Vestcor Gains 1.96% in 2018

New Brunswick's Vestcor recently reported a 2.08% gross, 1.96% net return for 2018:

Vestcor Inc. (Vestcor) has released its 2018 Annual Report, which reflects the successful amalgamation on January 1, 2018 of its predecessor companies, Vestcor Investment Management Corporation (VIMC) and Vestcor Pension Services Corporation (VPSC). Vestcor operates as a private, not-for-profit company offering global investment management and pension and benefit administration services to public sector entities.

“Despite difficult market conditions, especially during the last quarter of 2018, we are proud to announce that Vestcor has been able to achieve positive investment performance for our clients” said John A. Sinclair, President and Chief Executive Officer. “Our clients frequently cite capital preservation as a key objective for their investment strategies. Despite a negative market environment for risk assets in 2018, we are pleased to have delivered on that objective during the year.”

The Annual Report also outlines that Vestcor successfully exceeded the key performance targets of their administrative clients during the year despite an overall 13% increase in pension and benefit applications.

“We are also proud to have continued to offer management and administration services that are very cost effective versus other public sector peers” declared Mr. Sinclair.

Further investment disclosure reports a 2.08 percent overall gross investment return for total assets under active management for the year ended December 31, 2018, with a management expense ratio of approximately 0.12 percent. “Our not-for-profit business model continues to provide low cost, efficient investment and administration services for our clients” said Sinclair. Pension Funds under active management specifically achieved an overall 2018 return of 2.07 percent which exceeded blended client portfolio benchmarks, before investment management costs, by approximately 1.15 percent during the year.

The long-term annualized Pension Fund returns, since Vestcor began its investment management business (originally known as N.B. Investment Management Corporation prior to its privatization in 2016) in 1996, continue to exceed both client return and risk management funding requirements at 7.09 percent.

About Vestcor

Located in Fredericton, New Brunswick, Vestcor provides global investment management services to nine different public sector client groups representing approximately $16.9 billion in assets under management, and administration services to 11 public sector pension plans and 4 employee benefit plans.

The Vestcor Group of Companies was created through Province of New Brunswick legislation in July 2016 (the Vestcor Act). As of October 1, 2016, N.B. Investment Management Corporation was continued as VIMC, while the operations of the Pension and Employees Benefits Division of the Province of New Brunswick’s Department of Human Resources were transferred to VPSC. On January 1, 2018 VIMC and VPSC were amalgamated to form Vestcor Inc.

Vestcor’s team of more than 140 New Brunswick-based service professionals provides innovative, integrated, cost-effective investment management and pension and benefit administration services solutions to a number of public sector entities that meet the requirements of approximately 96,000 individual members and 134 employer groups.

Take the time to read Vestcor's 2018 Annual Report, it is very well written and not too long.

Late this afternoon, I had a chance to talk to Jon Spinney, Vestcor's CIO. I thank him and John Sinclair, Vestcor's CEO, for taking the time to answer my emails and questions.

John Sinclair emphasized the key thing for Vestcor's clients: “Capital preservation is a key goal for our clients, and we were happy to deliver positive returns for 2018 in a challenging market environment, particularly the 4th quarter when volatility increased significantly.”

Jon Spinney shared this with me by email prior to our conversation:

“Overall, 2018 was a good year for us in the context of a volatile 4th quarter. Our clients, partially due to Shared Risk regulations in the province, run fairly low risk levels in their asset portfolios (on average similar in total risk levels to a 35-40% equity/60-65% bonds public market portfolio). As such, we’ve looked for opportunities to de-risk the asset portfolio in a prudent manner wherever possible while maintaining return generating opportunities. Consequently, we expect to lag somewhat during stronger periods but should perform well when markets are more challenging.

Our stakeholders understand that strategy and are willing to make that trade-off. With the RBC DB median return at about -0.65% in 2018 compared to our total fund composite return of 2.08%, that strategy worked to produce a somewhat smoother return profile for clients both recently and over the longer term.

In terms of active management, after considering all investment management costs, we outperformed our benchmark by just over 1% for the calendar year. While Vestcor’s reliance on Private Markets has historically been somewhat less than many of our peers (our strategy has relied heavily on internal active management, with approximately 85% of assets managed in house), these strategies were significant contributors to value-add during the most recent year and have a strong long-term track record. “

Jon expanded on these points during our call. He told Vescor underperformed the RBC DB median return in 2017 but over a two-year and longer horizon, it is outperforming this index with 20-30% less volatility.

Interestingly, while Private Markets were significant contributors to value-add in 2018, Jon told me they're not as heavily weighted as their peers in privates and run most of their absolute return strategies internally:

As shown above, there is $1.3 billion invested in public market Absolute Return Strategies (run internally), $666 million in Private Equity, and $1 billion each in Real Estate and Infrastructure.

So, he's right, Vestcor is not as heavily weighted in private markets as its peers and Jon explained this to me: "We have many clients. Some are more mature and need liquidity, but even they have a minimum of 5% in private equity, real estate and infrastructure. Others typically have 12-15% in real estate, 10-12% in private equity and 10% in infrastructure."

The Absolute Return Strategies in public markets are beta neutral strategies which typically underperform in a raging bull market but outperform when markets get hit.

It's important to read this passage from pages 19-20 of the Annual Report:

Our Absolute Return portfolio seeks to produce stable, positive returns in all market environments while resulting in little to no correlation with traditional investment strategies, thus providing attractive returns and enhanced diversification for the combined portfolio. To achieve this, we manage separate internal strategies that provide exposure to event-driven, fundamental, and quantitative investment approaches, in varying amounts. Meaningful allocations to these portfolios combined with a well-developed risk management and capital allocation framework allow the strategy to achieve the goal of positive, low risk returns without taking on unintended risk exposures as can often be the case in multi-strategy absolute return portfolios. While each strategy is managed in a diversified and prudent manner by a portfolio management team, we additionally employ a combined portfolio risk budgeting approach to ensure risk is efficiently managed and budgeted through all market environments by shifting capital and risk allocations to their most favorable locations where necessary.

In 2018, the benefit of a diversified investment approach is apparent. While each of the sub-strategies provided positive total returns, only two of the three sub-strategies provided returns in excess of the benchmark. The combined portfolios provided a positive total return of 2.36%, delivering stable performance in a volatile, risk adverse environment. Vestcor uses a proactive risk management approach for these strategies, meaning that these positive returns were achieved with extremely low volatility and near zero correlation to traditional investment categories. On a four-year basis, the strategy has managed to navigate challenging investment environments to produce a positive 4.00% annualized return while maintaining net zero exposure to broad equity markets.

The private equity portfolio is diversified across several factors including geographies, industry sectors and currencies, and investments are made through a combination of commitments to external funds, co-investments alongside fund managers and direct internally managed investments. In 2018, this portfolio produced very strong returns, outperforming comparable public market strategy benchmarks by 27%. A record amount of distributions were received by the private equity program during 2018 as a healthy exit environment prevailed. Over the longer-term four year period, private equity returned 19.11%, outperforming the blended benchmark by greater than 11% per year.

The Real Estate portfolio has two broad components: North American Real Estate Investment Trust (REIT) securities, and private real estate in the form of limited partnership interests, direct co-investments and direct holdings. Canada represents the largest component of the private portfolio however we continue to seek high quality opportunities abroad. The private portfolio continued to achieve strong returns in 2018 as a result of good fundamentals in supply and demand and continued low capitalization rates.

The Infrastructure portfolio has two broad components: first, private infrastructure in the form of co-investments diversified by geography, currency and by asset type and also fund commitments to limited partnerships. Second, an internal public infrastructure portfolio that is designed to provide similar long-term return and risk characteristics as private infrastructure investments. Both portfolios produced positive returns in 2018, with particularly strong private portfolio returns stemming from a combination of solid growth in earnings and continued low market discount rates.

Lastly, in terms of compensation, the CBC made a big stink that N.B. pension management employees score record $5M in bonuses, but I wonder if anyone bothered reading the annual report.

In particular, there's a detailed discussion on compensation beginning on page 32, and the senior managers at Vestcor delivered on their long-term targets so they are entitled to their compensation:

Also worth mentioning that while this compensation may raise some eyebrows and critical comments from uninformed New Brunswickers like David Raymond Amos, the folks at Vestcor are not paid anywhere near as much at their peers in the rest of Canada.

So let's dispense with the CBC/ communist crap on compensation at large pensions, these investment managers are delivering on their long-term targets and their compensation structure is clearly explained in the annual report.

If people are getting big bonuses it's because they're delivering long-term results, and that's a good thing, especially in New Brunswick where public pensions were a total mess prior to the establishment of Vestcor.

Below, the Board of Trustees for the New Brunswick Public Service Pension Plan held the 2018 Annual General Meeting on September 6, 2018 in Bathurst, NB. Fast-forward to minute 47 to hear Vestcor's CEO John Sinclair's comments, he covers a lot of key points worth listening to.