Practical analysis for investment professionals
08 October 2012

The Canadian Model: Ontario Teachers’ Turns Pension Investing on its Head

An article in the September issue of Institutional Investor magazine, “The Oracle of Ontario,” offers a glowing profile of Jim Leech, CEO of the C$117 billion Ontario Teachers’ Pension Plan, and delivers an excellent account of how the fund’s unique governance structure and focus on direct investing has allowed it break the mold of public pension plan investing.

It’s a quick read that offers a number of valuable takeaways for professional investors. Here are my top three:

  • Governance. Public pension funds have traditionally been heavily influenced by intrusive boards, politics, and often, union agendas — all which may help to explain the underfunding crisis many public plans now face. Ontario Teachers’ unique governance structure has been in place since its founding in 1990, when the Ontario government and the Ontario Teachers’ Federation set it up as an independent nonprofit corporation. An independent board was established and the board delegates all investment decisions to the CEO. This stands in sharp contrast to the politically charged micromanagement that characterizes the industry today.
  • Direct Investing. Instead of engaging consultants and farming out its investment management function, Ontario Teachers’ does almost all of its investing in house. This extends beyond just equities and fixed income, and includes private equity, real estate, infrastructure, and activist investing. Since its inception, Ontario Teachers’ returns have bested those of both its peers and its benchmarks. The direct investing model has long been employed successfully by endowments and foundations but largely avoided when it comes to public pension funds. This model isn’t unique to Ontario Teachers’ either, as other Canadian plan sponsors have adopted a similar direct investment approach. Sovereign wealth funds and plan sponsors are reportedly eager to adopt the so-called “Canadian model,” but it won’t be for everyone. Size matters, especially when investing in nontraditional asset classes. And, as CEO Leech points out in the article, “You can’t do it with B players,” meaning you have to be willing to pay up for talent. Furthermore, Canadian pension plans operate under the “prudent man” rule, giving them more flexibility than other funds, including US pension plans that must operate under ERISA rules.
  • Industry Implications. Ontario Teachers’ success bears close watching, as it is likely to have far-reaching effects. As pension plans struggle to meet their obligations, they may reevaluate the expense and value-add of consultants and outside managers. At the same time, risk taking by some of Wall Street’s biggest players has been reined in by regulators. Public pension funds, with trillions of dollars in assets at their disposal, are likely to fill the void. This shift in power is offering the largest plan sponsors investment opportunities that were heretofore unavailable.

You can read the full story, “The Oracle of Ontario,” on Institutional Investor magazine’s website.

Please note that the content of this site should not be construed as investment advice, nor do the opinions expressed necessarily reflect the views of CFA Institute.

About the Author(s)
David Larrabee, CFA

David Larrabee, CFA, was director of member and corporate products at CFA Institute and served as the subject matter expert in portfolio management and equity investments. Previously, he spent two decades in the asset management industry as a portfolio manager and analyst. He holds a BA in economics from Colgate University and an MBA in finance from Fordham University. Topical Expertise: Equity Investments · Portfolio Management

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