AIMCo Loses 3.4% in 2022

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In early April, James Bradshaw of the Globe and Mail reported that AIMCo posted a 3.4% loss in 2022 during a ‘difficult year’ where public equities and bonds plunged:

Alberta Investment Management Corp. reported a 3.4-per-cent loss last year as falling values for publicly traded stocks and bonds outweighed strong returns from investments in infrastructure and renewable resources.

The investment losses reduced AIMCo’s total client assets by about $10-billion from the previous year, to $158-billion. AIMCo had the strongest year in its history in 2021, posting a 14.7-per-cent return that made it one of the top-performing pension investors in Canada that year.

The plan’s annualized return over four years is 5.9 per cent, and it has returned 7.2 per cent over 10 years, which beat the benchmarks against which AIMCo measured itself in both cases.

AIMCo’s 2022 returns were still 1.8-per-cent higher than its internal benchmark in spite of the loss, demonstrating how difficult it was to be an investor last year as high inflation and rapid interest rate increases shook global markets. Like many of its peers, AIMCo suffered from a rare simultaneous dive in public equities and fixed income markets, which make up a large share of the plan’s assets.

The public equities portfolio at AIMCo, which owns shares traded on stock exchanges, lost 10 per cent last year, while private equity had a modest 0.5-per-cent return. Money market and fixed-income investments, which include bonds, lost 8.1 per cent. All three portfolios did better than the benchmarks AIMCo uses as a yardstick, which were a loss of 10.6 per cent for public equities, a loss of 9.1 per cent for fixed income and a loss of 3.7 per cent for private equity.

“It was certainly a difficult year,” said Marlene Puffer, the chief investment officer who joined AIMCo in January, in an interview.

Other large pension plans also wrestled with tough conditions in markets last year. The Caisse de dépôt et placement du Québec lost 5.6 per cent in 2022 and its chief executive officer Charles Emond predicted there is more volatility ahead. Ontario Teachers’ Pension Plan reported a 4-per-cent return last year, and the Ontario Municipal Employees Retirement System gained 4.2 per cent. But the varying returns are driven partly by differences in the mix of assets each plan holds for its members and are hard to compare directly.

Looking ahead to the rest of this year, Ms. Puffer said “it is definitely an environment with a lot of uncertainty but we’re seeing opportunities across the board.”

AIMCo invests more than 30 pools of money on behalf of 17 pension, endowment and government funds in Alberta, and its global approach to investing is set by those clients, which choose the mix of assets they want. Over the past two years, AIMCo has overhauled its leadership, bringing in Evan Siddall as CEO, Ms. Puffer as CIO and David Scudellari as head of international investment.

Because AIMCo’s public securities account for a large share of AIMCo’s overall investing portfolio, with a combined market value of $79-billion, their weak performance in 2022 overshadowed strong returns that AIMCo earned from some private assets.

AIMCo’s $17.4-billion infrastructure portfolio gained 16.8 per cent for the year, beating its benchmark by 8.5 percentage points. And its renewable resources portfolio, which is comparatively small at $3-billion and includes timberland and agricultural investments, increased by 25.7 per cent, which was 18 percentage points above its benchmark.

Some of those investments benefitted from exposure to higher commodity prices, Ms. Puffer said. But they also performed well because they are “less linked to GDP than other asset classes are,” she said. “So as economic growth has slowed, it hasn’t impacted those areas as much.”

The plan’s real estate portfolio, which has struggled with low returns over the past four years, was also a bright spot with a 4.6-per-cent gain that outpaced its benchmark of 2.1 per cent.

AIMCo has yet to release a detailed breakdown of performance for each of its portfolios, which will be included in an annual report to be released in June.

In a news release, Mr. Sidall, the CEO, said AIMCo “will enhance our commitment to private asset classes,” which are proving popular with clients.

One of the key opportunities for investments is in credit, and private debt and loans in particular, as yield from that lending are typically tied to interest rates and have risen accordingly. And AIMCo has just secured access to a new pipeline to generate those loans: When it hired Mr. Scudellari from its larger rival the Public Sector Pension Investment Board in January, the two pension fund managers struck an agreement to jointly fund private loans to companies.

The first deal under the agreement was just completed, Ms. Puffer said, though details have not been disclosed.

“It’s a beautiful asset class at this point in time, provided that you invest in it prudently in high-quality areas of that market,” she said.

The fall in public equity and bond values, however, has meant that many clients are bumping up against their target allocation levels for private assets. And that means there is less money available to increase allocations to those areas.

“We are not in a situation of having to reduce any of those allocations but we are more limited than usual in terms of the availability of that dry powder,” Ms. Puffer said.

In April, AIMCo quietly put out a press release announcing its 2022 net investment return exceeded the benchmark over 1, 4 and 10 Years:

Edmonton, Alberta – Alberta Investment Management Corporation (AIMCo) today announced a -3.4%¹ net investment performance, exceeding its benchmark return by 1.8%, with total client assets under management standing at $158 billion for the year ended December 31, 2022. Cumulative long-term results are 5.9%, 0.6% above benchmark, and 7.2%, 0.7% above benchmark, over a 4- and 10-year period, representing net investment returns of $27 and $67 billion respectively.

“With high inflation, rising interest rates and unprecedented declines in both public equities and fixed income markets taking place simultaneously, 2022 was an extremely challenging year for investors,” said Evan Siddall, Chief Executive Officer of AIMCo. “The strength of our investment team mitigated the impact of these unique markets, allowing AIMCo to outperform.”

Infrastructure, renewable resources, and real estate portfolios posted a one-year return 16.8%, 25.7% and 4.6% respectively, each strongly outpacing their benchmark. Public equity volatility was greater than it has been since the outset of the pandemic, and returns were muted by the significant drop in both public equities and fixed income markets as interest rates rose.

“Despite the impact of short-term market conditions, we are focused on long-term performance, and our clients and their beneficiaries can be confident we are committed to ensuring they achieve their long-term goals,” added Siddall. “With the expectation that the market will remain volatile, we will make strategic shifts in our investments that will enhance our commitment to private asset classes and securing strong partnerships globally, both of which will ensure we are well placed to continue to deliver on our purpose.”

Investment Performance

Performance by Asset Class

Investment Highlights
Infrastructure

  • AIMCo acquired a greater stake in Howard Energy Partners. Read More

  • Tidewater Renewables Ltd and AIMCo closed a $150 million five-year senior secured second lien credit facility. Read More

  • AIMCo acquired a 100% equity stake in Cando Rail & Terminals Ltd., one of North America’s largest owners and operators of first and last mile rail infrastructure. Read More

  • AIMCo and Railpen took a 94% percent stake in Constantine Energy Storage. Read More

  • AIMCo invested in Haddington Ventures which is set to develop the world’s largest green hydrogen production and storage platform. Read More

  • AIMCo acquired AusNet with consortium. Read More

  • AIMCo, CPP, and Manulife increased commitment to BAI Communications to support acquisition-led growth plans. Read More

Real Estate

  • AIMCo and Ridgeback Group acquired a portfolio of U.K. build-to-rent assets. Read More

Detailed performance information will be available in AIMCo’s Annual Report to be released in June.

About Alberta Investment Management Corporation

AIMCo is among Canada’s largest and most diversified institutional investment managers with $158 billion of assets under management. AIMCo invests globally on behalf of 17 pension, endowment and government fund clients in the Province of Alberta. AIMCo manages more than 30 pools of capital on behalf of these clients. With offices in Edmonton, Calgary, Toronto, London and Luxembourg, our more than 200 investment professionals bring deep expertise in a range of sectors, geographies and industries.

For more information about AIMCo please follow us on LinkedIn or Twitter.

¹Total AIMCo Fund calculations do not include $22.9 billion of assets that do not meet the required conditions for inclusion in AIMCo’s excess returns as of December 31, 2022.

²AIMCo Total Fund market value includes Tactical and Overlay program notional exposures of Money Market & Fixed Income, Public Equity asset classes.

Last week, AIMCo put out its Annual Report for 2022 which you can read here.

I contacted AIMCo's CEO Evan Siddall to arrange a discussion but he was away on vacation and put me in touch with Denes Nemeth to arrange a discussion with someone else.

Unfortunately, Denes came back to me yesterday stating they were not doing interviews on the annual report which I found strange and stated so in my reply to him, Evan Siddall, Mark Wiseman and Jim Keohane.

Effective communication is part of what I call Pension Governance 101 and it doesn't just consist of granting one interview to James Bradshaw of the Globe and Mail who is a decent reporter but doesn't know the questions to ask because he never worked at a large public pension fund.

Anyway, I'm not surprised AIMCo lost money last year as their asset mix is still significantly weighted in public stocks and bonds:

I'll drill down a little more on performance below but first some other items. 

Let's begin with Chair Mark Wiseman's message:

Mark notes his tenure at AIMCo ends at the end of the year and notes the following:

Over the span of my career in investing, I’ve been humbled many times by volatile markets and  economic factors. It is why those who know me understand my preoccupation with long termism. That approach is driving AIMCo’s focus on strategy and adaptations that will better serve the needs of clients. It is imperative that the focus remains squarely there — clients’ needs over the long term.
It's true, on any given year you can under-perform a benchmark, especially this year where a handful of tech stocks are driving performance:

Good luck beating your benchmark if you're not overweight the "Magnificant Seven" (Apple, Amazon, Google, Microsoft, Metaverse, Nvidia and Tesla).

Next, let's go over the message from AIMCo's CEO Evan Siddall:

Evan notes AIMCo made significant hires last year to strengthen the executive team:

  • Suzanne Akers, Chief Risk Officer
  • Denise Man, Chief Technology Officer
  • Paul Mouchakkaa, Executive Managing Director, Head of Real Estate
  • Krista Pell, Chief Human Resources Officer
  • Dr. Marlene Puffer, Chief Investment Officer
  • David Scudellari, Senior Executive Managing Director, Head of International Investment

Indeed, these are all qualified and experienced professionals which will help AIMCo transition more into private markets and improve the overall asset mix.

In particular, Marlene Puffer, former CEO of CN Investment Division and David Scudellari who headed Private Equity and Credit Investments at PSP, will be instrumental in building the resilience of AIMCo's overall portfolio.

Evan also notes this:

Last year, in this message, I reflected on the erosion of trust between AIMCo and its clients. I am  humbled to report a significant degree of improvement in the relationships. In our annual survey, our  clients delivered a 48-point increase in net-promoter score — our primary metric by which we measure  client satisfaction. I characterize this as a quantum shift, and I am grateful to our clients for  acknowledging our efforts with a number of initiatives including the restructuring of our Public Equities platform and robust consultations on product descriptions,strategy, compensation and budget.

I assure you, we are not done yet.

With all of these positive developments, it is unfortunate that the conditions for investors were among the most challenging we’ve seen in years. Just one year after delivering record investment performance, our team navigated the market consequences of Russia’s invasion of Ukraine, deglobalization, high inflation, a global re-assessment of risk premia and a resulting rise in interest rates. Our -3.4%  investment return on the portfolio was above the benchmark return, although a negative result below what we were aiming for.

Again, unless they're magicians, given the asset mix, I'm not surprised AIMCo had a negative year just as I wasn't surprised CDPQ and others had a negative year. 

That brings me to performance:

Last year in April, when I discussed AIMCo's record 14.7% gain in 2021 with former co-CIOs Sandra Lau and James Barber, I noted the spectacular performance in Private Equity (66%) headed up by Peter Teti was an outlier due to a confluence of factors where they disposed of assets in a frenzied market which was buying them up furiously.

In 2022, not surprisingly, Private Equity's returns were flat (0.5%) and I expect more muted returns ahead. 

Instead, Infrastructure and Renewable Resources headed up by Ben Hawkins delivered the double-digit gains last year, registering 16.8% and 25.7% net returns.

Not to take anything way from Ben Hawkins and his team as they are doing a great job but those type of returns in these asset classes are also outliers which were due to dispositions.

If you look at the four-year returns of 9.5% and 12%, that's more in line with what I would expect in those asset classes.

I would invite you to read the Q&A with AIMCo's new CIO Marlene Puffer for more details on the investment performance:

 

Two things worth noting here:

Despite the global headwinds, AIMCo delivered a -3.4% total fund net investment return, outperforming the benchmark by 1.9%* . Overall, the diversified portfolio construction of exposure to public and private assets helped mitigate the negative impact of the challenging macroeconomic backdrop. Inflation-sensitive portfolios, such as Infrastructure (16.8%), Renewable Resources (25.7%), Private Debt & Loan (6.2%) and Real Estate (4.6%) delivered the strongest returns. Our defensive and disciplined positioning, prudent underwriting process, active risk and liquidity management, and constant deployment of capital seeking the best risk-adjusted returns, contributed to resiliency, even during a market downturn.

And this:

In 2023, the whispers of recession are lingering, which could transpire within the calendar year. Even though many central bank officials have paused interest rate increases, the impact of the fastest rate hiking cycle on record is starting to be felt across various industries, most notably in the regional banking sector in the U.S.

Bond markets and yield curves have an impressive track record of forecasting recessions. An inverted yield curve — which has historically been the most accurate predictor of recessions — continues to send warnings, in many cases inverting to a degree not seen since the early 1980s.

With these conditions in mind, we are being surgical in terms of where we are putting new capital, and taking measures to make sure clients’ portfolios are positioned appropriately for the circumstances and their risk profiles.

In other words, gong forward, risk management will be critical as they face the real possibility of a US and global recession.

One thing Marlene didn't answer is foreign currency gains/ losses and how they factored into AIMCo's overall results and the ongoing challenges in Real Estate, particularly Offices in North America and how AIMCo is dealing with these challenges.

I would have loved to talk to her but to be fair, she's only been at this job for six months and she needs another year before she can get fully comfortable with everything.

Lastly, AIMCo did publish its executive compensation for 2022:

As you can see, Evan Siddall's total compensation more than doubled to $3.1 million but the highest total compensation in 2022 went to former co-CIO Sandra Lau at $3.44 million. In my humble opinion, Sandra deserved every penny of that and I think Evan would agree with me. 

More interestingly, AIMCo is still doling out millions to former CEO and CIO Kevin Uebelein and Dale MacMaster as they earned $2.8 million and $1.95 million respectively even though they departed the organization two years ago (actually Kevin first, then Dale).

I'm sure Mark Wiseman will tell me these severance payouts are "industry standard" but it raises eyebrows and the optics look terrible (I assure you, this isn't industry standard).

AIMCo better get its stars in line because there has been some very strange shifts in its executive leadership over the last few years.

And next time you publish any results, do like CPP Investments and PSP Investments and contact yours truly so I can ask pertinent questions.

Trust me, with the millions you guys and gals get paid, it's the least you can do before enjoying your nice vacation.

Alright, let me wrap it up there and go eat something as my cynical Greek side is coming out and I definitely don't get compensated properly for all the hours I put into this blog.

Below, Mark Wiseman, chair of AIMCo, joins BNN Bloomberg that Canada’s 2 per cent inflation target is set for a reason and that the markets and Canadians need to fully understand the serious damage inflation can cause to the economy. He says Canada is better placed than the US in its fight against inflation due to higher immigration into this country, as wage growth for labour is a key driver of inflation. 

You can also watch it here. Is Mark positioning himself to be the next Governor of the Bank of Canada? Stay tuned, with Mark you just never know, he's always thinking ten steps ahead... 

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