As British Columbia Investment Management Corporation (BCI), the $211.1 billion asset manager for around 30 Canadian pension funds and insurers, has transitioned to being an active in-house global investor requiring robust systems, processes and specialised expertise, it has also built a value-added, modern centralized trading framework.
In an industry first white paper, the investor explores the benefits and drawbacks of centralized trading for institutional investors, sharing its experiences. BCI argues that an innovative, centralized trading framework provides clients with greater portfolio returns, lower fees, and allows for improved risk management.
“Our framework was designed with a cross-asset mindset to enhance portfolio returns, lower costs and better manage risk,” said Daniel Garant, executive vice president and global head of public markets at BCI where he oversees a $124.7 billion allocation to fixed income and public equity (around 60 per cent of the net assets under management) the bulk of which is managed internally.
“It was imperative that our platform deliver best trade execution, as well as have strong governance to help influence ESG practices with our global financial partners, in addition to streamlining processes, efficiencies, and scalability for our continued growth,” said Garant.
Better decision making
BCI’s centralized, end-to-end trading approach ensures connectivity at the highest levels and enables one cross-asset desk to execute for the entire corporation. Having a complete picture of trading activities, fees, and data allows for better aggregated pricing on total transactions with partners, and further allows for better decision making grounded in centralized data sources.
Promoting collaboration in what is typically a siloed function at many large institutional asset managers, BCI’s centralized trading framework also shifts the role of the trader from operations to advisor, allowing trading professionals to add significant value to the investment process.
Samir Dhrolia, senior managing director, global derivatives, trading and indexing portfolio management explains more. “Joining BCI at a time when the corporation transitioned to active management allowed me to lead a trading team implementing processes and frameworks from scratch. There has long been an established, back, middle and front office approach to trading, coming in to create something new without legacy frameworks to constrain us was very exciting.”
As outlined in the White Paper, the key benefits of a centralized trading framework include:
Cross-asset view that enhances portfolio returns, reduces costs and allows for better risk management.
A central voice facilitated via BCI’s One Wallet platform, a relationship management tool that manages a total view of payments across BCI, negotiating with external parties for the best possible results for clients on commissions, deal flows and third-party services. This is increasingly important as BCI’s operations spans the globe with teams in Victoria, Vancouver, New York, and this year, London, UK
Fosters a performance-focused team, and offers an environment where employees collaborate across the portfolio management, cross asset risk and liquidity functions
Streamlines processes, effectiveness, and scalability for continued growth
Optimizes management oversight, and strengthens legal, compliance and operational controls thus reducing a variety of operational and investment risks
The paper details how best practices to implement centralized dealings comprises governance, regulatory requirements, defining order types and cross-asset best execution. The analysis draws on the existing body of research for trading desk structures, industry trends and scenario analysis to estimate the benefits net of costs. It also draws on case studies from global asset management firms.
BCI says continuing to invest in its internal capabilities is the most significant lever it has for reducing total cost for clients of value-added active management.
BCI’s total costs, consisting of internal, external direct, and external indirect costs, were $2.2 billion or 1 dollar and 8.1 cents per $100 of assets under management for fiscal 2022, all of which are netted against investment returns. This compares to total costs of $1.6 billion or 88.5 cents per $100 in fiscal 2021.
The increase in costs was driven primarily by strong performance and value-add in private equity and real estate, which resulted in higher external costs on the proportion of assets managed externally. While strong performance results in higher fees paid to external managers through profit-sharing agreements, our clients retain most of the value added by these managers.
BCI’s $78.0-billion fixed income program accounts for 37.0 per cent of net assets under management. The $64.3-billion public equities program represents 30.5 per cent of net assets under management. Private equity represents $24.8 billion and 11.8 per cent of net assets under management.