Canada’s C$95 billion ($74 billion) AIMCo is already renowned for its willingness to experiment and an eclectic mix of assets that includes a Chilean utility and BBC Television Centre in London. Now the asset manager is pushing innovation further, taking ownership stakes in energy groups and hedge funds, using new technology to boost efficiency, and going after private equity with renewed gusto.
“Winning in today’s market is about trying to be a little [more clever] in what you do and looking harder, rolling up your sleeves, and also optimising costs,” says chief investment officer Dale MacMaster, speaking from the fund’s Edmonton, Alberta, headquarters.
Just under a quarter of the portfolio lies in inflation-sensitive assets, where strategy is undergoing a shift. Rather than invest in an individual infrastructure asset, AIMCo increasingly seeks out investments that bundle together a developer, existing assets and a deal pipeline, all in one. Earlier this year, AIMCo invested in two wind-energy projects in Alberta with the renewable energy division of Milan-listed global group Enel. This first step will lead to transactions in other regions. Similarly, in one of the largest clean-energy deals to date, AIMCo partnered with AES Corporation to buy US solar energy giant sPower from hedge fund Fir Tree Partners late last year. That partnership is also fuelled by an ambitious growth plan and follow-on acquisitions.
“It is no longer just about buying a bridge or buying a road,” MacMaster says. “It is about partnering with like-minded people who share your outlook on due diligence and risk and return, are good at operating assets, and can be nimble.”
It’s a similar theme in the real-estate strategy. In 2016, MacMaster oversaw the purchase of a 27 per cent stake in US real estate investment trust WPT Industrial, which invests in industrial properties such as warehouses and logistics and distribution centres. It means AIMCo can access one of the fastest-growing real-estate sectors in the US, tap into WPT’s expertise and share costs, rather than buying assets directly or using expensive external managers. It also opens the door to transactions with WTP involving assets that may not necessarily go into the REIT.
MacMaster has even applied this principle to the hedge fund strategy, some of which is run in-house – such as volatility- and event-driven plays – and some of which is with external managers, including global credit firm Blue Mountain and multi-strategy firm Paloma Partners.
Mindful of both costs and the fact that AIMCo will never have the resources to develop internal expertise in all strategies, the fund has bought a minority stake in US hedge fund DFG, which specialises in structured and leveraged credit. AIMCo had already invested in the equity, mezzanine and rated tranches of DFG’s collateralised loan obligations. Purchasing the ownership piece, in 2016, took that participation one step further, optimising the cost structure in the process.
“We would like to do more of these platform investments, where we can access specialised teams, but don’t want to pay 2 or 20 or even 1 and 15,” MacMaster said. “By owning a share of the company, we are able to optimise this. Private debt will be another growth area for us. We may look to do something there.”
MacMaster is taking the private debt allocation down paths where few pension funds have ventured in other ways, too. Strategy will now include fund lending, adding to existing allocations to private mortgages, and middle-market loans in Europe and the US. AIMCo will extend credit facilities to private equity firms via a subscription funding strategy in partnership with a large UK bank hitherto focused on mid-market loans. Fund lending is a downshift in risk from mid-market loans, which MacMaster believes are frothy thanks to the extended credit cycle.
“Many loans are covenant-light, and companies are getting credit extended that probably shouldn’t,” he says.The strategy has a return of about Libor plus 160 basis points. It is also dominated by major banks.
In-house for equities
Although about 80 per cent of AIMCo’s assets under management is handled internally, MacMaster uses external mandates in equity more than in any other allocation. Here, the split is 65/35 internal versus external management, with allocations to about 10 managers, including UBS and Blue Harbour. Managers tend to run high-conviction strategies in smaller portfolios, an approach that has done well recently since correlations in equity markets have dropped, creating more of a stock-pickers market.
AIMCo’s internal equity teams focus mostly on factor-based approaches, selecting stocks using value, momentum and quality, although innovation to add value to existing quant models is a constant theme; for example, staff recently added additional factors to the minimum variance portfolio, employing a value tilt and a quality tilt to outperform the benchmark.
“Our ability to refine our quant models is keeping us ahead of the curve,” MacMaster says.
He hopes to run the same kinds of quant strategies in-house for the Chinese market, where he is increasingly focusing the equity portfolio in anticipation of explosive growth ahead. AIMCo recently invested in BlackRock’s fund targeting China A-shares, a market dominated by retail investors. BlackRock’s active strategy sifts through a potential universe of 3000 stocks, using traditional quantitative insights along with big data and machine learning. Investing in the fund could lead to a similar internal allocation in the future.
“It follows a model we’ve used for years when we extend into new geographies and new asset classes,” MacMaster says. “We tend to use a manager, then co-invest, and as we develop expertise, we may bring those strategies in-house.”
AIMCo is also using data and artificial intelligence (AI) to develop its operational efficiency, exploring a more sophisticated tactical asset allocation model via an early-stage partnership with experts at the University of Alberta. The partnership is also looking into how AI and quantum computing could develop a more robust rebalancing model. AIMCo rebalances when equities are about 3 per cent overweight, but MacMaster says this could be refined.
“It’s about finding that optimal spot between rebalancing too frequently, and the cost of that, versus letting your winners run,” he explains.
Private equity’s middle market
AIMCo has a 4 per cent allocation to private equity, where recent strategy has focused on investing in smaller funds of between $500 million and $1 billion, instead of big funds often 10 times the size, which are less plentiful. It means a reduction in operational capability and more key-person risk, but it also allows access to top-quartile mid-size managers, which is easier than getting into top-quartile large-cap funds, where demand outstrips opportunity and trillions of dollars of dry powder make fee negotiation almost impossible. Strategy also includes co-investment, where AIMCo has a proven in-house capability to go direct and can position itself as one of the larger limited partners in smaller funds.
Indeed, accessing top-quartile managers in the middle market now lies at the heart of a private equity strategy MacMaster wants to expand to 10 per cent of AUM. AIMCo’s member funds decide their own strategic asset mix and convincing their boards to increase allocations will be a long process, but MacMaster is convinced of the benefits.
This follows on from AIMCo revisiting the private equity portfolio three years ago in an analysis with Bain Consulting. The process examined the difference in performance between top-quartile and medium-quartile managers, revealing that the best outperform those on the rung below by as much as 10 per cent.
“If you can access top-quartile managers, you can do really well, and this is what attracts us,”MacMaster says, adding that this large difference is unique to private equity. In other asset classes, the difference between top and medium managers is much more compressed – in fixed income, for example, it is just 25-50 basis points. The analysis also reaffirmed private equity’s persistence of performance, which also distinguishes it from other asset classes.
“Top-quartile private equity managers in a first, second and third fund are also very likely to be in the first quartile, or at worst second quartile, with their fourth. This contrasts to public equity, where you actually get a reversal to the mean,”he explains.
AIMCo has begun to adjust its allocation, build relationships and sell itself to general partners. It has met with about 350 mid-market funds and carried out a deep dive with 50, which has resulted in seven or eight commitments totalling about $800 million so far.
“We want to build the allocation because, from where we sit, it has the most attractive characteristics,” MacMaster says. “Over the long run, private equity outperforms everything else.”