2020 YEAR IN REVIEW – FUND AND ASSET CLASSES
The Plan’s portfolio is measured by two key metrics. The primary objective is to generate a long-term return on invested assets that exceeds the Funding Policy’s discount rate of 6%. This is the rate established in the Funding Policy. The secondary objective is to outperform the return of the Policy benchmark. This outperformance is termed ‘added value’ and allows for the evaluation of the effectiveness of the investment strategy and its implementation at the total Fund level. Benchmarks are valuable tools Provident10 uses to measure performance of individual asset classes and the managers who invest in them on Provident10’s behalf.
Total Net of Fees CAD $ Returns
|Fund level||Benchmark||Value Added|
|Listed Infrastructure 1||-6.2%||-8.1%||1.9%|
1.Weighted approximation return calculation.
For the year ending December 31, 2020, the Fund netted a total return of 11.9%, compared to the policy benchmark return of 9.2%, realizing 2.7% of added value. Provident10 uses a thorough and rigorous risk-controlled approach by choosing an optimized risk level within a multi-year framework and with the selection and weighting of asset classes to achieve a target return. In simple terms, the amount of acceptable risk is identified, then the mix of assets is determined to give the best chance to achieve the goal.
The Equity portfolio is made up of both Canadian and Global public and private equity asset classes. The public equities represent a large cross segment of developed and emerging markets diversified throughout multiple economic sectors. For 2020, Global Equities provided the greatest results, delivering the Plan a return of 21.4%, compared to the associated benchmark return of 14.2%, for added value of 7.2%. Canadian Equities, while providing a lower total return, nevertheless contributed 7.8% to the Fund performance, which represents 2.2% added value.
The Private Equity allocation is a combination of direct investments in private companies and funds. An allocation to Private Equity expects to provide a higher return, albeit with a lower risk level than the public Global Equity markets. Private Equity delivered a return of 20.1% and added value of 3.9%. Fixed Income and Infrastructure are asset classes intended to protect the Fund portfolio during periods of market stress. In an environment of declining rates, Fixed Income generated a return of 9.2% for the year; that is, 0.5% of value achieved over the benchmark. While the asset class is comprised of a sizable portion of Canadian government and corporate issuers, it also includes Global Credit investment. The latter provides exposure to faster growing economies operating within a different interest rate regime than Canada. Provident10’s international credit exposure provides an attractive risk-return balance for the portfolio. Over the past year, the Global Credit portion of the portfolio earned a return of almost 12%.
Infrastructure, both listed and private, provides diversification and some level of inflation protection for the Fund. The holdings consist of listed and private companies as well as infrastructure funds. The asset class achieves diversification through both geographic and industry sector coverage. Private Infrastructure produced a return of 9.2% compared to its benchmark 6.0%. Listed Infrastructure earned an approximate return of -6.2%, also performing above the benchmark.
Real Estate suffered from the pandemic more than other asset classes and difficulties persist for specific sectors including commercial offices and retail properties located throughout Canada. During the year, Provident10 focused significant attention to better understand key valuation measures and risks resulting from the pandemic. Challenges in the asset class were evident with a limited return of 0.3%.
Commercial Mortgages offer dual advantages over some other forms of fixed income instruments such as corporate bonds including illiquidity premiums and direct claims on a tangible asset. The historical sustainability of the Canadian mortgage market was further validated during the pandemic with no recorded default or impairments in holdings.
Historically, the Plan has been able to provide its members a robust rate of return over time.
TOTAL FUND PERFORMANCE
Net return as of December 31, 2020