Jo Taylor Discusses OTPP's Mid-Year Results

 Ontario Teachers’ put out a statement stating net assets total $204.7 billion at mid-year 2020:

Ontario Teachers’ Pension Plan Board (Ontario Teachers’) today announced its net assets totaled $204.7 billion as of June 30, 2020. The total-fund net loss was 0.4% for the first six months of the year.

“The first half of this year has brought significant challenges for investors, with financial markets experiencing unprecedented volatility due to the COVID-19 pandemic, which in turn has had a devastating impact on the global economy, as well as companies and communities around the world,” said Jo Taylor, President and Chief Executive Officer. “Our diversified and high-quality portfolio has so far been quite resilient, highlighting the benefits of our balanced capital allocations and long-term investment approach. That said, we expect this pandemic to have lasting repercussions, and we want to remain vigilant and agile until the full impact can be established.”

“In the years before the crisis we had positioned the portfolio more defensively, including raising our exposure to fixed income and gold, employing a hedge against a downturn in equities and fortifying our liquidity position. These moves provided stability and helped offset losses experienced by our private assets that were disproportionately affected by COVID-19 such as airports, energy and retail real estate,” said Ziad Hindo, Chief Investment Officer. “The unprecedented volatility and dislocations in the markets provided us with an opportunity to rebalance the portfolio to position it for long-term success.”

Mid-year results provide a snapshot of performance over a six-month period, while long-term returns provide a true measure of the effectiveness of Ontario Teachers’ investment strategy. As at June 30, 2020, Ontario Teachers’ had an annualized total-fund net return of 9.5% since inception in 1990. The five- and 10-year net returns, also as at June 30, 2020, were 6.2% and 9.6%, respectively.

“The shock COVID-19 has delivered to economies around the world has been severe, but we are confident that our strong foundation and long-term investment strategy will see us through this turbulent period,” added Hindo. “Given our strong liquidity and access to capital we are well placed to pursue attractive investment opportunities as they emerge.”

 

Investing globally is an essential element of Ontario Teachers’ investment strategy and ability to meet its long-term investment objectives. During the first six months of the year the organization was able to successfully secure attractive investment opportunities in North America, Europe, the Middle East and Asia-Pacific. It also announced the appointment of London-based Karen Frank as Senior Managing Director of Equities, and our first Singapore-based employee, Bruce Crane, as Managing Director, Infrastructure & Natural Resources, Asia Pacific, both of whom will join the organization in the coming months.

Ontario Teachers’ 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 2020, currency had a positive 0.5% impact on the total fund, resulting in a gain of $1.2 billion that was mainly driven by a stronger U.S. dollar relative to the Canadian dollar.

Ontario Teachers’ took decisive action to protect its employees and communities from the spreading pandemic. By mid-March the organization had fully restricted all business travel, asked members not to visit its offices in person and most employees began working remotely. Despite the major changes, Ontario Teachers’ core investment and member services businesses were able to continue operating normally.

“I want to thank the entire team for their tremendous efforts during the COVID-19 pandemic. They have demonstrated an incredible adaptability and positive spirit while continuing to fulfill their duties on behalf of our members,” concluded Taylor.

About Ontario Teachers’
The Ontario Teachers' Pension Plan Board (Ontario Teachers') is the administrator of Canada's largest single-profession pension plan, with $204.7 billion in net assets (all figures at June 30, 2020 unless noted). 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 9.5% 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 as at January 1, 2020, 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.

You can read the financial statements here.

Earlier today, I had a chance to catch up with Jo Taylor to discuss OTPP's mid-year results. 

I want to begin by thanking him for taking some time to speak to me on short notice and also thank Dan Madge for setting this call up. 

I began by asking Jo how OTPP has been adapting to to the pandemic. He told me just like other pensions, early on a decision was made to ensure the health and safety of OTPP's employees all over the world.

"Our employees in Toronto are all working remotely. We will bring some back later this fall, taking a staggered approach and on a voluntary basis depending on how the health situation develops. Our Hong Kong office is closed and in London, it's difficult because most employees take public transit into work."

In other words, it's not easy to open up all offices at once and for the foreseeable future, they will be working remotely. 

He said they will soon open up their office in Singapore and  Bruce Crane, Managing Director, Infrastructure & Natural Resources, Asia Pacific, will be based there.

We then got into mid-year results and he told me going into 2020, they had raised their allocation to fixed income and were positioned more defensively. 

He said the results were flat for the first six months and that proved to be very good given the damage the pandemic caused in public and private markets.

"The focus remains on international expansion, especially in Asia, investing alongside our partners and finding disruptive companies there and elsewhere."

I noticed the bond allocation was significantly cut as at June 30 and it was much higher at the end of 2019 mostly owing to repos where they leverage their fixed income portfolio (they made phenomenal gains in Bonds, helping offset losses in private markets). 

Jo told me they trade bonds depending on where yields are but given rates are at record low levels, they will need to focus on Real Assets and some other ways to make up for the low yields on bonds.

In terms of private markets, he told me OTPP has suffered in some areas (Retail real estate assets, transportation infrastructure assets and some private companies) but they value these assets very conservatively (I suspect they will take some writedowns in these assets in 2020 as will other large Canadian pensions).

But Jo also said they have ample liquidity to provide support to companies who need it in 2021 and even 2022 if needed. 

I told him there is a dichotomy going on in public markets where a few mega cap tech companies are leading the S&P 500 higher while most of the market doesn't participate.  

Not surprisingly, pensions and well balanced mutual funds are trailing the market compared to hedge funds taking concentrated tech bets

The other thing I noted is how the massive expansion of the Fed and other global central banks' balance sheets is fueling this liquidity bubble benefiting tech and creating a dichotomy between public and private markets.

Basically, central banks have created a liquidity bubble which favors tech stocks over private equity, real estate and infrastructure.

Jo told me this presents a challenge when some of their benchmarks are made up of the S&P 500 but over the long run, he still believes the value add will be in private markets.

This is true, I'm just observing that in the short-term, most pensions are trailing their public and private market benchmarks because of this liquidity bubble which is benefiting a handful of mega cap tech shares.

What else? Jo told me they are focusing on disruptive technologies/ companies.

He specifically mentioned their investment in KRY, Europe’s largest digital healthcare provider, where they invested in a series C to help the company raise US$155 (€140) million in order to help the business accelerate its ambitious growth plans in Europe and transform the way millions of patients access health services in a digital age.

He also mentioned their partnership with see Sidewalk Infrastructure Partners (SIP) which recently announced the first phase of a project that will bring a first-of-its-kind connected and autonomous vehicle corridor to the State of Michigan:

Sidewalk Infrastructure Partners (SIP) is building the future of infrastructure. Today, we are thrilled to announce the first phase of a first-of-its-kind connected and autonomous vehicle (CAV) corridor in partnership with Michigan Governor Gretchen Whitmer and the State of Michigan, the Michigan Department of Transportation, the Michigan Economic Development Corporation, and the City of Detroit.

Cavnue, a company launched by Sidewalk Infrastructure Partners and announced today, was selected to lead the project in partnership with the Michigan Department of Transportation. Cavnue’s mission is to build the world’s most advanced roads, that are safer, offer greater throughput, improve access to affordable and high-quality public transit and shared mobility, and enable more efficient movement of goods.

The first phase of the project will test technology and explore the viability of a more than 40-mile driverless vehicle corridor between Downtown Detroit and Ann Arbor. We are thrilled to work with initial project partners the University of Michigan, Ford, and the American Center for Mobility, and stakeholders and communities throughout Michigan as the connected corridor project moves forward.

What else? He mentioned OTPP's investment in SpaceX and other exciting areas like their recent investment in Epic games, operator of Fortnite, one of the world’s largest games with over 350 million accounts and 2.5 billion friend connections.

We didn't get into that investment in detail but I noted today that a judge, through a temporary restraining order, blocked Apple’s move to revoke Epic Games’ developer accounts.

I noted in a world of low growth, OTPP and other large pensions have no choice but to invest in disruptive companies but they need to do so carefully and make sure these investments are scalable or else it won't move the needle over the long run.

Jo agreed but he said OTPP's investments in traditional businesses will continue and provide support to invest in and capitalize in disruptive companies.

Recall and earlier conversation I had with OTPP's CIO Ziad Hindo where he told me they are looking for cross pollination where investments in disruptive technologies benefits their entire portfolio. 

In terms of funded status,  Jo told me OTPP has an $11 billion surplus and the plan's stakeholders filed their actuarial report in January and there will be no changes to the contribution rate or benefits over the next three years.

I ended the conversation by commending Jo on the steps OTPP is taking to improve diversity & inclusion at the organization, referring to the pledge they signed to be part of the #100blackinterns movement:

Jo told me they are looking to broaden diversity & inclusion beyond "just gender" and want to hire and mentor these interns so they have opportunities to succeed within the organization.

"At Teachers', we are always looking to do the right thing, not just at our organization but in our investee companies."

I couldn't agree more and told him to continue pushing the boundaries on diversity & inclusion.

Lastly, I asked Jo how this pandemic has impacted him personally.

"Well, I am not traveling as much and I used to travel often. I'm taking advantage however to recharge and the pandemic has put more of a pressure on all of OTPP's senior managers to communicate often and effectively to all our employees. Communication is critical during these times."

He also added: "Doing due diligence on a company is far more challenging when you can't walk the floors with their management to see their operations."

He's right on all fronts, communication is critical and due diligence is a lot harder during these unprecedented times.

It is also worth noting that OTPP's CFO, David McGraw, announced he will be retiring from Ontario Teachers’ in summer 2021 after 16 years with the organization. 

 

Jo Taylor said: “David has had a substantial impact across the fund and played a key role in helping us become a world-class pension plan. He has also enabled the business by creating strong oversight and governance processes and using analytics and insights to enhance our financial decision-making tools and capabilities.”

Once again, I thank Jo for taking some time to chat with me earlier today and look forward to our next conversation.

Below, take the time to listen to Beth Tyndall, Chief People Officer, Ontario Teachers' Pension Plan and Glain Roberts-McCabe, President, The Roundtable discuss how to keep your head above water during times of extreme uncertainty. Very good conversation.

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