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Ontario Teachers’ Pension Plan reported a 1.9-per-cent return in the first half of 2023 as higher interest rates prompted the fund manager to pour tens of billions of dollars back into the bond market.

Unless Teachers, which manages the pensions of Ontario’s 336,000 active and retired educators, delivers significantly higher returns in the second half of this year, the fund is set to post its weakest annual performance since 2018, when it returned 2.5 per cent. That would put Teachers on track for 2023 to produce its second-lowest annual returns in more than a decade.

“Yes the returns are low, but so is the risk we take,” chief executive officer Jo Taylor said in an interview. “We work really hard to deal with volatility so that we don’t make losses at any point.”

Teachers’ net assets increased to $249.8-billion as of June 30. The goal is to teach $300-billion by 2030. For its most recent 12-month period, the fund’s total return was 4.8 per cent, which was above its internal target but well below its 10-year average return of 8.6 per cent.

Fixed-income investments – such as government bonds – comprised 52 per cent of Teachers’ assets halfway through 2023, representing $127.3-billion in investments. That is nearly triple the $45-billion worth of fixed-income investments Teachers held at the end of 2021, accounting for just 19 per cent of assets at the time.

“Fixed income as an asset class has a critical role to play in the portfolio again given where the market is,” chief investment officer Ziad Hindo said in an interview. “Although we started buying fixed income last year, the market gave us more opportunity this year as we decided to increase our allocation there.”

Part of the reason Teachers has bulked up on fixed income assets, primarily in the form of $118-billion worth of bonds, is to brace its portfolio against the growing signs of recession in both the United States and Canada.

“Absolutely you invest in fixed income because you worry about the bad times. You can’t forecast when they happen, but to the extent that you can buy Government of Canada bond yields at 4 per cent or thereabout, absolutely they are a good protection against if and when economic conditions were to worsen,” Mr. Hindo said.

Infrastructure investments also continued to increase during the first half of this year, climbing to $42.4-billion or 17 per cent of assets. That compares with $26.1-billion at the end of 2021, as Teachers has invested in data centres, cellular communications systems and electricity transmission networks.

Commercial real estate has been a major area of focus among large pension funds and institutional investors in recent months, as valuations of retail and office assets have declined. Some investment funds – such as Brookfield Asset Management – believe the “best real estate opportunities since 2009 are coming” as falling valuations raise the prospect of discounted sale pricing.

Teachers, which is one of Canada’s largest commercial landlords through its ownership of Cadillac Fairview Corp. Ltd., is taking a more conservative approach. The fund manager restructured its real estate division in June, bringing Cadillac Fairview’s 37-person investment operations team in-house and launching a search for a global head of real estate.

Mr. Taylor said the move was part of a broader strategy to diversity Teachers’ real estate holdings beyond retail and office assets and into other areas such as multifamily residential and industrial. Overall investment in real estate, however, has grown little over the past six months from $28.1-billion to $29.3-billion, though Mr. Taylor said a key goal will be to expand Teachers’ real estate holdings beyond Canada into more international markets.

One international market where Teachers will not be expanding is China. The pension fund suspended investments in the world’s second-largest economy early in 2023 with its Chinese exposure at roughly 2 per cent of its assets, or about $5-billion.

“We said we were paused and we are still paused” in China, Mr. Taylor said. “I would say geopolitics and how we operate internationally is getting more complicated; there are more inputs to our thinking in terms of what people would like us to do.”

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