AIMCo's $174 Million External Fees?

Submitted by Leo Kolivakis, publisher of Pension Pulse.

Earlier tonight I spoke with AIMCo's CEO, Leo de Bever. I will come back to that conversation but first let's go over the news.

Nathan Vanderklippe of the Globe and Mail reports that AIMCo head hits back at pay package critics:

The head of Alberta's investment firm is
lashing out at critics who say his multimillion-dollar pay package is
more appropriate for a professional hockey player than the man in
charge of $70-billion in provincial savings and pensions.

The
controversy has stoked new calls for controls on provincial executive
compensation in Alberta, a province that has been hit hard by the
recession and now finds itself with a fast-growing unemployment rate
and a nearly $7-billion deficit. Even the board of AIMCo is now looking
at ways to change its executive compensation.

Some of the anger
has been sparked by the revelation that Leo de Bever, the newly
installed chief executive officer of Alberta Investment Management Corp.,
earned $2.1-million last year, a figure that included $500,000 in
long-term incentives - which Mr. de Bever says is currently worth
nothing based on the fund's performance - and a $1-million signing
bonus. The signing bonus was paid to cover off compensation Mr. de
Bever had accrued at his former job.

AIMCo chief investment
officer Jai Parihar, who is retiring, earned $2.8-million in salary and
severance, plus an additional $362,000 in deferred compensation. Board
members are paid $347,000 a year, nearly as much as the firm's chief
operating officer.

The numbers, which were released in AIMCo's
annual report, galled Opposition politicians, who angrily watched the
province's treasured Heritage Fund lose $3-billion in value in the same
year AIMCo was brought out from under government management and made
into an arm's-length corporation. The Heritage Fund is Alberta's
piggybank for oil and gas profits. The fund has since recovered
$2-billion of that loss. Still, the compensation struck some as far too
rich.

"A million-dollar signing bonus. Where do they think they
are? In the NHL?" said Hugh MacDonald, the finance critic for the
province's Liberal Party, who said it is time for the government to set
standards for executive pay at public agencies. "For the economic
times, it's too high. And the track record doesn't warrant that."

But
Mr. de Bever defended the compensation as fair - and, in fact, a deal
for the province - yesterday. AIMCo paid $174-million in external
management fees last year. Mr. de Bever has calculated that it is four
times cheaper to have his employees oversee money over hiring outsiders.

Mr. MacDonald, however, believes a sub-million-dollar salary should be suitable for the man in the top job.

"I think we should attract qualified individuals with a salary range of $600,000 to $800,000," he said.

But
those who hired Mr. de Bever said small salaries are a bad idea. "You
want the top guys doing it. You're not going to get the top guys if
you're paying bottom dollar," said Charles Baillie, the former TD Bank
head who chairs AIMCo.

Mr. de Bever told
me tonight that he would have preferred if the headlines read "AIMCo
pays $174 million in external management fees."

He was obviously
disappointed with the press coverage and I believe justifiably so. The
million dollar signing bonus isn't a big deal because it covered
compensation owing to him while he was head of Victorian Fund Management Corporation.

Mr.
de Bever added that he didn't take the job at AIMCo for the signing
bonus. He wants to build something and he prefers to build an internal
team instead of farming it out to external managers who don't deliver.

"I had Brian Gibson (senior vice-president equities, formerly at Ontario Teachers')
look into the external managers and he found that over the last 10
years, excess return was zero (when adjusted for fees)."

[Note: Every public pension fund should undertake the same exercise and publicly post the results.]

When
you're paying $174 million in fees, you expect returns net of fees,
otherwise what's the point? Mr. de Bever is right to be upset. The
politicians in Alberta are pulling hissy fits over his compensation and
not over the $174 million in external management fees, which he's
trying hard to save by building a qualified internal team.

So how did AIMCo perform? Gary Lamphier of the Edmonton Journal reports that AIMCo's fund posts a 10% loss:

Alberta
Investment Management Corp.(AIMCo), which manages$69 billion of
public-sector financial assets, posted a loss of 10.1 per cent for the
year ended March 31.

The decline, disclosed in AIMCo's first report
since it was spun off by the provincial government as a Crown
corporation in early 2008, reflects a dismal year for equity markets
worldwide.

AIMCo's balanced
funds--which include various public-sector pension and endowment funds,
including the $14 billion Alberta Heritage Savings Trust Fund--posted a
loss of 18.0 per cent for the year.

The balanced funds hold a mix
of equities, money market, fixed income and inflation-sensitive
securities, with the equity component topping 50 per cent in many such
funds.

AIMCo's government funds --
which include the Sustainability Fund--posted a gain of 3.3 per cent
for the 12 months ended March 31. Unlike AIMCo's pension and endowment
funds, the government funds are invested almost solely in
ultraconservative money market and fixed-income assets.

"It was
an environment where things did go wrong in world markets," said
AIMCo's CEO, Leo de Bever, in an interview with The Journal.

"When
you're losing 10.1 per cent, I suppose you could argue that it's a bad
number. But it was a very average performance (during a year) when the
average wasn't very good," he said.

"So
when you look at the typical pension fund losing about 16 per cent on a
calendar year basis, and maybe a bit more on a fiscal year basis
through March, I think AIMCo didn't do worse than anybody else, but it
didn't do better, either."

Canada's other major public investment
funds also reported poor numbers for the period. The CPP Investment
Board, with assets of $105.5 billion as of March 31, incurred a loss of
18.6 per cent over the previous 12 months.

The $87.4-billion
Ontario Teachers' Pension Plan, and the $44-billion Ontario Municipal
Employees Retirement System(OMERS)posted losses of 18 per cent and 15.3
per cent, respectively, for the fiscal year ended Dec. 31, 2008.

After
posting huge declines through the first quarter--major U.S. indexes hit
12-year lows in March, and Canada's top equity benchmark sagged to a
six-year low --stock markets have surged over the past six months.

Leading indexes are now more than 50 per cent above their lows.

The
rebound has helped AIMCo's balanced funds recover a good chunk of last
year's losses, de Bever said, although he didn't offer specific figures.

"The
bounce back has been much stronger than anyone anticipated, and we've
participated in it. We've done slightly better than the market over the
last six months, so that's encouraging," he said.

"But whenever
you see a situation where the market went down because of a lot of
things--including the failure of the financial system, and lack of
liquidity--and now it's bouncing back fairly rapidly because liquidity
is recovering, in part, you wonder whether it's too much too soon. But
I'm delighted that things have gone pretty well over the last six
months."

AIMCo's annual report also disclosed compensation levels for the fund manager's senior officers, including de Bever.

His
total pay package for 2009 was slightly more than $1.6 million. It
included a base salary of$333,000, and other cash benefits and lump sum
payments of about $1.1 million.

AIMCo chairman Charles Baillie
said the $1.1 million figure mainly reflects an upfront cash payment to
help compensate de Bever for income he gave up when he left his
previous post in Australia to become CEO of AIMCo in August 2008.

Baillie said de Bever's annual compensation trails that of most other top Canadian pension fund CEOs.

A
quick survey bears this out. CPP Investment Board CEO David Denison
earned $2.9 million in total compensation for fiscal 2009. Ontario
Teachers' Pension Plan CEO Jim Leech earned $2.03 million, and OMERS
boss Michael Nobrega was paid $3.75 million.

AIMCo, which was
created on Jan. 1, 2008, with a staff of 137, continues to add
personnel and beef up its internal resources, said de Bever. It expects
to have 250 on its payroll by 2010, when it's scheduled to move into
its new headquarters on Jasper Avenue at 108th Street.

AIMCo
is also investing in new systems and processes to cut operating costs,
he said. By 2012, it aims to reduce these costs by $45 million a year.

Although
skeptics question AIMCo's ability to lure top investment talent from
Toronto and other major money centres to Edmonton, de Bever said that
hasn't been an issue.

"I've found it quite feasible to attract
talent to Alberta to build an organization that can compete with the
best in Canada. Some people seem to doubt that's possible, that you
cannot replicate the CPP or Ontario Teachers. But I'm not exactly
trying to replicate them. I'm trying to build something that has the
same performance, but we may not get there the same way," he said.

"It's
not going to happen overnight. It will take at least four or five years
to put in place. When I worked at Ontario Teachers it took nearly 10
years to build all the components that people now perceive as a very
successful organization. It's now 10 years later and I'm trying to do
the same thing here, but the problems are different and the solutions
will be different."

AIMCo's fiscal year ends March 31st and the performance of the balanced funds was on par with that of CPPIB. and their senior officers were much better compensated, especially if you take away the signing bonus.

And let's not forget PSPIB's dismal FY 2009 results where they lost a staggering 23%. PSP's CEO, Gordon Fyfe, received $1.42 million total compensation after delivering those horrible results.

But
a loss is a loss except let's be fair here. Mr. de Bever walked into
his office in August and two weeks later, the markets went haywire. He
didn't have time to react to what was going on. "Had I been there a
year earlier, I might have been able to implement some changes. The
reality is nobody could have done much in 2008."

[Note: That's where I disagree with Mr. de Bever. Nancy Everett limited the losses at GM's pension fund by allocating more to bonds at the end of 2006. HOOPP also saw the beauty of bonds in limiting downside risk.]

The
reality was that Mr. de Bever landed at his new job during the worst
possible time. He didn't even have a chance to evaluate what was
working and wasn't working at AIMCo. He is still in the process of
ramping up operations.

Carrie Tate of the Financial Post reports that AIMCo eyes private equity deals:

Alberta
Investment Management Corp. could announce one or two private equity
deals by the end of the year as infrastructure such as sewer lines and
transmission grids are in desperate need of makeovers.

Leo de
Bever, the firm's chief executive who was brought in to restructure the
newly formed Crown corporation, said his firm is looking at about half
a dozen potential private equity deals.

"Opportunities are walking in the door," he told reporters Tuesday morning.

A
couple of the deals under the microscope are in the United States, one
to two in the United Kingdom, a "couple" in Canada, and one in
Australia, Mr. de Bever said. One or two deals could be unveiled before
the end of the year, he said.

The transmission grid in North America, Mr. de Bever said, needs about $100-billion in investment to get it up to speed.

Some
of the deals would require an investment of around $100-million, he
said. The Edmonton-based firm, which manages about $70-billion for
Alberta pensions, endowments, and government funds, may look for
partners if necessary.

The
new CEO is in the process of restructuring AIMCo, and one of his goals
is to

ditch the multi-million external management contracts. The deals
were set up before AIMCo was spun out of the government, and some come
with long-term contracts of up to eight years.

When
Mr. de Bever took over the fund, it was paying roughly $175-million per
year in external fees. He has shaved that number down to $150-million,
and hopes it will drop to about $100-million in three years.

Right
now he said he's spending an "inordinate" amount of money to have
external mangers make investment decisions on basic asset classes such
as equities. However, the long-term contracts are concentrated in the
private equity world, Mr. de Bever said.

Mr. de Bever hopes
the firm will be reshaped up to his standards in five years. As
external managers are dropped, he plans to beef up AIMCo's internal
staff. About 190 people now work for AIMCo, and he wants to about 250
people on the payroll.

His goal is for the fund to return
between 1% and 2% above the index annually. "It is not insignificant,"
he said when added up over 10 years.

On
private equity, Mr. de Bever inherited roughly 50 partnerships. He told
me that exposure to vintage years 2007 and 2008 hurt AIMCo. "I am still
thinking about what to do with those funds".

I then got into the issue of private market benchmarks. I told him that one of my biggest beefs was with pension funds that use bogus benchmarks in private markets.

To
my surprise, he agreed with me. "We're risk managers and view the
opportunity cost of each investment. This isn't perfect because during
the last few months public equities ran up sharply, but over a ten year
horizon, we think private equity will outperform."

I went over AIMCo's 2008-2009 Annual Report
and sure enough, on page 16, there is a footnote for private equity
that reads: "The Private Equity Benchmark composite is comprised of CPI
plus 8% and S&P/TSX Composite Index plus 2.5%."

[Note: For real estate, AIMCo uses the ICREIM/IPD Large Institutional All Property Index.]

Mr.
de Bever has a PhD in economics so he understands opportunity cost of
an investment. But you don't need a PhD in economics to figure out that
if you're going to tie up your money for ten years, you'd better make
sure you're beating a liquid investment. It's just common sense.

Finally, Deborah Vedlin of the Calgary Herald writes CEO has long road ahead:

AIMCo
chief executive Leo de Bever was in full damage control mode on Tuesday
as he discussed the arm's-length investment entity's results for
2008-09 and the size of his paycheque.

The fact AIMCo had a lousy
year shouldn't surprise anyone. It, like every other pool of capital in
the world, was buffeted by the global downturn that was exacerbated by
the lack of liquidity in the capital markets.

For
his part, de Bever's timing couldn't have been worse because the
financial meltdown happened within weeks of him sliding into his new
post.

"It was the worst time to manage through," he said, adding the volatility of last year comes around every 40 years.

Making
things more challenging was the realization that the organization he
was now charged with running was woefully understaffed to meet the
stated mandate.

As de Bever puts it, he was flying blind.

For
a guy with a PhD in economics from the University of Wisconsin and a
professional pedigree that includes stints at the Bank of Canada under
then-governor John Crow, the Ontario Teachers' Pension Plan fund,
Manulife Financial and most recently Australia's Victorian Funds
Management Corp., that statement pretty much sums up the challenge that
came with the AIMCo assignment.

The results for the most recent
fiscal year, which also show a $3-billion drop in the value of the
Heritage Fund, were hurt as much by the downdraft in the equity markets
as they were by the fact that there were no currency hedges in place.
While things are looking better so far this year--de Bever says they
are ahead of the broad TSX composite index--the issue of how to manage
currency exposure is still being worked out.

And even though de
Bever has made strides with the organization, which oversees $70
billion of Albertans' money, he is still a long way off from where he
would like to be.

For one thing, the external money managers are still taking a big bite from his annual budget.

Of
the $70 billion under his watch, one-quarter is managed by firms that
were paid $175 million last year. More disconcerting is that the
returns generated over the past decade have covered expenses, but not
much more.

If Albertans want to whinge about misspent dollars, that might be a better place to start.

He's
also working hard to make the internal investment allocation process
more effective. At the time of his arrival, de Bever notes there were
70 pools of capital governed by 90 different benchmarks.

"There are economies of scale that come from unification . . . I would like to squeeze $25 million in direct costs."

Anyone
understanding the world that de Bever operates in is aware of the time
it takes to make investment decisions and the challenges of staying
away from what he calls investment fads. For every 10 opportunities
presented, he said, one might turn into a solid investment.

The
other bit to ponder is the constant challenge of managing the
government perception of what constitutes an acceptable degree of risk
versus where that definition lies in the realm of investment management.

"Governments want to kill risk at every cost, but asset management demands taking risk."

The
good news is that there will be some changes forthcoming in the
legislation governing AIMCo that will be positive from the perspective
of setting the agenda for the Crown corporation. As it stands, the
deputy treasurer sits on its board, a situation that compromises the
intent of AIMCo truly operating at arm's length from the government.

The
other balancing act de Bever is negotiating is what constitutes an
appropriate amount of risk, as well as determining how much of the
monies should be invested in Alberta.

"The question is, 'To be,
or not to be . . . in Alberta.' There are plenty of Alberta-based
companies with strong positions in North America and the challenge is
weighing diversification versus rate of return," he said in his
typically soft-spoken manner.

Because de Bever is optimistic on
Alberta's prospects, thanks to its natural resource wealth, he is fully
expecting there will be plenty of decision points in the coming months
involving Alberta-based companies.

The
reason for his optimism comes from a belief that economic growth in
China and India will fuel natural resource demand -- "materials and
energy"--to Alberta's benefit.

He's even got a positive take on
the moribund natural gas business, saying he expects demand will catch
up with supply, with consolidation in the sector likely offering some
interesting investment opportunities.

"The best solution for
cheap natural gas, is cheap natural gas," he said, referring to the
massive supply response underway south of the border, where only 712
natural gas rigs are drilling compared with the 1,544 at this time last
year.

Even so, de Bever is under no illusions that the coming months won't be without their challenges.

"The
sands are shifting quickly," he says, noting the infrastructure plays
that once offered strong returns are now over-priced and not the
reliable investment vehicles they once were when he was at Ontario
Teachers.

But he is cautiously optimistic, influenced perhaps by
a book he makes reference to called The Triumph of the Optimists, which
details more than a century of investment returns.

By this time
next year, de Bever is hoping to be talking about a very different
AIMCo, not to mention very different market conditions and investment
results.

He's got a long road ahead, optimistic or not.

He
does have a long road ahead but I am confident he will succeed. I
finished off my conversation with him by discussing the current market
environment. I asked him what he thought of the liquidity-driven rally which I wrote about yesterday. In particular, I told him it feels like 1999 all over again.

"The
current environment reminds me of 2004. Stocks got hit hard and all of
sudden the downturn stopped. I said it was because of the China effect
and Wal Mart, but liquidity was strong back then after the Fed cut
rates."

"I think the massive stimulus will start showing up.
Think about it like a car stuck in snow. The wheels spin but at one
point they hit the pavement (and off you go). I see pipeline inflation
pressures building down the road. I prefer equities over bonds over the
next few years, but don't ask me what stocks will do over the next six
months. We can have a pullback but they will recover."

Let me repeat what I stated last August. AIMCo is lucky to have Leo de Bever as their new CEO. The
politicians in Alberta should give him a chance to prove himself. I am
confident he will succeed in building a great team and add long-term
value to the funds he's been entrusted to manage.

Comments

[Anonymous]

Blame the problem on prior management then while in office claim lack of funds (or help) All the while they grab the cash and in 4 years move on regardless of all the bagholders. Maybe a peer review every year where goals must be met to recieve portions of pay/bonus. But that sounds like more cronyism