June 11, 2009
Dr. Leo de Bever
CEO, Alberta Investment Management Corporation
AIMCo—Edmonton’s New Investment Opportunity
Chairman: Jo-Ann McArthur, President, The Empire Club of Canada
Head Table Guests
Heather Ferguson: President, The Hearing Foundation of Canada, and Director, The Empire Club of Canada
Rev. Canon Philip Hobson: Incumbent, St. Martin-in-the-Fields Anglican Church
Randy Ferguson: Chairman, Edmonton Economic Development Corporation
David Santangeli: Managing Director, Morrison Park Advisors
A. Charles Baillie: Chairman, Alberta Investment Management Corporation
Alex Squires: Managing Partner, Brant Securities Limited, and Secretary, The Empire Club of Canada
Phyllis Clark: Director, Edmonton Development Corporation
Ron Gilbertson: President and CEO, Edmonton Economic Development Corporation.
Introduction by Jo-Ann McArthur
AIMCo was established in Edmonton as a Crown corporation on January 1, 2008 and is responsible for approximately $68 billion in Alberta pension funds, endowments and savings, including the Heritage Savings Trust “Rainy Day” Fund.
It was structured to remain at arm’s length from government with its own board of directors and designed to operate like the Canada Pension Plan or the Ontario Teachers’ Pension Plan and to increase returns on the province’s holdings—all areas that today’s speaker knows well.
The Dutch-born economist holds a PhD in Economics from the University of Wisconsin. Dr. de Bever was appointed CEO of AIMCo in April 2008 and was recruited from one of Australia’s largest public-sector pension funds. He has served as chief investment officer since 2006.
Upon leaving Canada for Australia our financial papers said that Oz’s gain was Canadian pensioners’ loss. Luckily for us he became frustrated with government red tape and interference and returned to Canada.
Prior to that, he held senior posts with Manulife Financial and Ontario Teachers’ Pension Plan in Toronto, playing a major role in redefining risk management, and over the course of his career has proved to be a very accurate canary in the coalmine.
AIMCo had been operating under the radar since its formation, buying up stakes in infrastructure like waterworks in England and a power company in Washington.
That low profile changed with its investment in the oil patch with the recent purchase of a major stake in Precision Drilling Trust, Canada’s largest drilling company. Intense political and public debate followed on investment policies.
To quote Leo de Bever, “This is the one lesson that’s come out of this whole episode—I think most of Alberta didn’t get the memo on AIMCo.”
Ladies and gentlemen, to deliver that memo in person, please welcome Dr. Leo de Bever.
Leo de Bever
Thanks Jo-Ann. I think you just gave my speech.
Ladies and gentlemen, Canada has more than its share of innovative funds that invest long-term savings with the single-minded focus on the best long-term return on risk for the ultimate recipients and I’m proud to have been a part of one of those institutions, Ontario Teachers, for almost 10 years.
Now today I’m very pleased that so many of you have come out to hear more on how we intend to give substance to the provincial government’s dream to create another strong pension endowment manager and this time in Alberta. But before I get to AIMCo itself and how it intends to deploy Alberta’s savings in global opportunities, I want to talk a bit about the larger Alberta growth story, about the maturation of its educational and medical institutions and the opportunities for technology that you could contribute from the rest of Canada to help solve some of Alberta’s energy issues, and the outlook for returns on both in and out of energy.
Now very selfishly I want to show what AIMCo and other Edmonton financial institutions represented here today have to offer to people with the right skills.
Alberta has been a growth story since its inception in 1905. At the time it only represented 4 per cent of Canada’s population. Over the next 40 or 50 years it was a magnet for immigrants, mostly drawn in by opportunities in agriculture and ranching. But over the last 40 years the story has shifted into immigration causing the population growth rates to be roughly double what it is in Canada and of course that’s been driven by energy. Today, Alberta makes up 11 per cent of the population but 17 per cent of GDP. The province has the youngest population in the country and even in the current environment 71 per cent of the population have jobs versus 61 per cent in the rest of the country. The Edmonton-Calgary corridor is now home to two and a half million people and it’s one of the densest urban areas in Canada. And, perhaps not surprisingly, growing at twice the national rate has meant that public spending on social infrastructure has been running at twice the Canadian pace per capita, which is one reason Alberta hasn’t been hit quite as badly by this recession as the rest of the country.
Now a fast-growing population base and growing energy sector need greater financial-sector support. We are not the only people looking for additional staff. There are some institutions represented here that are based in the Edmonton area. As you know Calgary is home to the regional headquarters of the big banks and it services the traditional oil and gas sector. Edmonton has Alberta Treasury Branches, the Canadian Western Bank, some of the major cooperatives and certain credit unions and they draw on the same kind of pool that I’m drawing on so it is in my self interest to make sure that that pool is as big as possible.
I’ve been doing business for 25 years in Alberta. The changes over that period have been quite remarkable. Because of public and private investments many of the provincial institutions are now reaching critical mass and the most obvious places where that’s happening is in the universities and medical facilities. I have spent a fair bit of time with the University of Calgary and the University of Alberta and I’ve been very impressed with the quality both of the programs and the facilities that have been made possible in part by Alberta’s good fortune in energy. We are now working with both universities actually, Calgary and the University of Alberta, to fund something called the Alberta Finance Institute, which is trying to help create exactly the kind of people whom I need to run my business and that some of my colleagues in the financial sector need as well.
Now reputations tend to lag reality and it will take a while before the high calibre of academic staff and programs will be recognized externally but it is already happening. The Financial Times of London has this year ranked the Alberta MBA program in the top 100 in the world and number two in Canada. And the same is true in other areas like medicine and life sciences where the major constraints are attracting or training people fast enough to staff what are truly world-scale facilities.
Now the recent economic and financial problems have not passed Alberta by, but the province has held up relatively well in Canada just like Canada has not suffered as much as many other countries. There have been job losses. There have been cancellations of oil-sand projects and the conventional oil and gas industry in Calgary is feeling quite depressed to be honest. Lower oil and gas revenues imply that the provincial government will be running deficits for the next few years, an unusual phenomenon in the province.
I’d like to remind you that the one constant in all of this is that we tend to overeact to both good and bad news. In other words, right now most people are reasonably depressed about what’s happening or over what has just happened, but I think we are far more depressed than we need to be. Yes, we have lots of problems, but I would argue that the Canadian and Alberta glass is three-quarters full and not half-empty or one-quarter empty or whatever. Canada’s financial system is healthier than most and the financial stimulus provided by public-sector programs will eventually kick in. I think we are better equipped than most countries to deal with those problems particularly if you just don’t sit around and wait for the government to solve your problems for you.
I think today is likely to be the darkest moment before the dawn, not the prelude to a projected bust. We think the global economy is already bottoming out and AIMCo intends to take full advantage of the investment opportunities that this represents. When growth resumes, both the demand and price of energy will pick up, so there is a reasonable possibility that Alberta will start growing again by 2010. It may not be a rapid straight-line recovery, but I think worrying about whether it is going to be “v” or a “w” or an “l” or whatever matters less than realizing that the end of this thing is near and that we should be concentrating on the long run. And of course being the kind of investor we are, that’s what we tend to focus on to keep our long-term success the same as it has always been. You have to find productive people to deploy financial capital and the right technologies with well-managed companies. In the end the only sustainable jobs in companies are the ones that are efficient and productive.
Now the challenge in a resource economy like Alberta is that there is not much interest in productivity when times are going well and there is not much capital to become more efficient when prices are weak. You have probably heard the famous bumper sticker that is not for family consumption that Calgary and Edmonton have had about God giving them another boom, but there has not really been enough investment in the next upturn in my view to go into this with a really productive environment and that’s where technology will come in. Alberta is a high-cost producer of conventional energy and a conventional industry will need a lot of new tricks to get oil and gas out of the oilfields efficiently.
Everybody talks about how Alberta has more oil than Saudi Arabia in the oilsands and that’s true but again bringing in the right technology will be crucial because the existing technology is costly and immature in its use of water, energy and a number of other things. So lots more needs to be done to make that truly profitable for the economy.
Having said that, it is hard to imagine a scenario where Alberta will not do well over the next 20 or 30 years. And that’s part of the message we’re carrying to you with this group of companies meeting you today.
Let’s talk about AIMCo. I knew I was in trouble last year when I was introduced in Calgary as Leo de Bever, CEO of AIMCo, the best-kept secret in Alberta. I guess I missed the point when AIMCo bought 20 per cent of the company called Precision Drilling. Many people concluded the province was getting into the drilling business. The good news is that it gave us an opportunity to explain who we really were and reasonable people understood but the bad news is that the world still has its share of very unreasonable people.
So who are we? Well we manage about $70 billion of Alberta’s savings. It goes up and down. The daily volatility or weekly volatility I think is about $400 million so that shows you what markets will do to you. I’m told that makes us Canada’s fifth-largest investment fund manager. We serve a number of public-sector pension plans and endowments like the Alberta Heritage Savings Trust Fund as well as the government’s short-term stabilization money. It is mostly invested in short-term bonds. Now these funds used to be administered by the Department of Finance. A few years ago, the government looked at the international evidence, the models that are available, and the best practice of how you manage these things, and came to the conclusion that managing these assets through a separate entity structure like Ontario Teachers or CPP would constitute better governance and would lead to better long-term results.
So AIMCo was set up in January 2008. The board was appointed, a very independent board run by Charlie Baillie, and it has been a great comfort to me because it is the buffer between me and the old way of thinking. I came in in August 2008. My timing was impeccable. The bottom was falling out of the market just as I got into my seat.
I think the decision to create AIMCo was a very courageous one from a political perspective. It represents a very sharp break from the past. I’m sure we will have our challenges in ensuring that everyone sticks with the program, but the Minister of Finance and the Premier have been extremely supportive. My board and I believe that being separate from government is absolutely crucial to our success. Now Precision Drilling provided one good reason there should be no confusion about independence of the decision-making process. One of the things that actually happened is that government knew absolutely nothing about what was going on so our media policy probably needs to be adapted a bit.
There is a more fundamental reason why we need to be independent and that relates to the objectives we set ourselves and how we measure outcomes. Pensions and endowments policies specify that we invest about 60 per cent of our assets in stocks. Capturing the equity premium is seen as the cheapest way to get incremental returns. So AIMCo and organizations like it deliberately seek short-term risk in the equity market where annual historical returns have ranged from minus 40 per cent to plus 60 per cent. We do this because over time all that annual volatility tends to produce an attractive average incremental long-term.
Now in that framework our job is to consistently exceed annual market returns because over time those average market returns will turn out to be attractive. However reaction to AIMCo’s minus 16 per cent return last year and the treatment of CPP at the hands of the Commons committee clearly show that politics and the court of public opinion have a different view. They don’t like short-term risk. They think short-term losses should be avoided so they want their annual returns to be positive. That leads to a fundamental contradiction. The reason equity risk is rewarding in the long run is that annual stock returns are essentially unpredictable in the short run. So if managers could anticipate and side-step negative annual market returns, their actions would change market pricing and their rewards for taking risk would cease to exist. There is no evidence that this is the case so that leaves us with two solutions. We let the court of opinion set optimal investment policy or accept that there needs to be a buffer between long-term investing and politics.
I suppose there is an additional possibility that our policies are all wrong. The period since 1982, the bottom of the last bear market, has been absolutely the best 27 years in the last 100 years from the standpoint of running a 60-40 pension portfolio. So without wanting to belittle that last year there were negative returns, it seems to suggest that our expectations may be higher than markets can deliver and at the moment we have negative returns. We forget about how good things were.
If we get ourselves positioned right in terms of how the place ought to be run in terms of policy and how you value outcomes, what kind of a manager is AIMCo likely to be in the future?
Expect us to have a single-minded focus on providing the best outcomes for our investment partners. I use the term advisedly because the relationship with the funds we are managing is changing. AIMCo used to receive a very prescriptive set of investment instructions from its investment partner funds and that is now morphing into a discussion on risk tolerance and how that translates into a broad allocation to equities, bonds and real-return assets. After that it is up to AIMCo to find the best opportunities within these categories.
Now once there is agreement on policy, how do you create an organization that finds the right investments and manages them effectively? It obviously all starts with the right people. That’s not just on the investment side but also on the risk-management and operations side. The investment and operations side have to work together to solve problems. I inherited an organization that was very weak in systems and understaffed in operations. We are upgrading our systems processes, controls, to best practice and our people are solving problems at an amazing rate.
We have been hiring. I started out with 120 people. I knew some of those were going to leave because they basically had signed on in the transition phase. We have replaced 30 of those and we have hired a total of 80 people so far. We are looking for another 50 over the next year or so. So now we are at the tipping point. Half of the people are new and the other half were there when we started. I think culturally that is making a huge difference.
Now what kind of people are we looking for? Our basic premise is that our people should be smart enough to work in any part of the organization so if you know someone who has what it takes to accept a brand new challenge in a fast-paced environment send them our way. The first thing that always comes up is Edmonton as a location and the place is cold. There are days in the winter when you wonder why you are there, but I lived in Wisconsin, I lived in Ottawa, and I can tell you that Edmonton isn’t really all that much different. There is an interesting study that has just been done about Edmonton where you compare the perceptions of the people in the city and the perceptions of the people who don’t live there. There is an enormous gap between the two. People in the city find all sorts of good things to say about it. People on the outside have this notion that there is only one word—cold. There is a lot there and I have had no trouble so far bringing people to Edmonton.
What we are doing frankly is bringing people in for a while to make sure that before they jump they are quite aware of what the city has to offer. Many of us have moved for what is a unique opportunity and that’s where it all starts. I think this is a unique opportunity. We are able to give to medium-level professionals an opportunity that would be very hard to beat anywhere else. We are also attracting many talented Albertans who previously moved away to centres like Toronto and New York and are now coming back, sometimes for family reasons.
Now a lot of what we intend to do is just plain common sense. We have abandoned strict asset class silos. We are encouraging co-operation and opportunities that don’t neatly fit in traditional asset classes and I learned a long time ago that the easiest return you can make for your partners is not spending money needlessly. That means doing the basics well, eliminating needless complexity. Our industry has to strive for efficiency just like any other and maybe that is another lesson from the downturn. I know that a few years ago in almost any country I looked at, the size of the financial sector was doubling and that somehow didn’t make any sense to me. But I didn’t know why. I think we have just discovered why.
Now on cost efficiency, I started with an organization that spent 75 per cent of its budget on external management of 25 per cent of its assets. We will be very pragmatic on how we are going to change it but we are going to change it. We are not going to do anything we are not capable of, but we are going to attract the talent to replace some external managers with internal management. It has to be a pragmatic trade-off, not just based on cost but also on benefits. A few examples might give you an idea of which direction we are heading.
Our existing private equity portfolio is highly concentrated in funds. In other words we pick people who manage the money for us. We now have an office at 70 York Street to get more efficient access to direct private equity deal flow. Expect more transactions like Precision Drilling where we use our capital to help listed companies achieve objectives they could not achieve on their own.
Now part of the reason I am here today is that we want to make it very clear that we are very open to working with other pension funds, with endowment funds, and other institutional investors on large projects and we would invite you to work with us in Alberta. Yes, we are a new player on the block, we are ready to implement best-investment practices, and improve upon them if we can. In the coming months we will be exploring investment opportunities with many of you in this room and others around the globe.
Thank you for the opportunity to share my thoughts with you and I hope to see you soon in Edmonton. Thanks very much.
The appreciation of the meeting was expressed by Heather Ferguson, President, The Hearing Foundation of Canada, and Director, The Empire Club of Canada.