Run it like a business

On the day Stephen Dowd sat down to talk about his job as vice president, infrastructure, for the Ontario Teachers’ Pension Plan (OTPP), the working membership of the C$117 billion (€88 billion; $118 billion) retirement fund, a contingent numbering around 180,000 strong, were struggling with a pressing dilemma – whether or not to show up for work.

For most of that week the Ontario Teachers’ Federation, a labour union representing both grade school and high school teachers in Ontario, had been threatening a one-day walkout. Touted as a political protest, it was the latest manoeuvre in a running dispute over ‘Bill 115’, a contentious anti-strike law that had already prompted one work stoppage: the so-called ‘Super Tuesday’ in December, which cancelled classes for 1,000 schools in the most-populated Canadian province.

As public frustration mounted, the Ontario government warned a strike would be illegal. Finally, at 4am on the Friday of the scheduled strike, the walkout was called off, and teachers reported to work.

Throughout the back-and-forth over a possible strike, it was business as usual for Ontario Teachers’ Pension Plan (Teachers’ for short). But that doesn’t mean the significance of the ongoing flap over Bill 115 would be lost on OTPP or Dowd himself. He’s apt to point out that Teachers’, as a single-profession pension named after its clientele, is attuned to the plight of its members, who typically have a 25-year career to invest for retirement and a 25-year-long retirement to draw from their pension.

“We have to be a financial institution with a long-term horizon,” Dowd stresses. Indeed, OTPP at the end of 2011 counted its oldest pensioner at 109, and has 2,600 people collecting retirement who are 90 or older.

“We have 100 people who are 100,” Dowd points out.

Young or old, Teachers’ has done a stand-up job of ensuring the financial health of each member. A just over two-decade-old organisation with a membership topping 300,000 (120,000 of whom are retired) OTPP boasted a return of 11.2 percent in 2011. The bigger picture is that the fund has returned 8 percent on average over the last decade, and 10 percent since its inception in 1990.

But to best illustrate what Dowd characterises as the long-term makeup of pension fund investing, look no further than Teachers’ infrastructure portfolio, an C$8.7 billion pool. OTPP began investing directly in infrastructure in 2001. A prolific airport investor, it is a 48 percent stakeholder in Birmingham International Airport and a 49 percent owner of Bristol International Airport – both in the UK. In addition, Teachers’ is a 39 percent interest holder in Brussels Airport and a 30 percent owner in Copenhagen Airport.

“It was the way we started,” Dowd says of the airport portfolio. Sydney Airport, which Teachers’ sold in the fall of 2011, was an early infrastructure holding.

Infrastructure returned 7.7 percent in 2011, compared with a benchmark of 6.1 percent – amounting to C$176.9 million of value added, OTPP says. On a four-year basis, the portfolio generated a 4.9 percent annual return, compared to a 5.1 percent benchmark for the same period.

“Private equity has more turnover – a five-to-seven-year holding,” Dowd emphasises, praising the “long-term, steady, inflation-linked” return that can come from a “hard asset”

In all, Dowd says Teachers’ has 26 people dedicated to infrastructure, split between deal sourcing and asset operation.


Born in Canada and partly raised in the US, Dowd graduated from Princeton University, then attended Dartmouth for business school, working for the late Chemical Bank (which would go on to form the core of JPMorgan Chase) and Fieldstone Private Capital Group (spun out from a similarly bygone banking concern, Bankers Trust) before landing with Enron Corporation pre-bankruptcy. Dowd remained with Enron in the aftermath of its historic downfall until joining OTPP in 2006.

His arrival coincided with a decision to, as Dowd puts it, “split infrastructure and private capital”. That decision belonged to current Teachers’ chief executive Jim Leech, a former Canadian Army captain who joined the plan in 2001 to head its private capital effort. Dowd credits Leech, named chief executive officer (CEO) in 2007, with handing a “parting gift” to Dowd – the decision to carve out infrastructure as a standalone portfolio.

Like his boss, Dowd is a proponent of the “run it like a business” approach to pension investing – a tactic dating back to 1990, when the Ontario government replaced its legacy retirement system and installed OTPP as a professionally staffed “Crown corporation”.

In addition to infrastructure, OTPP has designated a standalone bucket for private equity and real estate, with specialised personnel who, like Dowd, might have private sector experience and who are paid tantamount to what the private sector might offer. The Crown corporation template has since been used throughout the Canadian pension space, with the C$70 billion Alberta Investment Management Corporation (AIMCo), the C$170 billion Canada Pension Plan Investment Board (CPPIB), Caisse de dépôt et placement du Québec, which has C$159 billion, and the C$55 billion Ontario Municipal Employees Retirement System (OMERS), adopting the label.

Like Teachers’ – and unlike many US pensions – each aforementioned Canadian fund can invest directly in infrastructure as well as ably compensate its investment staff. In sum, the OTPP approach to investment management is uniquely Canadian – not to mention largely alien in America.

“[Teachers’] started its vision by asking ‘How do we run a pension plan? How do govern a pension plan?’ Run it like a business; govern it independently,” says Dowd. “We were able to then build a direct investing programme…with infrastructure coming later.”

The independently chosen board in charge of governing OTPP is able to delegate decision-making to Leech. Aside from investing directly, the plan can hire an outside money manager – the predominant model for running a pension in the US. America, a $3 trillion pension fund market, has in the past only brushed with direct investing. One-time Harvard Management Company legend Jack Meyer ran the Ivy League endowment like a hedge fund. Meanwhile, TIAA-CREF became 50 percent owner of Interstate 595 in late 2011.

Unlike the US, where organised labor might baulk at the notion of richly compensating a public official, there hasn’t been a backlash against the notion of the Crown corporation pension in Canada. That popular acceptance has been smoothed over by the argument that hiring and firing a manager comes with its own expense. Still, Dowd is aware that, as Teachers’ investment head, he is breathing in rarefied air.

“This doesn’t happen in a lot of the world,” he acknowledges. “There are a lot of talented people out there with a public service mentality who are willing to sacrifice [a higher salary] in order to be a good pension fund manager, but broadly and institutionally, there has to be that philosophical foundation [like at OTPP]”.

For Dowd, investing for a Crown corporation has its less tangible appeal.

“You can balance public service and an interesting, stimulating place to be,” he enthuses. “This is more challenging than working in a purely private sector job – it has an extra bit of appeal.”


Leveraging his background in energy, Dowd concedes that infrastructure, while “most definitely [involving] a learning curve”, was a “natural transition” for him that has proved rewarding.

“When I think about it, personally I’ve been involved in advising as a career, and what I’ve advised has been pretty complex and intricate as far as capital structure,” he says, calling infrastructure “a real intellectual challenge. I also like the concrete nature of it. You can touch and feel the asset.”

Dowd also expresses his enthusiasm for “putting together the long-term puzzle” of an infrastructure portfolio.

“Now that a portfolio has been selected, how do we manage it? This is an active business,” he says. “There is real skill required to manage an infrastructure asset, and optimising it. You have to pick the right management. You have to make sure the asset is robust. Infrastructure is not just doing a deal and putting it on the shelf and having an accountant report that the balance sheet is good. I continue to find a great deal of stimulation in building, as well as managing, a portfolio.”

Building an infrastructure portfolio is what has brought both Teachers’ and Dowd widely touted praise. In carrying it out, the plan has well-established criteria for deciding not just what kind of infrastructure asset to pursue for its portfolio, but what the role of the portfolio should be for OTPP as a whole.

“We broadly categorise a good infrastructure asset as: long-term, gross domestic product (GDP)-driven, like transportation; regulated, like a utility; and contracted, like a pipeline,” Dowd explains, neatly encapsulating Teachers’ portfolio. In addition to its airport collection, the plan is a 50 percent-owner of High Speed 1, a high-speed rail line between London and the Channel Tunnel. It is also a 25 percent holder of UK distribution network Scotia Gas.

Teachers’ is also inclined to own infrastructure in a country with a “clear regulatory regime,” with Dowd citing Australia, home to the Sydney Desalination Plant, also a plan holding, as well as Chile, where OTPP has a 50 percent stake in electricity outfit SAESA Group and ownership interests in Empresa de Servicios Sanitarios del Bio-Bio and Esval, which both operate water and wastewater assets.

His Canadian homeland, he states, “has a pretty good public-private partnership (PPP; P3) programme overall”. Canada has enabled the creation of a Crown corporation PPP authority for each province. Dowd says he believes privatisation of existing public infrastructure could emerge as a significant trend.

On the other hand, “we are less likely to go to a growth market, where regulation is not well-established,” Dowd says. OTPP is 50 percent-owner of power generation company InterGen and power plant operator Northern Star Generation in the US, as well as New York Container Terminal and Global Terminal in New Jersey.

“We look at the US,” Dowd notes. “To a degree, we haven’t had the success we’d like to have, but the US is a state-by-state basis, and there are 50. You also think there ought to be more activity, but there hasn’t been. We’ve seen a focus on greenfield transportation, which isn’t what we’re interested in.”

With that, Dowd is quick to point out that what’s right for Teachers’ is just that – what’s right for Teachers’.

“The right infrastructure asset for us could be the wrong infrastructure asset for someone else,” he says. “This isn’t supposed to be judgmental: stating what we go after is good and what we don’t go after is bad.”

As for where infrastructure can fit into a pension portfolio, Dowd feels compelled to “refrain from calling infrastructure a hedge” (OTPP has its own in-house global macro strategy), but instead evokes that time-honoured investment paean: diversification.

“Diversification is a fundamental tenet of a well-run pension fund, and that is what we get from infrastructure – we get diversification,” Dowd insists.


Dowd closed out 2012 participating in the ‘True Patriot Love Expedition’, climbing Island Peak, a 20,000-foot mountain in the Himalayas to raise awareness for the Canadian military. Heading into 2013, he says he remains bullish on infrastructure.

“We continue to see the value of the asset class and opportunity to invest,” he says.

Dowd then shares a Teachers’ anecdote: the infrastructure team, along with the private equity team, etch every transaction past and present on a decorative metal strip that is then hung against the wall in the main corridor of Teachers’ home office in Toronto. Private equity has a track record covering four strips, says Dowd, while infrastructure has just one strip.

“That is indicative of the hold we have, the intensity of looking at a deal, and the focus we have,” laughs Dowd. “The one strip is a physical illustration. We have a pretty good success ratio.”