BCI Publishes Its Corporate Annual Report For Fiscal 2023

Today, BCI published its Corporate Annual Report for Fiscal 2023:

VICTORIA, BC – British Columbia Investment Management Corporation (BCI) today released our Corporate Annual Report for the year ended March 31, 2023. The report outlines how BCI’s adaptability to rapidly changing market conditions resulted in the greatest one-year value add for the second year in a row.

“Our fiscal year unfolded in an environment of heightened volatility and uncertainty. It is a testament to the exceptional calibre and commitment of our team, and their ability to adapt to abruptly changing circumstances, that we were able to skillfully navigate through the turbulence and deliver strong investment results for our clients,” said Gordon J. Fyfe, Chief Executive Officer and Chief Investment Officer. “I take pride in what we have accomplished in trying circumstances, and wish to express my appreciation to all the remarkable people throughout the corporation who share the credit for our success.”

In addition to the Annual Returns released on June 27, 2023, the 2022-2023 Corporate Annual Report provides a summary of our annual activities.

During the year, BCI achieved many investment and operational milestones, key highlights include:

• BCI delivered the strongest year of outperformance to date, delivering 3.2¹ per cent above the Combined Pension Plans² benchmark, resulting in $4.6 billion in value add for our clients due to our diversifying public and private market investment strategies.
• Gross assets under management³ grew to $233.0 billion as we further develop our actively managed strategies and internal management, enabling us to continue to build meaningful futures for our clients no matter the market environment.
• Our commitment to environmental, social, and governance (ESG) is deeply ingrained within our organization, reflected in our investment beliefs, ESG principles, and the application of our ESG Governance Policy. This year we appointed a Global Head of ESG and grew the ESG team to 16 professionals.
• In a highly competitive market for top talent, we continued to seek out, welcome, and engage the world’s best and brightest to work on our clients’ behalf and grew our workforce to more than 700 professionals. We were once again recognized as one of Canada’s Top 100 Employers, one of Canada’s Top Family-Friendly Employers, and one of BC’s Top Employers.

Further information on our initiatives and activities can be found in our updated 2024-2026 Business Plan, also released today. Guided by our Long-Term Vision, four strategic ambitions form the basis of our business plan: Strengthening the Client Value Proposition, Optimizing Risk-Adjusted Returns, Leveraging Digital Technology, and Focusing on Our Talent— including progress around equity, diversity, and inclusion.

Our 2022-2023 Corporate Annual Report and 2024-2026 Business Plan are available on BCI.ca/reports.

ABOUT BCI
British Columbia Investment Management Corporation (BCI) is amongst the largest institutional investors in Canada with C$233.0 billion in gross assets under management, as of March 31, 2023. Based in Victoria, British Columbia, with offices in Vancouver, New York City, and London, U.K., BCI manages a portfolio of diversified public and private market investments on behalf of our 32 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.

CONTACT
Olga Petrycki, Director, External Stakeholder Engagement media@bci.ca

¹ Includes the impact of the centralized currency management program.

² The Combined Pension Plans reflect the investments of BCI’s six largest pension clients, namely: BC Hydro Pension Plan; College Pension Plan; Municipal Pension Plan; Public Service Pension Plan; Teachers’ Pension Plan; and WorkSafeBC Pension Plan.

³ Gross assets under management are shown net of leverage issued by QuadReal Property Group and include clients’ investment liabilities achieved through government bond repurchase agreements managed by BCI’s funding program.

Take the time to read BCI's 2022-2023 Corporate Annual Report as it is packed with a lot of information (click on PDF icon as it's the best way to read it, not the other way).

Recall, I recently went over the results here but stated I will revisit them when the report is released and more details are provided.

Here are some highlights from the Annual Report:

 

 

Note, the majority of BCI's assets are in North America (Canada is at 29%, US at 41%), followed by Europe (14%) and Emerging Markets (12%) and APAC only stands at 4%. 

The overweight position in emerging markets which almost has as much assets as Europe is a bit surprising but BCI has adopted an active management approach there (still, from a risk perspective, it's volatile in a rising rate environment).

Next, let's go over BCI Chair Peter Milburn's message:

I note the following:

The Board conducted its triennial review of the CEO/CIO succession planning process, and also its annual review of the CEO/CIO succession plan. Ensuring leadership continuity is a standing priority, and we took this opportunity to update BCI's process in accordance with current industry best practices. Specifically, we focused on enhancing stakeholder engagement during future successions.

This year, consistent with best practices, we conducted the triennial review of BCI's compensation structure to ensure we are competitive in the market, allowing us to attract and retain top talent. Based on the review findings, the Board approved revisions to BCI’s Compensation Philosophy, Annual Incentive Plan (AIP) and Long-Term Incentive Plan (LTIP) policy. These changes further align employee interests with those of our clients and bring BCI's LTIP in line with industry standards. Throughout the year, the Board and Human Resources and Governance Committee (HRGC) also prioritized talent-focused initiatives to maintain BCI’s standing as an employer of choice.

Two things. First, Gordon Fyfe is no spring chicken. By his own admission to me last summer, he's the oldest among his peer group and they tease him for being the granddaddy of the group (he's over 60 but not that old and remains in decent shape which is what counts).

Second, as you will see below, BCI has significantly bumped up its compensation with the CEO/CIO getting the most significant bump up but others also enjoying prosperous times at BCI.  

Whether or not everyone at BCI deserves a high level of compensation is a matter of debate (some do, many don't) but it's clear they bumped it up to attract people to Victoria (whether it's the right people with the right attitude is another topic for debate).

Alright, let's move on to the message from CEO/CIO Gordon Fyfe:

BCI posted Gordon's message on LinkedIn so it's worth going over it as he hasn't given any interviews to anyone and is probably off on vacation:

BCI’s latest fiscal year unfolded in an environment of heightened volatility and uncertainty, largely resulting from Russia’s February 2022 invasion of Ukraine. The outbreak of war in Eastern Europe gave rise to a confluence of risks that included runaway inflation, escalating interest rates, a banking crisis, and — for the first time in decades — significantly heightened geopolitical unrest. It is a testament to the exceptional calibre and commitment of our team, and their ability to adapt to abruptly changing circumstances, that we were able to skillfully navigate through the turbulence.

The market turmoil was, in fact, expected. I had been cautioning clients for the past year that more challenging times lay ahead, and we had taken steps to brace ourselves against the forecast headwinds. In terms of preparedness, BCI’s portfolio of diversified public and private market investments, most of which are actively managed in-house, allow a flexibility and responsiveness to changing market conditions that helped us deliver strong performance. While seeking out opportunities to leverage BCI’s competitive advantages, namely our ample liquidity and long-term investment horizon, to capture quality investments at fair prices, we intensified our focus on providing downside protection for clients’ assets through stringent risk management.

Performance Highlights

Although BCI is not immune to the prevailing market volatility — no investor is — our proactive approach to risk management was reflected in a resilient investment performance for the fiscal year, 3.5 per cent, compared to the benchmark result of 0.3 per cent. This 3.2 per cent outperformance added $4.6 billion in value for our pension plan clients and is the second year in a row we delivered our strongest-ever one-year relative return, an achievement I am delighted to recognize. However, given that our clients have a long-term view of things, it is important to not focus solely on short-term results. Accordingly, I should note that over the five-, 10-, 15- and 20-year return periods we also exceeded the benchmark returns, and delivered the actuarial required rate of returns our pension and insurance clients need to meet their future obligations.

With the chaos in public markets, our diversification into private assets again played an important role in driving BCI’s outperformance against key benchmarks. Private equity had an exceptionally active year, committing a record $9.8 billion through both direct investments and funds. Among noteworthy transactions, we acquired a significant minority stake in Authority Brands, a residential services platform with 15 brands that provide industry-leading residential and care-giving services from 1,900-plus locations throughout the United States and the world. BCI led this minority investment, investing alongside funds advised by an existing investment partner. We also made our largest direct, private equity commitment to date with Maxar Technologies, a global space technology and intelligence company whose customers include SiriusXM and NASA. This is an exciting opportunity which also involved an investment by our private debt team.

BCI’s infrastructure & renewable resources program coinvested in two ground-breaking businesses capable of accelerating the global green-energy transition: as part of a consortium, we acquired Reden Solar, which builds and operates solar power plants across Europe and Latin America; we also acquired a stake in Eku Energy, a global battery storage platform that is playing an important role in decarbonizing electricity grids.

Transactions such as these demonstrate the strong global network of investment partners BCI has built in recent years — stalwarts who stood by us during the pandemic and continue to steer some very good deals our way.

BCI’s gross assets under management reached $233.0 billion, as at March 31, 2023. BCI's funding program, which provides clients with access to policy leverage, has grown to nearly ($18 billion) in size, and played a significant role in our performance this fiscal year.

Access to leverage enables clients to increase the potential return by broadening their investment footprint, diversifying their exposure and increasing access to liquidity.

Performance Focused

Our proactive approach to risk management was reflected in a resilient investment performance for the fiscal year.

Clients First

BCI’s ‘Clients First’ value is the driving force behind all our investment and operational decision-making, and clients evidently appreciate how we do our utmost to help them build financially secure futures for their beneficiaries, challenging times notwithstanding.

We conduct client satisfaction surveys every two years, and our team received a first-quartile performance ranking in the latest assessment, compared to other home-grown and global asset managers serving the Canadian market. I am exceedingly pleased and proud of the level of confidence and high regard in which clients hold BCI — even during tough times such as the protracted COVID-19 pandemic, when clients and relationship managers had to adapt quickly to new ways of engagement. The positive results are a testament to living our values.

As the COVID-19 pandemic receded and in-person events resumed, we staged our first hybrid Investor Day in January 2023. It was a pleasure to address approximately 100 trustees and client representatives in person and online, and to reconnect with many people I had not seen since the outset of the pandemic. The event facilitated important discussions between clients and investment teams as a new calendar year began.

Advancing ESG

We advanced several significant measures on the environmental, social and governance (ESG) front this year. BCI’s ESG Governance Policy was revised by the Board of Directors working with management, and we released an updated version of our Climate Action Plan. As well, we further refined our Proxy Voting Guidelines to incorporate increased expectations of public companies with respect to ESG matters, including diversity and climate, and appointed our first global head of ESG.

Integrity

BCI is strongly committed to equity, diversity and inclusion (EDI), and has been a leading advocate for an increased role for women in investment management.

People and Culture

Crucially, we demonstrated BCI’s capacity to adapt to change with regard to talent and the work environment: after a near two-year absence from office-based work, I was delighted to welcome people back to the office while maintaining elements of flexibility through the adoption of a hybrid model, whereby most employees now operate on a three-days in office and two-days working from home schedule. Kudos to all the teams involved in facilitating this transition.

In keeping with our strategy to further extend BCI’s geographic reach and unlock new opportunities for diversification, fiscal 2023 saw the opening of an office in London, U.K., and the establishment of a foothold in Asia, along with a significant scaling up of the New York office.

We constantly seek top-tier talent and, despite being headquartered away from the major global investment hubs, BCI has built a world-class team of more than 700 employees. Still, given today’s exceedingly competitive environment with respect to human capital, we are focusing on talent risk management and retention. Working with our Board of Directors, we revised BCI’s Compensation Philosophy, including incentive elements, to bring them in line with current industry best practices. Other talent-related initiatives included the implementation of career pathing for team members and advancing succession planning in the senior ranks of the organization.

BCI is strongly committed to equity, diversity and inclusion (EDI), and has been a leading advocate for an increased role for women in investment management. Over the course of the past year, we demonstrated our resolve to “walk the talk” in that regard, promoting and recruiting several accomplished women to senior investment positions. I want to congratulate Jennifer Coulson, who spent the past decade at BCI assembling a world-class ESG team in public markets, on her new role as Senior Managing Director & Global Head, ESG. As well, I would like to formally welcome several outstanding newcomers to BCI, including: Lea Dubourg-Hrachovec, who will lead our London office as Managing Director; Rhonda Ramparas, Senior Managing Director and our first private equity hire in New York City; and first employee in India, Mumbai-based Helly Ajmera, who as Director & Head of India Investments will help grow our infrastructure & renewable resources footprint in Asia.

World Class

BCI has built a world-class team of more than 700 employees.

The Road Ahead

At this writing in early June, Canadian markets were digesting the Bank of Canada’s surprise announcement of a quarter-point increase in its benchmark interest rate to 4.75 per cent — the highest level since 2001 — and it was unclear whether or not other central bankers will attempt to stay the course on interest rates in order to rein in stubbornly high inflation. Given the stress in the global banking system, this could lead to a credit crunch and other forms of financial contagion. What remains clear is that we will continue seeing a more difficult landscape for investors. Nevertheless, BCI is capable of again rising to the challenge, and our clients can rely on us to be forthcoming with respect to whatever twists and turns the path forward takes.

I take pride in what we have accomplished in trying circumstances, and wish to express my appreciation to BCI’s Board of Directors, fellow members of the Executive Management Team and all the remarkable people throughout the corporation who share the credit for our success. Finally, thanks to our clients for the trust you place in BCI. We strive each day to maintain it.

Gordon J. Fyfe

Chief Executive Officer / Chief Investment Officer

A couple of points here. First, while BCI gained 3.5% last fiscal year outperforming its benchmark which gained 0.3%, I wouldn't highlight this too much. In fact, apart from BCI, I've seen a few large Canadian pension investment managers state how they added "record value add" last year when stocks and bonds got clobbered from historically high inflation.

The devil is in the details. What are those benchmarks at BCI across public and private markets? And if as others are doing, half the assets are in private markets which are not marked to market, it's a cake walk to beat the overall benchmark made up of public market benchmarks or "cost of capital" (whatever that means).

For example, below I show you the combined pension plan returns at BCI fro Public and Private markets along with the corresponding benchmarks:

 

A detailed analysis of value add in the annual report would show exactly what those benchmarks are and whether they reflect the risks taken in the underlying portfolio.

Also, one-year is meaningless in the pension world, value add and compensation especially should be measured over a four or five year period. But again, we need to know exactly what the benchmarks are and whether they reflect the risks taken in the underlying portfolio.

This goes for all of Canada's Maple Eight, not just BCI, we need an independent study of benchmarks, value add and compensation across all these funds to see who is beating tough benchmarks and who is blowing smoke up their clients' you know what.

All this to say that I'm definitely not impressed BCI added significant value add last fiscal year when stocks and bonds got whacked hard and I can say the same about other funds making similar silly claims (big deal, let's see how you all perform in a brutal five year bear market, then I will be impressed).

Now, this isn't to take anything away from BCI's teams, some of which performed very well on a relative basis last year, like Public Equities:

I do not know if these numbers incorporate leverage and hedge funds but they are impressive.

Next, have a look at Fixed Income's performance:

Now we know why BCI's Head of Public Markets, Daniel Garant, wanted to load up on private debt. On a one-year period, Private Debt generated positive returns of 4.6% and outperformed the benchmark by 2.5%, allowing them to beat their overall FI benchmark.

As far as Private Markets, here too, pay attention to benchmarks and more important to look at long-term performance:

 

It is worth noting that long-term performance counts in all Private Markets and I would say BCI's teams are doing a great job there. 

In Real Estate, QuadReal, BCI's real estate subsidiary, continues to diversify the portfolio geographically and by sector, overweighting Residential (33%) and Industrial (31%) but it still has a material exposure (22%) to Offices in Canada and the US.

No word on what writedowns they are taking there or have taken there.

Alright, what else struck me? Lack of discussion on currency gains to overall results except for this:

When you present results, you should always include a discussion on how currency gains/ losses impacted your overall results, not just discuss centralized currency management system.

For example, in my discussion with PSP's CEO Deb Orida, she was upfront with me that currency gains factored into their Private Debt and overall results in Fiscal 2023.

Alright, let me wrap it up with a brief discussion on compensation and diversity & inclusion and culture at BCI.

The table below shows executive compensation at BCI:

Gordon Fyfe's compensation jumped 25% from $4.1 million to just over $5 million which is close to the $5.3 million he received at PSP in 2013 just before departing in 2014:

It took Gordon ten years to crack the $5 million mark at PSP and nine years at BCI.

Perhaps his biggest legacy is he was able to convince the socialist government bureaucrats in British Columbia that BCI is a "special" Crown corporation that needs to have a separate pay scale than other Crown corps there, more reflective of the national average.

But as I stated above, not everyone at BCI deserves the comp they are receiving and that's not just a BCI problem, it's more of a widespread problem (rising tide lifts all boats).

Anyway, Daniel Garant, Lincoln Webb, Jim Pittman all got around $3 million in total comp (Garant a bit more) and Ramy Rayes, EVP Risk and Strategy saw his total compensation almost double to $2.2 million, which reflects the increased responsibilities he is taking there (read this recent interview with Ramy in the Globe & Mail). 

Good for them but notice it's an all boys club, where are the women?

I know, the best "man" for the job and there were some promotions that Gordon alluded to in his message but in 2023, not to have one woman in a very senior investment role (SVP) just looks really bad.

But I will qualify this by stating she needs to be highly qualified because putting an unqualified female SVP in an investment role is worse (same if you put an unqualified male in an SVP role).

And I'm pretty sure BCI doesn't have anyone in their investment department that has MS or any other neurological disease but I'll leave that discussion for another time.

Lastly, on ESG, BCI is doing very well but there needs to be a big discussion on the Thames Water debacle next year and how they will handle it.

So, overall, results were positive for fiscal 2023, the value add over benchmark however appears a lot better than it truly is, so focus on long-term results across all asset classes.

As far as Gordon Fyfe, I would have liked to talk to him but he's away on vacation and probably pondering his retirement and what comes next.

Truth be told, these markets are keeping me very busy, so I limit my calls now and focus. In my world,  I need to generate returns because it's either produce results or die, something Gordon Fyfe and most of you never have to experience (which is a good thing).

I thank all of you who value the work that goes into these comments and show their appreciation through your financial support.

Below, after the Bank of Canada (BoC) raised its benchmark interest rate by another 25 basis points on Wednesday, BoC governor Tiff Macklem held a press conference, taking questions and providing insight and reasoning for the increase. 

The central bank’s key interest rate currently stands at 5.0 per cent following back-to-back hikes, bringing it to levels not seen since 2001. 

Macklem cited concern over a string of hot economic data, which suggested to its governing council that interest rates were not high enough to cool the economy and bring inflation down.

 “We don’t want to make it more difficult than it has to be,” Macklem said, adding that due to unexpected inflationary pressures, it's possible there may be more hikes to come in the near future.

Here was the key passage in the Bank of Canada's statement released earlier today: 

Canada’s economy has been stronger than expected, with more momentum in demand. Consumption growth has been surprisingly strong at 5.8% in the first quarter. While the Bank expects consumer spending to slow in response to the cumulative increase in interest rates, recent retail trade and other data suggest more persistent excess demand in the economy. In addition, the housing market has seen some pickup. New construction and real estate listings are lagging demand, which is adding pressure to prices. In the labour market, there are signs of more availability of workers, but conditions remain tight, and wage growth has been around 4-5%. Strong population growth from immigration is adding both demand and supply to the economy: newcomers are helping to ease the shortage of workers while also boosting consumer spending and adding to demand for housing.

Also, Jim Thorne, chief market strategist at Wellington-Altus Private Wealth, and Robert Kavcic, senior economist at BMO Capital Markets, joins BNN Bloomberg to discuss their expectations for getting inflation down across Canada. 

Jim Thorne thinks the Bank of Canada is making a huge policy mistake and he might be right but we all know the Fed leads global rates up and down. I suspect the Bank of Canada will raise one more time before pausing but it all depends on wage inflation dynamics here and down south.

Lastly, Ed Yardeni, Yardeni Research president, joins 'Halftime Report' to discuss the latest CPI report, what is ahead for Federal Reserve policy and more. 

I noted that real earnings came in at 0.5% vs -0.1% expected, suggesting consumer spending will continue until labor market breaks. There’s no way the Fed will not raise by 25 bps later this month despite yield on 2-year Treasuries dropping 35 bps in a week. So the initial reaction of US dollar falling and stock futures surging might be shortlived.