AIMCo Tilting Away From Alberta Real Estate and Energy Sectors?

Geoffrey Morgan of the National Post reports that AIMCo is 'tilting' overweight investments away from Alberta real-estate and energy sectors: 

Alberta’s public pension manager admits it is overexposed to both the oil and gas industry and Canada’s largest oil-producing province, but its chief investment officer said those weightings are coming down as strategies shift.

“We go where we see the best risk-adjusted returns and the exposure we have in Alberta is driven by our own views,” Dale MacMaster, chief investment officer of Alberta Investment Management Corp., said in an interview following the release of the public pension investment manager’s 2020 annual report on June 28.

“Let’s face it, for many, many years Alberta was Canada’s leading engine of growth. Alberta far outpaced the rest of the country and it had very strong attributes.”

MacMaster said that outperformance has led AIMCo, which manages $118.6 billion in assets, to being slightly overweight in Alberta, particularly in real estate and the energy sector, where it is invested in public equities and through its fixed-income portfolios.

AIMCo in the past year has participated in refinancing efforts at Calfrac Well Services Ltd. and Western Energy Services Corp. as those companies opted to delay bond payments and restructure in the face of sharp sector downturns.

But on the same day that AIMCo released its annual report, Calgary-based junior Razor Energy Corp. announced it was deferring a regularly scheduled interest payment on a $50-million term loan to AIMCo.

“The company is grateful to be partners with AIMCo and the continued support as both a major shareholder and senior lender,” Razor said in a press release.

Nevertheless, MacMaster said oil and gas equities have rebounded along with Alberta’s economy, and that AIMCo has been tilting away from investments in the province, particularly its real-estate market, for several years.

The exposure to the local oilpatch has led to criticism that the fund manager should be better diversified outside of Alberta’s biggest sector to insulate against oil and gas downturns.

MacMaster said AIMCo sees strong tailwinds in logistics, data centres, health centres and multi-family housing real-estate investments and it has been shifting more investment dollars into those asset classes in recent years.

“The Alberta weight and the office and retail weight will come down over time with that repositioning,” he said.

MacMaster also pushed back on suggestions that AIMCo was too invested in energy, noting it is overweight by just 0.4 per cent and 0.5 per cent in the sector, “so not enough to make a huge difference.”

More broadly, he said a V-shaped recovery in both the markets and commodities have allowed AIMCo to sharply recover in the second half of 2020 after a volatility trading scheme impacted returns in the first half of the year.

AIMCo suffered a catastrophic $2-billion loss last year from a volatility trading scheme called VOLTS, which suffered major losses due to volatility caused by the outbreak of COVID-19.

I covered AIMCo's 2020 results here at the end of June. 

I spoke with with Dale MacMaster, their CIO, and we went over the results, including the underperformance in Real Estate (-13.6% vs -2.6% for RE benchmark):

Concerning steep losses in Real Estate, Dale told me like other large funds, they got hit in offices and retail and did well in multi-family, industrials and logistics. He said they own three super-regional malls with OMERS (Square One, Yorkdale and Scarborough Town Centre) that are exceptional assets because of parking and public transit going there but "Covid turned that strategy on its head" as lockdowns hurt super-regional malls and favored smaller, independent malls with pharmacies and retail grocers.

I dug a little deeper in the 2020 Annual Report (page 31) to see the sector and geographic as well as the top real estate holdings: 


As you can see, AIMCo has a huge Canada exposure in real estate, with 40% of assets in Ontario, 15% in Alberta, and another 10% in British Columbia, Quebec and rest of Canada. 

In total, 65% of the real estate assets are in Canada and in terms of sectors, offices and retail account for 50% of total assets, which explains why the Fund got hit so hard in real estate last year.

Now, as Dale MacMaster states, they are repositioning the portfolio both geographically and in terms of sectors, investing more in logistics, data centers and health centers, but it takes time to reposition a massive real estate portfolio and you really need to be go asset by asset to systematically see where you can generate the best risk-adjusted returns. 

In terms of the energy sector, it makes sense that AIMCo provides loans to oil & gas companies as they are right in its backyard, so they know the sector very well.

I'm also glad Dale pushed back on suggestions that AIMCo was too invested in energy, noting it is overweight by just 0.4 per cent and 0.5 per cent in the sector, “so not enough to make a huge difference.”

AIMCo, like other large Canadian pension funds, invests across traditional and renewable energy companies. It's always looking for the best risk-adjusted returns and it's quite silly to think they should be underweight traditional energy.

Back in March, I wrote a comment on how Canada's large pensions were boosting their stakes in oil sands, praising them as energy stocks were on fire the first quarter. 

Year-to-date, the energy sector continues to outperform the overall market, both in Canada and the United States:

All this just proves that critics need to stop going after AIMCo and other large Canadian pensions for investing in traditional energy companies and trust that the professionals running these funds are taking appropriate risks when warranted, always focusing on the long run.

Earlier today, a friend of mine sent me an article going over why the University of Calgary has suspended admission for its oil and gas engineering bachelor program amidst a downturn in Canada’s energy sector and a transition towards a more renewable future.

I'm all for the transition to a lower carbon future but admittedly, when I read these articles, I get irked because I see the politicization of oil & gas and it's just plain wrong on all fronts.  

In fact, maybe AIMCo shouldn't be tilting its overweight investments away from Alberta real-estate and energy sectors, at least not yet.

But I'll let Dale MacMaster and his team handle those calls.

Below, Lori Calvasina, RBC Capital Markets head of US equity strategy, discusses her outlook for the energy sector, as crude hits a multi-year high.