Canada’s Alberta Investment Management Corporation, (AIMCo), the C$90.2 billion ($69.4 billion) fund that invests on behalf of 26 pension, endowment and government funds, has more than three quarters of its assets in public markets, most managed internally.
This includes money market and fixed income allocations and a diversified mortgage portfolio, but the most sizeable chunk lies in a $27 billion sophisticated equity portfolio that combines passive low cost strategies with complex hedge fund allocations.
Internally managed equity investments include quantitative and passive strategies which currently invest in 45 countries around the world. Smart beta is one such allocation, and with it AIMCo aims to add 100-150 basis points every year.
“It’s been successful. I like smart beta,” says chief investment officer Dale MacMaster, in an interview from the fund’s Edmonton headquarters.
“We want to access beta as cheaply as possible.”
The smart beta ethos of breaking down returns into factors, and buying components like value or momentum, while isolating the remaining alpha is something he is now applying to an internally managed portable alpha strategy.
“We are adding more leverage to our own hedge fund strategies by customising the portable alpha allocation to a greater degree than before.”
Portable alpha combines leveraged exposure to an index with investments in a high-returning asset, or strategy uncorrelated to that index. The former provides the beta, the latter is supposed to deliver outperformance, or alpha. In a strategy that has evolved in recent years, MacMaster explains that a recent development is to create a global alpha pool that is then allocated across AIMCo’s beta exposure.
“We can have, say, Canadian beta and then receive alpha from a global alpha pool that has a diversified mix of exposures. It’s all about finding the most cost effective way to deliver alpha and beta.”
“I don’t want to pay exorbitant fees for straightforward hedge fund strategies that can easily be replicated. We try to be smarter in how we use hedge funds. A lot of what they can do we can do internally. Take a hedge fund that only trades volatility across every asset class – we can’t replicate exactly what they do, but there are strategies within that fund that we can execute on in-house, [on] a smaller scale, across a handful of assets.”
Many approaches to using hedge funds
MacMaster, who took over as chief investment officer in January 2015 and whose 17-year career at the fund includes its 2008 transition to the Crown Corporation, from Alberta Treasury Board and Finance, is, however, prepared to pay for enhanced strategies with high-conviction managers that promise to add a further 200-250 basis points.
These include long-only and hedge fund strategies with AIMCo using seven to eight hedge funds running uncorrelated strategies that bring real diversification and a deeper expertise than the in-house teams, while remaining cost effective.
“You have to acknowledge that you simply can’t do everything in-house. Currently you are seeing many pension funds divesting of their hedge fund holdings. There are many approaches to using hedge funds. We don’t look for especially high hedge fund returns; instead we look for diversified, uncorrelated alpha of modest returns, say between 6-8 per cent, on a basket of hedge funds overlaid with equity market beta.”
MacMaster uses hedge funds that specialise in leveraged credit, volatility and other diversified strategies.
“One of our hedge funds does nothing but buy positions of other hedge funds at a discounted rate in the secondary market,” he reveals.
“It’s probably easier to negotiate deals with new hedge funds that don’t have such a strong record. Most of our funds have long successful track records. If a fund has a 15-20 year record of shooting the lights out, it is difficult to negotiate fees downward. Some of our best managers have limited capacity for new money.”
AIMCo’s $19.4 billion private investment portfolio includes real estate, infrastructure, private equity and timber, where the fund is in the process of rotating land in timber to agriculture to maximise value.
The $10.4 billion real estate fund is still Canada focused with around 90 per cent of the portfolio in direct real estate with the pension fund only investing in funds when it needs the expertise or scale.
“We will invest with funds in specialist areas like, say, a total rehabilitation of a property in a geography where we have limited direct experience. We can’t do that so we find the guys that can.”
In a higher risk, higher return strategy, foreign real estate is increasingly focused on development opportunities rather than core, income producing real estate, he says.
AIMCo used to only invest in private equity with funds, but once it built an in-house expertise and “hired the right people,” the portfolio evolved to combine fund investments, co-investment and directs.
Now the allocation is evolving again with MacMaster overseeing a strategy to target middle market private equity funds.
“There is fierce competition to invest in the large private equity funds – the biggest are turning away money. We can afford to fund the middle market funds and we can be the lead investor. The smaller funds do get the good investments too. There is a far greater choice in certain geographies and sectors.”
Private investments have also grown since AIMCo opened a London office. MacMaster says he has been amazed by the number of contacts and transactions that have come AIMCo’s way by people “attracted to our shop.”
Like so many other asset managers, AIMCo is benefiting from regulatory changes at banks.
“We have looked at opportunities in private debt and loan, collateralised loan obligations (CLOs) and trade finance. Some of these ideas are still being incubated,” he says.
“One challenge is that banks’ existing client relationships typically straddle numerous asset classes and can impinge on a pension fund’s specific investments. If you step in, you must make sure there is an alignment of interest, and that they have skin in the game.”
Sharing the risk is important and he prides himself on AIMCo’s deep relationship with a handful of partner banks.
“It takes time to structure things.”
“Canada has a very good reputation for pension management. Canadian funds have a very strong governance model with a blue-chip board operating at arms-length from government overseers,” he says.
“It was initially difficult to get the government’s attention that reform was important, but now AIMCo is a very successful story and I am proud to have been a part of it.”