RockCreek: 2022 Investment Reflection

It was a tough year in the markets for everyone. A question that we’ve been asked is: “Why we did not reach our net return of 4.5%?” Can you help us address that?

2022 was a historic year for financial markets as global central banks confronted accelerating price inflation with aggressive interest rate hikes. In Canada, the annual rate of inflation exceeded 8%, a level not seen in nearly forty years, and in response the Bank of Canada increased its policy interest rate by 400 basis points to 4.25%. The dramatic increase in interest rates put strong downward pressure on stocks and bonds with even low-risk investments like investment grade bonds losing 10.6%.* But at RockCreek we are very excited about the opportunities that are being set up for future returns in the portfolios. With higher rates come higher future expected returns. For example, at year end, those same investment grade bonds had a yield to maturity of 4.3% as compared to the 1.8% offered coming into 2022.   

* As measured by the S&P Canada Aggregate Bond Index for calendar year 2022. 

 

How did we perform, all things considered?

The Foundation’s investment portfolio held up well despite the challenging market environment. The portfolio returns outperformed market indices and peer institution portfolio returns. The Foundation’s portfolio in 2022 (-4.5%) outperformed the median endowment and foundation portfolio (-6.9%*) by a positive 2.4%.  

The Foundation’s portfolio also outperformed Canadian stocks by a positive 2.1%, outperformed global stocks by a positive 8% and outperformed Canadian investment grade bonds by a positive 6%.** 

*BNY Mellon Canadian Master Trust Universe – returns reported gross of fees 

**S&P/TSX Composite TR Net, MSCI AC World TR Net CAD, S&P Canada Aggregate Bond Index 

 

What are the strengths of the portfolio?

A big strength and driver of return in the portfolio is the access and investments in top-tier investment managers and impactful investment opportunities. In many cases this is one and the same, as we expect our investment managers to take a sustainable approach to investing the Foundation’s capital in such a way that leads to strong risk-adjusted results and outperforms market benchmarks and peers. Capacity with these managers is constrained to many institutions but due to the combined experience and reputation of the Toronto Foundation and RockCreek, the portfolio has access to these strong investment opportunities.  

Another strength of the portfolio is the growing diversification across asset classes and types of investments. This allows the portfolio to generate returns greater than the markets and also protect against downside risk in more volatile markets.  

 

Where are we making the biggest impact with our responsible investing portfolio? Is there a specific example of an investment that’s having impact?

We are looking at impact across the portfolio in both the public and private markets.  

On the private side, The Children’s Investment Fund and Generation Investment Management are two examples of those top-tier impactful managers.  

The Children’s Investment Fund has been engaging with two Canadian railroad companies to improve climate-related disclosure and de-carbonize their business operations. As a top holder of Canadian Pacific Railway and Canadian National Railway, the manager has a strong voice in the strategic direction of these businesses and has called for each to explore greater use of advanced biofuels to decrease its greenhouse gas emissions, dedicate research and development to the electrification of its network, and continue to advocate for initiatives to further decarbonate the rail freight industry. 

Generation Investment Management is a global leader in sustainable investing. As they noted in their most recent annual letter, when Generation started down the road of sustainable investing 19 years ago “few other investors were considering sustainability factors” and now under the encouragement of investment professionals “thousands of corporations have set ambitious targets to cut their emissions and improve their diversity, and are pursuing those ambitions with zeal.” This is a firm that will continue to push their portfolio companies, peers and themselves forward on these issues, all the while staying focused on their clients’ need for investment returns in excess of what they could be getting elsewhere. 

In the private markets, where the Foundation is also investing, one impactful investment is in Generate Capital, a diversified platform for financing and operating renewable and sustainable infrastructure projects. In 2022, Generate acquired StormFisher, an Ontario-based circular economy and decarbonization solutions developer, as a key component of the Generate Upcycle platform. Generate is now operating anaerobic digesters in London and Drumbo that reduce methane emissions while producing renewable natural gas. 

 

What would you tell a skeptic about the future of responsible investing? How would you respond? 

The big question among investors is: Can you meet your performance returns and your fiduciary role while you are impactful? Our data, sourced from some of the top investments and portfolio where we have a long track record shows the answer to be an emphatic yes! At the same time, recent political conversations around ESG have created much heat. We think the word 'ESG' was meant to create a new approach but has not been as effective. To some extent, the criticism is valid as flawed data and simplistic approaches have allowed bad actors to make misleading claims under the pretense of ‘ESG.’ Foundations and high net worth individuals with mission-oriented reasons for caring about sustainability are all looking for a better alternative than the word ESG, and one form of that is the thoughtful, measured and results-oriented investing program that has been adopted by the Foundation.  

 

Is there anything you’ll be monitoring for how you might reconfigure our investment strategy? 

We are continuously assessing the market environment to determine the optimal portfolio within the strategic objectives of the long-term investment policy. In 2022, this included taking a relatively defensive posture in equity risk and holding short maturity bonds with less interest rate sensitivity. Going forward, we will continue to be flexible, nimble, and always keeping in mind our long-term objectives so we don’t get swayed by short term noise. 

 

Why are we well-positioned for the rest of 2023 and beyond?

In 2021, the Foundation initiated changes to the investment strategy in collaboration with RockCreek. The outperformance in 2022 reflects the benefits that these changes have already had on the portfolio in a short time period. These structural changes have shown early success but ultimately will pay off in the long-term. Changes include: 

1. A more diversified asset allocation that mitigates downside risk through market cycles 
2. A broader universe of investment strategies to include opportunities in high returning asset classes such as private credit, real assets and private equity 

We believe these structural changes to the investment strategy place the Foundation’s portfolio on a more sustainable long-term path as we seek to ensure that the portfolio is a sustainable source of capital for the Foundation’s work in the years to come.