AIMCo admits it under-performed in 2019, references recent $2.1B loss in annual report

The investment agency that manages the Alberta government's long-term savings fund and tens of billions of dollars from public-sector pensions admits it under-performed in 2019, the same year it came under intense scrutiny following controversial legislation that broadened its portfolio.

"Despite all of AIMCo's asset classes earning strong absolute returns in 2019, our performance fell below benchmark," chief executive officer Kevin Uebelein said in the Crown corporation's annual report, released Thursday afternoon.

"While we have bested the benchmark in 10 of the past 12 years, we acknowledge that in the short term we have not met our clients' expectations."

The report reveals that AIMCo's aggregate net return for its investments was 10.6 per cent — half a per cent lower than its benchmark.

"I think it is important for the investment manager to acknowledge that there are objective, external benchmarks that they failed to meet, and as a consequence the funding position of the pension fund has been lessened," said Bob Ascah, a political scientist and Parkland Institute research fellow who previously served as the director of the Institute for Public Economics.

"Because of the way the market performed over the last year, the safety margin has lessened," he said but added that the pension funds under AIMCo's control are funded "in a long-term, solvent way

"So there aren't any particular issues in the short term for the solvency of the fund."

The report lists the market value of the provincial government's long-term savings fund, the Heritage Savings Trust Fund, at $19.32 billion.

Recent $2.1-billion loss

AIMCo came under fire earlier this year after it lost $2.1 billion on a single investment strategy, prompting an independent review by accounting firm KPMG and allegations from critics that it cannot properly manage the $119 billion it oversees.

The corporation lost about two per cent of the value of its assets with a volatility-based strategy when the COVID-19 pandemic began to pummel the global economy.

In a report summarizing the AIMCo board of directors' review of what led to the $2.1-billion loss, posted quietly online Thursday, the corporation said that by January 2020 its risk management division had called for "increased attention to the very low probability but nonetheless extreme tail risk" of its Volatility Trading Strategy program, also known as VOLTS.

But a review by the corporation found the escalation of that issue to senior management and the board was "incomplete" and did not come soon enough.

"By the time Public Equities began to take action to reduce VOLTS exposure in early March, it was too late," the report said. "Unprecedented and sustained volatility caused by the COVID-19 crisis made it impossible to unwind the positions without considerable loss."

The report said AIMCo's board approved a plan to wind down and then permanently close the program, fixing losses at $2.1 billion.

"The breadth and depth of risk governance controls, collaboration and risk culture, while evolving and improving over the past 2-3 years, are still unsatisfactory," the report concluded.

It said AIMCo will be implementing 10 recommendations from the review related to risk management moving forward.

In the 2019 annual report, the outgoing chair of AIMCo's board acknowledged the loss.

"Although the focus of this report is on 2019, we know that AIMCo, like all investors, did not fare well in the first quarter of 2020, with investment performance suffering from the COVID-19-induced economic recession and financial market decline," Richard Bird said. "In addition, AIMCo experienced unusual losses on one investment strategy, which was particularly vulnerable to an abrupt market decline," he said, adding the board "recognizes the disappointment of our clients with this strategy."

AIMCo confirmed Thursday that the $2.1 billion loss was incurred entirely in 2020 and had no impact on the results contained in the report. A spokesperson for Finance Minister Travis Toews said the minister was at a community event Thursday evening and was unavailable for comment.

Controversial legislation

Over the past year, criticism of AIMCo's performance has increasingly entered the public sphere. In November, the UCP government passed a controversial omnibus bill that mandated the corporation manage the investments of three major pension plans for police officers, municipal workers, health-care workers, and many others.

The legislation also required the Alberta Teachers' Retirement Fund — an independent corporation that manages $18 billion of assets on behalf of more than 80,000 members — to begin using AIMCo as an investment manager by the end of 2021. It further prohibited any public-sector pension plan from withdrawing from AIMCo as an investment manager. The Alberta Teachers' Association (ATA) called the move a "hijacking" and its president, Jason Schilling, said the government's decision to do so without first consulting the association was "extremely disrespectful."

While the government said the shift is expected to provide maximum returns, the ATA worried AIMCo would not net the same level of returns the Alberta Teachers' Retirement Fund had previously. In a statement sent late Thursday, Schilling said AIMCo's performance hasn't quelled the ATA's concerns.

"AIMCo has again failed to meet their benchmarks," Schilling said. "Alberta Teachers' Retirement Fund investment returns consistently outperform AIMCo and that is who teachers want their retirement savings invested with. This result further underscores teacher concerns with the pension investment takeover."

Schilling said the separate report on AIMCo's volatility-based strategy pointed to the need for a culture change.

"AIMCo needs to get its house in order and should win the confidence of clients instead of having the government force clients to invest with them," said Schilling.

Ascah said it is concerning that the government has given AIMCo a "monopoly" to manage these pension funds.

"Because when investment managers know that they could lose the contract, they are much more focused on meeting the needs of the customers," he said. "So that goes away."

In June, Opposition NDP MLA Christina Gray introduced a private members' bill that would reverse the pension changes in the omnibus bill, which affects the pensions of more than 400,000 Albertans.

But on Monday, an all-party committee dominated by the UCP voted against allowing MLAs to debate the bill. Members of the legislature will decide next week whether Gray's bill will proceed.

AIMCo's annual report also shows Uebelein, its chief executive officer, received more than $2.8 million in total compensation in 2019, the vast majority of which came from performance bonuses. Chief investment officer Dale MacMaster earned nearly $2.95 million.