OTPP posts 3.2% return for first half of 2018 amid more volatile markets

The Ontario Teachers’ Pension Plan posted a net return of 3.2 per cent for the first half of 2018, adding $4.4 billion to the plan as of June 30, 2018.

Speaking on a conference call on the mid-year result, Ron Mock, president and chief executive officer at the OTPP, called the first six months of the year a “snapshot” in terms of its significance to the fund’s long-term perspective. “We are living and investing in interesting times. Markets have been volatile in the year so far, especially compared to a year ago.”

Mock noted that the current investment environment has been a test of the portfolio’s strength and said the results prove its effectiveness even in volatile markets.

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Ziad Hindo, newly appointed as chief investment officer in June, emphasized the plan is changing its strategy overall to meet the challenges of extremely competitive markets. “In a market where most asset classes are fully priced, we are evolving our strategy to find assets that satisfy our risk profile and provide appropriate returns,” he said.

“We are well into a shift in our investment strategy that began two and a half years ago. With a shift to our total fund approach, we are building a portfolio able to withstand a variety of economic conditions. For example, we increased our exposure to the inflation sensitive asset class to give us protection against unexpected inflation, mindful that we are in a cycle of inflationary pressures. As it happens, this was our top returning asset class in the first six months.”

Without excessively dramatic shifts in asset mix, money markets saw the biggest jump in making up an increased portion of the portfolio, moving from 21 to 25 per cent from the end of 2017 to middle of 2018, according to the pension fund’s report.

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As well, currency movements were a boon for the fund in the past six months, adding 0.7 per cent to the total fund and representing a gain of $1.4 billion, which was largely due to the appreciation of the U.S. dollar, noted Mock. “The last few years, currencies have been working against us. It just so happens that in the first six months of this year it’s working for us.”

Private equities remained at 17 per cent of the portfolio, while the fund eased its position in public equities down one percentage point to 18 per cent. A heavier allocation to bonds brought that asset class to 24 per cent of the portfolio compared with 22 per cent at the end of 2017, which Hindo noted was meant to capture the advantages of rising interest rates.

Commodities and natural resources each gained a percentage point, now making up seven and four per cent of the portfolio, respectively. Real estate held steady at 14 per cent, while the plan eased down its infrastructure assets from 10 per cent to nine per cent. This decrease is due to rich valuations in the sector, which led the fund to see the past six months as a favourable time to make some sales, said Hindo. “We’re actively in the market looking for opportunities, but we also take advantage of, at times, higher market valuations to dispose of assets.”

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Mock added the brownfield infrastructure market, in particular, is one where the pension fund believes it’s prudent to make some moves towards selling. “And over the last 12 to 18 months, that’s more what we’ve been focused on than not. So we’re strategic and tactical about that.

“Infrastructure is a very important asset class to us, and the expanding definitions of infrastructure going forward are something that we’re very involved in. Over the next three to five years, we may find that what constitutes infrastructure may be shifting, given the expensive nature of infrastructure today in the more conventional thought process.”

On an expanding global scale, Hindo noted Ontario Teachers’ London and Hong Kong offices are valuable contributors to the plan’s returns. “The globalization of our investing platforms is critically important to delivering pensions for years to come,” he said.

Globally, the world’s growth has been less synchronized this year, said Hindo. “A sustained rise in U.S. interest rates has taken liquidity out of global markets. Global trade tensions have taken their toll, with a number of dislocations in recent months in emerging markets.” However, he emphasized the plan is not distracted by short-term shifts caused by geopolitical events.

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