Ontario Teachers’ active investing made a $36 billion difference
With over $186.1 billion (C$241.6 billion) in assets under management (AUM), the Ontario Teachers’ Pension Plan is one of the largest public pension funds in the world, but takes a more active approach than most of its peers.
“Ontario Teachers’ is an active, engaged investor, and approximately 80% of our assets are managed in-house,” Ben Chan, executive managing director for Apac at the Ontario Teachers’ Pension Plan, told AsianInvestor.
The debate between the effectiveness of active versus passive portfolio management intensified this year, amid the volatility of the re-opening of post-Covid markets in the face of rising inflation, interest rate hikes, and geopolitical tensions.
While passive strategies have performed well over the last few years, with most benchmarks moving upwards in unison, active managers should theoretically outperform in a volatile climate.
For Ontario Teachers’, a focus on active investing has directly resulted in strong returns for more than the three decades of its history through various economic cycles, said Chan.
“We have exceeded our benchmark return by an average of 1.7% a year since the fund’s inception in 1990, which means that active management has added an additional $36.7 billion, after all investment costs, to the fund,” he said.
According to Chan, the distinct advantage of Ontario Teachers’ is that it actively invests while maintaining a long-term view.
“We look beyond current economic cycles and take a thoughtful, patient approach to our investments,” said Chan. “From our experience, an actively managed global portfolio with a long-term view will provide better risk-adjusted returns for our members over time.”
In the current volatile market conditions, Chan said the fund is engaged with its portfolio companies to ensure they remain agile, resilient, and able to maintain a high level of performance.
THE CASE FOR ACTIVE
Over the past few decades, passive investing has had a strong appeal for many large asset owners and investors who are satisfied with duplicating market returns instead of trying to beat them.
Numerous studies have also been published showing that in many cases, active investment managers are not able to pick enough winners to justify their high fees, but that doesn’t mean this style should not be leveraged, according to Paul Colwell, senior director of investments and head of the advisory portfolio group for Asia at Willis Towers Watson (WTW).
“Roughly, anywhere between 70 to 80% of active funds fail to beat the benchmark, according to a lot of surveys, including our own research. While that's true, there are also the 20% that do beat the benchmark — so if you can find good, skillful active managers within that 20%, then that gives you an advantage and an uplift in return,” Colwell told AsianInvestor.
Institutional investors that have resources and research capacity to select these managers potentially will have a competitive advantage to gain access to those excess returns, said Colwell.
“But it takes a huge amount of work, which is why many won’t do it. For WTW it takes almost 200 hours to complete an investment due diligence and rate a fund manager,” he said.
In many cases, large government or public pension funds are very risk averse, and might feel that they don't have the resources or fee budget. They also don’t want to have to deal with stakeholders to explain any underperformance at a particular point in time.
“The bigger you are, the harder it is to be active and to be nimble, as well as being able to deviate from a benchmark,” said Colwell.
“There's a spectrum: it’s a function of cost, size, and risk profiling. And depending on where an asset owner sits on that spectrum, you may have more or less in passive or active management.”
CHINA ALPHA
When choosing to invest actively or passively, there is one final dimension that's worth considering: the market.
“There are certain markets that are better for active management than others, for different reasons. But essentially, it’s because the alpha opportunity can be tapped into in an efficient way,” said Colwell.
The onshore Chinese equity market, the China A-share market, is a good example of a marketplace where WTW sees quite significant alpha opportunities.
The A-shares market is still retail-oriented, although there have been measures to encourage the participation of institutional investors to take a long-term oriented investment approach and improve market efficiency. This gives ample opportunities for active managers to add value and outperform their passive peers, said Colwell.
JPM AM
Joanna Shen, emerging markets and Asia Pacific equities investment specialist at JP Morgan Asset Management agrees that with higher market inefficiency and volatility due to a high retail investor participation, Chinese equities are a fertile environment for alpha opportunities.
“The China A-Shares market, still under-represented in global indices, is abundant in structural growth opportunities in areas such as industrial automation, semiconductors, and renewables,” Shen told AsianInvestor.
This means that ultimately, it is the active managers that have proven skills, resources, and deep on-the-ground expertise that will be able to tap into market inefficiency and generate consistent outperformance, she said.
Although the sell-off over the past year has brought Chinese equities to their lowest valuation since 2015, Shen believes that a lot of the bad news has been priced in by now. Also, the recent announcement of policy support is encouraging.
“In terms of monetary policy, PBOC is moving in a very different direction to other central banks. Meanwhile, fiscal stimulus such as infrastructure spending is underway. In addition, there have been signs of regulatory easing in areas such as game approvals, auto purchase tax reduction, and real estate financing,” she said.