, he's an excellent CIO who is very busy these days trying to capitalize on dislocations in public and private markets.

Back to my conversation with Jo Taylor. I began by telling him I noticed that Teachers' rejigged its asset mix at the end of 2019 and increased its allocation to Bonds from 31% to 36%.

Jo told me they were waiting for a correction and positioned the portfolio more defensively, allocating more to fixed income, gold, defensive strategies and tail hedges.

He told me they were "able to ride out some of the storm" but obviously didn't predict a pandemic.

Still, he stressed the plan has a long-term focus, looking to generate 6.5% nominal over many years and their $6.5  billion surplus and cautious discount rate allows them to have the reserves to buffer this crisis. "We are fortunate to have these reserves".

But its the plan's long-term focus that will allow them to navigate these uncertain times.

Jo told me beyond money, Ontario Teachers' is providing its portfolio companies better information and guidance on best principles to deal with this crisis, real meaningful value added.

I asked him about how this COVID-19 crisis will impact Teachers' private market assets, specifically some sectors in commercial real estate (retail malls) and infrastructure like airports and toll roads.

He told me the way governments have responded means some assets will get hit this year but the extent of the virus and its long-term effects remain to be seen. "Longer term, these remain great assets".

He said Teachers' has 110 portfolio companies internationally across real estate, private equity, high conviction equity, and infrastructure and right now they are prioritizing liquidity and have conducted enough stress tests to meet all their liquidity needs.

And these liquidity needs go "above and beyond" capital calls from their private equity partners, which they had planned for, "it's about ensuring we are there to provide our portfolio companies any liquidity they need to ride out this storm".

I told Jo that when I went over HOOPP's 2019 results, retiring CEO Jim Keohane told me that as long bond yields approach zero, they need to plan ahead and look elsewhere as to where to invest because HOOPP won't invest in negative-yielding bonds.

Without going into specifics, he told me "there's been a lot of volatility in long bond yields" and they are taking a "granular approach" to deal with the shock and find suitable opportunities that will deliver their long-term results with less risk. "We need to manage that volatility very carefully," he said.

In terms of how Teachers' is coping with the COVID-19 crisis, he said he was very pleased with their technological capabilities, stating 98% of the staff are working remotely and business is continuing, the focus is on executing on their strategies.

He said that most of the disruption happened in Toronto where their support staff is located because their international offices are made up of investment professionals that are used to working remotely.

He was very happy with Teachers' member services, singling out Tracy Abel and her team who are responsible for overseeing the personalized service to Ontario Teachers' 329,000 working and retired members as well as for the Member Services division's Actuarial, Tax and Accounts Receivable Services; Employer Information Services and Strategic Initiatives.

"Tracy is great, she took over from Rosemarie McClean (who is now head of the UN Pension Fund) and she has done a wonderful job. She's calm and has an IT background which has proved very useful."

I asked Jo if Teachers' has reached out to its members during this crisis given that many of their retired members are elderly and particularly vulnerable to this virus (Teachers' has the oldest members among Canada's large pension plans).

Jo told me they have reached out and gotten 60% response stating their members are very happy with their service but he admitted "right now, they are rightly preoccupied with what is going on."

I also asked him how he is leading the organization given this new reality and remote working.

He told me they are focusing a lot on "communication" and everyone from senior managers on are expected to clearly communicate what needs to be done.

As for how he's coping personally, he told me he has been an investor for a long time, seen his fair of challenging times. "You need to be calm, give good direction, plan for the future, make sure members are well served and above all, ensure your employees are safe, informed and engaged."

I couldn't agree more. I told him that in a recent comment of mine I stated that Canada's top ten pensions are in a good position to weather this storm, even if they will all get hit.

He agreed and said that Canada's large pensions play a meaningful role in the Canadian financial landscape, providing much needed stability.

And since I am transparent about compensation, here is a summary of executive compensation for 2019:

As always, please read the detailed discussion on compensation starting on page 48 of the 2019 Annual Report.

I did ask Jo how Ron Mock is doing and he told me "he's fine, in Toronto at home" (I'm glad he's not in Italy).

I ended by asking Jo if he will be doing a lot more public interviews so I can embed them in my blog. He told me he hears me loud and clear and that he's working on it.

Once again, I thank Jo Taylor for taking the time to talk to me. I also told him that if he can deal with this crisis, he will be able to deal with any crisis that comes his way.

Lastly, OTPP believes that companies with good environmental, social and governance (ESG) practices do more than just earn returns. They contribute to a vibrant future for themselves, for their plan, and for many generations to come, which is why they apply their Responsible Investing principles every day. Their 2019 Responsible Investing Report is now available here.

Also, take the time to read OTPP's 2019 Annual Report, it's extremely detailed and very well written.

Below, highlights from OTPP's 2019 annual results. "We Lead. We Learn. We Last" is their corporate motto and it's very fitting.

Second, Michael Vogelzang, CapTrust principal and chief investment strategist, joins 'Power Lunch' to discuss what he thinks is next for markets following the coronavirus pandemic.

And CNBC's "Halftime Report" team is joined by Marc Lasry of Avenue Capital to discuss his investment strategy.

Lastly, watch as President Trump and the coronavirus task force give an update on the response effort from the White House. Dr. Birx and Dr. Fauci are superb, listen carefully to their comments (fast forward to minute 15).

Update: David Milstead of the Globe and Mail reports on how Ontario Teachers’ Pension Plan’s bond-heavy portfolio misses 2019 benchmark. Here is the important part:
The failure to beat the benchmark happens “often” when public stock markets have “exceptional” returns, Ziad Hindo, chief investment officer, said Tuesday.

Still, most of Teachers’ asset classes outside of fixed income underperformed their benchmarks.

The chief culprit in dragging down returns was teachers’ portfolio of “non publicly traded equities,” or investments in private companies that do not trade on an exchange. They returned 9.4 per cent in 2019, well below the 17.4 per cent benchmark for the class.
I wouldn't read too much into this article, Teachers' Private Equity has performed solidly over the long run and it performed well last year even if it underperformed its ridiculously high benchmark.

Ziad Hindo is right, you won't beat your benchmark every time, especially when public stocks are soaring, and the most important thing is to minimize downside risks, especially now.