Ontario Teachers’ Pension Plan gained 1.9 per cent last year, underperforming its benchmark by a wide margin, as it lowered valuations on real estate and infrastructure investments hit by higher interest rates.

The write-downs also stemmed from “asset-specific events that negatively impacted select investments,” the pension plan said in a statement Tuesday, without specifying more. The falling valuations cut into gains from holdings including credit and stocks.   

Equities rose 20 per cent, but the fund has just 10 per cent of its assets in public equities on a gross basis.

“We did not generate investment results to desired levels,” Chief Executive Officer Jo Taylor said in an interview. “Our outlook for 2023 was pretty cautious, that’s why we have the low listed equity exposure. We thought there’s probably a reasonable chance of markets correcting, which clearly didn’t happen, particularly in the US.”

Looking forward, the pension fund positioned itself “to move forward with caution, but some more optimism in terms of the prognosis for recovery internationally,” Taylor said.

The real estate portfolio declined 5.9 per cent, compared with a 2 per cent gain for its benchmark. Infrastructure assets lost 2.8 per cent.

Real assets

Overall, Ontario Teachers’ return trailed its internal benchmark by nearly 7 percentage points. Some of the other top Canadian pension funds have also reported losses on real estate assets. But infrastructure assets have generally been resilient and continued to generate gains.

At Ontario Teachers’, real assets, which combines infrastructure and real estate, account for about 28 per cent of the portfolio. In real estate, on top of being heavily exposed to retail and offices, Ontario Teachers’ was pretty early in making cap rate change adjustments to its portfolio, Taylor said. In 2022, the pension fund increased its cap rates by about 100 basis points, and further adjusted it up 25 basis points last year, he said.

“That took a reasonable chunk out of the performance valuation of those assets just on their own,” he said. “And we’re trying to diversify away from those two sectors into other things that give us both a bit of a better balance and hopefully the ability to see different rates of return.”

'Another tough year'

Last year, the pension fund announced it would move its real estate investing team in-house, from subsidiary Cadillac Fairview Corp., and named Pierre Cherki to head the new team.

“What we want that team to do is to be really thoughtful and careful about what we add to the portfolio to try and diversify our returns and our performance,” Taylor said. “How is it going forward? I think it’s gonna be another tough year in real estate in 2024, the returns available will be marginally positive.”

Total assets managed by Ontario Teachers, which oversee pensions for about 340,000 members in Ontario, remained virtually flat at $247.5 billion at the end of 2023. Over 10 years, the pension fund had an average return of 7.6 per cent. The plan started this year fully funded, with a preliminary surplus of $19.1 billion.

On infrastructure, Ontario Teachers’ adjusted its discount rate assumptions it uses in calculating values going forward.

“We raised that by about 60 basis points to reflect higher interest rates. I don’t think many people have done that yet, but we felt we needed to do that to be a bit more realistic,” Taylor said.

Last year, Ontario Teachers’ made a bigger bet on bonds and credit and added leverage to pay for it and Taylor still sees value in these assets. It is also betting on technology through its growth equity team, Taylor said.

“The other thing we will continue to do is back good private equity businesses where we see them operating in sectors and geographies that we like,” Taylor said. “We’ve put more capital into India, for example, and into Australasia last year. We’ve been active in Europe as well. So we’re trying to get a balance between our North American activities.”