AIMCo Delivers Positive Mid-Year Results
Alberta Investment Management Corp. reported a 4.5-per-cent gain on its investments in the first half of the year, but the pension fund manager is staying cautious against a backdrop of slow economic activity.
The half-year investment returns posted by AIMCo, which amounted to $6.1-billion in investment income, were “right around benchmark levels,” chief investment officer Marlene Puffer said in an interview Thursday. AIMCo does not disclose the benchmarks it uses to measure returns at the mid-year mark, and Ms. Puffer said lagging valuation updates for some private asset classes make timely comparisons difficult.
AIMCo has earned an average annual return of 5.4 per cent over four years, and 7.3 per cent over 10 years. The Edmonton-based manager, which invests on behalf of 17 pension, endowment, insurance and government funds in Alberta, manages total assets of $164-billion as of June 30, compared with $158-billion at the end of last year.
The positive first-half return marks a turnaround from last year, when stock and bond markets took a rare simultaneous dive and AIMCo took a 3.4-per-cent loss, driven by declines in its public-market holdings. Even so, AIMCo has taken “a fairly risk-controlled approach” so far this year, waiting for “a stronger view that rates may have hit their peak, which we’re not convinced of yet,” Ms. Puffer said.
“We’re still concerned about the economic outlook and the stickiness of inflation and the implications that that has for what may continue to remain somewhat sluggish economic activity,” she said. “We’re somewhat cautiously positioned in terms of our overall asset mix in public markets. In terms of our relative weighting of equities versus bonds, for example, we have taken the position that it’s still not time to be aggressive in the equity market.”
Public stocks, which make up one-third of AIMCo’s total investment portfolio, posted gains in the first half of the year in spite of rising rates and turmoil among regional banks in the United States. AIMCo said bonds also performed well, though the pension fund manager does not disclose individual performance results for specific asset classes mid-year.
AIMCo’s private debt and loan team was busy, closing 15 transactions worth more than $300-million through June, and its private mortgages team approved more than $900-million in new loans and renewals. But overall, it was a slower start to the year for its private asset classes – which include private equity, infrastructure and real estate, and make up 40 per cent of total assets.
Real estate, in particular, was “more muted” so far this year, as AIMCo focuses on revamping the portfolio to be more resilient and globally diversified at a moment when some parts of office and retail real estate are coming under intense pressure.
“A lot of our activity in real estate is around liquidity and cash management, really thoughtful pacing of any new acquisitions,” Ms. Puffer said. “I think the team is working on some quite creative solutions to repositioning the portfolio.”
In mid-September, AIMCo will formally open a new Singapore office, which will be led by senior managing director Kevin Bong, a recent hire who came over from the Government of Singapore Investment Corp.
AIMCo released its mid-year results earlier today:
At the halfway mark of 2023, AIMCo delivered a 10-year annualized net investment return of 7.3% and a 4-year annualized net investment return of 5.4% for clients. For the sixth month period ending June 30, 2023, AIMCo’s net investment return was 4.5%.
The brief report is available here and below:
There is nothing really surprising in these results.
If you look at AIMCo's total portfolio, 60% is in Public Markets (33% Public Equities, 27% Money Markets + Fixed Income) and 40% is in Private Markets (Real Estate, Infrastructure and Private Equity).
The report states the following drivers behind the mid-year positive results:
- Global equities markets posted gains, overcoming the threat of a regional banking crisis in the U.S.as well as continued rate hikes by central banks
- Bond markets performed well with AIMCo positioning benefiting client portfolios
- Private market activity has been muted with AIMCo remaining highly selective in seeking long-term investment opportunities
According to James Bradshaw's article, Real Estate was more muted so far this year as AIMCo focuses on revamping that portfolio:
Real estate, in particular, was “more muted” so far this year, as AIMCo focuses on revamping the portfolio to be more resilient and globally diversified at a moment when some parts of office and retail real estate are coming under intense pressure.
“A lot of our activity in real estate is around liquidity and cash management, really thoughtful pacing of any new acquisitions,” Ms. Puffer said. “I think the team is working on some quite creative solutions to repositioning the portfolio.”
Indeed, AIMCo's Real Estate team led by Paul Mouchakkaa is repositioning that portfolio by sector and geography but it takes time.
The information on AIMCo's Real Estate performance and activity below was taken from the 2022 Annual Report which is available here (scroll till the bottom to obtain access to PDF):
Note this part:
For the past several years Real Estate has employed a strategy of repositioning the domestic and foreign portfolios towards industrial, multi-family and growing niche sectors like data centres to lean into the secular tailwinds. This repositioning has enabled AIMCo Real Estate to prepare for long-term performance in an evolving new economy and weather the impacts of COVID-19. Over 10 years, Canadian Real Estate achieved a rate of return of 6.0%, compared to a benchmark return of 5.5% and Foreign Real Estate achieved a rate of return of 8.0% compared to a benchmark return of 6.7%.If you look at the charts, Industrial (27.1%) and Residential (21.5%) lead the pack but Office (21.3%) and Retail (16.7%) still make up a huge portion of AIMCo's Real Estate portfolio.
As far as geographic exposure, it's overwhelmingly in Canada with Ontario (37.5%), Alberta (10.4%) and British Columbia (6.1%) making up over half the portfolio and the US (21.8%) and Europe (7.4%) making up less than a third.
Most notably, exposure to Asian real estate is a pittance, 0.1%, placing AIMCo at odds with its large Canadian counterparts which have much higher exposure to US, European and Asian real estate in high performing sectors like Industrial and Residential.
So, I'm curious to understand what AIMCo's CIO Marlene Puffer meant when she stated:
“A lot of our activity in real estate is around liquidity and cash management, really thoughtful pacing of any new acquisitions. I think the team is working on some quite creative solutions to repositioning the portfolio.”
It's not a disaster but there is a lot of work to be done there to reposition this portfolio and it will not happen overnight.
In mid-September, AIMCo will formally open a new Singapore office, which will be led by senior managing director Kevin Bong, a recent hire who came over from the Government of Singapore Investment Corp.
I think they need to partner up with best in class partners and really ramp up real estate investments in Australia and Asia Pacific.
As far as Private Equity, there was "an investment in ImageFIRST alongside fund manager TPG as well as four fund commitments to new funds with existing managers that have generated consistent above-market performance and strong co-investment dialogue."
From what my contacts are telling me, and judging by what BCI's Jim Pittman has publicly stated, activity in Private Equity remains muted and you need to manage your liquidity carefully in this environment.
On a more positive note, I note the following:
- The Mortgages team approved more than $900 million in new loans and renewals with investments in Canada, U.S. and U.K.
- The Private Debt & Loan team closed 15 transactions totaling more than $300 million including direct investments and a re-up commitment to a European partner specializing in the software/technology sector
- AIMCo and PSP Investments partner to invest in loan opportunities.
So, all in all, I'd say AIMCo's mid-year results are good, led by Public Equities and if everything goes smoothly in the second half of the year, the annual results should be fine.
One area that still needs a lot of work is Real Estate but the portfolio did produce above benchmark returns last year and is still being repositioned.
I would have liked to have spoken to Marlene to go over more details but AIMCo only gave a brief interview to James Bradshaw of the Globe and Mail.
That's fine, mid-year results are not terribly important and what counts are annual results and long-term performance.
On a related note, AIMCo Chair Mark Wiseman published his final investment comment on the future on investing for the Globe and Mail stating there is no place like home and why investors should bank on a unified North America:
The world is undergoing a paradigm shift, both politically and economically. This is the last in a four-part series that examines several changes, including the energy transition opportunity, evolving dynamics of emerging markets and how North America can leverage its comparative advantages to strengthen its position in the global market.
Investment portfolios benefit greatly from diversification – both geographic and by asset class. At times, I have criticized investors for having too much home-country bias at the expense of maintaining the right global footprint.
But, as pointed out in the first article in this series, we are in an intense period of geopolitical and economic complexity that requires new ways of thinking. And in this environment, from a North American perspective, there is no place like home.
In recent weeks, I have analyzed this paradigm shift from the perspective of an investor or asset manager – the geopolitics, the interest rate environment, the energy transition and the technology changes, to name a few. And while there are no silver bullets, the analysis leaves me confident that allocating capital in North America is a winning bet, because a distinct combination of relative strengths and opportunities positions investors in the region for superior long-term, risk-adjusted returns.
To take a step back, regionalization has become the name of the geopolitical game. Clusters around the world such as the European Union, the Association of Southeast Asian Nations (ASEAN) and Middle East North Africa Pakistan (MENAP) are all seeking to form stronger trade blocs and integrated supply chains. Investors should look at North America through a similar lens.
Canada and the United States both have the potential to create and accelerate comparative advantage through industrial policies that attract and catalyze more trade and cross-border investments. But regardless of who is in government or what policies are put in place, the region possesses enviable benefits – today.
North America’s myriad natural resources, energy self-sufficiency, market scale, human capital and history of integration represent a winning hand. While Mexico plays an important role in this continental advantage, for the purpose of this piece I will focus on the markets I know best: Canada and the U.S.
The U.S.’s abundance of liquefied natural gas (LNG), and Canada’s dominion over base metals and critical minerals, are particularly crucial for energy security and set the stage well for the transition finance opportunity, which I believe will be the next gold rush.
After Russia, Iran and Qatar, the U.S. is home to the world’s most LNG resources. The U.S.’s command over LNG has proved strategically advantageous, particularly since the Ukraine war began and energy prices soared. Perceptive investors should look to the valuable opportunity for LNG to be exported to Europe and other jurisdictions, while, as a transition fuel, it replaces or supplements higher-emission forms of energy.
Canada has a similar ace up its sleeve, not only in natural gas, but also as the future destination of choice for the mining and processing that will drive the energy transition. A top-five producer of cobalt, copper, graphite, precious metals, nickel and uranium, it also has the potential to expand production of other key elements such as lithium and magnesium.
It’s also the only country in the Western Hemisphere with deposits of all the minerals required to make next-generation electric batteries. In an annual survey of global mining companies this year, three Canadian provinces made the top-10 preferred jurisdictions for mining investment and another listed Canada as the top jurisdiction of choice for the global mining industry to invest in new green technologies.
In isolation, these are both important assets; in combination, they set the stage for a powerful regional bloc that competes with Middle Eastern and Russian rivals for LNG, and with China for the mining of critical minerals.
Canada and the U.S. together present a massive commercial and geographic market. This positions North America to spur investment, research and development in the next generation of telecommunications, data centres and digital infrastructure, which will require a profusion of energy and a copious amount of space.
Demographically, the region benefits from its skilled and educated work force. Canada has the highest percentage of college and university grads in the G7.
But the country also realizes that it needs more people – especially young people – as its dependency ratio (the number of retired people to working aged people) is increasing. In North America, in no small measure owing to high immigration, demographic and economic catastrophe is far less of a threat than it is in much of Europe and Asia.
Japan’s population, for example, fell by 800,000 last year as the country spirals into demographic crisis. China’s population is aging rapidly and its current total of 1.4 billion is predicted to decline below 800 million by 2100. By 2035, more than 400 million (30 per cent) Chinese are expected to be the age of 60 and older. And critically, China has entrenched net-negative migration going back decades.
Europe’s demographics are likewise in crisis. The European Commission acknowledges the share of people in the EU older than 65 will increase from 20 per cent today to 30 per cent by 2050, and the bloc could see its population shrink by 6 per cent, or 27.3 million people, by 2100.
By opening its borders to half a million immigrants per annum, and prioritizing young skilled workers, Canada, in particular, has established a feasible path to escaping this trap.
The U.S. has its own problems with stagnating population growth and less-widespread political and public support for immigration, but maintains a robust labour force that continues to add hundreds of thousands of jobs monthly, despite severe inflationary issues. Its population is expected to grow, albeit modestly, and reach 394 million by 2100.
All said, these global demographic trends give long-term investors another reason to bank on North America and positions the region as the market of choice.
While today North America possesses advantages, the right public policies can create a gap against its competitors. The U.S. Inflation Reduction Act (IRA) and the Chips and Science Act are an important start, signalling an unmistakable shift to make the U.S. a leader in modern industrial policy in strategic sectors such as semiconductors and clean energy.
Canada has followed closely behind with its critical minerals strategy, investing nearly $4-billion in geoscience, mineral processing, manufacturing and recycling.
Despite initial concerns from the Canadian auto industry about the IRA, it sets the stage for expanded continental trade by establishing eligibility requirements for parts assembled in North America or minerals sourced from a free trade partner. The world still relies on China to mine and to make electric-vehicle batteries, but this poses an immense advantage and market opportunity for Canadian miners and manufacturers.
One risk of embracing supply side economics, through policies such as the IRA and Ottawa’s critical-minerals strategy, will be the impact on continuing, persistent inflation. If the policies don’t massively boost productivity and innovation, they will worsen that issue.
Therefore, with interest rates rising, affecting the outlook for real investment returns, and increasing the interest paid on public debt, improvements in human capital, research and development, innovation and productivity, are all highly desirable to investors.
The challenges both countries face are real, but their ability to realize productivity gains (something that the U.S. is much better at than Canada) is bolstered by acting as a single, unified market. While Canada and the U.S. will inevitably continue to compete, they are stronger and more competitive on the global stage when working together in areas such as energy transformation and supply chain security. And we seem to be on this path politically, at least for the time being.
Earlier in this series, I opined that investing is effectively an act of faith in the future. But it should never be about blind faith.
As a Canadian who lives and works on both sides of the border, I see the North American continental economy as a source of stability and great potential for investors in this uncertain risk environment. The sheer abundance of its natural resources, its human-capital potential, the strength and size of its market and its geopolitical stability, when coupled with strategic policies, can yield unprecedented investment opportunities, right here at home.
I agree with many points Mark raises here but I'm a lot more bullish on the US than Canada -- A LOT MORE BULLISH.
Our country has tremendous potential but it is run by inept leaders and that's why apart from the REM, there hasn't been any major project in Canada over the last eight years.
It's pathetic, people I know in Ottawa tell me even if Trudeau's Liberals lose the next election (likely but not a done deal), it will take five years minimum to clean up the mess they're leaving behind.
Anyways, don't get me started on what ails Canada, I can write a book on this topic.
We need more skilled and unskilled immigrants, more single-family homes to house these immigrants and Canadians that are sick of living in a condo because they can't afford a home. We also need better economic and energy policies that recognize the primacy of the private sector and that nuclear energy is the only way we will credibly lower our carbon footprint over the long run (not wind mills and solar panels).
We also need a Canada Healthcare Fund modeled after CPP Investments or else rising healthcare expenses will bankrupt us, but the way the federal officials are spending money, we are headed for default sooner rather than later.
I can go on and on and on, but I become vicious and irascible so don't get me started.
Lastly, AIMCo's CEO Evan Siddall will join the Canadian Club Toronto on Tuesday, September 26 to discuss the Canadian Model of Pension Investment and how this revolutionary approach to managing the investments of Canadian pension beneficiaries has evolved after a generation in practice:
Evan will sit down with Sabrina Maddeaux (The National Post) to explore various themes, including the efficiency of markets and active risk management, the significance of active management justified by a trio of factors: information, mispricing, and asset allocation, and the necessity of diversification to ensure portfolios are designed to meet the needs of each plan. They will also delve into 'fast' and 'slow' investment approaches and discover the crucial advantage that Canadian pension investment managers employ toward fulfilling the long-term investment objectives required to fulfill their mandate to Canadians.
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You can purchase tickets here and it should be a great event as Evan has kept a relatively low profile at AIMCo.
I look forward to hearing what he has to say on the Canadian pension model and other topics.
It's also a good time to remind AIMCo and others that this blog isn't a charity, it's the best blog in the world on pensions and investments and the reason is simple, I work my tail off to make it great.
Please show your financial support and help me continue delivering great comments on pensions and investments.
Below, AIMCo Chair Mark Wiseman joins BNN Bloomberg to discuss why there is no place like home when it comes to investing. Wiseman says today's economic and geopolitical complexity means Canadian investors need to be payed more for the risk they are taking when investing globally. He adds domestic North American markets look the most attractive for Canadians.
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