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The Ontario Teachers' Pension Plan office in Toronto is seen in this file photo.. The plan reported a 4-per-cent return for 2022 when it released its results on Tuesday.COLE BURSTON/The Canadian Press

Ontario Teachers’ Pension Plan reported a 4-per-cent return in 2022, helped by a conscious shift toward investments in assets that are sensitive to higher interest rates in a year market volatility spurred widespread losses in public markets.

Teachers’ annual return beat its internal benchmark of 2.3 per cent, and its net assets increased to $247.2-billion. Over 10 years, Teachers has returned 8.5 per cent, and the plan was considered fully funded at year-end.

Pension plans faced a tough year in 2022 as high inflation and rapidly rising interest rates created volatility in markets. But pension fund managers found refuge in the large portfolios of investments they have built in privately held assets such as infrastructure and private equity, which were more stable, as well as commodities and natural resources that are highly sensitive to interest rates and had a boom year.

Teachers, which manages the pensions of Ontario’s 336,000 active and retired teachers, has ramped up its investments in several of those asset classes, and started to move back into fixed-income securities as interest rates rose. Chief executive officer Jo Taylor has been vocal about the need to be brave in the plan’s investment choices in order to find stable returns in a tumultuous market.

“On a relative basis they’re good results. A lot of our peers find it more challenging to get it to positive territory,” Mr. Taylor said in an interview. “I think we’ve been very much living to that agility principle in the last two years by making bold choices around which areas we think we can make returns.”

On Monday, OPSEU Pension Trust announced a net investment loss of 2.2 per cent for 2022, bringing its 10-year average return to 7.8 per cent. And in recent weeks, Ontario Municipal Employees Retirement System said it returned 4.2 per cent in 2022, while Caisse de dépôt et placement du Québec lost 5.6 per cent. But wide variations in the plans’ portfolios and membership make them difficult to compare directly.

As the recent collapse of Silicon Valley Bank creates new paroxysms in markets, Mr. Taylor said he expects the immediate impact on Teachers from the banking crisis will be “really, nil.” But as the fallout unfolds, he said the widespread uncertainty it creates could start to make deals more difficult if banks pull back on lending and financing for mergers.

“What’s really the issue? I think it’s wider confidence in markets,” Mr. Taylor said. “And then secondly, will it actually mean that some of our banking partners are a little more cautious about being active at the moment on helping us with transactions?”

Last year, Teachers put more money into fixed-income assets, starting to rebuild a portfolio that it had reduced when interest rates fell to ultralow levels after the onset of the COVID-19 pandemic. The plan pushed further into credit, setting up a private credit team in London, and chief investment officer Ziad Hindo said “there is clearly more room for us to grow that asset class” even after it reached its largest share of Teachers’ portfolio at year-end, at 14 per cent of assets or $35-billion.

Teachers has also significantly increased its infrastructure portfolio in recent years. Those investments are in assets such as toll roads, airports, digital infrastructure and power generation that tend to have predictable cash flows tied to inflation. Last year, infrastructure assets delivered some of the strongest returns for Teachers, gaining 18.7 per cent, which beat a 15.1-per-cent benchmark.

Investments in commodities and natural resources returned 19.5 per cent and 29.6 per cent, respectively, though those assets make up smaller slices of the overall portfolio.

Private equity gained 6.1 per cent, surpassing a benchmark loss of 3.9 per cent, helped by foreign currency gains from a strengthening U.S. dollar.

Teachers underperformed in public stocks and bonds as well as real estate. Public equities lost 12.5 per cent, which was worse than a benchmark loss of 10.2 per cent. Bonds lost 5.9 per cent.

And the $28.1-billion real estate portfolio lost 3.5 per cent, missing its benchmark of a 6.7-per-cent gain as valuations on its Canadian retail and office portfolios fell, affecting capitalization rates. Teachers owns Cadillac Fairview, which has a high concentration of retail and office properties in Canada, which underperformed last year.

Mr. Hindo said retail sales productivity levels at many properties are back to pre-COVID levels, “so they’ve recovered quite well.” But the recent decision by Nordstrom Inc. to wind down its Canadian operations creates renewed pressure on malls, including three major properties owned by Cadillac Fairview where the luxury retailer was an anchor tenant.

“Mall anchors has never been an easy story, particularly for the larger malls, but it’s something that Cadillac Fairview has had to deal with multiple times in the past, whether it was Sears or Target, so they’re pretty good at turning that space around and reconfiguring it in a profitable way,” Mr. Hindo said.