OTPP's CEO on 2021 Mid-Year Results

Ontario Teachers’ Pension Plan released its first-half results stating net assets total $227.7 billion at mid-year 2021:

First-Half Highlights:

• Six-month and one-year total-fund net returns of 3.8% and 13.2%, respectively
• $8.6 billion in net investment income generated for the Fund
• Since inception total-fund net return of 9.6%
• Plan sponsors filed fully funded valuation with regulators
• Successfully acquired high-quality assets on four continents

TORONTO - Ontario Teachers’ Pension Plan Board (Ontario Teachers’) today announced its net assets totaled $227.7 billion as at June 30, 2021. The total-fund net return was 3.8% for the six-month period, while the 12-month total-fund net return was 13.2%. Ontario Teachers’ earned $8.6 billion in net investment income during the first half of 2021.

As at January 1, 2021, the plan was fully funded with an $8.5 billion surplus, underscoring its long-term financial health and sustainability. The plan’s sponsors, Ontario Teachers’ Federation and the Ontario government, filed the January 1, 2021 valuation with the regulators.

“These results demonstrate the continued execution of our investment strategy and exceed the required rate of return to keep the Plan fully funded over the long term,” said Jo Taylor, President and Chief Executive Officer. “While mid-year is an important checkpoint, long-term results are the best gauge to assess our investment performance. We are pleased to be sustaining strong 10-year and since inception returns.”

As at June 30, 2021, Ontario Teachers’ had an annualized total-fund net return of 9.6% since inception in 1990. The five- and 10-year annualized net returns, also as at June 30, 2021, were 7.9% and 9.3%, respectively.

 “Our diversified portfolio was resilient and delivered positive returns despite the lingering uncertainty of the pandemic. We saw strong performance in our private and public equity, innovation and inflation-sensitive asset classes. Gains were partially offset by losses in fixed income and currency,” added Ziad Hindo, Chief Investment Officer. “As part of our ongoing efforts to construct a more balanced and diversified portfolio, we allocated additional capital to real assets such as infrastructure and real estate, inflation-sensitive assets, and our Teachers’ Innovation Platform.”

Ontario Teachers’ holds investments denominated in over two dozen currencies across more than 50 countries but reports its assets and liabilities in Canadian dollars. In the first half of 2021, currency had a negative 1.5% impact on the total fund, resulting in a loss of $3.2 billion. This was driven by a stronger Canadian dollar relative to most global currencies, particularly the U.S. dollar.

“Our focus remains on driving sustainable and long-term growth while providing great service for our members. Thanks to our global team, we have completed a number of high-quality private transactions so far in 2021, which position us well as we work towards our goal of reaching $300 billion in net assets by 2030,” concluded Taylor.

The following are major transactions from the first half of the year:

• Led a C$375 million Series D fundraising round for ApplyBoard, a Waterloo, Ontario-based online platform that empowers students around the world to access top quality education;
• Acquired a 40% holding in Caruna, Finland’s largest electricity distribution company;
• • Led an RMB1 billion fundraising round for CD Finance, a leading rural service institution that supports entrepreneurship and poverty alleviation in China’s rural population;
• Alongside IFM Investors, jointly acquired a 100% interest in the Canadian district energy operations owned by Enwave Energy Corporation, a low-carbon energy provider, for C$2.8 billion on an enterprise value basis;
• •Purchased a 100% interest in Evoltz Participações S.A., a leading electricity transmission platform in Brazil. The company has seven electricity transmission lines that total more than 3,500 km across 10 states in Brazil;
• • Through our real estate subsidiary Cadillac Fairview, committed US$400 million to the Hines Asia Property Partners fund, a multi-sector, open-ended, diversified vehicle targeting top-tier markets in Japan, Australia, South Korea, Singapore and China (including Hong Kong).
• Acquired a majority stake in Logoplaste, a leading global designer and manufacturer of innovative and sustainable plastic packaging solutions for premier consumer brands;
• Made a significant strategic investment in Mitratech, a leading provider of legal and compliance software.

In addition to the many climate change and ESG-related direct investments noted above, since June 30 Ontario Teachers’ has become an anchor investor in two climate change-related funds by committing significant capital to the Brookfield Global Transition Fund and the TPG Rise Climate Fund. As part of Ontario Teachers’ commitment to achieve net-zero greenhouse gas emissions by 2050, it is increasing investments in climate-related solutions that will help the world transition to a low-carbon economy.

About Ontario Teachers’
Ontario Teachers' Pension Plan Board (Ontario Teachers') is the administrator of Canada's largest single-profession pension plan, with C$227.7 billion in net assets (all figures at June 30, 2021 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 9.6% since the plan's founding in 1990. Ontario Teachers' is an independent organization headquartered in Toronto. Its Asia-Pacific region offices are located in Hong Kong and Singapore, and its Europe, Middle East & Africa region office is in London. The defined-benefit plan, which is fully funded as at January 1, 2021, invests and administers the pensions of the province of Ontario's 331,000 active and retired teachers. For more information, visit otpp.com and follow us on Twitter @OtppInfo.

Earlier today, I had a chance to talk with OTPP's CEO, Jo Taylor. 

Let me begin by thanking Jo for taking some time to talk to me and also thank Dan Madge for setting up the call and providing me with a heads-up.

Jo began by telling me that OTPP manages assets and liabilities over the long run and a half year's results are not what ultimately count (their long-term performance is what counts and it's excellent).

He said their long-term objectives are twofold:

1. That the Plan remains fully funded
2. And that assets reach $300 billion by 2030

The more immediate focus is asset selection and portfolio composition.

He said because OTPP is a more mature plan, it has one of the lowest discount rates among public plans and takes less risk to take into account their outflows and inflows.

He reiterated that over a six-month and one-year total-period as at the end of June, the fund produced net returns of 3.8% and 13.2%, respectively.

The big gains came in Equities, both Public Equities and Teachers' Private Capital but Jo also mentioned that the Teachers' Innovation Platform produced solid returns in the first half of the year.

In a Bloomberg interview, Jo states this:

“We set up the innovation portfolio to give us exposure to private high-growth, disruptive businesses,” Jo Taylor, the fund’s chief executive officer, said in an interview. “It probably needs to be several billion dollars to actually meet that test, but it is meaningful at the moment because it’s making great returns.”

The innovation portfolio also adds value to the rest of OTPP’s investing activities, he said, by letting managers slowly wade into new markets to learn about them.

“This area should grow more, as we’ll probably allocate more capital to it, and also the growth rate of the portfolio is generally higher than other areas,” Taylor said.

The gains in Fixed Income and Real Assets were more muted with rates remaining at historic lows and ongoing problems with retail real estate and some airports due to the Covid crisis.

"We had some valuation adjustments on many of these assets at the end of 2020 and these adjustments are still weighing on these assets."

Nonetheless, Jo told me they are still looking to increase their Real Assets which provide "stable cash flows" and want to increase that portfolio from 20% to 30% over the next 4-5 years (see a recent comment of mine here).

Interestingly, he told me the focus is on "core infrastructure assets" which include electric grids, gas transmission and more utilities-type investments. 

As far as wind and solar assets (renewables), OTPP still invests there but he told me the abundance of capital going into these assets has weighed returns down from "high single digits to low single digits."

He added: "The challenge for us is to find assets which match our liabilities but also provide decent prospective returns."

In the Bloomberg article, Ziad Hindo, OTPP's CIO, states this:

“We have a really wide, ambitious plant to grow our real assets, maybe not as a direct replacement to fixed income” but as the “closest thing” to it,  Hindo said in an interview. “Real assets like core infrastructure provide stable income, stable cash flows that are indexed to inflation, with a good level of certainty, spread through several geographies,” he said. 

Essentially, OTPP will be reducing its massive bond portfolio over next few years to invest more in "core infrastructure" where yields are higher than bonds and risks are relatively lower than other segments of infrastructure (like utilities, core infrastructure can be hit if rates go up or if regulations change).

In Fixed Income, he said the return-driven portfolio (RDI) had some challenges but they are actively trading bonds and are now at 15% (they were a lot higher at the beginning of 2020).

In the liability-driven portfolio (LDI), he said they increased their weighting to inflation sensitive assets (from 17% at end of 2020 to 21% at end of June) and that this portfolio is doing well.

In a Financial Post interview, Ziad Hindo states this:

“What we know historically is that inflation is not really kind to traditional asset classes … stocks or bonds,” said Ziad Hindo, chief investment officer at the pension manager. Commodity prices, on the other hand, tend to rise when inflation is on an upward trajectory and provide a hedge against it.

“Clearly there’s more uncertainty around the outlook for inflation,” Hindo said in an interview. “We’re not saying it’s our base case but we have to plan for it and it absolutely felt prudent that an increased allocation into inflation-sensitive asset classes was warranted because of that uncertainty.”

 The strength in the Canadian dollar during the first half of the year detracted from performance but over a five-year period, currency gains and losses typically wash out. OTPP partially hedges some currencies but it's too capital intensive to hedge all foreign currency exposure.  

Jo and I also discussed OTPP's Real Estate portfolio in a little more detail. 

Recall, similar to other large pensions, OTPP's Real Estate posted big declines last year (-13.7% vs -4.7% benchmark), mostly owing to the pandemic and ensuing lockdowns which hit retail assets and offices hard.

In OTPP's case, there was also a big home country bias in Cadillac Fairview's portfolio but in general, lack of sector and geographic diversification hurt that asset class last year.

However, this year is shaping up to be better than last year even if there are ongoing concerns with the delta variant. 

Jo told me Cadillac Fairview is diversifying more geographically and in terms of sectors.

He mentioned the recent deal with Lincoln Property Company to invest in multifamily in Arlington, Virginia.

But he also told me that OTPP "has little Industrial properties" and they won't be chasing them here because valuations are rich (everyone wants industrial properties, now more than ever).

Still, it's important to note that Cadillac Fairview has great assets in Canada and abroad and the domestic ones will bounce back (like Toronto's Eaton center).

Jo told me that Ziad Hindo and Jane Rowe sit on Cadillac's board of directors and Ziad is looking at  a couple of industrial property deals in Canada.

But they are also pursuing a "densification strategy" to develop mutltifamily properties around their prized retail assets, which effectively means working with developers to redevelop these properties.

I think this is a great strategy, one that other large Canadian pensions should pursue. 

Lastly, in terms of risks, Jo mentioned a couple worth noting:

1. OTPP is fully integrated internationally, that is why Jo Taylor was named CEO, but geopolitical risks have risen over the past 12 months and that will make investing in some countries a bit more complicated.
2. Jo was careful to differentiate impact investing in two segments: 1) climate change and 2) social impact. He told me he's worried that in a post-pandemic world, rising inequality will lead to more populism and more geopolitical risks.

"Teachers' clients are highly educated and very concerned about these issues. We are looking to make a difference here by investing more in education and other areas to bridge the divide." 

I couldn't agree more, I always love talking to Jo Taylor, he's very sharp and very thoughtful.

I've given you the important details of our conversation, probably should also mention they are looking to invest more in private debt and today, Spark Infrastructure Group, an Australian investment fund which owns and manages a portfolio of electricity infrastructure assets, agreed to be acquired for A$ 5.2 billion by private equity firm KKR & Co., Ontario Teachers’ Pension Plan Board, and PSP Investments. 

These are the type of "core infrastructure" assets Jo Taylor was referring to and he told me they like investing in Australia.

Anyway, once more, I thank Jo Taylor for talking with me earlier. You can read some articles on OTPP's mid-year results here, here and here.

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