AIMCo Posts 8.0% Return in 2023

The Canadian Press reports AIMCo's balanced fund earned 8.0% in 2023, falls short of benchmark:

Alberta Investment Management Corp. says its balanced fund earned a net return of 8.0 per cent for 2023, short of its benchmark return of 9.3 per cent.

The investment manager says its public equity investments earned 15.8 per cent, while its fixed income holdings earned 7.7 per cent. 

The firm's private equity portfolio generated a return of 6.7 per cent, while infrastructure investments earned 3.8 per cent and its renewable resources portfolio returned 1.6 per cent.

AIMCo's real estate portfolio lost 8.4 per cent, while mortgages earned 4.5 per cent and private debt and loan holdings returned 9.6 per cent.

In 2023, AIMCo's total fund returned 6.9 per cent compared to a benchmark return of 8.7 per cent. 

AIMCo, which had $160.6 billion in assets under management at the end of 2023, invests on behalf of pension, endowment, insurance, and government clients in Alberta. 

"During 2023, persistently high inflation and interest rates and challenging geopolitical factors combined to affect global markets," AIMCo chief executive Evan Siddall said in a statement.

"Our investment teams continued to seize opportunities and effectively mitigate emerging risks to deliver a solid return for our clients and the Albertans they serve."

Barbara Shecter of the National Post also reports AIMCo posts 6.9% annual return, but misses benchmark amid real estate headwinds:

Alberta Investment Management Corp. (AIMCo) posted an overall return of 6.9 per cent in 2023, despite challenges in its real estate portfolio. The asset manager, which invests on behalf of pension, endowment, insurance, and government clients in Alberta, ended the year with $160.6 billion in assets under management.

The return, though positive, fell below AIMCo’s benchmark return of 8.7 per cent.

The real estate portfolio was down 8.4 per cent at Dec. 31, 2023, offsetting significant gains posted by public equities and fixed income, which were up 15.8 per cent and 7.7 per cent respectively. The private equity portfolio also generated a positive return, at 6.7 per cent, while renewables were up 3.5 per cent. Mortgages and private debt and loan posted positive returns of 4.5 per cent and 9.6 per cent, respectively.

AIMCo took the hit to its primarily North American-focused real estate portfolio alongside other funds invested in the office segment of commercial real estate as hybrid work persisted, said Marlene Puffer, who has been the asset manager’s chief investment officer since early last year.

“The valuations have suffered for more than one reason,” she said, adding that clarity around interest rates coming down — hopefully over the next quarter — could lead to more deals in the sector, in which there is often a large gap between the price a buyer is willing to pay and the amount a seller is willing to accept.

Positive on Poloz

“That is the dance that’s happening right now,” she said. “I think the market will settle itself out and we’ll see some significant properties change hands this year. But they’re not going to be changing hands at bottom-of-the-barrel valuations.”

AIMCo’s real estate holdings are primarily located in Canada and the United States, with some in Europe and the United Kingdom. At the end of fiscal 2022, the office segment accounted for 21.3 per cent of the portfolio, with updated figures expected to be published this June.

Puffer said she views it as a positive development that former Bank of Canada governor Stephen Poloz has been selected to lead a working group created to help the federal government identify domestic investment opportunities for pension funds in Canada.

“I have a lot of faith in Stephen Poloz to lead this activity. I think he’s a very balanced, thoughtful investment and markets expert and we’ll be very pleased to work with him on this,” she said of the working group, announced in last week’s federal budget, that will focus on investment opportunities for pensions in digital and physical infrastructure, airport facilities, artificial intelligence and housing.

Canada’s large, globe-trotting pension management organizations were blindsided by a section in last fall’s economic update that indicated Ottawa planned to find ways to keep more of their billions of investment dollars in Canada.

Assets in Canada

“There are certainly areas where discussion can, I think, be very productive,” said Puffer, who was chief executive of the division responsible for investment management of CN Pension Trust Funds and also served as vice-chair of the Board of the Healthcare of Ontario Pension Plan (HOOPP) before joining AIMCo.

“We have a lot of assets in Canada today and one of the questions is whether or not there can be additional, for example, infrastructure assets available in Canada that are attractive for us in terms of our global opportunities.”

The budget specifically mentioned airports, an infrastructure asset Canada’s largest pension managers have coveted for years. The Liberal government studied the potential of multi-billion-dollar privatizations in 2017, but the idea was ultimately shelved. Puffer said it’s too early to say whether a major Canadian airport will be put on the block.

“None of us know very much about what the government has in mind at this moment so it will be interesting to see how that all evolves,” she said.

AIMCo’s annualized 10-year return was 6.7 per cent at the end of the 2023.
 The asset manager also publishes returns for a “balanced fund” across all asset classes, which does not include clients that exclusively choose fixed income and money market investments. AIMCo’s annualized 10-year return for this balanced fund mix is 7.3 per cent.

Client mandates dictate to some degree how much and how quickly portfolios can be adjusted in response to market and macro-economic conditions, Puffer said, as do some asset classes such as infrastructure, which tend to be long-term holdings.

Private debt is an asset class where shifts are easier and AIMCo is keen to expand activity there, she said, describing “modest” deal flow from a year-long joint venture with another Canadian pension, the Public Sector Pension Investment Board. (PSP) That arrangement was forged in January 2023 when the Alberta-based asset manager snagged leveraged finance and capital markets veteran David Scudellari from PSP. Puffer said AIMCo has also been working with large global private credit players in the U.S. and Europe, where the relationships have led to a broadening of deal flow in other asset classes such as private equity — and to bigger allocations.

She singled out one recent transaction, which she identified only as “a popular one” among institutional investors, as one in which AIMCo might normally have seen its allocation cut back.

And James Bradshaw of the Globe and Mail reports deals continue to lag as investors on both sides can’t agree on prices, AIMCo CIO says:

Major investors are still having a hard time agreeing on prices as a drawn-out period of high interest rates continues to stall deal making and weigh on private asset values, says Alberta Investment Management Corp. chief investment officer Marlene Puffer.

AIMCo reported a 6.9-per-cent return across its funds in 2023, which includes clients with varying tolerance for risk. Its balanced fund, which reflects a typical mix of client assets, earned 8 per cent. Both returns missed the internal benchmarks AIMCo uses to measure its performance – by 1.8 percentage points for the total fund and 1.4 percentage points for the balanced portfolio.

Even so, Ms. Puffer said she is “quite content” with where the funds landed. Strong returns from public stocks, which earned 15.8 per cent as markets surged, and bonds that returned 7.7 per cent were the driving forces behind AIMCo’s gains. By contrast, returns from privately owned assets were uneven. Real estate lost 8.4 per cent, private equity gained 6.7 per cent and infrastructure – an asset class that has typically performed well through a period of high inflation – earned 3.8 per cent.

“It’s always a bit of a challenge when public equity markets are the leader and all of our strategies around diversification are the laggards,” Ms. Puffer said. “When you look at that, you have to remind yourself that the reason for diversification is when the opposite happens.”

AIMCo invests on behalf of 17 pension, endowment, insurance and government clients in Alberta. It now has nearly $161-billion in assets, up from $158-billion a year earlier.

Investors have been eagerly anticipating a pivot among central banks to cutting interest rates now that inflation shows signs of coming under control. But the timeline for that has dragged out, adding to the uncertainty and keeping dealmakers in “a little bit of limbo,” Ms. Puffer said.

“The common theme … is the adjustment to the higher interest rate environment,” she said in an interview. “That’s producing challenges in agreeing on prices: what’s the correct valuation for any asset in the private asset space?”

That is even true in the secondaries market, where fund investors buy and sell stakes in pools of private assets before those investments are realized, usually at a discount. That can help free up cash for pension funds to put into other investments. In recent months, the Canada Pension Plan Investment Board, the Caisse de dépôt et placement du Québec and the British Columbia Investment Management Corp. have all tapped the secondaries market to sell upward of US$1-billion of fund stakes.

“Activity is picking up” in secondaries, Ms. Puffer said, and AIMCo is active as both a buyer and seller. But with valuations in flux, “it’s a very careful analysis on thinking about what kind of discount you’re willing to take on some of your assets in order to redeploy that capital. … We will take some modest discount in order to redeploy in other areas, but we’re very thoughtful about how we do that.”

Real estate continues to be a prime example of the gap in expectations between buyers and sellers. AIMCo’s losses in that portfolio last year were driven in part by the adjustment to hybrid working arrangements during the pandemic. There have been few transactions to reset expectations for market prices, and some investors are looking to take advantage of the pressure on the sector and buy assets at low prices.

“We’ve suffered some pain in our valuations at year-end. It seems to be moderating somewhat now,” Ms. Puffer said. “There’s still challenges in really finding where assets will actually trade. … There are players out there who are interested in owning some office but owning it at a very deep discount, and those trades have not really cleared yet.”

Earlier today, AIMCo issued a press release stating it achieved 8.0% return in 2023:

Strong public equity, fixed income, and private equity performance despite challenging investment environment

Edmonton – Alberta Investment Management Corporation (AIMCo) today announced a Balanced Fund net investment return of 8.0%, or $8.9 billion, for the year ended December 31, 2023. This result was approximately 1.4 percentage points below the benchmark return of 9.3%. Annualized long-term results were 5.3% over a four-year period and 7.3% over a ten-year period, representing net investment returns of $22.5 billion and $62.2 billion, respectively.

AIMCo invests on behalf of pension, endowment, insurance, and government clients in Alberta. Each client determines their long-term asset mix according to their objectives and risk appetite, which is a key determinant of potential returns along with AIMCo’s execution in public and private markets. AIMCo’s Balanced Fund reflects a typical client mix of investments across all asset classes. AIMCo’s Total Fund return reflects the aggregated results of all client accounts, including clients who exclusively choose fixed income and money market investments to achieve their objectives. In 2023, the Total Fund returned 6.9%, which was 1.8 percentage points below its 8.7% benchmark return. Total client assets under management were $160.6 billion as at December 31, 2023.

“During 2023, persistently high inflation and interest rates and challenging geopolitical factors combined to affect global markets,” said Evan Siddall, Chief Executive Officer, AIMCo. “Our investment teams continued to seize opportunities and effectively mitigate emerging risks to deliver a solid return for our clients and the Albertans they serve.”

In contrast to 2022, both Public Equities and Fixed Income posted significant gains of 15.8% and 7.7% respectively in 2023. AIMCo’s Private Equity portfolio also generated a return of 6.7%, while the Infrastructure and Renewables portfolio returned 3.5%. Real Estate, which was particularly affected as economies adjust to post-pandemic work practices, was down 8.4%. Mortgages and Private Debt & Loan had positive returns of 4.5% and 9.6%, respectively.

“With a continued focus on long-term results, we made significant strides in implementing our new investment strategy and translating it into asset class specific strategies, while navigating challenging markets throughout 2023,” said Marlene Puffer, Chief Investment Officer, AIMCo. “As we set our sights on 2024, we will focus on enhancing value in our existing direct investments and on managing private asset class allocations in this environment of capital constraint and higher interest rates.”

Investment Performance¹

For the Year Ended December 31, 2023

Investment Performance by Asset Class

For the Year Ended December 31, 2023

¹All performance results are net of fees and costs.

Detailed performance information will be available in AIMCo’s 2023 Annual Report, which will be released in June 2024.

Alright, so AIMCo's Balanced Fund which represents the typical client mix of investments across all asset classes achieved a net return of 8% last year.

AIMCo's results didn't surprise me, they're in line with what other peers that have a higher allocation to public markets posted and the weakness in real estate is also in line with what others posted, maybe a tad worse since they have a relatively higher allocation to offices in North America (21% in offices when most peers have 10-15%).

You'll notice that apart from public equities and fixed income and money markets where the bulk of the gains came (mostly indexed there), private debt (9.6%) and mortgages (4.5%) also kicked in and that's what you'd expect in a year where rates remain high and inflation persists.

Higher rates and less deal activity also impacted real estate, infrastructure, private equity and renewable resources where AIMCo continues to add value over a longer period.

What will happen this year? Well, if inflation pressures persist and the Fed doesn't cut rates, it will be another tough year for real estate, private equity, infrastructure and renewables and public markets will also experience a setback in the second half of the year.

Not an easy environment and as AIMCo's CIO Marlene Puffer states above, they're not willing to sell real estate and private equity assets at a deep discount (that might change but they have plenty of liquidity to wait for the cycle to turn).

Now, I would have loved to delve deeper -- a lot deeper -- into AIMCo's 2023 results but their annual report is only out in June once the provincial government ratifies it.

I find it incredibly frustrating that like CDPQ, AIMCo cannot post its annual report when it releases its annual results (not their fault, their respective provincial governments need to approve them first). 

As I stated before, if I was Pension King of Canada, I'd make it illegal for any pension fund to post results without concurrently releasing its annual report because that's where all the "juice" lies, the rest is cosmetics

I did contact Evan Siddall and Marlene Puffer earlier to see if they have anything to add and didn't hear back from them.

Truthfully, there's not much point discussing results unless I can sink my teeth into the annual report.

So, I think the asset class leaders should be proud of their results even if the fund missed its benchmark return of 9.3% (AIMCo has one of the toughest benchmarks among the Maple Eight and they are completely transparent about all their benchmarks which I commend them for):

I also commend AIMCo for stepping up their game in communications and continuing to strive for a very inclusive workplace that emphasizes capabilities of all workers and accommodates neurodiverse workers.

I've said this before and I'll state it again and again till I turn blue, there's a lot more work that needs to get done to attract, retain and accommodate all workers, especially Canadians with disabilities and neurodiverse workers.

Alright, let me wrap it up there. Once again, detailed performance information will be available in AIMCo’s 2023 Annual Report, which will be released in June 2024.

Below, AIMCo CIO Marlene Puffer discusses what impacted the performance of the Balanced Fund in 2023 and more.

Also, AIMCo recently released its inaugural episode of ABsolute Returns where host Alex Zabjek sits down with University of Toronto professor and author, Ajay Agrawal, to discuss how a new wave of artificial intelligence is challenging the status quo — and how you can get on board. 

Moreover, AIMCo's former Board Chair, Mark Wiseman, reflects on the transformative changes over the last four years and why they can't be ignored. Finally, AIMCo's Chief Economist, Jean David Tremblay-Frenette, breaks down the numbers behind the Bank of Canada’s latest interest rate decision.