Ontario Teachers’ Simple Recipe...Has Rare Ingredients

The Ontario Teachers’ Pension Plan is the best performing pension fund in the world over the last ten years. How? It’s simple recipe. But you almost certainly won’t find the ingredients in your local plan...


Despite the European debt crisis and flat equity markets, Ontario Teachers’ Pension Plan had another great year in 2011. The fund managed to return 11.2 percent, bringing the total fund size up to around $116 billion. Once again, Teachers’ is setting the standard for pension funds globally. And I mean that quite literally: CEM Benchmarking noted that the fund’s 10-year returns are the highest of any of the 350+ pension funds it tracks globally. In other words, this is the best performing pension fund on earth.

So how do they do it? Teachers’ has a simple recipe...with rare ingredients:

  1. It has an enviable governance structure with sophisticated board members. This ensures that the fund has the resources it needs to meet its objectives.
  2. Thanks to its smart board, the fund actually pays its people a decent salary. Perhaps not quite as much as they might make in the private sector but darn close! Add to this the fact that OTPP investors don’t have to do any fundraising (and can feel good about securing pensions), and Teachers’ has a world-class team of investment professionals.
  3. The fund’s strong governance and talented people then give the fund the capability to invest directly in assets through in-house teams, which saves on fees paid to Wall Street and offers better alignment of interest.
  4. Finally, I’d say the fund’s willingness to be creative and unconventional gives it an edge over peers -- most of which take the prudent man rule far too literally.

Anyway, all that is stuff that, for the most part, we already know about OTPP and its business. But there’s something you may not be aware when it comes to OTTP’s investment policy and success: Leverage.
According to the annual report that was released today, the fund has pension assets of around $116 billion. But the assets owned by its investment team add up to something around $151 billion. How does that work? Well, it seems Teachers’ has been borrowing in the money markets and using the capital to invest in a variety of asset classes (see chart below). Here’s a blurb:

“Money-market activity provides funding for investments in all asset classes, and is comparable to a treasury department in a corporation.”

In other words, one of OTPP’s ingredients in its recipe for success appears to be leverage; about $35 billion worth or 30% of the portfolio. I’m not sure I can think of any other plans that have borrowed $35 billion to juice returns in other asset classes. Fascinating. And given that the fund continues to do well, it seems to be working.