OTPP boosts bonds, late cycle protection

Last year the $191.1 billion Ontario Teachers’ Pension Plan (OTPP) increased its allocation to bonds to 31 per cent, up from 22 per cent in 2017.

The defensive strategy was aimed at taking advantage of rising yields in fixed income markets and protecting the portfolio from a potential economic slowdown given the late cycle and decade-long economic expansion, said CIO Ziad Hindo, promoted internally last year following Bjarne Graven Larsen’s departure.

The increased allocation to bonds was funded by a corresponding trimming of the fund’s allocation to money markets, namely in repos and derivative exposures, Hindo said.

“Last year we repositioned the portfolio to include more fixed income to give protection against a potential economic downturn and also take advantage of an increase in market interest rates,” he said during the 2018 results presentation of the fund for 327,000 working and retired Canadian teachers.

However last year’s strongest gains came from the fund’s private equity allocation which returned 19.5 per cent. (See OTPP’s private equity revolutionfor more information on their private asset investments.)

Other real asset allocations to infrastructure and real estate, where the emphasis is on future-focused, sustainable investment, also “carried the day” to lead the strong returns.

Key private equity investments last year included Canadian environmental services group GFL and Germany’s metering company Techem, but Hindo noted that the steep competition for private assets means Teachers’ expertise and strong relationships with GP partners, with whom the fund co-underwrites the bulk of its deals, is increasingly vital to success.

“Despite a more difficult environment, we were able to conclude a number of significant, complex transactions during the year,” he said. The fund’s private equity allocation is around 18 per cent of AUM, forecast to grow to at least 19 per cent.

The depreciation of the US dollar relative to the Canadian dollar also drove results, said Hindo.

OTPP invests in 35 global currencies and in more than 50 countries but reports its assets and liabilities in Canadian dollars. In 2018, currency had a positive +1.5 per cent impact on the total fund, resulting in a gain of $2.8 billion in a change from the negative currency impacts in 2017 and 2016.

Hindo reaffirmed Teachers’ commitment to the ability of active investment strategy to generate added value over the long-term.

“Our performance last year was stronger and less volatile than it would have been with a more traditional allocation to publicly traded stocks and bonds,” he said.

The total fund net return was 2.5 per cent for the year.

As at December 31, 2018, the plan has had an annualised total fund net return of 9.7 per cent since inception.

The five- and 10-year net returns, also as at December 31, 2018, were 8 per cent and 10.1 per cent, respectively. In 2018 the fund was fully funded for its 6th consecutive year at 104 per cent.

OTPP Boosts Bonds for Late Cycle Protection