Fixed Income

OTPP bucks trend, keeps buying bonds

Just as some of the world’s largest pensions funds sell down their fixed income holdings in favour of equities and private assets, Ontario Teachers’ Pension Plan has been buying more in 2019 as it seeks to rebalance the portfolio in the event of an economic downturn.
By the middle of the year, bonds made up 36 per cent of their C$201.4 billion portfolio, up from 31 per cent in December. That took their total fixed income exposure to 47 per cent and compares to 33 per cent in 2017. The weighted average allocation to fixed income among the world’s 20 largest pension funds is 37.2 per cent and just 19.4 per cent for North America.
Canada’s second-largest pension plan, which has been fully funded for six consecutive years, has also sought to take advantage of rising bond yields. And in the first half of 2019 that bet paid off with a total fund net return of 6.3 per cent. Their portfolio is a mix of Canadian and international government, provincial, and real-return bonds.
Chief Investment Officer Ziad Hindo said fixed income led the pension fund’s positive performance in the first half. He said increasing their allocation to bonds was part of their strategy over the last few years to have a more “balanced approach” to risk.
OTPP is one of the consistently best performing funds in the world. As at December 31, it had an annualised total fund net return of 9.7 per cent since inception. The five- and 10-year net returns were 8 per cent and 10.1 per cent, respectively.

To help fund the rebalance, the Canadian pension fund reduced their holdings in real assets in the first half, taking some money out of real estate and selling out of so-called real-rate products. They largely maintained their allocation to equities to make up 34 per cent of the portfolio.
Their bond-buying strategy comes as interest rates around the world move towards zero to help stave off recession, placing further pressure on institutional investors to find alternative sources of yield. Already this year central bankers have cut rates 32 times, according to Bloomberg, and the swap rate market suggests there is more to come over the next 12 months.
California Public Employees’ Retirement System’s CIO Ben Meng said in June that buying bonds in the absence of higher interest rates was not an option. At the time, its allocation to fixed income sat at 28 per cent. And at a September investment committee meeting, head of global fixed income Arnold Phillips said they may have to “rethink the assumptions” in asset allocation as rates shift towards zero.
Tom Tull, CIO of the $28 billion Employees Retirement System of Texas, said last month at an Investment Magazine conference in Sydney that with interest rates where they are, they were allocating more money to alternatives. And the $110 billion State of Wisconsin Investment Board has sold out of government bonds into cash, with CIO David Villa saying that they are too expensive.
But OTPP’s outgoing chief executive officer Ron Mock said the fund’s focus was to deliver “stable” returns through a “variety of market conditions.” He said the balanced portfolio approach was delivering strong returns in line with long-term objectives.

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