Ontario Teachers’ Chops Bond Holdings After Huge Gain in 2020

(Bloomberg) — Ontario Teachers’ Pension Plan has slashed its holdings of government bonds from developed countries after reaping large gains during last year’s plunge in yields.

The pension fund, one of Canada’s largest investment managers, cut exposure to fixed income by eliminating exposure to sovereign debt with negative interest rates and reducing its holdings of the lower-yielding bonds. Teachers’ generated more than C$10 billion in investment income from the asset class in the first half of 2020, the fund said in reporting its 2020 results Tuesday.

Its fixed income portfolio gained 20.7%. Such gains won’t be repeated any time soon, Ziad Hindo, chief investment officer of the C$221.2 billion ($175 billion) fund, said in a statement.

“With a persistent low interest rate environment expected in the coming years, fixed income will be a less effective source of diversification and returns in the immediate future,” Hindo said.

Overall, the pension fund earned 8.6% last year, trailing its benchmark by 2.1 percentage points, as gains in fixed income and equities were partially offset by significant losses on shopping malls and other real estate. Strategic allocations to gold and an equity hedge helped returns during a volatile year in which markets were roiled by the Covid-19 pandemic, the fund said.

“This was my first full year as CEO, and it is safe to say it did not go quite as I anticipated,” Chief Executive Officer Jo Taylor said in the annual report. “That said, in trying circumstances we demonstrated financial resilience while delivering outstanding service for our members.”

Prompt monetary and fiscal support helped to restart the global economy, allowing many of Teachers’ portfolio companies to bounce back quickly, Hindo said in the report.

Mall Exposure Hurts

Ontario Teachers’ public equity portfolio gained 15.2% while private equity advanced 13.5%. But its real estate portfolio lost 13.7% due to a writedown on private holdings and declines on international assets.

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Operating income for real estate was C$800 million, 30% lower than the previous year, following rent abatements and lower occupancy, particularly for Canadian retail, the fund said. Ontario Teachers’ owns Cadillac Fairview, owner of prime malls including Vancouver’s Pacific Centre and Toronto’s Eaton Centre.

The problems in Canadian malls, as well as a decline in shares of mall owners Macerich Co. in the U.S. and Multiplan Empreendimentos Imobiliarios SA in Brazil and a weaker real, pushed real estate losses to C$4.1 billion for the year.

Teachers’ sold its 16.4% stake in Macerich in January when the shares rallied during January’s Reddit-inspired frenzy for heavily-shorted stocks.

“The pandemic highlighted the importance of robust portfolio diversification across different assets, geographies and sectors,” Hindo said. Teachers’ is targeting C$300 billion in net assets by 2030.

While it’s cutting exposure to government bonds, the pension fund increased investments in U.S. high-yield corporate bonds and partnered with private credit firms to capture default, liquidity and funding risk premiums. The total value of credit assets was C$18 billion at the end of the year, compared to C$16.3 billion in 2019.

(Updates with elimination of some debt exposure in second paragraph)

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