A conversation with Ziad Hindo

How is the plan managing through this time of heightened inflation?

ZH: Last year we experienced one of the most challenging investment environments in the past 100 years. Volatility in global financial markets was partly caused by the aggressive tightening in monetary policy to contain rising inflation. The traditional 60/40 portfolio recorded its worst performance since 1937, as both government bonds and equities declined by double-digits. The only major assets across global financial markets to deliver positive returns were those that react positively to inflation, such as commodities and infrastructure.

Emerging from the COVID-19 pandemic, we recognized that significant monetary and fiscal stimulus would boost inflation globally. Inflation is impactful to the fund and can have an adverse impact on both the asset and liability side of the balance sheet. On the asset side, it traditionally adversely impacts asset prices, such and stocks and bonds, and makes earning a real return more difficult. On the liability side, higher inflation increases the cost of future pension payments.

To protect the fund against rising inflation, we adapted the asset mix to lower our sensitivity to interest rates. In 2020 and 2021, ahead of the inflation surge, we decreased the economic exposure of fixed income in the portfolio and shortened the maturity dates of our bond holdings. We increased our investments in assets that offer some inflation protection, securing a heavier weighing of our portfolio in commodities, actively seeking investments in natural resources, and assets like infrastructure – all of which tend to perform better in inflationary environments. We continue to evaluate the risk of inflation and take steps to defend our portfolio against inflation volatility.

Given the heightened volatility in financial markets, are you making any adjustments to the portfolio?

ZH: We continue to focus on diversification as an important lever to earn the required risk-adjusted returns, through careful construction of a portfolio of assets that perform differently across investment environments. In 2022, given the significant sell off in fixed income and credit asset classes, we decided to increase the asset mix exposure to both, thereby increasing portfolio diversification. In addition, we continued our focus to grow real assets, especially core infrastructure, which provides stable cash flows with inflation protection. Those actions helped make the portfolio more balanced from a risk perspective.

In addition to asset class diversification, we expanded our international footprint, opening an office in Mumbai and San Francisco, our fifth and sixth global offices, a reflection of our growing international presence. Being physically located in these markets will provide us more opportunities to diversify through sourcing attractive investment opportunities. Diversification and global growth are key ingredients in executing on our strategy to help us grow our assets to $300 billion by 2030.

How are you advancing efforts to combat climate change?

ZH: Climate change demands urgent action, and we are playing an active role in helping the transition to a low-carbon economy. In 2022, we advanced our multi-faceted climate change strategy that’s deeply rooted in driving real-world emission reductions. We made continued progress on growing our green assets, adding $3 billion worth of new green assets to our portfolio in 2022. OTFT issued another green bond, its first in Canadian dollars. Recognizing the urgent need to use our influence as a global investor, we also announced an ambitious plan to invest in high emitting businesses with the explicit goal of decarbonizing them faster. We continue to position our portfolio for the low carbon economy, decreasing our portfolio carbon intensity by 32% since 2019 and we’re on track to achieve our interim reduction target of 45% by 2025.

We also continue to engage with our portfolio companies and provide our expertise and influence to support them on their emissions reductions journey. 

Finally, we continue to be guided by our Responsible Investing Principles and are embedded in our internal processes and considered at all stages of our investment lifecycle.