The Ontario Teachers’ Pension Plan saw a 4.2 per cent rate of return in 2016, which was down 8.8 percentage points from 13 per cent in 2015.
“We’re actually pretty happy about the return,” Bjarne Graven Larsen, the plan’s executive vice-president and chief investment officer, said on Wednesday during a press conference to announce the results. He noted that the plan’s underlying assets generated returns of 7.2 per cent, although they suffered from a currency return of minus 2.8 per cent. In comparison, 2015 saw an asset return of 4.3 per cent, with a boost from currency returns of 8.3 per cent. The plan also announced a funded rate of 105 per cent.
The plan has exposure to 37 currencies, including the U.S. dollar ($49.6 billion), the euro ($7.8 billion), the British pound ($4.5 billion), the Japanese yen ($3.3 billion) and the Chilean peso ($3.1 billion).
“The big mover last year was the British pound,” said Graven Larsen. “Usually, we don’t hedge in general, but we felt before the referendum in the U.K., it was a significant risk. So we decided to hedge 50 per cent of our significant position in British pounds. . . . Yes, 4.2 [per cent] is lower than the 10 per cent in the last five years but it’s actually pretty decent, given the [currency fluctuations].”
Last year, the plan shifted its exposure to foreign currency to 40 per cent from 60 per cent. “This [change] acknowledged foreign exchange exposure was growing, and we needed to pull it down to manage the volatility of the fund,” Ron Mock, president and chief executive officer, said during the conference.
In terms of asset class performance, fixed income grew by 0.8 per cent (0.2 per cent below the benchmark); Canadian equity by 19.1 per cent (2.2 per cent above the benchmark); non-Canadian equity by 4.1 per cent (0.2 per cent below the benchmark); natural resources by 8.3 per cent (1.6 per cent above the benchmark); and real assets by 5.3 per cent (1.9 per cent above the benchmark).
Graven Larsen also noted the plan would adjust its asset classes for 2017. Equities, real assets and absolute return strategies will stay the same. But this year, fixed income will only refer to government bonds, while corporate and emerging market debt will fall under the new credit category. And the natural resources asset class (commodities, timberland, agriculture and oil and gas) has evolved into an inflation-sensitive category.
“We want to do well, even if it’s the underlying equity factor that drives return, if it’s inflation that drives return or if it’s interest rates that drive return,” said Graven Larsen. “For that reason, we introduced inflation-sensitive assets, and it’s not only natural resources there.”