Behind Ontario Teachers’ investment strategy
In a discussion with Simon Brewer from the Money Maze podcast, Ontario Teachers' CEO Jo Taylor explains the reasons for the plan's strong performance.
Despite a challenging year, Ontario Teachers' delivered a 4% return in 2022, contrary to negative performances in most stock and bond markets. The TSX Index, which tracks a basket of Canadian stocks, dipped almost 6%, including dividends; the S&P 500, which tracks America's largest public companies, lost 18%; and the bond market performance was similarly dire.
What was behind the strong performance? Ontario Teachers' CEO Jo Taylor spoke about the company, its origins, and how financial decisions get made with Simon Brewer on the Money Maze podcast, as part of its series on "Super Allocators."
Investing expertise helps deliver retirement security for Ontario teachers
"We invest for the 336,000 retired and working teachers of Ontario to make a return, to make sure that pensions are fully funded, but we also administer the pension plan," Taylor says, adding that from the onset, a professional board has overseen the governance of the plan. The board decided early on that a key requirement was to bring asset management responsibilities in-house, which led to having an experienced investment team that could invest on behalf of the members.
Investment professionals have delegated authority, which gives them the flexibility to make investment decisions and actively manage the investment portfolio. Investment decisions are made by Chief Investment Officer Ziad Hindo and the team of 400+ investment professionals located around the world.
Currently, approximately 80% of the plan's funding is derived from investment returns with the other 20% coming from contributions from teachers and the Ontario government.
[Our Total Fund Management team] thinks about capital allocations on a five-year, but rolling basis each year, to try and make sure we've got agility and balance for the economic world that we see ahead of us.
Flexibility and agility are key to investment success
Ontario Teachers' has a sophisticated team called Total Fund Management "that thinks about capital allocations on a five-year, but rolling basis each year, to try and make sure we've got agility and balance for the economic world that we see ahead of us," explains Taylor.
This flexibility is what helped the Plan’s financial performance over the last two years. For instance, Taylor and his team realized early on that inflation would likely be a problem in the global economy. That was a double challenge for a defined-benefit pension plan like Ontario Teachers' because inflation not only increases its liabilities, which are inflation-linked, it also erodes the ability for companies in the portfolio to achieve profitability and growth.
The company tackled that challenge by investing in assets that offer some form of inflation protection. These include commodities, natural resources and real assets like infrastructure and real estate. "We're really one of the few plans out of the pathway this year which was able to produce a positive return when a lot were finding that they were seeing negative returns," Taylor says.
Long-term investors have the benefit of patient capital
Since Ontario Teachers' invests to provide retirement pensions to teachers over decades, it can be committed to its portfolio companies for the long term. This is ideal for private equity because value can take many years to come to fruition. However, the benefits of patience are worthwhile. Since 1991 private equity investments at Ontario Teachers' have returned close to 20% a year, a "badge of honour," Taylor says. Infrastructure returns have also grown on average 10% a year since that program was started in 2000.
Meanwhile, Taylor says Ontario Teachers' is helping steer management in the companies they've invested in to decarbonize their businesses and are even considering selectively buying heavy emitters to help them clean up faster. "We're going to target companies with a very high-carbon emission footprint," he says. That will involve targeting companies with up to 30 times more intensity of carbon use than the average and seeing what can get done to reduce carbon emissions while generating good returns. "We've reserved a small amount, $5-billion, to be able to try this out on three or four businesses and actually show, to not only our stakeholders but also our partners, that actually we're able to deliver this," he says.
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The future also looks bright for Ontario Teachers'
"I was very clear when I took over at Teachers' in 2020 that from a base of $200 billion in assets, my target [by 2030] was to get us to $300 billion," Taylor says. This has motivated the investment team to work systematically to make that happen. "We give people a fair amount of delegated responsibility which they like, and we just have to make sure there are the right control environments around them in terms of what they're doing," added Taylor.
Taylor says the plan is fully funded on very conservative assumptions, enabling it to have a surplus for when times are a little leaner. "But we absolutely can't be complacent. When you have a plan of our scale with fully inflation-linked liabilities, you really have to be on making sure you continue to make every year some sort of positive contribution.”
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