British Columbia Investment Management Corporation (BCI) ended our fiscal year on March 31, 2020, with $171.3 billion of assets under management. The $17.8 billion increase in net assets reflects investment gains of $4.0 billion and $13.8 billion of client net contributions.Over the 10-year period, the annualized return for the combined pension plan[1] clients was 8.5 per cent compared to a benchmark of 7.2 per cent, representing $11.2 billion in added value. Over the five-year period, BCI generated an annualized rate of return of 6.0 per cent against a benchmark of 5.2 per cent, representing $4.4 billion in added value.
Despite the extraordinary societal and financial circumstances faced during the fourth quarter due to the COVID-19 global pandemic, our annualized return for the combined pension plan clients stands in positive territory at 3.0 per cent, net of all fees, slightly lagging the benchmark by 0.25 per cent.
“Our results reflect a solid performance despite the impact of the COVID-19 pandemic and resulting market volatility,” said Gordon J. Fyfe, CEO/CIO of BCI. “Adding $11.2 billion in value over the last ten years is a proud accomplishment for the entire BCI team. Our commitment to creating secure financial futures for plan beneficiaries, many of whom continue to endure substantial changes to their daily lives, drives BCI’s activities now more than ever.”
All asset classes contributed positively to the combined pension plan portfolio absolute return except for public equities, which were the most impacted by the recent downturn in the fourth quarter of BCI’s fiscal year as financial markets experienced one of the worst, and fastest, peak-to-trough declines in history. Our public markets program was defensively positioned heading into the pandemic: public equities were underweighted; and fixed income was overweighted. As a result, our portfolios broadly outperformed their benchmarks through the market downturn.
On a relative basis, most of BCI’s investment strategies beat their benchmarks during fiscal 2020, while a very strong 16.2 per cent performance in private equity lagged its benchmark for the year due to unhedged foreign currency exposure in the portfolio, after having outperformed the same benchmark by 15.8 per cent last year.
Our real estate program, managed by QuadReal Property Group (QuadReal), returned 8.5 per cent against a benchmark of 6.3 per cent. QuadReal marked down the value of the domestic real estate portfolio in late fiscal 2020 by 1.4 per cent to reflect more conservative valuations given the uncertainty in the Canadian market at that time. With this adjustment, QuadReal continued to reduce potential risk in the portfolio while maximizing diversity and liquidity on behalf of BCI and our clients.
BCI’s combined pension client one-year return represents a $253 million relative underperformance for the year, compared to a $2.0 billion outperformance in fiscal 2019.
“The best measure of our performance is our long-term results,” said Gordon J. Fyfe. “Since inception, BCI has focused on the long-term and diversified the portfolio across a wide range of asset classes that are aligned with our clients’ long-term return objectives and risk requirements.”
In 2020, BCI celebrates 20 years of investing globally on behalf of British Columbia’s public sector. BCI’s longer-term return exceeds the required actuarial rates of returns for most of our six major pension plan clients — currently ranging from 5.65 to 6.75 per cent. As a result, our clients’ most recent funding ratios vary from 103 per cent to 129 per cent. Over our 20-year history, through market downturns and material disruptions, BCI has outperformed the benchmark by 0.7 per cent on average per year, which represents $12.2 billion of value-added activity. Returns are important — for every $100 a pension plan member receives in retirement benefits, on average $75 is provided by BCI’s investment activity.
“Six years ago, we started transforming into an active, in-house asset manager and brought more of the investment decisions back to BCI for greater control over the strategy and risk management while increasing portfolio diversification and lowering costs,” said Gordon J. Fyfe. “Many of our clients have used their strong financial health to update their strategic asset allocations by reducing exposure to public equities, and increasing allocations to bonds, private markets, and credit.”
As at March 31, 2020:
PUBLIC MARKETS
Public markets, composed of fixed income and public equity investments, represents $112.8 billion and accounts for 65.9 per cent of net assets under management.
BCI’s fixed income program represents $57.1 billion and 33.4 per cent of net assets under management. The program invests in public and private market debt, as well as oversees our exposure to foreign currency. In fiscal 2020, we introduced a leveraged bond fund and funding desk capability to manage and optimize BCI’s internal liquidity and provide direct access to wholesale funding markets.
Our $55.7 billion public equities program represents 32.5 per cent of net assets under management. In fiscal 2020, we continued to internalize asset management by bringing $3 billion in-house and deploying the capital through BCI’s internally managed active equity pooled funds. BCI introduced the global fundamental portfolio that is mandated to create a defensive portfolio by investing in quality companies with well-established competitive advantages, as well as the internally managed active U.S. small cap portfolio. The global partnership fund was launched in fiscal 2020 to deploy active risk in more diversified strategies within less crowded markets.
In addition to fixed income and public equities, our public markets program manages $9.7 billion of leverage which equates to (5.7) per cent of the total assets under management.
Ahead of the COVID-19 pandemic, BCI’s public markets program was defensively positioned with a quality bias toward non-cyclical, large companies in equity markets and high-quality debt in fixed income. As a result, our portfolios broadly outperformed their benchmarks through the market downturn in late fiscal 2020. BCI maintains a long-term perspective and disciplined approach during this period of uncertainty. Taking advantage of dislocations and volatility in the markets and putting capital to work for our clients has been a key focus for our public equities team.
PRIVATE EQUITY
Private equity represents $17.9 billion and 10.4 per cent of net assets under management. With a sector-focused strategy, the program invested $5.3 billion in new capital for the year ending December 31, 2019, including $1.8 billion to eight direct investments. Notable investments included: Press Ganey Associates, a U.S. healthcare patient experience survey company; BMS Group, a U.K. independent specialty wholesale insurance brokerage platform; and Valence Surface Technologies, an aerospace surface finishing platform, purchased in partnership with ATL Partners.
The program also committed $3.7 billion to 17 new fund commitments and one top-up fund commitment, reinforcing strategic relationships with existing core partners, as well as seeding new partners with capital to invest as the economic cycle changes and opportunities arise. BCI completed 10 private equity fund sales for total proceeds of $800 million.
The ratio of direct investments to total private equity assets under management increased to 38.0 per cent compared to 32.0 per cent in fiscal 2019.
INFRASTRUCTURE & RENEWABLE RESOURCES
Infrastructure & renewable resources represents $18.3 billion and 10.7 per cent of net assets under management.
The infrastructure component is diversified by geographic region and sector, and consists of a global portfolio of regulated utilities in the water, electricity, and wastewater sectors; energy transmission; as well as roads, port terminals, and light rail transit. We seek meaningful equity positions allowing us to adopt an active governance approach. For the year ending December 31, 2019, we committed $1.3 billion to infrastructure assets. Notable investments included partnering with like-minded global institutional investors to own Czech Grid Holdings, the largest regulated gas distribution network in the Czech Republic, our first direct infrastructure investment in Central and Eastern Europe. We also initiated a new partnership with a global infrastructure fund manager focusing on developing markets, providing our clients with exposure to new regions and sectors.
The renewable resources component invests in long-life renewable resource assets that are essential to a growing population and increase in economic mobility. Our strategy involves investing in majority or co-controlling positions, or as a strong minority partner. For the year ending December 31, 2019, BCI initiated a new strategic partnership with Paine Schwartz, an investment management firm specializing in sustainable food chain investing.
REAL ESTATE AND MORTGAGES
QuadReal, a company owned by BCI and created in 2016, actively manages our clients’ real estate and mortgage investment portfolios, which represent $32.0 billion and 18.7 per cent of total net assets under management.
The $25.5 billion real estate program accounts for 14.9 per cent of BCI’s net assets under management, of which $16.8 billion represents domestic assets, while international assets total $8.6 billion. QuadReal sold $2.4 billion in Canadian assets in fiscal 2020, highlighted by the first tranche of planned partial interest dispositions of 42 assets to RBC Global Asset Management Inc. ($1.5 billion) for the benefit of its long-term 50/50 partnership with BCI. In addition to preserving ownership of valuable assets, it allows QuadReal to re-deploy into more value-adding assets or developments in Canada and extend its reach in international markets. For the year ended December 31, 2019, QuadReal committed $2.5 billion to increase our clients’ international real estate holdings to 34.0 per cent of the overall portfolio, compared to 28.4 per cent in the year previous.
QuadReal is a significant lender to the commercial real estate industry, focusing on direct mortgage investments with strong-yielding and attractive risk-return profiles. The $6.5 billion-mortgage program accounts for 3.8 per cent of BCI’s net assets under management. QuadReal continues to expand the mortgage program into the U.S. to provide clients with geographical diversification. Commitments to both domestic and U.S. commercial mortgages totaled $2.4 billion for the year.
Our costs
BCI is committed to maintaining fiscal discipline as we continue to expand our global investment footprint as an active, in-house asset manager. Our pension fund and insurance fund clients, representing 98 per cent of total assets managed, are moving into more private assets, including private equity, infrastructure & renewable resources, real estate, commercial mortgages, and private credit. This entails higher investment management fees while providing the potential for higher risk-adjusted returns. BCI’s combined pension plan returns, including the returns for each asset class, are reported net of costs.
BCI’s total costs, consisting of internal, external direct, and external indirect costs, were $1.3 billion or 79.0 cents per $100 of assets under management for fiscal 2020, all of which are netted against investment returns. Internal costs, operating costs over which BCI has direct control including salaries, rent, technology, and consulting fees, represented 19.1 per cent of total costs in fiscal 2020 (or 15 cents per $100 of net assets under management) compared with 24.1 per cent of total costs in fiscal 2019.
External direct costs represented 28.2 per cent for the fiscal year (or 22 cents per $100 of net assets under management), while external indirect costs accounted for 52.7 per cent of costs (or 42 cents per $100 of net assets under management). The external direct and external indirect costs for fiscal 2020 reflect the increase in assets under management, as well as our clients increasing their allocations to include more privately-held assets. External managers and partners typically earn performance fees when their investment decisions outperform pre-established benchmarks. While strong performance results earn higher net returns, BCI’s investment management fees also increase.
As BCI provides more transparency, our total costs include indirect external asset management fees which are usually not disclosed in the industry as they are netted from external partners’ performance.
BCI Fiscal 2020 Highlights
- Committed $11.5 billion to private markets — private equity, infrastructure & renewable resources, real estate, and mortgages. Notable direct investments included: BMS Group; Press Ganey; Waterlogic; and Czech Grid Holdings, our first direct infrastructure investment in Central and Eastern Europe.
- Welcomed the Insurance Corporation of British Columbia (ICBC) as a new client. BCI was awarded the mandate for managing ICBC’s insurance fund and its pension fund.
- Introduced a corporate-wide environmental, social, and governance (ESG) strategy to ensure these considerations are consistently integrated and applied across all asset classes at BCI.
- Transitioned the responsibility for managing BCI’s commercial mortgage program to QuadReal Property Group.
- Completed a multi-year project that resulted in the introduction of a new investment management platform, which increases BCI’s capability to process trades, provides deeper insights into our portfolios, and reduces operational complexity.
- Implemented a new asset liability management system that allows BCI to strengthen our advice in investment strategy.
- Recognized as one of Canada’s Top 100 Employers and one of BC’s Top Employers while adding 58 employees, strengthening BCI’s expertise in the areas of portfolio management, asset management, risk management, information technology, and corporate & investor relations.
- Contributed $75,000 to the Rapid Relief Fund established to provide emergency assistance to those in need in the Greater Victoria area.This was a monetary reflection of the working day that our employees are allowed, but not able during the COVID-19 pandemic, to spend with a local worthy cause. BCI’s executive management team contributed a further $50,000, and BCI employees made individual donations.
KEY FACTS
BCI’s 2019–2020 Corporate Annual Report will be released on August 17, 2020 and will be available on www.bci.ca
About BCI
With $171.3 billion of managed assets, British Columbia Investment Management Corporation (BCI) is a leading provider of investment management services to British Columbia’s public sector. We generate the investment returns that help our institutional clients build financially secure futures. With our global outlook, we seek investment opportunities that convert savings into productive capital that will meet our clients’ risk/return requirements over time. We offer investment options across a range of asset classes: fixed income; public and private equity; infrastructure & renewable resources; real estate, and mortgages.
I've already went over BCI's fiscal year results here and went over some important points you need to keep in mind when looking at BCI's results and comparing them to their large Canadian peers.
But for some reason, this year, BCI delayed the release of its annual report a few weeks after it released its fiscal 2020 results.
Take the time to carefully read BCI's 2019-2020 Corporate Annual Report here. It provides far more detail than the press release a few weeks ago and will give you a much better understanding of BCI's results and operations.
On LinkedIn, BCI states the following:
"Today, we published our 2019-2020 Corporate Annual Report detailing BCI's investment returns across all asset classes for the fiscal year and our corporate activities. This year, BCI proudly marks 20 years of investing globally on behalf of British Columbia's public sector. In recognition of our 20th anniversary, the report includes a timeline of key achievements in our history."
You can view BCI's 20-year timeline below:
It's been quite an impressive run, first with Doug Pearce and then with Gordon Fyfe leading the organization.
In terms of a good overview, here are the key charts:
As you can see, BCI now manages a little over $170 billion (all figures are CAD) and 80% of those assets are managed in-house, drastically reducing operational costs.
Over the last 20 years, BCI has added a total of $12.2 in added value, beating its benchmark by 70 basis points (6.5% vs 5.8%).
In terms of regional exposure, 41% of its total assets are in Canada, 33% in the US, 11% in Europe, 135 in Emerging Markets and 3% in Asia.
This tells you that unlike its large Canadian peers, BCI is still too heavily invested in Canadian public and private markets but that has been changing in recent years, especially after BCI signed a record $7-billion partnership with RBC Global Asset Management which allowed it to sell a 50% stake of its Canadian real estate holdings to other smaller institutional investors while it retained a 50% stake. The proceeds will be used to buy more US, European and Asian commercial real estate.
It takes time to turn around a steam liner and in BCI's case, it's focus has shifted radically in recent years, diversifying away from public markets into private markets and away from domestic assets to international assets.
Now, I took the time to read BCI's annual report carefully. Obviously, I can't cover it all here so let me draw your attention to what caught my eye.
Peter Milburn, Chair of BCI's Board, states the following in his message:
During the year, we focused on crisis management, enterprise risk management, and communication to better understand the measures and protocols BCI had in place in the event of a crisis or natural disaster. In addition to reviewing the framework, we participated with management in a table-top exercise and role-played a crisis. The board also provided input into the approaches BCI would follow to engage with multiple and varied stakeholders during a crisis, recognizing that regular interactions and timely communication are essential.
We also encouraged and supported management’s initiatives to proactively communicate the anticipation of a downturn, despite not knowing the trigger nor the timing. During this COVID -19 period, BCI deliberately increased the amount and frequency of communication with clients, staff, the provincial government, and third parties.The true strength of an organization is demonstrated during adversity. As a board, we fully endorse BCI’s corporate response,communication and stakeholder engagement activity, and investment performance during this challenging time. It is a testament to the level of talent and commitment at BCI and the underlying performance culture.
Well, I am encouraged to see BCI is stepping up its communication game with key stakeholders but as I detailed in a recent comment on pension communication, BCI lags its large Canadian peers when it comes to communication.
In particular, apart from the corporate annual report, there isn't much you can find on its activities throughout the year. Even its website is terrible, you have to go to sitemap all the way at the bottom to find media to find any relevant news items.
To be fair, it's gotten a bit better and there are more postings and LinkedIn posts too but BCI lags way behind its large peers when it comes to regular, timely and relevant content on its operations throughout the year. Its real estate subsidiary, QuadReal, does a much better job communicating its activities.
Anyway, let me skip to the CEO/CIO's report which begins on page 8 of the annual report.:
"On a relative basis, most of BCI’s investment strategies beat their benchmark during fiscal 2020, while a very strong 16.2percent performance in private equity lagged its benchmark this year due to unhedged foreign currency exposure in the portfolio, after having outperformed the same benchmark by 15.8 percent last year."
Now, that part confused me a little because BCI's private equity program has 48% of its assets invested in the US and 30% in Europe:
The US dollar was doing very well until April of this year, after BCI's fiscal year ended at the end of March. The Canadian dollar started strengthening a lot after April, so I was surprised that unhedged foreign currency exposure was why Private Equity lagged its benchmark.
Still, as shown above, over the last five years, Private Equity has handily beat its benchmark and that's because Jim Pittman came to BCI and started ramping up co-investments with BCI's PE partners to reduce fee drag.
Importantly, in Private Equity,the ratio of direct investments to total private equity assets under management increased to 38% compared to 32% in fiscal 2019.
I expect this ratio will continue to increase until the fund investment/ co-investment program fully matures and half of it or more will be co-investments.
One thing I didn't read in BCI's annual report was a full discussion on private market benchmarks.
Whenever I see a PE benchmark returning 16.9% on any given calendar or fiscal year, I find it ridiculously hard to beat.
And keep in mind, during the fiscal year, BCI's PE team completed 10 private equity fund sales for total proceeds of $800 million. So distributions were there to help them lock in those extraordinary gains or else they would have really lagged their PE benchmark by a wide mark.
Apart from Private Equity, I read on BCI's real estate portfolio:
On a one-year basis, real estate delivered an annualized return of 8.51%, outperforming the 2019 transitional benchmark of 6.72%.
The key passage explaining this performance was this:
The portfolio increased to $25.5 billion from $24.3 billion the year previous. Domestic and international assets accounted for $16.8 billion and $8.7 billion, respectively. Growth in Canada was driven by robust capital appreciation in industrial and residential sectors. However, the portfolio’s largest increases were attributable to the Americas and Europe, owing to strong capital growth and continued capitalization rate compression in U.S. industrial and residential real estate,and European office and residential. For the year ended December 31, 2019, QuadReal committed $2.5 billion to the global program. Commitments included $2.4 billion in direct investments, and $142 million in fund investments. QuadReal’s portfolio allocation has shifted to 34.0 per cent invested outside of Canada, compared to 28.4 per cent the year previous. The objective is to achieve a 50/50 balance between domestic and international by 2023.
Surprisingly, QuadReal didn't use the pandemic to take significant writedowns in its Retail portfolio like the Caisse's Ivanhoe Cambridge and other large pensions did.
I don't know if that will change next year but it did catch my attention.
Anyway, take the time to read BCI's entire annual report here, it is very well written and informative.
In terms of future communication, I'd like to see more YouTube clips featuring Gordon Fyfe, Jim Pittman, Stefan Dunatov, Daniel Garant, and others and a lot more articles discussing BCI's activities during the fiscal year.
Lastly, you can see executive compensation below:
I think it's very important to read the full discussion on compensation and analysis which starts on page 49 and to remember these figures are in line with BCI's peer group in the rest of Canada.
More interestingly, I went through B.C.'s famous public sector salary database which hasn't been updated yet and saw that almost all the top public sector salaries are concentrated at BCI.
Again, no surprise to me, public pensions in Canada are run like huge conglomerates, effectively like a business where long-term results have to be there to justify compensation.
People reading this database and wondering why there's a wide discrepancy between compensation at BCI and say BC Hydro or some other organization are completely clueless thinking these are civil servants working at BCI. They're not, if they don't perform, they're fired and out of a job and it's the finance sector where industry compensation is very competitive, so that explains the why BCI dominates this very public database.
Also worth noting that Canada's large public pensions are the best in the world, which is good news for Canadians in the public sector, not so much for those in the private sector who don't have access to a well-governed defined benefit plan.
Below, Bob Doll, Nuveen chief equity strategist, joins"Closing Bell" to discuss what has carried the market higher and what he's watching for now.