Tuesday, July 3, 2012

AIMCo Returns 7.4% in Fiscal 2012

Dan Healing of the Calgary Herald reports, AIMCo reports ‘not bad’ 7.4% annual return:
Alberta’s public investment firm faces challenging bond and equity markets going forward that will make it difficult to repeat its 2011-12 total net return of 7.4 per cent, its chief executive says.

Leo de Bever, who heads up Alberta Investment Management Corp. or AIMCo, said Wednesday many of the factors that went into posting “not a bad return” for the year ended March 31 are not sustainable.

Therefore, he said, the company will continue to seek out “unusual” investment vehicles in future.

“As much as I find it rewarding to have these both absolute and relative returns, known as value added, it worries me what you’re going to do going forward,” he told reporters in discussing the annual report to be released today.

“We got a lot of that return from the alternative asset classes: infrastructure, private equity, timberland and real estate. It basically validates the reason we were created by the government ... to create the internal capacity to manage assets directly and to do that at lower cost than through external managers.”

The 7.9 per cent total return (7.4 per cent net of fees) beat AIMCo’s “benchmark” goal of 5.9 per cent by two percentage points. Last year, the firm’s actual return matched its benchmark of 8.2 per cent.

De Bever, who became CEO about three years ago, said he’s pleased that AIMCo was able to post 8.7 per cent return from its balanced funds (8.2 per cent after fees, 6.4 per cent benchmark), which are split about 60-40 in equities and bonds.

Its short-term government funds earned just 4.2 per cent net of fees on a 3.6 per cent benchmark.

By comparison, in April, the Ontario Teachers’ Pension Plan reported an 11.2 per cent rate of return for calendar 2011, boosting net assets by $11.7 billion to $117 billion. It noted it earned 1.4 percentage points above its 9.8 per cent benchmark or $1.4 billion in value-added returns.

According to its annual report, AIMCo grew its assets under management to $69.7 billion from $68.8 billion in 2010-11 despite the Alberta government withdrawing $5 billion to cover its budget deficit.

“It’s tough figuring out what’s going to give first, the bond market or the stock market,” De Bever said. “I think the bond market will hang in there for a while because central banks are still creating liquidity and the risk aversion of the public in general is creating a shift to bonds.”

He said the company is looking for niche infrastructure investments between $500 million and $1 billion but they are very scarce.

There are some opportunities in economically challenged Europe, he added, but AIMCo must be careful not to try to “catch a falling knife” when looking for good investments there.

“Austerity may be good for the soul but it’s not good for the economy right now,” he pointed out.

De Bever said the length of time it takes to win regulatory approval of projects like the Northern Gateway oil pipeline through B.C. makes them unattractive.

“The problem in markets like Canada and the U.S. is that the time it takes to get (pipeline projects) approved becomes an impediment,” he said.

“I don’t want to sit there and argue for 10 years over permits and that sort of thing.

“It’s not that I don’t think environmental reviews are appropriate, I think they are, but let’s get them over in a decent amount of time and not just use them as delaying tactics.”

Environmental reviews have delayed a series of pipeline projects in Canada including the Mackenzie Valley gas pipeline to the north, the Northern Gateway oil pipeline to the west and the Keystone XL oil pipeline south into the United States.

AIMCo has bought into projects including forestry in Australia, a toll road in Chile and a river barge scheme in Brazil.

“I’d like to find stuff a little closer to home but, to be honest, I can’t find anything that’s terribly interesting,” he said, adding that investments in Alberta have the added tension of second guessing and speculation of political influence because of AIMCo’s ownership.

AIMCo’s operating costs in the fiscal year jumped to $323 million or .46 per cent of invested assets from $248 million or .36 per cent the year before, driven by higher internal performance-driven fees (up $19 million to $56 million) and external asset management, legal and other expenses of $89 million, up $53 million.

Total compensation came to $59 million, up $11 million, due to hiring more staff and staff incentive plans.

Doug Alexander and Jeremy van Loon of Bloomberg report, Canada's AIMCo Pension Gains 7.4% on Real Estate, Bonds:

Alberta Investment Management Corp., Canada’s fourth-biggest pension-fund manager, posted a 7.4 percent return on investments last year, helped by holdings of real estate and long-term bonds.

Investment income was C$5.16 billion ($5.03 billion) for the year ended March 31, Leo de Bever, chief executive officer for the Edmonton, Alberta-based fund, said in an interview. The fund’s assets rose 1.3 percent to C$69.7 billion from a year ago, according to its annual report released today.

AIMCo, as the fund is known, beat the 3.2 percent median return of the country’s pension funds over the 12 months, according to RBC Dexia Investor Services.

AIMCo was established in January 2008 to manage investments for Alberta’s provincial government, public pension plans and endowments, including the C$16.4 billion Alberta Heritage Savings Trust Fund. AIMCo oversaw about C$54.7 billion in balanced funds, which posted an 8.2 percent return. Government funds had a 4.2 percent return.

Real estate holdings returned 23 percent, while timberlands assets climbed 20 percent, according to the annual report. The fund’s long bonds portfolio returned 17 percent, compared with 7.5 percent for its money-market and fixed-income investments. Private equity rose 13 percent, and stocks increased 2.4 percent.

For its part, AIMCo put out a brief press release:

Alberta Investment Management Corporation (AIMCo), one of Canada’s largest investment management firms, today reported 8.7% gross rate of return on behalf of its balanced fund clients for its 2012 fiscal year end. AIMCo earned a 7.9% gross rate of return or $5.2 billion in value-added returns from a total fund perspective including a 4.7% gross rate of return from government funds.

“I am pleased to report that AIMCo earned a gross return of 8.7% for our balanced fund clients last year,” said Leo de Bever, CEO, AIMCo. “This is a solid result in the face of unsettled markets. We continue to build the team and infrastructure necessary to earn better than market returns in the future.”
Last Friday, I went over why Leo de Bever, AIMCo's President and CEO, is warning of storm clouds ahead. Today, wanted to dig deeper into AIMCo's FY 2012 results.

I invite my readers to carefully go over AIMCo's annual report by clicking here. My comments below all draw on this annual report.

The annual report, titled "Going Where Opportunity is Next", begins with a famous quote by hockey legend Wayne Gretzky: "“I skate to where the puck is going to be, not where it has been.”

That quote pretty much captures Leo de Bever's mindset. He's constantly worried about what lies ahead, not what happened in the past. All smart investment managers think the same way.

In his message from CEO (page 5), de Bever states the following:
We continue to work toward completing major improvements in our corporate architecture. Consistently delivering on AIMCo’s goal will always be a challenge, but I am confident these improvements will leave AIMCo well positioned.

The current financial environment likely will not make our task any easier. The next few years may well create a once-in-a-generation financial turning point. Many market indicators are pointing to the end of the 30-year bull market in bonds that started with the war on inflation.

Interest rates may remain low for some time, as the Global Financial Crisis left us with high unemployment and weak economic growth, despite enormous injections of liquidity that have resulted in negative real interest rates. This was compounded last year by concerns about the sustainability of the rapid growth in public debt and social spending, first seen in the U.S. and then in Europe.

Finding workable long-term fiscal and monetary policy solutions will require approaches that, on the surface, may seem counterintuitive. Fiscal austerity may be good for the soul, but it is not so great for economies with high unemployment and under-utilized productive resources. Building support for an emotionally unpalatable approach will be difficult.

In this uncertain environment, we will concentrate more than usual on “investing between the cracks”, in opportunities that do not fit a conventional asset class. We strongly believe that this is what it will take to find net returns that are attractive, stable and uncorrelated with market volatility.

We have attracted many talented people, because talent drives performance. We have also committed significant resources to business systems and processes. Good investment decisions start with good information, and good execution relies upon strong compliance and controls.

Cost-efficiency is important. Managing more assets internally and rationalizing relationships with external managers have reduced costs for listed and unlisted assets. This has kept base operating costs essentially unchanged, despite higher allocations to labour-intensive infrastructure, private equity and real estate. Cost is not the whole story. At AIMCo we focus on our clients’ bottom line – where can we find highest return net of costs and adjusted for risk?

It will be decades before most of our clients require liquidity from the assets we manage. Recently, we have found good long-term infrastructure opportunities abroad that are a better match for pension liabilities than bonds. We expect that similar opportunities will start to appear closer to home given the need for social infrastructure and reduced access to traditional sources of public financing.

Investment outcomes are inherently volatile, and good long term strategies are not always validated in the short run. We try to protect our clients as best as possible against near-term risks, while remaining poised to go – and capitalize on – where opportunity is next.
And as the article above states, de Bever sees opportunities in niche infrastructure investments and in other alternative investments where opportunities lie.

Not surprisingly, this is where most of the value added was generated. I created the table below to illustrate this point (click on image to enlarge):

As you can see, most of the value added in alternatives came from Private Equity and Timberlands, returning 13.1% and 19.5% respectively, over their benchmark returns of 1.6% and 9.6%.

This immediately caught my attention, so I looked into the performance benchmarks of all asset classes on page 15 (click on image to enlarge):

I was surprised to see how some of the benchmarks for some investment asset classes do not reflect the underlying risk of the investment portfolio.

Remember my simple rule of thumb for gauging an investment manager's performance. In any investment activity, whenever someone trounces their benchmark by a wide margin, it typically means that the benchmark is grossly deficient and doesn't take into account the underlying risks of the investment portfolio.

I have written all about alternative investments and bogus benchmarks when I began publishing this blog in June 2008 and also wrote a lengthy comment, It's All About the Benchmarks, Stupid!. Academics are catching on to the topic of risk and expected returns of private equity investments.

What shocks me is that I've discussed this topic a few times with Leo de Bever and AIMCo has even published white papers on benchmarks for unlisted infrastructure. Well, maybe they got the benchmarks right for Infrastructure and Real Estate but the ones for Timberlands and especially Private Equity do not reflect the risks they're taking.

Importantly, these benchmarks do reflect the leverage and illiquidity risk of the private market investments, which is why AIMCo seriously outperformed in these asset classes.

Worse still, in Private Equity, the Venture Capital portfolio returned 21.3% net of fees, outperforming the benchmark by 19.8%. When you mix VC in a PE portfolio, your benchmark better reflect that increase in risk profile. In this case, it doesn't.

Leo de Bever isn't a dumb guy, far from it. He knows all this, which is why I'm not surprised he ignored my emails asking him to explain how these benchmarks reflect the risks of the underlying portfolio.

And it isn't just in Private Equity. A quick glance at some of these benchmarks suggests there are deficiencies in the way they account for Hedge Funds, Commodities and other investment activities.

So why did the Board approve these benchmarks? Maybe it was for compensation purposes, allowing AIMCo to attract investment managers to Edmonton. I don't know. All I know is that benchmarks matter a lot because that's how you measure added value and set compensation.

On the issue of compensation, there was a discussion on pages 32-33, where it was stated that compensation costs were $59.1 million for 2012, an increase of $11.3 million over fiscal 2011, primarily due to continued investments in people and strong investment performance in 2012 . Details of salaries and benefits are provided on pages 56-57.

All in all, I thought this was a pretty good year for AIMCo but I did have issues with the way value added was measured for some private market investments (mostly PE). If Leo de Bever or anyone else at AIMCo feels otherwise, I welcome them to contact me directly and I will update this post.

Below, Leo de Bever, chief executive officer of AIMCo, talks about his company's relationships with sovereign-wealth funds, He speaks with Bloomberg's Jeremy van Loon in Calgary.

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