BCI Gains 3% in Fiscal 2020

British Columbia Investment Management Corporation (BCI) announced an 8.5% annualized rate of return for the 10-year period for Fiscal 2020:

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.

BCI is the last of the major Canadian pensions to report its results.

Its fiscal year ends at the end of March, like CPP Investments and PSP Investments, but it wouldn't be fair to make a direct comparison for a lot of reasons, the key ones outlined below:

• BCI's active, in-house asset management started six years ago when Gordon Fyfe replaced Doug Pearce as President and CEO (Pearce retired).
• The main thing Gordon did was shift the focus on private markets (private equity, real estate, infrastructure and natural resources).
• He hired Jim Pittman from PSP Investments to head up private equity and launched QuadReal Property Group (“QuadReal”), an independent privately held company based in Vancouver, Canada to manage BCI's real estate assets.
• Prior to 2016, BCI was mostly invested in public equities, fixed income and real estate with some exposure to private equity and infrastructure. Gordon's mandate was to switch the focus away from public markets to private markets and diversify BCI's massive real estate holdings away from Canada to the rest of the world.
• Last year, 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.
• In private equity, Jim Pittman and his team have managed to increase the  ratio of direct investments to total private equity assets under management to 38% compared to 32% in fiscal 2019 (mature PE programs in Canada have 50% or more in co-investments). Those direct investments are co-investments with partners where BCI pays no fees and it allows BCI to ramp up its private equity allocations.
• Still, private equity equity represents $17.9 billion or 10.4% of net assets under management, which is an improvement over the last five years but well below the 25% of CPP Investments or even the 14% allocation at PSP Investments.
• Regardless of these differences, BCI's fiscal 2020 results are in line with those of CPP Investments which gained 3.1% in fiscal 2020 and better than PSP Investments' results which was a loss of 0.6% in fiscal 2020.
• Interestingly, BCI disclosed its public markets program manages $9.7 billion of leverage which equates to (5.7) per cent of the total assets under management. So, as in other Canadian pensions, leverage is being used for an efficient use of capital and to juice up returns.

Now, in terms of performance, public equities performed particularly poorly (not as bad relative to benchmarks). Private equity performed far better for the fiscal year, at 16.2%, although it underperformed its 22.2% benchmark.

Infrastructure showed strong returns at 8.6% (benchmark was 7%) and real estate at 8.5% (benchmark was 6.3%), with global real estate investments (12.2%) driving harder than domestic real estate (7.6%).

I must admit, I am a little surprised that BCI's real estate results are that strong given their exposure to Canadian office space and retail but I guess QuadReal is doing a great job.

I recently discussed how QuadReal launched its green bond framework to finance sustainable investments and projects through BCI QuadReal Realty.

I would have liked to have seen BCI's annual report but the press release clearly states BCI’s 2019–2020 Corporate Annual Report will be released on August 17, 2020.

This marks the first time ever that BCI releases its annual report later than its results and given it's just two weeks away, the right thing would have been to release the results and annual report at the same time.

I will make sure to edit this blog comment and provide up-to-date executive compensation figures and will then start the annual Pension Pulse compensation report where I post executive compensation at all Canadian pensions (and more).

Lastly, BCI has to do more to improve its communication strategy and while it has done incremental steps, it lags all its major Canadian peers on this front.

I want to hear more from Gordon Fyfe, Jim Pittman, Stefan Dunatov, Daniel Garant, and Lincoln Webb and see content posted on LinkedIn, YouTube, Twitter and Facebook (although, I loathe Facebook and Instagram, think it's a monumental waste of time).

By the way, BCI's executive management needs more gender diversification and like the rest of Canada's big pensions, the organization needs to improve diversity and inclusion at all levels and start hiring more people with disabilities.

It's not hard when people work from home, BCI and the rest of Canada's large pensions can literally hire disabled Canadians from all over the country who can easily work for them. That will get their numbers up from 0% to 1% (I'm being facetious but deadly serious, it's a crime at all of Canada's large organizations).

That's all from me, I will edit this comment on August 17th when I return from my vacation and BCI releases its annual report.

I'll be around tracking pension news and looking mostly at stocks in the market, so feel free to email me if you have something to discuss (LKolivakis@gmail.com).

This is also a good time to thank the few of you who take the time to donate to this blog and show your financial support, it's greatly appreciated.

The rest of you who have never contributed a dime but read my comments religiously,  you too can easily contribute using the PayPal options at the top left-hand side of this blog under my picture. Don't be shy, especially if you like the content and want me to continue this blog. 

Alright, vacation time, I'll be back posting comments on Monday, August 17th and will edit this comment then. If you need to reach me, I'll be around, just email me.

Below, in the 10 editions of the database that Postmedia has produced, executives at BCI have consistently topped the list:

Workers at that agency, responsible for investing money for government pension plans, represent more than half of those 100 top earners. CEO Gordon Fyfe was the best-paid public servant in B.C. in 2018 with a salary of $3 million and expenses of $34,000.

The Investment Management Corporation has always maintained that it manages billions worth of assets, so must offer compensation packages that are competitive with private industry to attract top employees. Its executives are paid through the pension plans they manage.

“BCI does not receive a single dollar of public funding assistance from government. As a result, the provincial government does not play a role in determining compensation rates for BCI executive and employee salaries,” the Finance Ministry said in an email.

I can guarantee you BCI's executives will once again top the list in 2019 and that's just fine by me even if British Columbia's socialist/ communist press disagrees (they really need to get a life).

When it comes to public pensions, you get what you pay for, and if you're not compensating these people properly, you will get lousy long-term results which will be far more costly to B.C.'s taxpayers.

Keep this in mind as you search through B.C.'s famous public sector salary database below.

The database is instructive on one level, however, it shows you the total remuneration of each employee at BCI making over $75,000 a year and gives you an idea of what other large Canadian pensions pay for similar positions.