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French (Canada) - Canadian Public Sector Pension Fund
- 2021
- US Large Cap Value Equity
- CAD 600million
- US
- Active mandate, separately managed account
- Manager research
- Excess returns over a US value benchmark
Our specialist says:
Given the headwinds the value style has faced, searches for value managers must look beyond headline quantitative track record analysis. Although high-quality active value managers should be expected to outperform a value index—and a major market index over the long term—they may face performance headwinds when value is out of favour. For several years preceding the launch of this search, we observed this dynamic in the growth-led US market, where more moderate value managers held a relative performance advantage over deeper value managers across the peer group. The client, however, was looking for a clear value manager without style drift so—to ensure that deeper value managers were not screened out or unfairly penalised due to a style headwind—we focused on performance vs. a value benchmark as well as managers’ style profiles over time.
Engagement at a glance
This Canadian pension fund, which traditionally uses an internal team for conducting manager searches, had already reviewed several managers in this asset class before enlisting bfinance’s assistance. As an adviser, bfinance worked collaboratively with the client’s team to provide additional resources and scrutiny. The investor was seeking an active large cap value strategy that would fit within a US equity portfolio that already contained large cap growth and small cap strategies. The previous US value manager had recently closed following sustained outflows and the experience spurred the client to consider prospective managers’ corporate size and stability alongside their investment strategy.
Client-Specific Concerns
The client was placed in a challenging position when one of its value-focused managers opted to close unexpectedly and return investor capital. In response, the client worked with bfinance to launch a search for a well-established manager with at least USD 5 billion in assets under management to gain a degree of confidence about the firm’s ability to withstand potential drawdowns. Environmental, social and governance (ESG) concerns were also of high importance: the pension fund had recently embarked on developing and building out its ESG policy and had set strong internal strategic priorities on climate change and diversity. The pension fund wanted ESG to be a material weight in the search, which included a detailed assessment of managers’ ESG integration, firm-specific and strategy-level credentials, with particular scrutiny of climate change and diversity areas. The high ESG standards narrowed the eligible US value equity manager universe and the search process ruled out many managers that gave this topic cursory attention.
Outcome
- Focusing on style: The team used multiple lenses to identify managers with strong, consistent ‘value’ credentials, scrutinising their exposures, holdings and style characteristics. This assessment process eliminated managers that had benefited from low exposure to ‘value’ headwinds.
- Supporting ESG evolution: as the client developed more advanced environmental, social and governance (ESG) policies, this search became a highly ESG-centred project that also helped shape the fund’s internal guidelines. The team looked at each manager’s ESG integration, monitoring and engagement, as well as ESG ratings on managers’ portfolios from third-party data providers. The client’s highest priorities included climate change and diversity and inclusion, or “D&I”—at the manager level and in the investment process. As a Canadian institution, the client placed particular attention on relations with indigenous communities.
- Examining porfolio fit: the bfinance team provided combination analysis to evaluate how the prospective manager would fit alongside the asset owner’s incumbent US equity managers. This process included overlap analysis, correlation of historical returns across different market environments, scenario analysis and weight optimisation analysis under different portfolio construction scenarios (maximum diversification, maximum Sharpe ratio, risk parity).
