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Navigating new realities in asset management

Jonathan Hausman, Ontario Teachers’ Chief Strategy Officer, speaks about how investors can adapt to a rapidly changing environment.

The business environment is undergoing a major shift. From new and disruptive technologies to geopolitical changes, to an acceleration of climate change, to higher interest rates and inflation, there is ample evidence of bigger challenges to navigate. Investors today need to understand emerging trends and find ways to adapt – all while remaining true to their organization’s core principles and investment ethos.

As part of a recent panel at the Milken Institute Global Conference, Jonathan Hausman, Chief Strategy Officer at Ontario Teachers', discussed how to maintain that delicate balance while navigating these paradigm shifts to capitalize on new opportunities to enhance our performance. Read the below panel recap to learn more.

How does the original construct of Ontario Teachers’ influence the way you invest today?

Jonathan Hausman: Our model originated in 1990. The Government of Ontario, one of two sponsors of Ontario Teachers' (the other is Ontario Teachers’ Federation), decided it was better for pension assets to be invested and managed by an organization that was independent from its sponsors. This meant we needed to delegate authority to experts and create a governance system that was going to remain de-politicized. This guided us on a path to do three things, which still hold true today.

First, innovation was, and is, essential. Initially, the fund only held government debentures that couldn't be traded, so we had to use derivatives to diversify our portfolio. We were one of the first in the space to use derivatives extensively. Second, we brought our asset management responsibilities in-house. Our model as an independent and active, direct investor meant we needed to form execution teams in private equity, infrastructure, natural resources, venture capital and real estate, notably acquiring Cadillac Fairview in 2000, a holding we still have today. Lastly, global diversification was vital. To achieve this, we set up global offices, starting in London and Hong Kong, and now have more than eight offices worldwide.

How do you stay ahead of shifts in the macroenvironment?

JH: The environment in which we are investing is vastly different than it was even five years ago. We’re also in the midst of simultaneous paradigm shifts – geopolitical, climatological, technological and financial. When you’re faced with these shifts, the mindset that we bring to investing needs to be more critical of the underlying assumptions we have about the business we do and the environment we do it in.

We don’t know what the future will bring, so we have to prepare for more unknowns. We’ve had two “one-in-100-year” shocks in the last three years. You can be blown over by those or you can try to think through what an organization should do if X, Y or Z were to occur. We’ve gone through a process of figuring out what these instances could be and how these would impact Ontario Teachers’. We may not choose the right ones and they may never happen, but it’s the process of developing that musculature in the organization that builds the ability to anticipate and respond.

What do you see as the biggest challenge you’re facing in this new landscape?

JH: Every investment thesis is an evolving thesis and to me that’s the biggest challenge. It’s a balancing act between curling up into a ball and wanting it to go away, versus getting over the edge of your skis. To find that balance, you have to get convicted on a way forward and then be able to climb down if it doesn't work. Management consultants call this “strategic imperfectionism” and it is how successful organizations will galvanize their teams in an uncertain environment.

There is a greater focus today on building value in the companies we own as the overall capital liquidity environment is less robust than it was before. So, it’s about finding further value as part of the asset management process, such as through AI or climate change opportunities.

What are you seeing in terms of transaction volumes in your private equity allocation?

JH: There is a greater focus today on building value in the companies we own as the overall capital liquidity environment is less robust than it was before. So, it’s about finding further value as part of the asset management process, such as through AI or climate change opportunities.

An important part of the asset management process is about husbanding the asset class.  It’s about gaining the highest exit multiple possible and generating the most cash along the way, and these tools, particularly in a case where you have a significant share, can be highly impactful in terms of creating value. That's a mindset shift in the private equity world.

How are you thinking about AI as an investment opportunity?

JH: The premium on having digitized data structured in a manner that can be leveraged by AI-based technologies has gone asymptotic. When we think about the 130 companies we own, a primary focus is to track the data because it’s key to any application of artificial intelligence. Every survey I've seen among both investors and corporates shows 90% think that Generative AI is core to their business and critical to their future, and 90% haven't done anything about it. We’ve basically got 18 months to two years not only to prepare companies to be ready to leverage their data, but also to create a culture where every individual person in that company, no matter what level, is involved.

Are you using AI to enhance your approach to investing?

JH: We’ve taken a very deliberate approach, one which is not only about the application but about the culture of innovation. It’s about putting the tools in the hands of teams. We're encouraging not only our investment teams, but also other partners in our organization to identify use cases. We also have to create the tooling, the foundation and the guardrails. This is not without risk and ultimately requires a cultural mindset shift to move to a different type of operation.

How do you ensure you have the right talent to adapt to a changing investment environment?

JH: We have an apprenticeship model at Ontario Teachers’. It lends well to the transformation that needs to occur, because increasingly it’s those people coming into the organization that are going to be teaching the people who are already there. The other aspect we’ve been focused on is making sure our talent is properly compensated, enabling us to attract talent that would be competitive with anyone. There's also an added mission element. I think people are motivated by the mission to preserve the retirement security of the teachers who live in Ontario. And I would finish by noting an attraction among both mid-level and incoming team members to want to work in an environment, such as at Ontario Teachers’, where there’s a lot of interesting work being done.