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AIMCo Sees Returns Rebound in 2009-2010
Last Saturday, Lisa Schmidt of the Calgary Herald reported that AIMCo sees returns rebound:
The
province's investment manager has won back significant ground over the
past year, its chief executive said Thursday, following tough losses
in 2008.
Alberta Investment Management
Corp., known as AIMCo, said overall returns are running in the range of
about 17 per cent, said Leo de Bever, who will mark two years at the
helm next week.
"If you look at the return on the Heritage Fund,
that's sort of indicative of what we did on the endowments and for the
pension plans," he said. The rainy day fund gained $2 billion to $14.4
billion for the 2009-10 year, compared with a $2.6-billion loss a year
earlier.
But the recent market volatility has already pared back some of those overall investment gains, de Bever also cautioned.
"So
far, we're still above water, but it's mostly been because of our
effort in active management. The markets themselves haven't given us
very much," he said.
The crown
corporation, which oversees about $69 billion in provincial savings,
employee pensions and endowment funds, lost 10.1 per cent on its
investments in fiscal 2009. Despite the expected gains in 2010, the
overall fund did not increase in value due to government withdrawals,
de Bever noted.
Official figures won't be released until this
fall, when AIMCo files its annual report. The agency was set up by the
provincial government in January 2008.
But the much improved
performance is sure to spark a gusher in staff bonuses, an issue that
needs to be monitored, said Alberta Liberal finance critic Hugh
MacDonald.
"They are going to be rewarded," he said, noting the
agency paid out significant bonuses for the previous year when the fund
lost money.
"We have to keep AIMCo accountable, because they have well in excess of $60 billion of Albertans' dollars under their control.
"We're going to have to wait and see," he said.
"With
the instability that has occurred in the financial markets, it will be
five years or more before we see . . . just how effective this new
approach is with AIMCo."
For his part, de Bever acknowledged the
payouts will be higher, but said the sums are warranted if the
organization hopes to retain and attract talented staff.
He also noted that external management costs have been slashed by about 30 per cent to $120 million over the past year.
"I feel that the trade-off for Albertans was pretty good," he said.
"I
paid $120 million to managers that lost me $500 (million). I paid a
much, much smaller amount to people internally that did make me money."
Meanwhile,
the Edmontonbased agency has hired 90 new staff over the past 18
months. and de Bever plans to hire another 30 by next year for a total
of about 250.
"We've spent a lot of money in the last two years beefing up the operations side of things," he said.
"It's just now that we're starting to hire for the investment side."
But that aggressive recruitment drive has not hampered deal-making over the past few months.
AIMCo
is currently working on several international deals, de Bever said,
though he declined to give details, given that talks were currently
underway.
He said the investment focus for private equity remains
on key areas such as energy, materials and food amid a slow economic
recovery.
"There's still an awful lot of companies that got in over their heads in 2008," he said.
"They are now looking for a partner."
As
reported in the article, official figures won't be released until this
fall, when AIMCo files its annual report. You can, however, read AIMCo's 2008-2009 Annual Report and find some very interesting information [Note: Pay attention to the benchmarks used to evaluate alternative asset classes].
Despite
the rebound in returns, Mr. de Bever continues to deal with PR issues. But as Gary Lamphier of the Edmonton
Journal reports, PR perils part of life for CEO at AIMCo:
It's
been two years since Leo de Bever assumed the top job at Alberta
Investment Management Corp. (AIMCo), and he has plenty of reasons to
smile.
AIMCo's returns have snapped back nicely since the bear
market ended and economic recovery took hold. Although formal results
for fiscal 2009-10 won't be out until fall, the $69-billion Crown
corporation will show much improved numbers.
After posting a
loss of 10.1 per cent last year, AIMCo -- which manages Alberta's
public pension and endowment funds -- will report gains of about 17 per
cent on its balanced funds for the year ended March 31.
Since
the firm also manages the province's Sustainability Fund, which
invests mainly in ultrasafe low-return bonds, AIMCo's overall returns
will be slightly lower than that.
Meanwhile,
de Bever has engineered a sweeping overhaul of operations, including a
move into spiffy new headquarters on Jasper Avenue earlier this year.By replacing costly external
managers with in-house talent and spending millions on new computer
systems, AIMCo has shaken off its bureaucratic roots and now operates
like any other sophisticated, professional fund manager.
AIMCo's
execs are judged -- and rewarded -- on performance, bringing a dose
of Bay Street's edgy business culture to a city that's still getting
used to the idea of being home to one of Canada's top institutional
money managers.
AIMCo's growing clout hasn't gone unnoticed. The
Edmonton-based firm has a growing profile in the national media and
de Bever pops up regularly on business news shows. With investments
all over the world, from Asia to Europe, AIMCo's reach is increasingly
global.
Despite that, de Bever says
he's sometimes frustrated by the parochial politics of Alberta, where
AIMCo is still regarded by many as an appendage of the Tory
government.
"The biggest surprise is, I thought everyone knew
what the government intended to do here (by spinning off AIMCo as an
independent entity) and that there was a fairly strong understanding
of that, but that turns out not to be the case," de Bever says.
"It's
taken longer than I'd hoped to gain the trust of the people I manage
money for. They see me -- or did see me -- as an agent of government,
rather than someone who is trying to help solve their long-term
funding problems."
In reality, de
Bever insists the Stelmach government has taken a hands-off approach to
AIMCo from Day 1, and has never tried to meddle in its portfolio
decisions.
"The one thing that hasn't happened is that the
government has had absolutely no influence on anything we've done over
the last two years, directly or indirectly," he says. "But I must tell
you that whenever I do something in Alberta, I have to do that second
check, and ask myself: 'Gee, how could this be perceived?' "
De
Bever got a taste of Alberta's political realities last year, when
AIMCo invested $330 million in Calgary-based Precision Drilling Trust.
Critics slammed the deal as a thinly veiled attempt to bail out a
debt-saddled player with a big footprint in the oilpatch.
De
Bever staunchly defended the deal as a solid investment for AIMCo,
and Precision's performance since has confirmed that. Still, he was
bruised by the experience and says he no longer makes investments in
Alberta without first considering the optics.
"It's tempering my
willingness, and in some cases my board's willingness, to sign up for
certain things that could have PR implications," he says.
"Whenever
I do something I have to look at how much management time it's going
to take to defend that decision in public. And in a fairly significant
way, it's causing me to say, 'All right, if I can do some things in
Alberta or outside of Alberta, it may be easier to do it outside.' "
In
particular, de Bever says PR worries are affecting how AIMCo
positions itself in the province's sprawling energy sector. Although
AIMCo sees plenty of opportunity for upside, it's also wary of
appearing to be a tool of government.
"I've had several
opportunities where, from an economic standpoint, I should have made
that investment. But from an overall 'how will this be perceived'
point of view, it didn't happen," he admits.
"Now is that good
or bad? It probably means investors from out of province, in some
cases, probably can do it easier than we can."
De Bever doesn't
offer any specifics, but it seems likely that some of those
investments involved key energy infrastructure such as oil-sands
upgraders.
As for the market outlook as a whole, de Bever
remains cautious. He sees "choppy" stock markets ahead as investors
try to sort out whether the recent strength in corporate earnings is
sustainable.
His biggest worry is that
governments will curtail fiscal stimulus and begin to focus --
prematurely, in his view -- on reining in their budget deficits.
"I'm
a fiscal conservative in the long run, but I think you have to be
really careful that you don't repeat the mistakes of the 1930s," he
says.
"It may be necessary to prime the pump a while longer. I
know all the arguments against that, but the alternative is so much
worse. We could be in for protracted slow growth or even negative
growth with deflation. The way out of that is to keep the stimulus
going."
I
agree with Mr. de Bever. I am a fiscal conservative but fear that if
governments pull the stimulus too quickly, then we risk heading into a third depression.
Another interesting article that caught my attention was from Tara Perkins of the Globe & Mail, Infrastructure king in no rush to invest again:
Leo de Bever is one of the godfathers of infrastructure financing, but these days you couldn’t get him to touch the stuff.
“The
time to be in infrastructure is not now,” he says point blank. “It’s
too expensive, everyone’s in it. Whenever everyone’s in it, you want to
back off.”
Infrastructure investments are a hot commodity thanks
to the predictable long-term cash flows that they generate. Pension
plans, insurers and banks are expanding their burgeoning infrastructure
teams and chasing deals such as the Canada Pension Plan Investment
Board’s $3.2-billion preliminary offer for Sydney-based toll road
operator Intoll Group, whose largest asset is its stake in Highway 407
north of Toronto.
Mr. de Bever, the chief executive of Alberta
Investment Management Corp. (AIMCo), knows the space as well as anybody.
During the ten years he spent as a senior vice-president of the
Ontario Teachers’ Pension Plan, he developed a reputation as the king
of alternative asset classes. He came to run what he affectionately
referred to as his $13-billion orphanage: a pile of assets that
Teachers’ scooped up – including infrastructure and timberland – that
other investors balked at because they didn’t fit neatly into any
traditional asset classes. Manulife Life Financial Corp. lured him away
from Teachers’, but after two years with the insurer he moved to
Australia to become chief investment officer of Victorian Funds
Management Corp., one of the country’s top public sector pension funds.
These
days price isn’t his only concern. “The problem with infrastructure
is, particularly in tight fiscal periods, you run into regulatory risk
and you have to be absolutely sure – just like we saw with the 407 –
that the government sticks to the original deal and doesn’t try to
change it after the fact,” he said during a recent interview in
Calgary.
Mr. de Bever’s caution speaks
to the dilemmas confronting policy makers and investors around the
globe, as cash-strapped governments look for ways to get their fiscal
houses in order. Governments are seeking to do deals with the private
sector as a means of raising funds, but have trouble justifying the
moves unless the terms are extremely favourable to them.
When the
financial crisis was still in full force, California Governor Arnold
Schwarzenegger invited a number of American pension plans and a few
Canadian pension plans to a meeting to discuss financing for the
state’s numerous infrastructure requirements.
“We
sat together with his advisers for a day or two, and went through
that, and at the end of it the advisers were basically saying, ‘You
guys have a lot of money, you could put it to good use, you don’t have
to charge us as much as somebody else,’” said Mr. de Bever. “And I
said, ‘Wait a minute, that last part I don’t get. We have to make money
on these investments.’”
“I did a fair
bit of the early infrastructure stuff among Canadian pension funds,”
he said. “And in the beginning you could get an honest 14 per cent
return on equity because the market was very inefficient.” To do the
same thing these days, with a number of players competing for deals,
would take a whole pile of leverage, he suggested.
The
reason he got a very good real return bond deal on the 407 project
when he was at Teachers’ is that initially, no bank wanted to finance
the 407 because they were not convinced that Ontarians would pay tolls,
he said. “I was the first one to finance the debt behind that equity,
and we got a five and a quarter real return bond, which now seems
obscene.”
That’s not to say that he’s written infrastructure off entirely.
“In
most places, water and sewage are going to take an enormous amount of
capital because everything is starting to leak,” he said. “Given that
the fiscal positions of a lot of these governments is pretty weak,
private capital has to come in at some point, and that’s when I think
infrastructure will become attractive again.”
That could be as soon as two or three years from now. In the meantime, he’s sitting tight.
Mr.
de Bever is one of the smartest pension fund managers I've ever met.
He knows what value means and is patient enough to "sit tight" waiting
for the right opportunities to come along. Two years ago, I wrote that AIMCo was lucky to get him as their CEO. I stand by that comment.
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Canadian pension funds are geniuses and co-investing with private equity shops. Not sure what they do the other 364 days a year...
Leo, in one of your previous contributions I made a serious mistake. I couldn't resist making a remark that, at the time, I thought was too clever to pass up.
This was a dismal lack of judgement on my behalf.
Please accept my sincere apologies.
Kindest regards.
This must be leo's second avatar? WTF in this fluff would cause you to not to laugh out loud? He acts as if these returns are based on fundamentals and the not the feds endless(?) liquidity. The music will stop and de beaver's chair may be electric.
de Bever Recipe for Success:
"I feel that the trade-off for Albertans was pretty good," he said.
"I paid $120 million to managers that lost me $500 (million). I paid a much, much smaller amount to people internally that did make me money."
A green shoot. Let's see if some government herbicide can be applied quickly.
Our country reeks of trees, our yaks are very large...