Despite volatile markets and an unpredictable economic environment, Vestcor has managed positive fund returns again for 2023
Vestcor Inc., a Fredericton, NB-based independent not-for-profit global investment management company that services 11 public sector client groups, achieved a 7.50 percent total fund return for 2023 on behalf of its clients, contributing to five- and 10-year annualized returns of 6.27 percent and 6.73 percent, respectively. These returns ensure Vestcor’s clients continue to meet their funding objectives, despite the period of higher inflation indexing requirements of the past few years.
“Most of the plans that we manage money for are target benefit-type pension plans, and under New Brunswick, they're called shared risk plans. So, they do have some specific risk parameters that they need to meet,” says John A. Sinclair, president and chief executive officer at Vestcor. “That typically leads to designing investment policies that typically do well in weaker capital market environments like 2022. And, maybe the results are not as strong as some of our peers in stronger capital market environments like 2023, but we’re very happy with our 2023 results being pretty strong even considering our design metric. When we string together the good period and a not-as-good period, we still have a pretty strong overall return. It's gratifying to see that strategy played out in those two periods back-to-back.”
Vestcor’s shared risk and target benefit clients require a lower risk approach than most typical pension plans. This lower risk design means Vestcor, and its clients, expect returns to be lower than those of riskier designed plans during times of positive market results, but are also expected to be better protected in years of negative returns. Sinclair says this was confirmed in 2022, an excessively challenging year for financial markets, when Vestcor achieved overall pension fund returns of -3.63 percent on behalf of its clients, while several Canadian defined benefit pension plans had median returns of -10.3 percent, as reported by RBC Investor Services (RBCIS). As the markets strengthened in 2023, the median return for these same Canadian defined benefit pension plans in 2023 was positive at 9.1 percent, while Vestcor’s lower risk returns compared as expected at 7.50 percent. In addition, Vestcor’s longer-term four-year annualized pension fund return of 4.94 percent compares very favourably to the corresponding annualized return of 4.21 percent as reported by RBCIS, with much lower risk.
In addition to Vestcor’s positive results, its clients also continue to benefit from the organization’s cost-efficient, not-for-profit model. The investment management expense ratio remained at 0.14 percent in 2023, or 14 cents per $100 of average net assets, well below the average expense ratio of most investment management alternatives.
Key enhancements in responsible investments
Additionally in 2023, Vestcor launched its second annual Responsible Investment Report. The report showed two key enhancements: a significantly enhanced carbon emissions measurement coverage to a much larger proportion of assets under management, and the carbon emissions of the overall investment portfolio measured in the prior year had declined by approximately 10 percent. The report also speaks to the organization’s leadership in and commitment to providing clients with risk management services and tools that assist in developing sustainable long-term investment programs that meet their objectives.
Sinclair says that Vestcor is measuring and monitoring how well the various investments are doing in terms of creating and realizing carbon neutrality and sustainability goals. “A large number of companies have put out guidelines on how they intend to become carbon neutral by 2050. On an annual basis, we measure and monitor how well the various investments we are involved in are doing this and what their strategy is. That becomes a risk management perspective within our portfolio selection process.
“We set out responsible investment guidelines and made those public in 2019. The guidelines talk about how our portfolio managers use ESG information, and how they talk directly to portfolio companies to make sure we understand what the risks are before we make those investments.
“Last year, for the first time, we published our Responsible Investment Report. The report is different than the guidelines; it goes into more detail of what we do. But last year was the first time we actually calculated the carbon exposure using TCFD (Task Force on Climate-related Financial Disclosures) guidelines for a large portion of our portfolio. This year’s report was the second year, so we were able to do a year over year calculation that identified that the carbon exposure in our portfolio for the same amount of assets decreased by about 10 percent. But that's not because we're divesting, that's just the same selection within our portfolio.
“We want to make sure the work is being done and, through our Responsible Investment Report, our clients get annual reporting on how this process is playing out over time. That way they feel comfortable that we’re engaged in making sure we’re on top of it from a risk perspective.”
Vestcor Inc.’s 2023 Annual Report, including financial statements, will be published in June.
