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Fixed-income still drives Teachers’, while future bets look to tech

Fixed-income still drives Teachers’, while future bets look to tech
Business
The Ontario Teachers’ Pension Plan Board is increasingly focusing on future bets such as investments in Elon Musk’s Space-X and Verily Life Sciences, a healthcare tech and data company under the umbrella of Google parent Alphabet Inc. But returns for the Teachers’ fund continue to be driven by good old-fashioned bonds.

The pension plan’s total assets surpassed $200 billion in the first half of the year, with the $10.3 billion gain from Dec. 31 led by the performance of a long-held asset class — fixed income — which has been given increasing weight in the portfolio.

During a conference call Wednesday to discuss mid-year results, executives said a decision to allocate more of the asset mix to fixed assets over the past few years was driven by their views on the late stage of the global economic cycle and a long-term diversification strategy, and would not be tweaked in response to short-term shifts, such as changes in government interest rates.

“In the era of a 24-hour news cycle, it is easy to get distracted by what is moving markets at that moment in time. While we’re not immune from these short-term trends, we work hard to take the long view and plan for the future,” chief investment officer Ziad Hindo said.

“Our best mechanism is diversification so we don’t regret being overexposed to one asset class.”

A combination of reallocation of assets and returns pushed fixed income — mostly bonds — to 47 per cent of the portfolio in June, from 41 per cent in December of 2018. Hindo declined to reveal a future target for the asset allocation.

“I’m not sure I can disclose where we’d like to be, going forward,” he said. “I feel comfortable that we’ve had a significant increase of fixed income and it’s already started to pay dividends.”

The $201.4 billion fund’s six-month return was 6.3 per cent, and it has an annualized total fund net return of 9.7 per cent since inception. The five and 10-year net returns, as of Dec. 31, 2018, were eight per cent and 10.1 per cent, respectively.

The executives said current market conditions and competition are making it challenging to buy assets across all categories, including real estate and infrastructure. 

But chief executive Ron Mock said price isn’t the only consideration Teachers’ has to offer. With the plan in a surplus position, and access to liquidity to take advantage of opportunities, he said the pension fund manager also has a “secret sauce” in its track record of finding assets — and partners — where improvements can be made that generate higher returns.

Teachers’, Canada’s third-biggest public pension fund, is continuing to look for opportunities in Asia despite unrest in parts of the region, such as Hong Kong, where protests have created havoc in the streets and at the busy airport hub.

Jo Taylor

Jo Taylor, who is responsible for the pension’s international operations and will take over as CEO when Mock retires at the end the year, said the situation in Hong Kong — an important gateway for the fund to China and north Asia — is being closely monitored.

“We are investing in that region… And we’ll continue to be actively investing,” Taylor said, pointing to recent deals in India and Malaysia. 

“I think the point here is how do we do that in such a way where we not only work with our partners effectively, but we also allow our staff in Hong Kong… to be able to operate safely.”

He acknowledged that the situation there appears to be changing daily.

“Honestly, I think it’s too early to say we definitively know what the outcome is going to be in Hong Kong,” Taylor said.

“But I think at the moment there is a bit of a movement towards slightly more calm and we would hope that that continues.”

On the conference call, Teachers’ executives highlighted a fresh commitment to tech investments through the Teachers Innovation Platform, or TIP, which was set up in April to focus on late-stage venture capital and growth equity investments in the disruptive tech area. TIP made the SpaceX investment at an undisclosed price in June.

Hindo said the pension manager is studying the long-term investment potential of another new frontier: cannabis. 

Like other investors, Teachers’ is sizing up the fledgling industry’s prospects following legalization in Canada last year. Several Canadian cannabis companies are experiencing growing pains, from regulatory scrutiny to the challenges of the substance remaining illegal at the federal level in the United States while being legal in a several states.

“Pending our full investigation and research into the sector, we’re not really going to take a significant foray into a direct or core investment in cannabis,” said Hindo.

“But there’s nothing at the moment that suggests to us that cannabis could not represent a viable long-term investment plan. It’s just that we need to do a bit more work.”

 

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