Ontario Teachers to raise Asia, EM exposure

Ontario Teachers’ Pension Plan is moving to build up its overseas portfolio, most notably in Asia, but emerging-market debt is not top of the list of investments planned by the C$127.3 billion ($128 billion) state retirement fund.

OTPP received the appropriate licences and opened an office in Hong Kong – its first in Asia – in September, as it felt it had reached a sufficient level of investment in the region and the markets are now riper for tapping by direct investors.

“We set up an office in Hong Kong because we believe there’s a critical mass here,” says chief investment officer Neil Petroff*. “My team travelled over 12 million miles last year, so it’s very stressful. There’s a point when it’s time to be closer to the markets [you invest in].

“Doing deals in Asia used to be a lot tougher,” he tells AsianInvestor, “but now the people here are more receptive as the population ages and all these very wealthy families owning major conglomerates look at succession and simplifying their corporate structures.”

That said, OTPP has a limit on how much we can invest in emerging markets, which stands at 14%, “but we foresee that being increased”, says Petroff.

“Still, our liabilities are Canadian, and emerging markets are a lot more volatile, so we have a cap on that exposure. And we wouldn’t buy EM bonds to use up that scarce resource, but we’d rather do private deals or infrastructure deals, for example.”

The fund does invest in EM debt on a risk-adjusted basis, “but it doesn’t really attain the 4.5% return we are required to achieve”, says Petroff. “That’s a tough number to reach if the market’s flat or US or Canadian government bonds are at 3% or less.”

Reflecting a greater focus on emerging markets, Brazil is a likely location for the fund’s next office, says Petroff.

“We can envision an office in South America, as we have a lot of assets in Brazil and they are starting to grow in Colombia and Peru,” he notes. “We own 30% of a fairly sizeable Brazilian real estate company called Multiplan, and we have key relationships with business leaders there.

“The timing is hard to say,” adds Petroff. “We’re still creating a strategic plan as to how we create a footprint outside Canada.”

*A full interview with Neil Petroff appears in the November issue of AsianInvestor magazine.