AIMCo Sees Returns Rebound in 2009-2010

Last Saturday, Lisa Schmidt of the Calgary Herald reported that AIMCo sees returns rebound:

The province's investment manager has won back significant ground over the past year, its chief executive said Thursday, following tough losses in 2008.

Alberta Investment Management Corp., known as AIMCo, said overall returns are running in the range of about 17 per cent, said Leo de Bever, who will mark two years at the helm next week.

"If you look at the return on the Heritage Fund, that's sort of indicative of what we did on the endowments and for the pension plans," he said. The rainy day fund gained $2 billion to $14.4 billion for the 2009-10 year, compared with a $2.6-billion loss a year earlier.

But the recent market volatility has already pared back some of those overall investment gains, de Bever also cautioned.

"So far, we're still above water, but it's mostly been because of our effort in active management. The markets themselves haven't given us very much," he said.

The crown corporation, which oversees about $69 billion in provincial savings, employee pensions and endowment funds, lost 10.1 per cent on its investments in fiscal 2009. Despite the expected gains in 2010, the overall fund did not increase in value due to government withdrawals, de Bever noted.

Official figures won't be released until this fall, when AIMCo files its annual report. The agency was set up by the provincial government in January 2008.

But the much improved performance is sure to spark a gusher in staff bonuses, an issue that needs to be monitored, said Alberta Liberal finance critic Hugh MacDonald.

"They are going to be rewarded," he said, noting the agency paid out significant bonuses for the previous year when the fund lost money.

"We have to keep AIMCo accountable, because they have well in excess of $60 billion of Albertans' dollars under their control.

"We're going to have to wait and see," he said.

"With the instability that has occurred in the financial markets, it will be five years or more before we see . . . just how effective this new approach is with AIMCo."

For his part, de Bever acknowledged the payouts will be higher, but said the sums are warranted if the organization hopes to retain and attract talented staff.

He also noted that external management costs have been slashed by about 30 per cent to $120 million over the past year.

"I feel that the trade-off for Albertans was pretty good," he said.

"I paid $120 million to managers that lost me $500 (million). I paid a much, much smaller amount to people internally that did make me money."

Meanwhile, the Edmontonbased agency has hired 90 new staff over the past 18 months. and de Bever plans to hire another 30 by next year for a total of about 250.

"We've spent a lot of money in the last two years beefing up the operations side of things," he said.

"It's just now that we're starting to hire for the investment side."

But that aggressive recruitment drive has not hampered deal-making over the past few months.

AIMCo is currently working on several international deals, de Bever said, though he declined to give details, given that talks were currently underway.

He said the investment focus for private equity remains on key areas such as energy, materials and food amid a slow economic recovery.

"There's still an awful lot of companies that got in over their heads in 2008," he said. "They are now looking for a partner."

As reported in the article, official figures won't be released until this fall, when AIMCo files its annual report. You can, however, read AIMCo's 2008-2009 Annual Report and find some very interesting information [Note: Pay attention to the benchmarks used to evaluate alternative asset classes].

Despite the rebound in returns, Mr. de Bever continues to deal with PR issues. But as Gary Lamphier of the Edmonton Journal reports, PR perils part of life for CEO at AIMCo:

It's been two years since Leo de Bever assumed the top job at Alberta Investment Management Corp. (AIMCo), and he has plenty of reasons to smile.

AIMCo's returns have snapped back nicely since the bear market ended and economic recovery took hold. Although formal results for fiscal 2009-10 won't be out until fall, the $69-billion Crown corporation will show much improved numbers.

After posting a loss of 10.1 per cent last year, AIMCo -- which manages Alberta's public pension and endowment funds -- will report gains of about 17 per cent on its balanced funds for the year ended March 31.

Since the firm also manages the province's Sustainability Fund, which invests mainly in ultrasafe low-return bonds, AIMCo's overall returns will be slightly lower than that.

Meanwhile, de Bever has engineered a sweeping overhaul of operations, including a move into spiffy new headquarters on Jasper Avenue earlier this year.

By replacing costly external managers with in-house talent and spending millions on new computer systems, AIMCo has shaken off its bureaucratic roots and now operates like any other sophisticated, professional fund manager.

AIMCo's execs are judged -- and rewarded -- on performance, bringing a dose of Bay Street's edgy business culture to a city that's still getting used to the idea of being home to one of Canada's top institutional money managers.

AIMCo's growing clout hasn't gone unnoticed. The Edmonton-based firm has a growing profile in the national media and de Bever pops up regularly on business news shows. With investments all over the world, from Asia to Europe, AIMCo's reach is increasingly global.

Despite that, de Bever says he's sometimes frustrated by the parochial politics of Alberta, where AIMCo is still regarded by many as an appendage of the Tory government.

"The biggest surprise is, I thought everyone knew what the government intended to do here (by spinning off AIMCo as an independent entity) and that there was a fairly strong understanding of that, but that turns out not to be the case," de Bever says.

"It's taken longer than I'd hoped to gain the trust of the people I manage money for. They see me -- or did see me -- as an agent of government, rather than someone who is trying to help solve their long-term funding problems."

In reality, de Bever insists the Stelmach government has taken a hands-off approach to AIMCo from Day 1, and has never tried to meddle in its portfolio decisions.

"The one thing that hasn't happened is that the government has had absolutely no influence on anything we've done over the last two years, directly or indirectly," he says. "But I must tell you that whenever I do something in Alberta, I have to do that second check, and ask myself: 'Gee, how could this be perceived?' "

De Bever got a taste of Alberta's political realities last year, when AIMCo invested $330 million in Calgary-based Precision Drilling Trust. Critics slammed the deal as a thinly veiled attempt to bail out a debt-saddled player with a big footprint in the oilpatch.

De Bever staunchly defended the deal as a solid investment for AIMCo, and Precision's performance since has confirmed that. Still, he was bruised by the experience and says he no longer makes investments in Alberta without first considering the optics.

"It's tempering my willingness, and in some cases my board's willingness, to sign up for certain things that could have PR implications," he says.

"Whenever I do something I have to look at how much management time it's going to take to defend that decision in public. And in a fairly significant way, it's causing me to say, 'All right, if I can do some things in Alberta or outside of Alberta, it may be easier to do it outside.' "

In particular, de Bever says PR worries are affecting how AIMCo positions itself in the province's sprawling energy sector. Although AIMCo sees plenty of opportunity for upside, it's also wary of appearing to be a tool of government.

"I've had several opportunities where, from an economic standpoint, I should have made that investment. But from an overall 'how will this be perceived' point of view, it didn't happen," he admits.

"Now is that good or bad? It probably means investors from out of province, in some cases, probably can do it easier than we can."

De Bever doesn't offer any specifics, but it seems likely that some of those investments involved key energy infrastructure such as oil-sands upgraders.

As for the market outlook as a whole, de Bever remains cautious. He sees "choppy" stock markets ahead as investors try to sort out whether the recent strength in corporate earnings is sustainable.

His biggest worry is that governments will curtail fiscal stimulus and begin to focus -- prematurely, in his view -- on reining in their budget deficits.

"I'm a fiscal conservative in the long run, but I think you have to be really careful that you don't repeat the mistakes of the 1930s," he says.

"It may be necessary to prime the pump a while longer. I know all the arguments against that, but the alternative is so much worse. We could be in for protracted slow growth or even negative growth with deflation. The way out of that is to keep the stimulus going."

I agree with Mr. de Bever. I am a fiscal conservative but fear that if governments pull the stimulus too quickly, then we risk heading into a third depression.

Another interesting article that caught my attention was from Tara Perkins of the Globe & Mail, Infrastructure king in no rush to invest again:

Leo de Bever is one of the godfathers of infrastructure financing, but these days you couldn’t get him to touch the stuff.

“The time to be in infrastructure is not now,” he says point blank. “It’s too expensive, everyone’s in it. Whenever everyone’s in it, you want to back off.”

Infrastructure investments are a hot commodity thanks to the predictable long-term cash flows that they generate. Pension plans, insurers and banks are expanding their burgeoning infrastructure teams and chasing deals such as the Canada Pension Plan Investment Board’s $3.2-billion preliminary offer for Sydney-based toll road operator Intoll Group, whose largest asset is its stake in Highway 407 north of Toronto.

Mr. de Bever, the chief executive of Alberta Investment Management Corp. (AIMCo), knows the space as well as anybody. During the ten years he spent as a senior vice-president of the Ontario Teachers’ Pension Plan, he developed a reputation as the king of alternative asset classes. He came to run what he affectionately referred to as his $13-billion orphanage: a pile of assets that Teachers’ scooped up – including infrastructure and timberland – that other investors balked at because they didn’t fit neatly into any traditional asset classes. Manulife Life Financial Corp. lured him away from Teachers’, but after two years with the insurer he moved to Australia to become chief investment officer of Victorian Funds Management Corp., one of the country’s top public sector pension funds.

These days price isn’t his only concern. “The problem with infrastructure is, particularly in tight fiscal periods, you run into regulatory risk and you have to be absolutely sure – just like we saw with the 407 – that the government sticks to the original deal and doesn’t try to change it after the fact,” he said during a recent interview in Calgary.

Mr. de Bever’s caution speaks to the dilemmas confronting policy makers and investors around the globe, as cash-strapped governments look for ways to get their fiscal houses in order. Governments are seeking to do deals with the private sector as a means of raising funds, but have trouble justifying the moves unless the terms are extremely favourable to them.

When the financial crisis was still in full force, California Governor Arnold Schwarzenegger invited a number of American pension plans and a few Canadian pension plans to a meeting to discuss financing for the state’s numerous infrastructure requirements.

“We sat together with his advisers for a day or two, and went through that, and at the end of it the advisers were basically saying, ‘You guys have a lot of money, you could put it to good use, you don’t have to charge us as much as somebody else,’” said Mr. de Bever. “And I said, ‘Wait a minute, that last part I don’t get. We have to make money on these investments.’”

“I did a fair bit of the early infrastructure stuff among Canadian pension funds,” he said. “And in the beginning you could get an honest 14 per cent return on equity because the market was very inefficient.” To do the same thing these days, with a number of players competing for deals, would take a whole pile of leverage, he suggested.

The reason he got a very good real return bond deal on the 407 project when he was at Teachers’ is that initially, no bank wanted to finance the 407 because they were not convinced that Ontarians would pay tolls, he said. “I was the first one to finance the debt behind that equity, and we got a five and a quarter real return bond, which now seems obscene.”

That’s not to say that he’s written infrastructure off entirely.

“In most places, water and sewage are going to take an enormous amount of capital because everything is starting to leak,” he said. “Given that the fiscal positions of a lot of these governments is pretty weak, private capital has to come in at some point, and that’s when I think infrastructure will become attractive again.”

That could be as soon as two or three years from now. In the meantime, he’s sitting tight.

Mr. de Bever is one of the smartest pension fund managers I've ever met. He knows what value means and is patient enough to "sit tight" waiting for the right opportunities to come along. Two years ago, I wrote that AIMCo was lucky to get him as their CEO. I stand by that comment.