AIMCo CEO Evan Siddall on The Hedgehog and The Fox
China poses a conundrum for asset managers because while it is cheap and growing, there are risks when it comes to rule of law and transparency, said Evan Siddall, chief executive of the Alberta Investment Management Corp. (AIMCo).
The $158-billion pension and endowment manager opened its first office in Asia this month, in Singapore, and Siddall spoke about AIMCo’s plans there following a speech in Toronto on Sept. 26.
“My guess is that we’ll probably position ourselves in economies around that market that can participate in the growth but don’t have some of the risks,” he said.
“If you can find opportunities to participate in the growth of consumer spending in China without actually being in China, those are attractive, depending on the price.”
Siddall noted, however, that “mis-pricing” or a mismatch between price and true value that makes an acquisition attractive, is less likely to occur in markets that do business with China and where perceived risks related to transparency and the rule of law are lower.
“Everybody wants that kind of investment,” he said. “We’re quite, like most other investors, quite reticent about China.”’
While he didn’t strictly rule out investments in China, which has been beset by a slowdown in previously red-hot growth alongside rising trade, diplomatic and military tensions with the United States, he did mention China in an example of an infrastructure investment tied to climate and then reversed course to say that such an investment would not be made by AIMCo in China.
“China is ridiculously cheap,” Siddall said. “We’re just gonna have to be very, very careful about China because there are reasons why it’s mis-priced.”
AIMCo has very little invested in China and most if not all investments there were made through external fund managers, he said, noting that the entire commitment to Asia is around two per cent of the fund’s assets.
How much more will be invested in Asia now that AIMCo has a physical office there as part of a global diversification strategy hasn’t been strictly defined.
“It’s no more complicated than ‘more’ because we’ve got room to grow,” Siddall said.
After his speech, he declined to weigh in on AIMCo’s potential role managing a separate Alberta pension plan should the province elect to the withdraw from the national Canada Pension Plan. A report commissioned by the province’s previous government was made public Sept. 21 and indicated Alberta could walk away from CPP with a $334-billion asset transfer and create its own pension under different management.
“This is a political matter…. We’ll probably be asked our view and we haven’t even thought about it,” Siddall said. “We’re told under legislation by the province who we work for. If that changes, we’ll do a great job.”
Edmonton-based AIMCo is among the last of the Maple 8 group of Canada’s largest diversified pension management organizations to open an office in Asia, and the Singapore opening came just months after some members of the group, including the Ontario Teachers’ Pension Plan Investment Board, the Caisse de dépôt et placement du Québec and British Columbia Investment Management Corp., announced pauses to private direct investments in China amid growing economic and diplomatic tensions.
The Canada Pension Plan Investment Board, which invests funds not needed to pay current CPP benefits, has the largest commitment to China among Canadian pension management organizations at nearly $52 billion or a shade over nine per cent of assets. CPP Investments officials have not announced any change to the organization’s China strategy.
Paula Sambo of Bloomberg also reports China gloom made some assets ‘ridiculously cheap,’ Aimco says:
Assets with exposure to China look “ridiculously cheap” and Alberta’s investment manager plans to boost such holdings outside the country to take advantage of depressed valuations, its chief executive officer said.
“If you can find opportunities to participate in the growth in China, without actually being in China, those are potential mispricing opportunities,” Alberta Investment Management Corp. CEO Evan Siddall said Tuesday during an event in Toronto. “My guess is that we’ll probably position ourselves in economies around those markets that are interesting.”
Aimco, which manages about C$160 billion ($118 billion) for the energy-rich Canadian province, has minimal direct investments in China and relationships with a number of external fund managers that invest there.
The firm’s target for allocation to the Asia-Pacific region is “more,” Siddall said. “It’s actually no more complicated than ‘more’.” Aimco had only 3.8% of its money invested in Asian economies at the end of last year, with 77% in the US and Canada.
To remedy that, Siddall opened a Singapore office this month after hiring Kevin Bong to run it as senior managing director and chief investment strategist.
Canada’s large pension funds have pulled back on some activities in China. Earlier this year, British Columbia Investment Management Corp. said it was halting direct investments in China due to geopolitical risks. Ontario Teachers’ Pension Plan cited regulatory changes in China, heightened risk, and deteriorating relations with the US and Canada for a decision to pause private-asset deals in the country.
Meanwhile, Chinese authorities are considering relaxing the rules that cap foreign ownership in domestic publicly traded firms, people familiar with the matter told Bloomberg last week, seeking to lure global funds back to its $9.4 trillion stock market.
The policy tweaks, if implemented, would aim to boost overseas ownership in stocks listed in Shanghai, Shenzhen and Beijing. China caps total foreign ownership in locally listed firms at 30%, and subjects a single foreign shareholder to a 10% limit.
What Bloomberg Economics Says
China is down shifting onto a slower growth path sooner than we expected. The post-Covid rebound has run out of steam, reflecting a deepening property slump and fading confidence in Beijing’s management of the economy. Weak sentiment risks becoming entrenched. We now see GDP growth halving from an average of 8% per year in the decade before the Covid crisis to 4% in the decade after — and falling to 1% by 2050.
The optimistic case for China remains grounded in the enormous size of the economy, the scope for gains as productivity catches up to the global frontier, and the development orientation of the government. These drivers remain in place, but with diminished force.
On Tuesday, AIMCo CEO Evan Siddall joined the Canadian Club Toronto 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.
As you can read from the media coverage above, a lot of the main focus was on China but there was a lot more to this event than that and I want to cover it properly here.
First, let me thank Evan Siddall for sending me his opening remarks which are excellent (added emphasis is mine):
Canadian Club – September 26, 2023
Evan Siddall Remarks
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Thanks to Bryan and EY as sponsor. I also want to recognize our peer Maple 8 pension fund managers, many of whom are here today.
And thanks to all of you for being here. We’ve all got only a fixed amount of time in life. I’m grateful you’d all order the same lunch and spend a few minutes listening to me.
I want to offer a few thoughts and then Sabrina and I are going to chat — about what you want to hear.
*****
We investors are in the risk business. We can’t outperform markets consistently without embracing risk.
The trick is to know which risks to take, which to avoid, and how much risk to take once we’ve decided we want it.
My objective today is to draw back the curtain and explain how we go about taking risks — making investments — at AIMCo.
How can we win when two-thirds of money managers consistently underperform the stock market?
Study after study confirms the “Efficient Markets Hypothesis,” which says that all information — everything there is to know — is priced into the public market, all the time.
So, beating the market is mostly about luck, and you should never pay for that.
The spurious vale of security selection reminds me of the one about the investor who shorted Tesla — and got electrocuted!
To paraphrase the legendary investor David Swenson, charging fees for giving people stock market advice represents monumental transfer of wealth from individual to institutional mutual fund investors.
Or as John Bogle, who championed passive investing to grow Vanguard into an $8 billion index fund, was fond of saying, “Don’t look for the needle in the haystack. Just buy the haystack!
What then is the role of active investment management? Why, after all, am I here?
First of all, there are many more asset classes than public equities. Asset allocation decisions represent an important lever that portfolio managers can pull to create excess returns. Decisions around how much to invest in each asset class, and when, may be the greatest source of value creation in active management.
Under our Chief Investment Officer, Dr. Marlene Puffer’s, leadership, AIMCo has therefore shifted from an asset class-centric mode of thinking to one that brings a “total portfolio” lens, working across teams and developing comparative metrics. While our clients retain strategic asset allocation responsibilities, we can offer advice regarding portfolio construction and marginal asset allocation to add returns.
Important exceptions also exist to the Efficient Markets Hypothesis. First, only public information is priced into share prices, which is why insider trading pays.
Secondly, people do not always act in economically rational ways — especially when it comes to money — so prices can be distorted. People can be pretty wild, actually, especially in crowds.
And markets are crowded.
Investors therefore can best generate excess returns by identifying unconventional ideas that combine two factors: (A) a legal information advantage or uncommon insight, where (B) non-economic factors have distorted prices.
Both of these characteristics are both more prevalent in private markets than public markets.
Larger, more complex investment opportunities have fewer competitors, making the potential value of these factors higher. That’s one key reason large pension funds tend to seek private investments. In addition to the basic principle of diversification — which I will come to shortly, successful investing therefore requires three factors:
- Edge — an identifiable basis on which the investor has some unique information or source of advantage. At AIMCo, we are constantly asking what’s so special about our thesis?
- Mispricing — confidence that your insight is not yet priced in, and
- Conviction — that the price eventually will come around to your way of thinking.
This last factor acknowledges that time matters. Long-term investors like us have more opportunities to realize returns. We can afford the time it might take.
Effective risk management helps fund an investor’s conviction over time and gives security when things don’t go to plan. In investing, after all, what is comfortable is rarely profitable.
If, as John Maynard Keynes said, successful investing is “anticipating the anticipation of others,” patience is indeed a virtue, and a source of edge as well.
Embracing risk also takes a certain mentality: a distanced, calculating, unromantic coldness that welcomes challenge, and does not bristle.
That’s why Warren Buffet says he values temperament over intellect in an investor.
Instead of opting to “fail conventionally,” hiding behind popular wisdom and strength in numbers, the best investors champion unconventional — even pioneering — ideas.
Investing therefore also demands a tolerance for failure. As long as you’re right more than you’re wrong, you’re winning.
At AIMCo, we are launching an innovation function to institutionalize learning from failure. We are establishing a group to register, prioritize and, in the most promising cases, explore innovative ideas that involve any change in our business processes or strategy.
Our intention is to improve how we make decisions. After all, decision making is the engine, the essence, of our being.
In Isaiah Berlin’s famous essay on decisioning, he drew an important distinction between foxes, who know many things, and hedgehogs, who know one big thing.
Daniel Kahnemann explored a similar idea in his Nobel-winning work, Thinking, Fast and Slow. He distinguished intuitive “System 1 thinking” from deliberative “System 2 thinking” — the type that that relies on data and analysis and is patient, logical, deliberate and rational. That’s how a fox thinks.
Hedgehogs, by contrast, rely on instinct and intuition. They trust their guts and act quickly. Many successful entrepreneurs know one big thing: think of Larry Page and Sergei Brin, who co-founded Google, or Sara Blakely of Spanx, or Henry Ford.
Most unsuccessful entrepreneurs also thought they knew one big thing, but turned out to be wrong. Hedgehogs are seldom in doubt — and not always right.
Experience or wisdom may actually be less valuable than we believe. The human mind searches constantly for efficiency-seeking heuristics and shortcuts.
Fashioning order from life’s cacophony helps us function as children, but constrains our imagination as adults.
Most neuroscientists follow the paradigm that our minds are prediction-manufacturing machines.
System 1 thinking — our “hedgehogness,” if you will — resistance to challenge, commitment to our convictions and the proclivity to rely on bias unless we make a practice of challenging our own assumptions, narratives and “priors” — becomes ever stronger as we age.
Our “priors” may in fact close our minds and lead to a petrification of thought. Kahnemann said it well:
"Our comforting conviction that the world makes sense rests on a secure foundation: our almost unlimited ability to ignore our own ignorance."That is my favourite quote. If you take home anything from today, remember it:
"Our comforting conviction / that the world makes sense / rests on a secure foundation / our almost unlimited ability / to ignore our own ignorance."System 2 fox-like thinking therefore requires extra effort as we become more sure of our “been-theres” and “done-thats.” A rigorous, data- driven investing process reduces opportunities for cognitive bias and weeds them out via constructive challenge.
A culture where employees feel free to speak up, where their diverse ideas are welcome, offer more opportunities to police cognitive bias and avoid poor decisions.
The value of a truly inclusive culture is powerful to us. Embracing psychological safety promotes higher productivity, excellence in decision making and much improved risk management. It also demands inclusivity. I believe that a diverse employee population is a huge competitive advantage.
At AIMCo, only about a third of our employees are white men and our executive committee actually has more women than men. This isn’t performative stuff. It’s real, moral and strategic. And we will continue to welcome diversity from wide range of traits as we make decisions.
*****
Lastly, the inherent value of diversification is overlooked by people pressuring Canadian pension funds to invest more at home.
I want to confront the topical complaint that pension funds allocate something like 4% of our capital to domestic stocks. Given where this criticism is mostly coming from — a few domestic equity-centric fund managers, I suspect they are hoping to see our billions of additional dollars chasing Canadian stocks and therefore bidding prices higher.
They don’t mention that the Maple 8 large Canadian pension funds collectively have around 13.5% more of our assets in Canadian fixed income, which are essential to hedge our clients’ mature pension liabilities.
Nor do they acknowledge our investments in Canadian real estate, infrastructure, renewables, private equity, private credit and mortgages. In fact, taking all asset classes into account, pension funds quarter and half of our total assets invested in Canada. Since Canada's share of global GDP in 2022 was between 1.0% and 1.5%, as a group we remain substantially overweight Canada.
AIMCo itself currently has 42.9% of our assets invested in Canada. We own properties like Yorkdale and Square One shopping malls around Toronto, and the Northern Courier pipeline in northern Alberta in partnership with Métis and First Nation communities. We are also building rental housing where it’s needed in major Canadian cities.
However, as everyone knows, an investor can reduce risk without reducing returns by avoiding a portfolio of correlated investments whose fortunes rise and fall together, such as having too many assets in any single country — like Canada.
We are therefore unapologetically expanding AIMCo‘s presence in London and opening offices in Singapore and New York in order to increase deliberately the potential sources of diversification and return- seeking investments for our clients.
Our clients have pension liabilities to fund. At AIMCo, we work on behalf of Albertan teachers, nurses, police officers, judges, professors, fire fighters and civil servants. We also manage the funds of the Alberta Heritage Fund for 4.4 million Albertans.
The pension savings of Canadians are not our nation’s piggy bank. Maintaining a diversified investment portfolio helps us keep our promises to our clients and their beneficiaries.
As fiduciaries, we owe it to them that we maximize our investment returns on their behalf, by taking risks responsibly.
*****
Folk wisdom goes a long way out west. Their advice to me would be to heed the words of Kenny Rogers:
"You got to know when to hold ‘em, know when to fold ‘em, know when to walk away — and know when to run."Thank you.
These opening remarks are excellent for a lot of reasons.
First, it shows you Evan Siddall is a deep thinker.
Very few people can successfully integrate Isaiah Berlin's essay, The Hedgehog and the Fox, and Daniel Kahneman's Thinking, Fast and Slow to discuss pensions and investments.
[Note: As an aside, Berlin taught Charles Taylor who taught me political theory and so much more at McGill. Best known for his famous essay on two concepts of liberty, one of my favorite essays was on The Originality of Machiavelli. Berlin was a towering force, you can find many of his great essays collected in
"Our comforting conviction that the world makes sense rests on a secure foundation: our almost unlimited ability to ignore our own ignorance."
The value of a truly inclusive culture is powerful to us. Embracing psychological safety promotes higher productivity, excellence in decision making and much improved risk management. It also demands inclusivity. I believe that a diverse employee population is a huge competitive advantage.
At AIMCo, only about a third of our employees are white men and our executive committee actually has more women than men. This isn’t performative stuff. It’s real, moral and strategic. And we will continue to welcome diversity from wide range of traits as we make decisions.
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