US active managers are struggling to add value over the benchmark in the current economic environment.

At the October investment committee meeting for the Teachers Retirement System of the City of New York, TRS’ Tax Deferred Annuity Programme – which oversees so-called Passport Funds for beneficiaries seeking a supplementary retirement plan – board members heard how lower quality stocks are outperforming the broad market in what is commonly referred to as a “junk rally.”

It is making it difficult for active managers to outperform, explained board consultant Goldman Sachs Asset Management’s Michael Fulvio, presenting to trustees overseeing one of the city’s five retirement plans. One of the reasons poorer quality stocks are doing well is because they are often highly levered and are now benefiting from lower rates since the Federal Reserve cut rates.

“It has been a very challenging environment for active managers to add incremental value over the benchmarks we use,” he said, adding the latest data on active management is still to come through although the passport funds reported strong numbers from an absolute return perspective.

“We haven’t yet received active management numbers. It’s been a tough market for active managers to outperform public benchmarks and we will dive into this more in couple of months.”

Unlike assets belonging to the five New York City pension funds (TRS, the New York City Employees’ Retirement System, NYCERS, the New York City Police Pension Fund, the New York City Fire Pension Fund and the New York City Board of Education Retirement System) the Tax Deferred Annuity is not managed by the Bureau of Asset Management.

BAM poised to reengage with trustees

At the October investment committee meeting of the New York City Fire Pension Fund, the focus was on how the fund’s shared asset manager, the Bureau of Asset Management, is poised to re-engage with trustees. BAM collectively manages $282 billion in assets on behalf of nearly 800,000 beneficiaries.

In the new year, the Bureau will work closely with the different funds to ensure its strategy is aligned with their individual needs, alongside looking at headcount, staffing and compensation. The focus will be on understanding the priorities of each fund (they all have their own liabilities and asset allocation) and ensuring the Bureau meets those goals and expectations, said Steven Meier, chief investment officer and deputy comptroller for asset management, New York City Retirement Systems.

“We are looking to do much more customization. We are very receptive to that,” said Meier.

As of the end of fiscal year 2024, the pension funds collectively had an asset allocation of around 42 per cent in public equities, 32 per cent in public fixed income and 26 per cent in alternatives.

Meier added that the investment team are also concerned about the risk of over-diversification. They are trying to guard against siloed vertical thinking that ignores the overlap between, say, public equity and fixed income, or public and private markets. He said obvious overlaps are visible in real estate debt which overlaps with private credit/debt.

“We are going to look at exposure across the entire portfolio,” he said, flagging more conversations ahead on the economic factors driving performance.

Come the new year, trustees at the pension funds will also have a chance to scrutinize proposals to cease pension investments in fossil fuel infrastructure.

NYC Comptroller Brad Landers, fiduciary of the pension system, recently proposed the exclusion from three of the pension funds of future private markets investments in upstream and downstream fossil fuel infrastructure including midstream and downstream infrastructure, pipelines, distribution facilities and liquefied natural gas terminals.

Lander said the divestment proposal is the first in the country for a pension fund.

“That’s a big step that has not been taken by any large U.S. public pension fund, and we will have some work to do together to put it into place,” he said.

Industry participants have reacted positively to the UK government’s proposed evolution to the local government pension pools, but some pool executives say more clarity is needed on the suggestion that reform could see the establishment of new pool companies or mergers between pools. Either way, the reform signposts significant capacity building and costs for all pools, whatever their starting point.

In her first Mansion House speech last week Chancellor of the Exchequer, Rachel Reeves, launched the government’s much-anticipated, mega fund remedy to drive investment in productive assets and back Britain.

She called for more rapid reform of LGPS pooled funds, including individual funds fully delegating the implementation of investment strategy and taking their principal advice on their investment strategy from the pool.

Pools would need to set up FCA-regulated investment management companies with the expertise and capacity to implement investment strategies. In another change, the individual pension funds would also be required to transfer legacy assets to the management of the pool.

Since 2015 the LGPS has come together into eight groups to manage their investments through asset pools. But they have developed different models and less than half of the total LGPS assets have been pooled. It means the full rewards of low costs and scale that have fuelled analytical expertise, portfolio efficiency, liquidity management and access to private markets amongst Canadian and Australian super funds, remains out of reach.

“Few in the scheme would disagree that pooling has not delivered to its full potential and that change is needed to ensure that the scheme continues to perform in the long term,” states the government in a consultation document the industry is invited to respond to over the next nine weeks.

“The government’s view is that full, effective and consistent delegation of strategy implementation is needed to ensure the benefits of scale and ensure that decisions are taken at the appropriate level by people best placed to make those decisions,” it states.

Five of the pools are already standalone FCA-authorised investment management companies. But two have an outsourced model that relies on external providers, and one has a model in which a joint committee provides oversight, but the partner funds retain management of most assets.

It signposts significant capacity building and costs for all pools, whatever their starting point.

Even the five pools which already constitute investment management companies will need to develop new capabilities to build capacity on local investment – another stated priority – and provide advice on investment strategies to funds, states the government.

The government’s quest for reform has been welcomed in some quarters.

“We are supportive of the model being outlined for the evolution of pools and the way they work with their funds,” says Richard J Tomlinson, chief investment officer at Local Pensions Partnership Investments. “We strongly advocate the ability of pools to be the principal provider of investment advice and that all investment implementation is delegated to the pool, with all assets being managed by the pool.”

“Our experience at LPPI is that this model, combined with scale and the establishment of internal investment teams, delivers better outcomes for funds and ultimately the members. This experience and our track record in delivering investment advice and implementation is reflected in the structure outlined in the consultation.”

Fewer pools?

The government acknowledges the changes may trigger a shakeup in the number of pools. Reform could see the establishment of new pool companies, mergers between pools, or existing pools becoming clients of already FCA regulated managers for some or all services required.

However, the lack of clarity on this point is already a concern for Tomlinson.

“The drive for pools to have these changes in place by March 2026 should support increased engagement between funds and across pools. Whilst there was no explicit requirement for pools to merge, there is guidance that where pools have existing capabilities, other pools should look to work together. We believe this can be the catalyst for cross pool collaboration and ultimately consolidation; to create greater scale and efficiencies and we would have liked the consultation to have been clearer about this end objective.”

Calls for clarity where also made by Laura Chappell, chief executive of Brunel Pension Partnership, speaking to Top1000funds.com in the build up to the latest announcement.  “The government needs to ensure it offers a clear steer, coupled with consistent policy that is properly enforced – it’s worth remembering the role of policymakers in creating the Maple 8,” she said.

The government has also said it wants to transform governance. Committee members would be required to have the appropriate knowledge and skills; the pension funds would be required to publish a governance and training strategy (including a conflicts of interest policy) and an administration strategy. Within the pools, they would also need to appoint a senior LGPS officer and to undertake independent biennial reviews to consider whether they are fully equipped to fulfil their responsibilities.

Pool boards would be required to include representatives of their shareholders and to improve transparency.

DC reform

Australian pension schemes invest around three times more in infrastructure compared to the UK’s DC schemes and 10 times more in high growth businesses and private equity compared to their UK equivalent, says Reeves. Meanwhile Canadian teachers and Australian professors reap the rewards of investing in productive UK assets through their pension schemes rather than British savers.

In addition to forcing the fragmented 86 LGPS pension funds that collectively manage £400 billion to accelerate pooling, Reeves outlined new legislation to push the UK’s DC pension funds, forecast to manage £800 billion in assets by the end of the decade, into mega pools of £25-£50 billion.

Mark Fawcett, chief executive officer of NEST Invest who was at Mansion House when Reeves gave her speech, says the fund was supportive of the government’s position.

“We see the benefits of scale and are experiencing those ourselves,” he told Top1000funds.com. “We think more consolidation in the DC sector is positive.”

Nest Invest currently manages over £46 billion and is expected to grow to £100 billion by 2030 fuelled by contributions of about £500 million a month alongside investment returns.

About 20 per cent of the fund’s assets are invested in the UK and it continues to expand its private asset investments in infrastructure and property and announced a recent joint venture with PGGM and LGIM around housing.

“We are very committed to investing in private markets in the UK where we see attractive investments,” Fawcett says.

Will it work?

It remains to be seen whether mega funds will trigger more investment in the UK.

LPPI argues bigger pools aside, the government needs to do more to remove the disincentives that are blocking capital in supporting key strategic activities. In a recent paper, the investor argued that the government can make more projects investable by reducing execution risk for investors.

Moreover, many of the pools say they are already substantial investors in the UK.

LPPI currently has 20 per cent of its portfolio invested in the UK, the large majority in private markets where social impact is greatest.

The £30 billion Greater Manchester Pension Fund (GMPF) the UK’s largest local authority scheme recently ploughed more money into affordable housing, targeting 30 per cent of its 10 per cent allocation to real estate to the UK’s residential sector.

Private sector DB funds, off the menu

Reeves speech did not detail plans to reform the UK’s £1.4 trillion private sector DB pension fund industry (separate from the LGPS) in a source of frustration for many hoping for guidance, especially on how corporate schemes can use their surpluses.

Morten Nilsson, executive director and CEO at Brightwell which manages around £37 billion of assets on behalf of the United Kingdom’s BT Pension Scheme, BTPS, as well as assets of the DB arm of the EE Pension Scheme, believes these corporate pension funds are well positioned to support economic growth and better outcomes for members, particularly by investing in the transition.

Speaking during a webinar, he said low carbon infrastructure assets offer a particular opportunity for these mature, low risk investors looking for stable, predictable, inflation-linked returns, that also meet their net zero targets.

“You can’t have better investors in your critical assets than local pension schemes because we can’t run away,” he said.

He warned that the complexity of galvanizing investment in productive assets from these DB funds will require more than “a newspaper headline.”

 

Stewardship at British Columbia Investment Management Corporation (BCI), the C$250.4 billion ($179 billion) investment manager is wide ranging. From voting at shareholder meetings at every public company in the portfolio, to applying pressure on North American banks to finance more clean energy; advocating on tying executive compensation to sustainability targets; and cajoling oil and gas companies to incorporate climate risk assessments into their audited financial statements, stewardship is multi-faceted and progress hard-won.

“There is no magic bullet for engagement,” says Jennifer Coulson, senior managing director and global head of ESG, at BCI which has just published its first Stewardship Report detailing its methods and progress on how it uses its ownership rights and influence to drive sustainability.

Engagement with policy makers is a key element of strategy and although Coulson describes coordination and consultation with governments as “time consuming and requiring significant effort” – BCI contributed to 26 ESG-related policy consultations, roundtables and joint statements last year – she says the rewards are impactful, long-term, and far-reaching. They also have the potential to drive progress not only in BCI’s current portfolio companies but in future investments too.

“Investors can play an impactful role as the connective tissue between companies and policymakers. Now more than ever, we need coordination on policy, regulations, and mechanisms that incentivise changes in behaviour and investments in solutions,” Coulson says.

Most recently, BCI’s engagement with the Canadian government together with peers in the Sustainable Finance Action Council contributed to policy makers announcing next steps for Canada’s long-awaited green taxonomy at PRI in Person in Toronto.

“Seeing the federal government officially back this taxonomy is a promising step forward on climate and a positive development for attracting green and transition capital to Canada,” Coulson says.

Elsewhere, BCI has actively engaged with the regulator and global capital markets to help shape the creation of the IFRS sustainability disclosure standards. The stewardship team communicate disclosure expectations with public and private companies, and she notices an increase in companies voluntarily reporting against the SASB Standards.

Coulson says she also notices positive momentum at the policy level on issues like gender diversity on boards.

“When BCI began engaging on the topic of women on boards average representation for TSX Composite Index companies was 9 per cent, last year it was more than 36 per cent,” she says.

“This was achieved by working with the securities regulators on disclosure requirements and engaging directly with companies at the same time.”

Direct engagement with companies can often feel more immediate and productive than engaging with policy makers. But she warns this “does not necessarily translate into easier” given the effort and resources required to research, coordinate, and engage in constructive conversations. Engagement is a complex, non-linear process that varies from company-to-company in the depth and breadth of topics as well as the type of outreach.

BCI’s stewardship report reflects just how tough it is, stating that 40 per cent of engagement outcomes are “neutral” indicating that a company hasn’t taken steps towards the “desired action” and there is more work to do.

Coulson counters that in instances with a single request, like asking companies to respond to CDP, the engagement could remain neutral while BCI waits for the disclosure results before moving from neutral to objectives-achieved. Some of the investor’s more complex, long-term engagements that have multiple topics and milestones can be assessed differently year-on-year depending on the overall progress.

More encouragingly, direct and collaborative engagement with companies can be highly effective for targeting niche issues or in instances of  gaps in regulation, where BCI can drive standards.

For example, Canadian investors have been engaging securities regulators for more than a decade on say-on-pay. Despite most Canadian issuers taking this on voluntarily, a mandatory requirement does not exist other than for companies incorporated under the Canada Business Corporations Act.

“Because of the policy gap, it was easier to achieve the desired outcomes by engaging directly with the corporates and filing shareholder proposals,” Coulson says.

One area BCI is engaging with corporates is around bond issuance, helping shape the sustainable bond market and trying to increase the product offering available to fixed income investors. While public equities come with explicit and well-defined shareholder rights like voting, she insists investors in fixed income have equally powerful levers through their financial commitments and support for new issuances.

“The bond market is evolving and strong ESG practices are now a basic requirement for conventional and sustainable issuers alike, Coulson says.

“By meeting with companies to express our expectations and share our expertise, we can actively shape bond programs and instruments that align to globally recognized best practices, while setting a high bar for future issuances.”

She is outspoken on the shortcomings of sustainably linked bonds.

“Unlike labelled bonds, sustainability-linked bonds (SLBs) often lack ambitious targets and have minimal penalties for missing the targets they do have, limiting the incentive for an issuer to actually pursue sustainable solutions. We have seen less enthusiasm from the market for these instruments.”

BCI is a member of the ICMA Sustainability-Linked Bond Working Group and the Sustainability-Linked Loans Refinancing Instruments Taskforce to try and help improve the overall product offering for SLBs.

Coulson also shares her concerns about the lack of progress at the PRI, reflecting that although the right conversations have happened, notably on climate, they remain insular.

“Conversations are generally taking place between those who are already bought-in,” she says.

“To see real, meaningful progress, we need to expand our reach and engage in broader dialogue, particularly with groups that have differing views. We must keep top-of-mind that these challenges affect everyone and demand collective action from all players, not just the most passionate.”

One area she’d have liked to have seen more progress was around “getting back to basics” on corporate governance. She believes a lack of effective governance fundamentals related to board independence, management compensation, and diversity, even in developed markets, continues to impact long term sustainable returns.

“We can’t overlook the power of good governance practices in providing a solid foundation for progress on material environmental and social issues,” she says.

In a region as diverse as Asia investors can lean in and take advantage of inefficiencies and inconsistencies around growth, central bank policy and diverse regulatory regimes.

Asset owners in the region are increasingly finding active management, across all asset classes, optimises returns and reduces risk.

APAC fixed income offers rich pickings for active investors prepared to venture away from an off-the-shelf passive exposure and open the door to the region’s diverse opportunities across credit quality, duration and interest rate sensitivity.

An example could be an Australian core bond fund which combines government and corporate issuers in a barbell position with AAA, long-maturity Australian government bonds sit on one end for ballast, and high-quality investment grade bonds focused on income and yield, on the other.

Anthony Kirkham

This allocation could mitigate volatility from riskier parts of a portfolio like equity, but at the same time capture yield and income in the investment grade space, explains Anthony Kirkham, portfolio manager at Western Asset Management, a division of Franklin Templeton, speaking to Top1000funds.com from the Melbourne office.

“Such a portfolio might have an overweight in credit in shorter maturities where credit spreads are attractive and can provide good income. At the same time, it might hold a greater weight of the longer maturities, particularly in the 10- and 20-year parts of the curve in AAA government securities that would behave the way you want them to during periods of risk off,” he says.

Japan’s $1.6 trillion Government Pension Investment Fund (GPIF), whose active equities added huge value in the past year, also recently switched the mandate of a Y9 trillion ($62 billion) domestic bond fund from passive to active management: GPIF currently allocates 51 per cent of domestic bonds to active strategies.

Active management also helps investors navigate APAC’s patchwork of fiscal policies. Active managers can capture any move in yield curves based on specific central bank policy, for example.  The difference between most of the region’s central banks and the Bank of Japan, currently on a tightening cycle, is a case in point.

“When you understand the different characteristics, you can add more value in these markets through outright duration positioning, or by actively managing your yield curve positioning,” Kirkham continues.

He adds that active management also allows investors to navigate currency volatility and can be a useful alpha generator.

“Currency volatility is a risk that needs to be managed or mitigated. We find some clients want to avoid it and others are prepared to take a little risk,” he says.

Active management also allows investors to navigate regulatory risk. For example, when China’s regulatory crackdown on the construction sector spooked investors and hit the property bond market, it led to a sharp decline in the value of developers’ US dollar-denominated bonds sharply lower.

“You can’t avoid thinking about regulatory risk,” says Kirkham, who flags risks such as the regulatory limits placed on different funds and the fact regulation adds to the costs of doing business and can also impact liquidity if it becomes difficult to trade.

For active investors, regulatory knowledge is just another opportunity to lean into, says Connie Chan, managing director of investments at Temasek, speaking during the latest annual review. Singapore’s S$389 billion state-owned investment firm has around 48 per cent of the portfolio in liquid and/or listed assets.

Connie Chan

“We see continued structural reforms in a number of (APAC) markets. This has helped to reduce supply-side constraints, create more open and competitive markets, as well as improve productivity,” she says.

Active management also allows investors to be thoughtful around correlations. For example, the Hong Kong Monetary Authority pegs the Hong Kong dollar to the US dollar and closely follows Federal Reserve strategy. Many other regional central banks also keep a close eye on their currency relative to the US dollar.

“This is important to understand when sizing positions,” says Kirkham. “Many countries are cognisant of Fed strategy when adjusting their own monetary policy which can have an impact in terms of currency and economic growth in that country.”

Active management brings the depth of analysis needed for navigating such a diverse region. At Western Asset Management, the team draws on expertise from local and global analysts, with the latter able to provide insights on global issuers using local markets to fund themselves. For example, in Australia around half the credit market consists of foreign issuers with local operations seeking to diversify their funding sources.

Meanwhile, local analysis provides granular expertise and insight on less efficient pricing mechanisms that reflect asymmetric information in the market.

Investors targeting sectors and countries

At Japan’s $1.6 trillion Government Pension Investment Fund (GPIF) active equity is gaining traction after the fund attributes its latest, record gains to active investment in Japanese (and foreign) equities. GPIF’s domestic equity allocation returned a massive 41.4 per cent for the financial year ending March 2024.

Eiji Ueda

GPIF only allocates about 4 per cent of its domestic equity portfolio (around 25 per cent of AUM) to active funds, down from levels closer to 13 per cent 10 years ago. But under a new strategy introduced by chief investment officer Eiji Ueda, at the helm since April 2020, GPIF has increased the number of active domestic equity mandates to 23 across Japanese and international managers. In a hallmark strategy he is reconstructing active equity by choosing managers based on the consistency and stability of their excess return in addition to qualitative selection.

“We expect our active portfolio to generate excess stable returns in the future,” he states in GPIF’s latest annual report.

In another example, the New Zealand Superannuation Fund runs a dynamic asset allocation program called strategic tilting that takes exposures to markets across multiple asset classes. As part of this, the $77.1 billion investor strategically tilts exposures to a group of emerging markets that includes countries across the Asia Pacific.

 “In our strategic tilting program, we are overweight equities and currencies in emerging markets.  Most of this emerging market exposure is to Asia,” says Alex Bacchus, acting chief investment officer at the fund until December 1.

Alex Bacchus

Elsewhere, deliberate stock picking strategies allow investors to single out opportunities in specific market segments, such as China’s manufacturing and consumer goods sectors; Japan and Korea’s auto and advanced technology sectors; India’s pharmaceutical industry and Australia’s natural resources. This approach is particularly effective in the current climate given the different growth drivers fuelling Asia’s economies and the slowdown of growth in China.

It’s an approach honed by Temasek where APAC exposure includes a 27 per cent allocation to Singapore including stakes in many companies listed on the SGX; a 19 per cent allocation to China and 7 per cent allocation to India where Chan says the firm plans to invest more.

“We will increase our focus on India, as it has a large and growing domestic market, in addition to being a beneficiary of supply chain diversification. In the rest of Asia, we are looking to increase our exposure to Southeast Asia and Japan. As an active shareholder, we engage with our portfolio companies on their growth strategies and plans to create shareholder value,” she says.

Published in partnership with Franklin Templeton Investments

Opportunities in APAC: Diverse and dynamic

The list of reasons to invest in APAC is compelling and institutional investors in the region are increasingly tapping the opportunities. Top1000funds.com looks at the different levels of income, volatility, efficiency and ultimately returns across the region.

Interim investment strategy at Ireland’s two new Future Funds will be highly conservative for the first six to nine months. The €8.4 billion Future Ireland Fund, FIF, forecast to grow to €100 billion by 2035, and the €2 billion Infrastructure Climate and Nature Fund, ICNF, have been set up to invest windfall receipts from multinationals like tech and pharmaceuticals attracted to Ireland because of its low corporation tax rate.

For now strategy will comprise low risk allocations to high credit quality Euro-area sovereign and quasi-sovereign bonds with the aim of generating stable and reliable returns with minimal risk. Cash investments must have a credit rating of A- or higher, and a maximum maturity of three years.

Even in this interim stage, the investments will integrate ESG and align with the sustainable investment strategy of sister fund, the €10 billion Strategic Investment Fund, ISIF, adapted to reflect the FIF’s more limited investment universe.

“We will have invested more than €10 billion in the two funds by the end of the year, with that figure expected to rise to €16 billion by the end of 2025,” says Minister of Finance Jack Chambers.

“These two long term savings funds are a vital element of managing the state’s finances in a prudent and responsible manner over the coming decades. In using the proceeds from volatile windfall tax receipts to help us meet the challenges we know our country will face, rather than using them to fund existing day to day expenditure, we are safeguarding and protecting our future.”

Putting the infrastructure in place

Over the next six to nine months the National Treasury Management Agency, NTMA, mandated by the government to manage the investments, will design different and appropriate long-term strategies for both funds.

The NTMA will also put in place the necessary people – recruitment of a director to lead a new business unit is already underway –  skills and supporting infrastructure to manage the funds for the long term.

Required structures include the procurement of a custodian to hold and safeguard the assets and hiring a panel of investment managers to implement aspects of the long-term investment strategy.

A new investment committee will be established by the NTMA to oversee the funds and the number of NTMA board members will be increased by two.

The investment strategies for the FIF and ICNF will be subject to consultation with the Minister for Finance and the Minister for Public Expenditure.

Investing for the future

Despite the forecast growth of the fund, the tax windfall could prove temporary. For each year from 2024 to 2035 the government says it will invest 0.8 per cent of GDP, estimated at between €10-€12 billion a year. But tax receipts are volatile and could dry up.

Ireland’s corporate tax rate is 12.5 per cent, one of the lowest in the world, compared with a global average of 23 per cent, according to the Tax Foundation. The government can access the fund from 2040 for pensions and health spending for an ageing population, plus decarbonisation and digitisation projects.

“New Zealand, Norway, Canada and Australia are among a number of sovereign wealth funds around the world that [the government] has taken into account in planning for the Future Ireland Fund, said a spokesperson at NMTA. “These funds offer very useful guidance,” they said.

However, using elevated tax receipts to set up a sovereign wealth fund is unusual.

The Infrastructure, Climate and Nature Fund’s purpose is to support government expenditure where there is “a significant deterioration in the economic or fiscal position of the state” in the years 2026 to 2030 on designated environmental projects. Up to 22.5 per cent of the assets under management can be used in any given year after 2026.

The two new funds will sit alongside the €10 billion ISIF which has its own mandate to invest with a specific double bottom line to generate return and economic activity in Ireland.

Recent ISIF investments include new port infrastructure in Cork Harbour which will accelerate the deployment of Ireland’s first offshore wind projects, on the east and south coast. Elsewhere ISIF recently committed over €1.5 billion to housing investment in Ireland to act as a catalyst for attracting third-party co-investment hoping to unlock up to €1 billion of wider homebuilding activity.

 

In a dramatic purge in a pension sector renowned for its stable governance, the government in Canada’s western province has removed the entire board of the $160 billion Alberta Investment Management Corporation (AIMCo) and sacked its CEO, citing rising costs and poor returns.

The province’s finance minister conservative Nate Horner, who has been in the position since June 2023, has been appointed the sole director and chair for AIMCo on an interim basis. Before being elected to parliament in 2019 aged in his mid-30s, Horner was a rancher with a cow-calf mix farm operation.

The abrupt departure of AIMCo’s chief investment officer Marlene Puffer earlier in September foreshadowed the most recent turmoil. Puffer joined AIMCo in 2023 from Canada’s railway pension fund CN Investment Division and was part of a new management team put in place to shore up governance at the asset manager after 2020 losses.

“Last week’s wholesale dismissal of AIMCo’s new board and senior management team is difficult to understand,” Keith Ambachtsheer, University of Toronto Rotman School of Management executive in residence and pension system luminary, told Top1000funds.com. “Was there something in the benchmarking process that triggered the Alberta government’s actions? If not, was fraud or major conflicts of interest detected? Also, what makes the government think it can improve on the high quality of the board and executive team it just fired?”

Another industry insider called the sacking “sensational” noting  noone in the wider industry “saw it coming.”

“Most of the major commentators agree that this was unprecedented,” they added.

A new board chair will be appointed within 30 days, Alberta United Conservative Party premier Danielle Smith said in a statement.

Meanwhile, the ousted board included pension veterans like interim chair Ken Kroner and Jim Keohane, the former chief executive of the Healthcare of Ontario Pension Plan.

AIMCo’s chief executive officer, Evan Siddall, in the role since summer 2021, was also fired. Ray Gilmour, deputy minister of executive council, a senior public servant in Alberta, has been appointed interim CEO.

Pressure to invest more at home

One rationale for the board overhaul could be a push by policy makers to get the fund to invest more at home. Alberta’s premier Danielle Smith has made it clear she wants the pension fund to put more capital to work in Alberta.

Some stakeholders have already voiced concerns that this could mean more investment in fossil fuels.

Like Alberta Federation of Labour (AFL) president Gil McGowan who said the billions of dollars of pension assets controlled by AIMCo belong “to workers, not the government,” continuing, “workers with money in pensions need to know they are secure. They remember Danielle Smith musing about using pension funds to prop up oil and gas companies that couldn’t otherwise get financing. They remember Danielle Smith musing about setting up a sovereign wealth fund, but she hasn’t been clear where the money would come from. Albertans are jittery. Rightly so.”

The encroaching politicisation of Canada’s $4.1 trillion Canadian pension industry was front of mind at FIS Toronto earlier this year. Ambachtsheer and the former chief executive of CPP Mark Wiseman warned the founding principles that have made Canadian funds exemplars around the world are under attack.

“The Canadian model is under threat today,” Wiseman said. “When you see trillions of dollars in assets, when you see a government that is running deficits, when you see economic malaise – and we’ve seen this in other jurisdictions –this is the time when pension assets get raided. And I’ll use that term, because that is the risk that I think the Canadian model faces today.”

Wiseman warned that the issue is “much more acute than people think”.

“It will come under a different guise, it’ll be said, ‘you should invest more in Canada’, ‘you should invest more in infrastructure’, ‘we should let people have access to their capital earlier’, or whatever excuse may be the fact of the day.”

Rising costs and struggling returns

AIMCo posted an overall return of 6.9 per cent in 2023 despite challenges in its real estate portfolio. The return, though positive, fell below its benchmark return of 8.7 per cent and policy makers, including Minister Horner, cited rising costs and poor returns as a key rationale for the re-set.

According to a statement from the government, between 2019 to 2023 AIMCo’s third-party management fees increased by 96 per cent; the number of employees jumped by 29 per cent and wage and benefit costs increased by 71 per cent. AIMCo has around 600 employees spread across seven offices in Canada, London, New York and Singapore.

One reason for rising costs has been the push into alternatives. Like the growing $7 billion private credit portfolio where the organization has recently expanded its talent base with new hires in New York and a strategy to push into large cap partnerships and deal flow out of the US.

The investor has also attracted criticism in recent years from some of its member funds. AIMCo manages assets for 17 pension funds and organizations, a more complex job than overseeing one single pool of capital. Speaking at FIS Toronto earlier this year, Puffer explained the complexities of running money over 32 pools of capital and paying attention to each client individually.

“We need to make sure we’re delivering what each client actually needs. Not just at the total portfolio or total fund level,” she said.

For more on this topic see below

The politicisation of investments at US public funds