A Discussion with Jo Taylor and Co-CIOs on OTPP's Mid-Year Resuts
Ontario Teachers’ Pension Plan delivered a 4.2% return in the first half of the year as it boosted exposure to stocks and commodities and trimmed back on credit.
The fund’s gains equaled C$10.8 billion ($7.9 billion) in net investment income, bringing it to C$255.8 billion of assets.
“Our results for the first half of 2024 reflect an ability to generate positive returns in a range of market conditions across our investment teams,” Chief Executive Officer Jo Taylor said in a statement Tuesday. The fund doesn’t disclose returns by category in its midyear results.
Credit became 14% of the portfolio on a gross basis as of June 30, down from 16% at the end of 2023.
The Toronto-based firm manages about 80% of its portfolio internally.
Ontario Teachers’ made several new appointments, including naming Mabel Wong chief financial officer, announced Tuesday. Wong had been the acting CFO since the departure of Tim Deacon in April. Prior to joining the pension fund in 2023, she spent about 15 years at Brookfield Asset Management.
The fund also tapped Bernard Grzinic as executive managing director for capital markets, where he’ll be in charge of active risk-taking in credit. Chief Operating Officer Tracy Abel plans to retire at the end of the year.
Naimul Karim of the National Post also reports Ontario Teachers' pension posts better returns, but says wins are getting harder to come by:
The Ontario Teachers’ Pension Plan says it had a better first half of 2024 after ending 2023 on a disappointing note, as it generated positive returns across its portfolio.
Teachers’ said it had a six-month return of 4.2 per cent, or $10.8 billion, as of June 30, and had $255.8 billion in assets, up $8.3 billion since the end of 2023.
“All of our asset groups actually made a positive contribution, which wasn’t the case in 2023,” chief executive Jo Taylor said. “We are aiming for a four per cent real return and, therefore, our performance in the first half of the year is pretty consistent with that long-term objective.”
In 2023, Teachers’ posted a net return of 1.9 per cent, which was sufficient to cover net pension outflows, but Taylor said it was not satisfactory. It also had a more negative economic outlook than what ultimately transpired, so it did not benefit from the strong market performance, particularly in the United States.
Although a thorough assessment of this year’s performance can only come about by the end of 2024, Taylor said the pension plan is feeling “more positive about how returns are coming through the different parts of the investing teams.”
Teachers’ invests in more than 50 countries in a broad array of assets. But despite being in a “comfortable position” and being fully funded for the past 11 years, Taylor said it isn’t as easy to make returns in the current environment than it was in the past.
“Some of the reason for that is more volatility in the market,” he said. “It’s more complicated to be a large-scale international investor, the type we are, investing around the world with geopolitics and other issues.”
He said some of the markets where Teachers’ made good returns on a 10-to-20-year basis have been providing reduced returns in recent years.
Earlier today, Ontario Teachers' issued a press release stating it delivered a positive return in first half of 2024:
- Net assets at $255.8 billion.
- Six- and 12-month total-fund net returns of 4.2%.
- Strong long-term returns of 7.3% over ten years and 9.3% since inception.
- Fully funded for the 11th straight year and plan sponsors have announced they will file a valuation with the regulatory authorities.
- Appointed a number of senior leaders to best position the plan for the future.
TORONTO (August 13, 2024) -- Ontario Teachers’ Pension Plan Board (Ontario Teachers’) today announced a total-fund six-month net return of 4.2%, or net investment income of $10.8 billion. The one-year total-fund net return was also 4.2%. Net assets are $255.8 billion, up $8.3 billion from year-end (all figures are as at June 30, 2024, and in Canadian dollars, unless noted).
"Our results for the first half of 2024 reflect an ability to generate positive returns in a range of market conditions across our investment teams, and maintain a well-funded status for our members,” said Jo Taylor, President and Chief Executive Officer.
Given the plan’s liabilities stretch decades into the future, results over longer periods are particularly important. Ontario Teachers’ had an annualized total-fund net return of 9.3% since inception in 1990. The five- and 10-year annualized net returns were 6.7% and 7.3%, respectively.
The table below summarizes Ontario Teachers' portfolio mix by asset class for the current period and previous year-end.
Funding Status
As of January 1, 2024, the plan was fully funded with a $19.1 billion preliminary funding surplus, underscoring its long-term financial health and sustainability. On July 23, 2024, the plan’s sponsors, the Ontario Teachers’ Federation and the Government of Ontario publicly announced that the funding valuation will be filed with the regulatory authorities. The co-sponsors elected to classify the surplus as a contingency reserve.
Corporate News
- Announced retirement of Tracy Abel, Chief Operating Officer, effective as of the end of 2024.
- Appointed new leaders including:
- Mabel Wong, as Chief Financial Officer, announced today. Ms. Wong has served as Acting Chief Financial Officer since April, following the departure of Tim Deacon from the organization.
- Bernard Grzinic appointed as Executive Managing Director, Capital Markets, where he will guide Ontario Teachers’ active risk taking in credit and absolute return strategy asset classes.
- Steve Saldanha named Executive Managing Director, Total Fund Management, responsible for shaping overall asset mix, managing trading activities, and integrating portfolio construction with treasury and funding capabilities.
- Robert Sturgeon promoted to Senior Managing Director, Global Investment Strategy, tasked with assessing the global business environment, developing strategic responses to emerging global themes, and fostering strategic relationships for Ontario Teachers’.
Transactions Highlights
Ontario Teachers’ manages approximately 80% of assets internally, with a focus on deploying capital into active strategies. During the first half of 2024, the fund continued to diversify investments in Canada and globally.
Investment highlights from the period include:
Equities
- Fairstone Bank of Canada, a portfolio company of Ontario Teachers’, and Home Trust Company will be merging their businesses to create the leading alternative lender in Canada, boasting an extensive Canadian footprint servicing more than two million customers with more than 250 branches from coast to coast.
- Acquired a significant minority stake in Kogta Financial (India) Limited, a fast-growing retail focused non-banking financial company specializing in the secured vehicle and MSME (Micro, Small and Medium Enterprises) financing space in India.
- Successfully closed the sale of Shearer’s Foods, a leading contract manufacturer and private label supplier serving the snack industry in North America, and the partial sale of SeaCube Container Leasing Ltd., one of the world's largest operating lessors of intermodal containers.
Infrastructure & Natural Resources
- Completed a third investment in National Highways Infra Trust (NHIT). NHIT is an Infrastructure Investment Trust (InvIT) sponsored by the National Highways Authority of India, the Government of India’s nodal agency for national highway development.
- Co-sponsored an InvIT with the Mahindra Group called Sustainable Energy Infra Trust (SEIT). SEIT is India’s largest InvIT in the renewable energy space and is listed on the National Stock Exchange of India.
Real Estate
- Alongside its Boreal IM joint venture, completed one investment in a logistics property in Germany, encompassing 37,000 sqm, and signed four logistics investments across Germany and France, totaling nearly 200,000 sqm. Additionally, completed the construction of a logistics asset in Spain, covering 54,000 sqm, and commenced construction on a logistics asset in Germany, spanning 23,000 sqm.
Teachers’ Venture Growth
- Co-led a fundraising round of SmartHR, a leading cloud-native human resources management platform in Japan.
- Participated in an investment in DeepL, a leading language AI company, whose platform provides category-leading AI-powered translation and writing solutions for businesses globally.
- Invested in Perfios, India's leading B2B SaaS company serving the financial services sector in 15 countries, empowering 900 financial institutions.
- Led the fundraising round of Instagrid, a leading provider of high-performance portable battery systems.
About Ontario Teachers’
Ontario Teachers' Pension Plan Board (Ontario Teachers') is a global investor with net assets of $255.8 billion as at June 30, 2024. 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 340,000 working members and pensioners.
Our more than 450 investment professionals operate in key financial centres around the world and bring deep expertise in a broad range of sectors and industries. We are a fully funded defined benefit pension plan and have earned an annual total-fund net return of 9.3% 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 discussion with OTPP's CEO Jo Taylor and to my pleasant surprise, joining him were Gillian Brown, CIO of Public & Private Investments and Stephen McLennan, CIO of Asset Allocation.
It was a pleasant surprise because initially I thought only Jo would take part in the Teams meeting so let me begin by thanking all of them as well as Dan Madge who organized this meeting.
As noted in the press release, former CFO Tim Deacon who departed Teachers' in early April to become CFO of Sun Life was officially replaced today by Mabel Wong:
I want to congratulate her for this well-deserved appointment as well as Bernard Grzinic, Steve Saldanha and Robert Sturgeon for their appointments.
Alright, let me get straight to my conversation with Jo, Gillian and Stephen but one other note, these are solid mid-year results and as I keep telling you, these are pension plans so you really need to focus on 5,10, 15 and 20 year results.
Jo began by giving me an overview of mid-year results:
What was really pleasing in the first six months was all parts of our business made a contribution. If you look at what did well, public equities did well, we saw good returns there and also from our Equities category.
We are very aware of the impact of inflation on the plan. Again, the Inflation Sensitive category did well for us. And I think we shared with you in 2023, one of the areas we have been investing both capabilities and capital is in Credit and the credit team is performing to expectations with good returns relative to what we were hoping to get from that category albeit there are signs that credit spreads are tightening up so the returns we got last year may not be there going forward.
Another main feature of our activities as you know is we have a lot of private assets, we have a lot of actively managed private assets so driving the performance out of those businesses is really important to us because M&A activity is a lot lower than it was 2-3 years ago. We are spending a lot more time being thoughtful on how we do that, how we help those companies not only grow but to help them tactically buy good target acquisition companies.
And I think the reason why you are talking to me but also Gillian and Stephen is because we are thoughtful how we get the right balance between active and passive management and how we get the right allocation in the portfolio both by asset class and geography to businesses we think can grow in the current environment.
I interjected to note Teacher's successfully integrated Cadillac Fairview's global real estate team and asked him how the diversification is going in that asset class both by sector and geography realizing this is a slow moving process.
I also noted that distributions in private equity are at historic lows, valuations at historic highs and there's so much money entering private credit that returns are bound to be negatively impacted (especially if it's a bad global recession).
Moreover, I noted in public equities, things are continuing to go smoothly but concentration risk remains elevated due to the Mag-Seven domination but that seems to be tapering off.
Jo responded:
We wanted to bring international real estate into the business in 2023 to try to make sure we did two things: one is to make sure we have the diversification we are looking for alongside the Canadian Cadillac Fairview portfolio and that was by geography and by sector because as you know, we are heavily into retail and office at Cadillac Fairview. That is working well but it's also working well for the second reason we wanted to do which is actually share all the local and asset class knowledge we had in the other teams to see if there were any crossover activities we can look at by having that team in-house looking at markets in real estate, and that's happening. It's good to see because it has broadened our stream of opportunities to look at.
When it comes to private equity, as you know, private equity has been a fabulous asset class for Teachers' for a long time. It has made really good returns for over 20 years and I would be be very careful to read anything too definitive in terms of what's happening at the moment if you're a long-term investor.
But what we are seeing for us is a bit of a shift which we have been doing for a few years to go into assets where we are the control investor or a significant minority investor. That's really to do a couple of things. One is to have the influence and make sure returns are generated but we also made commitments for the plan in terms of carbon intensity reduction targets, climate change and walking the talk of diversity, equity and inclusion. It's quite hard to do that if you're a small investor. Having that influence and equity involvement makes it easier for us to deliver on our broader capabilities around impact investing as we described what we are trying to do.
Then if you look more broadly at the portfolio, the biggest debate we've had more recently is given some of our benchmarks are very tough to beat with a net liquidity premium, what is the right mix between active and passive? If you look at 2023, you would have been a better passive investor than a more active manager and we try to be thoughtful, is that a trend or is that something where tactically, you just need to shift the balance.
Jo then gave the floor to Gillian who added this:
Leo, you and I have spoken before around the point Jo is making around active versus passive decisions. Our job is not to overreact to short-term market changes but trying to read through it to see what is going to have a longer-term impact on the business going forward and our expectation to return that premium to public markets by investing passively. Those are certainly conversations we are having but right now the focus is on leaning into the portfolio, making sure we are getting the most out of the assets we own given that we are still in a slower transactional environment that what has been traditionally the case.
I noted that Ontario Teachers' has an important allocation to external hedge funds (used to be 10% of the total portfolio 22 years ago when I first met Ron Mock who schooled me on their approach) and asked her if that also figures into the active versus passive debates.
Gillian responded:
It would be. Stephen and I view a series of decisions around active versus passive and then there could be active where you do it directly yourself or outsourced to an external manager where you need the capabilities or the cost benefit makes sense to build that business externally.
I then turned my attention to Stephen McLennan and asked him from a total portfolio standpoint, I know bonds have done well recently but volatility is creeping up and you need to be a lot more hands on in the total portfolio approach to generate the active returns.
Stephen responded:
Absolutely. I think we start by how do we build the overall portfolio so we have the right resilience or shock absorbers to a variety of those events. Predicting the market one month from now or two months from now is a very difficult exercise so we try to take the right approach to make sure we have the right resilience and as I said earlier the right shock absorbers so those don't become events that force us to do something we wouldn't otherwise want to do and that lends itself perfectly to the active versus passive discussion in terms of our flexibility built into the overall portfolio, again so we are not forced out of a position or force to do something we wouldn't normally do and this far this year, the portfolio has held extremely well.
I asked Jo, Gillian and Stephen about distributions in private equity as I noticed some of their peers are selling assets (at fair market valuations) they have held for a very long time to make up for losses in real estate or other assets and I asked them when you sell an asset you've had on the books for a long time, you need to make sure you get the right price and that it's the right decision over a the long run.
Jo responded:
As far as distributions, one of the core questions is how do you see valuations at the moment and what growth is available to that business over the next ten years. If you can make that work, then it's all fine but sometimes you can't make that work in terms of value expectations of the seller and your interpretation of future growth doesn't match theirs.
I think the other point is we made great returns in private equity and we are quite thoughtful of any material changes to make with a relative short amount of data because of what is happening at the moment, and I guess one of the questions we haven't covered which I think is very relevant to private equity is how you see the debt market for those portfolio companies and the cost of debt as much as the availability of debt to give to projects which is relevant as far as returns you can generate. And I'm not sure that is a clear area at the the moment, whether it's a temporary change or a long-term shift in terms of how those businesses are going to be supported between equity and debt.
I interjected noting if private debt is taking off, shouldn't it be easier for private equity to access the debt they need to support those businesses?
Jo replied:
The point I'm trying to make is it's a combination of the cost of the debt as well as the multiple in terms of EBITDA that you are able to get relative to what you have seen in the past.
That has changed but private equity is still a core part of our portfolio and will remain that, we are very focused on driving growth in those businesses and we are also helping those businesses to tactically buy well when opportunities arise for tactical add-ons to businesses that we like.
Beyond that, how do we put around our management companies a team that can help them from an operational and investment standpoint and that industry is starting to think about how they help businesses maximize their performance.
I also noted that I do see a trend in Teachers' peers where they're shrinking private equity through the secondary market and focusing a lot more on the mid-market space and asked Jo if that is what they're doing as well.
He replied:
I think we have been quite active in the mid-market anyway, perhaps more than some others. But we have a big private market exposure and it covers a multitude of sectors, sizes, geographies so the diversification across that portfolio is pretty good overall. I think the issue for us is really where we want to that portfolio in the future and if we have realizations coming in where would we take that capital to, back to the same asset class or is it somewhere else? And that's going to be a live discussion as it always is every year. Overall, I would say we don't have any needs to make radical change happen.
We talked about it before, Leo, probably the asset class where we want ot make the most change is probably in real estate.
I chuckled and blurted out: "You're not alone there, it's a problematic asset class for many of your peers and I'll be talking to some of them this week on that."
I shifted my attention to infrastructure which has been a steady and solid asset class at Teachers' for quite some time.
Jo shared this:
Infrastructure has been a strong performer for a number of years. We generally invest in core infrastructure projects in utilities, etc. Probably the one area we have been very active is electricity transmission which has been a good space in recent years.
I think that portfolio when we look at it is performing to our hopes and expectations.
In closing, I asked Gillian and Stephen what are the risks they see and how they will prepare for the next six months to a year portfolio-wise and where they will allocate risk.
Stephen started off:
I don't know if we are going to go so far as to say where we are going to allocate risk. Some of the things we are tracking or taking a strong interest in are the US elections and that's an area which is very difficult to predict and even if we predict who the winner is, what are the knock-on effects going to be so that's an area we are spending quite a bit of time trying to digest on who the winner might be and where possible, take appropriate action. That's probably one of the more substantial market events that is known and as you highlighted in a previous question, just overall market volatility and we saw a flareup of it ten days ago, just making sure the portfolio is able to sail through those types of events is also top of mind for us but I think the US election is our main focus area right now.
Gillian added this:
On our side in active risk-taking, it's not necessarily a six-month horizon, we are really leaning into managing our holdings actively to make sure we are getting the most of the assets we are holding in the portfolio and I think we are asking the teams to be really disciplined in looking at their portfolios and determine what assets you want to continue to hold or not and be clear we are not forced to transact in the market now but when we see things at the right price, we are active participants to either buy or sell.
I noted that even if there is a big market dislocation, they have the leverage to transact if they need to seize opportunities.
Jo chimed in:
We have that and the liquidity. Teachers' has always had a strong amount of liquidity and that's a big advantage for us if things get a little more volatile. But I would say we are pleased with how the portfolio is performing overall, it did cope well with the recent market fluctuations. For us it comes down to where we think we can make the right returns taking the view that we are a mature plan with a long-term investment horizon trying to achieve 7-8% style returns.
I hope they continue delivering these type of returns and end this year with high single digit returns.
Lastly, I noted a great article in Fortune India covering activities in that country where Deepak Dara, SMD shares their approach.
Jo told me: "India remains a strategically important country but it's unusual you find something that's attractively priced so it becomes a question of how you manage growth and figure out either who would like to buy that asset or whether or not retail investors would see it as an interesting opportunity in a few years time."
Alright, that's where we ended it and I want to once again than Jo, Gillian and Stephen for an very in-depth and insightful discussion.
Please remember, you will NOT read these insights in newspapers, only here, so please support this blog so I continue delivering these comments (I thank all of you who do).
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