Ontario Teachers’ Pension Plan said gains in its bond portfolio helped offset losses in infrastructure and real estate, allowing the fund to nearly break even in the first half of the year.

The $205 billion (US$155 billion) pension fund lost 0.4 per cent in the six months through June despite a stock market correction and economic upheaval sparked by the COVID-19 pandemic.

“Some of our hardest hit investments were among our private assets. Heavily-impacted segments were leisure and travel, including our five airports, and assets where consumer spending declined, which is our shopping malls and Cadillac Fairview,” Jo Taylor, the chief executive officer, said in a conference call with journalists Tuesday.

While the pandemic led to unprecedented market volatility, the pension fund’s moves over the past three years to position its portfolio more defensively helped soften the blow, Taylor said.

Negative Rates

The pension fund has trimmed exposure to debt by cutting back on sovereign markets with negative interest rates and by reducing exposure to markets such as the U.S., which has seen a significant economic impact from COVID-19, Ziad Hindo, the fund’s chief investment officer, said on the call.

“The fixed income asset class generated $7.9 billion in income and that offset losses in both inflation-sensitive asset class, which was $2.1 billion, and also the infrastructure and real estate, which generated a loss of $4.7 billion,” Hindo said.

Fixed income accounted for 23 per cent of the portfolio -- compared with 46 per cent at the end of last year -- with bonds representing 14 per cent. The fund reported $41.6 billion in real estate and infrastructure and property as of June 30, making up about one-fifth of the portfolio.

Its money market exposure, which includes debt issued, was negative $24 billion, from negative $79 billion at the end of 2019, as OTPP didn’t need as much funding for its fixed income activities, Hindo said in an interview.

Credit Opportunities

The pension fund sees abundant opportunities in credit markets globally.

“Reflecting back on the last few months, since the onset of the crisis, corporate balance sheets globally have been impacted by the severity of their economic downturn. And that means that over the next few years these corporate balance sheets need to be repaired and they will need capital injection, be it equity or credit, and we believe credit in particular will offer reasonably good risk adjusted returns,” Hindo said.

Retail Businesses

He says the retail storefront business model is being challenged by increasing online sales on the heels of the coronavirus lockdown that kept people at home for months.

But the pension fund is invested “in some of the best performing, high quality malls in Canada, with the best locations, and those malls have been able to generate value, by managing better and by making sure that the experience inside the shopping malls is a lot more than what it used to be,” Hindo added.

In the first half of the year, currency had a positive 0.5 per cent impact on the total fund, resulting in a gain of $1.2 billion that was mainly driven by a stronger U.S. dollar relative to the Canadian currency.

Teachers’ annualized net return over the past 30 years is 9.5 per cent.

“These results are not being achieved on a straight line basis. It includes, for example, losses incurred during the tech bubble and the 2008 financial crisis,” Taylor said in the earnings call.

“We’re in the risk business. We need to continue to adopt an entrepreneurial approach to find the next series of investment opportunities, we have ample liquidity at present at a time when things are changing very rapidly, we’ll make the best returns.”