In an era when an increasing number of investors are embracing passive investments such as index funds, the Ontario Teachers' Pension Plan is putting its faith in its people by allocating more capital to active investment strategies.
Teachers announced on Wednesday it earned a 4.2-per-cent return in 2016, performance that ranked behind peers but exceeded its benchmark and left the $175.6-billion plan with an $11.5-billion surplus.
Last year, Canadian pension plans averaged a 6.8-per-cent return, up from 5.4 per cent in 2015, according to survey from Royal Bank of Canada. Teachers' 4.2-per-cent return exceeded the 3.5-per-cent performance of its benchmark. Over the past five years, Teachers posted a 10.5-per-cent annual return, and over 10 years, gains averaged 7.3 per cent.
Teachers chief investment officer Bjarne Graven Larsen said in a news conference on Wednesday the fund turned in "solid returns," with short-term performance reflecting a $4.5-billion negative impact from swings in currency markets last year. Gains on currency moves added 8.3 per cent to performance in 2015, when the fund was up by 13 per cent.
Approximately 60 per cent of the Teachers portfolio is invested in non-Canadian dollar assets, and the fund invests in 37 different currencies.
To reduce risk and increase future returns, Teachers chief executive Ron Mock said the fund decreased the amount of capital it allocates to passive investments in stocks and bonds, shifting the portfolio to sectors in which the fund has in-house expertise, such as real estate, private equity and larger equity ownership in select companies. Mr. Mock said the fund's "secret sauce" is the internal investment acumen built up over 25 years of investing.
New York-based BlackRock Inc., the world's largest asset manager, made headlines this week by announcing plans to replace actively managed mutual funds with passive vehicles that rely on computer-driven stock picks. Mr. Graven Larsen said that while Teachers also makes use of cutting-edge technology in the investment process, the fund is increasing its focus on active management.
Mr. Mock warned that investors should not expect the 10-per-cent-plus annual returns turned in by equity markets during bull markets. He said if the fund can consistently generate 4-per-cent "real returns," after inflation, "we will be pretty happy."
Teachers has significant investments in Britain and Mr. Mock said the fund plans to continue investing in the region in the wake of Britain's decision to leave the European Union, because of the country's attractive regulatory regime and solid economic fundamentals.
As CEO at one of Canada's largest pension plans, Mr. Mock said he is in regular contact with the federal government over the Liberals' plans to invest in infrastructure. Former Teachers CEO Jim Leech was recently named a special adviser to the planned Canada Infrastructure Bank.
Mr. Mock said that while Teachers supports the infrastructure bank concept, considerable work needs to be done to align the relationship between private investors and federal, provincial and municipal governments before the fund commits capital. He said that while there are a handful of large Canadian infrastructure initiatives that could be launched within the next year, experience in Australia and Britain shows it can take a decade to get significant projects planned, funded and permitted, in order to start construction.
The Teachers fund has 318,000 active and retired members, including 142 pensioners who are over the age of 100.