The Alberta Investment
Management Corp. (AIMCo) was created
in January 2008, just a matter of months before the collapse of
Lehman Brothers Holdings. But under the leadership of Leo de
Bever, CEO and CIO, AIMCo survived the financial crisis and has
built a reputation as one of the world’s
pre-eminent and technologically-savvy institutional investors,
returning an annualized 8.8 percent since inception. AIMCo now
manages some C$80 billion ($62.5 billion) for 27 pension and
endowment funds in the Canadian province, including sovereign
wealth vehicle the
Alberta Heritage Savings Trust
In January 2015 Dale MacMaster, former head of public market
investments at AIMCo, took over as CIO following de Bever's
retirement. In this, the first of a two part interview, he
spoke to Sovereign Wealth Center’s David Evans
about how AIMCo is pursuing opportunistic sources of yield in a
challenging market environment. The transcript has been edited
for grammar, space and context.
SWC: What are the key investment
challenges AIMCo will face in 2015?
The main challenge we face, and that all
investors face, has been this unusual period of low interest
rates. Historically, on 10-year bond yields, you expect to have
a cushion of 200 to 250 basis points over inflation, and now
there are many jurisdictions where we have negative real rates.
It’s an highly unusual situation, a highly
contrived position that the central banks have put us in. And
[the banks] have wrestled away any counters to their
Years ago there were the so-called bond
vigilantes; if they felt the central bank policies were wrong
they would react. But the central banks have now wrestled that
completely out of the system, and it’s a very
complacent situation in the bond markets today.
SWC: How have low yields changed your
outlook on other asset classes?
Those low rates have everything else —
all assets — looking very expensive. Because all
assets are essentially priced off the U.S. yield curve, prices
are high not only on other sovereign bonds, but also on hard
assets like real estate and infrastructure. Investors have fled
low interest rates and taken on more risk, so
there’s also an element of moral hazard to this
too; in order to achieve the rates of return they want,
otherwise conservative investors have started to reach from
government bonds to corporate bonds to high-yield and mezzanine
debt, to equity and infrastructure, timber, structured notes,
you name it. Everyone has been reaching.
And so far, it’s all worked out,
because when equity markets start to correct, central banks are
quick to calm markets down. The real challenge moving forward
is how we transition to a more normalized interest rate
environment, and we’re going to see that I think
this year, maybe in June, maybe in September in the U.S. But I
think it’s fair to say that the transition to this
new interest rate environment is not going to be easy or
without volatility. So I’m cautious.
SWC: Has the situation had an effect on
your views on stocks?
If you look at valuations in equity markets, they
look a bit stretched to me, especially in the U.S. And we could
easily see a correction in the markets as we transition.
It’s just not reasonable to expect that equity
markets will continue to go up as interest rates rise. So
either that’s going to be a rough ride, or central
banks will back away. That’s the challenge: Either
we move down a path of higher interest rates and get higher
volatility, or we don’t, and we’re
faced with this continuing environment with low rates of
We’ve been very fortunate over the
last four, five, six years; coming out of a bull market, all of
these assets have inflated, but I think the day of reckoning
has finally come. If you ask me where ten-year returns on bonds
are going to be over the next ten years, you’re
going to be flat to negative. So there’s no hiding
in fixed income. And equity markets look volatile.
Also, because everyone’s flocked to
the illiquids — real estate, infrastructure, timber
— those look inflated too, and of course now there are
retail products on some of those and that’s caused
some of those prices to be inflated even more.
There’s no hiding place, is what I’m
saying. My philosophy is that sometimes you can’t
force the market, you have to take what the market gives you.
If you’re patient, you’ll get an
SWC: In which sectors are you looking for
Energy is a good example. Very few people would
have predicted that oil prices would drop by 50 percent or
more. As an investor you can’t control that, but
you can control your reaction to it. As a value-type investor
with a long-term horizon we can afford to wade into those areas
and pick away at quality energy names with strong balance
Going into October when energy prices started to
fall off, we were underweight energy. When oil hit the $65
range we saw some opportunities, because markets like to react
first and ask questions later. We did a few things: we created
a basket of securities in the energy small-cap mid-cap area,
and started to pick away at those names. It’s a
bit odd, but even as energy prices fell and looked like they
were stabilizing at around $45 to $50 dollars those stocks
actually bounced, and we made a profit in them.
SWC: What is your outlook for
energy going forward?
We will continue to mine that theme, and I think
we’re going to get another opportunity. In the
short term, supply/demand dynamics are such that as we move
into spring, we could see another leg down — and that
would be the final opportunity for investors to really get in
at an opportunistic price. Why I’m optimistic
about energy is that if you look at energy demand over the past
35 years it’s gone straight up.
Demand has been consistent. What we had was a
short-term supply issue, driven by North American fracking
resulting in the U.S. getting market share. I think
it’s temporary and it will rebalance at a higher
price. What we do know is that above $100 more oil supply comes
on the market than can be satisfied by the demand. But at a
price around $70 to $75 we’ll find an
In the energy area you don’t see
many opportunities like this. I know there’s a lot
of people going around saying: this time it’s
different. I quite frankly don’t believe it. Every
time [an oil price collapse] has happened in the past, looking
12 months to 24 months out you’ve had very nice
double-digit returns on things like equities and even
debt-related opportunities in energy. Call me a bull. I can be
afforded the luxury of time as a long-term investor.
SWC: Turning back to yields,
what’s your outlook on fixed income?
As an asset allocator we’ve been
long equities and short bonds in our portfolio for a while now.
I would say now we’re getting a little closer to
home. It’s really more about the equities than the
bonds; we’ve actually seen little opportunity in
bonds for quite some time now. We do interest-rate risk and
credit risk in the fixed income portfolio, we lived through
2007 and 2008 and those were pretty nasty times. As a bond
investor you have to be somewhat of a contrarian. Unlike
equities, bond yields and credit spreads go up and down; and
now we’re at a time when interest rates are low
and credit spreads are tight,and you just have to get out. You
have to be underweight, and be patient.
SWC: What would kind of catalyst would
change your perspective?
If we get a decent equity market correction,
credit spreads will widen, we’ve already seen
high-yield widen quite a bit due to the energy high-yield bonds
in there. We’ll see lots more of that. What
I’m saying is you can’t force the
market, you have to be patient, sometimes there are periods
when returns are simply low.
But you have to set yourself up to be in a
position to take advantage when the crisis hits and there are
forced sellers. And there will be lots of forced sellers in the
next crisis, which we will inevitably get every four or five
years; whether it’s from exchange traded funds in
over the counter [OTC] markets that don’t have the
liquidity, the regulatory changes we’ve seen in
banks, that have eliminated prop [proprietary trading] desks
and really restricted their ability to act as a natural buffer
in the market — because they don’t use
their balance sheets any more to carry inventory.
Without that natural buffer in the market, some of these OTC
prices will simply gap down and pension funds and other
investors with a long term horizon, a strong balance sheet and
lots of liquidity can take advantage. And those are the times
when you make your decade. In the meantime returns
aren’t going to be great and that’s
just the way it’s going to be.