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Ontario Teachers’ Pension Plan’s bond-heavy portfolio caused it to miss its benchmark in 2019 as equity markets rallied, it reported Tuesday – but that mix of defensive assets is helping out now, its leaders say.

“We became increasingly focused on protecting our capital and building liquidity, and that continued throughout 2019 and into this year,” CEO Jo Taylor said Tuesday during a conference call to discuss results. “This more defensive stance and some thoughtful choices we’d been making, including those related to our asset mix, helped us navigate current conditions.”

However, Mr. Taylor, who became chief executive officer of Teachers on Jan. 1, declined to discuss current asset or funding levels, saying the fund is restricted in its disclosures because it has issued publicly held debt.

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Teachers closed 2019 with 37 per cent of its assets in equities, both publicly traded and privately held. Bonds and other fixed-income products made up 46 per cent of the portfolio. The pension plan shifted away from stocks and toward bonds in the first half of 2019, saying at the time it wanted to prepare for a slowing or even recessionary global economy.

That asset mix hurt the 2019 results as stocks continued their rally through the end of the year, peaking in February.

Teachers’ 10.4-per-cent return in 2019 helped add $16.3-billion in assets to the fund, allowing it to close at $207.4-billion, its first time ending a year above the $200-billion mark. Yet its benchmark – the return of a similar portfolio, used to evaluate performance – was 12.2 per cent.

The failure to beat the benchmark happens “often” when public stock markets have “exceptional” returns, Ziad Hindo, chief investment officer, said Tuesday.

Still, most of Teachers’ asset classes outside of fixed income underperformed their benchmarks.

The chief culprit in dragging down returns was teachers’ portfolio of “non publicly traded equities,” or investments in private companies that do not trade on an exchange. They returned 9.4 per cent in 2019, well below the 17.4 per cent benchmark for the class.

Teachers’ publicly traded stocks returned 15.2 per cent, below the benchmark of 16.7 per cent. Real estate, commodities, natural resources and credit investments also underperformed, while infrastructure’s 4.3 per cent return, versus a benchmark of negative 0.3 per cent, was the rare winner.

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The defined-benefit pension plan serves the province’s 329,000 active and retired teachers. Teachers said it closed 2019 fully funded, with a $6.1-billion surplus when $46.5-billion in estimated future contributions are included.

Teachers posted five- and 10-year net returns of 7.8 per cent and 9.8 per cent, respectively, through Dec. 31. The plan’s annualized yearly return since inception 30 years ago was 9.7 per cent. “That number includes some tough years, such as the tech bubble and the 2008 financial crisis,” Mr. Taylor said.

In addition to the 2019 shift to bonds, Mr. Hindo said, Teachers added to its gold position and has established a “portfolio overlay strategy” to hedge overall market volatility. It sold more private assets, like real estate and infrastructure, than it has bought and has locked in gains, he said.

Mr. Hindo said Teachers also added to its liquidity. The fund ended 2019 with $79.1-billion in money market funds, versus $59.5-billion at the end of 2019. That is “not only to cope with any expected downturn, but also to have the capital to deploy counter cyclically when opportunities present themselves,” he said.

Mr. Hindo declined to offer specifics, however, on whether Teachers is plunging back into public equities, either because the fund sees value or because of significant rebalancing. “To the extent that the markets give us opportunities to add to our already fortified portfolio, then we have the capital and liquidity to take advantage of that.”

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