Queen’s Park is not currently considering offering the Ontario Investment Fund mandate to one or more of the three large Ontario-based Maple Eight pension funds.Eduardo Lima/The Canadian Press
Keith Ambachtsheer is director emeritus of the International Centre for Pension Management and executive in residence at the Rotman School of Management, University of Toronto.
The Government of Ontario recently announced its intention to create an Ontario Investment Fund which would finance the building of durable assets in minerals, life sciences, AI, defence, and “new economy” manufacturing in the province. The fund, announced during the budget last week, will have a war chest of $4-billion.
Strangely, the government stated its intention that the fund would be managed by a private-sector general partner and that it would launch a “competitive process” to find one.
Why do we say it is strange that the Ontario government is going for a private-sector partner? Because over the course of the past three decades, Canada has become home to the world-renowned “Maple Eight″ pension funds, which include The Ontario Teachers’ Pension Plan (OTPP), the Ontario Municipal Employees Retirement System (OMERS), and the Hospitals of Ontario Pension Plan (HOOPP). These large public-sector pension funds are known for, among other things, the fact that they are largely managed in-house.
When the federal government wanted to create a $15-billion national growth fund a few years ago, they asked the federal Public Service Pension (PSP) Investment organization to manage it.
Ontario seeks private-sector manager for new $4-billion Protect Ontario investment fund
Similar arrangements have been made between the Province of Quebec and the La Caisse de dépôt et placement du Québec (CDPQ) and between the Province of Alberta and the Alberta Investment Management Corporation (AIMCo).
Why is Queen’s Park not considering offering the Ontario Investment Fund mandate to one or more of the three large Ontario-based Maple Eight pension funds?
The origins of the Maple Eight funds go back to a 1988 pension fund management study commissioned by the Province of Ontario titled “In Whose Interest?” Following the advice that management philosopher Peter Drucker set out in his 1976 book The Unseen Revolution, the 1988 Ontario study recommended restructuring its public sector pension funds based on three pillars: 1. Legitimacy, 2. Good Governance, 3. Scale. By 2012, the Economist described the resulting Maple Eight as a group of funds feared by Wall Street, and to be emulated by their peers around the world.
A unique characteristic of the Maple Eight funds is that they in-source a good part of their investment management activities, including in the private equity, real estate, and infrastructure sectors.
Why has this been such a successful strategy? Because the Maple Eight fund managers have been able to achieve the same gross returns in these sectors as their private sector counterparts, but at materially lower costs.
For example, a CEM Benchmarking study shows that while private-sector investment fees in averaged in the range of 3.3 per cent to 4.9 per cent of assets, the average in-house management cost was a much lower 0.4 per cent. These findings came from a large international database extending over 22 years.
The findings indicate that net of investment management costs, private markets strategies implemented by internal management teams of the Maple Eight outperformed their outsourced counterparts by some three to four percentage points a year over the last two decades.
These choices to partner with pension funds for government investment funds made sense for the federal, Quebec, and Alberta governments. Why not for Ontario?
Given it is their money, the Ontario government intends to spend, Ontario’s taxpayers deserve an answer to that question.