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
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
the outlook for the
Alberta Heritage Savings Trust
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
SWC: Do you see opportunities in hard
assets in developed markets, such as real estate and
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
SWC: AIMCo has invested heavily in
timberland over the past few years. It is still an asset class
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
s of this world, and the likes of
[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
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
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
SWC: How about multi-asset
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
Looking at structures that share the risk is one
place to start. And having a partner you trust is also
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.:
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.