Amid soaring markets, Ontario Teachers' Pension Plan nets 1.9% return, facing valuation and rate challenges
The Ontario Teachers' Pension Plan concluded 2023 with underwhelming performance, achieving a net return of 1.9 percent, and closing the year with assets totaling $247.5bn.
This outcome was influenced by the Plan's conservative asset allocation strategy, anticipating a recession, and the subsequent underexposure to the surging listed equities market.
Additionally, valuation adjustments in the Plan’s infrastructure and real estate holdings, prompted by rising interest rates, impacted overall returns.
Jo Taylor, the chief executive of the Ontario Teachers' Pension Plan, acknowledged the Plan's minimal investment in listed equities, constituting about 10 percent of its portfolio.
Despite the strong performance of what was held, the outlook for market valuations remains challenging into 2024. Taylor expressed the dilemma of possibly increasing the Plan's risk exposure in an uncertain valuation landscape.
The Plan's substantial investments in global real estate and infrastructure, comprising about 28 percent of the fund, faced devaluations due to the higher interest rate environment. Specific setbacks included retail spaces in downtown areas struggling post-COVID-19 and a European infrastructure project undergoing detrimental regulatory changes.
The real estate and infrastructure segments posted negative returns of 5.9 percent and 2.8 percent, respectively, against their positive benchmarks.
Taylor remarked on the tough outlook for real estate in the coming years, though he noted some resilience in the Canadian real estate portfolio, concentrated in major cities like Toronto and Vancouver, which are performing relatively well in terms of occupancy rates.
In addressing debates about Canadian pension funds investing domestically, Taylor highlighted the Plan’s significant investments within Canada, including $20bn in Cadillac Fairview and a total of approximately $100bn, representing 35 percent of the Plan's portfolio. He indicated a continued focus on private equity and infrastructure investments over Canadian listed equities.
Taylor also mentioned the Plan’s openness to partnering with the Ontario Infrastructure Bank on operational assets, emphasizing the Plan’s historical role as a responsible custodian of significant assets.
Despite the disappointing returns in 2023, the Ontario Teachers’ Pension Plan reported a ten-year annualized total-fund net return of 7.6 percent and has maintained full funding for eleven consecutive years, with a $19.1bn preliminary funding surplus.
