Pension fund BCI earns 7.5% annual return, hunts for deals as pressure mounts on sellers

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Flush with cash, British Columbia Investment Management Corp. (BCI) is on the hunt for bargains and hopes to take advantage as higher interest rates bite and sellers need to unload some assets at cut-rate prices.

The Victoria-based pension fund manager reported a 7.5-per-cent return in the fiscal year that ended March 31, rebounding from a more muted 3.5-per-cent gain last year. BCI now manages $250-billion worth of assets, up from $233-billion a year earlier.

BCI’s one-year return missed the benchmark it uses to measure its performance, which gained 11.6 per cent in part from surging prices for the largest U.S.-based technology stocks. With interest rates running high, BCI moved more of its clients’ money to bonds and private assets with lower risks and less volatile returns, and focused on bolstering its liquidity by allocating more money to assets that can easily be turned into cash to meet its obligations.

That conservative approach to managing risks has left BCI with the resources to go shopping for good deals. Even though the pension fund manager committed $15-billion to private markets last year, it still has about 60 per cent more liquidity than it expects to need in the coming year, leaving excess money that it can put toward new investments.

“We don’t think public markets will get any less volatile than they are right now, so we’re quite pleased with our portfolio construction as it stands,” said Ramy Rayes, BCI’s executive vice-president of investment strategy and risk, in an interview.

“We can be very, very aggressive in deploying in markets,” he said. “People might be forced sellers. That definitely won’t be our case, given our liquidity numbers, and we’re hoping to scoop some things on sale if they ever occur.”

Almost all of BCI’s asset classes recorded investment gains last fiscal year, adding $16.5-billion to the fund’s assets, after fees. The strongest gains were from global stocks, which rose 26.5 per cent, and Canadian stocks that were up 14.5 per cent.

Private loans also performed well, earning a 13.3-per-cent return. But after years of strong gains, boosted by banks that were reining in lending and forcing companies to turn to private lenders, a more crowded market has made the loans less lucrative.

“That’s part of the problem: Everybody started doing it,” Mr. Rayes said, and that means the spreads lenders are able to charge, “if anything, are starting to fall.”

BCI’s weak spot was its real estate equity portfolio, which lost 5 per cent and missed its benchmark, a gain of 6.8 per cent. That continues a trend whereby almost all of Canada’s largest pension funds suffered sharp losses on real estate last year, as high borrowing costs drove down valuations on properties, especially in the office and retail sectors.

In response, BCI has focused on improving the assets it already owns and building new properties to meet demand in sectors that are performing better. “We’ve been building, for example, data centres in the U.S., a high-conviction area for us,” Mr. Rayes said. “When you’re in a place where there’s fewer transactions, you’ve got to think about value creation with what you own.”

Over all, BCI’s investment performance for the year matched its five-year return of 7.5 per cent, and its average gain of 7.8 per cent over 10 years beat its benchmark by 0.7 percentage points. In a tough environment, BCI has largely had “extremely low volatility in our returns, and that’s exactly what we want,” Mr. Rayes said.

Looking ahead, BCI expects interest rates to remain higher when compared with the rock-bottom levels reached during the COVID-19 pandemic. As some companies struggle to cover the higher cost of debt, BCI plans to move quickly when assets come up for sale at attractive prices. In anticipation, the pension fund manager has been hiring staff to expand its offices in New York and London, seeking better access to deals.

“We think there’s going to be a good vintage ahead of the new deals that will come out, so it’s good to be where we are,” Mr. Rayes said.