BCI Gains 7.5% in Fiscal 2024

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The Canadian Press reports B.C. Investment Management earned 7.5% annual combined pension plan return:

VICTORIA – British Columbia Investment Management Corp. says it earned an annual combined pension plan return of 7.5 per cent for its latest year.

However, the result fell short of BCI’s benchmark which was boosted by the strength of the largest tech stocks and posted an annual return of 11.6 per cent.

BCI chief executive Gordon Fyfe said the fund delivered “solid absolute results even through challenged markets this year.”

The fund said all of its asset classes generated positive returns except its real estate equity investments which faced sustained market headwinds.

The combined pension plan return represents the performance of BCI’s six largest pension clients by assets under management.

BCI had $250.4 billion in gross assets under management as of March 31.

Earlier today, BCI released its annual results, earning a 7.5% return and surpassing $250 billion in gross assets for fiscal 2024:

VICTORIA, BC – June 27, 2024 – British Columbia Investment Management Corporation (BCI) today announced an annual combined pension plan return1 of 7.5 per cent. The combined pension plan return represents the performance of BCI’s six largest pension clients by assets under management (AUM).

Gross AUM2 grew from $233.0 billion last year to $250.4 billion for the fiscal year ended March 31, 2024, a year-over-year increase of $17.4 billion or 7.5 per cent. Net AUM totalled $229.5 billion, with investment gains contributing $16.5 billion net of all fees to this AUM growth.

“We delivered solid absolute results even through challenged markets this year,” said Gordon J. Fyfe, BCI’s Chief Executive Officer and Chief Investment Officer. “This was not a coincidence. Rather, it speaks to our team’s diligent risk approach and prudent liquidity management, which provided us with resilience and capability to capture market dislocations and deploy capital. Our investment teams continue to build a diversified portfolio, emphasizing direct and unique deals around the globe.”

All asset classes generated positive returns apart from real estate equity, where sustained market headwinds affected valuations. Liquidity management was a key focus, including $1.25 billion in capital raised from BCI’s inaugural bond issuance, with an additional $1 billion raised in the subsequent reopening of the same series. Asset classes focused on rebalancing across strategies to pursue opportunities in a muted deal environment. More than 10 direct deals were executed, further diversifying BCI’s portfolio with entry into new sectors and geographies complementing our strong Canadian footprint. Opportunities in infrastructure debt increased, and three transactions were closed, increasing European exposure. Private debt deployments were substantial at US$2 billion, focusing on differentiated opportunities in the middle and lower middle markets and expanding the program to Asia. Within the infrastructure & renewable resources and private equity programs, an increasing focus on asset management boosted portfolio valuations and created $17.6 billion in value over five years and returned $31.1 billion in cash distributions to clients.

Long term, BCI continues to deliver consistent annualized results, returning 7.5 per cent over a five-year period, representing a cumulative value add3 of $2.2 billion. As a result, BCI’s combined pension clients, with investment horizons extending many years, maintain a healthy position with funding ratios ranging from 103 to 133 per cent.

“Generating consistent long-term performance is imperative for our clients as they require greater cash flows for their obligations as pension plans mature,” added Fyfe. “Looking at our annualized 10-year return, for our combined pension plan clients, we outperformed the benchmark by 0.7 per cent, representing $8.3 billion of value add, consistently exceeding our clients’ nominal and real actuarial discount rates.”

“Our one-year relative performance lagged the benchmark this fiscal. This was no surprise as the exponential growth of the ‘Magnificent Seven’ tech stocks resulted in a very strong combined pension plan benchmark hurdle. We build portfolios that provide clients with the risk-adjusted returns they require over the long term, and that’s where we will continue to focus on adding value.”

RETURN SUMMARY FOR THE COMBINED PENSION PLAN CLIENTS

HIGHLIGHTS
Corporate

  • Expanded our total employees to 770, growing the global team year-over-year by 8.3 per cent, including 34 professionals in the London and New York offices, strengthening our physical presence in these financial centres.
  • Moved to fully embed ESG into corporate reporting, including alignment with the IFRS Sustainability Disclosure Standards, and began development of an internal ESG data platform.

Public Markets

  • Exceeded $5 billion in cumulative participation in sustainable bonds.
  • Launched an unsecured debt program with an inaugural $1.25 billion senior unsecured 10-year bond offering, and a subsequent $1 billion reopening of the same series, with the highest possible long-
    term credit ratings.
  • Acted as an anchor investor in Overland Advantage, a direct lending platform established by Centerbridge Partners in partnership with Wells Fargo, which will also yield co-investment opportunities.
  • Executed $2.7 billion of deployments in Absolute Return Strategies, which delivered strong one-year performance exceeding 12 per cent.
  • Deployed net US$2.0 billion for the Principal Credit Fund and achieved the strongest one-year performance since the fund launched with a 13.3 per cent annual return for fiscal 2024.

Private Markets

  • Concluded the take-private of Costa Group, Australia’s largest produce supplier of fresh fruit and vegetables.
  • Closed on three infrastructure debt investments, increasing capital deployment in high-conviction sectors that benefit from decarbonization and digitization in the U.S. and Europe.
  • Committed US$300 million to Cube Highways Trust, the largest road platform in India consisting of 18 toll and annuity assets and made a separate commitment to the Cube Highways growth platform, CH5, which targets further investments in India’s transportation sector.
  • Closed an investment in A2 Motorway, a leading European public-private partnership motorway.
  • Participated in an additional financing round for British Columbia-based Photonic Inc., a quantum computing company, positioning BCI as one of their largest shareholders.
  • Committed a total of $2.9 billion to the private equity program, including $2.2 billion to fund investments, reinforcing strategic relations with existing managers, and allocated the remaining $700 million to existing private equity direct investments to support the companies’ growth.
  • Deployed $3.3 billion in the real estate equity program to high conviction and growth sectors such as data centres, student housing, residential, and industrial globally.
  • Committed $3.2 billion in real estate debt investments, including Verve, an off-campus student housing and apartment, and a cold storage distribution facility.

The 2023-2024 Corporate Annual Report is available at BCI.ca.

All figures are in Canadian dollars unless otherwise stated.

ABOUT BCI
British Columbia Investment Management Corporation (BCI) is amongst the largest institutional investors in Canada, with C$250.4 billion in gross AUM as of March 31, 2024. Based in Victoria, British Columbia, with offices in Vancouver, New York, and London, U.K., BCI manages a portfolio of diversified public and private market investments on behalf of its 29 British Columbia public sector clients.

With a global outlook, BCI integrates ESG factors into investment decisions and activities that convert savings into productive capital to meet clients’ risk and return requirements over time. Founded in 1999, BCI is a statutory corporation created by the Public Sector Pension Plans Act. For more information, visit BCI.ca or LinkedIn.


Except as otherwise indicated, returns are time-weighted rates of return (TWRR) as at March 31, 2024. All returns are net of all costs and fees. Investments are reported by the program within the asset classes as set out in the clients' Statement of Investment Policies & Procedures (SIPP). Benchmarks represent a weighted combination of multiple indices specified in the clients' SIPP. The indices may vary over time.


1 The combined pension plan clients reflect the investments of BCI's six largest pension clients: BC Hydro Pension Plan, College Pension Plan, Municipal Pension Plan, Public Service Pension Plan, Teachers' Pension Plan, and WorkSafeBC Pension Plan.
2 Gross assets under management exclude market values for The Funding Program, which are clients’ investment liabilities achieved through government bond repurchase agreements and unsecured bond issuance.
3 Cumulative value-add is the additional dollar return that BCI generated for clients in excess of client benchmarks through active investments, excluding the impact of the centralized currency management program after all costs and fees.
4 The Funding Program includes clients’ investment liabilities achieved through government bond repurchase agreements and unsecured bond issuance.

You can download and read BCI's corporate annual report here (click on PDF icon on top to read PDF version).

Alright, BCI is the last to report its annual results and they're in line with what other funds reported so the results aren't surprising. Solid returns powered mostly by pubic equities and private credit while real estate equity suffered from some writedowns.

I did reach out to BCI earlier today to see if I can get Gordon Fyfe or someone else to comment on results but haven't heard back and doubt I will since Gordon typically goes on vacation these two weeks between St-Jean Baptiste and Canada Day.

Let me begin with the overall highlights looking at the returns relative to benchmark:

Similar to most of its peers, BCI underperformed its benchmark last fiscal year as the Magnificent Seven large cap tech stocks made equity indexes a lot more concentrated.

However, over a 5,10, 15 and 20 year period, the fund has added considerable added value over its benchmark and that's why it's best to look at long-term results when looking at pension fund performance.

Next, have a look at BCI's asset mix which has moved more to private markets since Gordon's arrival ten years ago:

As shown above, 26% in Public Equities, 31% in Fixed Income, 15% in Real Estate Equity, 13% in Private Equity, 12% in Infrastructure and Natural Resources, 7% in Private Debt and 4% in Real Estate Debt (mortgages).

So there's a pretty even split now between Public and Private Markets at BCI.

This is important to note as asset mix explains most of the returns over the long run at these large pension funds, but the approach in privates is critical to generate alpha over the long run.

What else? The geographic distribution of assets is pretty much what's you'd expect, mostly in Canada (31%), the US (43%) and Europe (14%) but a sizable allocation in Emerging Markets (10%) where BCI takes a more active approach:

Next, let's move to the Chair Peter Milburn's letter in the annual report:


I note the following:

With this focus on talent top of mind, the BCI Board has been engaged in ensuring BCI stays competitive in recruiting and retaining a world-class workforce. As such, we continue to monitor the Equity, Diversity, and Inclusion (EDI) strategy implementation to ensure management is delivering on its commitment to cultivating a workplace that attracts diverse talent and empowers all team members to excel. This year, a key strategic deliverable was the employee engagement survey, and the BCI Board received a summary of the results, which offer valuable quantitative and qualitative insights into employee satisfaction. In addition to last year’s self- identification census data, these results will further drive management to identify initiatives that enhance all aspects of the employee experience and attract and retain the specialized talent BCI requires to deliver on its strategies and client obligations. In alignment with the strategy’s commitment to create intentionality and accountability, we are pleased to disclose Director diversity metrics in this report for the first time.

Acknowledging the significance of ESG factors, together with evolving market and client expectations, ESG governance remains a top priority for the BCI Board as well. We directed management to advance BCI’s ESG governance policy and reporting structures to facilitate board oversight of ESG activities. This included monitoring key performance indicators to consistently evaluate BCI’s progress and performance in integrating ESG into its investment strategy. Directors also received continuous education on emerging ESG-related factors that could have a significant impact on the organization. We encouraged management to deepen ESG integration through the creation of an ESG data platform and are pleased to see the progress made to date. We look forward to observing the ongoing evolution of this resource.

As part of the triennial review cycle, the BCI Board approved revisions to the Valuation Policy, Cost Recovery Policy, and External Auditors’ Independence Policy. Our policy work establishes the governance which guides BCI’s operations and this year, as a result of the prudent investment risk management frameworks established in our Investment Risk Management Policy, we witnessed BCI’s teams not only maintain but grow the liquidity position. Impressive in light of the cash flow constraints experienced worldwide. This enabled the investment teams to continue to execute multi-year strategies and source opportunities for capital deployment.

Peter Milburn also acknowledged and congratulated Gordon Fyfe for receiving the Order of British Columbia:

Lastly, I want to acknowledge and congratulate Gordon J. Fyfe on his appointment to the Order of British Columbia, and the efforts of everyone at BCI who helped make this recognition possible. I am grateful to BCI’s leadership team and employees for their staunch commitment to our clients. Our purpose is rooted in delivering value to our clients, and we are thankful for their continued trust in BCI.

Next, let's go over CEO/CIO Gordon Fyfe's letter in the annual report:


 I note the following:

The adverse environment experienced over the past several years has further underscored the benefits of building a well-diversified portfolio focused on high-quality assets, while expanding sources of returns with regard to geographies, asset types and strategies – including private debt, a space BCI entered just five years ago. A combination of prudent asset allocation and stringent liquidity management with regard to client portfolios enabled BCI to perform well amidst ongoing market volatility. Over the course of fiscal 2024, we added around six months to the liquidity coverage ratio, ending the year with approximately 19 months and still growing. Those robust reserves and sizeable stores of ‘dry powder’ further attest to our effective strategy and risk management frameworks.

Several noteworthy strategic initiatives, including the evolution of our Funding Program and the addition of unsecured debt, continue to be fundamental to strengthening BCI’s liquidity position. This past year saw the issuance of our inaugural debt offering – which was oversubscribed and, accordingly, re-opened just three months later – achieving a total raise of $2.25 billion. The program also received the highest possible long-term credit ratings from leading global agencies: Moody’s (Aaa), S&P (AAA), and DBRS Morningstar (AAA). Those stellar ratings speak to our exceptional investment and operational capabilities.

As regards debt, we have increased our private debt holdings from zero in 2019 to more than $15 billion. The strategy is performing well, and we have experienced no defaults in our internal portfolios. All credit to the team. The rapid growth of this program reflects an economic milieu that has created a challenging environment for borrowers – and interesting opportunities to address the alternative credit needs of non-sponsor, middle-market companies. So, in another first for BCI, we announced an anchor investment in a new venture between Centerbridge Partners and Wells Fargo that focuses on direct lending to North American mid- market companies. It stands to reason that infrastructure debt was also an important focus area for BCI this year as we sought to offer compelling risk-adjusted returns with lower volatility and high-yielding cash flow. This strategy has been in development since 2020, and we expanded our capital deployment in this space over the past year.

And in terms of performance during the last fiscal year, I note the following:

Closer scrutiny of our relative one-year performance confirms that we outperformed benchmarks for all asset classes except real estate equity and private equity, both of which faced difficult market environments. I wish to note as well that, current challenges notwithstanding, we remain confident in our rebalanced real estate portfolio, which mainly comprises warehouses, data centres, and multi- family housing. Over the past eight years, we have reduced our office weighting by nearly half to 19.1 per cent, holding mostly ‘Class A’ buildings with high occupancy rates. With respect to private equity, we should bear in mind that this asset class has been a star performer and was a major contributor to those record value-add results posted for the 2022 and 2023 fiscal years. However, macroeconomic factors impacting private equity markets have slowed deal flow dramatically over the past year and caused valuations to decline. Additionally, private equity is paired with an internal benchmark holding a public equity index which saw explosive growth driven by the so-called ‘Magnificent Seven1 ’ tech stocks that collectively make up more than 25 per cent of the S&P 500 index. Suffice to say that, given the extenuating circumstances, we anticipated this year’s underperformance by BCI’s private equity holdings.

Gordon also cited BCI's ESG leadership:

BCI remains firm in its commitment to manage risk and achieve long-term returns on behalf of our clients. We do this by using environmental, social, and governance (ESG) considerations as an integral part of our investment process. Two major ESG-related milestones were reached in fiscal 2024: surpassing the expected 30 per cent reduction in our public equities weighted average carbon intensity2 (WACI); and exceeding the expected $5-billion cumulative participation in sustainable bonds.

Those milestones were achieved ahead of schedule, and I am proud of our team’s ongoing work to support the global goal of net zero and align our portfolio to a low-carbon future.

And this is worth noting on operating on a global scale:

We are already well on the way to realizing that latter ambition: our New York and London offices have proven successful in numerous respects, facilitating the hiring and retention of world-class talent and bringing a global perspective that augments BCI’s access to investment opportunities and risk management. I should also note that our presence in Mumbai, India, has proven instrumental in opening doors for BCI on the subcontinent and in neighbouring ASEAN markets. Establishing offices abroad is not without logistical and cultural challenges. However, we are confident that any obstacles we encounter can be successfully overcome by drawing on BCI’s trademark ingenuity and teamwork.

Indeed, BCI is recruiting top talent in its global offices. Yesterday on LinkedIn, Jim Pittman, BCI's global head of Private Equity posted this on hiring Jon Salon as Senior Managing Director and Global Head of Healthcare:

 
 
If you want to understand why BCI and others are opening or have opened offices in New York, London, Singapore, Mumbai and elsewhere it's because they need to hire local talent to beef up their investment team and here's a perfect example.

Next, let's go over a Q&A with Daniel Garant, EVP, Global Head of Public Markets, Ramy Rayes, EVP Investment Risk and Strategy:

I note the following takeaway Ramy states on BCI's performance:

I’m quite pleased with our performance this year. We closed the fiscal year in the mid-seven per cent absolute return, significantly exceeding our clients’ nominal actuarial discount rate. Our clients even outperformed their real actuarial discount rate, which consists of the inflation rate plus a real return objective commonly set at 3.5 per cent. This is particularly remarkable given the high inflation environment we experienced in the last few months. All else being equal, when funds outperform their actuarial return objectives, surpluses are generated.

On a relative basis, many of our programs have outperformed their benchmarks over both short and long- term periods. The total fund lagged its benchmark this year mostly due to the significant benchmark mismatch in both real estate equity and private equity. In a year when cap rates rose significantly, it is expected that real estate assets will experience negative mark-to-market adjustments, and therefore we were not surprised by the underperformance relative to the absolute return benchmark of 6.8 per cent. With regards to private equity, we benchmark our program against a global equity index plus a spread, serving as a measure of opportunity cost between private and public investments. Public markets performed exceptionally well in the last quarter of 2023, particularly the big tech sector, whereas private market valuations typically lag in recognizing such improvements in value.

And this on what Daniel notes on headwinds in real estate and where opportunities lie:

While interest rates have affected recent valuations, our focus as a long-term investor is on the strength of our assets and overall portfolio, as well as our ability to withstand inevitable mark-to-market fluctuations. For example, QuadReal has significant exposure to high-performing sectors like industrial, residential, and alternatives that continue to drive performance. In sectors such as commercial real estate, which have experienced the most significant impact, its office spaces maintain an impressive occupancy rate of over 85 per cent, ensuring robust recurring cash flows for our clients. As interest rates normalize over time, we expect to see mark-to-market variances gradually reverse, reflecting the underlying value of these investments.

We see strong opportunities in alternatives such as data centres and logistics, and multi-family properties. These sectors offer attractive returns, diversification, and resilience to economic cycles. Real estate debt is also presenting interesting investment options as the market grows. Real estate is a diverse asset class with room to capitalize on a wide range of global trends and market dynamics. Even in sectors facing challenges, specific assets can present unique opportunities. QuadReal’s sector expertise, which combines operational excellence with agility in the development and allocation of the portfolio, ensures BCI has differentiated access to investment prospects.

I agree and recently wrote a comment on why I'm not worried about real estate bets roiling Canada's large pension funds.

On Private Equity, the 5 and 10-year return are 16% and 16.7% respectively, outpacing its tough public equities benchmark plus spread. 

Are things slowing down in Private Equity? You bet, everyone knows this, just look at Goldman's latest hire:

The good years in Private Equity are definitely over but Private Credit seems to be humming along nicely, for now:

I say for now because that asset class hasn't been battle-tested for a recession and it's coming:

And there are growing concerns about how some funds are valuing private credit:

All this to say, the next five years are going to be a lot tougher than the last five years across public and private markets.

I think BCI is well diversified and well staffed to manage through all this but don't kid yourself, tough times lie ahead for all asset managers including Canada's venerable Maple Eight, Nine,Ten, Eleven...

One thing I did notice is that BCI ramped up its absolute return strategies which performed nicely last year. I gather this is a mix of internal and external absolute return portfolios (ie. hedge funds).

 Liquid alpha might be a better place to generate alpha over the next couple of years, that's my hunch.

Alright, let me wrap it up, would have liked to have gone over the results with Gordon, Ramy, Jim or Daniel but it seems like everyone is away on vacation.

Take the time to read BCI's annual report here which has a lot more information including a great section on ESG featuring a Q&A with Jennifer Coulson, Senior Managing Director and Global Head of ESG who noted this on LinkedIn earlier: " This is the first year we have integrated ESG reporting into our Corporate Annual Report as we look to align with IFRS Sustainability Standards. Well done to the whole BCI team."

In fact, I like Jennifer, think she and her team are doing a great job, so I will embed that section below:



What else? Executive compensation which is based on 5-year results:

 


I note that Jim Pittman got the biggest raise and deservedly so based on 5-year results. 

Jim and his team were very active last year, revamping that portfolio, selling $1 billion plus to Ardian in PE stakes to diversify vintage year risk and just be prepared for the coming slowdown.

Alright, really need to wrap it up here, mommy is calling me to help with the baby.

I'll be back next week, have a great, long Canada Day weekend everyone!

Below, in fiscal 2024, BCI's Funding Program secured multiple triple-A long-term credit ratings and launched its first-ever unsecured debt issuance. Led by the public markets department, teams from corporate & investor relations, investment strategy & risk, and operations collaborated to launch this successful initiative. Hear about the vital role their operations teams played in this project.

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