Ontario Teachers' Pension Plan's 13-per-cent rate of return in 2015 was buoyed by growth in its private market assets, where investing conditions have grown increasingly challenging.
The pension plan, which supports 316,000 of the province's teachers and retirees, earned $19.6-billion through all of its investments in a year peppered with deals – from toll roads to seniors' housing.
"This was the year of the privates, whether it's real estate, private equity or infrastructure," Ron Mock, chief executive officer of Teachers, told a media briefing on Wednesday. He noted that just a few years ago, fixed income had been a similar bright spot for the portfolio.
Teachers' private capital group posted a soaring 32.3-per-cent investment return in the 2015 calendar year. And infrastructure and real estate returned a collective 16 per cent in 2015. Each category exceeded the benchmark Teachers had set by a wide margin.
But the pension plan's executives are now approaching these same sorts of assets with heightened vigilance.
"A lot of assets have seen unprecedented global competition for the time being. … We think prices are high, and there's a risk the fund will not get compensated taking that risk going forward," said chief investment officer Bjarne Graven Larsen, who joined the pension plan in February.
This attitude doesn't mean the fund thinks asset prices are set to fall in the near future, Mr. Graven Larsen added, but indicates caution is required to ensure Teachers can add enough value to anything it buys to make up for the high prices those businesses and structures command.
Last year, Teachers completed a re-evaluation of its investment strategy with a special focus on how best to grow internationally. The review highlighted a need not only for outperforming benchmarks in different asset classes, but also for bringing those specialties together under a more unified strategy to boost total returns overall.
Teachers has created a new group called "portfolio construction" under Mr. Graven Larsen to look at possible risks across the global portfolio – from the implications of a British exit, or "Brexit," from the European Union, to investment areas that should potentially be developed or receive more funding.
This effort to unify its asset classes comes as Teachers manages more capital than ever. The pension fund had $171.4-billion in assets under management, up from $154.5-billion in 2014.
The pension plan has steadily moved to oversee more of its investments, with 80 per cent of assets now managed internally by teams in Toronto, London and Hong Kong. Mr. Mock said these offices all performed well in 2015, and the pension plan was considering adding another base in South America.
The 2015 financial results included a 17.7-per-cent return in equities, with non-Canadian investments significantly outperforming those made in the country. The fund's fixed-income portfolio, including bonds, had a one-year return of 5.9 per cent. Meanwhile, natural-resource investments were a dark spot, down by 1.3 per cent last year amid the commodity downturn.
Teachers ended last year 107-per-cent funded, with a surplus of $13.2-billion. That positions the plan to meet future pension liabilities over time, with money to spare.
With the ratio of active teachers to pensioners currently hovering at around 1.4 to one, the pension plan is paying out more in benefits than members are contributing. At the end of 2015, paid benefits reached $5.5-billion and new contributions stood at $3.3-billion.
Teachers has posted an annualized 10.3-per-cent rate of return since its founding as an independent organization in 1990. Since that time, pensions have been funded primarily through investment income. Only 21 per cent of assets have come from contributions from the province's educators and government employer contributions in that time.
Editor's Note: An earlier version of this story described Bjarne Graven Larsen as chief financial officer. In fact, he is chief investment officer.