Ontario Teachers’ makes bond bet as economic clouds gather
Ontario Teachers’ Pension Plan is making a bigger bet on bonds and credit and is adding leverage to pay for it.
The pension fund, one of Canada’s largest institutional investors, earned a 1.9 per cent investment return in the first half as its fixed income and credit portfolio advanced and stocks rebounded from last year’s correction.
Bond holdings jumped to $118 billion at the end of June, 55 per cent higher than at the end of December, the Toronto-based fund said in a statement Tuesday.
Bond yields are much higher now than after the COVID-19 shock, Chief Investment Officer Ziad Hindo said in an interview, making them a more appealing bet if the economy gets worse. The pension fund added exposure to longer-dated bonds and to the front end of the curve, where yields are “quite high” due to central banks’ tighter policy.
“When you’re buying bonds when yields are at circa 4 per cent, they become more income-producing, which is attractive,” Hindo said. “The starting level of yields means that they have a better chance at diversifying the portfolio when equities sell off, when we have an economic slowdown — whereas when yields were low at zero or even negative, it was very hard to get any income or get any diversification benefit.”
Ontario Teachers’ also increased its allocation to private credit. The firm remains interested in the leveraged loan market, where it’s finding opportunities to step into the place of traditional lenders.
“We’re seeing institutions like ourselves come into the credit market at a time where perhaps there’s a bit of retrenchment in lending, particularly from banks,” Hindo said.
Ontario Teachers’, like a number of other Canadian pension funds, takes advantage of strong credit ratings to borrow in short- and long-term funding markets to fuel investments and to participate in derivatives markets. The fund’s leverage soared during the first half, with funding for investments rising 47 per cent, to $145 billion. In this case, the increase was due to derivatives used to boost the fund’s overall exposure to fixed income, spokesperson Dan Madge said by email.
Ontario Teachers’ manages approximately 80 per cent of its nearly $250-billion portfolio with in-house employees, focusing on active strategies. It doesn’t break down returns by asset class in its mid-year results, and it didn’t give a benchmark return for comparison Tuesday.
The pension fund said in June that it’s working on an overhaul of its real estate operations and is seeking a global head to lead it. The search includes internal and external candidates, Chief Executive Officer Jo Taylor said.
“The real change of emphasis was around our international real estate investing activities, which is one of the areas we’ve been trying to build some diversification away from Canadian real estate,” Taylor said.
Ontario Teachers’ also added to its private equity bets in the first half, buying a co-control position in U.S. data-centre company Compass Datacenters LLC alongside Brookfield Infrastructure Partners.
“Some of the private markets for us are a little quieter than they may have been through 2022,” Taylor said. “And that’s just basically the level of activity, there’s an element of people waiting to see how valuations adjust and which assets are available for transactions.”