Investment Beliefs

Our investment beliefs provide a clear and transparent framework for how we work to achieve our client’s investment objectives. Our investment beliefs influence our views on capital markets, our investment and risk management processes, the managers we choose to partner with, and our overall approach to managing client assets. The following investment beliefs apply to the two long-term investment portfolios, Pension and Endowment, that we manage on behalf of the University of Toronto.

We believe that:

  1. Asset allocation is the most important investment decision.
    The primary determinant of a portfolio’s risk and return is its asset allocation. The starting point for asset allocation in the Pension and Endowment portfolios is the Reference Portfolio, which represents a simple, low-cost passive portfolio appropriate for the Pension and Endowment’s long-term horizon and associated return target and risk profile. We are permitted to deviate from the Reference Portfolio within certain parameters in order to pursue our value-added objectives. Under this framework, the Reference Portfolio also serves as a transparent and objective benchmark for measuring both active risk and the value gained or lost through our active management decisions.
  2. Diversification leads to more efficient portfolios.
    Diversification improves the risk-to-return ratio of investment portfolios. Total portfolio diversification, through effective portfolio construction, allows us to create more efficient portfolios by allocating risk across many different dimensions, such as risk drivers (e.g., equity, interest rates, currency), style factors (e.g., value, growth), geographies, sectors, managers and economic outcomes.
  3. Managing risk is a key element of successful investment management.
    Understanding and managing risk is critical to achieving our objectives. We believe that risk is not well captured by a single view of the portfolio, and that we must measure and manage multiple risks, including investment risk and active risk, and additional risks such as liquidity, operational, counterparty, reputational and ESG, including climate. Furthermore, we believe it is important to consider an investment’s underlying risk drivers instead of simply relying on asset class labels. For example, we view real estate not as a separate and distinct asset class but rather a combination of risk drivers (i.e., equity and interest rates), and we build this into our risk modelling. We also believe that it is important to integrate risk management into the investment decision-making process. This ensures that all investment decisions reflect the risk appetite and long-term expectations for the Pension and Endowment portfolios.
  4. Environmental, social and governance (ESG) considerations matter and are especially important for investors with a long-term investment horizon.
    We believe that ESG considerations, including climate change, can have a material impact on an investment’s risk and return. We also believe that these considerations are particularly relevant for portfolios that have a long-term investment horizon, such as the Pension and Endowment. By incorporating ESG and other relevant and material considerations into our investment processes, we believe we can make better-informed decisions and ultimately achieve better outcomes. Moreover, by being active owners through our voting, engagement and advocacy policies and practices, we believe we can positively influence the behaviour of corporations, policy-makers, regulators and investment managers and realize greater long-term value for the beneficiaries of the investments that we manage, while also contributing to a better future for society at large.
  5. Costs matter, but an investor’s primary focus should be risk-adjusted returns net of all costs.
    The lowest-cost portfolio is typically a passive portfolio, but an all-passive portfolio is unlikely to result in the highest risk-adjusted returns, net of all costs. While we always consider costs in our decision-making, an active management approach selectively applied has the potential to achieve higher risk-adjusted returns, net of all costs. In less efficient markets and for specialized investment approaches, we typically use an active management approach. For more efficient markets, we tend to invest passively. In all cases, we focus intensely on costs. When investing with active managers, we strive to negotiate low fixed fees in combination with a performance fee that is tied to the manager’s outperformance relative to an appropriate benchmark.