Comment les investisseurs à long terme s’adaptent à un éventail plus large de résultats possibles
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At a glance
- A higher cost of capital, geopolitics, and AI are the three big themes shaping institutional portfolios, and they have significantly widened the range of potential outcomes.
- Institutional investors should aim to build resilient, diversified portfolios that can achieve their return targets across a range of economic environments.
- The early advantages of the Canadian pension model have evolved in the decades since it emerged, but investors like Ontario Teachers’ still have key advantages.
How does a $300 billion pension plan prepare for a world where the range of outcomes keeps getting wider? Stephen McLennan, Chief Investment Officer, Asset Allocation, recently joined Ted Seides on the Capital Allocators podcast to discuss how institutional investors should be thinking about portfolio construction in today’s market, the themes influencing portfolio growth, and embracing uncertainty.
Listen to the full conversation and read highlights from the discussion below.
What are the big themes shaping the investment landscape today?
Stephen McLennan (SM): Since COVID, there have been three big themes. The first is a higher cost of capital, whether from higher inflation or other reasons, which means higher required returns across asset classes. The second is geopolitics, which used to be largely about the U.S. and China and has become broader and more complicated of late. The third is technology, specifically AI. In our opinion, the range of outcomes has become significantly wider over the last couple of years.
When it comes to the cost of capital, we expect inflation to be more volatile and likely to run higher. This is a material risk to a pension with inflation-linked liabilities. About 20% of our portfolio is in inflation-sensitive assets, such as commodities, including gold, and natural resources. They’re there to provide an offset when inflation hurts stocks and bonds.
On the technology side, AI is changing so quickly that having a high-conviction view is difficult. We try to be humble. There are things we don’t know, and we don’t want to be overconfident in our ability to predict how AI will evolve or be overconfident about a single outcome. There’s upside, and there’s also potential downside. That makes it even more important to run a balanced portfolio and have the right set of scenarios in place, so we don’t end up with a big drawdown.
What is Ontario Teachers’ trying to achieve with its portfolio?
SM: Ultimately, we’re trying to build a diversified portfolio that’s resilient across a number of different economic environments, so that we’re in a position to deliver on the pension promise for the 346,000 working and retired teachers in Ontario. Our objective is to deliver a 7% nominal return on a consistent basis.
To get there, investors’ focus should be on four things: diversification; active management, where you believe that you can earn returns above the market; a strong risk management framework; and a prudent amount of leverage.
Diversification is a powerful tool, but in any given period it’s likely to make you unhappy. When most investment committees review a portfolio, they gravitate to the things that did well and say, “These are really great.” For the things that didn’t, the natural reaction is, “Why are we doing that?” You need to look at how each piece was expected to contribute and how they work together toward the overall objective.
“Diversification is a powerful tool, but in any given period it’s likely to make you unhappy.”
How has competition changed, and where does Ontario Teachers’ still have an edge?
SM: Twenty-five years ago, there weren’t many investors with independent governance, a diversified portfolio, internal investment teams and the pool of capital to execute. Today, there are many more. The ability to write a large cheque and get preferential deal terms has definitely eroded, and more competition means lower expected returns across markets.
We still have real advantages. We have a long-term horizon, unlike a fund with a fixed life that has to do certain things with its portfolio. We have a long track record of being a good partner and delivering on what we say we’ll deliver. We have the institutional memory, governance, people and processes already in place.
There is also a real affinity for our mission. Most people have had a positive experience with a teacher, which helps us attract partners and recruit and retain staff.
The biggest advantage is that we’re well funded, with a funding ratio of 111%. That means we can pick where on the risk curve we want to operate. Investors get into trouble when they’re forced into a risk position they’re not comfortable with, and that’s when mistakes get made.
“We can be the master of our own destiny and pick where on the risk curve we want to play based on where we think the best market opportunities are.”
How do you make decisions when the path ahead is so uncertain?
SM: When it comes to investing, making decisions under uncertainty is part and parcel of that. Sometimes you need the forbearance to not do something rash. A former colleague at the fund always said you need to do what you think is right for the portfolio, even if some people are going to disagree with you. You need to believe in what you’re doing. That has stuck with me, and it’s something I try to keep in mind.
On the Teachers’ side, conviction runs through the whole approach. Our fully funded position helps here too. We’re never in a position where we have to force the portfolio to a particular number, so we can wait until pricing makes sense.
In a world where the range of outcomes keeps getting wider, the goal isn’t to predict which one arrives. It’s to build a portfolio resilient enough to deliver on your long-term objectives in any of them.