The office of the Ontario Teachers' Pension Plan.MATTHEW SHERWOOD/The Globe and Mail
Ontario Teachers' Pension Plan is charting a more aggressive investment course and pulling back its exposure to passive investment funds.
At a moment when index funds are in high demand and outpacing active strategies in many markets, the pension fund said it would put more focus on how its in-house investment professionals can boost returns on equity investments.
The discussion of the Toronto-based pension fund's evolving investment approach came as Teachers reported a 3.6-per-cent investment return in the first six months of the year, after factoring in expenses. This amounted to $6.4-billion of income generated by investments as net assets in the fund reached $180.5-billion as of the end of June.
"We want to continue our focus on value-add activities and use the strength of the teams that we've built over the last 25 years," Bjarne Graven Larsen, chief investment officer at Teachers, said on a call to discuss the plan's financial results.
"And that's really what we're going to do asset class by asset class – look for where we can increase our focus on active and reduce on passive because we think we have the skill sets to benefit from that," he said. About 80 per cent of the Teachers portfolio is already managed internally.
This approach runs counter to the global trend toward index investing and exchange-traded funds, which can be simpler and cheaper for investors. Earlier this year, Moody's Investors Service Inc. issued a report projecting that ETFs and indexes could overtake their active counterparts to make up a leading share of the U.S. market by 2024. "Passive investments account for $6-trillion [U.S.] of assets globally and 28.5 per cent of assets under management (AUM) in the U.S., a figure poised to exceed 50 per cent in the next four to seven years," the firm said in a statement in February.
Mr. Graven Larsen said that many investors are grappling with how to eke out better results in a lower-return, higher-volatility environment. "We find it is going to be more challenging, going forward, than it has probably been in the last decade to get to the kind of returns we need for the long term," he said. He added that this is why the fund is adjusting its strategy to diversify the portfolio and put a focus on stability through market downturns.
At the end of the first half of the year, the fund had 36 per cent of assets in equities and 25 per cent in what are referred to as real assets, including infrastructure and real estate.
When it comes to public equities, the heightened focus on active strategies will include "good old-fashioned stock picking," Mr. Graven Larsen said, as well as quantitative investment strategies that use sophisticated models to buy and sell securities.
In the private markets, the fund recently launched a department responsible for developing global investment relationships that will co-ordinate the many partnerships the fund has forged through its investment deals around the world. "It's intended to be the building of a network," said Ron Mock, chief executive officer of the pension fund.
The market vagaries that influenced Teachers' performance in the first half of 2017 included upward movement in global public equities, infrastructure and government bonds, while declining commodity and natural resource prices had a negative impact on returns.