AIMCo's Co-CIOs Discuss Their Record 14.7% Gain in 2021

Barbara Shecter of the National Post reports AIMCo delivers record 14.7% gain in 2021 as it rebounds from volatility scheme losses:

Alberta Investment Management Corporation (AIMCo) has bounced back from a $2-billion loss on a volatility trading scheme in 2020, posting the strongest net return in its history — 14.7 per cent — for the year ended Dec. 31.

The Crown corporation, which manages pension, endowment, and government funds in Alberta, beat its aggregate benchmark of eight per cent, with a record annual “value-add” of $7.7 billion. Client assets under management at the end of the year totalled $168.3 billion.

The annualized total fund return over ten years is 8.6 per cent.

“Delivering record investment returns is a tremendous accomplishment made possible by our in-house asset management expertise,” said Evan Siddall, who took over as AIMCo’s chief executive in July.

Siddall was previously head of the Canada Mortgage and Housing Corporation (CMHC).

James Barber, who joined AIMCo in July and became co-chief investment officer this month, praised the various teams for generating double-digit returns while responding to external risk-management recommendations following the 2020 volatility loss.

“We’ve been driving the car while changing the wheel,” he said, adding that the returns came from new investments rather than the re-valuation of a loss on paper.

“This wasn’t just a bounce back,” Barber said. “I think of the investment team being very astute in a stressful environment and actually being able to lean in and make good, risk-adjusted decisions.”

Sandra Lau, co-CIO, said the fund manager is in a good position to face down rising rates and high inflation through strategies undertaken over the past few years including geographic diversification.

“We have proactively moved to shorter duration assets and increased our allocation to private and real assets,” she said.

“Going forward the environment provides opportunity for a patient long-term investor to continue to increase allocation to illiquid (inflation-sensitive) investments and invest in private credit to further protect against inflation and higher rates.”

AIMCo’s balanced funds earned a net return of 16.2 per cent, outperforming the benchmark by 7.3 per cent. The investment manager’s government and specialty funds also beat their benchmark, with a return of five per cent.

Barber said some of the return-generating investments were years in the making, particularly in areas such as private equity and debt. Meanwhile, AIMCo’s overriding strategy remains to allocate capital where expected returns are high, while selling investments when they reach attractive prices even when they might have been purchased for the longer term.

Earlier this week, the Alberta Investment Management Corporation (AIMCo) announced record investment performance on behalf of its 32 clients, earning a total fund return of 14.7% outperforming an aggregate benchmark of 8.0% resulting in a record annual value-add of $7.7 billion:

Alberta Investment Management Corporation (AIMCo) today announced its investment performance for the year ended December 31, 2021. On behalf of its Alberta-based pension, endowment and government fund clients, AIMCo earned a total fund return of 14.7% net of all fees — measuring a composite of its clients’ portfolios. This represents the strongest year in AIMCo’s history, surpassing an aggregate benchmark of 8.0%, resulting in a record annual value-add of $7.7 billion.

The annualized total fund returns over four and ten years are 7.4% and 8.6%, respectively. Total client assets under management at the end of the year were $168.3 billion.

Through active investment, in 2021, AIMCo achieved an excess return of 6.7% on total assets under management, over and above the composite benchmark. AIMCo’s Balanced Funds, those portfolios that represent the full investment capabilities of AIMCo, earned a net return of 16.2%, outperforming the benchmark by 7.3%, while Government & Specialty Funds earned a net return of 5.0%, outperforming the benchmark by 2.8% for the year.

“Delivering record investment returns is a tremendous accomplishment made possible by our in-house asset management expertise. Ultimately, these returns are for the benefit of our clients and we’re proud to play our role in helping them secure a better financial future for the Albertans they serve,” said Evan Siddall, Chief Executive Officer. “By providing superior, long-run, risk-adjusted net returns, we are proud to support each of our clients in achieving their long-term goals.”

Investment Highlights

Infrastructure

• AIMCo sold its majority share of Eolia, a leading independent power producer in the Spanish renewable energy sector Read More

• AIMCo Welcomes Investment by First Nations, Métis Nations and Suncor in Northern Courier Pipeline Read More

• Iguá Saneamento S.A., a company in clients’ Infrastructure portfolios, won an auction for a Brazilian water and wastewater services concession for $1.7 billion Read More

• AIMCo committed to the second close of Keppel-Pierfront Private Capital Fund Read More

• AIMCo leads investment in India’s first renewable energy infrastructure investment trust, Virescent Renewable Energy Trust Read More

Private Equity

• AIMCo participates in the IPO of Hayward Holdings Read More

• AIMCo participates in the sale of Davies Read More

• AIMCo and OMERS sold a majority stake in Environmental Resources Management Read More

Real Estate

• AIMCo, King Street and a sovereign wealth fund established a joint venture with East End Studios to meet demand for production studios Read More

• AIMCo Realty concluded the sale of $500 million of green bonds Read More

Renewable Resources

• AIMCo and New Forests acquire Lawson Grains, one of Australia’s largest grains and oilseeds businesses Read More

Responsible Investment

For the third consecutive year, the Responsible Asset Allocator Initiative (RAAI) has placed AIMCo among the world’s top 30 most responsible asset allocators Read More

Operational Update

Over the course of 2021, AIMCo integrated the investment assets of the Alberta Teachers’ Retirement Fund, Alberta Health Services and the Workers’ Compensation Board – Alberta, bringing total assets under management to $168.3 billion at year end.

Detailed performance information will be released in AIMCo’s 2021 Annual Report, available at the end of June.

About Alberta Investment Management Corporation

AIMCo is among Canada’s largest and most diversified institutional investment managers with $168.3 billion of assets under management. AIMCo invests globally on behalf of 32 pension, endowment and government funds in the Province of Alberta.

For more information about AIMCo please follow us on LinkedIn or Twitter.

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AIMCo Total Fund performance results are net of fees and do not include $30.1 billion of assets transferred from the Alberta Teachers’ Retirement Fund, Alberta Health Services and Workers’ Compensation Board – Alberta in 2021 that have not yet met the required conditions for inclusion in AIMCo's value-add as at December 31, 2021.

Money Market and Fixed Income Total Market Value includes $2,012 million of notional exposure of this asset class. This is composed of cash and synthetic cash from AIMCo's Tactical Overlay Program, plus notional Fixed Income exposure.

Public Equities Total Ending Market Value does not include Tactical Overlay Program notional exposures in this asset class.

AIMCo posted its best year ever, gaining 14.7%, surpassing an aggregate benchmark of 8%, resulting in a record annual value-add of $7.7 billion.

More tellingly, AIMCo’s balanced funds which represents the full investment capabilities, earned a net return of 16.2%, outperforming the benchmark by 7.3%.

These numbers are very impressive. 

All the major asset classes contributed to the record annual value-add, especially Private Equity (65.9% return, 57.1% value-add), Infrastructure (19% return, 12.2% value-add), Renewable Resources (15% return, 8.2% value-add) and Real Estate (14.5% return, 6.8% value-add).

Now, the annual report isn't available yet so I don't have details, but on Friday afternoon, I had a chance to discuss these results with AIMCo's new Co-CIOs, Sandra Lau and James Barber.

I want to thank both of them for taking the time to talk to me and also thank Dénes Németh, Vice President Corporate Communications, for setting up this Teams meeting.

I want to begin by stating something Sandra told me at the end of our conversation: "Dale MacMaster, AIMCo's longtime CIO who just retired, deserves the credit for these results along with our whole investment team. We are just the messenger."

James agreed and I also want to recognize Dale for his invaluable contribution to the organization's success over the years he was the acting CIO.

Alright, it's Friday, I realize that I typically reserve the end of the week to talk about markets but there is a lot to cover on pensions this week and I did get into market risks with both Co-CIOs at the end of our conversation so please keep reading. 

I began by asking them about the outstanding returns in Private Equity and how much of that was due to the sale of ERM or other assets.

James replied:

"I think what we saw in Private Equity was a function of two things: 1) the program maturing so no more J-curve effects. We are seeing the revaluation of assets which were investments we made years ago. Strong equity markets helped those valuations as strong rising valuations are helpful to that. Secondly, there were situations where we exited as well. ERM would be one example, Hayward would be another one of a successful IPO exit. So, it wasn't just ERM, a couple of situations where we were divesting as well as having assets where we were executing on the underlying thesis and those assets were being revalued. I'm sure you've seen this, equity markets have been robust, in particularly in private equity where there's a lot of capital, so we are seeing multiples expand. But at the same time, there's a lot disruption happening, businesses are being successful at creating revenues, supporting that multiples expansion, so we have been fortunate benefit."

He added: 

"I wouldn't want to extrapolate those returns. We think as the program becomes more diversified across geographies, sectors, strategies and vintage, we will continue to see strong returns but no the outsized returns we saw last year. [As the J-curve effects dissipate] We are now moving more into the sweet spot as the program matures so some of those investments we made years ago are coming into fruition. And the second thing is the program is more focused on mid-market space and from a sector perspective we've focused on technology, healthcare and other areas which have proven to be good places to make investments a few years ago. These businesses have not only taken market share but have benefited from high margins."

Interestingly, on the mid-market focus of the program, he stated this:

"If you are a very large player, or incumbent, it becomes increasingly difficult to grow your top line. What we find is large incumbents are being attacked by mid-market companies, people coming out of VC or growth equity space, and this is where innovation is happening, So, we actually want to remain focused on the mid-market space in the coming years (to benefit from this disruption going on). It's not just economic growth but companies growing their market share."

Sandra expanded on the geographic focus, which deal added to the PE returns last year and the J-curve effect:

"You're right that the US, Europe and UK remain the focus but last year, the team started expanding into Asia as well. So when you will read the annual report once it is out, you'll see we are starting to allocate more into Asia in Private Equity. As far as deals, the Hayward IPO. Hayward was a 6x multiple giving us close to 60% return for that single investment. As far as the J-curve effect which I remember Dale talking to you about, we started the program in 2016. Five or six years later, riding out the J-curve and harvesting those returns is good timing as far as our PE portfolio."

We then moved the discussion to Real Estate where James made these remarks:

"Real estate was marked down in 2020, so some of the return is because we are seeing decent revaluation. Part of it is the real estate footprint where we leaned into industrials, data centers and residential. Those have been really strong performers, particularly in the industrial space.Offices and retail remain more challenged and the jury is still out as we see employees headed back to the office and travel more, so the recovery there is ongoing. But overall, the performance in Real Estate is partly from revaluations, partly from a shift in strategy."

Sandra added:  

"To be honest, Alberta's real estate was lagging last year, we were still overweight and that has still been lagging but we see a recovery going on there. To what James alluded to, it's more a factor of the positioning of the portfolio. We were overweight industrials and residential and underweight retail and offices. We were early, even before Covid hit (2019), to shift that dynamic, so it's a good time to harvest those returns."

In terms of geographic exposure in Real Estate, James told me the focus has shifted outside of Canada, focusing more in the US and increasingly in Europe and the UK and some small investments in Asia (smaller part of the portfolio).

He added: "For the year, the foreign portfolio outperformed, we saw 14% in Canada and 15 and change percent for the foreign portfolio. So the foreign portfolio adds diversification and growth potential with a lot of capital moving that way."

Sandra said partnerships are crucial for foreign investments: 

"I think we have $13-14 billion in domestic real estate and $7-8 billion in foreign real estate (she didn't have exact figures in front of her) but for foreign investments, the model has always been to use platform companies. So we use platform companies to open up foreign jurisdictions or other type of foreign exposure. Using the platform company gives us the benefit to have the access, the pipeline, all while sharing the benefit."

Sandra added that the platform companies are also critical to realize on their value creation plans and these are the type of models they use for foreign real estate and infrastructure investments. 

James confirmed they are up to almost 40% in international real estate and it's critical to have good partners in these markets who understand local dynamics and the regulatory environment. "In markets where we have more expertise and been longer, we tend to go direct (like Canada)."

We shifted the discussion to infrastructure where James noted:

"Infrastructure is a similar story. Good, solid year but many of those investments were made years ago. We did have a couple of situations where things moved quicker than anticipated. One example is Eolia where we invested in 2019, expected a ten year investment horizon but received a number of approaches and ended up selling that asset at what we deemed to be a significant premium. Being investment led, sometimes it makes sense to crystallize these assets and redeploy capital where you can continue to have a higher IRR. So we recycled that capital in areas where we think we can get better returns. Overall in infrastructure, it was a combination of some transactions doing what they're suppose to be doing and others being realized supporting returns."

James added: "It's also an area where we are seeing shifting dynamics, not just in terms of transition finance but also in terms of inflation protection. We are seeing more players coming to the table where they are looking for more inflation protection in the underlying asset."  

I mentioned to them that Ontario Teachers' has been shifting more assets out of fixed income into core infrastructure and even though it isn't a perfect substitute, this is where they feel they can get better risk-adjusted returns over the long run. 

Sandra replied:

"This is the direction that clients we invest on their behalf have been pushing for even as early as 2021 or even earlier. This is the direction they are shifting to. The backdrop you're describing, higher rates, inflation protection..in fixed income, going from long bonds into shorter duration..so from bonds to real assets (real estate and infrastructure), those are the themes our clients we invest for on their behalf are focusing on. So it is a trend we are seeing even at our pension fund."

We then moved the discussion to ESG and responsible investing and how it permeates across all asset classes. James expanded on this:

"There are two pieces to this and you are right about how it permeates across asset classes. This is one where Sandra and I partnering up in the CIO role said we want to preserve the benefits of deep asset class specialization, expertise and focus but at the same time, there are a number of initiatives that are really pan-asset class. We think they are going to be really important in terms of driving success and differentiating the winners vs the losers. ESG is one of those, talent is another, data and analytics would be a third and there are a couple of others. But responsible investing is an important one and I think if you do it in a more strategic way, across the platforms, you can actually achieve better outcomes, much better integration, support structure around that. So, we have been working hard making sure we have our resources aligned, embedding them in the investment decisions, making sure they are really close to the investment teams to help guide in the research and decision making process, not in the after-the-fact reporting process or policy perspective. So for every item that comes to the investment committee, we ask for an independent review to (make sure ESG risks are properly evaluated)."

He added: 

"We have done a lot of work around climate change and energy transition. We want to be investment led, we think our energy department is going to expand by more than 50% over the coming decades. And so, we are not going to turn off our lights, the heating and stop traveling, It's going to be a massive transition in terms of the structure of the economy. So, there's a lot of uncertainty. We don't have all the answers but in those circumstances where the landscape is going to change meaningfully, there is lots of uncertainty. That means the reward for good hard research and due diligence is more pronounced and there will be plenty of opportunities but there will also be plenty of risks around that. For us at AIMCo, how do we capture and navigate those opportunities and risks in a very proactive, investment led manner. This will be pivotal to our success. So we are spending more time in this space looking at all kinds of things like hydrogen, storage, carbon capture, etc."

He also notes: 

"If you look at the relative returns between energy and technology, it's north of 50% this year. So if you can pick up an asset at 5 or 6 times EBITDA, we think we engage, provide expertise and capital and add a lot of value for our clients. This is a super interesting space but you need to navigate it through an investment lens."

Sandra interjected: 

"I would just add, the investment lens is always critical to create value but we never lose sight of being a good corporate citizen in terms of stewardship, advocacy, engagement and proxy voting. ESG integration is critical, we have the RI team embedded in the investment team to do full ESG due diligence in our investment process. We are actively involved in GRESB. Our real estate portfolio achieved a high score, so we are not only delivering good returns and value-add, we achieved a high score (in terms of sustainability and energy efficiency) on those assets. So striking a good balance on both, that is something we are proud of. We issued our first green bond last year. We are also starting to report more and more on our carbon footprint. It's kind of tricky but we are more engaged in this activity."

We ended by talking about markets and  shared my bearish views with Sandra and James:

• Ignore the yield curve at your own peril
• Will the housing affordability crisis lead to a recession
  

I told Sandra I just read Hoisington's quarterly economic update and I am worried the Fed is too hawkish here, thinking 3% on the 10-year US Treasury note is starting to be attractive here.

Sandra was too kind and shared her astute market thoughts:

"I don't have a crystal ball but I think the Fed was wrong on the way in and wrong on the way out. They were too bold (at the onset of the pandemic) and are way too aggressive now. I think the bond market has priced it right, 3% across the whole whole curve from 2 to 30 years. The Fed can raise the overnight rate to the nominal terminal rate of 2.5% or 3% but to be honest, I think this is the max the market and the economy can take. The Fed doesn't mind deflating the bubble in some assets and I am surprised the stock market hasn't done much selling as of yet. However, if the Fed went more aggressive, going above 3%, then I would be more concerned about a really hard landing. Monetary policy is a blunt tool, you now that, so if the Fed becomes really aggressive, I'd be concerned about a hard landing. Right now, we are still ok in the mid cycle but once the Fed goes too fast, too aggressive, I am concerned about the housing market and how it impacts consumer confidence, consumer leverage spilling to the HELOC (home equity line of credit) refinancing risk, stress tests and then into financial market risk of the true credit market cycle. That's really a risk and I don't think the Fed wants to go higher than 3%."

Sandra added they are very defensive and cautious in equities and actively hedging tail risks here. James said their value tilt has paid off this year.

Alright, let me wrap it up there and wish everyone a Happy Earth Day and nice weekend. I also wish Orthodox Christians a Happy Easter.

Let me once again thank Sandra and James for another great conversation full of stimulating insights.

After talking to them, I see how they complement each other and why they will make fabulous Co-CIOs at AIMCo.

Below, the Alberta Investment Management Corp. (AIMCo) came off a record year with a total fund return of 14.7 per cent, resulting in an annual value-add of $7.7 billion. James Barber, co-chief investment officer and head of private investments with AIMCO, joins BNN Bloomberg to discuss the institutional investor's investment outlook amid global inflation.

And the investment committee joins the 'Halftime Report' to discuss its take on the markets and how Fed tightening will impact investors. I agree with Steve Weiss, TINA is dead, stocks will head lower and people will quickly realize we are in a bear market and it could get a lot nastier, especially if the Fed remains ultra hawkish in spite of a slowing US economy.