The “Canadian model” portfolio of the Ontario Teachers’ Pension Plan has delivered some enviable returns over the past 25 years. Of course, it includes a lot of assets that an average investor can’t easily buy—including big stakes in privately held companies and infrastructure facilities like toll roads and airports, to name just a couple. But some of the principles behind the Teachers team’s approach could be just as valuable to someone managing a college-savings kitty or a 401(k). Here’s how to let Northern Lights guide your portfolio.
Keep Fees to a Minimum
Fees paid to outside advisers and fund managers have dragged down many pension plans’ performance—which is one reason Teachers cuts outsiders out of its process. To minimize the impact of fees on your own savings, choose index funds and ETFs over actively managed funds; if you plan to hire a financial adviser, calculate whether you’ll save money by paying an hourly fee rather than an annual percentage of your assets.
Hunt for Cash Flow
Canadian-model plans love a long-term cash stream. In November, Teachers and two other funds bought shares of the Chicago Skyway toll road, entitling them to inflation-indexed toll income—for the next88 years. One way small investors can imitate that approach: Buying the ProShares S&P 500 Dividend Aristocrats ETF (NOBL), which owns shares in companies that have increased dividends for at least 25 consecutive years. (It’s currently paying a 2.7% yield.)
Wait for a Cheap “Softball”
Reluctance to overpay has led Teachers’ management to say no to some investing opportunities this year. Of course, investors can (and do) often disagree about what makes a given asset expensive. One metric that many investors like to use for individual stocks: five- and 10-year average price-to-earnings ratios. When a stock’s current P/E ratio is much higher than the long-term average, it’s a sign that shares have gotten overpriced.
Read our feature piece “These Canadians Own Your Town.”
A version of this article appears in the December 15, 2015 issue of Fortune with the headline “Three Key Lessons From ‘Teachers.’ “
For more on Canada, watch this Fortune video:
