Alberta takes axe to investment culture

Since taking up the role of chief executive at the Alberta Investment Management Company, Leo De Bever has implemented a cultural change that has been both dramatic and fast – including halving the workforce and then tripling it. He spoke with Amanda White about how those changes have affected the investment mindset of the organisation.

Leo De Bever has definitively made his mark on the Alberta Investment Management Company (AIMCo) in the 18 months since joining as chief executive.

“I implemented cultural change fast within AIMC’s internal investment team,” he says.

De Bever inherited 130 investment staff and about 80 are still with the organisation. He has since hired another 130 and says there are still about 50 positions he’d like to fill, including 30 currently advertised on the organisation’s website.

“We have moved at an enormous pace in the last year, in particular we’ve made up for the lack of investment in operations and investment in the past 10 years. It’s (as if) in the past 10 years AIMCo didn’t take out fire insurance in systems and operations. We didn’t have a fire so it looked like we saved money,” he says.

Part of the challenge has been to attract good investment professionals to western Canada, an unlikely investment location compared with its eastern competitor, Toronto.

This has certainly been a factor in the search for a chief investment officer, a role which De Bever merged into his own when the incumbent CIO left. The search for a replacement has been long, extensive and unsuccessful.

“We looked at the results of other investors, such as USS in London, and decided it was unlikely we would find someone to fulfil the position, someone who wants to move. So we think our best chances are with someone who will be a chief investment officer in three to five years’ time, we’ll train someone from the inside,” he says.

Since taking up his tenure, De Bever has moved a further 10 per cent of assets in house, which has had the dual purpose of cost-saving and expanding the focus of the internal investment team.

“About 75 per cent of the costs were from 25 per cent of the assets that were managed externally. Now the costs are about 50:50 and 85 per cent is managed in-house.”

But it’s not just on an outlay of costs that internal management makes sense for AIMCo, the internal team is performing better, he says.

De Bever said last year AIMCo paid about $125 million to external managers and lost $500 million on that portion of the portfolio, while internally it earned $400 million above the benchmark, and paid about $10-20 million to internal staff.

“We are pragmatic about it and realise there are some specialist areas where it is appropriate to outsource,” he says.

But private equity and infrastructure will now be managed in-house.

“It’s a straight question of economics, in private equity (you) can pay up to one-third of your return to the manager, but internally we pay less than 10 per cent. So we’re staffing up,” he says.

De Bever says building an internal team is not just about cost savings, but about being smarter.

“We are focusing on our talent and making sure we understand the future marginally better than others do,” he says. “We think there’ll be large changes in the next 20 years in global economies.”

In particular he says the industries under question are materials, energy and food, and within the energy sector there will be more change than anything seen since 1900s.

“Emerging markets come into that and we have to understand those markets better. But we look at emerging markets as challenging because growth and return on investment is not the same,” he says.

De Bever is no stranger to pension management in Canada, having previously served as senior vice-president of research and economics at Ontario Teachers Pension Plan. However his most recent role before joining AIMCo was as chief investment officer of VFMC in Australia. Both are multi-client organisations, with AIMCo managing assets for 27 endowment and government pension funds with a total of about C$70 billion under management.

The focus of the hires in the investment team until now has been on adding to the private equity and infrastructure teams. Now, De Bever says, the focus will turn to risk management and tactical asset allocation.

“One of the major contributions I made at Teachers was to change the focus from returns to a focus on risk,” he says. “You have to have a good risk-management system and culture to focus on risk, in many cases it’s not done in a way that’s ideal from the way I look at it.”

“With quantitative risk management, you either love it or hate it, but I think if you do it right and don’t make silly assumptions — like the world is perfect — then risk can be captured. Most things will be repeated, ‘Black swans’ do happen but mostly history repeats itself, you have to be prepared for it to happen.”

The AIMCo investment team is divided into public market and private market investment groups.

Within the public market, group equities — which make up about C$17 billion — are managed by three distinct groups: active equities, the structured and quantitative investments group and the external fund management group (responsible for 12 products, 68 mandates and 42 external manager relationships).

The fixed-income group manages 14 different short-, mid- and long-term portfolios for both balanced fund and special-purpose investment partners. It oversees about C$40 billion in investments of which about C$13 billion is for the balanced fund.

The private investment team manages assets in mortgages, infrastructure, private equity, timberland and real estate, and at the moment AIMCo has about $1.5 billion in private equity, across 15 different fund partners.

Balanced Fund Asset Allocation

 

Global public equity 37.0%

Canadian public equity 15.0

Commodities 0.2

Timberlands 0.5

Infrastructure 3.3

Real Estate 9.5

Real Return Bonds 3.6

Fixed Income 26.0

Money Market 1.4

Overlays 0.3

Private equity 3.2