AIMCo's CEO on Putting Clients' Interests First

Jeffery Jones of the Globe and Mail reports that AIMCo's new CEO Evan Siddall looks to put clients’ interests first after major losses last year:

Evan Siddall sees his first priority as head of Alberta Investment Management Corp. as transforming the culture so clients’ interests are first, and key to that is remembering the lessons from its infamous multibillion-dollar loss on early-pandemic market swings.

Mr. Siddall began as chief executive officer of the provincially owned agency known as AIMCo in July, capping a number of senior staff changes that followed the $2.1-billion loss on market volatility trading in 2020, and the investigation it sparked. Former CEO Kevin Uebelein left the position before his full tenure was up.

Aided by outside consultants, the internal probe concluded AIMCo suffered from a poor approach to risk management, which led to the losses under the volatility trading strategy (VOLTS). It set out recommendations to prevent a repeat, most directed at improving oversight and accountability.

The debacle was a symptom of a culture in which the pension-fund clients were given little input into investment decisions, Mr. Siddall said. He added that this attitude is being replaced by a new relationship in which clients’ goals are given greater consideration.

In an interview, he said the volatility strategy is now so discredited that AIMCo staff dealing with the fallout try to avoid the term, reminding him of the villain whose name is taboo in the Harry Potter books.

“It’s funny – people, when they talk about the episode, it’s almost like they whisper ‘Voldemort’ instead of saying VOLTS. It’s the thing you don’t talk about,” he said.

“I actually wanted to talk about it because that was the important inflection point for us. It was a painful lesson, but a lesson it was. And you know, as a result, the company’s farther ahead from a risk management point of view than it would be. And I think it created the segue for this … what we’ll call a new covenant with our clients.”

AIMCo manages $153-billion in assets for 32 clients. They include pension funds for municipal employees, first responders, judges, university professors and others, as well as government accounts such as the $18-billion Heritage Savings Trust Fund.

When the financial world went on a roller-coaster ride in response to economic disruptions caused by COVID-19 in March, 2020, the volatility strategy – essentially a bet that markets would remain within a specified band of ups and downs – produced outsized losses, equal to a sixth of AIMCo’s 2019 investment returns.

It has since stopped the activity, but the episode called AIMCo’s investment acumen into question, and pension-plan executives openly expressed concerns about the risk inherent in their members’ retirement plans as markets whipsawed in the early weeks of the economic crisis.

Mr. Siddall said one big problem was that AIMCo is accustomed to managing pensions by fiat, and focusing primarily on the needs of clients is not “reflexive.” He said this was a message AIMCo chairman Mark Wiseman imparted when Mr. Siddall was considering the post, saying the change would require a lot of work. Mr. Wiseman, formerly of BlackRock Inc. and Canada Pension Plan Investment Board, also joined after the volatility losses.

Changes in legislation led to confusion about how much autonomy AIMCo had for its investment strategies, Mr. Siddall said. A bill passed by the NDP government in 2018 sought to remove the influence of politicians from AIMCo’s decisions. Then in 2019, Premier Jason Kenney’s newly elected UCP government forced the management of additional public-sector pensions, including those of the province’s teachers, under the AIMCo umbrella.

Last month, Mr. Siddall signalled the change in tone when AIMCo struck an agreement that ended months of lawsuits, court hearings and bitter negotiations with the Alberta Teachers’ Association. The union representing 46,000 members was staunchly against AIMCo controlling their pensions, arguing their long-time manager, the Alberta Teachers’ Retirement Fund (ATRF), had provided above-average returns for decades.

Under the deal, ATRF has final say over the $19.3-billion pension plan while AIMCo manages it. AIMCo, the teachers and their pension manager hailed the outcome. “It contains provisions designed to provide alignment between AIMCo’s management of ATRF’s assets and the best interests of our plans,” ATRF chief executive officer Rod Matheson said at the time.

Clients have noticed the shift in management style, but point out it is still early. Mr. Siddall canvassed them early on for their thoughts about their relationships with AIMCo, said Chris Brown, CEO of Local Authorities Pension Plan, whose members include public-sector employees in health, municipalities and education. He said he expressed concerns about risk management and respecting what the plans and the beneficiaries want.

“[This means] really understanding that, notwithstanding your key clients are required to use you, the business still needs to be client focused, it needs to be focused on what the clients are trying to achieve, because AIMCo exists to serve the clients, not the other way around,” Mr. Brown said.

Since the losses in the spring of 2020, AIMCo’s financial results have improved. At the end of the second quarter, it reported it had a year-to-date total fund return of 7.3 per cent, beating its benchmark by 3.5 per cent. It generated $4-billion over its benchmarks during the period.

The next big step for AIMCo will be formalizing a climate-change and “transition finance” plan, which may include a net-zero CO2 target, Mr. Siddall said. It will release targets early next year to guide the portfolio in terms of future investments, he said.

However, unlike other major funds, including the Caisse de dépôt et placement du Québec, AIMCo will not divest its oil-and-gas assets, which make up 4.5 per cent of its public-equities portfolio. To do so would be to miss out on financial gains and opportunities as energy companies invest to reduce their carbon footprints, he said.

“There will be money to be made in transition plans for our clients, and we’re going to use home-field advantage to do it, and we will benefit from the ingenuity that exists here. I’m not going to take us out of that ingenuity by divesting of hydrocarbons,” Mr. Siddall said.

Barbara Shecter of the Financial Post also reports on how Evan Siddall rocked the boat at CMHC, but looks to calm the waters at AIMCo: 

Evan Siddall built a reputation as an outspoken and sometimes controversial figure during his seven-year tenure CEO at Canada Mortgage and Housing Corporation.

So when he arrived in Edmonton in July as the freshly appointed chief executive of Alberta Investment Management Corp., a traditionally quiet manager of pensions, endowments and government fund assets, that was being buffeted by some controversies of its own, he probably felt right at home.

AIMCo was working to steady its nearly $120-billion ship — and relationships with some 30 clients — after a $2.1 billon loss last year on a volatility strategy when markets were rocked by the declaration the global pandemic.

It was also locked in a public battle with Alberta Teachers’ Retirement Fund, which had been forced by legislation passed in 2019 to use AIMCo as its sole investment manager. AIMCo and ATRF initially failed to reach an agreement on the terms of their new arrangement, so these were imposed on them through a government order in January.

The asset manager was at the centre of a few political storms, too, the biggest brought about when Alberta Premier Jason Kenney mused that he might pull Alberta out of the Canada Pension Plan, putting the spotlight on AIMCo as the likely future manager of those funds.

Then last month, another Canadian pension giant, Caisse de depot et Placement du Quebec, thrust divestment — a sensitive issue in oil-rich Alberta — back into the spotlight with a declaration it would sell off all assets that produce crude oil products by the end of next year.

In his first major interview since taking the helm at AIMCo, Siddall — who pledged to keep a lower profile in his new assignment — said he thinks he has helped smooth the waters so far.

For one thing, he says, his arrival helped AIMCo and Alberta Teachers’ Retirement Fund forge a new negotiated management agreement in September, just a few months after he arrived. He is quick to point out, though, that he doesn’t think this reflects poorly on previous management, particularly given that the relationship was akin to an “arranged marriage” that one side was clearly unhappy about.

“I did have the advantage of, if there was a pile of something people were standing in, they were overwhelmed by the stench of that I suppose, and I wasn’t,” Siddall said.

“Sometimes a good hockey team changes the coach and the team plays better; it has nothing to do with anything other than cosmetics but, yeah, that is part of the story for sure.”

But with much work underway at AIMCo, including completing the implementation of a series of recommendations to the board from outside experts to beef up risk management and make changes to the culture following last year’s volatility loss, there can be no promises of smooth sailing.

For one thing, AIMCo is unlikely to follow any sort of divestment strategy, preferring to invest in and capitalize on Alberta’s homegrown strength and expertise in energy throughout any transition to a lower carbon economy, Siddall said. That could raise questions about whether the Crown corporation is being directed by government, which has its own reasons for wanting a healthy oil and gas industry. But Siddall is quick to dispel this idea.

“I’ve had no conversation, not a single conversation with the government, where they instructed us as to how to position ourselves in the energy sector,” he said. “It’s an investment decision.”

Siddall said he believes “there’s money to be made” by those with “long-term, patient capital (and) insight into the energy sector” including cutting-edge clean technology. It is an echo of what AIMCo chair Mark Wiseman told the Post last year. Wiseman joined the Alberta pension manager’s board in July 2020 and encouraged Siddall to apply for the CEO job after Kevin Uebelein stepped down before the end of his employment contract this year.

“That’s AIMCo. If it’s anybody it’s AIMCo,” Siddall said. “We have a home-field advantage that we’re going to take advantage of and that, in my mind, does not include divestment.”

In spite of his strong views and his reputation, Siddall said he intends to work mostly behind the scenes, with public statements confined mainly to required appearances before a government standing committee.

“I’m going to lead differently here,” he said “You lead based on what the what the circumstances suggest.”

Still, a lower public profile doesn’t mean accepting the status quo.

Some legislation in Alberta over the past few years has aimed to extend the arms-length relationship between AIMCo and the provincial government, and Siddall — and Wiseman — are hopeful they can drive that wedge further to clarify for clients that AIMCo exists to make money for them and “not to be a tool of government.”

“I think the current government’s quite clear on that and that’s good, and the more we can clarify that the better,” Siddall said, though he declined to weigh in on what, if anything, he thinks the UCP will do.

“It’s their decision, not ours, and all we can do is tell them how we could be more independent and the sorts of things that they might consider,” he said. “So we’ve done that, and they will decide whatever they want decide.”

He also demurred when asked about the possibility of Albertans’ portion of the Canada Pension Plan being severed from the national pension scheme and brought under the AIMCo umbrella, something Alberta Premier Jason Kenny has touted and his United Conservative Party-led government is studying.

“My sincere answer is we don’t talk about it (and) I don’t want to talk to them about it,” said Siddall. “That’s a political question.”

However, he noted that AIMCo is proving it can handle more assets under management.

“Our job is to build an organization that can do what we’re asked to do, period,” he said, adding that the pension manager is successfully integrating the ATRF assets and additional assets of the Workers’ Compensation Board. It will soon be adding the investment assets of Alberta Health Services, with current assets under management rising to $153 billion from $118.6 billion at the end of last year.

Something like a CPP transfer would not happen overnight in any event, Siddall said, which would leave AIMCo plenty of time to complete its work on integration and risk management — if the government chooses to go that route.

In the meantime, he is getting to know the board of directors, about half of them in person. One such meeting was a two-hour conversation with Jim Keohane about how he ran the Healthcare of Ontario Pension Plan (HOOPP) for eight years as CEO before retiring last year.

In an interview last week, Keohane told the Financial Post that today’s markets resemble past bubbles, propped up by liquidity from policy and monetary interventions. He also sees elements of “mania” in the markets, leaving long-term institutional investors with few safe places to invest.

Siddall doesn’t disagree.

“It’s hard to make money,” he said, noting that AIMCo’s job is to satisfy its pension, endowment and government fund clients by beating benchmarks — or doing less badly in poor market conditions — as well as keeping ahead of inflation and managing interest rate risks.

“Asset prices where they are and so much cash flying around… both through central bank support and fiscal support, it’s just priced all assets ridiculously,” Siddall added.

Siddall said the key for investment professionals, including those at AIMCo, is to “keep some dry powder around for dips… You’ve got to just look for opportunities to make money for your clients.”

He leaves such matters primarily in the hands of his chief investment officer. For now, he says, the view is that inflation is transitory, though they are keeping a keen eye on that, and suggests that central bankers will begin to rein in quantitative easing.

“My goal (is) to set a strategy for the institution to make sure we’re in the right businesses, to make sure we’ve got the right capital and people behind those businesses, and that we have a decision-making function that is excellent,” he said. “And so we’re working on improving that.”

Two fantastic interviews with Evan Siddall, AIMCo' new CEO who literally started working in July.

Before I delve into some of the topics raised here, I have reached out to Evan and we plan on doing a one-on-one discussion very soon.

There's no rush, it will be my pleasure to talk to him when the time is right.

I think these interviews give you a good glimpse at what to expect from Evan and AIMCo under his leadership. 

First, the organization will adopt a client-centric approach and make sure it puts the interests of its clients first.

That doesn't just include better risk management, which AIMCo has implemented following Barb Zvan's independent report, it also includes more open dialogue with its clients, better communication and really understanding their needs. 

I don't know Evan very well yet but my perception is he's taking a different approach at AIMCo than the CMHC, meaning he's taking the time to really listen to all his clients and he wants an open and ongoing dialogue to make sure they're comfortable and very well informed about all the strategies and all the risks being taken.

Here, allow me to just say something. I know some of AIMCo's clients are still peeved about the $2.1 billion loss in the VOLTS strategy last year.

I've covered it ad nauseam on my blog, got experts to discuss it, I certainly didn't hold back but in my sincere and professional opinion, way too much fuss has been made about VOLTS and the organization and its clients need to move past this volatility blowup.

I've seen a lot in my lifetime, trust me when I tell you every major Canadian pension has skeletons in its closet, some I've discussed and others I keep private but everyone has gone through a blowup at one time or another in its history.

And you know what? That's not necessarily bad. It's like when I'm trading stocks. Sometimes I feel good, get cocky but Ms. Market always gets the final say. When I least expect it, she slaps me in the face or worse, kicks me in the nuts, and that pain is far more valuable than anything you'll read in useless trading books.

Bridgewater's founder Ray Dalio has written a book on principles and owning your mistakes and actions.

When an organization suffers a setback, just like when we suffer a setback in life, that's not necessarily a bad thing as long as it learns from its mistakes and grows stronger from the experience.

I've seen CDPQ lose $40 billion in 2008 buying ABCP and losing money on long-term swap blowups. PSP was selling credit default swaps and buying ABCP back then and got whacked hard and look where these two organizations are now.

So, my best advice to AIMCo's clients and even its staff, don't dwell on VOLTS, learn from it, remember it but move past it and focus on the future. You'll all come away much stronger.

Don't misunderstand me, I don't want to minimize the $2.1 billion loss but in the grand scheme of things, it's peanuts and you really need to start thinking super long-term to understand why (keep the examples I brought up in mind, there are plenty of others).  

AIMCo needs to focus here and turn the page on VOLTS.

In particular, it needs to make sure it can partner up with great partners all over the world and invest across public and private markets in the best interests of its clients. 

Nothing else matters, not VOLTS, not ATRF, not opting out of CPP -- these are all distractions, you need to keep your eye on the prize and focus on the long run.

Now, Evan is in a politically sensitive position in the sense that he doesn't want to rock the boat too much, especially since he just started at AIMCo.

That's fine but I'm not in the same position and will bluntly tell you my opinions on certain things, like ATRF is lucky to have AIMCo manage its assets even if it has final say (whatever, listen to your pension managers), opting out of CPP would be a really dumb decision by Alberta (akin to the way they handled their COVD-19 strategy, a disaster!), and divesting out of oil & gas is for environmentally sensitive weenies!!

I'm sure that last one caught the attention of many. The more I think back to CDPQ's Climate Strategy 2021, the more convinced I am that the fourth pillar of exiting oil producers was a big mistake.

And not because they are significant in its portfolio, they're not, but because that attracted all the media attention away from the third pillar which I thought needed to be the focus.

I'm not a big fan of divestment, except for tobacco where engagement is truly futile, I prefer engagement even if it's not always easy to engage with Big Oil. 

But like OPTrust's CIO James Davis recently told me, fossil fuels will be around for a long time, so simple divestment isn't easy nor is it necessarily in the best interests of your members.

I like to remember the philosopher Hegel when thinking about big issues like has the pendulum swung too much to the ESG spectrum, creating huge opportunities in traditional energy?

I'm not an expert but I can guarantee you the people at AIMCo know this sector better than anyone in Canada.

They are not divesting, most of Canada's large pensions refuse to divest, it's their right, just like it's CDPQ's right to exit oil producers.

There's no right or wrong answer but when you divest, you're still left with a problem, where will you invest to make the returns you're required to generate over the long run?

And if you read the second interview above, Evan Siddall is right on point when he states:

Siddall said he believes “there’s money to be made” by those with “long-term, patient capital (and) insight into the energy sector” including cutting-edge clean technology. It is an echo of what AIMCo chair Mark Wiseman told the Post last year. Wiseman joined the Alberta pension manager’s board in July 2020 and encouraged Siddall to apply for the CEO job after Kevin Uebelein stepped down before the end of his employment contract this year.

“That’s AIMCo. If it’s anybody it’s AIMCo,” Siddall said. “We have a home-field advantage that we’re going to take advantage of and that, in my mind, does not include divestment.”

But Evan also understands the transition economy is here to stay and AIMCo will reveal its strategy in transitioning to net zero early next year.

What else struck me about the interviews above?

Evan Siddall has a tremendous board of directors, I'd love to be able to lean on Mark Wiseman, Jim Keohane and others there if I was running that organization. Their knowledge, their experience, their patience are all invaluable.

Jim Keohane sees troubling signs in markets, limited options for policymakers.

I talked to him about market manias in late August and it's arguably worse now. 

The biggest problem now is massive central bank interventionism, it's really hard to short or underweight a market backstopped by the Fed and other central banks.

I honestly don't know where we are headed with all this interventionism, I feel like we are on a ship and Captain Kirk (or Captain Powell) is taking us on a journey where no man or woman has boldly gone before.

Just remember Tom Barracks's famous words back in 2005 when he cashed out of his real estate holdings: "There's too much money chasing too few good deals, with too much debt and too few brains. The amateurs are going to get trampled, that's why I'm getting out." 

But Evan is right, you need "dry powder" in these markets and liquidity risk management is critical.

Alright, let me wrap it up there, I hope to talk to Evan Siddall real soon and get a better lay of the land of organizational and other changes going on at AIMCo.

Below, on November 15, 2018, in conversation with Mary Condon, Dean (Interim then of Osgoode Hall Law School), Evan Siddall (then CEO of CMHC) discussed his career journey from Wall and Bay Streets to public service, prompted by a desire to contribute to a greater cause. He spoke to the value that diversity of thought and experience can bring to the public service. He also addressed the challenge that “tall poppy syndrome” poses to attracting the best and brightest and how it threatens Canada’s capacity for innovation at a time when it’s needed most.

Great speech and while I understand why Evan is taking a more low key approach at AIMCo, I hope to hear more from him on many important issues. 

Lastly, to all those aspiring to work at AIMCo, listen carefully to Evan Siddall, pay attention to his words and actions and I believe it will help guide you in your decision to join the organization.

Let me leave you and Evan with one of my favorite quotes from Albert Camus: “In the midst of winter, I found there was, within me, an invincible summer. And that makes me happy. For it says that no matter how hard the world pushes against me, within me, there’s something stronger – something better, pushing right back.”