A Conversation With OTPP's CEO on Their Mid-Year Results

The Canadian Press reports Ontario Teachers' earned 1.9% net return for first half of 2023:

TORONTO - The Ontario Teachers’ Pension Plan Board says it earned a net return of 1.9 per cent for the first six months of the year.

The pension fund’s total net assets stood at $249.8 billion at June 30, up from $247.2 billion at Dec. 31, 2022.

Chief investment officer Ziad Hindo says the fund saw positive returns across multiple asset classes including public and private equities, infrastructure, and credit over the first six months of the year.

The growth came as the fund earned a 12-month total-fund net return of 4.8 per cent.

Ontario Teachers says its five- and 10-year annualized net returns were 7.0 per cent and 8.6 per cent, respectively.

The pension fund, which invests to pay for the retirement for 336,000 working members and pensioners, noted that as of Jan. 1 the plan was fully funded with a $17.5-billion funding surplus.

Paula Sambo of Bloomberg News also reports Ontario Teachers’ makes bond bet as economic clouds gather:

Ontario Teachers’ Pension Plan is making a bigger bet on bonds and credit and is adding leverage to pay for it.

The pension fund, one of Canada’s largest institutional investors, earned a 1.9 per cent investment return in the first half as its fixed income and credit portfolio advanced and stocks rebounded from last year’s correction. 

Bond holdings jumped to $118 billion at the end of June, 55 per cent higher than at the end of December, the Toronto-based fund said in a statement Tuesday. 

Bond yields are much higher now than after the COVID-19 shock, Chief Investment Officer Ziad Hindo said in an interview, making them a more appealing bet if the economy gets worse. The pension fund added exposure to longer-dated bonds and to the front end of the curve, where yields are “quite high” due to central banks’ tighter policy. 

“When you’re buying bonds when yields are at circa 4 per cent, they become more income-producing, which is attractive,” Hindo said. “The starting level of yields means that they have a better chance at diversifying the portfolio when equities sell off, when we have an economic slowdown — whereas when yields were low at zero or even negative, it was very hard to get any income or get any diversification benefit.”

Ontario Teachers’ also increased its allocation to private credit. The firm remains interested in the leveraged loan market, where it’s finding opportunities to step into the place of traditional lenders. 

“We’re seeing institutions like ourselves come into the credit market at a time where perhaps there’s a bit of retrenchment in lending, particularly from banks,” Hindo said.

Ontario Teachers’, like a number of other Canadian pension funds, takes advantage of strong credit ratings to borrow in short- and long-term funding markets to fuel investments and to participate in derivatives markets. The fund’s leverage soared during the first half, with funding for investments rising 47 per cent, to $145 billion. In this case, the increase was due to derivatives used to boost the fund’s overall exposure to fixed income, spokesperson Dan Madge said by email. 

Ontario Teachers’ manages approximately 80 per cent of its nearly $250-billion portfolio with in-house employees, focusing on active strategies. It doesn’t break down returns by asset class in its mid-year results, and it didn’t give a benchmark return for comparison Tuesday. 

The pension fund said in June that it’s working on an overhaul of its real estate operations and is seeking a global head to lead it. The search includes internal and external candidates, Chief Executive Officer Jo Taylor said.

“The real change of emphasis was around our international real estate investing activities, which is one of the areas we’ve been trying to build some diversification away from Canadian real estate,” Taylor said. 

Ontario Teachers’ also added to its private equity bets in the first half, buying a co-control position in U.S. data-centre company Compass Datacenters LLC alongside Brookfield Infrastructure Partners. 

“Some of the private markets for us are a little quieter than they may have been through 2022,” Taylor said. “And that’s just basically the level of activity, there’s an element of people waiting to see how valuations adjust and which assets are available for transactions.” 

Earlier today, Ontario Teachers’ put out a press release stating it delivered a positive return in first half of 2023:

2023 mid-year highlights:

• Six- and 12-month total-fund net returns of 1.9% and 4.8%
• Strong long-term returns of 8.6% over ten years and 9.4% since inception
• Plan is fully funded for 10th straight year and sponsors have elected to file a valuation with the regulators
• Advanced portfolio diversification with high-quality investments across asset classes

TORONTO (August 15, 2023) -- Ontario Teachers’ Pension Plan Board (Ontario Teachers’) today announced a total-fund six-month net return of 1.9%, while the 12-month total-fund net return was 4.8% (all figures as at June 30, 2023, unless noted). Net assets are $249.8 billion (all figures are in Canadian dollars unless noted).

“We continue to deliver positive investment returns for our members. Our investment portfolio is purposely designed to help us achieve stable returns over the long term, and our half-year results demonstrate that our portfolio construction is working as planned,” said Jo Taylor, President and Chief Executive Officer. “Our balanced portfolio positions us well to navigate markets that we anticipate will continue to be volatile in the coming years.”

As a defined benefit pension with liabilities that stretch decades into the future, Ontario Teachers’ remains focused on delivering consistent investment returns over the long term. Ontario Teachers’ had an annualized total-fund net return of 9.4% since inception in 1990. The five- and 10-year annualized net returns were 7.0% and 8.6%, respectively.

Investment Performance

Time Period (all as of June 30, 2023)	Six-months	12-months	Five-years	10-years	Since inception
Total-fund net return	1.9%	4.8%	7.0%	8.6%	9.4%

“We saw positive returns across multiple asset classes including public and private equities, infrastructure, and credit over the course of the first six months of 2023,” added Ziad Hindo, Chief Investment Officer. “Looking ahead, we will remain disciplined as we pursue attractive investment opportunities while building value within our high-quality portfolio of companies.”

Detailed Asset Mix

	As at June 30, 2023		As at Dec. 31, 2022
Asset Class	$ billions	%	$ billions	%
Equity
Public equity	23.3	9%	21.9	9%
Private equity	60.7	25%	58.3	24%
Teachers' Venture Growth	7.0	3%	7.3	3%
	91.0	37%	87.5	36%
Fixed income
Bonds	118.0	48%	76.2	31%
Real-rate products	9.3	4%	9.8	4%
	127.3	52%	86.0	35%
Inflation sensitive
Commodities	20.9	9%	25.0	10%
Natural resources	10.6	4%	10.1%	4%
Inflation hedge	12.2	5%	12.7	5%
	43.7	18%	47.8	19%
Real assets
Real estate	29.3	12%	28.1	12%
Infrastructure	42.4	17%	39.8	16%
	71.7	29%	67.9	28%
Credit	37.4	15%	35.2	14%
Absolute Return Strategies	20.6	8%	18.7	8%
Overlay1	0.4	0%	(0.2)	0%
Funding for investments2	(145.0)	(59%)	(98.8)	(40%)
Net investments3	247.1	100%	244.1	100%

 

¹ _{Includes strategies that manage the foreign exchange risk for the total fund.}

² _{Includes term debt, bond repurchase agreements, implied funding from derivatives, unsecured funding, and liquidity reserves.}

³ _{Comprises investments less investment-related liabilities. Total net assets of $249.8 billion at June 30, 2023 (Dec. 31, 2022 - $247.2 billion) include net investments and other net assets and liabilities of $2.7 billion (Dec. 31, 2022 - $3.1 billion).}

Funding Status

As of January 1, 2023, the plan was fully funded with a $17.5 billion funding surplus, underscoring its long-term financial health and sustainability. The plan’s sponsors, Ontario Teachers’ Federation and the Government of Ontario, have elected to file the January 1, 2023 valuation with the regulatory authorities. 

Transactions Highlights

Ontario Teachers’ manages approximately 80% of assets internally, with a focus on deploying capital into active strategies. During the first half of 2023, the fund continued to diversify investments globally. Highlights from the period include:  

Equities

• Acquired a co-control position in Compass Datacenters, a company that designs and constructs data centres for some of the world’s largest hyperscalers and cloud providers on campuses across the globe.
• Supported BroadStreet Partners Inc. in their acquisition of Westland Insurance, one of the largest independent insurance brokers in Canada.
• Entered a strategic partnership with Sevana Bioenergy LLC, which will see Ontario Teachers’ acquire a majority stake in the business and make a capital commitment to develop renewable natural gas projects across North America.
• Helped portfolio company APCO Holdings LLC acquire National Auto Care, a leading provider of finance and insurance products, administration, consulting services, training, and marketing support. 
• Supported GPA Global in its acquisition of Cosfibel Group, one of the leading players in luxury promotional packaging.

Infrastructure & Natural Resources

• Acquired a significant equity ownership position in Diamond Communications, one of the largest privately held U.S. wireless communications infrastructure platforms. 
• Acquired 25% equity stake in Sweetwater Royalties, a base metals and industrial minerals royalty company. 
• Acquired a majority stake in Mitolo Family Farms, a vertically integrated grower, harvester, packer and marketer of fresh potatoes and onions based in Australia.
• Completed the acquisition of 2degrees Mobile’s passive mobile tower assets in New Zealand alongside Connexa.

Real Estate

• Cadillac Fairview (CF), Ontario Teachers’ real estate subsidiary, acquired a significant majority stake in Lincoln Property Company’s Residential Division to support and grow multifamily property operations and investments across the United States. CF first acquired a 49% interest in Lincoln Residential in 2019.
• Expanded into Spain and France with Boreal IM joint venture acquiring logistics assets.
• Announced a partnership with Gateway Capital to form a new investment vehicle, Gateway Capital Urban Logistics Partnership (GULP), to acquire and develop Australian assets.

Corporate News

• Alongside CF, announced an evolution to their real estate operating model that will see the establishment of an in-house real estate asset class group at Ontario Teachers’. This aligns the real estate investment approach to that of other asset groups, where investment capabilities are embedded within Ontario Teachers’ to enable information sharing, co-sourcing, and best practices across geographies. With this model Ontario Teachers’ will focus on global real estate investing and portfolio management, while CF will focus on growth, diversification, and densification of its real estate portfolio in Canada.
• Appointed Bruce Crane to the position of Head of Asia-Pacific. Mr. Crane joined Ontario Teachers’ in 2020 and most recently led the Infrastructure & Natural Resources team in Asia-Pacific. He succeeds Ben Chan, who retired in June.  

Financial Statements

Q2 2023 Interim Report

About Ontario Teachers’

Ontario Teachers' is a global investor with net assets of $249.8 billion as at June 30, 2023. We invest in more than 50 countries in a broad array of assets including public and private equities, fixed income, credit, commodities, natural resources, infrastructure, real estate and venture growth to deliver retirement income for 336,000 working members and pensioners.

With offices in Hong Kong, London, Mumbai, San Francisco, Singapore and Toronto, our more than 400 investment professionals bring deep expertise in industries ranging from agriculture to artificial intelligence. We are a fully funded defined benefit pension plan and have earned an annual total-fund net return of 9.4% since the plan’s founding in 1990. At Ontario Teachers’, we don’t just invest to make a return, we invest to shape a better future for the teachers we serve, the businesses we back, and the world we live in. For more information, visit otpp.com and follow us on LinkedIn.

Earlier today, I had a brief chat with OTPP's CEO Jo Taylor to catch up and go over mid-year results.

Let me repeat what I stated to him and other CEOs that post mid-year or quarterly results, I'm not a big fan of covering these results because what counts at large pensions are annual and long-term results (5 and 10-year results).

But covering these results allows me to catch up with some people so I do it.

Let me begin by thanking Jo for taking some time to call me and also thank Dan Madge for setting up this call.

Jo began by giving me his overview:

1.9%, a positive return, we are still well funded, fully funded. Our annual return over the last 12 months is a shade under 5%. It's positive, it's not quite at the 4% real return we aspire to make on the longer term basis for the plan. But as you say in many of your articles, vis a vis our 10-year returns of 8.6% or 9.5% since inception, we are in good shape. 

So what is front of mind? We did share a little while ago, the reorganization of real estate. Basically what that's designed to do is leave Cadillac Fairview do what it's best at which is developing real estate in Canadian cities which will be predominantly in Toronto, a little bit in Montreal and Vancouver around what we already do but also try to diversify that portfolio by sector, more in multifamily (residential) on shopping malls we own and develop industrial real estate -- for example at Buttonville Airport which we will turn into an industrial site shortly.

What we are doing at Teachers' is bringing what we do internationally (in real estate) more into our organization and make it more of a standard asset class sitting alongside other asset classes. And to do that, we will bring the existing Cadillac Fairview team that does it already and probably add some capability to that over time. 

The role of that team is to get geographic diversification but also to help us find more product categories that we like which might be better suited to look at outside Canada. Medical/ life sciences is one area we are quite active in outside of Canada and we will continue to do some of that, as well as some other more specialist areas.

That's a fairly long-term project, I think we will complete the in-sourcing of that team by the end of the year and get it ready for 2024 and changing the asset mix of Cadillac Fairview will take us a bit of time, but  it hasn't been part of our business that has performed the easiest for us recently, so it's probably time we get on top of that as you mentioned in previous comments of yours.

I interjected and said Cadillac Fairview has great assets in Canada but it needs to diversify geographically and by sector as it remains too exposed to Canadian retail and offices. I also told him that they're right to move cautiously and not enter into a fire sale of their Canadian real estate, opting instead to develop these assets into mixed-use properties.

Jo replied:

Yes, it's a very good summary and the other thing to say is when we operate internationally, I think Teachers' is a slightly more familiar brand than Cadillac Fairview. So Teachers' Real Estate is more helpful to make it part of an integrated plan of what we do in other parts of the world.

I then told Jo I noticed they have ramped up their Credit portfolio to which he commented:

Yes, we built it up last year, it's increased a bit this year. We like that area at the moment. When you look at the world we operate in, given the higher cost of bank funding and relatively full valuations for businesses, in Credit you can get a mid double-digit return, probably looks like a better option than equity at the moment. We have been bringing in talent to do that both in North America and in Europe.I'd say we are towards the end but still in built mode for this product area.

I then moved on to private equity where I'm hearing valuations remain high and things are getting tougher out there.

Jo replied:

Some of that is the market which gives you what it gives. Valuations are still healthy for the projects we've seen and we liked so we've been under-bidders on some projects. We've been very careful on what would add to the portfolio. Funding costs are a lot higher than they used to be from the banks. Most of what we've done more recently, you've probably seen on our deal flow reporting is bolt-on acquisitions for some of our larger portfolio companies. 

The other thing that has slowed down is divestments because you want to be thoughtful about things when selling. We don't have to sell assets so we want to time it to get the right price for our members.

On divestments, I told him I talked about the sale of Cubico yesterday and it shows two Canadian pension funds can get together, nurture a company and realize great returns on their investment after seven years:

I thought you wrote a very thoughtful comment. People tend to overreact to any one asset. We buy assets, we sell assets. We've been very clear that we see climate change as an opportunity segment for Teachers'. 

We are investing in a lot of areas related to climate change. You've seen us do a lot in electricity transmission as well as renewables through our Infrastructure business, and we like both of those areas. We're trying to make sure we can operate in areas where there's a tailwind for growth. They are positive assets in terms of what they can do to the climate and local community. 

But more than anything we have to make a return, we have to make sure we can enter those assets on a right risk-adjusted basis.

If I can say one thing, what you'll see at Teachers' is we are trying to craft steady incremental returns for the plan and we are taking relatively low levels of risk versus many of our peers.

So, we have constructed a portfolio which is pretty careful relative to what is going on out there in the rest of the world.

He went on:

For example, we added Fixed Income to our portfolio in the first half of the year. We did that because we saw better yields on bonds, both on the front and back end of the yield curve. At 4 and a bit percent, you get reasonable yield off that and it starts to look more interesting then when we were looking at it in 2021 where they were zero to negative. We can be agile tactically around parts of the portfolio where it makes sense both in terms of diversification and where it makes sense in terms of risk and returns.

I would say OTPP is exceptionally good at tactical asset allocation in their Fixed Income portfolio but keep in mind, these are asset-liability matching decisions, not necessarily directional bets on the fixed income market.

I then told Jo that I have been very vocal that venture capital will experience a difficult cycle here (see this recent comment on OMERS) and asked him about Teachers' Venture Growth:

We are pretty happy with the portfolio we have at Teachers' Venture Growth at the moment. I think adding to it might be more complicated because a lot of the good companies are well funded and they're not looking for money for the next couple of years. So, that team will concentrate on making the businesses we have better and think about which segments they want to add to the portfolio. 

As you point out, sometimes they're very busy, sometimes they are more focused on portfolio planning and oversight. They're probably more on the second mode just at the moment.

Lastly, I asked Jo about energy transition where they are looking for scale and whether there are areas here which are the right fit for Teachers':

We have gone out before and said that selectively some assets which have a high carbon footprint where we can help them move into a lower carbon footprint within manageable period of time at costs we think we can define. We may do that with a partner, so we talk to people like Brookfield, but the main point is not be virtuous, we actually believe if we go down that path, the asset will be worth more when we finish. 

We've looked at a few of those and back to your question, they've tended to be quite big companies when we looked at them. 

I think on the newer technologies, the new fuel sources, they tend to be slightly smaller transactions and there is more risk in those just to know where they're going to go.

So, I'd say overall, we've been most focused in either renewables or in electricity transmission, both of which we've proven we can execute pretty well and we have a portfolio now where we can share knowledge to actually make better choices.

Once again, I thank Jo Taylor for his thoughtful comments and sharing so many excellent insights in this mid-year review.

Also, the information you read on this blog isn't widely available and I appreciate those of you who value the work that goes into these comments and support the efforts via a contribution on the top left-hand side using the PayPal options.

Below, a recent Money Maze podcast where Jo Taylor discusses his time with 3i which educated him in Venture capital and growth investing. He discusses delegating investment decisions, their appetite to be less constrained than many and their geographic and asset priorities, along with why thy have, at times, made big asset allocation switches. 

 In a candid and wide ranging discussion, culture, communication and ESG are all woven into this rich and varied exchange. 

Also, an interview with Jo Taylor at SuperReturn International about how they became one of few investors with positive returns in 2022, the move from bonds to more inflation sensitive assets and how being agile can improve your returns.