Vestcor Loses 3.63% in 2022 Amid a Historically Challenging Year
Fredericton, NB – Atlantic Canada’s largest investment firm once again exceeded the long-term investment objectives of its clients, protecting the assets of clients and their members through a particularly challenging year in the financial markets. Vestcor Inc. (Vestcor), an independent not-for-profit company based in Fredericton, NB, offers global investment management and pension and benefit administration services to a number of public sector entities.
While many pension plan managers experienced double digit negative returns during a historically challenging year, Vestcor’s results provided reassurance that their lower risk approach required by many of their Shared Risk and Target Benefit Plan clients support the sustainability of these pension plans to the benefit of their members.
Vestcor achieved overall returns of -3.63% during 2022. This is particularly significant when compared to the median gross returns (pre-fee) of Canadian defined benefit pension plans, which was -10.3% for the same period, as noted in a recent report by RBC Investor & Treasury Services (RBCITS). More importantly, Vestcor’s longer term 4-year gross annualized pension plan return was 5.99% at year-end, comparing favourably to the 5.32% 4-year median return also reported by RBCITS.
Also of significance was the return realized above clients’ investment policy benchmarks. The active management activities of Vestcor’s highly specialized employees led to an outperformance of client-set benchmarks by a record 2.63% during the year, adding $538 million in value to clients. These additional returns have added 1.31% per annum or over $1 billion in investment earnings for clients during the most recent four-year period.
Vestcor’s administration service team continued to be challenged in 2022 by significant additional transactional processing volumes and member service inquiries, however they were successful in continuing to meet most client processing time targets.
In addition, Vestcor’s clients benefit from the organization’s cost-efficient, not-for-profit model. The investment management expense ratio was 0.14%, or 14 cents per $100 of average net assets, well below the average expense ratio of most investment management alternatives. Pension administration service fees also remained as the second most cost efficient as compared to a select group of national peers, at $98 per member, nearly $50 per member below the average from that group.
“We are very pleased to once again share how our not-for-profit client focused design allows us to cost effectively meet the return objectives of our clients.” said John A. Sinclair, President and Chief Executive Officer. “2022 was a particularly challenging year on many fronts. It was truly an outlier year. Consumers continued to re-emerge from the COVID pandemic during the year by rapidly trying to purchase a limited supply of goods and services, accelerating inflation concerns, while a combination of geopolitical events and central bank policy tightening actions all ended up negatively impacting financial markets. Consequently, both equity and fixed income markets contributed significantly negative returns in 2022 – which is not normal behaviour for financial markets. Our overall results however are further evidence to the long-term success of our low-risk approach, achieved by our specialized workforce.”
2022 also saw the launch of Vestcor’s inaugural Responsible Investment Report, available at vestcor.org/investments. The report speaks to the organization’s leadership in and commitment to providing clients with risk management services and tools that assist in developing sustainable long-term investment programs that continue to meet their objectives. Utilizing the guidelines of the Task Force on Climate-related Financial Disclosures (TCFD), the report also provides climate related greenhouse gas emissions disclosure for our consolidated core public securities investment portfolio.
ABOUT VESTCOR
A Partner in Creating and Delivering Sustainable Financial Security.
Located in Fredericton, New Brunswick, Vestcor provides global investment management services to 10 different public sector client groups representing approximately $20.0 billion in assets under management as at December 31, 2022, and administration services to 11 public sector pension plans and 4 employee benefit plans.
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 public sector entities. Vestcor currently services the requirements of over 111,000 individual plan members and 140 participating employer groups.
The full 2022 Annual Report, including Vestcor Inc.’s financial statements, is published in June 2023 and available at vestcor.org/annualreports. Further information about Vestcor is available online at vestcor.org.
I waited till now to discuss Vestcor's results because I wanted to view the annual report which is now available here.
Let's begin by reading the Chair Michael Walton's message below:
Next, let's read CEO John Sinclair's message below:
I note this part on investment management:
As mentioned above, our low-risk investment management approach performed well in 2022 during a period where most equity and fixed income markets achieved significantly negative returns. This approach, along with the significant additional value-added returns created through our investment team’s active management approach, resulted in relatively stronger overall total fund returns for those shared risk /target benefit plan clients and other pools of capital to whom we provide investment policy advice.
For example, the RBC Investor & Treasury Services (RBCITS) median Canadian defined benefit pension plan gross pre-fee return for 2022 was -10.3% versus the -3.63% total return experienced by the overall Vestcor composite return for the pension plans we manage. More importantly, our longer term 4-year gross annualized pension plan return of 5.99% also exceeds the RBCITS comparative median annual return of 5.32%.
In addition to this gross return differential, Vestcor’s lower investment management costs have continued to provide additional comparative benefits to our clients in this challenging environment. Most importantly, our long-term investment performance continued to exceed the long-term funding targets of our clients, while being achieved with much lower realized risk than traditional defined benefit pension plans as required by their legislated requirements. Client performance is reported to their members through their own communication process, and many of these reports are available through their respective sections of our website.
Investment returns relative to our clients’ investment policy benchmarks reached another record high due to the strong active management performance from each of our four investment teams: private markets, equity, quantitative investments, and fixed income. Our investment performance outperformed client benchmarks net of investment expenses by 2.63% during the year, which represented approximately $538 million in additional value added. Over a longer four-year period, we have exceeded both the blended client investment policy benchmarks and our investment management costs by 1.31% per year. This performance has provided our clients with additional returns totaling over $1 billion of investment earnings over their investment policy benchmarks during the four-year period.
Total assets under management dropped in 2022 to $19.9 billion from $21.0 billion in the prior year. This decrease in assets resulted from $557 million in net investment interest and dividend income, a $(1,368) million decline in net investment valuations, client payouts of $(945) million and $623 million of additional client capital contributions.
As far as where the value add came from, as shown below, it came from alternatives:
The discussion states this:
We manage separate internal portfolios that provide exposure to a variety of securities, markets and strategies managed using both traditional and quantitative approaches. Meaningful allocations to these portfolios combined with a well-developed risk budgeting framework allow the strategy to achieve the goal of positive, low risk returns without taking on the unintended risk exposures that can often be found in traditional multi-strategy absolute return portfolios such as hedge funds. While each strategy is managed in a diversified and prudent manner by a particular 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 the most favorable locations where necessary the strategy has been successful in producing significant positive returns with minimal correlation to traditional markets and less than half the volatility of traditional hedge funds.
In 2022, the Absolute Return Strategy generated returns of 8.56%, with positive contributions from both the fundamental and event driven and quantitatively managed sub-portfolios.
Vestcor’s private equity portfolio is diversified across geography, sector and currency, and investments are made through a combination of commitments to external funds, co-investments alongside fund managers and direct internally managed investments. In 2022, the portfolio gained nearly 8% and significantly outpaced its public equity benchmark for the year, which earned a -12.15% return for the year. Over the longer- term four-year period, private equity has returned nearly 17% per year, outperforming the portfolio’s Public Equity benchmark by nearly 8% per year.
The Real Estate portfolio has two 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. The newly formed Real Assets team deployed significant capital in direct Real Estate investments during 2022, and despite the volatility of 2022, the combined portfolio earned a return of nearly 4.6% vs. a benchmark return of 4.5%.
Vestcor’s Infrastructure portfolio has two components: first, private infrastructure in the form of both fund commitments into limited partnerships as well as co-investments (diversified by geography, currency and by asset type) and second, an internal public infrastructure portfolio that is designed to provide similar long-term return and risk characteristics as private. In 2022, the combined strategy earned strong returns of 13.05%, compared to a benchmark return of 8.9%.
Now, I did briefly chat with Vestcor's CIO Jon Spinney about the overall results and he told me they're more cautious and are looking to manage risk carefully across public and private markets.
Similar to CAAT in many ways, their hedge fund portfolio came through nicely and the long-term returns in Private Equity are solid. Infrastructure also posted solid returns last year and Real Estate was fine but had some challenges in Offices.
In my opinion, what is missing in Vestcor's discussion is charts showing the sector and geographic diversification by private market asset class.
I also would have liked to have seen a detailed discussion on currency hedging and how much that contributed to overall results.
But I can tell you John Sinclair, Jon Spinney and the entire Vestcor team are doing a great job to the point where I would recommend the organization manages all the public pensions of Atlantic provinces, not just New Brunswick.
What else? Similar to CAAT, I see Vestcor one day offering DB plans to employers looking to expand their retirement offerings to employees.
Lastly, on compensation, I read the section carefully and think Vestcor pays its senior executives very fairly for the long-term results they produce:
Keep in mind, similar to CAAT Pension Plan and OPTrust, Vestcor manages $20 billion in assets, so it's not that small and it's an important Canadian pension investment manager and administrator.
Below, a recording of the New Brunswick Public Service Pension Plan's Annual Information Meeting on September 22, 2022 in Fredericton, NB. Fast forward to minute 31 to listen to CEO John Sinclair.
Note: I will replace this clip once the new one is available in September to go over 2022 results.
Update: Vestcor's CIO Jon Spinney shared this with me after reading this comment:
I thank Jon for providing me these charts and informationThanks for the coverage of Vestcor this week. I saw in your comment that you made the following observations:
“In my opinion, what is missing in Vestcor’s discussion is charts showing the sector and geographic diversification by private market asset class.
I also would have liked to have seen a detailed discussion on currency hedging and how much that contributed to overall results.”
We do use this information in portfolio construction to build a complete public + private markets portfolio, and we do provide it in regular reporting for individual trustee groups, but since some client portfolios we manage can look quite unique based on when they initiated allocations in an asset class, the “Vestcor total fund” report is not always representative of the reality for individual clients. As a result, we haven’t historically included that as part of Vestcor’s annual report to minimize confusion but will consider it going forward.
For Real Estate, Vestcor’s portfolio size positions us nicely to be able to source attractive deals in high quality markets primarily within Canada, although we do have international diversification as well. From a sector diversification perspective, the portfolio remains nicely balanced (all figures as of Dec 31, 2022):
Vestcor’s Private Infrastructure portfolio is well balanced from a geographic and sector perspective:
As is our private equity portfolio:
From a currency hedging perspective, as a policy, our clients maintain foreign equity allocations unhedged to $CAD as a risk management and liquidity enhancing strategy for most assets with foreign currency fixed income fully FX hedged, although Vestcor maintains discretion to hedge or un-hedge FX risk where it makes sense to reduce risk or manage exposures. In the past, this has been done tactically during periods of extreme market movements (e.g., during 2020) or more strategically within foreign private market portfolios. Overall, a situation where $CAD is broadly weaker such as 2022 would be accretive to our returns relative to a hedged strategy.
Comments
Post a Comment