Exclusive: AIMCo CIO MacMaster on Asset Classes and Strategies

April 07, 2015 by Loch Adamson

Read Part 2 of Sovereign Wealth Center's Exclusive Interview with AIMCo's MacMaster
Exclusive: Dale MacMaster on Real Estate and Infrastructure Investing
Dale MacMaster on Portfolio Strategy and Smart Beta
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Under the stewardship of CEO and CIO Leo de Bever, the Alberta Investment Management Corp. (AIMCo) built a reputation as one of the world’s pre-eminent and savviest 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 the Alberta Heritage Savings Trust Fund, a sovereign wealth vehicle. 

Dale MacMaster, former head of public market investments at AIMCo, stepped in as CIO in January 2015 following de Bever's retirement. He spoke to Sovereign Wealth Center’s David Evans about how AIMCo views different asset classes and new investment strategies in a challenging market. This is the second of a two-part series. The transcript has been edited for grammar, space and context.

SWC: What’s the outlook for the Alberta Heritage Savings Trust Fund?

Our mandate on the Heritage Fund is purely economic, to get the highest return we can on investable assets, and that continues. Our biggest client is quite flexible in how we invest those assets and has continued to relax constraints. We can invest [the Heritage Fund] globally in whatever assets we see fit and we’ll continue to do that.

SWC: Many investors are bullish on Asia at the moment because of the low energy prices. How do you see the oil glut affecting Asia and emerging markets?  

We have lots of assets in Asia, most of them on the listed side. When it comes to Asia and the wider emerging markets as well, lower commodities prices should provide investors with an investable theme, since those countries that have large energy deficits should benefit from improved terms of trade and the currency should be less vulnerable: so think here India, South Korea, China and Taiwan. They will be beneficiaries of lower energy prices. 

However, countries that rely on energy exports have of course seen revenues fall — and that means populist policies may become unsustainable, and you may get civil unrest: think here Brazil, Russia and the Middle East. So you have to differentiate between emerging markets. You’ve got be very specific.

But overall as an asset class we’re not really fond of emerging markets right now, for a couple of reasons. One is because of the strength of the dollar, and emerging markets don’t tend to do well in that sort of environment because capital floods back to the U.S. Secondly, from a valuation standpoint the premium over developed markets isn’t as attractive as some people think.   

SWC: Do you see opportunities in hard assets in developed markets, such as real estate and infrastructure?

It’s challenging. We’ve heard a lot about infrastructure in the last couple of years. Countries in general need to spend tens of billions on roads and bridges and basic infrastructure and its frustrating because we haven’t really seen [that spending], it’s been slow to emerge. Australia’s one exception, there’s going to be a lot of infrastructure there and that’s one area we’re looking at. 

SWC: What about real estate?

Real estate has gotten very expensive. We started our real estate program in Canada many years ago, and we have a very nice position there. A few years ago we moved into foreign real estate, and we now have assets in Europe. As a result we opened an office in London, and that’s been very good for us, having boots on the ground. It helps us develop new contacts and new sources of transactions.

But I would say we’ve had to try and be more clever than we have in the past in order to get returns — we’ve had to take more risk. We’re looking more at development opportunities rather than core. We’ve had to think about buying projects that need a little bit of tender loving care that we can spruce up, reposition and resell. Taking on a little bit more risk on an opportunistic basis: that’s our strategy in foreign real estate. 

These are still attractive areas, but they’re also areas that everyone is touting. Everyone you meet says they’re looking at illiquids because listed markets are so lousy. As a result it’s very competitive, and its very hard for us to find deals at attractive prices. So you have to roll your sleeves up. It helps if you can somehow be segmented or have partners that you develop relationships over the years with, or find niches. 

SWC: AIMCo has invested heavily in timberland over the past few years. It is still an asset class you like?

Timberland has been a very good asset class for us. But again, it’s an asset that would have been great to buy thirty or forty years ago; frankly everybody’s there now. We’ve been able to find some transactions over the years that have been very good for us. But it’s challenging, I’ve found timber to be "chunky". You can’t go to a client and say: I’m going to increase my weight in timber to a billion dollars like you would in a listed market. Its not that easy. You have to have the team ready and looking at deals and building relationships and be ready to pounce when something comes along. We have all of the Carlyle [Group] s of this world, and the likes of  BlackRock  [in the asset class].  

Again, it’s a case of rolling up your sleeves and finding assets with a bit of hair of them. We did a transaction in Australia on an asset [the Great Southern Plantation] coming out of bankruptcy. That was a challenging deal but it could earn us 10-12 percent IRR [internal rate of return] over the coming years.

SWC: Have you looked at so-called smart-beta strategies, which are based on passive benchmarks that weight holdings by earnings or other factors rather than market capitalization?

We look at risk factors on the listed equity markets; we’re kind of a quant shop in that regard. We’ve been doing this for many years and have built models that emphasize value, momentum and quality. Those are factors that have shown to be very important in beating markets. Sometimes those things are stronger in certain environments, but in general, over the long run being exposed to value, momentum and quality has resulted in good returns. And quite frankly our results show it. 

We also do minimum variance, which allows you to create a portfolio that has less risk than the market beta — but with higher return, which is counter to what financial theory would say, but nevertheless that’s been a product that’s worked. We continue to develop new models and backtest research to stay on the cusp of that.  

SWC: How about multi-asset strategies?

We’re involved in hedge funds to get exposure to certain assets that aren’t well correlated with the rest of our books, like levered credit, or volatility. Hedge funds are an important part of our business. We have some American and some European funds; we have one fund that focuses on regulatory capital relief trades, for instance. We have a U.S. based manager that does levered credit, another one that does volatility. We have a hedge fund that does nothing but buy secondary positions from other hedge funds. That did very well coming out of the credit crisis, where hedge funds were looking for liquidity.

SWC: You mentioned regulatory capital relief trades. It’s a trend we’ve noticed: large institutions stepping in to provide liquidity as banks struggle under new regulations. Have you pursued any other strategies in this area?

We’ve been involved in term collateral arrangements and term repurchase agreements and tri-party repo, where we provide funding for a basket of assets provided by the bank. We’ve been doing those for quite some time. We’re also looking at entering other areas that banks have been involved in and looking to partner with them on things like trade receivables, trade finance and infrastructure funding. 

The problem is, when we deal with banks, there are potential conflicts; banks have many lines of business and look at their clients on a multi-business viewpoint, they might relax terms of lending to certain clients to get underwriting fees, for example. So you have to be mindful of the bank’s long-term relationship with its clients. Another aspect you have to be aware of is that banks have been involved in these lines of business much longer than we have.

Looking at structures that share the risk is one place to start. And having a partner you trust is also important.

SWC: What sectors do you think will perform well over the coming months?

We’ve moved into energy as a contrarian play. We’ve started to move away from sectors that did pretty well, like consumer discretionary and consumer staples. We’re also underweighting the more defensive parts of the market, like pipelines, utilities and interest rate sensitive REITS [real estate investment trusts]. These are "yieldy" parts of the equity market that have shown a lot of strength over the past few years. But PE [price to earnings] multiples are well extended on things like pipelines and utilities, some of them have 20-25 PE on them, and those businesses in the long run have delivered more like 14-15. Those stand to correct pretty harshly as we transition to higher rates. 

We like health care, technology, financials. On countries, we like Japan hedged, with the central bank trying to reflate. We’ve been long Japan for a couple of years now, with the country hedge.

We’re favoring Europe over the U.S. now, we’ve been overweighting U.S. for the last couple of years; to us that looks, on a valuation basis, a little overextended. Also the strength of the U.S. dollar is starting to impact returns there. We like Europe, we think they’re a couple of years behind the U.S. in terms of the stimulus and getting companies going and growth and all that, and valuations are more attractive [than in the U.S.], so we’ve been overweight Europe.

SWC: What’s the outlook like in the financial sector?

You have to differentiate between U.S. and Europe. Europe is a different model with different concerns. The European banks have been a little slower to right their assets to normal. In the U.S., banks have been frustrated by unrelenting litigation and settlements that are still whacking them six or seven years after the credit crisis. Nevertheless we’re staying with that, we like both U.S. regional banks and the large global banks based in the U.S.: Citi[group] , Bank of America [Corp.] , we think they’ll do well.  

And we’re still fond of our Canadian banks as well, they’ve recently corrected 10-12 percent on fears of the housing market being overdone and a slower economy based on our dependence on energy. To us, that’s just a buying opportunity, they have a pretty significant moat in their business in Canada. So we favor Canadian banks too.


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