Thursday, April 24, 2014

AIMCo Gains 12.5% Net in 2013

CNW reports, AIMCo Announces Strong Returns for Clients in 2013:
Alberta Investment Management Corporation (AIMCo) is pleased to report a 14.0 % net rate of return on behalf of its balanced fund clients, who represent $63.2 billion of assets under management, for the year ending December 31, 2013. AIMCo’s government and specialty fund clients, who represent $11.5 billion of assets under management, earned a net return of 4.0%. In aggregate, AIMCo earned a 12.5% net rate of return on assets under management of $74.7 billion, generating investment income in excess of $ 8.3 billion and active return of $589 million across all clients.

Public market investments , comprised of $ 25.5 billion in Money Market & Fixed Income and $32.0 billion in Public Equities, significantly outperformed their market benchmarks, as did Mortgages and Private Debt& Loan. Private Investments in Real Estate and Timberlands also contributed to the strong performance.  

States Leo de Bever, Chief Executive Officer, “Since AIMCo was created in 2008, we have been singularly focused on achieving superior return on risk on our clients’ combined assets of $75 billion. Size gives us the economies of scale and access to investment expertise that allows us to extract above market returns on the best available terms .” Since 2008 , the organization has delivered on its mandate, earning a five year annualized net return of 8.8% and approximately $3 billion in value added.

Detailed performance information will be available in AIMCo’s Annual Report to be release d in June 2014. 
In my last comment, I wrote about CAAT gaining 13.9% net, praising them for their excellent results. As I was writing that comment, I received an email notice on AIMCo, which posted the same impressive net returns in their balanced fund where the bulk of the assets reside.

Importantly, these returns are net of all fees, which is the way all pension funds should report their returns. I'm also glad AIMCo changed its reporting date to a calendar year instead of a fiscal year. I hope PSPIB and CPPIB do the same for comparison purposes but that is up to government bureaucrats in Ottawa.

What drove AIMCo's  strong 2013 results? The same thing that drove most of the returns at other pension funds, U.S. and global equities. Ben Dummett of the WSJ reports,
Alberta Fund Giant Benefits from Buoyant Equity Markets:
Alberta Investment Management Corp. said Wednesday it posted a 12.5% return last year, benefiting from improving equity markets as other big Canadian pension funds have done.

The double-digit gain beat the Alberta-based pension fund's benchmark return of about 11.5% and comes after Ontario Teachers' Pension Plan generated a 10.9% return last year and Caisse de Depot et Placement du Quebec posted a 13.1% gain.

Like these funds, AIMCo, which oversees 74.7 billion Canadian dollars ($67.7 billion) on behalf Alberta's provincial public sector employees, attributed its performance in part to its public equity holdings.

"We had an overweight to equities and that paid off quite handsomely," Leo de Bever, AIMCo's chief executive, told The Wall Street Journal in a phone interview.

Global stock indexes surged last year on expectations of improving global economic conditions. The U.S. broad-based S&P 500 stock index gained 30% in 2013, while the Stoxx Europe 600 rose 17% and Japan's Nikkei Stock Average benchmark gained 57%.

Looking ahead, Mr. de Bever suggests equities may not perform as well this year, but he remains more bullish on stocks compared with bonds.

"Over the next five years…I'd rather be in stocks than bonds because bond yields are either going to stay low" or if they rise that will hurt capital gains, the pension fund executive said.

In the fixed-income sector, AIMCo favored corporate bonds, and short duration debt, allowing these investments to outperform their benchmarks last year. The pension fund's real estate, and timberland investments in Australia also generated solid returns.

But repeating that performance is becoming more difficult because the "the pricing (for these assets) is getting very high," Mr. de Bever said.
Indeed, Gary Lamphier of the Edmonton Journal reports, AIMCo manager expects returns to moderate for 2014:
Alberta’s giant pension fund manager posted double-digit returns for 2013, marking the best performance in its six-year history.

Edmonton-based Alberta Investment Management Corp. (AIMCo), which oversees $74.7 billion of assets, recorded a net return of 12.5 per cent last year. In dollar terms, that equates to more than $8.3 billion.

The gains included a net return of 14 per cent on the balanced funds AIMCo manages for various public-sector pension and endowment fund clients, including the $17.3-billion Alberta Heritage Savings Trust Fund.

Balanced funds, which hold a mix of stocks, bonds and other securities, comprised more than $63 billion, or nearly 85 per cent of AIMCo’s total assets at the end of 2013.

AIMCo’s government and specialty funds, which largely hold conservative, low-return money market securities, posted a net return of four per cent last year.

The sparkling 2013 performance boosted AIMCo’s five-year annualized net rate of return — which dates back to the global financial crisis of 2008 — to a more-than-respectable 8.8 per cent.

Leo de Bever, the veteran 65-year-old pension fund manager who has served as AIMCo’s first and only CEO since the firm was spun off as a Crown corporation in 2008, says AIMCo’s nifty 2013 gains were driven largely by the sizzling performance of U.S. and global equities.

The S & P 500 Index, the main U.S. stock market benchmark, rose nearly 30 per cent last year, its best performance since 1997. Japan’s Nikkei 225 Index soared by well over 50 per cent and the MSCI World Index jumped more than 22 per cent.

“Last year if you stayed away from bonds and were overweight equities, that obviously worked out well,” says de Bever.

“Global equities did the best, followed by U.S. equities and then Canadian equities. So any of our peers that were heavily into Canadian equities wouldn’t have done quite as well as those who had global exposure.”

The S & P/TSX Composite Index, Canada’s main equity benchmark, posted a relatively modest gain of 9.5 per cent last year, trailing all of the major U.S. indexes by a wide margin. Canada’s resource-heavy index was weighed down by the poor performance of energy and mining stocks.

The roles have reversed thus far in 2014, however, as energy stocks have surged. Toronto’s lead index is up about 6.7 per cent through Wednesday’s close. That’s well above the 1.4-per-cent uptick in the S & P 500 Index, the top-performing U.S. equity index.

“After a year like last year people were obviously saying, ‘What are the parts of the market that are really overvalued, and what are the areas that got hurt?’ ” de Bever notes. “Well, what got hurt last year were resources stocks. That was both a China story and a developing world growth story,” as both slowed.

“This year we’ve had some political turbulence (notably in Ukraine) which is probably causing some of that money to flow back into energy, since there’s a feeling that energy security in Europe is now going to be what it is,” (i.e., less certain.)

So what kind of year does de Bever anticipate for equity investors in 2014?

“My guess is that when we get to the end of the year, the net return will be much more modest than what we saw last year, but that doesn’t mean it’s going to be negative,” he says.

“The overall top-line growth of the economy is not bad. It’s not great, but what’s happening is that the profitability of a lot of companies is still strong because they are implementing new ways of doing things, and using new technologies to save costs. So as long as (economic growth) is up, stock markets may hang in there.”

Indeed, while the generally accepted view is that economic growth since the 2008-09 recession has been softer than in past cycles, de Bever says he is beginning to doubt that conventional view.

“I think people probably underestimate the strength of the economy right now,” he argues. “The measurement system we use for GDP (Gross Domestic Product) is very good for industrial economies that make stuff, but it’s not so good for measuring ideas and services,” he notes.

“My sense is that growth is understated, and inflation is probably overstated. Sometimes we’re too morose about our growth prospects. I think the economy is probably doing better than people think.”
I agree with Leo de Bever, growth is understated (see Brian Romanchuk's latest comment, Commercial & Industrial Loans Holding Steady) and inflation is overstated. I also think stocks will continue to outperform bonds but going forward, deflation remains my single biggest concern, so bonds aren't dead by any stretch of the imagination (see Hoisington's latest economic commentary to understand why long bond yields have further room to decline). 

The only thing that irks me with all these Canadian pension funds reporting their results is that they don't release their annual report at the same time as they make their results public. The Caisse did post its annual report on its website, but the English version isn't available yet. HOOPP's full 2013 annual report is available here.  I am going to do a full comparison of all these large Canadian pension funds in the near future, looking at their annual reports in detail, comparing everything, including compensation and culture.

As far as my outlook 2014, I remain overweight U.S. stocks, the U.S. dollar, short Canada and the loonie, and still like high beta sectors, including biotech, and think the latest selloff presented another excellent buying opportunity, especially for NASDAQ shares.

By the way, did anyone notice how Apple's Tim Cook stuck it to short sellers by announcing a stock split and share buyback? Apple shares are rallying 8% today. He must have taken Carl Icahn's advice. The analysts covering Apple on Wall Street are frigging clueless. Most of the large Canadian pension funds, especially Ontario Teachers, loaded up on Apple shares during the last quarter, following the lead of other top funds.

Below, Canada’s Alberta Investment Management Corporation is opening an office in London – the first outside of Canada. Chief executive Leo De Bever talks to the FT’s Anne-Sylvaine Chassany about the company’s plans for Europe. Great discussion, well worth listening to.