MFA’s Corner

MFA’s Diversified Multi-asset Class Fund

The Municipal Finance Authority of BC’s (“MFA”) long-awaited Diversified Multi-Asset Class Fund (“DMAC” or the “Fund”) is expected to launch in mid-January 2022. This article provides our members with some details on this new investment option – the first of its kind for BC local governments. The Fund will offer BC’s local governments a broadly diversified investment option to prudently grow reserves not needed for 10 years or longer.

Before highlighting some key characteristics of the Fund, please make note of the next GFOABC Investors’ Forum Webinar on December 14th. This educational session will meet one of the requirements to enter the Fund: the finance officer responsible for financial administration (Section 149 of the Community Charter or Section 237 of The Local Government Act) must attend an educational/informational session on the DMAC. We urge any other local government finance employee who is interested to join as well.

Phillips, Hager & North will manage the new Fund according to investment beliefs and policies vetted and approved by a team of local government investment professionals and MFA’s trustees. Central to those guiding principles is the notion of managing the Fund with a long-term view, with the aim of exceeding the core inflation rate by 3.5% annually, while minimizing expected volatility. The target global portfolio will include allocations to fixed income, equities and alternative strategies - such as direct real estate investments. The Fund will be highly diversified, both geographically and by asset class/management style, to optimize forward-looking expected risk-adjusted returns.

The Fund will align with a shared focus among BC’s local governments on ESG and climate change considerations. All components of the Fund will be managed under the UN’s Principles for Responsible Investing and incorporate broad ESG considerations into the investment process. DMAC will be a “Low Carbon” Fund with a significant portion (expected to be over 40%) of the asset classes employing a strict Fossil Fuel Free (FFF) screen. The DMAC will incorporate as many FFF investing approaches as prudent, where employing such strategies would not be expected to materially detract from expected risk-adjusted returns. While achieving a higher portfolio-level FFF composition was desired, options were limited as several of the asset classes and strategies are not currently available in a FFF format. However, the vast majority of assets held within the investing categories over which we do not employ a strict FFF screen can in fact also be defined as FFF investments. For example, with the exception of the Canadian Equities strategy, we would expect a maximum of 10% of the assets held within each of the non-FFF strategies below to be invested in securities of FFF companies. The screen employed is the same one that is employed in our FFF Short Term Bond Fund and screens out securities of companies “directly involved in the extraction, processing and transportation of coal, oil and natural gas.” Finally, the Infrastructure component being contemplated to be added in mid-2022 would be focused on renewable energy-related investments (such as wind farms, for example). The targeted allocation of investments to the various strategies employed within the Fund will be as follows:

Continued next page.

Suitability of the Fund and a positive member investment experience will be key concerns for the MFA as it onboards interested local governments. The Fund will not be suitable for all local governments. Members will need to carefully determine whether long-term investment in the DMAC Fund is appropriate for their own circumstances. The MFA is available to discuss key considerations local government investors and their Councils/Boards should understand prior to investing in the Fund. Of primary importance will be the designation of reserves as suitable for long-term investment, a process that first begins with long-term cash flow/ reserve analysis. Once reserves have been identified as long-term in nature, this will need to be acknowledged as such by a Council or Board. We foresee selling the Fund prematurely or during a market correction and thereby crystalizing paper losses – as among the biggest risks to a successful investment experience for local governments. In order to minimize the risk of selling early, but also to accommodate asset classes, such as Alternatives, that cannot be quickly liquidated, investors in the Fund need to plan for the possibility of not being able to redeem funds quickly during unexpected circumstances, ahead of the targeted 10 year investment horizon. Under the vast majority of circumstances, we expect requests for redemptions will be honoured within a month. However, a lockup period for redemption requests of up to 3 years is a possibility under extreme scenarios. Undertaking a thorough and transparent process, which may require updating your existing Council or Board-approved Investment Policy and understanding the accounting impacts of the Fund on your financial statements, are some of the critical steps local governments will need to undertake prior to investing in the Fund.

While it is necessary for a local government to be aware of the total amount of funds not needed within the next 10 years or longer, that figure may not necessarily be the amount of money that may be invested in the DMAC. A local government’s maximum exposure to the Fund will be either 10% or 25% of their last year’s reported Cash & Investments total. Those percentages are based on a local government’s population – those with populations over 10,000 may invest up to 25% of their total Cash & Investments, otherwise a maximum of 10% applies. Second to this, of the Total Allowable Amount, up to a maximum of 25% may be ‘derived’ from (or ‘to the credit of’) Restricted or Deferred Revenue reserves. These limits are illustrated in the calculation sheet below.

If a Local Government is invested in the Fund and that investment appreciates to an amount greater than their calculated investment limit, the local government may not contribute any additional funds to the DMAC. However, they will not be required to bring themselves into compliance by withdrawing funds from the DMAC.

MFA and PH&N are available to discuss the new Diversified Multi-Asset Class Fund with you and/or your Council/Board and they have a variety of materials to

assist in policy development or communications. As a starting point, please feel free to contact us to gain a better understanding of the Fund, investment limitations and the processes we are suggesting. Lastly, again, we encourage interested and curious parties to join us and PH&N for an educational session on the DMAC on December 14th .

MFA looks forward to continuing to play a leading role in assisting BC’s local governments manage their investment needs.

PETER URBANC has 30 years of experience in global banking and the public sector, having worked as an investment banker, treasurer and executive officer. From 1990 to 2009, he was an investment banker working with leading international banks with a specialty focus on the debt capital markets. In 2009, Peter joined the Province of Nova Scotia’s Department of Finance as Executive Director and Treasurer. He also served as a Director of the Nova Scotia Pension Services Corporation and Trustee of both the Nova Scotia Teachers’ Pension Plan and the Nova Scotia Public Service Long Term Disability Plan Trust. In January 2016, Peter took on the role of Chief Executive Officer at the Municipal Finance Authority of British Columbia. He holds a Bachelor of Commerce degree from McGill University and an MBA from the J.L. Kellogg School of Management.