AIMCo's De Bever Sees a Tepid 2013?
Despite non-stop political wrangling in the United States and Europe and a sluggish global economy, AIMCo is poised to rack up decent returns for 2012.This article was written right before Christmas but gives you a good indication of what one of the most intelligent pension fund managers in Canada thinks is in store over the next 12 months and over the the next 10 years.
With just days to go before the year-end, Alberta Investment Management Corp. has posted a gain of about 10 per cent on its public-sector pension and endowment funds, which make up about three-quarters of its $70 billion portfolio.
If one includes the short-term and special-purpose funds AIMCo manages for the Alberta government — which are invested mainly in safe, low-return money market assets — the year-to-date return is about eight per cent, says AIMCo CEO Leo de Bever.
That’s about two per cent or $1.5 billion above the return for comparable market benchmarks before including costs, he says.
AIMCo’s costs equate to about 0.4 per cent of assets, which de Bever calls low for a complex, actively managed portfolio.
Although 2012 was a better year for equity markets than many expected, the veteran pension fund manager isn’t promising a repeat performance in 2013. In fact, de Bever warns that returns are likely to be poor, although it’s impossible to predict with any precision.
“Anyone who claims he has any insight into where markets are going on a six- or 12-month basis has an exaggerated notion of his own intellect,” he says.
“The situation right now is especially muddy because it’s driven by politics, not economics. If I saw a 20 per cent drop in equity markets, that to me would be the signal to pile in. But is that going to happen? My guess is not.”
Instead, de Bever expects a lot of meandering, sideways market action in 2013, which could leave the broad equity indexes little changed over the next 12 months.
“My guess would be that after a relatively strong 2012, 2013 could be very tepid. As in either a small loss or just treading water,” he says.
“We’re trying to find substitutes for bonds, because that’s where we think the biggest risk is. And we’re keeping a normal weight for equities, trying not to be exposed to a growth story because there is no real growth,” he says.
“The difficulty is that the dividend stocks have been bid up in price to such a degree that a lot of that benefit is gone. So if I had to say whether our equity returns will be higher or lower than in 2012, I’d say they’ll be lower.”
Although he didn’t mention it, de Bever’s subdued outlook for stocks is consistent with the low returns that the Shiller P/E index currently implies. The closely followed stock market metric, devised by Yale University professor Robert Shiller, reflects the average price-earnings multiple for U.S. stocks over the last 10 years.
The Shiller P/E currently sits in the low 20s, well above the long-term average of 16. Although it has soared to as high as 45 at past market peaks — as it did in 2000, before the markets tanked — the current, slightly elevated level suggests this isn’t the ideal time to load up on equities.
On Wall Street, it’s a different story, however. As always, the spirit of sunny optimism prevails and most market watchers are bullish.
Barron’s, the influential U.S. investment weekly, says the Wall Street strategists it polled for its annual year-end outlook piece are calling for an average gain of 10 per cent for the S&P 500 Index next year.
Their forecasts for the index ranged from a high of 1660 — implying a gain of 15.6 per cent from Wednesday’s closing level — to a low of 1434, which would leave the S&P 500 largely unchanged for the year. Not a single strategist sees markets declining in 2013.
According to a separate poll of 49 forecasters conducted by Bloomberg News, precious metals will lead returns for all asset classes in 2013, with gold prices expected to reach $2,000 US an ounce, up from about $1,670 currently.
For his part, although he believes stock markets face significant near-term risks, de Bever believes equities will outperform bonds over the next decade.
“Right now, when you look at volatility levels in the stock market, there seems to be this notion that there’s no problem whatsoever, and of course that isn’t true. We’ve got a significant recession risk and a significant fiscal risk, so my sense is that stock markets aren’t particularly cheap,” he says.
“But if I had to be Rip Van Winkle and wake up 10 years from now, I think stocks are the better place to be, even on a risk-adjusted basis, because the returns on bonds just won’t be there,” he argues.
“Right now, people are scared. They almost don’t care about making any income. They’re just more concerned about not losing any capital. But at some point that’s going to change.”
De Bever was one of the first to come out and call the top on bonds. Others, like Michael Sabia, the President and CEO of the Caisse, followed warning investors that the bond party is over. By the start of the year, the great pension shift was underway as investors are all wondering whether the time has come to say buh bye bonds.
But as I explained in a previous comment, the titanic battle over deflation has yet to sink bonds and while the risks of an important backup in yields over the next year are high, there are structural deflationary headwinds that still favor bonds, even at these historic low yields. These include demographics, high and persistent unemployment, technological change and lower energy costs.
One of Canada's smartest and richest financiers, Paul Desmarais Jr., warned that the deleveraging cycle in Europe and elsewhere could take five to seven years to run its course. This seems like a reasonable assumption that many bond bulls, like Gary Shilling, keep referring to.
In short, even if bond yields back up over the next 12 months as the US and global economy surprise to the upside, the risks of debt deflation remain high. This is why I'm not convinced the Fed will stop its asset purchases anytime soon or that bonds will underperform stocks over the next 10 years.
Importantly, unless we see a sustained pickup of good paying jobs in the United States, Europe and elsewhere, don't count bonds dead just yet. The most important crisis threatening the global economy remains the jobs crisis, not the manufactured debt crisis. If policymakers don't tackle the former, the latter will explode.
But one thing I can guarantee you is that historic low bond yields mean you will see more volatility in global markets over the next decade. Interestingly, de Bever and his Deputy CIO, Jagdeep Baccher, have been busy sharpening up their global tactical asset allocation (GTAA) strategy. They are doing this by investing in a skillful team to identify opportunities around the world and by revamping their IT infrastructure, investing in cutting-edge data management.
And when it comes to alternative investments, de Bever takes a more measured approach, often shunning the rest of the pension herd which keeps piling into hedge funds, private equity, real estate and infrastructure at any cost. By bringing assets internally, he has managed to cut costs significantly and improve net performance.
As far as his stock market outlook, I'm much more bullish than he is on 2013. The Alcoa conference call confirmed one of the themes I'm positioning for, namely, a significant rebound in China. I remain bullish on materials, focusing on coal, copper, and steel ('CCS'), and keeping my eye on shipping stocks to see if they awake from their coma.
Below, Bloomberg's Dominic Chu reports that Alcoa reported fourth-quarter sales that exceeded analyst estimates as the company sees China's economy driving aluminum demand. He speaks on Bloomberg Television's "In The Loop."