Meet AIMCo's Chief Investment Strategy Officer
In October 2020 AIMCo, the C$118 billion Canadian fund appointed its first chief investment strategy officer splitting the investment function between the top down strategy and bottom up implementation responsibilities. Amanda White talks to Amit Prakash about how the new function will add valuable investment insights to clients.
While AIMCO formerly created this position late last year the underpinnings and drivers of the investment strategy function at AIMCo have been present for a long time. With the appointment of Amit Prakash as the first chief investment strategy officer they are now present in a focused and deliberate manner. The headline objective of the function is to move the organisation into better alignment with its clients’ investment objectives.
“Our end goal is we are seen more as a trusted adviser, rather than simply an investment manager on behalf of our clients,” Prakash says. “The manner in which we describe what it offers to our clients, is to extend the conversations we have been having beyond the deliverables we have presented them. To look beyond the delivery of alpha to help them with their decisions, with their strategic and top-down views.”
It allows AIMCo to more readily add a top-down strategic portfolio view to what it already does for clients in driving alpha.
“We believe combining those makes for a more robust combination than doing one or the other,” Prakash says.
The fund is now six months into the process of building the team and infrastructure for the strategy function and has started revisiting investment objectives with clients including reviewing their risk appetites, policy mix and alpha targets.
“We are starting at ground zero. That is a journey we will be on for the near term,” Prakash says. “Understanding our clients’ objectives and creating the framework to assess the efficacy of our current solution sets and identify gaps and move from there.”
AIMCo’s clients – which include nine public sector pension funds and a number of endowments – remain fully in charge of their policy mix. The strategy function, and the top down view, allows AIMCo to provide an advisory function to better aligns clients’ needs and the solutions offered. The same process will be used in the longer term to look at portfolio tilts.
The top down view
Prakash says from a top-down view AIMCo believes in the longer-term, risk assets are a better place to be and that illiquid assets provide better value.
“A lot of the portfolio positioning happens within the current strategies that we manage, that is where if you look from the top down we have a very marginal overweight to equities. We have pulled that in over the last little while as markets became a lot more volatile and things starting to look exuberant more than they have in the past. But over the long term we are positive about risk assets.”
Not surprisingly Prakash has a weak outlook for bonds, but he thinks any potential inflation will only be fleeting.
“We believe inflation would be transitory in nature given some of the secular drivers haven’t really changed, thinks like the ageing population, technology and globalisation. We may get a bump in inflation but it isn’t something we believe is a permanent uplift.”
The fund has a negative long-term forecast for fixed income and for the past few years has allocated into the adjacent asset classes such as private debt and loans, which are more attractive from risk return perspective.
“That has played out well,” he says. “And at margin we have been slightly underweight bonds and lower duration has been helpful.”
Since the COVID crisis AIMCo has been cautiously managing its active risk budget and pulled back a bit on risk, and at the same time improved liquidity.
“We are well ahead of liquidity characteristics compared to where we were pre-COVID. We are being careful where we take risk. We are well positioned at the moment, pulled active risk back, and that allows us to step in again if opportunities present themselves. We have done a fair bit of that over past 12 months given their were interesting opportunities.”
The team has been active in private equity and private debt, where it has looked beyond North America and taken advantage of some mid-market opportunities in Europe.
It’s also been active in real estate where its been moving to reduce retail and add more logistics and industrial holdings.
“One of the benefits of AIMCo is many of our clients have long investment horizons and that allows us to utilise our liquidity more effectively, we were not forced sellers through pandemic. On the contrary we deployed capital and are well positioned at the margin to do that now should markets soften more relatively to where they are now,” he says.
There are some investment opportunities that AIMCo is looking at but not yet invested, such as emerging market debt.
“We do have some EMD but we use it as an alpha driver in existing funds rather than a beta permanent delivery.”
But the real role of Prakash’s team, is not so much about the tactical changes, but to look at the risk appetite of clients over the longer term and the strategic mix of the portfolio.
“We have seen clients increase allocation to illiquids, and therefore on the mirror image of that is the assessment of the liquidity profile of the portfolios. Being long term helps with not needing liquidity, but as allocations to illiquids increase its beneficial to keep an eye on the liquidity profile of clients.”
There are other insights clients can gain from a top down view, such as an assessment and better understanding of their factor exposures across the portfolio.
“The first step is to understand the factor exposures relative to liabilities and if there is a potential need to adjust some of that,” he says. “What might come from that, clients might want to manage their rates exposures or growth factor for example, and that is one of the things some of our clients are interested in. You need a top down view for that to ensure the balance is right.”
Having a dedicated department to manage the top down view means all the associated tools can also be project managed. Prakash and his team are working with the in-house technology team to build a robust and scalable client investment dashboard, which would allow them to look at all the different exposures across the portfolio such as sectors, factors, and duration exposures.
“We can do it now, but we want a more robust and scalable process. It is early days in that process working with the tech team.”
Another project underway is the implementation of a new risk model which will be up and running this year. The risk system will sit alongside the asset-liability analytics system from Ortec Finance which was also added relatively recently.
“This will give us more flexibility and tools from a risk measurement perspective,” he says.
In the past year AIMCo has undergone quite a lot of change in its senior rankings. Mark Wiseman, former CEO of CPPIB and global head of active equities at BlackRock, was appointed chair of the fund in July last year, and just last month the former CEO of Canadian fund HOOPP, Jim Keohane, was appointed to the board.
In November it appointed a new chief risk officer, Andrew Tambone and a new chief financial officer, Paul Langill.
With the appointment of a chief investment strategy officer the investment function has been split and both Prakash and CIO Dale MacMaster report to AIMCo’s chief executive and are equal partners in the fund’s investment capabilities and performance. Evan Siddall was recently appointed as CEO and will take over from Kevin Uebelein in July.
“The CIO and I work closely and well together and that’s one of the necessary conditions for us to succeed,” says Prakash. “It is hugely important we are joined at the hip.”
For clients Prakash takes on the top-down, long-term forecasts and policy mix views and the CIO’s investment team implements from the bottom up.
All the client reviews are done in conjunction between the two teams and a governance structure is now in place where all of the client-related portfolio advice goes through a committee co-chaired by Prakash and MacMaster.
“We co-chair this to ensure it has the right level of oversight and clients have benefit from a 360 view that also includes the head of clients and chief risk officer. This ensures investment conversations with clients get a full vetting across the shop.”
Previously the top-down activities were also done by the CIO and investment team but the separation allows an equal focus and engagement on strategy, and alpha delivery and active risk.
“It improves and broadens how we are engaging with clients,” Praksah says. “Most of our clients are not choosing between alpha and beta. Without the right beta most clients would struggle to meet their obligations. Historically they were primarily focused on beta through the policy mix and we were primarily focused on alpha through investments. We want to look at the top down so the decisions about beta are better informed. This way we can improve the betas we are offering and the alphas.”
This is an excellent interview with Amit Prakash, AIMCo's Chief Investment Strategy Officer.
Recall, Mr. Prakash joined AIMCo late last year at the same time that Andrew Tambone stepped into the role of Chief Risk Officer and Paul Langill joined AIMCo as Chief Financial Officer.
In its press release, AIMCo stated this:
Amit Prakash joined AIMCo as Chief Investment Strategy Officer (CISO) effective October 1, 2020. He brings extensive experience in portfolio management, strategy and trading to the role.
The CISO is a new role to AIMCo. The CISO and Chief Investment Officer (CIO), both reporting to the Chief Executive Officer, will be equal partners in ensuring that AIMCo’s investment capabilities and performance continue to develop and succeed. The CISO will specifically focus on ensuring that AIMCo’s investment offerings and platform are in alignment with the evolving needs of clients and the changing macro environment.
The way I read this is the CISO will advising clients on their investment offerings as their needs evolve and the CIO, Dale MacMaster, will continue implementing the investment strategy once the clients set their investment policies and risk tolerance.
To be honest, the governance is a little confusing, both CIO and CISO report to CEO but what are their respective roles and what happens if they differ on certain investment views?
It's one thing to say "we handle top down views" and "they handle bottom-up implementation" but having worked at pensions, I can tell you that governance is the key to the success as is clear and concise risk responsibilities between clients and within teams.
From reading this interview, I get the sense that Mr. Prakash is there to advise clients on long-term asset class decisions, he is building technological capabilities to better inform them, and he will be working with the CIO and CRO on implementing the clients' policy decisions.
As Prakash states: "Historically they were primarily focused on beta through the policy mix and we were primarily focused on alpha through investments. We want to look at the top down so the decisions about beta are better informed. This way we can improve the betas we are offering and the alphas.”
That's all fine but who owns the beta decision? AIMCo or the clients? It's my understanding that it's the clients and AIMCo is just there to advise them. Then the investment teams led by the CIO are in charge of implementing those investment decisions from a bottom up level.
Still, this is a work in progress, there's a new CEO coming in and he will also have a say in the governance of this and will need a clear understanding of the respective roles of the CIO, CISO and CRO and how they relate to clients, the board and the respective investment teams.
Governance is the key to making this a success. You need clear roles and clear responsibilities or else it will create more problems than solutions.
Even Prakash rightly notes: “The CIO and I work closely and well together and that’s one of the necessary conditions for us to succeed, it is hugely important we are joined at the hip.”
Anyway, earlier today, I spoke with Mihail Garchev.
The TFM series of 9 episodes Mihail and I presented on this blog had incredible interest and response. I know Mihail, being one of the leading experts and practitioners on the topic, has had many senior investment professionals from the Canadian and international funds reaching out to him on various subjects, given his experience at PSP Investments and currently, at BCI, where he is officially stepping in as a Vice President, Total Fund Management this Monday. Mihail always tells me that BCI is a great place to work, a great organization, and even more so, great people and culture, and that he created many meaningful professional relationships.
Given his passion for the topic, I asked Mihail to share some thoughts in his personal capacity on this topic and he is what he shared:
This is a welcomed development and yet another confirmation of the accelerating trend in the large Canadian funds to move toward a total fund management approach. It would be fascinating to hear Amit's thoughts and perspective on what drove the evolution in the organization's thinking toward such an approach. There might be different catalysts for every fund, whether these are internal challenges related to efficiency, scale, blind spots, or external drivers, whether evolving client needs and objectives or the ever-changing and challenging investment landscape.
It is excellent that AIMCo is taking the opportunity to rethink the investment process structure from scratch and not try to retrofit new approaches into legacy structures to the extent possible. However, this has to be true for both the investment and the governance structures, as both need to be designed in tandem. Also, these need to be aligned, complementary to each other, and have the healthy tension of keeping each other in check.
Outside the investment and strategy decisions, what could lead to adverse outcomes is the investment process structure and the governance structure. The latter two, in my opinion, represent half of the overall success. Great insights with the less efficient process, and even worse, conflicting governance, could lead to less optimal outcomes. It is great to see that AIMCo rightfully so focuses on the governance aspect from the get-go, instead of rushing in with, on the surface, certainly more exciting investment insights and designing investment processes.
There is no one-size-fits-all approach, and each fund has its unique circumstances. In a way, we are all exploring these uncharted territory. Many great takeaways would emerge as each one of the large Canadian funds finds its own total fund approach and the successes and challenges along the way.
I think the critical question is what challenges the organization is trying to address. This question needs to be intersected with a reflection on the core investment beliefs. And when I mean investment beliefs, I do not mean virtue-signaling off-the-shelf truisms, but rather, deep understanding of the role of asset classes, strategies and related investment processes. For example, the investment beliefs for private asset classes could dictate very different strategy, implementation, and related investment processes at the asset class or total portfolio level and how the organization demonstrates and communicates success.
A total fund process may solve efficiency and scale challenges or blind spots and stop there. So, it is great to see that AIMCo is thinking a step further and aligning the total fund concept with a "higher and better use”. In a way, it is great to be a great asset manager, but the second derivative of this is to be a trusted advisor. This is a particular challenge for multi-client asset managers (CDPQ, AIMCo, IMCO, BCI) instead of single client ones (CPP, OTPP, OMERS, PSP), where there is usually a greater fusion between these roles.
Another interesting aspect of the greater alignment with clients is rethinking what the main goal is. In my opinion, we will see an evolution of the current practice to define a long-term investment policy (asset classes, limits, liquidity, rebalancing, hedging, leverage policies and so on) at the onset (top-down) and then filling up the buckets bottom-up with investment strategies and alpha targets.
It may be much more efficient to define an investment policy in terms of desired outcomes and what constitutes risks to these outcomes, and then dynamically manage what asset classes and strategies, when, how much, what risk, and what liquidity requirements on. As long as the outcomes have a sufficient probability of being achieved, how exactly one achieves them would bring more flexibility and efficiency versus prescribed and confined approaches. I believe many of the organizations would move, in one form or another, toward an outcome-oriented policy portfolio rather than an asset class (or even factor-based) policy portfolio. Asset classes, factors, alpha strategies are just tools to achieve outcomes. In the multi-client aspect, this also means rethinking their "product shelf" where currently most, if not all, provide only asset/factor-based pooled fund products. But in a client-aligned future state, an outcome-oriented approach may lead to a "product shelf" based on outcomes.
The outcome-oriented approach may also help to address one of the most critical challenges to any top-down decision-making. In a bottom-up decision process, many small decisions sum up to the final result. Because of the diversification of decisions, the variation of the final results is less dramatic. In a top-down approach, however, the decisions are mainly concentrated and need to be sizable to have an impact.
As a result, the chance of a wrong decision at the wrong time is significantly higher, and this may lead to unfortunate significant impacts on the portfolios, and often results in a disproportionate impact on the overall organization value added (one wrong decision could wipe out all the hard-earned alpha in all the asset classes) as well as career risk (and the aversion to it).
Therefore, it is almost impossible for the asset manager to bear the top-down risk unless within tight risk parameters. More concentrated decisions, and by virtue of it, fewer decisions as a number, with tight risk parameters, unfortunately (and mathematically) lead to being less optimal than many diversified bottom-up decisions. So, both the governance, but also the investment and product structure, the "product shelf," and the measures of success need to be designed with the acceptance and understanding of the risk-sharing between the asset manager and the clients. The "trusted advisor" approach is also aimed at helping resolve some of the above challenges and is a necessary step toward a greater client focus and alignment.
The multi-client asset management model also brings added complexity in every aspect, whether decision-making or investment and operational process or reporting and communicating success. As a simple example, there might be one top-down investment insight, but this investment insight might lead to different decisions for each client as what is optimal may mean different things for the different clients.
Thus, equally crucial to governance is designing a scalable investment process. Otherwise, complexity may increase exponentially, with every additional element or consideration added to the process. Therefore, thinking about its design in advance and not rushing ahead with implementation is critical.
This is where technology is needed. It requires a careful evaluation of the feasibility of an in-house ambition, no matter how great it might sound, versus being pragmatic and creative in bringing in various solutions. I am often using the iPhone analogy in this case. What matters is the functionality of the iPhone. First, Apple did not build many of the components themselves (the camera, the chip, the memory, the hardware). What Apple did is to find and assemble the right components. Second, and the crucial aspect, have the iOS operating system that makes all these components function efficiently. Think of the operating system as the governance and the investment process. Finally, no matter what great analytics one might show, the core is to have reliable, correct, well-understood and agreed, and timely basic exposure information and understand the accounting versus the investment book of records.
In any case, this is an incredible and exciting journey for AIMCo, and I wish Amit, the strategy team, and the organization all the success going forward. Also, I believe there is now a critical mass of organizational support, intellectual and real capital, and more and more industry interest in the topic of total fund management. I hope the initial platform that Pension Pulse has provided to discuss these topics could evolve into a specialized total fund focused peer group forum to connect like-minded professionals, facilitate discussions and meetings on common topics of interest, provide thought leadership, educational series, specific expertise, and on processes and research findings, all to advance the Canadian Pension Model further.
I thank Mihail for his astute insights, he truly is one of the best total fund managers in the country and he's looking forward to resuming his role at BCI this Monday.
What Mihail sees, and we both know, is there are a lot of moving parts to total fund management, you need to be ready technologically (most aren't) and you need to have a clear governance structure in order to implement the right capabilities and translate it into long-term success.
Total Fund Management is a work in progress and I do hope to further these discussions with Mihail and other pension professionals as this is the key to success for the Canada Model 2.0.
One thing did strike me from Mihail's comments, top down decisions are hard and they can wipe away years of alpha in one bad year.
This is why most investment managers do not own the risk of policy portfolios (strategic asset allocation) or even tactical asset allocation decisions, it's simply too risky (high career risk), they let their clients set these policies and will deviate from a narrow range but only if everyone is on board.
From an investment manager's point of view, it's safer taking many diversified alpha bets from a set policy portfolio than trying to hit a home run by going overweight a certain asset class on any given year.
Some pensions do this well but the risks are high and you really need to be lucky to consistently get the beta right.
On that point, I was thrilled to learn HOOPP's former CEO, Jim Keohane, has joined AIMCo's board of directors recently along with other highly qualified people:
Alberta Investment Management Corporation (AIMCo) announces the appointment of Mr. Jim Keohane as a member of the board of directors for a term to expire on May 26, 2024. This announcement follows the signing of the Order in Council, O.C. 160/2021, by the Lieutenant Governor of Alberta on May 27, 2021.
The Order also reappoints Ms. Jackie Sheppard as a member of the board of directors for a term to expire on June 30, 2024. Ms. Sheppard has been a member of AIMCo's Board since July 1, 2018.
"Independence and best practice governance structures are critical to the long-term success of public asset managers. That AIMCo continues to attract the highest calibre of leadership is a testament to the autonomy with which we continue to execute against our mandate, on behalf of our clients," said Mark Wiseman, AIMCo Board Chair. "Jim Keohane is an excellent addition to the AIMCo Board of Directors. Formerly, one of Canada's longest serving pension plan CEOs, Jim brings to bear considerable pension plan expertise, and a uniquely informed perspective to ensure client objectives are fully aligned to long-term investment strategy."
The appointment of Mr. Jim Keohane fills the vacancy left by the departure in December 2020 of Mr. Robert L. "Jay" Vivian Jr., who had served two terms at the time of his retirement from the board.
"I am honoured to be appointed to the Board of Directors of AIMCo during this critical inflection point in the organization's evolution," said Jim Keohane. "AIMCo is an investment manager purpose-built according to the principles of the Canadian model, with substantial scale and in-house investment expertise. As a member of the Board, I am committed to further strengthening the organization to ensure it is the most effective platform from which its clients are able to achieve the sustainable long-term investment performance necessary to meet their objectives."
"On behalf of the Board of Directors, I wish to thank Jay Vivian for his commitment to AIMCo since 2014. Jay brought a keen perspective to each meeting and demonstrated exemplary service for the benefit of all Albertans," added Mark Wiseman. "Today's re-appointment of Jackie Sheppard, recently appointed as Chair of the Governance Committee, ensures the organization may further benefit from her vast experience, while also maintaining an important degree of board continuity."
Jim Keohane was President and CEO of the Healthcare of Ontario Pension plan from 2011 until his recent retirement in March 2020. He joined HOOPP in 1999, bringing more than 25 years of institutional investing experience with several national firms.
Mr. Keohane is a frequent speaker on retirement income security and liability driven investing.
Jim was the architect of HOOPP's Liability Driven Investment strategy and is considered a global expert in this area. He is a strong advocate for collective pension schemes and has championed several studies on the topic.
After completing his Bachelor of Science degree at the University of Ottawa, Mr. Keohane obtained his MBA at Queen's University. He is a Chartered Financial Analyst and has completed the Directors Education Program (Rotman School of Business) at the Institute of Corporate Directors. Jim is on the Board of Queen's University and is the Chairman of the Investment Committee and Chairman of the Pension Committee. He is a former member of the Board of the Canadian Coalition on Good Governance, and previously served on the Board of Home Capital. He was selected as a member of the Ontario Technical Advisory Panel on Retirement Income Security.
Jackie Sheppard is the former Executive Vice President, Corporate and Legal of Talisman Energy Inc. Ms. Sheppard has been on the board of directors for Emera Energy Inc. since February 2009 and was named chair in May 2014. She served as the inaugural Chair of the Research and Development corporation of the Province of Newfoundland and Labrador, a Provincial Crown Corporation, until June 2014. She is founder and Lead Director of Black Swan Energy Inc., an Alberta upstream energy company that is private equity financed. She is also a Director of ARC Resources Ltd., a publicly traded energy company focused on Canadian natural gas development. She was a Director of Cairn Energy PLC, a publicly traded U.K.-based international upstream company, until retiring from that board at the end of 2018.
Ms. Sheppard is a Rhodes Scholar, having received an honours jurisprudence, bachelor of arts and master of arts from Oxford University. She earned a bachelor of laws degree (honours) from McGill University and a bachelor of arts degree from Memorial University of Newfoundland. Ms. Sheppard also holds an honorary doctor of laws from Memorial University of Newfoundland, and has been appointed as Queen's Counsel for the Province of Alberta.
These are very accomplished people, Jim Keohane and Jackie Sheppard will only bolster AIMCo's already impressive Board led by Mark Wiseman.
AIMCo's new CEO, Evan Siddall,is going to have a top-notch board of directors and investment team to lean on, and I'm sure he's eagerly awaiting to begin his new job.
Below, Money Evolution goes over strategic versus tactical asset allocation.
I also embedded Mihail's discussion on TFM Capability once again. Great insights!