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The Ontario Teachers’ Pension Plan office in Toronto is seen in this file photo.. The plan reported a 4-per-cent return for 2022 when it released its results on Tuesday.COLE BURSTON/The Canadian Press
Ontario Teachers’ Pension Plan reported a 4-per-cent return in 2022, helped by a conscious shift toward investments in assets that are sensitive to higher interest rates in a year market volatility spurred widespread losses in public markets.
Teachers’ annual return beat its internal benchmark of 2.3 per cent, and its net assets increased to $247.2-billion. Over 10 years, Teachers has returned 8.5 per cent, and the plan was considered fully funded at year-end.
Pension plans faced a tough year in 2022 as high inflation and rapidly rising interest rates created volatility in markets. But pension fund managers found refuge in the large portfolios of investments they have built in privately held assets such as infrastructure and private equity, which were more stable, as well as commodities and natural resources that are highly sensitive to interest rates and had a boom year.
Teachers, which manages the pensions of Ontario’s 336,000 active and retired teachers, has ramped up its investments in several of those asset classes, and started to move back into fixed-income securities as interest rates rose. Chief executive officer Jo Taylor has been vocal about the need to be brave in the plan’s investment choices in order to find stable returns in a tumultuous market.
“On a relative basis they’re good results. A lot of our peers find it more challenging to get it to positive territory,” Mr. Taylor said in an interview. “I think we’ve been very much living to that agility principle in the last two years by making bold choices around which areas we think we can make returns.”
On Monday, OPSEU Pension Trust announced a net investment loss of 2.2 per cent for 2022, bringing its 10-year average return to 7.8 per cent. And in recent weeks, Ontario Municipal Employees Retirement System said it returned 4.2 per cent in 2022, while Caisse de dépôt et placement du Québec lost 5.6 per cent. But wide variations in the plans’ portfolios and membership make them difficult to compare directly.
As the recent collapse of Silicon Valley Bank creates new paroxysms in markets, Mr. Taylor said he expects the immediate impact on Teachers from the banking crisis will be “really, nil.” But as the fallout unfolds, he said the widespread uncertainty it creates could start to make deals more difficult if banks pull back on lending and financing for mergers.
“What’s really the issue? I think it’s wider confidence in markets,” Mr. Taylor said. “And then secondly, will it actually mean that some of our banking partners are a little more cautious about being active at the moment on helping us with transactions?”
Last year, Teachers put more money into fixed-income assets, starting to rebuild a portfolio that it had reduced when interest rates fell to ultralow levels after the onset of the COVID-19 pandemic. The plan pushed further into credit, setting up a private credit team in London, and chief investment officer Ziad Hindo said “there is clearly more room for us to grow that asset class” even after it reached its largest share of Teachers’ portfolio at year-end, at 14 per cent of assets or $35-billion.
Teachers has also significantly increased its infrastructure portfolio in recent years. Those investments are in assets such as toll roads, airports, digital infrastructure and power generation that tend to have predictable cash flows tied to inflation. Last year, infrastructure assets delivered some of the strongest returns for Teachers, gaining 18.7 per cent, which beat a 15.1-per-cent benchmark.
Investments in commodities and natural resources returned 19.5 per cent and 29.6 per cent, respectively, though those assets make up smaller slices of the overall portfolio.
Private equity gained 6.1 per cent, surpassing a benchmark loss of 3.9 per cent, helped by foreign currency gains from a strengthening U.S. dollar.
Teachers underperformed in public stocks and bonds as well as real estate. Public equities lost 12.5 per cent, which was worse than a benchmark loss of 10.2 per cent. Bonds lost 5.9 per cent.
And the $28.1-billion real estate portfolio lost 3.5 per cent, missing its benchmark of a 6.7-per-cent gain as valuations on its Canadian retail and office portfolios fell, affecting capitalization rates. Teachers owns Cadillac Fairview, which has a high concentration of retail and office properties in Canada, which underperformed last year.
Mr. Hindo said retail sales productivity levels at many properties are back to pre-COVID levels, “so they’ve recovered quite well.” But the recent decision by Nordstrom Inc. to wind down its Canadian operations creates renewed pressure on malls, including three major properties owned by Cadillac Fairview where the luxury retailer was an anchor tenant.
“Mall anchors has never been an easy story, particularly for the larger malls, but it’s something that Cadillac Fairview has had to deal with multiple times in the past, whether it was Sears or Target, so they’re pretty good at turning that space around and reconfiguring it in a profitable way,” Mr. Hindo said.
You might not think it’s possible to outperform the average Wall Street professional with just a single investment. Fund managers are highly educated and steeped in market data. They get paid a lot of money to make smart investments.
But the truth is, most of them may not be worth the money. With the right steps, individual investors can outperform the majority of active large-cap mutual fund managers over the long run. You don’t need a doctorate or MBA, and you certainly don’t need to follow the everyday goings-on in the stock market. You just need to buy a single investment and hold it forever.
That’s because 88% of active large-cap fund managers have underperformed the S&P 500 index over the last 15 years thru Dec. 31, 2023, according to S&P Global’s most recent SPIVA (S&P Indices Versus Active) scorecard. So if you buy a simple S&P 500 index fund like the Vanguard S&P 500 ETF (NYSEMKT: VOO), chances are that your investment will outperform the average active mutual fund in the long run.
It’s a good bet that the average fund manager is hardworking and well-trained. But there are at least two big factors working against active fund managers.
The first is that institutional investors make up roughly 80% of all trading in the U.S. stock market — far higher than it was years ago when retail investors dominated the market. That means a professional investor is mostly trading shares with another manager who is also very knowledgeable, making it much harder to gain an edge and outperform the benchmark index.
The more basic problem, though, is that fund managers don’t just need to outperform their benchmark index. They need to beat the index by a wide enough margin to justify the fees they charge. And that reduces the odds that any given large-cap fund manager will be able to outperform an S&P 500 index fund by a significant amount.
The SPIVA scorecard found that just 40% of large-cap fund managers outperformed the S&P 500 in 2023 once you factor in fees. So if the odds of outperforming fall to 40-60 for a single year, you can see how the odds of beating the index consistently over the long run could go way down.
Warren Buffett is one of the smartest investors around, and he can’t think of a single better investment than an S&P 500 index fund. He recommends it even above his own company, Berkshire Hathaway.
In his 2016 letter to shareholders, Buffett shared a rough calculation that the search for superior investment advice had cost investors, in aggregate, $100 billion over the previous decade relative to investing in a simple index fund.
Even Berkshire Hathaway holds two small positions in S&P 500 index funds. You’ll find shares of the Vanguard S&P 500 ETF and the SPDR S&P 500 ETF Trust (NYSEMKT: SPY) in Berkshire’s quarterly disclosures. Both are great options for index investors, offering low expense ratios and low tracking errors (a measure of how closely an ETF price follows the underlying index). There are plenty of other solid index funds you could buy, but either of the above is an excellent option as a starting point.
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The numbers from the Department of Finance suggest they have struck taxation gold. But they’ve been wrong before
Published Apr 19, 2024 • Last updated 8 hours ago • 5 minute read
“99.87 per cent of Canadians will not pay a cent more,” the prime minister said this week, in reference to the budget announcement that his government will raise the inclusion rate on capital gains tax in June.
The move will be limited to 40,000 wealthy taxpayers. “We’re going to make them pay a little bit more,” Justin Trudeau said.
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But it’s hard to see how that number can be true when the budget document also says 307,000 corporations will also be caught in the dragnet that raises the inclusion rate on capital gains to 66 per cent from 50 per cent.
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Many of those corporations are holding companies set up by professionals and small-business owners who are relying on their portfolios for their retirement.
The budget offers the example of the nurse earning $70,000 who faces a combined federal-provincial marginal rate of 29.7 per cent on his or her income. “In comparison, a wealthy individual in Ontario with $1 million in income would face a marginal rate of 26.86 per cent on their capital gain,” it says.
Policy wonks argue that the change improves the efficiency and equity of the tax system, meaning capital gains are now taxed at a similar level to dividends, interest and paid income. The Department of Finance is an enthusiastic supporter of this view, which should have set alarm bells ringing on the political side.
That’s not to say it’s not a valid argument. But against it you could put forward the counterpoint that capital gains tax is a form of double taxation, the income having already been taxed at the individual and corporate level, which explains why the inclusion rate is not 100 per cent.
The prospect of capital gains is an incentive to invest particularly for people who, unlike wage earners, usually do not have pensions or other employment benefits.
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That was recognized by Bill Morneau, Trudeau’s former finance minister, who said increasing the capital gains rate was proposed when he was in politics but he resisted the proposal.
Morneau criticized the new tax hike as “a disincentive for investment … I don’t think there’s any way to sugar-coat it.”
Regardless of the high-minded policy explanations that are advanced about neutrality in the tax system, it is clear that the impetus for the tax increase was the need to raise revenues by a government with a spending addiction, and to engage in wedge politics for one with a popularity problem.
The most pressing question right now is: how many people are affected — or, just as importantly, think they might be affected?
One recent Leger poll said 78 per cent of Canadians would support a new tax on people with wealth over $10 million.
But what about those regular folks who stand to make a once-in-a-lifetime windfall by selling the family cottage? We will need to wait a few weeks before it becomes clear how many people feel they might be affected.
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The numbers supplied to Trudeau by the Department of Finance suggest they have struck taxation gold: plucking the largest amount of feathers ($21.9 billion in new revenues over five years) with the least amount of hissing (impacting just 0.13 per cent of taxpayers).
The worry for Trudeau and Finance Minister Chrystia Freeland is that Finance has been wrong before.
Political veterans recall former Conservative finance minister Jim Flaherty’s volte face in 2007, when he was forced to drop a proposal to cancel the ability of Canadian companies to deduct the interest costs on money they borrowed to expand abroad.
“Tax officials vastly underestimated the number of taxpayers affected when it came to corporations,” said one person who was there, pointing out that such miscalculations tend to happen when Finance has been pushing a particular policy for years.
Trudeau’s government has some experience of this phenomenon, having been obliged to reverse itself after introducing a range of measures in 2017, aimed at dissuading professionals from incorporating in order to pay less tax. It was a defensible public policy objective but the blowback from small-business owners and professionals who felt they were unfairly being labelled tax cheats precipitated an ignoble retreat.
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Speaking after the budget was delivered, Freeland was unperturbed about the prospect of blowback. “No one likes to pay more tax, even — or perhaps more particularly — those who can afford it the most,” she said.
She’d best hope such sanguinity is justified: failure to raise the promised sums will blow a hole in her budget and cut loose her fiscal anchors of declining deficits and a tumbling debt-to-GDP ratio.
That probably won’t be apparent for a year or so: the government projected that $6.9 billion in capital gains revenue will be recorded this fiscal year, largely because the implementation date has been delayed until the end of June. We are likely to see a flood of transactions before then, so that investors can sell before the inclusion rate goes up.
After that, you can imagine asset sales will be minimized, particularly if the Conservatives promise to lower the rate again (though on that front, it was noticeable that during question period this week, not one Conservative raised the new $21 billion tax hike).
The calculated nature of the timing is in line with the surreptitious nature of the narrative: presenting a blatant revenue grab as a principled fight for “fairness.” The move has the added attraction of inflicting pain on the highest earners, a desirable end in itself for an ultra-progressive government that views wealth creation as a wrong that should be punished.
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Trudeau’s biggest problem is that not many voters still associate him with principles, particularly after he sold out his own climate policy with the home heating oil exemption.
The tax hike smacks of a shift inspired by polling that indicates that Canadians prefer that any new taxes only affect the people richer than them.
Success or failure may depend on the number of unaffected Canadians being close to the 99.87-per-cent number supplied by the Finance Department.
History suggests that may be a shaky foundation on which to build a budget.
National Post
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