Ontario Teachers' returns disappoint as markets soar and interest rates hit real estate
The Ontario Teachers’ Pension Plan ended 2023 with disappointing results after allocating assets based on expectations of a recession, but chief executive Jo Taylor said he’s not planning a major shift into equities given that markets still look overheated.
Underexposure to listed equities plus valuation adjustments in Teachers’ infrastructure and real estate portfolios stemming from higher interest rates led to a net return of 1.9 per cent to end the year with $247.5 billion in assets.
“We only have about 10 per cent of our portfolio invested in listed equities,” Taylor said in an interview, adding that what the pension did hold performed well as markets soared at the end of last year. “But you look at valuations as we go into 2024 — they look as challenging if not more challenging than they were when we entered 2023, and that’s going to be an interesting debate for us in terms of, if we want to blend the risk up a little bit, how we do that?” he said.
About 28 per cent of the fund is invested in global real estate and infrastructure, both of which took valuation hits in the higher interest rate environment. Taylor said some retail space in downtowns was affected by continuing struggles in the aftermath of the COVID-19 pandemic, while an infrastructure project in Europe was subject to a regulatory change that affected projections.
Adjustments were made to real estate capitalization rates — an indicator of the rate of return expected from an investment based on operating income and costs —in both 2022 and 2023, Taylor said. Now, the pension fund is in a holding pattern to see whether interest rates come down, he said.
Teachers’ real estate portfolio generated a negative return of 5.9 per cent against a positive benchmark
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