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After beating its benchmark for the first time in three years, Ontario Teachers’ Pension Plan believes it’s well-positioned for an inflationary and tumultuous world.

Teachers rode big gains in private equity and infrastructure to post an 11.1-per-cent return for 2021, topping its benchmark comparison portfolio by more than two percentage points. The two asset classes helped compensate for benchmark-lagging performance of publicly traded stocks and real estate.

The overall outperformance – while slightly behind two large peers – is a turnaround. Teachers missed its benchmark by roughly two percentage points in both 2019 and 2020 – the only two years of the past decade it has failed to exceed the comparison portfolio.

Teachers’ annualized net return over the past five years is 8.4 per cent, and 9.3 per cent over the past 10 years. The return figures are after investment costs. The plan closed the year with $241.6-billion in assets.

“We were looking to shift more into private assets a little while ago,” Jo Taylor, Teachers’ chief executive officer, told The Globe and Mail on Monday. “I think that served us well through 2021 and is giving us a stable and well-established portfolio as we see some of the turbulence in 2022.”

Teachers believes many private assets, particularly in infrastructure, have predictable cash flows that serve as protection against inflation. “We looked at inflation as something that troubled us a little bit as we went into 2022 because we didn’t see it as transitory, we thought it would actually hang around a bit more than some central bankers were suggesting,” Mr. Taylor said.

And that was before Russia invaded Ukraine, which has helped upset supply chains and cause chaos in the pricing for many commodities – “amplifying” Teachers’ views, Mr. Taylor said.

In the meantime, Teachers has joined nearly all the Western world’s institutional investors in trying to wash its hands of Russian investment.

Mr. Taylor said Teachers has no direct investments in Russia and its only remaining exposure is “a very light involvement with third party managers – way south of $50-million.” (That’s about two one-100ths of 1 per cent of Teachers assets.) “We have had discussions with those third-party managers, trying to express our preference to make it zero where possible.”

“We’ve had a long-standing view that Russia wasn’t a destination of choice for investment,” Mr. Taylor said.

Teachers said its private equity portfolio returned 29 per cent in 2021, versus a benchmark of 17.5 per cent. Private equity, which typically uses debt to fund investments in companies that do not trade on public stock markets, increased from 19 per cent of Teachers’ portfolio at the beginning of the year to 23 per cent, or $55-billion, at the end.

Teachers also posted a 7.9-per-cent gain in infrastructure – assets such as airports and toll roads – versus a benchmark of 1.2 per cent. Teachers’ $26-billion infrastructure portfolio includes five European airports, which were punished in the pandemic by the drop in air travel but have since rebounded. Infrastructure investments make up 11 per cent of the Teachers portfolio.

Public equity – stocks that trade on exchanges and are available to the individual investor – returned 9 per cent, below a benchmark of 13.1 per cent. Public equities take up 11 per cent of the portfolio, or $27.2-billion, a steep decline from 19 per cent of assets at the beginning of the year.

And real estate, where Teachers has a number of shopping malls and other retail holdings, returned 2.5 per cent, versus a benchmark of 8.8 per cent. The asset class is 11 per cent of the Teachers portfolio.

The defined-benefit pension plan serves the province’s 333,000 active and retired teachers. Teachers said it closed 2021 fully funded, with a $17.2-billion surplus when $47.4-billion in estimated future contributions are included.

Teachers has a large number of retired members, with long life expectancies, compared with its count of active members. That mix has typically meant Teachers has held more bonds than some other systems, such as the Canada Pension Plan.

The portfolio closed the year with $33.3-billion in bonds, or 14 per cent of assets, up from 8 per cent at the end of 2020. Rising interest rates mean declining bond prices, and Teachers’ bond portfolio declined 9.4 per cent in 2021.

The fixed-income category, which includes other investment products that aren’t technically bonds, was 19 per cent of the portfolio at year-end, up from 16 per cent at the end of 2020.

At the same time, Teachers is building its Innovation Platform, with investments in high-tech and other disruptive companies. Often, the price to get in is very high, but so far, the returns have been as well: the $7-billion Innovation portfolio returned 39 per cent in 2021, Teachers said.

Two other major pension investors topped Teachers’ returns in 2021: Caisse de dépôt et placement du Québec posted a 13.5-per-cent, benchmark-beating return in 2021. The Ontario Municipal Employees Retirement System reported a turnaround 15.7-per-cent return after posting a 2.7-per-cent loss in 2020.

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