Investor Profile

AIMCo enhances top down strategy function

In October 2020 AIMCo, the C$118 billion Canadian fund appointed its first chief investment strategy officer splitting the investment function between the top down strategy and bottom up implementation responsibilities. Amanda White talks to Amit Prakash about how the new function will add valuable investment insights to clients.

While AIMCO formerly created this position late last year the underpinnings and drivers of the investment strategy function at AIMCo have been present for a long time. With the appointment of Amit Prakash as the first chief investment strategy officer they are now present in a focused and deliberate manner. The headline objective of the function is to move the organisation into better alignment with its clients’ investment objectives.

“Our end goal is we are seen more as a trusted adviser, rather than simply an investment manager on behalf of our clients,” Prakash says. “The manner in which we describe what it offers to our clients, is to extend the conversations we have been having beyond the deliverables we have presented them. To look beyond the delivery of alpha to help them with their decisions, with their strategic and top-down views.”

It allows AIMCo to more readily add a top-down strategic portfolio view to what it already does for clients in driving alpha.

“We believe combining those makes for a more robust combination than doing one or the other,” Prakash says.

The fund is now six months into the process of building the team and infrastructure for the strategy function and has started revisiting investment objectives with clients including reviewing their risk appetites, policy mix and alpha targets.

“We are starting at ground zero. That is a journey we will be on for the near term,” Prakash says. “Understanding our clients’ objectives and creating the framework to assess the efficacy of our current solution sets and identify gaps and move from there.”

AIMCo’s clients – which include nine public sector pension funds and a number of endowments – remain fully in charge of their policy mix. The strategy function, and the top down view, allows AIMCo to provide an advisory function to better aligns clients’ needs and the solutions offered. The same process will be used in the longer term to look at portfolio tilts.

The top down view

Prakash says from a top-down view AIMCo believes in the longer-term, risk assets are a better place to be and that illiquid assets provide better value.

“A lot of the portfolio positioning happens within the current strategies that we manage, that is where if you look from the top down we have a very marginal overweight to equities. We have pulled that in over the last little while as markets became a lot more volatile and things starting to look exuberant more than they have in the past. But over the long term we are positive about risk assets.”

Not surprisingly Prakash has a weak outlook for bonds, but he thinks any potential inflation will only be fleeting.

“We believe inflation would be transitory in nature given some of the secular drivers haven’t really changed, thinks like the ageing population, technology and globalisation. We may get a bump in inflation but it isn’t something we believe is a permanent uplift.”

The fund has a negative long-term forecast for fixed income and for the past few years has allocated into the adjacent asset classes such as private debt and loans, which are more attractive from risk return perspective.

“That has played out well,” he says. “And at margin we have been slightly underweight bonds and lower duration has been helpful.”

Since the COVID crisis AIMCo has been cautiously managing its active risk budget and pulled back a bit on risk, and at the same time improved liquidity.

“We are well ahead of liquidity characteristics compared to where we were pre-COVID. We are being careful where we take risk. We are well positioned at the moment, pulled active risk back, and that allows us to step in again if opportunities present themselves. We have done a fair bit of that over past 12 months given their were interesting opportunities.”

The team has been active in private equity and private debt, where it has looked beyond North America and taken advantage of some mid-market opportunities in Europe.

It’s also been active in real estate where its been moving to reduce retail and add more logistics and industrial holdings.

“One of the benefits of AIMCo is many of our clients have long investment horizons and that allows us to utilise our liquidity more effectively, we were not forced sellers through pandemic. On the contrary we deployed capital and are well positioned at the margin to do that now should markets soften more relatively to where they are now,” he says.

There are some investment opportunities that AIMCo is looking at but not yet invested, such as emerging market debt.

“We do have some EMD but we use it as an alpha driver in existing funds rather than a beta permanent delivery.”

But the real role of Prakash’s team, is not so much about the tactical changes, but to look at the risk appetite of clients over the longer term and the strategic mix of the portfolio.

“We have seen clients increase allocation to illiquids, and therefore on the mirror image of that is the assessment of the liquidity profile of the portfolios. Being long term helps with not needing liquidity, but as allocations to illiquids increase its beneficial to keep an eye on the liquidity profile of clients.”

There are other insights clients can gain from a top down view, such as an assessment and better understanding of their factor exposures across the portfolio.

“The first step is to understand the factor exposures relative to liabilities and if there is a potential need to adjust some of that,” he says. “What might come from that, clients might want to manage their rates exposures or growth factor for example, and that is one of the things some of our clients are interested in. You need a top down view for that to ensure the balance is right.”

Having a dedicated department to manage the top down view means all the associated tools can also be project managed. Prakash and his team are working with the in-house technology team to build a robust and scalable client investment dashboard, which would allow them to look at all the different exposures across the portfolio such as sectors, factors, and duration exposures.

“We can do it now, but we want a more robust and scalable process. It is early days in that process working with the tech team.”

Another project underway is the implementation of a new risk model which will be up and running this year. The risk system will sit alongside the asset-liability analytics system from Ortec Finance which was also added relatively recently.

“This will give us more flexibility and tools from a risk measurement perspective,” he says.

Governance structure

In the past year AIMCo has undergone quite a lot of change in its senior rankings. Mark Wiseman, former CEO of CPPIB and global head of active equities at BlackRock, was appointed chair of the fund in July last year, and just last month the former CEO of Canadian fund HOOPP, Jim Keohane, was appointed to the board.

In November it appointed a new chief risk officer, Andrew Tambone  and a new chief financial officer, Paul Langill.

With the appointment of a chief investment strategy officer the investment function has been split and both Prakash and CIO Dale MacMaster report to AIMCo’s chief executive and are equal partners in the fund’s investment capabilities and performance. Evan Siddall was recently appointed as CEO and will take over from Kevin Uebelein in July.

“The CIO and I work closely and well together and that’s one of the necessary conditions for us to succeed,” says Prakash. “It is hugely important we are joined at the hip.”

For clients Prakash takes on the top-down, long-term forecasts and policy mix views and the CIO’s investment team implements from the bottom up.

All the client reviews are done in conjunction between the two teams and a governance structure is now in place where all of the client-related portfolio advice goes through a committee co-chaired by Prakash and MacMaster.

“We co-chair this to ensure it has the right level of oversight and clients have benefit from a 360 view that also includes the head of clients and chief risk officer. This ensures investment conversations with clients get a full vetting across the shop.”

Previously the top-down activities were also done by the CIO and investment team but the separation allows an equal focus and engagement on strategy, and alpha delivery and active risk.

“It improves and broadens how we are engaging with clients,” Praksah says. “Most of our clients are not choosing between alpha and beta. Without the right beta most clients would struggle to meet their obligations. Historically they were primarily focused on beta through the policy mix and we were primarily focused on alpha through investments. We want to look at the top down so the decisions about beta are better informed. This way we can improve the betas we are offering and the alphas.”

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