AIMCo Gains 2.3% in 2018

The Alberta Investment Management Corporation (AIMCo) recently announced its investment performance for the year ended December 31, 2018:

The aggregate return achieved on behalf of its fourteen Alberta pension and endowment balanced fund clients was 2.5% 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 2018, AIMCo achieved a net return premium of 1.1% for its balanced fund clients, over and above the composite benchmark.

With the gains achieved in 2018, AIMCo has earned its clients investment income in excess of $60 billion, net of all costs, since being established in 2008, of which more than $6.3 billion represents value addinvestment income above the benchmark returns for the period. “We continue to see our long-term investment strategies paying off for Albertans. The results are a testament to the expertise and dedication of our talented team,” said Kevin Uebelein, Chief Executive Officer. “With the continued trust of our clients, we look forward to seeking out new investment opportunities that will build prosperity in the years to come.”

“Market volatility made 2018 a challenging year. Delivering a positive return for our clients was a significant achievement,” added Chief Investment Officer Dale MacMaster. “Our results show the necessity of a diversified portfolio. Returns on some of our real estate and infrastructure investments helped offset results from asset classes that did not perform as well.”

Detailed performance information will be available in AIMCo’s Annual Report to be released in June 2019.

This week, AIMCo's 2018 Annual Report was released. You can view it here and download the entire PDF file here. Take the time to read this report, it's not too long and extremely well written.

At a minimum, read Chair J. Richard Bird's message on page 9 and CEO Kevin Uebelein's message on page 10. Below, I quote Kevin:

AIMCo’s investment performance in 2018 demonstrated the value of a well-diversified portfolio, realizing strong value add from investments made years, or even decades ago. Active management by AIMCo’s investment teams contributed nearly a full third of value add received by AIMCo’s Balanced Fund Clients, which earned a net investment return of 2.5%, outperforming their benchmark return by 1.1% for the year. Illiquid investments, particularly Infrastructure, Renewable Resources, and Real Estate, exhibited strong outperformance, while public market investments, particularly Public Equities, were negatively impacted by the significant market volatility that closed out the year.

Earlier today, I had a chance to speak with Dale MacMaster, AIMCo's CIO. I want to thank Dale for taking the time to chat with me on his vacation, I love talking to him because he's really nice and super sharp, covering key issues pertaining to public and private markets.

We started off by talking about the US jobs report that came out this morning. The US economy added 224,000 jobs in June, a strong comeback for the labor market after a disappointing May.

Dale said the report was strong and "takes 50 basis point cut off the table this month." He said with job growth averaging 170,000 a month and unemployment so low, it was surprising the market was pricing in a rate cut this late in the expansion.

I told him the S&P 500 is up 19% year-to-date led by tech stocks which are up almost 30%, so I too am surprised the Fed would entertain a rate cut especially since financial shares are up 18% this year:

The only justification is that inflation expectations remain on the low side, and as Dale told me, that gives the Fed some room to cut here.

Still, I'm not convinced the Fed will cut and even if it does, I agree with UBS strategist, Francois Trahan: “When it comes to US stocks, the Fed put is dead.”

Dale told me at the beginning of October last year, the market was pricing in 2-3 rate increases and by January, that all flipped the other way.

He said both stocks and bonds have rallied hard this year but with the yield curve inverting, he suspects the bond market will be a better gauge of economic activity going forward.

He said earnings are growing from a lower level and that trade issues continue to hamper the market (he thinks they will eventually be resolved but not in the near term).

Anyway, that led to a discussion of AIMCo's results. Below, a table of asset class performance which can be found on page 23 of the Annual Report:

I like the way AIMCo presents its results and if it were up to me, all pensions would be forced to present their results by asset class exactly like this.

I also like the way AIMCo follows up with their performance benchmarks on the next page (page 24):

Now, we can discuss the merits of some of the benchmarks they use in illiquid asset classes -- for example, why shift from S&P 500 to total CPI 1 Month Lagged + 650 bps (5-year rolling average) in private equity?? -- but at least they are very transparent about their benchmarks.

Anyway, I mentioned to Dale that Public Equities struggled last year but have performed well over the last five years (Fixed Income performed very well last year and over last 5 years).

He told me the breadth of the market narrowed, factor investing is underperforming and the only factors working are growth and momentum, which are the top factors again this year. "Value and quality" are underperforming once again.

He gave me the example of a L/S fund managed by AQR asset management, one of their external managers, where even within the same sector like semiconductors, buying value underperformed momentum.

I told him I trade these markets and see it firsthand, hedge fund quants and CTAs have taken over these markets, which is why it's all about buying the rip and selling the dip.

He doesn't think this is sustainable over the long run but admitted that it can persist for a lot longer than most investors think (Keynes's famous quote: "Markets can stay irrational longer than you can stay solvent").

We then got into a very interesting discussion on private markets which all performed very well:

Dale told me these double-digit returns aren't sustainable and he gave me the example of real estate stating: "Toronto commercial real estate has done well but with cap rates at historic lows, it will be much harder for them to go lower" (see my recent comment on real estate here).

He said they're not buying "core assets" in real estate and have been active buying and selling real estate assets. They are also diversifying their holdings outside of Canada (out of $16 billion, $4 billion is foreign).

I asked him if he sees a bubble in private equity and he said "no, there's no bubble in PE, I've heard this for years but multiples are at historic highs, funds are getting bigger and bigger, there's record dry powder and realizations are increasingly being done among private equity funds selling to each other" (see my recent comment on BlackRock's Canucks shaking up PE).

Still, Dale told me clients are big believers in private equity and illiquids, as is he, because their plans are fully funded and the prospect of losing 40% or 50% in listed markets scares them.

Interestingly, he told me AIMCo is still under-invested in private equity (3-4% of total), especially relative to its peers that have 10-12% invested in this asset class and they see great opportunities all over the world in PE. He told me that AIMCo has a dedicated PE funds and co-investment team and "many LPs want co-investments but don't have the requisite team that can handle them".

He also said many GPs promise co-investments and don't deliver but AIMCo has longstanding relationships with its GPs and they have grown their co-investments nicely over the years (Leo de Bever started this program to reduce fees).

On whether private market valuations are "massaged", Dale was unequivocal: "That's absolutely not the case. Our audit committee values independence above all else and oversees a very thorough valuation process for all holdings in our illiquid asset classes. The end result is often valuations that are relatively conservative, the proof being that when we go to sell, our realizations happen at much higher multiples."

In terms of asset mix, Dale told me clients have the final say but they do consult them. He told me he'd advise them to put more in private equity and other illiquids like infrastructure where the spread over long bond yields has widened in recent years making this asset class more attractive despite the increased competition.

We ended our discussion talking about risks that lie ahead. He said global growth is slowing, CFOs are concerned, trade issues linger but he thinks they will be resolved going into the next election. "The biggest concern I have is if central banks start tightening and keep tightening, making a policy error, but that's not what I see right now."

There is a great Q&A with Dale on pages 20-23 of the Annual Report where he states the following:

We believe that global economic growth is moderating and should settle around potential growth in most geographies, accompanied by relatively stable inflation conditions.

We favour a modest overweight to equities and an underweight to bonds. With clients at or near their targets for illiquid assets we will continue to invest and overweight the private assets as we believe that they will continue to generate attractive risk adjusted returns over the listed assets. As we contemplate new strategies, our clients’ evolving funded status and evolving asset mix requirements combined with market trends and opportunities will be foremost in our thinking.

Lastly, I embed the summary compensation table on page 67 of the Annual Report:

Once again, take the time to read the detailed discussion on compensation that precedes this table and keep in mind, it is primarily based on long-term results.

You will notice Dale MacMaster had the highest compensation again but that's because he has been working at AIMCo for a very long time so his long-term incentive plan is better than Kevin Uebelein's for now. "Once Kevin's LTIP kicks in, I assure you he will be getting compensated more than me, and rightfully so."

I commend Kevin Uebelein, he has done a great job at AIMCo succeeding Leo de Bever and I'm impressed with him, his senior team and all the employees at AIMCo. Their overall results are in line with their peers like OTPP and OMERS but with less allocation to private equity, for now.

Below, Kevin Uebelein, CEO of AIMCo, joins BNN Bloomberg to discuss their billion-dollar purchase of Northern Courier pipeline from TC Energy.

I spoke with Dale on how undervalued the oil & gas sector is and how Canada needs a new pipeline that covers the entire country or we risk being left far behind our neighbors to the south which are energy self-sufficient.