TORONTO - The Ontario Teachers' Pension Plan has cut its allocation to U.S. equities by a third, reducing its investments by about C$3 billion (US$1.9 billion).
The C$70 billion fund had about 15% of its assets in U.S. stocks as of December, which is now down to about 10%, said Leo de Bever, vice president of research at the Toronto-based fund.
"We don't think the major indexes on the whole will perform that well (for several years)," said Mr. de Bever.
The fund had most of its U.S. equity holdings in passive products benchmarked to the Standard & Poor's 500 index. Teachers actually got the bulk of its exposure to U.S. equities through equity swaps on the S&P 500, which the fund recently let lapse, according to Mr. de Bever.
He said the fund plans to do more active equity investing, pointing out that returns from passive indexes have been very bad for the last couple of years.
"It's not that we don't like stocks. We're going to be more selective, and the way we invest in stocks is changing," Mr. de Bever said. "We've had the bulk of our exposure through passive indexes. Now we'll be doing active investing."
Reinforced view
While fund officials were examining what to do with the fund's U.S. equity investments, the book "Irrational Exuberance" was published. It was written by Robert Shiller, an economics professor at Yale University. Mr. de Bever said that the arguments Mr. Shiller makes in his book about stocks performing poorly for a long time when price-earnings ratios are high reinforced his views about the U.S. equity market.
Teachers had a 60% allocation to equities overall, which totaled C$41.4 billion as of December 2001, and that allocation has fallen to 55% temporarily.
Mr. de Bever said the fund will be re-entering the U.S. equities market by investing "on a stock-by-stock basis." He said the fund has existing outside money managers it will work with, as well as investing in-house. He declined to say if the fund might do searches for any more active equity managers.
"We think the market as a whole will underperform for a long time, but some individual stocks will perform well," said Mr. de Bever.
He said he didn't think the fund's cut in its U.S. equity investments had any effect on the U.S. equity markets. "We're a flea on the elephant in the U.S. market," said Mr. de Bever.
"We are taking a look at all of our assets," he said. "Just because we invest in certain investment buckets doesn't mean we have to continue those investments.
More selective
"We will become more selective in all asset classes," he said, adding too many pension funds follow benchmarks too closely, just wanting to get a little better return than the benchmark.
"Pensioners can't eat benchmarks," said Mr. de Bever.
"It used to be because computers were so slow that we took all the stocks in the S&P 500 and the TSE 300 (Toronto Stock Exchange) and invested in them," he said. "Now we're looking at those 800 stocks and trying to do investing based on the expected returns of the stocks relative to their volatility.
"If you have a well-diversified portfolio, you tend to outperform the index," added Mr. de Bever.
"If you buy the index, you tend to buy more of particular stocks as they get more expensive," he explained. "But is that the best way to invest?"
For example, he said, the fund wanted to look at big companies vs. small companies when making investment decisions.
"We don't want to blindly follow the index," said Mr. de Bever. "We learned from that experience. If we had not blindly followed the index, maybe we could have done better for our clients."
He said the fund would take some of the money that was invested in U.S. stocks and put it in private equity investments and infrastructure investments "where we think we may be able to do some interesting things."
Last year, the plan took advantage of the sharp decline in the U.S. equity markets after the Sept. 11 terrorist attacks and invested more money in U.S. stocks, achieving higher returns in the fourth quarter. For 2001, the pension fund only had a small loss of 2.3%.
