BCI Gains 6.1% in Fiscal 2019

The British Columbia Investment Management Corporation (BCI) announced an annual combined pension return, net of costs, of 6.1 per cent for the fiscal year ended March 31, 2019, versus a combined market benchmark of 4.5 per cent. This generated $2.0 billion in added value for BCI’s pension plan clients:
The excess return was largely driven by the outperformance of our private assets, finishing the fiscal year with significant returns from both income generation and capital appreciation. BCI’s managed net assets increased to $153.4 billion from the previous year —reflecting investment gains of $9.0 billion, partially offset by $1.2 billion of client distributions.

As pension plans have long-term financial obligations, BCI focuses on generating long-term client wealth while protecting the value of the funds. Returns are important – for every $100 a pension plan member receives in retirement benefits, on average $75 is provided by BCI’s investment activity. Over the five-year period, the annualized return was 8.2 per cent against a benchmark of 7.1 per cent, adding $6.1 billion in value. Public equities, which represents 40.5 per cent of the overall portfolio contributed more than half of the fund’s overall return and excess return for the five-year period. For the 10-year period, the annualized return was 9.8 per cent against a benchmark of 8.6 per cent. BCI added $10.9 billion in value over this period.

“Our results reflect solid performance from all asset classes despite the uncertainty and volatility in the markets,” said Gordon J. Fyfe, CEO/CIO of BCI. “These contributions signal the success of our strategic focus since 2015 of adopting an active, in-house approach that emphasizes private markets. Adding $6.1 billion in value over the last five years is a proud accomplishment for the entire BCI team. Our investment decisions go a long way towards building the financial futures for our clients in the province of British Columbia.”

As at March 31, 2019:

Public Markets composed of fixed income and equity investments, represents $94.9 billion and totalled 61.8 per cent of assets under management. BCI’s fixed income program’s assets, including Other Strategies were $32.7 billion. The program invests in public and private market debt, as well as oversees our exposure to foreign currency. For fiscal 2019, we introduced a private credit fund and a change in mandate of our Corporate Bond Fund. Our public equities program represents $62.2 billion and 40.5 per cent of assets under management. In fiscal 2019 we internalized about $6.5 billion of net assets, shifting our reliance on external managers to internal management where we seek opportunities to invest directly in public companies as well as cost-effective index programs.

Real Estate represents $24.3 billion and 15.8 per cent of assets under management. QuadReal Property Group, a company owned by BCI and created in 2016, actively manages our clients’ real estate investment portfolios. The program’s domestic assets totalled $17.4 billion and global assets totalled $6.9 billion. Most of the growth was attributed to increased allocations to Europe and Asia Pacific, as well as continued growth within North America. For the year ended December 31, 2018, QuadReal committed $3.1 billion to the global program increasing global assets to 28 per cent of the overall portfolio, compared to 24 per cent in the year previous.

Private Equity represents $13.0 billion and 8.5 per cent of assets under management. With a sector-focused strategy, the program invested a total of $1.8 billion to nine principal investments, increasing the ratio of principal investments to total AUM to 32 per cent. Acquisitions included Verifone Systems, a global provider of payment and commerce solutions, and Springs Window Fashions, a market leader in window coverings specializing in made-to-order products. We committed $3.0 billion to 15 funds, including six commitments to new strategic relationships.

Infrastructure represents $12.8 billion and 8.4 per cent of assets under management. Our program 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, 2018, we committed $1.2 billion in infrastructure assets. Notable investments were acquiring an equity interest in GCT Global Container Terminals Inc., a North American container terminal operator; and increasing our equity position in Puget Sound Energy, a Washington State-based utility company.

Mortgage represents $5.4 billion and 3.5 per cent of assets under management. BCI is a significant lender to the commercial real estate industry, focusing on direct mortgage investments with strong-yielding and attractive risk-return profiles. We have a well-established Canadian mortgage program and, as a global investor, we have expanded the program into the U.S. to provide clients with geographical diversification. Our commitments to both domestic and U.S. commercial mortgages totaled $3.7 billion for the fiscal year.

Renewable Resource represents $3.0 billion and 2.0 per cent of assets under management. We invest 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. We successfully closed on our first direct U.S. timber transaction, increasing the program’s allocation to both timber and direct investments.

Our costs

BCI’s total costs were 58.4 cents per $100 of net assets under management; compared to 65.4 cents in fiscal 2018 — consisting of internal, external direct, and external indirect costs, all of which are netted against investment returns. By increasing the percentage of assets managed by BCI’s investment professionals, we have transitioned from a reliance on third parties to a more cost-effective model of managing our clients’ illiquid assets. Internal costs are operating costs directly paid by BCI and include salaries, rent, and technology and consulting fees, representing 24.1 per cent of costs for the fiscal year (or 14.0 cents per $100 of net assets under management). External direct costs are investment management fees paid to third parties to manage assets and include fees to asset managers, auditors, custodian, etc., where BCI has discretion over the buy and sell decision of the asset, representing an estimated 27.2 per cent for the fiscal year (or 15.9 cents per $100 of net assets under management). External indirect costs are investment management fees incurred on our behalf by BCI pooled investment portfolios to general partners, who have discretion over the buy and sell decision of the asset. These costs are disclosed for transparency based on underlying reports provided by these third parties and are 48.7 per cent of costs for the fiscal year (or 28.5 cents per $100 of net assets under management).

Fiscal 2019 Highlights
  • Increased internally managed assets to 79.3 per cent from 73.3 per cent in Fiscal 2018 by our continued focus on direct investing, the introduction of the Principal Credit Fund, as well as internalizing about $6.5 billion of net assets previously managed by external public equity managers.
  • Committed $13.1 billion to illiquid assets — infrastructure, mortgage, private equity, real estate, and renewable resource. Notable direct investments included: Verifone Systems, GCT Global Container Terminals Inc., and increasing our equity position in Puget Sound Energy.
  • Added 74 employees to BCI, strengthening our expertise in the areas of portfolio management, asset management, risk management, information technology, and corporate and investor relations.
  • Completed final phase of the transfer of property and asset management of real estate investments from BCI’s former external property managers to QuadReal Property Group.
  • Publicly released BCI’s Climate Action Plan and Approach to the Task Force on Financial Disclosures Recommendations.
About BCI

With $153.4 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; mortgage; public and private equity; real estate; infrastructure; and renewable resource.
Take the time to read BCI's corporate Annual Report 2018-2019 here. Also, take the time to read BCI's 2018 Responsible Investing Report here.

I note the following from Peter Milburn, Chair of BCI's Board of Directors:
This past year, the board approved and established a benchmark governance policy to develop a transparent, objective, and structured process for setting investment and compensation benchmarks and excess return objectives. We recognize that benchmarks and excess returns are important instruments for investment performance measurement, incentive compensation, and risk management.
I also note the following from Gordon Fyfe, BCI's President & CEO/ CIO:
When I joined BCI five years ago, we set out to better meet our clients’ investment return objectives by shifting our investment focus to private markets and global equities, and securing greater, direct control over investment activities. Today, our in-house, active asset management model is firmly established to deliver on this commitment. However, we continuously benchmark ourselves against the best and constantly seek to improve. BCI remains focused on continuing to internalize the management of more assets within both private markets and public markets, expanding and diversifying our investment strategies, and strengthening our talent pool and technology.

In fiscal 2015, approximately 57.0 per cent of our clients’ assets were internally managed and, today, that percentage has increased to 79.3 per cent. And with no immediate need for liquidity, BCI can take advantage of less liquid opportunities that others cannot — embracing more value-added investment strategies that go toward managing the probability of meeting our clients’ long-term return expectations.

While the markets have been more volatile and the near-term outlook uncertain, the fundamental drivers of returns strongly suggest we are operating in a low return environment for the forseeable future. A large part of BCI’s success is now attributable to our ability to deploy our clients' capital into the private markets. This year we committed $13.1 billion in the illiquid markets, expanding our direct investments and increasing our global exposure.

I thank our team for executing on BCI’s model, both in terms of investment strategy and resulting performance.
When Gordon joined BCI five years ago, I stated it was to shift the strategy away from public to private markets and to internalize as much as possible to lower overall costs. And that's exactly what they've done.

Look at the table below which provides details on the weightings of assets under management as at end of March 2019 (end of fiscal year):

As shown, 38.2% are in private markets and 61.8% are in public markets.

In this regard, BCI trails its larger peers that have more in private markets, especially in Private Equity and Infrastructure where the weightings are 8.5% and 8.4% respectively (others have over 10% in both).

Next, have a look at BCI's regional allocation of assets under management as at end of March 2019:

As shown, 41.3% of the assets are in Canada, way more than its peers.

For the longest time, I was criticizing BCI for having too much Canadian real estate exposure but this year, BCI's record $7 billion real estate partnership with RBC Global Asset Management was a stroke of genius to diversify its real estate holdings outside of Canada while keeping a percentage of great local assets.

Diversifying real estate holdings outside of Canada will also bring BCI in line with its large Canadian peers which are much more globally diversified across public and private markets.

Next, let's look at the summary of returns by asset class for the combined pension plan clients over the last 15 years:

As shown, over the last fiscal year, Private Equity had the best returns, 16.5%, trouncing its benchmark which delivered 0.7%. That benchmark in Prive Equity is a joke, it's not reflective of the investment risks being taken but I still applaud the great returns Jim Pittman's team delivered.

Next, Renewable Resources delivered 13.2%, outperforming its benchmark return of 7% and Global Real Estate gained 12.2%, outperforming its benchmark of 6%.

Infrastructure gained 9.9%, outperforming its benchmark which was up 7%.

In Public Equities, both Canadian and Emerging Markets underperformed their benchmark and in Fixed Income, short term and nominal bonds outperformed their benchmark.

The story is pretty much the same as other large Canadian pensions, most of the outperformance came in private markets, especially private equity.

Jim Pittman and his team are doing a great job and the co-investments are now delivering better returns than fund investments. Still, they need to deploy more capital and do more co-investments to lower overall fees and bring up the weighting of PE relative to the overall portfolio.

All in all, it was a very solid year for BCI and I like the way they report their costs.

I think a lot more work needs to go into explaining benchmarks for private markets and linking them to overall compensation but this seems to be a work in progress.

In terms of compensation, the summary compensation table below was taken from page 46 of the Annual Report:

Long gone are the days when Gordon Fyfe was clearing $5 million+ at PSP but since 2003 he has made over $50 million gross in compensation as the leader of PSP and BCI so he has done extremely well for himself.

Looking at the table, I think Jim Pittman is underpaid relative to his colleagues since PE has produced the highest returns over the last 5 years and most added value (and I'm not saying that because I like Jim, I'm being brutally honest).

Anyway, solid results at BCI for fiscal 2019 and they're executing on their strategy. I hope they also fixed up the culture at the organization and boosted morale which was at an all-time low last year following mass layoffs of the equity team (that was a royal screw up!).

The other thing I'd ask of BCI is that every year, either Gordon Fyfe or Daniel Garant, SVP Public Markets, do a video clip going over the highlights and post it on YouTube. Communication isn't BCI's strength, they're getting better but it's still too sporadic, too secretive.

Lastly, a personal message to Gordon Fyfe, you owe me a breakfast the next time you're in Montreal. I loathe breakfast meetings but for you, I'll make an exception as we have a lot of catching up to do.

Below, headquartered in Vancouver, Canada, QuadReal Property Group is a global real estate investment, operating and development company. The company’s $27.4 billion real estate portfolio spans 23 Global Cities across 17 countries. QuadReal was established to manage the real estate program of British Columbia Investment Management Corporation (BCI), one of Canada’s largest asset managers with a $153.4 billion portfolio.