As British Columbia Investment Management Corporation (BCIMC) moves towards its target of having 30 per cent of its portfolio exposed to real assets, it is seeking collaborative opportunities with similar large institutional investors.
The investment manager is on the lookout for other like-minded investors and has already made significant co-investments in recent years.
This year BCIMC joined forces with the Public Sector Investment Board (PSIB) to acquire TimberWest Forest Corp, western Canada’s largest timber and land-management company.
The deal, which is believed to have been worth more than $1.03 billion, resulted in the formerly public company moving to a privately held entity with ownership split evenly between both BCIMC and PSIB.
BCIMC has also attracted high profile partners outside Canada. In June this year CalPERS announced that it would become a one-third owner in Bentall Kennedy, one of North America’s largest real-estate-investment advisories.
CalPERS purchased the ownership interest from Ivanhoe Cambridge, the real-estate subsidiary of la Caisse de dépôt et placement du Québec.
CalPERS had been a client of Bentall Kennedy for more than a decade and will now be part of an ownership structure that is split evenly between BCIMC and Bentall Kennedy’s senior management.
| BCIMC chief executive and investment officer, Doug Pearce, says that the collaborative initiatives ensure an alignment of interests with like-minded long-term investors, while also ensuring the ongoing deal flow necessary for the fund to reach its real-asset targets.Pearce explains that the fund also sees advantages in scale, that is, co-investment allows the different players to access large deals, the size of which have been a barrier to entry, and reduces competition for scarce quality-yielding assets. |
Powering across borders
BCIMC has effectively used this strategy to secure key core infrastructure assets. The investment manager teamed up with two other Canadian investors to purchase Washington State’s biggest electric utility for a reported $3.5 billion.
The purchase of just under half of Puget Sound Energy involved fellow Canadian pension managers, Canada Pension Plan Investment Board (CPPIB) and Alberta Investment Management (AIM).
Puget Sound Energy provides electricity and natural gas services to nearly 2 million people over the US border in Washington state.
In addition to its investments, BCIMC is also active in collaboration on a range of environment, social and corporate governance-related investor networks.
It was an early signatory to the United Nations backed Principles for Responsible Investment (UNPRI).
As part of its work at UNPRI it has worked with other members to promote improved standards of disclosure by companies operating in emerging markets.
BCIMC is also working collaboratively within UNPRI and the Investor Network on Climate Risk to encourage stock exchanges around the world to incorporate environment, social and corporate governance considerations in requirements for listed companies.
Global pension funds continue to have a defensive asset allocation, reflected in the anaemic growth in the total assets of the world’s largest 300 pension funds by less than 2 per cent in 2011, new Towers Watson research reveals.
The P&I/ Towers Watson Global 300 research reveals that concerns about ongoing uncertainty in global markets remains, with last year’s growth in assets down from 11 per cent in 2010.
Aside from the global financial crisis, it was the lowest annual growth rate since 2003.
Defined-benefit assets still account for the vast majority of assets, but are growing at a slower rate than defined contribution.
Defined-benefit (DB) funds account for 70 per cent of total assets, growing by over 1 per cent in 2011, compared to 8 per cent the previous year.
Defined-contribution (DC) assets grew by 4 per cent, driven in part by a long-term shift in pension assets away from costly DB schemes. This growth, however, was well below the 13 per cent recorded the previous year.
Asian high
The asset consultant’s research reveals that the Asia-Pacific has the highest five-year growth rate of 9 per cent, compared to Europe at 6 per cent, while North America remained virtually unchanged.
Assets held by Australian funds grew at the fastest rate during the five-year period to the end of 2011, 18 per cent in US dollar terms, followed by Brazilian with 14 percent.
Carl Hess, global head of investment at Towers Watson, notes that asset allocation at the world’s largest pension funds had grown much more defensive over the past six or seven years as a result of the ongoing uncertainty shrouding the global economy.
“The top 20 funds, on average, now have roughly equal amounts in equities and bonds (about 40 per cent each) and the rest in alternatives and cash. At the same time Asia-Pacific funds, in particular Japan, have maintained much higher allocations to bonds in keeping with prevailing investment beliefs there,” Hess says.
Japan’s Government Pension Investment Fund maintains its top ranking as the world’s largest fund with total assets of about $1.4 trillion.
This is followed by Norway’s Government Pension fund and the Netherland’s APB rounded out the top three.
New entrants
The research shows that 47 new funds entered the ranking during the past five years mainly from Australia (8), Mexico (4), Germany (4), Finland (2) and Russia (2). During the same period, the US had a net loss of 19 funds from the ranking, yet it still accounts for 121 funds in the research. The UK is the next highest with 27 funds, down two funds from five years ago.
Hess says funds are reacting to the low-growth economic outlook and market volatility by increasing their capacity to make dynamic asset-allocation decisions.
“Many of the top funds are prioritising governance and risk-management arrangements as a matter of urgency, spurred on by the increasing likelihood of benefit default if they don’t,” he says.
The Towers Watson research, released in January, shows that bond allocations in the world’s seven biggest pension markets have fallen by 3 per cent on aggregate over the past 16 years, to 37 per cent.
Out of equities
However, over this same period equity allocations have fallen by 8 per cent to 41 per cent.
The greatest shift out of equities has occurred in the UK and the US where allocations have fallen from the mid-to-high sixties to now less than 45 per cent.
Japan maintains the highest allocation to bonds, with 59 per cent of the country’s total pension assets in bonds.
The shift out of equities has resulted in higher allocations to alternative assets, especially real estate, according to the research.
Towers Watson found that across the seven biggest pension markets, allocations to real estate, hedge funds, private equity and commodities has grown from 5 per cent to 20 per cent since 1995.
On the first page of the British Columbia Investment Management Corporation (BCIMC) annual report is a flow chart titled “complexity and connections”, outlining how the Japanese earthquake and subsequent tsunami and nuclear disaster sent shock waves through the global economy.
Understanding complexity and both the risks and potential opportunities that can arise from an increasingly connected but heterogeneous global investment environment is central to the future plans of one of Canada’s largest institutional investors.
BCIMC manages more than $92.5 billion in assets for 40 clients, including 11 public-sector pension funds in British Columbia, Canada.
Rethinking and getting real
Chief executive and investment officer Doug Pearce says being a truly global investor that now invests in more than 43 different countries requires radically rethinking old investment approaches.
This involves both a re-evaluation of the way the BCIMC’s clients decide its strategic asset allocation, which will involve shifting from a conventional mean-optimisation approach based on modern portfolio theory to using aspects of thematic investing.
It will also involve increasing real assets, both as a reaction to increased client demand but also in response to a low-returns environment BCIMC believes will be here for at least the medium term.
BCIMC has set itself the ambitious target of having 30 per cent of total assets under management exposed to real assets by 2014-2015. To do this, it has targeted up to $1.4 billion in infrastructure commitments annually, $1.2 billion to private equity and $1 billion to real estate.
The private-equity, real-estate and infrastructure-and-strategic-investment buckets currently represent a little less than 25 per cent of the portfolio.
One bucket, two streams
This will also involve splitting its infrastructure-and-strategic-investment bucket into two streams: infrastructure and renewables.
The primary focus of the infrastructure stream will be on core infrastructure assets such as water, electricity and gas utilities, waste disposal and energy, including electricity generation, transmission and storage. It also encompasses transportation, including roads, railways, bridges and waterways.
Renewables will include timberland, agriculture and other sectors such as renewable energy.
Increasing internal capacity
BCIMC is also continuing to incrementally add to its internal investment team, which currently manages 65 per cent of assets in house, including 60 per cent of the public-equity allocation, all of its allocation to bonds and mortgages, and part of its private-equity, infrastructure and real-estate holdings.
By 2014-2015, the corporation will manage 70 per cent of assets in house, moving to 75 per cent by 2018-2019.
BCIMC has identified areas where it needs to increase its capacity, including the operational side of its private-equity and infrastructure programs, as well as in the development aspect of its real-estate portfolio.
The push to rethink its investment approach includes the internal investment team challenging conventional investment thinking and strategies, Pearce says.
“Right now we think a lot of that [modern portfolio theory] has broken down. Looking at 20-year histories of correlations and standard deviations in a global portfolio does not make a lot of sense to us,” says Pearce.
“We know we want to be in different markets for diversification, for returns and also because of where the growth is. The developed world is probably doing 2 to 2.5 per cent and emerging markets are much stronger in terms of GDP growth, which we think will eventually result in capital-market growth.”
“Looking in the rear-view mirror doesn’t make sense to us. We are looking at what we can do in these markets and we are trying to assess risk on a different basis other than volatility.”
Pearce notes that volatility is still an important measurement of risk, but the investment team is now challenging itself to look at risk in a much more holistic way, including what certain exposures are in the portfolio based on major investment themes.
| BCIMC has been working closely with a global management consultancy to identify these emerging investment themes and where opportunities might lie.Pearce points to population growth, demand for food and energy, demographic change and global healthcare needs, and the rise of the consumer in Asia as some of the themes the investment manager has identified.It is an approach that looks beyond traditional asset buckets to looking at where in the value chain of a particular theme the best relative risk/return opportunities may lie.“The most important asset allocation decision is how much do we put into these thematic investment ideas versus what instrument we use such as if it is a bond or a stock. So, it changes the nature of asset allocation,” Pearce says.
BCIMC plans to also incorporate its thematic investment approach directly into its offering to clients. Currently the fund offers 65 pooled-fund options to clients that are typically asset class- or subset of asset class-focused. The investment manager will launch thematic-based pooled funds that are not asset-class constrained. |
Research and deploy
The investment team has identified healthcare and food production as two immediate areas that are requiring more research, with the manager combining its own research capabilities with those of its consultant.
Three years ago BCIMC added 12 investment staff, forming its own in-house research team.
In addition, the corporation is bolstering its links with academia, collaborating with the University of British Columbia’s Sauder School of Business on a two-year project to develop an approach to forecasting asset-class returns in the future.
Pearce says that while thematic investing approach identifies both opportunities and also seeks to identify exposure across the portfolio to these same themes, it increases the demand for better information and better technology.
BCIMC has flagged increasing its technological capacity so it can gain ongoing and timely information on the exposure of the portfolio to certain key themes.
“Technology is one of the two major inputs into the whole investment process here. We look at our portfolio in the traditional set of lenses, and what I am asking people to do is to look at the portfolio with different lenses,” he says.
“An example would be: what is our real exposure to China? There are a lot of European and North American companies that have extensive revenues that come from China. So, maybe we should be looking at the portfolio in terms of source of revenue exposure.”
Managing concentrations in exposures
Like other commodities-based economies, Canada is exposed to a potential slow down in the Chinese economy. Pearce says that managing concentrations in exposures is particularly relevant for the Canadian investor given finance, energy and mineral sectors accounting for 77 per cent of the Canadian equity market as of March 31, according to internal BCIMC analysis using the TSX Capped Equity Index.
“If we look across all these sectors, we would find our exposures are pretty short in some areas, due to these types of companies not really being in Canada,” he says.
“We don’t have very many large food or healthcare companies, for example. There are a whole bunch of sectors we don’t really have much of and we believe they are growing fast in other parts of the world and it might be worthwhile for us to say, ‘ok, let’s diversify.”
Almost two-thirds of the total assets under management are in Canada, with the next biggest regional exposure the US at 18 per cent, Europe 7.8 per cent, emerging markets 7.6 per cent, Asia 4.1 per cent.
|
BCIMC combined-pension return for its clients |
||
|
PERIOD |
RETURN |
COMBINED-MARKET BENCHMARK |
|
Year to March 31, 2012 |
5.9% |
3.8% |
|
20 years |
8% |
7.9% |
|
15 years |
7% |
6.8% |
|
10 years |
6.2% |
5.9% |
|
5 years |
3.3% |
3.3% |
BCIMC’s asset allocation as of March 31 2012 was:
Public equities 45.0%
Fixed income 26.8%
Real estate 14.4%
Infrastructure and strategic investments 5.3%
Private placements 4.4%
Mortgages 4.1%
The $165.8-billion Canadian Pension Plan Investment Board (CPPIB) has substantially increased its investment in logistics properties in China, doubling its funding of a partnership with the Goodman Group.
It is the second time in a year that CPPIB has doubled its exposure to logistics properties in this Chinese joint venture, with its latest injection of funds totally $400 million.
Goodman, which also partners with CPPIB in logistics-themed property investments in North America, Hong Kong and Australia, will kick in an extra $100 million into the Goodman China Logistics Holding (GCLH) fund.
It is understood that CPPIB has invested more than $2.2 billion in co-investments with Goodman across these three countries in the past two years.
CPPIB’s most recent expansion in its China investments comes on the back of announcing earlier in the month that it would make its first direct investments – also via a Goodman joint venture – in US industrial real estate.
Goodman and CPPIB have targeted an equity amount of $890 million on a 55/45-per-cent basis, representing a $400 million investment from the Canadian investment manager, which manages the assets of 18 million Canadian contributors and beneficiaries.
The American ventures
The North American joint venture will target logistics and industrial properties in key North American markets.
Other large Canadian institutional investors such as the Ontario Teachers’ Pension Plan and la Caisse du dépôt et placement have been among the most active deal makers in recent years, making major investments in both North America and Europe.
CPPIB’s allocation to property now totals more than $17.7 billion, representing about 10.7 per cent of its total portfolio.
The Pension Real Estate Association’s August investment report reveals that 46 per cent of funds in its database report a target allocation to real estate of less than or equal to 8 per cent of their total portfolios.
About a quarter of funds reported they targeted a 10-per-cent allocation.
Across all the funds the average actual allocation was 9.1 per cent in 2011 up from 7.7 per cent the previous year.
The database covers 1000 US public and private pension plan sponsors, endowment foundations and other funds.
Logistics lowdown in the People’s Republic
CPPIB’s increased commitment to China takes the GCLH to $1 billion, with the joint venture having a portfolio of 12 properties in the key Chinese cities of Shanghai, Beijing, Tianjin, Kunshan, Chengdu and Suzhou.
The joint venture partners report that the portfolio has a 100-per-cent occupancy rate, with a strong tenant base.
Despite fears of an economic slowdown in China, Mark Machin, president of CPPIB Asia says that rising domestic demand will underpin its logistic property investments.
“CPPIB’s additional investments reflect our belief that China’s logistics sector will continue to grow as demand for modern, efficient logistics facilities is being fuelled by a rising domestic demand for consumer goods,” he says.
“Together with Goodman, we expect that GCCLH will continue to perform well over the long term through its participation in the rapid growth of this market.”
Other investors that are seeing an opportunity in investing in Chinese logistics real estate include Global Logistics Properties, a unit of Singapore’s sovereign wealth fund.
Bloomberg reports the company invested $1 billion in China last year, with online retail giant Amazon among its list of tenants.
Many portfolio managers use multi-factor models, but these are only as good as the various inputs used to construct them.
MSCI looks at how flawed-model construction can result in optimised portfolios that are not efficient.
The paper, Is Your Risk Model Letting Your Optimized Portfolio Down?, reveals that faulty risk models tend to underestimate risk in times of increasing market volatility and to overestimate risk when market volatility is falling.
MSCI finds that this can still occur despite models having both the correct underlying risk factors and an accurate process for estimating risk.
This can occur through sampling errors due to a limited history of returns, and a misalignment that arises from discrepancies between risk and alpha factors.
Portfolio managers’ alphas are often based on asset characteristics that are similar, but not identical to, those used to form risk factors.
A portfolio manager attempting to use an optimising model might tend to emphasise the part of the alpha that is not shared by the risk factors – also known as the residual alpha – because the risk model believes that part has no systematic risk. This might create bets in the portfolio that the manager did not intend to take.
MSCI proposes a number of solutions to these problems.
To read the paper, click here.