It is the end of an era for the British Columbia Investment Management Corporation (bcIMC). As Doug Pearce, the company’s outgoing CEO and chief investment officer, retires this spring, one of the country’s largest institutional fund managers is closing a significant chapter in the development of its investment strategy: moving from a plain-vanilla portfolio of domestic stocks and bonds to a global one with more diverse assets. At this critical juncture, the independent agency is also preparing for the future by drawing inspiration from major global trends.

The corporation invests on behalf of different public bodies in B.C., including 11 public sector pension plans that finance the retirement benefits of more than 500,000 members. Nowadays, the Victoria-based agency is one of the world’s most influential investors, with a global portfolio of almost $110 billion. But that success was years in the making.

Seeking Alternatives
During its early years in the late 1980s, before it became independent from the provincial government, bcIMC invested only in domestic stocks and bonds. But over the years, it began looking beyond Canada. Today, about 42% of its assets are invested abroad. The agency has also upped its exposure to real assets, such as infrastructure, real estate and renewable resources, which now make up about one-quarter of its total portfolio. (Stocks comprise almost half, with 15% allocated to fixed income. Private equity, mortgages and short-term securities together make up 10%.) “Real assets are great for our liabilities—they are long term; they are assets on the ground,” says Pearce, adding that some of those assets provide a degree of inflation protection, too.

With real estate investments—which account for about 18% of bcIMC’s total portfolio—the company focuses on development (buying land and building on it) rather than on purchasing property. “Returns are greater when we develop,” Pearce says, citing high real estate prices as a reason for this approach. “It’s something the larger pension plans can do in Canada.” Currently, bcIMC has 24 development projects across the country, including office, industrial, retail and multi-family apartment buildings.

The company’s real estate holdings are almost entirely in Canada because this is a market that bcIMC understood when it started these investments. But, as the program matures, it will become more international in the future, Pearce says. By contrast, he adds, the majority (77%) of the agency’s infrastructure investments are outside of the country—generally in developed nations, because fewer of Canada’s infrastructure assets have come to market. Together with renewable resources, infrastructure investments make up 6% of bcIMC’s total portfolio.

However, the corporation doesn’t endorse all alternatives. For example, it has always avoided hedge funds. “In B.C., our clients are relatively conservative. Therefore, putting leverage on the portfolio is very limited,” Pearce explains. “[And] we didn’t like the non-transparency of hedge funds.”

Changing With the Times
This cautious approach paid off for the company during the global financial crisis. “We were in the first quartile for the year ending Dec. 31, 2008,” Pearce says, explaining that negative returns were hard to avoid. “Every asset class got hit.” But bcIMC’s strategy had several saving graces that limited its losses.

“We had little in the way of securitized assets,” says Pearce. “We had no ABCP [asset-backed commercial paper]. We did not have a liquidity problem. And, at that time, we had a bit more fixed income, and we had no leverage.”

Equity valuations were at attractive levels immediately after the crisis. Interest rates, on the other hand, were at historic lows, so the fund manager determined that fixed income wouldn’t be able to generate the returns its clients seek. (Its 20-year annualized return for combined pensions is 7.9%.) As a result, bcIMC reduced its fixed income allocations and increased its equity exposure.

A few years after the financial turmoil, bcIMC had to deal with another matter. In 2013, an interest group within the community of B.C. teachers—the Burnaby Teachers’ Association—accused the corporation of being unethical for investing in companies such as weapons manufacturer Lockheed Martin and British American Tobacco.

“Tobacco, unfortunately, is still a legal substance. Therefore, it’s in our realm of investment, so we do have holdings there,” Pearce explains. The corporation remains invested in Lockheed Martin, too. It says engaging with companies on the environmental, social and governance risks that can affect their long-term value is more effective in encouraging change than divesting.

The organization also has significant holdings in Canada’s extraction industry. But it has publicly criticized most mining companies in the country for not being transparent enough and not complying with environmental recommendations. “We could be doing a better job in many areas,” Pearce says. “I’m not saying we shouldn’t extract, but we need to do it in a sustainable manner.”

bcIMC is also a founding signatory of the voluntary United Nations Principles for Responsible Investment. Pearce believes that following such principles doesn’t limit the pool of investment options or returns. “I think that’s an old argument; I think it’s a false argument,” he says, adding that, increasingly, companies have no choice but to be as socially responsible as possible because more and more customers demand it.

Thematic Investing
Going forward, Pearce predicts a greater focus on thematic investing, which aims to identify trends that can produce investment opportunities. “In my entire career of 35 years, I’ve always seen declining interest rates,” he notes, adding that they will likely climb in the future. This could present headwinds, so bcIMC will need a strategy that creates tailwinds. Enter thematic investing. Pearce says it is particularly suitable for long-term investors because the trends behind the investment themes are long-term forces.

For bcIMC, the investment themes will come from trends such as demographic growth in developing nations, the aging population in developed countries and climate change, Pearce explains. Take population growth in emerging countries, for example. This trend, coupled with the expansion of the middle class there and its greater purchasing power, means that people will likely increase their protein intake. “Food is going to be really important going forward, so we’re into agriculture, food processing [and] food storage,” he says, adding that bcIMC’s thematic investment program will expand in the coming years.

As bcIMC prepares for a new chapter, Pearce says tomorrow’s highly complex and more globalized world offers many opportunities for investors starting today. “It’s a fascinating time for people who are allocating capital.”

Q&A

Doug Pearce envisions bcIMC’s future

What is bcIMC’s investment approach going forward?

We’re long-term investors, so we should be focusing on what the [investment] themes will be. We’ve identified five large trends, and each of those trends comes with investment themes. The trends are demographics, climate change, technology, the growth of emerging markets and capital market reforms [such as regulatory reforms].

How will climate change, for example, affect your future investment strategy?

It [brings] opportunities and risks. With water levels increasing in the oceans—and this is just one example of climate change—you have to be concerned about how close to water your property is. [Natural events such as storms] seem to be happening far more frequently, so do you really want to be invested in coastline properties? Maybe we need to be invested in farmland that has good water supply. Climate change has many ramifications for a diversified portfolio, and rising sea levels is only one example. There would be other risks and factors to consider for different asset types.

And how will technology affect your future investment approach?

Technology is ubiquitous in everything we do, in every sector, and it has really mushroomed. In a way, it is very disruptive, but it can be very helpful. We just need to be on top of it. We also have to recognize that it changes very quickly. If you were invested in AOL, Yahoo!, IBM—in many ways, those companies have been impacted. You can stay too long with technology, so maybe we need to change our [long-term] philosophy on technology.

Yaldaz Sadakova is associate editor of Benefits Canada.

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Copyright © 2019 Transcontinental Media G.P. This article first appeared in Benefits Canada.

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