Ontario Teachers’ Pension Plan looks at commodities for hedge against inflation

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The spectre of rising inflation caused the Ontario Teachers’ Pension Plan to increase its exposure to inflation-sensitive assets including gold and “a broad basket of commodities” in the first half of the year as investment teams continued to grapple with fallout from the global COVID-19 pandemic.

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The fund posted a net return of 3.8 per cent for the six months to June 30, with assets of $227.7 billion. Net investments in commodities accounted for 12 per cent of the asset mix in the first half of the year, up from eight per cent at the end of 2020.

“What we know historically is that inflation is not really kind to traditional asset classes … stocks or bonds,” said Ziad Hindo, chief investment officer at the pension manager. Commodity prices, on the other hand, tend to rise when inflation is on an upward trajectory and provide a hedge against it.

“Clearly there’s more uncertainty around the outlook for inflation,” Hindo said in an interview. “We’re not saying it’s our base case but we have to plan for it and it absolutely felt prudent that an increased allocation into inflation-sensitive asset classes was warranted because of that uncertainty.”

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Teachers’ first-half results took a hit from losses in fixed income and a strong Canadian dollar. The fund invests in local currencies across more than 50 countries but reports in Canadian dollars.

Chief executive Jo Taylor said he believes the worst of the pandemic has passed for the fund, even though there may be subsequent waves and new variants of the fast-spreading virus.

“Clearly COVID has had an impact on our activities over the last 18 months. Some segments that have (been) hit harder than others,” Taylor said, pointing to the fund’s portfolio of airports, where activity hasn’t fully rebounded, and real estate investments affected by work-from-home mandates.

But he added that there is “momentum” in many portfolios, including private assets and credit, and said much of the value is coming from increases in revenue and profitability rather than factors such as changes in multiples applied to valuations.

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“(It) is a really good reference point to say your companies are thriving and growing despite COVID — we don’t have too many walking wounded,” Taylor said.

“We’ve been showing quite good momentum towards the objective … to get assets managed to $300 billion by 2030.”

In its latest results, Teachers posted a return of 9.6 per cent per year since inception, and a 9.3 per cent return over 10 years. Over the past 12 months, the return was 13.2 per cent.

“The returns we made (this year) were solid, ahead of what we need to do to keep the plan fully funded,” Taylor said.

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The fund’s investment teams are continuing to search for investments in real assets, including infrastructure and real estate, the executives said, adding that they also expect further contributions from the Teachers Innovation Platform, a two-year old investment department that seeks out late-stage venture capital and growth equity investments in companies that use technology to disrupt incumbents and create new sectors. TIP represented three per cent of the fund’s asset mix in the first half of the year, up from two per cent at the end of 2020.

Another area of focus for the fund manager is the energy transition to alternatives to fossil fuels. Taylor and Hindo said Teachers is engaging with companies it invests in to reduce their environmental impact and does not believe divestment of energy investments is the answer.

“I’d say climate and climate-related investing is what technology was in the 90s,” Hindo said. “It isn’t going to just become a sector, it’s going to impact every other sector, and it’s our responsibility to make sure that as stewards of capital that we position our fund well, not only just to generate the returns but also to play our part (as) responsible investors in helping to transition to a … less carbon-intensive economy.”