'It was a pretty good performance from all parts' of the Teachers' portfolio, each of which contributed to the fund’s investment gains, CEO Jo Taylor said.The Globe and Mail
Ontario Teachers’ Pension Plan is polishing up its portfolios to get ready for a pickup in deal-making, but a slow market for mergers dominated by bargain-hunting buyers is making it hard to sell assets.
Stock markets have mostly been on the rise in the first six months of this year, but owners of privately held assets have had to be patient. Teachers invests a large share of its $255.8-billion of assets in private markets, and would typically look to sell some of its long-held or lower-performing investments to recoup cash that can be used to make new deals.
With buyers and sellers still rarely seeing eye to eye, that has meant Teachers is holding on to companies, real estate and infrastructure assets for longer than it typically would before reaping the full gains from investments. And the pension fund has increased the amount of energy it devotes to maintaining and improving what it already owns – to boost returns in the near term, and to make them attractive to potential suitors when deal-making rebounds.
“We spend a lot of time trying to make sure our businesses are growing the way we would hope, but also anybody who would like to be a future owner of that business would look at it and say it’s well-run,” chief executive officer Jo Taylor said in an interview.
Teachers reported a 4.2-per-cent return on its investments in the first six months of 2024, in a mid-year update, earning $10.8-billion of investment income over that span. However, overall, the plan’s assets increased by $8.3-billion, because it paid out more in pension benefits than it took in from new contributions.
“It was a pretty good performance from all parts” of the portfolio, each of which contributed to the fund’s investment gains, Mr. Taylor said.
Over 10 years, Teachers has earned an average annual return of 7.3 per cent.
Teachers manages pensions for about 340,000 members in Ontario, including working and retired teachers.
On Tuesday, the pension fund also announced that Mabel Wong has been named chief financial officer, having served as interim CFO since her predecessor, Tim Deacon, announced in March that he was leaving to join Sun Life Financial.
Teachers is also looking to acquire new assets. The pension fund made infrastructure investments in India and invested in real estate focused on logistics in Europe in the first half of the year. But investors are still having a hard time agreeing on the growth prospects and value of assets, Mr. Taylor said. “If you’re not aligned on that then it’s quite difficult to make something happen.”
Teachers is still getting plenty of calls from potential buyers, but at the moment, “people who are out looking to buy businesses are looking for a deal,” he said. “More often than not, we’ll probably try and wait until we feel we can get full value for it.”
Making investments abroad is more fraught currently, Mr. Taylor said, with wars, geopolitical tensions and uncertainty about the outcome of the U.S. presidential election. As a result, finding the right mix of stability and growth in foreign markets is harder than it used to be, he said. But he said a recent visit from British Chancellor of the Exchequer Rachel Reeves, who met with Canadian pension fund executives, sent positive signals that the United Kingdom – where Teachers is already a major investor, especially in energy – could be an attractive, predictable place to invest.
In the meantime, Teachers increased the portion of its investments that are allocated to publicly traded stocks, which now make up 15 per cent its portfolio, or $37.2-billion, compared with 10 per cent at the start of the year.
Last year, Teachers took a cautious stance toward the stock market, betting on a correction that never happened. When stock prices surged, the fund’s portfolio did well, but it missed out on the full benefits because it had lower levels of exposure.
“What we’ve tried to do is design a portfolio that’s resilient,” Mr. Taylor said. “And the recent wobble you saw in the market … actually, we were happy that our portfolio proved that it was able to absorb those fluctuations.”
Teachers trimmed its exposure to bonds, from 35 per cent of the portfolio to 33 per cent, as expectations take hold that a cycle of interest-rate cuts is coming from central banks. And it pared its exposure to credit, an asset class that has been popular but has recently shown early signs of strain, from 16 per cent to 14 per cent.