Wednesday, October 7, 2009

AIMCo's $174 Million External Fees?


Earlier tonight I spoke with AIMCo's CEO, Leo de Bever. I will come back to that conversation but first let's go over the news.

Nathan Vanderklippe of the Globe and Mail reports that AIMCo head hits back at pay package critics:

The head of Alberta's investment firm is lashing out at critics who say his multimillion-dollar pay package is more appropriate for a professional hockey player than the man in charge of $70-billion in provincial savings and pensions.

The controversy has stoked new calls for controls on provincial executive compensation in Alberta, a province that has been hit hard by the recession and now finds itself with a fast-growing unemployment rate and a nearly $7-billion deficit. Even the board of AIMCo is now looking at ways to change its executive compensation.

Some of the anger has been sparked by the revelation that Leo de Bever, the newly installed chief executive officer of Alberta Investment Management Corp., earned $2.1-million last year, a figure that included $500,000 in long-term incentives - which Mr. de Bever says is currently worth nothing based on the fund's performance - and a $1-million signing bonus. The signing bonus was paid to cover off compensation Mr. de Bever had accrued at his former job.

AIMCo chief investment officer Jai Parihar, who is retiring, earned $2.8-million in salary and severance, plus an additional $362,000 in deferred compensation. Board members are paid $347,000 a year, nearly as much as the firm's chief operating officer.

The numbers, which were released in AIMCo's annual report, galled Opposition politicians, who angrily watched the province's treasured Heritage Fund lose $3-billion in value in the same year AIMCo was brought out from under government management and made into an arm's-length corporation. The Heritage Fund is Alberta's piggybank for oil and gas profits. The fund has since recovered $2-billion of that loss. Still, the compensation struck some as far too rich.

"A million-dollar signing bonus. Where do they think they are? In the NHL?" said Hugh MacDonald, the finance critic for the province's Liberal Party, who said it is time for the government to set standards for executive pay at public agencies. "For the economic times, it's too high. And the track record doesn't warrant that."

But Mr. de Bever defended the compensation as fair - and, in fact, a deal for the province - yesterday. AIMCo paid $174-million in external management fees last year. Mr. de Bever has calculated that it is four times cheaper to have his employees oversee money over hiring outsiders.

Mr. MacDonald, however, believes a sub-million-dollar salary should be suitable for the man in the top job.

"I think we should attract qualified individuals with a salary range of $600,000 to $800,000," he said.

But those who hired Mr. de Bever said small salaries are a bad idea. "You want the top guys doing it. You're not going to get the top guys if you're paying bottom dollar," said Charles Baillie, the former TD Bank head who chairs AIMCo.

Mr. de Bever told me tonight that he would have preferred if the headlines read "AIMCo pays $174 million in external management fees."

He was obviously disappointed with the press coverage and I believe justifiably so. The million dollar signing bonus isn't a big deal because it covered compensation owing to him while he was head of Victorian Fund Management Corporation.

Mr. de Bever added that he didn't take the job at AIMCo for the signing bonus. He wants to build something and he prefers to build an internal team instead of farming it out to external managers who don't deliver.

"I had Brian Gibson (senior vice-president equities, formerly at Ontario Teachers') look into the external managers and he found that over the last 10 years, excess return was zero (when adjusted for fees)."

[Note: Every public pension fund should undertake the same exercise and publicly post the results.]

When you're paying $174 million in fees, you expect returns net of fees, otherwise what's the point? Mr. de Bever is right to be upset. The politicians in Alberta are pulling hissy fits over his compensation and not over the $174 million in external management fees, which he's trying hard to save by building a qualified internal team.

So how did AIMCo perform? Gary Lamphier of the Edmonton Journal reports that AIMCo's fund posts a 10% loss:
Alberta Investment Management Corp.(AIMCo), which manages$69 billion of public-sector financial assets, posted a loss of 10.1 per cent for the year ended March 31.

The decline, disclosed in AIMCo's first report since it was spun off by the provincial government as a Crown corporation in early 2008, reflects a dismal year for equity markets worldwide.

AIMCo's balanced funds--which include various public-sector pension and endowment funds, including the $14 billion Alberta Heritage Savings Trust Fund--posted a loss of 18.0 per cent for the year.

The balanced funds hold a mix of equities, money market, fixed income and inflation-sensitive securities, with the equity component topping 50 per cent in many such funds.

AIMCo's government funds -- which include the Sustainability Fund--posted a gain of 3.3 per cent for the 12 months ended March 31. Unlike AIMCo's pension and endowment funds, the government funds are invested almost solely in ultraconservative money market and fixed-income assets.

"It was an environment where things did go wrong in world markets," said AIMCo's CEO, Leo de Bever, in an interview with The Journal.

"When you're losing 10.1 per cent, I suppose you could argue that it's a bad number. But it was a very average performance (during a year) when the average wasn't very good," he said.

"So when you look at the typical pension fund losing about 16 per cent on a calendar year basis, and maybe a bit more on a fiscal year basis through March, I think AIMCo didn't do worse than anybody else, but it didn't do better, either."

Canada's other major public investment funds also reported poor numbers for the period. The CPP Investment Board, with assets of $105.5 billion as of March 31, incurred a loss of 18.6 per cent over the previous 12 months.

The $87.4-billion Ontario Teachers' Pension Plan, and the $44-billion Ontario Municipal Employees Retirement System(OMERS)posted losses of 18 per cent and 15.3 per cent, respectively, for the fiscal year ended Dec. 31, 2008.

After posting huge declines through the first quarter--major U.S. indexes hit 12-year lows in March, and Canada's top equity benchmark sagged to a six-year low --stock markets have surged over the past six months.

Leading indexes are now more than 50 per cent above their lows.

The rebound has helped AIMCo's balanced funds recover a good chunk of last year's losses, de Bever said, although he didn't offer specific figures.

"The bounce back has been much stronger than anyone anticipated, and we've participated in it. We've done slightly better than the market over the last six months, so that's encouraging," he said.

"But whenever you see a situation where the market went down because of a lot of things--including the failure of the financial system, and lack of liquidity--and now it's bouncing back fairly rapidly because liquidity is recovering, in part, you wonder whether it's too much too soon. But I'm delighted that things have gone pretty well over the last six months."

AIMCo's annual report also disclosed compensation levels for the fund manager's senior officers, including de Bever.

His total pay package for 2009 was slightly more than $1.6 million. It included a base salary of$333,000, and other cash benefits and lump sum payments of about $1.1 million.

AIMCo chairman Charles Baillie said the $1.1 million figure mainly reflects an upfront cash payment to help compensate de Bever for income he gave up when he left his previous post in Australia to become CEO of AIMCo in August 2008.

Baillie said de Bever's annual compensation trails that of most other top Canadian pension fund CEOs.

A quick survey bears this out. CPP Investment Board CEO David Denison earned $2.9 million in total compensation for fiscal 2009. Ontario Teachers' Pension Plan CEO Jim Leech earned $2.03 million, and OMERS boss Michael Nobrega was paid $3.75 million.

AIMCo, which was created on Jan. 1, 2008, with a staff of 137, continues to add personnel and beef up its internal resources, said de Bever. It expects to have 250 on its payroll by 2010, when it's scheduled to move into its new headquarters on Jasper Avenue at 108th Street.

AIMCo is also investing in new systems and processes to cut operating costs, he said. By 2012, it aims to reduce these costs by $45 million a year.

Although skeptics question AIMCo's ability to lure top investment talent from Toronto and other major money centres to Edmonton, de Bever said that hasn't been an issue.

"I've found it quite feasible to attract talent to Alberta to build an organization that can compete with the best in Canada. Some people seem to doubt that's possible, that you cannot replicate the CPP or Ontario Teachers. But I'm not exactly trying to replicate them. I'm trying to build something that has the same performance, but we may not get there the same way," he said.

"It's not going to happen overnight. It will take at least four or five years to put in place. When I worked at Ontario Teachers it took nearly 10 years to build all the components that people now perceive as a very successful organization. It's now 10 years later and I'm trying to do the same thing here, but the problems are different and the solutions will be different."

AIMCo's fiscal year ends March 31st and the performance of the balanced funds was on par with that of CPPIB. and their senior officers were much better compensated, especially if you take away the signing bonus.

And let's not forget PSPIB's dismal FY 2009 results where they lost a staggering 23%. PSP's CEO, Gordon Fyfe, received $1.42 million total compensation after delivering those horrible results.

But a loss is a loss except let's be fair here. Mr. de Bever walked into his office in August and two weeks later, the markets went haywire. He didn't have time to react to what was going on. "Had I been there a year earlier, I might have been able to implement some changes. The reality is nobody could have done much in 2008."

[Note: That's where I disagree with Mr. de Bever. Nancy Everett limited the losses at GM's pension fund by allocating more to bonds at the end of 2006. HOOPP also saw the beauty of bonds in limiting downside risk.]

The reality was that Mr. de Bever landed at his new job during the worst possible time. He didn't even have a chance to evaluate what was working and wasn't working at AIMCo. He is still in the process of ramping up operations.

Carrie Tate of the Financial Post reports that AIMCo eyes private equity deals:
Alberta Investment Management Corp. could announce one or two private equity deals by the end of the year as infrastructure such as sewer lines and transmission grids are in desperate need of makeovers.

Leo de Bever, the firm's chief executive who was brought in to restructure the newly formed Crown corporation, said his firm is looking at about half a dozen potential private equity deals.

"Opportunities are walking in the door," he told reporters Tuesday morning.

A couple of the deals under the microscope are in the United States, one to two in the United Kingdom, a "couple" in Canada, and one in Australia, Mr. de Bever said. One or two deals could be unveiled before the end of the year, he said.

The transmission grid in North America, Mr. de Bever said, needs about $100-billion in investment to get it up to speed.

Some of the deals would require an investment of around $100-million, he said. The Edmonton-based firm, which manages about $70-billion for Alberta pensions, endowments, and government funds, may look for partners if necessary.

The new CEO is in the process of restructuring AIMCo, and one of his goals is to ditch the multi-million external management contracts. The deals were set up before AIMCo was spun out of the government, and some come with long-term contracts of up to eight years.

When Mr. de Bever took over the fund, it was paying roughly $175-million per year in external fees. He has shaved that number down to $150-million, and hopes it will drop to about $100-million in three years.

Right now he said he's spending an "inordinate" amount of money to have external mangers make investment decisions on basic asset classes such as equities. However, the long-term contracts are concentrated in the private equity world, Mr. de Bever said.

Mr. de Bever hopes the firm will be reshaped up to his standards in five years. As external managers are dropped, he plans to beef up AIMCo's internal staff. About 190 people now work for AIMCo, and he wants to about 250 people on the payroll.

His goal is for the fund to return between 1% and 2% above the index annually. "It is not insignificant," he said when added up over 10 years.

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