Can Alberta Put Its Oil Money to Work?

Pension fund manager Leo de Bever wants better results from the province’s public assets.


Leo de Bever has always regarded risk as an investor’s most important resource. When the Dutch-born economist ran the research and economics department at the Ontario Teachers’ Pension Plan, from 1994 to 2004, he put in place a system that stressed return on risk and set limits on overall portfolio exposure. That approach led the province to make pioneering investments in infrastructure and commodities and helped cement Ontario Teachers’ reputation as one of the world’s most innovative pension fund investors.

Now de Bever is hoping to achieve similar results at Alberta Investment Management Corp., which oversees C$68 billion ($59 billion) for an assortment of public pension and endowment funds, including the Alberta Heritage Savings Trust Fund, the C$14.5 billion sovereign wealth fund fueled by the province’s oil and gas revenue. Until last year these funds were run from the bureaucratic bowels of Alberta’s Ministry of Finance and Enterprise in Edmonton and achieved solid if unspectacular returns. Seeking to improve results, the province created Aimco in January 2008 to operate at arm’s length from the government. De Bever was appointed chief executive officer in April 2008 and began work last August, with free rein to shake up Aimco’s investment strategy.

The 61-year-old fund manager is wasting little time in making the most of his freedom. He is ramping up the firm’s equity exposure by as much as 10 percentage points and making some sizable direct investments in big companies. He believes Aimco can realize outsize returns by making a few dozen concentrated bets on stocks about which it has strong convictions. He expects to be able to generate a consistent 100 basis points more than passive benchmarks return.

“My board thinks I’m a bit of a wuss for arguing that that’s not a layup,” de Bever tells Institutional Investor. “But it’s an aggressive target for where we are as an organization. I only take risks that make sense.” He predicts Aimco can reach these performance goals in three to four years.

De Bever faces challenges on multiple fronts in his bid to improve Alberta’s returns. He must extricate Aimco more fully from the provincial government and transform a conservative culture, which historically has outsourced much of its money management, into one that embraces calculated risks. He also has to sort out a complex and inefficient structure involving 12 clients that have unique asset mixes and often conflicting views on basic issues, such as the advantages of active versus passive management.

Perhaps most daunting, he has to improve performance in a period of extreme volatility and uncertainty. The global financial crisis contributed to a 16 percent decline in Aimco’s assets under management; that was better than the 18.4 percent drop, on average, experienced by large Canadian pension plans, according to London-based RBC Dexia Investor Services, but significant all the same. (Alberta benefited from having a large unhedged foreign exposure, which enabled it to take advantage of the decline in the Canadian dollar.) A sharp fall in natural-gas prices has also slowed the Alberta economy and led the province to forecast a C$4.7 billion budget deficit in the year ending next March. That deficit is likely to force the province to draw on its Sustainability Fund, a pool of largely short-term Canadian government securities that represents one third of the assets in Aimco’s C$29 billion Specialty Fund.

Aimco also manages C$39 billion in its Balanced Fund, which currently allocates 47 percent of its assets to equities, 27 percent to bonds, 19 percent to inflation-sensitive areas such as infrastructure and real estate, and 7 percent to short-term money market instruments. To boost returns, de Bever plans to decrease the fund’s bond allocation and increase its equity exposure over the next nine months.

Equity prices are likely to remain volatile, he says, but historical trends suggest that returns will be strong over the next decade. “If you put a dollar in the equity market today, in my mind it’s almost a foregone conclusion that in ten years it will have doubled,” he says.

To oversee the stock portion of Aimco’s portfolio, de Bever hired two former colleagues from his days at Ontario Teachers’, Brian Gibson and George Engman, as senior vice presidents in charge of equities and private equities, respectively. Gibson spent eight years at Ontario Teachers’ and presided over the portfolio’s expansion from C$5 billion to C$33 billion. Engman ran private equities at the fund from 1991 to 1996 and most recently was in charge of private equity investing at Integrated Asset Management Corp. in Toronto. Both men joined Aimco in November.

De Bever began implementing his new equity strategy with two big transactions this spring. In its largest deal as of that time, Aimco invested C$280 million in Precision Drilling Trust. The Calgary outfit, Canada’s largest oil field services provider, last year borrowed C$235 million at 17 percent to acquire Houston-based rival Grey Wolf. Before it could refinance its debt, oil prices plummeted, and Precision lost its investment-grade credit rating.

Aimco stepped in on April 20, buying about 15 percent of the company for C$105 million, or C$3 a share — a 34 percent discount to the market price at that time. The Alberta fund also lent Precision C$175 million at 10 percent for eight years and received warrants to buy an additional 15 million shares, or about 5 percent of the outfit, at C$3.22 a share. With its financing secure and oil prices rebounding, Precision saw its stock soar to C$6.85 by mid-June.

In May Aimco agreed to invest C$220 million in Viterra, Canada’s largest grain processor, based in Regina, Saskatchewan. The deal, which is pending shareholder approval but is expected to close later this year, would give Aimco a stake of about 10 percent and help finance Viterra’s C$1.2 billion acquisition of leading Australia agribusiness ABB Grain.

The Precision and Viterra deals reflect de Bever’s expectation that prices for materials and energy will rise as the global economy recovers, beginning later this year and gaining momentum in 2010. The Aimco CEO believes that China, India and other developing nations with significant savings will lead the rebound.

De Bever is authorized to increase equity exposure by as much as 10 percentage points, but he still needs to gain a consensus on how risk will be distributed within the asset class. Aimco now has about 1,500 actively managed equity positions. De Bever sees this as inefficient, a sort of closet index fund. He wants to move toward a structure similar to one used at Ontario Teachers’, in which most of the holdings are indexed, except for a small number of high-conviction investments.

Aimco now has about 15 concentrated positions; Precision and Viterra, once that deal is completed, will be by far the largest. Over the next 12 months, de Bever would like to boost this group to 45 or 50 names.

He has some client spadework to do first, however. Virendra Gupta, executive director of the Edmonton-based Universities Academic Pension Plan, which has about C$2 billion with Aimco, says his board leans toward passive investing. “Leo’s not a magician,” he says. “We don’t believe in magicians. We want to understand what they want to do, their logic, their analytics.”

By contrast, the Local Authorities Pension Plan, which invests some C$13 billion with Aimco on behalf of cities and technical colleges in Alberta, has long favored active management. But the plan is negotiating with Aimco over which benchmarks should be used to measure performance and determine incentive compensation.

The benchmarking issue is important because de Bever sees bonuses as essential to his strategy. His goal is to reward investment professionals for risk-adjusted performance over several years and encourage broader strategic thinking by basing senior-level bonuses on total fund performance. “Philosophically, we’re on really quite similar ground, but when it gets down to the details, there are some rub points,” says Ron Liteplo, CEO of the Local Authorities plan. Aimco resists using MSCI’s all-country world investable market index — which Liteplo favors — because it includes small- and midcap stocks, which de Bever considers impractical for a large fund like his to invest in.

De Bever is a straight-shooting academic economist who has been an investment professional for more than three decades. He earned a Ph.D. from the University of Wisconsin in 1976, having joined the Bank of Canada a year earlier; there he became chief forecaster and redesiged the bank’s model of the Canadian economy. In 1980, de Bever moved to Chase Econometrics Canada, where he served as chief economist before taking a similar position in 1986 at Crown Life Insurance Co., which today is part of the Great-West Lifeco group of companies. From 1991 to 1994, he worked at Nomura Securities Canada as chief economist and bond strategist.

It was at Ontario Teachers’, where spent the next decade, that de Bever made his name by applying econometrics to pension risk management. As senior vice president of research and economics, he was a key adviser to CIO Robert Bertram. De Bever introduced risk budgeting, a tool that pointed to lucrative opportunities in infrastructure and commodities. Those areas, together with real-return bonds and currencies, which de Bever also ran, represented about one sixth of Ontario Teachers’ C$85 billion in assets by 2004.

De Bever, though, wanted to run his own show. So in 2004 he joined Toronto-based Manulife Financial Corp., the world’s fourth-largest life insurer by market capitalization, to run its C$90 billion portfolio. In 2006 he moved to Melbourne, Australia, to become CIO of Victorian Funds Management Corp. He tried to free the then–A$37 billion ($28 billion) firm from political influences, but his hopes were quickly dashed. Although he had the support of the state premier, John Brumby, the civil service resisted. When Aimco called, de Bever jumped at the chance to return to Canada.

Political support for an independent Aimco is strong. “Three years ago [then-] Finance minister Shirley McClellan looked around the cabinet and asked if anybody here wouldn’t like to make another $450 million a year,” Alberta’s current Finance minister, Iris Evans, explains. “She drove home the point that when you have the restrictions of a political climate, there would be perhaps less opportunity to look at some of the global investing that Aimco could do. My job is to support them and not get in their face.”

Nonetheless, Aimco remains tied to the Ministry of Finance in practice and in public perception. Although Aimco will move into a separate structure next year, the firm and the ministry now operate out of the same building and share computer and auditing systems. One of the members of Aimco’s board of directors is Alberta’s Deputy Minister of Finance, Robert Bhatia; the other nine members are appointed by the government, albeit from recommendations made by a committee comprised of the board chairman, the deputy minister of Finance and an unaffiliated individual. Most important, the ministry retains budgetary control, although Aimco expects to have full authority next year. “There’s a lot of work to do to make sure we are independent, not just theoretically but in fact,” says board chairman A. Charles Baillie, former CEO and chairman of TD Bank Financial Group.

These connections, plus a history of investments in the 1980s and 1990s that were aimed at economic development, help to explain the public uproar that followed Aimco’s investment in Precision Drilling. Opposition Liberal politicians in Parliament accused Aimco of bailing out the company to save well-paid jobs in Alberta and faulted it for distorting the province’s oil-and-gas economy. De Bever says the investment was not politically motivated, adding that the Finance minister was notified only after the board had approved the deal. Still, he concedes that there’s a downside to having a government representative on the board. “It’s becoming problematic, because the government can’t say they were totally out of the loop,” he explains. “I have to talk about this in a very down-to-earth way to make sure that people understand that we don’t have any political objectives. Our only objective is to make money.”