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LONDON- The Ontario Teachers' Pension Plan Board has slashed its bond holdings and plans to invest more in real assets as it hunts for better inflation-hedged returns, its chief executive told Reuters.
The move by OTPP, Canada's third largest pension fund with around C$227 billion ($280.82 billion) in assets, comes as companies from Unilever to Nestle warn of rising input costs and market forecasts for higher inflation hit multi-year highs.
"At the start of 2020 our bond exposure was sort of high 40s (percent)...and we're probably running at the moment closer to 10%, 12%, something like that," OTPP CEO Jo Taylor said in an online interview.
"We...downscaled significantly our provincial bonds as well as our government bonds around the world. And, to be honest, if you look at the returns you make on government bonds at the moment, it's not particularly attractive to hold them."
To help get a better rate of return, Taylor said, the fund had shifted more money into real estate, infrastructure and commodities.
Over the next five years, he said, the fund aimed to increase its allocation to real estate and infrastructure to around 30% from 20%, split roughly equally between the two asset classes.
Adding in an increased allocation to private credit, and the total additional money to be spent by OTPP in private markets globally over the period would be around C$70 billion, he said.
INTERNATIONAL REACH
Over the first half of the year, OTPP struck a number of private asset deals outside Canada including the purchase of a 40% stake in Finnish electricity distributor Caruna, and a 100% interest in Brazilian electricity company Evoltz Participaç?es.
"The thing we like about real estate, and infrastructure, is some of those businesses actually have inflation coverage on their income, whether it's tenants or contracts they have with governments around take-off for utility assets."
On real estate, Taylor said around 80-90% of the investments were in Canada, but that he aimed to make the split with the rest of the world roughly equal, with a greater focus on underweight parts of the market.
"We'll be doing more in, say, medical, logistics, industrial and particularly multifamily, which are all areas in the real estate index where we're probably a little bit underweight at the moment."
With inflation likely to increase over the next 18 months, the OTPP had also ramped up its exposure to natural resources including timberland, copper and gold to around 12% of the portfolio from 8% at the start of the year, Taylor said, and would likely remain "pretty high" going forward.
As part of its global expansion, the OTPP aims to increase the number of staff at its European headquarters in London by a third to around 100 over the next 18 months, continuing strong growth as it targets more opportunities in the region.
"We've got a lot of investment opportunities that we're looking at, in both the UK and across Europe," Taylor said, citing the fund's focus on infrastructure including electricity distribution, gas pump pipelines and distribution and water. ($1 = 0.8083 Canadian dollars)
(Reporting by Simon Jessop Editing by Mark Heinrich) ((simon.jessop@thomsonreuters.com; +44 (0) 207 542 5052; Reuters Messaging: Reuters Messaging: simon.jessop.thomsonreuters.com@reuters.net))