BCI Annual Report


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OUR INVESTMENT FUNDS Investing is intrinsically dynamic. Capital markets continually evolve and we adapt our product line to ensure clients benefit from new investment opportunities. Our product line is diversified by asset class and strategy. Each pooled fund is expected to provide a different investment outcome. Like a mutual fund, a pooled fund combines our clients' contributions and invests in securities and other assets. This structure provides economies of scale, allowing clients to obtain a more diversified portfolio at a lower cost than they could attain by investing individually. BCI holds all assets in trust; clients do not own the individual assets within BCI's investment portfolios. We constantly review performance and market developments and each year, we may introduce, consolidate, or suspend funds to ensure optimal investment results. In fiscal 2021, our board approved investment policies for the Government Bond Fund. This is an actively managed pooled fund that, in addition to being a source of liquidity, provides increased diversification and downside protection benefits. Its performance is benchmarked against the FTSE Canada Universe All Government Bond Index. Where there are opportunities to reduce complexity, streamline investment accounting and reporting processes, and ultimately increase returns, we consolidate funds. In the past year, we consolidated the Construction Mortgage, Fixed Term Mortgage, Mezzanine Mortgage and U.S. Mortgage Opportunity funds into the combined BCI QuadReal Mortgage Program, effective January 2021. Its performance is benchmarked against the ICE Bank of America Merrill Lynch 1-3 Year Canada Government Index + Custom Spread. We also converted our infrastructure & renewable resources program from a closed-ended, fixed participation model to an open-ended structure. This allows clients to adjust their portfolio mix every six months rather than annually, provides flexibility for new clients to enter the program, and allows all clients to enjoy the diversification benefits of the program by providing access to all investments. CENTRALIZED CURRENCY MANAGEMENT In January 2021, we launched centralized currency management, which allows clients to tailor their overall currency hedging to meet their unique preferences. Clients can select a currency hedging policy as part of the regular asset-liability review process. As a result of the timing of these reviews, it will take some time for all clients to determine and set their currency hedging policies. Where clients' currency hedging policies were set prior to March 31, 2021, the impacts of these policies have been included as part of the combined pension plan returns. OPERATING COSTS Our key objective is to meet or exceed our clients' return expectations. Our investment strategy, client- driven changes to asset mix, and the types of assets under management all affect costs and client fees. Our clients require long-term actuarial rates of return. To continue generating returns for our clients, we focus on diversifying the sources of returns, including increasing our allocations to private markets, and securing greater direct control over investment activities. All of these factors drive changes in long-term cost trends. Our active, in-house asset management model requires robust systems and processes, and a growing complement of specialized expertise. Cost advantages arise from the economies of scale of managing $199.6 billion, pooling assets, and managing 77.3 per cent of assets in-house. This fiscal year, our total costs were $1.6 billion or 88.5 cents per $100 of assets under management (2019–2020: $1.3 billion or 79.0 cents per $100), consisting of internal, external direct, and external indirect costs, all of which are netted against investment returns. Internal costs are operating costs over which BCI has direct control and include salaries, rent, technology, and consulting fees. They represent 15.7 per cent (13.9 cents per $100) of costs. External direct and external indirect costs are incurred when BCI uses outside partners to execute specific investment strategies. Commonly, external partners earn performance fees when their investment decisions outperform pre-established benchmarks, so while returns are better, we also pay higher performance fees. External direct costs are investment management and performance fees that BCI pays to third parties to manage assets, including fees to asset managers, auditors and custodians, where BCI has discretion over the buy and sell decision of the asset, representing an estimated 28.8 per cent (25.5 cents per $100) for the fiscal year. External indirect costs are investment management and performance fees incurred by BCI pooled investment portfolios to general partners, who have discretion over the buy and sell decision of a specific asset. These costs are disclosed for transparency based on underlying reports provided by these third parties and are 55.5 per cent (49.1 cents per $100) of costs. We operate on a cost-recovery model and do not receive subsidies or financial aid from any third party. We are accountable to our clients for the costs involved in managing their funds. 2 0 2 0 - 2 0 2 1 C o r p o r a t e A n n u a l R e p o r t M a n a g e m e n t ' s D i s c u s s i o n a n d A n a l y s i s 2 0

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