Wednesday, July 20, 2016

bcIMC Dips 0.2% in Fiscal 2016

Canada News Wire reports, bcIMC Reports Fiscal 2016 Annual Returns:
British Columbia Investment Management Corporation (bcIMC) today announced an annual combined pension return, net of costs, of -0.2 per cent for the fiscal year ended March 31, 2016, versus a combined market benchmark of -0.3 per cent.

Fiscal 2016 was a challenging year for investors. However, within a low return environment, our investment activities generated $133 million in additional value for our pension plan clients, driven by strong performance in private markets and real estate. Relative outperformance within the public equity markets, especially Canadian equities and emerging markets, as well as outperformance within our mortgages program, also contributed to investment returns.

"On behalf of our clients, bcIMC manages a diverse and quality portfolio of assets and we follow an investment discipline that focuses on the long term," said Gordon J. Fyfe, bcIMC's Chief Executive Officer and Chief Investment Officer. "Maintaining our discipline allows us to manage market risks during periods of volatility so our investments can provide stable cash flows and will appreciate in value over time."

As a long-term investor, bcIMC's mandate is to invest the funds not currently required by our clients to pay pensions and other benefits. On average, $75 of every $100 a pension plan member receives is due to our investment activities.

In fiscal 2016, we continued to build relationships globally, expanded our investment products and assessed investment opportunities that align with our clients' long-term, risk and return objectives.

Fiscal 2016 Investment Highlights
  • Committed $2.6 billion in new capital in our Private Equities program, of which $730 million was in direct investments.
  • Deployed approximately $1.1 billion in direct investments in infrastructure.
  • Committed $1.1 billion through the mortgage program to commercial real estate across Canada.
  • Awarded an additional US$200 million China-A share quota from China regulators so we have the opportunity to invest in the region's new service economy.
  • Completed two Real Estate developments (745 Thurlow and Northwoods) and currently have 26 properties in various stages of progress across Canada
"Our investment professionals generated additional value for our clients in a low return environment. They are making the strategic investment decisions that enable us to continue to grow our clients' long-term wealth, while also protecting the value of their funds," added Fyfe.

For the year, bcIMC's managed net assets were $121.9 billion. As at March 31, 2016, the asset mix was as follows: Public Equities (47.5% or $57.9 billion); Fixed Income (21.4% or $26.3 billion); Real Estate (14.4% or $17.5 billion); Infrastructure (5.9% or $7.1 billion); Private Equities (5.6% or $6.8 billion); Mortgages (2.3% or $2.8 billion); Other Strategies—All Weather (1.5% or $1.8 billion); Renewable Resources (1.4% or $1.7 billion). For more information, bcIMC's 2015–2016 Annual Report is available on our website at

About bcIMC

With $121.9 billion of managed net assets, the British Columbia Investment Management Corporation (bcIMC) is one of Canada's largest institutional investors within the global capital markets. We offer our public sector clients responsible investment programs across a range of asset classes: fixed income; mortgages; public and private equity; real estate; infrastructure; renewable resources. Our investments provide the returns that secure our clients' future payments and obligations.
The article above is bcIMC's official press release available here. Those of you who want to delve deeper into fiscal 2016 results can do so by reading the Annual Report which is available here.

I didn't find any press coverage of bcIMC's fiscal 2016 results in major news outlets (either journalists are asleep or bcIMC isn't reaching out to them) but someone in Ottawa sent me a short article from Richard Dettman of News1130, BC pension fund posts no gain for 2015-16:
BC’s giant public-sector pension fund manager is reporting its first decrease since the financial crisis. The BC Investment Management Corporation says its assets under management in the year to the end of March were down $1.7 billion to $123.6 billion. Its biggest losing bet was on emerging markets, followed by Canadian stocks.

The BC fund underperformed its peers, such as Quebec’s Caisse de depot which returned 9.1 per cent last year and the Ontario Teachers’ Pension Plan which made 13 per cent. The four-year average return by bcIMC is 9.4 per cent.

CEO and chief investment officer Gordon Fyfe says bcIMC “plans to increase client returns by bringing more asset management in-house,” specifically its “private markets and public equities,” rather than using outside firms.

Canada’s fifth-largest pension fund says it is “rebuilding its base,” hiring 76 new people and reviewing compensation “to attract and retain skilled professionals.”
When Gordon Fyfe left PSP to head bcIMC two years ago, I stated he was going to focus on private markets and hire some people away from PSP.

One major hire from PSP is Jim Pittman who joined bcIMC in April of this year to head bcIMC's Private Equity group (scroll over "Private Equity" on bcIMC's organization chart). This is an excellent hire and I have nothing but good things to say about Jim who I'm confident will do a great job building out direct and fund investments at bcIMC.

[Note: Jim actually left PSP on good terms, took a break and was then hired at bcIMC. The former head of Private Equity at PSP, Derek Murphy, started a private equity firm based here in Montreal called Aquaforte which assists Limited Partners (LPs) to establish aligned, high-performing, private equity partnerships with General Partners (GPs). I'm pretty sure he's helping Jim with his activities at bcIMC.]

The other major and recent change at bcIMC is the creation of a subsidiary to manage real estate assets in-house. Gary Marr of the Financial Post reports, B.C. pension fund creates giant, multi-billion-dollar real estate company:
The Canadian commercial real estate industry will soon face a new multi-billion-dollar competitor in the marketplace.

British Columbia Investment Management Corp. said Wednesday it will take its $18 billion in real estate assets under management and create a new private company, to be called QuadReal Property Group, which will look to expand in Canada and globally.

BcIMC, which provides investment management services to the province’s public sector and invests the funds not currently required to pay pensions and other benefits, will set QuadReal up with an independent board of directors to oversee its operation.

As part of the move to internalize management of its real estate operations, the new company has retained Remco Daal as its co-president to head up its Canadian operations. Daal was the president of Bentall Kennedy, one of the companies that was providing external management to the B.C. pension fund.

The majority of bcIMC’s Canadian real estate assets are currently managed externally by Bentall, GWL Realty Advisors and Realstar. Management of real estate assets from those companies will begin to transfer to QuadReal in 2017. Roughly 500 employees are coming over from Bentall Kennedy to join the new entity.

“They’ve had a great run under the existing model and they are moving to more of a Canadian model as to how they manage their real estate,” said Daal, referring to the internalization of real estate, which is common for other major domestic players like the Ontario Municipal Employees Retirement System and Caisse de dépôt et placement du Québec.

With assets of $123 billion, 14 per cent of which is allocated to real estate, QuadReal expects to be saving money on fees as it begins to expand its base. Real estate allocation is slated to rise 18 per cent and bcIMC total assets will rise to about $150 billion in the next four years.

“We expect there will be assets for which we compete and opportunities for tenants which we compete,” said Daal, referring to the asset managers they are now dropping. “It’s all fair game.”

Last year, bcIMC started studying the internalization and brought in Jonathan Dubois-Phillips to look at that possibility. He will act as co-president and run QuadReal’s international operations.

The new company has no specific type of asset class in real estate it is eyeing and says it will be market driven. There is clearly no appetite to sell Canadian assets, which include Bayview Village, the luxury mall in north Toronto.

“The domestic portfolio is of a quality that we can’t replicate. The income stream is solid, solid and that’s ultimately what what our clients want,” Daal said.
While there may be no appetite to sell Canadian assets, the truth is bcIMC's Real Estate portfolio is almost entirely invested in domestic real estate, something which has hurt the fund's overall returns relative to its larger peers which are more diversified across global real estate (in other words, bcIMC cannot benefit from capital appreciation and currency appreciation which comes from investing in foreign real estate assets, especially if it doesn't hedge currency risk).

Now, this brings me to an important point, it's not exactly fair to compare bcIMC's fiscal year 2016 results to those of its other large Canadian peers because apart from the different fiscal year, bcIMC is expanding its investments in private markets and bringing these assets internally. It will take a few more years for bcIMC  to shift from a plain vanilla fund to one that is more diversified across global public and private asset classes.

Having said this, the fiscal year 2016 results and value-added are nothing to write home about but over a four-year period, which is what compensation is based on, the results are better (click on image):

And if you look at the returns by asset class for the combined pension plan clients (page 16 of Annual Report), they're actually quite decent across public and private assets (click on image):

The big returns came from Private Equities, Infrastructure and Real Estate but Canadian and Emerging Market public equities outperformed their respective benchmarks even if they were negative returns. The Bridgewater All-Weather portfolio also added value (see my last comment).

Keep in mind, however, as of now, nearly 50% of bcIMC's assets are in Public Equities, so no matter how well Private Markets perform, if global stocks get clobbered during the fiscal year, it will impact overall returns (click on image):

One thing I found odd in the fiscal 2016 Annual Report is that I couldn't find a discussion on the benchmarks used for each asset class. I'm a stickler for benchmarks because that determines value-added, compensation and risk-taking behavior at Canada's large pension funds.

The only mention of benchmarks I saw was on page 14 where they show index returns for the fiscal year (click on image):

But there is no discussion on private market benchmarks (if someone knows where I can find a discussion on bcIMC's benchmarks, please let me know).

As far as compensation, the table below from page 37 of the Annual Report provides a summary of compensation of bcIMC's senior managers (click on image):

Gordon Fyfe's compensation increased the most on a percentage and absolute basis but is significantly below what he was making at PSP. As far as the other senior managers, their compensation increased marginally and is way below what their peers in the rest of Canada earn.

Again, when looking at compensation, keep in mind it's four-year results that count and bcIMC's asset mix is still heavily weighted in public equities, which partly explains the variation in the compensation of its senior managers relative to their peers at other large Canadian public pension funds (still, they are top earners in British Columbia's public sector, so I don't feel bad for them).

To summarize, bcIMC's fiscal 2016 results aren't great but they're not that bad either given its asset mix is still heavily weighted in public equities. You can read all recent news pertaining to bcIMC here including their recent acquisition of a 10% stake in Glencore Agri (CPPIB owns a 40% stake).

Below, Manulife's Donald Guloien says the $78 trillion of unfunded pension liabilities poses a risk but also opportunities in the wealth management space.

He's right but read my comment on the big CPP clash where I share my thoughts on defined-benefit vs defined-contribution plans and why we need to build on the success of Canada's large DB pensions.

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