The Niagara Falls Review

Teachers’ won’t ‘head for the hills’ over Brexit

- BARBARA SHECTER Bshecter@Postmedia.Com

TORONTO — The Ontario Teachers’ Pension Plan is continuing to hunt for deals in the United Kingdom, even as concrete steps were taken Wednesday to extricate Britain from the European Union.

“We’re not heading for the hills by any stretch of the imaginatio­n,” chief executive Ron Mock said at a media briefing Wednesday, shortly after news broke that Britain sent a letter to the European Union that marks a significan­t step in its move to exit the economic partnershi­p.

The historic breakup has not led to any bargains so far, according to chief investment officer Bjarne Graven Larsen, who noted that while currency fluctuatio­ns can sometimes make assets look cheaper, “the pricing of assets in the U.K. continues to go up.”

Mock said there is likely to be a period of uncertaint­y, but added that the pension managers are hopeful about the long-term prospects for Britain and the European Union.

Teachers’ posted a 4.2 per cent return in fiscal 2016 after accounting for swings in the British pound and U.S. dollar. Despite the negative impact of currency fluctuatio­ns, the plan exceeded its benchmark return of 3.5 per cent and remained fully funded for its fourth consecutiv­e year, Teachers’ said.

Net assets rose by $4.2 billion from the previous year to $175.6 billion, beating the benchmark translated to a “value add” of $1.3 billion, the pension manager said in a statement.

“I’m very pleased that Ontario Teachers’ remained fully funded for the fourth year in a row despite major challenges in the global economy,” said Mock, who noted that big swings in global currencies had an impact on the shortterm value of the pension plan’s assets.

The fund invests in more than 50 countries with 37 global currencies, and the return on those investment­s in local currency was 7.2 per cent. Converting those gains back into Canadian dollars has a negative impact of 2.8 per cent. In 2015, currency gains added 8.3 per cent to returns.

Executives said the currency impact in 2016 would have been worse if the fund manager, which invests and administer­s the pensions of Ontario’s 318,000 active and retired teachers, had not hedged about half its exposure to the British pound before the surprising outcome of the Brexit vote.

While currency exposure has helped Teachers’ in the past, Mock and Larsen said the exposed portion of the portfolio is being reduced to around 40 per cent from 60 per cent through a combinatio­n of asset allocation, hedging and balance sheet management.

Teachers’, which invests in stocks, bonds and real assets including real estate and infrastruc­ture assets, has posted an average annualized return of 10.1 per cent since its inception in 1990. The five-year return is 10.5 per cent and 10-year return is 7.3 per cent. The plan was 105 per cent funded as of Jan. 1.

More than three-quarters of the funding of members’ pensions has come from total investment income since 1990, with the remainder coming from member and government contributi­ons.

“We make investment­s to pay pensions for generation­s,“said Larsen. ”Stable returns and capital preservati­on are essential to our ability to deliver retirement security to our members.“

Last year, Teachers’ began implementi­ng a new strategy aimed at better integratin­g its asset selection approach and risk management processes. There are three strategic areas of focus: total-fund returns, value-add above benchmark returns, and volatility management.

The fund’s real assets group, which includes real estate and infrastruc­ture, had total assets of $44.3 billion at year-end, compared to $40.6 billion a year earlier. The real estate portfolio, managed by subsidiary Cadillac Fairview, totalled $26.5 billion in net assets at year-end and returned 7.7 per cent, exceeding the 7.4 per cent benchmark. The infrastruc­ture portfolio had $17.8 billion in assets at year-end, up from $15.7 billion a year earlier.

The total value of the plan’s public and private equity investment­s dropped to $66 billion at the end of 2016 from $77.5 billion a year earlier. Teachers’ said the reduction was partly due to a strategic decision to reduce total portfolio risk by lowering exposure to equities and increasing exposure to fixed income securities. The investment return in the equities portfolio was 4.8 per cent, compared to the benchmark of 4.9 per cent.

The pension plan missed the benchmark return in two areas: private capital and fixed income. Private Capital investment­s totalled $26.6 billion at year-end, a decrease from $28.4 billion a year earlier, while the investment return was 4.3 per cent compared to the benchmark of 5.4 per cent.

Fixed Income had $75.2 billion in assets at year-end, compared to $69.1 billion at the end of December 2015. The one-year return of 0.8 per cent was slightly below the benchmark return of one per cent.

Meanwhile, natural resources investment­s posted a one-year return of 8.3 per cent, above the benchmark of 6.7 per cent. The investment­s totalled $10.5 billion at year-end, compared to $10.2 billion a year earlier.

I’m very pleased that Ontario Teachers’ remained fully funded for the fourth year in a row despite major challenges in the global economy.”

Ron Mock, CEO of Ontario Teachers’ Pension Plan Board

 ?? KEVIN VAN PAASSEN/NATIONAL POST ?? Ron Mock. CEO of Ontario Teachers’ Pension Plan Board, said the OTPP pension managers are hopeful about the long-term prospects for Britain and the European Union as Brexit unfolds.
KEVIN VAN PAASSEN/NATIONAL POST Ron Mock. CEO of Ontario Teachers’ Pension Plan Board, said the OTPP pension managers are hopeful about the long-term prospects for Britain and the European Union as Brexit unfolds.

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