WORKERS CAPITAL
Ontario Teachers' fund adds $13.8 billion in 2020, with new innovation platform returning 16%

Barbara Shecter 

© Provided by Financial Post SpaceX's live webcast shows the Starship SN10 prototype during a test flight at the Boca Chica Village in Brownsville, Texas on March 3.

The Ontario Teachers Pension Plan posted an 8.6 per cent return in pandemic-beset 2020, aided by fixed-income and equity investments and a 16 per cent return from a recently launched innovation investment platform.

“(It’s) a new activity for us — we are trying to grow it,” chief executive Jo Taylor said in an interview Tuesday.

“The pleasing thing for me was, in 2020, it was generating a 16 per cent return, which I think is very encouraging to show that that portfolio, which includes SpaceX, is actually doing pretty well.”

The strategy behind the Teachers’ Innovation Platform (TIP), formed in April of 2019, is to make late-stage venture capital and growth equity investments in companies that use technology to disrupt incumbents and create new sectors.

Elon Musk’s SpaceX, the inaugural investment for that platform, which represents a very small part of Teachers’ overall investment portfolio, suffered a setback Tuesday when a test rocket launched in Texas exploded.

Taylor said that mishap won’t deter Canada’s largest single-profession pension fund from investing in innovative companies as part of a balanced portfolio, including SpaceX.

Ziad Hindo, Teachers’ chief investment officer, said SpaceX has been a good investment and its value was marked up at year-end. He added that Teachers has participated in three funding rounds since 2019, “showing the conviction we have in that business.”

The investment thesis is based on the company’s “proven track record of space launches and significant future growth potential of their Starlink satellite broadband service offering, which they are successfully rolling out globally including in Canada,” he said.

Taylor said the investment in Musk’s company builds on past satellite technology investments by the Teachers’ fund, and decisions about putting money into innovative or disruptive technologies involve weighing risks and reward.

“The … question is making sure we get the right balance in the number of those investments we make and the level of risk it’s appropriate to take,” Taylor said. “And when we’re taking that risk are we getting paid for it, are we getting the returns that we would hope to see.”

Hindo said Teachers has ambitions to increase investments through the new innovation platform “significantly” over the next few years, though the pension fund investment manager does not give specific targets for asset classes. The innovations investments were valued at $3.2 billion at the end of December and represented two per cent of overall assets.

Teachers, which closed out 2020 with net assets of $221.2 billion, up $13.8 billion from a year earlier, invested in SpaceX in June of 2019. Financial terms of the investment were not disclosed.

Hindo and Taylor said the Teachers’ fund entered the pandemic year in a defensive position — with high fixed-income exposure — because the investing team was anticipating a slowdown following a prolonged period of growth that felt “long in the tooth.”

That strategy paid off in the first half of the year — generating more than $10 billion in investment income — as did equity investments that bounced back with central bank and government stimulus. Teachers’ real estate portfolio suffered during the pandemic, down 13.7 per cent as the sector was “hit hard” by the pandemic, along with retail. But private equity investments soared, with a return of 13.2 per cent.

Hindo said fixed-income exposure has been reduced, with capital redeployed to investments in real assets such as infrastructure that are expected to provide more stable cash flows linked to inflation.

Teachers has continued to make infrastructure investments this year, including taking a 20 per cent stake this month in Caruna, Finland’s largest electricity company, alongside new investors KKR and Swedish pension fund AMF.

The pension manager also took advantage of a wild stock market run earlier this year, in what became known as the GameStop or Reddit rebellion against short sellers, to dispose of a 16.4-per-cent stake in California-based mall owner Macerich Co. for US$500 million.

Taylor said Teachers had been a long-term owner of Macerich, holding a stake since the late 1990s.

“It wasn’t that we were in and out quickly,” he said.

At its yearend in 2020, Teachers had produced an annualized total-fund net return of 9.6 per cent since inception, with five and ten year net returns of seven per cent and 9.3 per cent, respectively.

The plan was fully funded for an eighth consecutive year with a preliminary surplus of $8.5 billion

AIMCo’s next move: As Alberta contemplates CPP exit, investment manager focuses on rebuilding trust
Manulife to offer insurance clients rewards points for getting vaccinated
Pension plan chief’s resignation renews debate over vaccine queue jumping