Leo de Bever on Imagining a Better Future
Below, some bullet points from our conversation:
- AIMCo delivered 11.5% on their balanced fund for fiscal year 2013 which ended on March 31st. This represents 200 basis points value added above the policy (benchmark) portfolio which is excellent. The annual report will be made available in June.
- Unlike Ontario Teachers' or HOOPP, AIMCo cannot leverage its portfolio using derivatives and repos. It's forbidden by Alberta's provincial law. It's important to keep this in mind because looking at headline figures doesn't explain risks. Leo thinks intelligent use of leverage is fine but they can't do this at AIMCo and he jokingly told me: "this could change but by then the timing will be wrong."
- We talked a lot about the global economy, monetary and fiscal and policy. He explained how monetary policy is raising the value of all assets as cheap money floods the system. "Problem is all the money is benefiting the banking system, corporations are hoarding record amounts of cash but the money isn't flowing into the real economy."
- We talked about inefficient demand and the paradox of thrift. Leo thinks governments need to facilitate infrastructure spending to ignite demand and that the myopic focus on fiscal austerity will create more problems down the road.
- We discussed rising inequality in the United States and elsewhere. He told me GDP is not capturing everything in the economy. In particular, human capital isn't being captured: "Take a company like Facebook. Probably used $100M in physical capital or less and they extracted $20B and more. Where did it go?"
- He also told me to read a book, Race Against the Machine, to understand how the digital revolution is accelerating innovation, driving productivity and irreversibly transforming employment.
- But technology isn't all bad. Leo sees incredible innovations taking place in energy, healthcare and many other fields.
- He told me that on a recent trip to Palo Alto, he was amazed to see how universities are working closely with the private sector and venture capitalists to commercialize ideas. "We are lagging in Canada and this needs to be addressed. Canadian universities are not producing students with the skill sets that are needed by industry."
- In terms of markets, we talked about bonds, stocks and the facade of strength. He still thinks that stocks will outperform bonds over the long-run but he notes the performance of stocks won't be spectacular.
- In the unlisted markets -- private equity, real estate and infrastructure -- they look at deals that make sense and like to "invest between the cracks."
- AIMCo is looking to sell its stake in Place Ville Marie here in Montreal, most likely to the Caisse, the other major owner. The decision has nothing to do with Quebec but they think it's time to give another operator the opportunity to work the asset. "That's what makes a market."
- Finally, we discussed benchmarks in private markets and compensation. Leo thinks benchmarks must reflect opportunity cost but he also told me that even "top quartile managers can underperform markets on any given year," so you need to make sure your compensation is competitive enough to attract and retain the right people to manage the unlisted assets which have all sorts of issues like J-curves and stale valuations.
- But he did add that using different benchmarks in private markets (ie. one for performance and one for compensation) can create "organizational, behavioral and agency issues." You have to make sure your investment managers are aligned with the long-term targets of the pension plan.
Leo will be at the C.D. Howe Institute on Monday April 29 as part of the Toronto Roundtable Event delivering a similar speech: "Imagining a Better Future: Why Forecasts of a Mediocre Future are Probably Wrong."
Below, Steve Kroft of CBS 60 Minutes reports that technological advances, especially robotics, are revolutionizing the workplace, but not necessarily creating jobs.