Jo Taylor's Bold Vision For Ontario Teachers'
If there are a few hundred thousand Ontarians who’ve slept more soundly than the rest of the province for the past 32 years, it’s because their retirements have been funded in part by the Ontario Teachers’ Pension Plan. Ever since the provincial government handed the management of teachers’ pensions to an outside body in 1990, about the only time members have had cause to consider the wizardry behind the curtain is when the plan has changed wizards. In 2020, Jo Taylor made everyone aware that someone new was in charge at Teachers when, after taking over from Ron Mock, he announced he wanted the plan to make “bolder and bigger” investments. The U.K.-born Taylor, who had run the plan’s London office for eight years, then said he wanted Teachers to be more “entrepreneurial” and started talking about its “brand.” The plan hasn’t been this interesting since it sold its stake in the Toronto Maple Leafs in 2011. We spoke to Taylor in February via Zoom.
The markets have been on a trampoline so far this year. How does OTPP cope with volatility?
We’re a long-term investor trying to fund contributions to members on a 30- to 50-year time frame. You’re really looking to stay with businesses where you believe in their growth prospects and that they are actually disruptive in a market that has attractive characteristics. And you’re not put off by short-term implications, which may have nothing to do with the business. We have a lot of investment in private companies; they’re less prone to massive fluctuations. The last thing to say is, we entered this year with some— I think concerns is the right word. We lightened our equity weighting a bit. Valuations toward the end of 2021 were pretty full in a number of markets. But let’s be honest: Depending on what happens in Ukraine, things might start to look a little different.
Your plan has provisions for major adverse events. Can you give me a sense of what they are?
Let’s be clear: A plan of our size, you can’t cover all adverse events that could impact you. So, a massive shock to the exchanges around the world—we’ll feel that. The other thing that affects a plan like ours is inflation. We try to do our best. I set the task for everybody when I started to increase the assets of the plan from $200 billion to $300 billion by 2030. To do that, we’re creating about $150 billion of growth, so you’re almost doubling the plan over that period. Which, frankly, is an interesting challenge.
How are you addressing the inflation threat?
We’ve leaned more into real assets, infrastructure and real estate, where you can have inflation-protected revenues, whether it’s rents or payments from government on an infrastructure basis. We’re pretty long on commodities. We have about 14% of the portfolio in commodities, deliberately to give us an inflation hedge.
Two years into the pandemic, how has the investment landscape changed?
It’s harder to be an international investor, because people are thinking much more locally these days. It’s hard to be an active investor in China and the U.S., because those two countries are going in quite different directions, politically. A number of sectors we would invest in have been really impacted by COVID. We’re seeing quite a lot of disruption and digitization, as well as some businesses having to re-engineer themselves to be successful. So, how do we help them? We’re an involved investor. We try to make sure our businesses are agile and can be, eventually, market-leading businesses.
Some change created by the pandemic is permanent, some is temporary. How do you tell which is which?
Honestly, I’m not sure you know at the time. Probably where we’ve changed the most is, we’ve really leaned into disruptive businesses we didn’t own. Our Teachers’ Innovation Platform, or TIP, is probably the highest-risk part of our portfolio. They’ve been very active through the pandemic, investing in 17 companies around the world, and the selection of companies is probably different to what it might have been pre-pandemic because of the disruption that’s happened.
One more pandemic-related question. Have you seen a difference in the retirement rate of your membership?
A little bit. The profile of our membership, between retired and contributing teachers, is going in one direction. On average, teachers contribute for 26 years, and they retire and collect for 32-plus. We have to be very careful about the risk allocation we take.
When you took over Teachers in 2020, you said one of your goals was to make “bolder and bigger” investments. What level of risk are you comfortable with?
I was very deliberate around this $300-billion target. I’ve set a growth mandate agenda for everybody, with a difficult exam question: How do you do it, whilst taking, in some cases, half the risk of our competitors? That’s the skill. We’ve generated annual returns since inception of almost 10%.
But given the demands on the plan, you saw the need to grow it even more. Was the plan not growing fast enough under Ron Mock?
Ron did a very good job, and the plan was fully funded under his leadership. As we go forward, we have to make sure the plan remains fully funded. We generate just under 80% of the returns. And we have this outflow that is increasing—it’s about $3.5 billion per year now, and it’ll be about twice that in 2035. In a plan with our funding dynamic, if you have a really bad year, it’s quite hard to recover. Which is one of the reasons we’ve decided to move quite a lot of our portfolio into private assets. They give us better, more predictable returns.
You made an investment in Elon Musk’s SpaceX. What was the point of that investment?
We have invested in a number of businesses involved in providing satellites in orbit, to be able to provide features for people on Earth. What interested us around SpaceX was their ability to really dominate the low-orbit satellite installation world, because of their recoverable rocket fleet.
Was there publicity value for you, as well?
There’s value and there’s issues with SpaceX. Some people have exactly the same reaction—is this just a publicity stunt rather than a real investment? Which it wasn’t, just to say it. But it is a known business. We say we want to back disruptive companies that are in our innovation platform. When you mention SpaceX, everybody gets it.
What sort of annual return are you expecting from your more venture capital–like investments?
Probably north of 20%. And we’ve been achieving above that since we launched the team.
Is that a predictable return or good fortune?
It’s been a favourable market. I think we have backed some interesting companies that other people are now very interested to buy off us or to help co-invest in. It’s a volatile portfolio within our overall mix, so we have to be thoughtful about that. To be honest, for a $230-billion pension plan, it’s about 3% of our portfolio, but it’s growing very rapidly.
That’s not a great amount of money. What is its value to you?
It’s good for our brand. It shows we’re innovative. We buy businesses that are making a difference, that are disruptive, and that adds some lustre to our other activities. In some of our geographic regions, where we back a high-profile, high-growth business, we build more familiarity. For example, we’ve owned the National Lottery in the U.K. for about 13 years. We had more profile backing Graphcore, a chip business, than we had with the lottery, because it was a sexy, high-growth tech business.
You’ve said Teachers will be investing more of its money— half of all private investments—in foreign markets. There are special risks in investing overseas, where you don’t know the nuances of the markets. How do you avoid making mistakes?
The best way is to employ local investors, because they understand that market better than I might from here. Historically, we’ve invested in about 50 countries. We’ve baked that down to nine, to have that very clear, locally based strategic focus on how we win in those markets. The key considerations for me are: Is the government predictable and stable? What’s our view of the economy? What’s our view of regulation, and is it predictable? And the last one, which is also super important, is, What’s the currency doing? We’ve had some countries where we’ve been able to make attractive local returns, but by the time you convert it back to Canadian dollars, it’s less attractive.
It seems some Canadian investors are moving away from the domestic market. “Fleeing” was one description. Are you part of that trend?
One of the challenges is finding businesses of scale to support. Honestly, we’d love to do more. Infrastructure investments are highly competitive because there are eight large Canadian pension plans, and the number of opportunities are limited, compared with an international landscape. Our mindset is to invest in Canada whenever we can. If we find a good opportunity, we will really run quite hard at it.
One area you’re moving out of is oil and gas.
We’ve always been very low in oil and gas, and we’ve been reducing it recently because we know members aren’t that keen on us holding fossil fuel assets.
Teachers has targeted a 67% reduction in carbon emissions by 2030, and you want to be net zero by 2050. What’s your mandate for that?
Just for clarity, we are looking at carbon-intensity emissions, different from absolute carbon reduction. We have to look at the overall intensity for assets we own, because if you buy more assets and just look at absolute footprint reduction, it gets quite difficult to deliver. Why do we do it? I think because we believe in it, directed by our stakeholders. We’ve had very clear feedback from our members that they expect us to do it. We do it because we think we’ll make better returns, because if we improve these companies with a better carbon footprint, they’re more attractive and more valuable to third parties. And we do it to avoid having businesses that nobody wants to own, in case we want to dispose of them at a later date.
There’s no official standard for what constitutes an ESG investment. Some funds are accused of greenwashing. How do you ensure you’re investing in something truly green?
The easiest thing to do is to go out and raise a green bond. When we raise debt—labelled as a green bond—to fund green assets, everything you invest in is certified by an external expert who has said it’s truly green. We’ve also asked consulting firms to look at our existing portfolio and say how much of it is green already. We have around $30 billion to $35 billion of green assets in our portfolio. So, we are walking the talk.
You mentioned earlier that one of the things you focus on when investing in foreign markets is whether the government is stable. Do you consider the United States to be a stable government?
Well, there’s an interesting question. I think if you look at the U.S. market at the moment, there are features in it that are quite similar to overseas markets that are seen to be higher-risk. Political stability could be one of those. If you look at things like inequality and the consistency of regulation across all states, there are some issues there for us. For balance, the U.S. has been far and away our best-performing market over 30 years. So you criticize it or move away from it only with careful thought.
What are your concerns about China’s regulatory crackdown?
I do not have a crystal ball, and it’s hard to know exactly where future changes will impact you as an investor. It’s back to those three things—does it meet those tests of being stable politically, economically and from the regulatory point of view? I would say our bigger issue with China, Trevor, is the perception of investing there at the moment, given the historic situation with the two Michaels and the human rights situation, which we are very mindful of.
It really sounds like public perception influences your investment decisions as much as potential returns.
If that’s what you’ve heard, I’ve given you the wrong impression, so I apologize. I have never been a proponent of investing for style purposes or for PR notoriety. Having said that, we’re trying to develop a brand that is consistent with what we do. And we are very clear that, as well as making great returns and being thoughtful about our climate footprint, we also want our companies to have a positive social impact. We actually do want to do the right thing. And that’s not just social greenwashing. That is something that is important to me.
You once said being an outsider allowed you to be more direct and challenging than someone who is part of the community. How has that worked for you?
I think there’s a large premium in directness, honesty and candour in all things you do. Within the business, people know my style is basically, say it as it is and deal with difficult discussions, rather than try to avoid them. It’s been a lot harder to connect with the Toronto community, meet people and build friendships in a pandemic where everything’s locked down. At some point we’ll get through this, which hopefully will allow me to make those relationships.
You did get a chance to meet the Queen, though.
I did, yes. And Prime Minister Boris Johnson. He said to me, “You’re one of these Canadian plans that own quite a few of our assets.” And I said, “No, we own quite a lot of your assets.” I ran down the list, and he went, “Wow. I didn’t realize it was that extensive.” But it was delightful to meet the Queen.
This is a great interview with Jo Taylor, I am glad I caught it this afternoon.
And I love the Queen, think she's an incredible lady who represents the best of the monarchy (can't say the same for some other members of her family).
As for Prime Minister Boris Johnson, he should read about the Canadian pensioners who own Britain.
Back to Jo Taylor. I'm pretty sure he's taking a much needed break this week but I did get to speak with him and Ziad Hindo, OTPP's CIO, last week when I covered their 2021 results.
To recap, the plan gained 11.1% in 2021 and closed the year with $241.6-billion in assets.
Also, Teachers’ annualized net return was 8.4% over the past five years and and 9.3% over the past 10.
More importantly, the plan which serves the province’s 333,000 active and retired teachers said it closed 2021 fully funded, with a $17.2-billion surplus.
So, OTPP is in great shape and by my calculations, it will cross the $300 billion mark over the next three years as long as we don't enter a nasty bear market during this time which is always possible.
The key takeaways I got from the interview above:
- Inflation definitely matters for OTPP and other plans that pay out indexed benefits which is why they invest heavily in inflation sensitive assets like real return bonds, real estate, infrastructure, commodities and timberland. I recently discussed why OTPP is financing a Canadian mining project and I also discussed how OTPP took direct ownership of approximately 870,000 acres of timberland in throughout the US South. You can read about this deal here. These deals along with many other core infrastructure deals and multifamily real estate deals demonstrate just how seriously OTPP takes inflation.
- Commodities (11%) and natural resources (4%) made up 15% of OTPP's portfolio as at the end of December so when Jo Taylor says commodities now make up 14% of total assets, I wonder if they allocated even more to them in Q1. I'm not sure about this but either way, along with real assets, they represent an important inflation hedge, underscoring my first point.
- As OTPP grows its assets internationally, country and currency risk are very important. As Jo states: "We’ve baked that down to nine, to have that very
clear, locally based strategic focus on how we win in those markets. The
key considerations for me are: Is the government predictable and
stable? What’s our view of the economy? What’s our view of regulation,
and is it predictable? And the last one, which is also super important,
is, What’s the currency doing?" When you pay out liabilities in Canadian dollars, currency risk matters a lot!!
- As the plan matures, funding risk matters a lot more. Jo praised Ron Mock, his predecessor, saying the plan was fully funded under his watch but he also added this: "We generate just under 80% of the returns. And we have this outflow that is increasing—it’s about $3.5 billion per year now, and it’ll be about twice that in 2035. In a plan with our funding dynamic, if you have a really bad year, it’s quite hard to recover."
- Need to take risks to generate returns. Jo said Teachers’
Innovation Platform, or TIP, is probably the highest-risk part of their portfolio but it represents just 3% of total assets. Still, if the innovative companies they are investing in like SpaceX become dominant players in their industries, these investments will pay off huge over the long run.
- Teachers' brand is unparalleled and that's why they can approach strategic partners all over the world to invest in private investments and new innovative companies.
- Teacher's is committed to responsible investing and takes all three pillars of ESG very seriously. As Jo states, they are looking at carbon-intensity emissions, different
from absolute carbon reduction. They are well on their way to being net zero by 2050. Teachers' has set industry-leading targets to
reduce portfolio carbon emissions intensity by 45% by 2025 and 67% by
2030, compared to its 2019 baseline. And it takes its social commitments very seriously, being part of the 30% Club and promoting diversity and inclusion within and in all its investments across public and private markets.
I think I covered the main points above but take the time to read last week's comment too.
I like Jo's style, he does say it like it is and deals with difficult discussions head on instead of avoiding them. If you talk with him, you'll appreciate his directness, honesty, candour and intelligence (he's extremely sharp and writes very well).
Below, Starship is SpaceX’s largest reusable rocket. It can carry more than 100 metric tons of cargo and crew per launch. Company CEO, Elon Musk, says Starship represents the “holy grail” for space travel, but the giant rocket vehicle also is crucial for SpaceX’s future.
Some experts have estimated that if SpaceX succeeds with Starship alongside Starlink, the company’s global satellite internet venture, the space firm’s valuation could skyrocket into the trillions of dollars. But before SpaceX can get Starship into orbit, the company faces a number of technical and regulatory challenges.
Like I said, the TIP portfolio is risky and small now but it has tremendous potential and companies like SpaceX are the reason why you need to invest in tomorrow's disrupters.
Also, a friend sent me this phenomenal discussion between Freddie Sayers and Bismarck Analysis’s Samo Burja. I highly recommend you watch this podcast and listen carefully because he explains why the world order is changing and why sanctions are likely to be counterproductive over the long run.