Alberta Investment Management Corp.’s chief investment officer is cautiously optimistic about the rest of 2024 after reporting mixed results in the first half of the year, anticipating a potential boost to stock and bond markets if central banks follow through on expected cuts to interest rates.
Monetary policy decisions are “the big variable” for markets in the coming months, according to Marlene Puffer, who joined AIMCo as CIO last year. The chair of the U.S. Federal Reserve, Jerome Powell, said last week that “the time has come” for a shift in the central bank’s policy, and markets are now pricing in a September rate cut, with more to come.
If the Fed follows through, “then we will have some tailwinds for the economy,” Ms. Puffer said. “But we have a lot of geopolitical uncertainty, a lot of variables that could come in to shake that up.”
AIMCo reported a 5.4 per cent return across its funds in the first half of 2024, according to a midyear update the pension fund manager released on Tuesday. Its balanced fund, which reflects a typical mix of client assets, earned 5.6 per cent over the same six-month span.
Over 10 years, the balanced fund has an average annual investment gain of 7.2 per cent, which equals a $63.3-billion net investment return.
AIMCo invests on behalf of 17 pension, endowment, insurance and government clients in Alberta. It now has nearly $169-billion in assets, up from $161-billion at the start of the year.
“I’m pleased enough with our performance year-to-date,” Ms. Puffer said.
The midyear update from AIMCo does not provide a detailed breakdown of performance for each asset class in its investment portfolio. But the publicly traded stocks it owns, which make up about 37 per cent of its investments, delivered the strongest investment gains in the first half of the year. “That has really been the tailwind for us,” Ms. Puffer said.
AIMCo also recorded gains from investments in infrastructure, renewable resources, mortgages, private debt and private equity.
Though stock-market gains have been fuelled for some time by a collection of large U.S. technology giants – a group labelled the Magnificent Seven that includes Apple Inc., Amazon.com Inc., electric vehicle maker Tesla Inc. and chip manufacturer Nvidia Corp. – Ms. Puffer cited a period in June when small-cap stocks outperformed their larger peers as a potential sign that the broader market is starting to reassert itself.
“It remains to be seen whether that trend is going to truly continue, but it took the wind out of the Magnificent Seven′s sails somewhat,” she said.
Returns from private assets have been up and down, with real estate continuing to be a sore spot. Ms. Puffer said some large real estate assets are starting to trade in the market, but in the more distressed pockets of the office and retail sectors, property values are still murky.
By contrast, AIMCo is still reaping strong gains from its private debt and loan business, which invests in a burgeoning market for loans to privately owned businesses. That market has been getting more crowded and competitive, and there have been modest increases in defaults as more companies buckle under the pressure of a slowing economy and high borrowing costs.
Even so, “we still feel very good about the space,” Ms. Puffer said. “We’re not chasing deals. We’re not sacrificing quality even as we still have capital to deploy.”
Paula Sambo of Bloomberg also reports AIMCo sees boom in private equity secondary deals:
Smaller investors are beginning to test the secondary market for private equity holdings, providing greater stability to pricing, according to Alberta’s public pension manager.
“We’re starting to see the evolution of that market,” Marlene Puffer, chief investment officer at Alberta Investment Management Corp. (AIMCo), said in an interview. “It’s not just sellers trying to take things off their books, and bottom feeders taking advantage of it. We’re starting to see a more balanced demand and supply in the secondary market.”
As a result, “discounts are starting to stabilize,” Puffer said.
The Alberta firm, known as AIMCo, handles about $169 billion for a variety of public-sector accounts in the province. More than a third of that portfolio is in private markets, including infrastructure, real estate and private equity.
AIMCo has been “quite pleased” with how the secondaries market is working for them, Puffer said, but declined to speak about specific transactions.
Investment bank PJT Partners Inc. expects that secondaries deal volume may reach US$145 billion this year, which would represent an all-time high, according to a recent report. The first half of the year saw a 40 per cent increase compared to the same period in 2023.
Large-cap credit
Meanwhile, AIMCo continues to push deeper into private credit — “a real steady contributor to our performance, as we are able to invest in that asset class in a way that kind of transcends the cycle,” Puffer said.
AIMCo is already active in middle-market private credit. Now it’s focusing on getting into more larger-cap U.S. deals, she said.
Overall, AIMCo earned a 5.4 per cent return in the first half of the year, led by gains in equities, the firm said in a statement Tuesday.
“Results are not too far below our benchmark. It’s been a challenging year,” Puffer said. “Our public markets are, generally speaking, above their benchmarks, while it’s the private assets that are lagging behind.”
Real estate continues to be a difficult sector, she said, though AIMCo sees pockets of opportunity in areas such as multifamily residential and grocery-anchored retail properties. Data centres are also a bright spot.
But there’s more activity now in the office market, allowing the pension fund to trim some Canadian office exposure. “We’re able to make the portfolio adjustments,” she said. “There’s starting to be some stabilization and some transactions going on.”
Earlier today, AIMCo released its mid-year results stating this:
At the halfway mark of 2024, AIMCo’s Balanced Fund earned a 10-year annualized net investment return of 7.2% and a 4-year annualized net investment return of 8.0% for clients. For the six-month period ending June 30, 2024, the Balanced Fund’s net investment return was 5.6%.
The full report is available here and I embedded it below:
Now, as I keep telling everyone, I cover mid-year results only to catch up with pension representatives but really these are pensions and what counts is long-term performance.
And in AIMCo's case, their Balanced Fund which is most representative of their full capabilities earned a 10-year annualized net investment return of 7.2% and a 4-year annualized net investment return of 8.0% for clients.
For the six-month period ending June 30, 2024, the Balanced Fund’s net investment return was 5.6% mostly owing to the strength in public markets.
These are solid results, in line with their peers but because AIMCo has more allocated to public markets relative to larger peers, it benefits more from the tailwinds supporting public markets.
Discussion with AIMCo CIO Marlene Puffer on mid-year results
Earlier today, I caught up with AIMCo CIO Marlene Puffer to go over mid-year results and more.
I want to thank her for taking some time to talk to me and also thank Carolyn Quick for setting up the teams meeting.
I began by asking Marlene how their summer was in Edmonton because she left Montreal to join AIMCo and I told her it's been a wet and miserable August here (most rain ever recorded which caused widespread flooding).
Marlene told me they had a beautiful summer for the most part in Edmonton with "some hot spells and smoky air". She has been enjoying some festivals there and will head off to Banff for the long weekend (lucky her, never been, only went to Calgary once and loved it).
I also asked her how Evan Siddall is doing after undergoing multilevel spinal fusion surgery.
I was happy to hear he's doing well and back at work (I did my L3-L4 spinal fusion surgery in late February and it's been up and down but I feel like I'm back at 75% now and measure my progress at the end of each month).
Anyway, glad Evan is feeling better and I asked Marlene to give me a broad overview of their mid-year results:
The Balanced Fund which is most indicative of our typical clients generated 5.6% for the half-year ending June 30th. The Total Fund is a little bit lower at 5.4%.
That compares with the long-term annualized rate-of-return over the last 10 years of 7.2% (for Balanced Fund) so it's reasonably within the range but we have the rest of the year to go yet and hopefully we will continue to enhance those returns through year-end.
As you know, we had quite a bumpy ride in Public Markets in some ways this year. In particular, the fixed income markets have been challenged to anticipate what's really going to happen in monetary policy. And Private Markets have been struggling adjusting to what has been a higher rate base and we will have to wait and see until interest rates normalize further until we see a pickup in activity there.
Our Public Markets did well. We have a big allocation to Public Equities and that was the biggest driver of our performance for the front end of the year. The Fixed Income portfolio has also performed well and our teams in some of the fixed income markets have performed extremely well. Our mortgage book and private debt book have been strong drivers as have our absolute return activities.
I interjected and asked if in Public Equities AIMCo has a fundamental, value-based approach or a mixture of approaches.
Marlene replied:
We have a very well-diversified portfolio in Public Equities that includes a variety of global strategies and also included to some degree portable alpha activities (ie. external hedge funds) and it's that diversification that continues to serve our clients well.
I told her in Fixed Income as she noted Mortgages performed well as refinancing activity picked up and Private Debt also did well and has grown to be an important portfolio at AIMCo.
Marlene replied:
We are growing the Private Debt portfolio and that portfolio is the reason for us opening the New York office earlier this year. We have a team in Private Debt alone that spans New York, London, Toronto and Edmonton. That team works in a globally synchronized way and a lot of the focus is currently on deeper relationships with strategic partners and in particular scaling that business in the large-cap US market.
She told me they had grown that business in the mid-cap space but given that they have to scale it more, they're shifting their focus on the large cap space.
Marlene told me Peter Shen in the London office is the head of that asset class and David Scudellari who came from PSP and joined AIMCo around the same time she joined is leading up the strategic partnerships for international investing and is heading up their New York office (he's originally from there) and they're a key driver of the expansion of the Private Debt portfolio.
I then shifted my attention to Real Estate and asked her how AIMCo is doing in offices in Canada which continues to be a challenging area and where the Fund is more exposed relative to most of its peers (except Ontario Teachers).
Marlene replied:
We have a diversified Real Estate portfolio where we do have a large Canadian portfolio and we have a large foreign real real estate portfolio in addition.
We been looking for opportunities as we've been putting new capital to work in some of the more niche areas like grocery anchored retail, especially in multifamily and in particular multifamily rental property. We've been doing that domestically and in the US and Europe, so that's where we've been focusing on in terms of new capital.
Clearly the domestic office market has faced some challenges but we started to see some buildings starting to change hands and I think there's some stability trying to find its way into that market.
In Private Equity, I noted she said they're waiting for rates to go down so transactional activity picks up.
Marlene responded:
That's right, it's a continuing trend from last year but there's some pickup in activity in the secondaries market. Our allocation to Private Equity is a little bit more modest than some of our peers and we continue to focus on strategic relationships there which is a big pillar of our overall strategy. Our focus on strategic relationships In Private Equity and certain sectors is also allowing for a stronger relationship between our PE team and Private Debt team because those areas are intertwined.
I noted AIMCo opened its Singapore office almost a year ago and I asked her if the focus in Private Markets at AIMCo will be much more in that region of the world.
She replied:
Part of our overall strategy in addition to deeper strategic partnerships in global diversification with a focus on Asia. That focus is opportunistic and primarily we are looking at infrastructure. Our staff there includes an infrastructure deal team and also Kevin Bong who joined a year ago and is head of our Singapore office and is Chief Investment Strategist and head of our total portfolio strategy at AIMCo.
Our primary focus there is in the infrastructure space and we've done some interesting deal sin that space again with partnerships and co-investment opportunity. We're looking at some of the other private market asset classes in Asia in a very careful, slow-moving opportunistic basis.
I then shifted my attention to other activities at AIMCo where I noted a strong focus on DEI and implementing the right culture. I asked her what they've been doing to bolster the right culture there.
Marlene responded:
We have a very strong culture at AIMCo and that culture as you say has been bolstered by a number of activities. We have a wonderful program where students come in and rotate through various departments. There was a press release from earlier this year where we were voted as a top employer in Alberta and Canada for young people.
Everything from student programs and rotation programs to mid-level professional program to help develop their leadership and provide them with some interesting opportunities that are cross-asset class.
A lot of focus on our senior leadership team on building leadership skill in alignment with our values.
The focus goes on in terms of building the right culture and Evan has been a tremendous culture carrier and really focuses on the important stuff in terms of having the right culture. he and I are really very much aligned on what constitutes a strong culture as is the whole executive team. We spend a lot of time and effort on that.
We just had for example not too long ago our get together which is "AIM converge local" where we brought our global teams together for a full day of culture sharing and focused different aspects of DEI. I was working on indigenous cultural awareness and we are working on that along with all the other aspects of DEI which I'm quite passionate about.
She also noted their CARE program where they focus on helping AIMCo employees with visible and invisible disabilities and we both agreed this is a great program and we both love the acronym CARE.
In fact, I noted AIMCo's peers can learn a lot of valuable insights on bolstering their culture by carefully studying what AIMCo is doing on DEI across all levels of its organization.
Importantly, at AIMCo, they don't just talk the talk on DEI, they walk the walk and I say this as an expert who knows how to discern fluff from real meaningful engagement in all aspects of DEI.
Marlene told me there is an article coming out on CFA Analyst where she shares her thoughts on neurodivergence and how to support neurodivergent employees.
Alright to conclude, I asked Marlene about the biggest risks she sees over the next six months to a year and whether they are worried about a global economic recession:
I think our overall view is that the Fed is going to engineer a reasonably soft landing. That came across last week where inflation and labour market activity are coming into more of a balance allowing them to add a little bit of stimulate more to fend off any recessionary risk in the US.
I think we're in pretty good shape with some cautious optimism here but that's not to say that fixed income markets and equity markets are pricing in exactly the right future. It remains to be seen on whether the fed executes exactly what is priced in to fixed income so we may see some volatility as the path becomes clearer. in equity markets we may see some difference in what's driving the return. It's been so concentrated in Mag-Seven and we're starting to see that may be breaking down.
I hope they're right on the Fed engineering a soft landing because my fear is we are in for a long and hard landing given the Fed kept rates to restrictive for far too long.
On Mag-Seven leadership, I agree, it's already breaking down and we shall see what happens tomorrow after the bell when Nvidia reports earnings.
Alright, let me wrap it up there and thank Marlene once again for a stimulating conversation.
Below, AIMCo Chief Investment Officer Marlene Puffer speaks to AIMCo’s 2023 Balanced Fund net investment return, which totaled 8.0% or $8.9 billion for the year ending December 31, 2023.