The Alberta Investment Management Corp. posted a 10.4 per cent return, net of all costs, at the end of 2017.Earlier today, I had a chance to talk with AIMCo's CIO, Dale MacMaster, to go over 2017 results.
In a news release on Wednesday, the fund said its active selections in each asset class contributed a return premium of 1.3 per cent for its balanced fund clients relative to the passive benchmarks it uses for comparison. The fund’s release emphasized its extended time horizon and noted that, over the past five years, it has achieved a net return premium of 0.9 per cent on behalf of all clients.
“As a long-term investor, we are proud of the sustained value add that we have delivered to our clients since the province made the bold decision to establish AIMCo 10 years ago,” said Kevin Uebelein, chief executive officer of AIMCo, in a press release.
As of Dec. 31, 2017, AIMCo held $103.7 billion in assets under management, which represents $8 billion in growth from $95.7 billion at the end of 2016. Further details of AIMCo’s strategy and performance for 2017 will be available in the fund’s annual report in June.
“Our strong investment performance in 2017 represents a short-term affirmation that our course of action is the right one and is the result of the high degree of trust our clients have placed in us to meet their objectives,” said Dale MacMaster, chief investment officer of AIMCo, in the press release. “More important, these returns have empowered our clients to make critical decisions for their stakeholders, such as reductions to contribution rates, or budget reconsiderations due to newly available funds. As Alberta’s economy strengthens, it is gratifying to be able to deliver our clients $1.1 billion of net value add against our benchmark returns.”
Before I get to our discussion, AIMCo put out a press release, AIMCo Achieves Premium 10.4% Return for Clients in 2017:
Alberta Investment Management Corporation (AIMCo) announced today its investment performance for the year ended December 31, 2017. The aggregate return achieved on behalf of its fourteen Alberta pension and endowment balanced fund clients was 10.4% net of all costs. AIMCo actively selects the assets it invests in within each class, and measures its performance relative to a standard passive benchmark for each class. In 2017, AIMCo achieved a net return premium of 1.3% for its balanced fund clients, over and above the composite benchmark.Alright, so AIMCo's detailed Annual Report won't be available until June but I did get speak with Dale MacMaster earlier to go over 2017's performance and more. I'd like to first thank Dale for taking some time out of his busy schedule to speak with me.
AIMCo's investment strategies are designed to deliver premium returns over an extended time horizon, not just for a single year or two. Over the last five years AIMCo achieved a net return premium of 0.9%, on behalf of all clients. This places AIMCo in the top quartile of its peer investment managers based on the most recent analysis by CEM Benchmarking, the industry's principal performance measurement firm. CEM's analysis also places AIMCo in the most favourable quartile for cost performance and risk curtailment.
"As a long-term investor we are proud of the sustained value add that we have delivered to our clients since the Province made the bold decision to establish AIMCo ten years ago," states Kevin Uebelein, Chief Executive Officer. "The commitment to our clients, and indeed all Albertans, demonstrated by the talented men and women at AIMCo is something I am most proud of. Every investment AIMCo makes represents Alberta, so we ensure that our decisions are both responsible and sustainable."
Dale MacMaster, Chief Investment Officer, adds, "Our strong investment performance in 2017 represents a short-term affirmation that our course of action is the right one and is the result of the high degree of trust our clients have placed in us to meet their objectives. More important, these returns have empowered our clients to make critical decisions for their stakeholders, such as reductions to contribution rates, or budget reconsiderations due to newly available funds. As Alberta's economy strengthens, it is gratifying to be able to deliver our clients $1.1 billion of net value add against our benchmark returns."
Detailed performance information will be available in AIMCo's Annual Report to be released in June 2018.
About Alberta Investment Management Corporation (AIMCo)
AIMCo is one of Canada's largest and most diversified institutional investment managers with $103.7 billion of assets under management, as at December 31, 2017. The organization's mandate is to maximize risk-adjusted net investment returns in a manner responsive to the needs and expectations of its 32 Alberta-based pension, endowment, government, and specialty fund clients. Balanced fund pension and endowment clients account for $88.2 billion of assets under management, and are most representative of AIMCo's overall performance, as they utilize the full range of the organization's asset and style capabilities. Government and specialty fund clients account for $15.5 billion of assets under management, and largely rely on AIMCo for its expertise in managing fixed income assets and for liquidity management.
Established as a Crown corporation on January 1, 2008, AIMCo is operationally independent – operating on commercial principles and at arm's length from the government of Alberta – yet strategically aligned with the Province as our shareholder. The organization is committed to the highest standards of corporate governance including an independent, highly-qualified and diverse Board of Directors that draws on global experience to provide meaningful guidance and oversight to the organization.
Here are the main points we covered:
- Total return: As stated above, AIMCo's Balanced Funds returned 10.4% in 2017, 130 basis points over the benchmark. Dale told me they've been very cautious over the last couple of years and were pleasantly surprised to see strong gains across public and private markets this late in the cycle. Over the last four years, the Balanced Funds delivered an annualized return of 9.5% relative to a benchmark return of 8.75%.
- Fixed Income: AIMCo's Fixed Income which includes money markets, mid-term and long-term bonds, private debt, real return bonds, and short-term and long-term segregated assets did very well. Dale told me there was 110 basis points value add over 4 years and 80 basis points value add last year which is top decile return in fixed income. AIMCo runs an internal portable alpha strategy in Fixed Income and it also engages in repo activities to add to returns. Dale told me they're not making big duration calls, focusing more on the short end and managing their risk closely there too (see further down, our discussion on macro environment).
- Public Equities: A solid performance across the board in Canadian, global and emerging market stocks with the latter gaining 30% on an absolute return basis and 2% relative to the benchmark. Across the $44 billion portfolio, value add was 1.8%. There is a portable alpha strategy as part of public equities which invests in 9 external hedge funds across several strategies including multi-strategy, macro, credit, L/S equity, catastrophe and even hedge fund secondaries.
- Private Equity: Dale shared this with me on AIMCo's PE portfolio: "We like the asset class and over the past 4 years we delivered annualized returns of 13.4% and a value add of 1.9% over benchmark. In 2017, the performance was flat versus a benchmark return of 8.0% so we underperformed there. Obviously, it’s the long-term that matters and the reason we lagged last year was the J-curve effect of some new fund commitments that we made over the last 2 years. This combined with the fact that some direct private equity assets that we hold, were more or less flat on the year after having delivered strong returns and relative value in 2016 and 2015."
- Real Assets: Here we talked mostly about Real Estate and Infrastructure. Dale told me the Real Estate portfolio returned 9% in 2017 relative to 7% benchmark which is the MSCI/ IPD Canadian All Property Index – Large Institutional Subset. AIMCo's Real Estate portfolio is diversifying more globally but relative to its large peers (except for bcIMC), it has more exposure to Canadian real estate and obviously has more exposure to Alberta real estate which dragged returns over the last few years but boosted them for a long time when the province was booming. Dale told me they focus on A buildings and the high vacancy rates in Calgary and Edmonton are mostly in B and C buildings. "It benefits us because people are getting out of those rents and signing long-term leases with our A buildings (many are LEED certified) which is great income and added protection for inflation." He added: "Things have stabilized over the last year." (no doubt, the rise in energy prices obviously helps but British Columbia's environmental zealots aren't helping Alberta's economy).
- Infrastructure: Dale told me AIMCo's Infrastructure portfolio delivered 9.2% in 2017, a 2% value add. He told me they took advantage of frothy markets and high demand to trim certain infrastructure assets which either didn't fit in the portfolio or still have great cash flows, a solid counterparties and provide good inflation protection but they wanted to realize on those gains and invest elsewhere. He said they are now taking much bigger stakes in infrastructure and their focus is on assets like ports where they see a backlog and good growth potential. The focus in Infrastructure is more in growth areas.
- Macro Risks: Dale told me the biggest risk is that we're at the tail-end of a long bull market in equities, inflation is picking up and the Fed is raising rates. He doesn't see a calamity (neither do I) but he does see central banks trying to normalize rates and that will cause volatility to pick up across all risk assets. He doesn't think rates or inflation will normalize to previous levels but there is an effort to normalize rates and that presents challenges across public and private markets. For example, in Real Estate cap rates will rise and valuations will be impacted which is why they're focusing more on class A buildings, signing long 15-year leases to get income and some inflation protection. I told him I'm worried about the yield curve inverting because I see global PMIs decelerating and the Fed continuing to raise rates which will cause the yield curve to invert and I"m not buying the inflation story at all (see here and here). Dale agreed, telling me "the forward yield curve" has already inverted ad policy errors are on his mind too and he’s paying close attention to credit spreads. He added: "Last year, people were worried about valuations and rising rates whereas this year, we also have potential trade wars and investors questioning market leaders like Facebook. I'm not saying it will be catastrophe but all these things really test a bull market, especially this late in the cycle."
Below, Alberta Premier Rachel Notley says the federal and Alberta governments have commenced discussions to "eliminate" investor risk in the Trans Mountain pipeline project.
I'm frankly disgusted and shocked by the ignorance British Columbia's government is showing, fighting this pipeline which the country needs, and I'm glad a new poll says more than half of British Columbians now support the Trans Mountain pipeline expansion project, with the number of backers rising even as the provincial government digs in its heels on the battle to stop the project from moving forward.
B.C.'s government needs to stop pandering to environmental lunatics and start doing what is right for the province and country. Let's all hope cooler heads prevail but I'm very worried and watching Canadian news at night makes me sick to my stomach (we need to wake up and stop perpetuating myths on how bad pipelines are for the environment, that is total nonsense!).