AIMCo's $174 Million External Fees?
Earlier tonight I spoke with AIMCo's CEO, Leo de Bever. I will come back to that conversation but first let's go over the news.
Nathan Vanderklippe of the Globe and Mail reports that AIMCo head hits back at pay package critics:
The head of Alberta's investment firm
is lashing out at critics who say his multimillion-dollar pay package is more appropriate for a professional hockey player than the man in charge of $70-billion in provincial savings and pensions. The controversy has stoked new calls for controls on provincial executive compensation in Alberta, a province that has been hit hard by the recession and now finds itself with a fast-growing unemployment rate and a nearly $7-billion deficit. Even the board of AIMCo is now looking at ways to change its executive compensation.
Some of the anger has been sparked by the revelation that Leo de Bever, the newly installed chief executive officer of Alberta Investment Management Corp., earned $2.1-million last year, a figure that included $500,000 in long-term incentives - which Mr. de Bever says is currently worth nothing based on the fund's performance - and a $1-million signing bonus. The signing bonus was paid to cover off compensation Mr. de Bever had accrued at his former job.
AIMCo chief investment officer Jai Parihar, who is retiring, earned $2.8-million in salary and severance, plus an additional $362,000 in deferred compensation. Board members are paid $347,000 a year, nearly as much as the firm's chief operating officer.
The numbers, which were released in AIMCo's annual report, galled Opposition politicians, who angrily watched the province's treasured Heritage Fund lose $3-billion in value in the same year AIMCo was brought out from under government management and made into an arm's-length corporation. The Heritage Fund is Alberta's piggybank for oil and gas profits. The fund has since recovered $2-billion of that loss. Still, the compensation struck some as far too rich.
"A million-dollar signing bonus. Where do they think they are? In the NHL?" said Hugh MacDonald, the finance critic for the province's Liberal Party, who said it is time for the government to set standards for executive pay at public agencies. "For the economic times, it's too high. And the track record doesn't warrant that."
But Mr. de Bever defended the compensation as fair - and, in fact, a deal for the province - yesterday. AIMCo paid $174-million in external management fees last year. Mr. de Bever has calculated that it is four times cheaper to have his employees oversee money over hiring outsiders.
Mr. MacDonald, however, believes a sub-million-dollar salary should be suitable for the man in the top job.
"I think we should attract qualified individuals with a salary range of $600,000 to $800,000," he said.
But those who hired Mr. de Bever said small salaries are a bad idea. "You want the top guys doing it. You're not going to get the top guys if you're paying bottom dollar," said Charles Baillie, the former TD Bank head who chairs AIMCo.
He was obviously disappointed with the press coverage and I believe justifiably so. The million dollar signing bonus isn't a big deal because it covered compensation owing to him while he was head of Victorian Fund Management Corporation.
Mr. de Bever added that he didn't take the job at AIMCo for the signing bonus. He wants to build something and he prefers to build an internal team instead of farming it out to external managers who don't deliver.
"I had Brian Gibson (senior vice-president equities, formerly at Ontario Teachers') look into the external managers and he found that over the last 10 years, excess return was zero (when adjusted for fees)."
[Note: Every public pension fund should undertake the same exercise and publicly post the results.]
When you're paying $174 million in fees, you expect returns net of fees, otherwise what's the point? Mr. de Bever is right to be upset. The politicians in Alberta are pulling hissy fits over his compensation and not over the $174 million in external management fees, which he's trying hard to save by building a qualified internal team.
So how did AIMCo perform? Gary Lamphier of the Edmonton Journal reports that AIMCo's fund posts a 10% loss:
Alberta Investment Management Corp.(AIMCo), which manages$69 billion of public-sector financial assets, posted a loss of 10.1 per cent for the year ended March 31.The decline, disclosed in AIMCo's first report since it was spun off by the provincial government as a Crown corporation in early 2008, reflects a dismal year for equity markets worldwide.
AIMCo's balanced funds--which include various public-sector pension and endowment funds, including the $14 billion Alberta Heritage Savings Trust Fund--posted a loss of 18.0 per cent for the year.
The balanced funds hold a mix of equities, money market, fixed income and inflation-sensitive securities, with the equity component topping 50 per cent in many such funds.
AIMCo's government funds -- which include the Sustainability Fund--posted a gain of 3.3 per cent for the 12 months ended March 31. Unlike AIMCo's pension and endowment funds, the government funds are invested almost solely in ultraconservative money market and fixed-income assets.
"It was an environment where things did go wrong in world markets," said AIMCo's CEO, Leo de Bever, in an interview with The Journal.
"When you're losing 10.1 per cent, I suppose you could argue that it's a bad number. But it was a very average performance (during a year) when the average wasn't very good," he said.
"So when you look at the typical pension fund losing about 16 per cent on a calendar year basis, and maybe a bit more on a fiscal year basis through March, I think AIMCo didn't do worse than anybody else, but it didn't do better, either."
Canada's other major public investment funds also reported poor numbers for the period. The CPP Investment Board, with assets of $105.5 billion as of March 31, incurred a loss of 18.6 per cent over the previous 12 months.
The $87.4-billion Ontario Teachers' Pension Plan, and the $44-billion Ontario Municipal Employees Retirement System(OMERS)posted losses of 18 per cent and 15.3 per cent, respectively, for the fiscal year ended Dec. 31, 2008.
After posting huge declines through the first quarter--major U.S. indexes hit 12-year lows in March, and Canada's top equity benchmark sagged to a six-year low --stock markets have surged over the past six months.
Leading indexes are now more than 50 per cent above their lows.
The rebound has helped AIMCo's balanced funds recover a good chunk of last year's losses, de Bever said, although he didn't offer specific figures.
"The bounce back has been much stronger than anyone anticipated, and we've participated in it. We've done slightly better than the market over the last six months, so that's encouraging," he said.
"But whenever you see a situation where the market went down because of a lot of things--including the failure of the financial system, and lack of liquidity--and now it's bouncing back fairly rapidly because liquidity is recovering, in part, you wonder whether it's too much too soon. But I'm delighted that things have gone pretty well over the last six months."
AIMCo's annual report also disclosed compensation levels for the fund manager's senior officers, including de Bever.
His total pay package for 2009 was slightly more than $1.6 million. It included a base salary of$333,000, and other cash benefits and lump sum payments of about $1.1 million.
AIMCo chairman Charles Baillie said the $1.1 million figure mainly reflects an upfront cash payment to help compensate de Bever for income he gave up when he left his previous post in Australia to become CEO of AIMCo in August 2008.
Baillie said de Bever's annual compensation trails that of most other top Canadian pension fund CEOs.
A quick survey bears this out. CPP Investment Board CEO David Denison earned $2.9 million in total compensation for fiscal 2009. Ontario Teachers' Pension Plan CEO Jim Leech earned $2.03 million, and OMERS boss Michael Nobrega was paid $3.75 million.
AIMCo, which was created on Jan. 1, 2008, with a staff of 137, continues to add personnel and beef up its internal resources, said de Bever. It expects to have 250 on its payroll by 2010, when it's scheduled to move into its new headquarters on Jasper Avenue at 108th Street.
AIMCo is also investing in new systems and processes to cut operating costs, he said. By 2012, it aims to reduce these costs by $45 million a year.
Although skeptics question AIMCo's ability to lure top investment talent from Toronto and other major money centres to Edmonton, de Bever said that hasn't been an issue.
"I've found it quite feasible to attract talent to Alberta to build an organization that can compete with the best in Canada. Some people seem to doubt that's possible, that you cannot replicate the CPP or Ontario Teachers. But I'm not exactly trying to replicate them. I'm trying to build something that has the same performance, but we may not get there the same way," he said.
"It's not going to happen overnight. It will take at least four or five years to put in place. When I worked at Ontario Teachers it took nearly 10 years to build all the components that people now perceive as a very successful organization. It's now 10 years later and I'm trying to do the same thing here, but the problems are different and the solutions will be different."
AIMCo's fiscal year ends March 31st and the performance of the balanced funds was on par with that of CPPIB. and their senior officers were much better compensated, especially if you take away the signing bonus.
And let's not forget PSPIB's dismal FY 2009 results where they lost a staggering 23%. PSP's CEO, Gordon Fyfe, received $1.42 million total compensation after delivering those horrible results.
[Note: That's where I disagree with Mr. de Bever. Nancy Everett limited the losses at GM's pension fund by allocating more to bonds at the end of 2006. HOOPP also saw the beauty of bonds in limiting downside risk.]
The reality was that Mr. de Bever landed at his new job during the worst possible time. He didn't even have a chance to evaluate what was working and wasn't working at AIMCo. He is still in the process of ramping up operations.
Carrie Tate of the Financial Post reports that AIMCo eyes private equity deals:
Alberta Investment Management Corp. could announce one or two private equity deals by the end of the year as infrastructure such as sewer lines and transmission grids are in desperate need of makeovers.Leo de Bever, the firm's chief executive who was brought in to restructure the newly formed Crown corporation, said his firm is looking at about half a dozen potential private equity deals.
"Opportunities are walking in the door," he told reporters Tuesday morning.
A couple of the deals under the microscope are in the United States, one to two in the United Kingdom, a "couple" in Canada, and one in Australia, Mr. de Bever said. One or two deals could be unveiled before the end of the year, he said.
The transmission grid in North America, Mr. de Bever said, needs about $100-billion in investment to get it up to speed.
Some of the deals would require an investment of around $100-million, he said. The Edmonton-based firm, which manages about $70-billion for Alberta pensions, endowments, and government funds, may look for partners if necessary.
The new CEO is in the process of restructuring AIMCo, and one of his goals is to ditch the multi-million external management contracts. The deals were set up before AIMCo was spun out of the government, and some come with long-term contracts of up to eight years.
When Mr. de Bever took over the fund, it was paying roughly $175-million per year in external fees. He has shaved that number down to $150-million, and hopes it will drop to about $100-million in three years.
Right now he said he's spending an "inordinate" amount of money to have external mangers make investment decisions on basic asset classes such as equities. However, the long-term contracts are concentrated in the private equity world, Mr. de Bever said.
Mr. de Bever hopes the firm will be reshaped up to his standards in five years. As external managers are dropped, he plans to beef up AIMCo's internal staff. About 190 people now work for AIMCo, and he wants to about 250 people on the payroll.
His goal is for the fund to return between 1% and 2% above the index annually. "It is not insignificant," he said when added up over 10 years.
I then got into the issue of private market benchmarks. I told him that one of my biggest beefs was with pension funds that use bogus benchmarks in private markets.
To my surprise, he agreed with me. "We're risk managers and view the opportunity cost of each investment. This isn't perfect because during the last few months public equities ran up sharply, but over a ten year horizon, we think private equity will outperform."
I went over AIMCo's 2008-2009 Annual Report and sure enough, on page 16, there is a footnote for private equity that reads: "The Private Equity Benchmark composite is comprised of CPI plus 8% and S&P/TSX Composite Index plus 2.5%."
[Note: For real estate, AIMCo uses the ICREIM/IPD Large Institutional All Property Index.]
Mr. de Bever has a PhD in economics so he understands opportunity cost of an investment. But you don't need a PhD in economics to figure out that if you're going to tie up your money for ten years, you'd better make sure you're beating a liquid investment. It's just common sense.
Finally, Deborah Vedlin of the Calgary Herald writes CEO has long road ahead:
AIMCo chief executive Leo de Bever was in full damage control mode on Tuesday as he discussed the arm's-length investment entity's results for 2008-09 and the size of his paycheque.
The fact AIMCo had a lousy year shouldn't surprise anyone. It, like every other pool of capital in the world, was buffeted by the global downturn that was exacerbated by the lack of liquidity in the capital markets.
For his part, de Bever's timing couldn't have been worse because the financial meltdown happened within weeks of him sliding into his new post.
"It was the worst time to manage through," he said, adding the volatility of last year comes around every 40 years.
Making things more challenging was the realization that the organization he was now charged with running was woefully understaffed to meet the stated mandate.
As de Bever puts it, he was flying blind.
For a guy with a PhD in economics from the University of Wisconsin and a professional pedigree that includes stints at the Bank of Canada under then-governor John Crow, the Ontario Teachers' Pension Plan fund, Manulife Financial and most recently Australia's Victorian Funds Management Corp., that statement pretty much sums up the challenge that came with the AIMCo assignment.
The results for the most recent fiscal year, which also show a $3-billion drop in the value of the Heritage Fund, were hurt as much by the downdraft in the equity markets as they were by the fact that there were no currency hedges in place. While things are looking better so far this year--de Bever says they are ahead of the broad TSX composite index--the issue of how to manage currency exposure is still being worked out.
And even though de Bever has made strides with the organization, which oversees $70 billion of Albertans' money, he is still a long way off from where he would like to be.
For one thing, the external money managers are still taking a big bite from his annual budget.
Of the $70 billion under his watch, one-quarter is managed by firms that were paid $175 million last year. More disconcerting is that the returns generated over the past decade have covered expenses, but not much more.
If Albertans want to whinge about misspent dollars, that might be a better place to start.
He's also working hard to make the internal investment allocation process more effective. At the time of his arrival, de Bever notes there were 70 pools of capital governed by 90 different benchmarks.
"There are economies of scale that come from unification . . . I would like to squeeze $25 million in direct costs."
Anyone understanding the world that de Bever operates in is aware of the time it takes to make investment decisions and the challenges of staying away from what he calls investment fads. For every 10 opportunities presented, he said, one might turn into a solid investment.
The other bit to ponder is the constant challenge of managing the government perception of what constitutes an acceptable degree of risk versus where that definition lies in the realm of investment management.
"Governments want to kill risk at every cost, but asset management demands taking risk."
The good news is that there will be some changes forthcoming in the legislation governing AIMCo that will be positive from the perspective of setting the agenda for the Crown corporation. As it stands, the deputy treasurer sits on its board, a situation that compromises the intent of AIMCo truly operating at arm's length from the government.
The other balancing act de Bever is negotiating is what constitutes an appropriate amount of risk, as well as determining how much of the monies should be invested in Alberta.
"The question is, 'To be, or not to be . . . in Alberta.' There are plenty of Alberta-based companies with strong positions in North America and the challenge is weighing diversification versus rate of return," he said in his typically soft-spoken manner.
Because de Bever is optimistic on Alberta's prospects, thanks to its natural resource wealth, he is fully expecting there will be plenty of decision points in the coming months involving Alberta-based companies.
The reason for his optimism comes from a belief that economic growth in China and India will fuel natural resource demand -- "materials and energy"--to Alberta's benefit.
He's even got a positive take on the moribund natural gas business, saying he expects demand will catch up with supply, with consolidation in the sector likely offering some interesting investment opportunities.
"The best solution for cheap natural gas, is cheap natural gas," he said, referring to the massive supply response underway south of the border, where only 712 natural gas rigs are drilling compared with the 1,544 at this time last year.
Even so, de Bever is under no illusions that the coming months won't be without their challenges.
"The sands are shifting quickly," he says, noting the infrastructure plays that once offered strong returns are now over-priced and not the reliable investment vehicles they once were when he was at Ontario Teachers.
But he is cautiously optimistic, influenced perhaps by a book he makes reference to called The Triumph of the Optimists, which details more than a century of investment returns.
By this time next year, de Bever is hoping to be talking about a very different AIMCo, not to mention very different market conditions and investment results.
He's got a long road ahead, optimistic or not.
He does have a long road ahead but I am confident he will succeed. I finished off my conversation with him by discussing the current market environment. I asked him what he thought of the liquidity-driven rally which I wrote about yesterday. In particular, I told him it feels like 1999 all over again.
"The current environment reminds me of 2004. Stocks got hit hard and all of sudden the downturn stopped. I said it was because of the China effect and Wal Mart, but liquidity was strong back then after the Fed cut rates."
"I think the massive stimulus will start showing up. Think about it like a car stuck in snow. The wheels spin but at one point they hit the pavement (and off you go). I see pipeline inflation pressures building down the road. I prefer equities over bonds over the next few years, but don't ask me what stocks will do over the next six months. We can have a pullback but they will recover."
Let me repeat what I stated last August. AIMCo is lucky to have Leo de Bever as their new CEO. The politicians in Alberta should give him a chance to prove himself. I am confident he will succeed in building a great team and add long-term value to the funds he's been entrusted to manage.
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