Leo de Bever, CEO of the C$70 billion (US$65.2 billion) Alberta Investment Management Corp., Edmonton, told participants at a financial analysts conference Thursday that pension funds and other institutional investors need to get out of their comfort zones to take advantage of “the next frontier” of long-term investing — finding return “between the cracks” of asset silos.As Leo prepares to leave AIMCo, he is once again touting unconventional investments and why they have worked well for them. And he is right, there are bubbles forming in credit markets, but I'm far from convinced that higher rates will hurt pensions or that rates will rise anytime soon, especially if global deflation takes hold.
Speaking at the CFA Institute conference in Chicago, Mr. de Bever talked about AIMCO’s “big themes” in long-term investments — energy, food, materials and robotic technologies — saying those industries are in a similar position to where infrastructure, timberland and commodities were to pension funds in the 1990s.
“What was new in the 1990s is conventional today,” Mr. de Bever said. “Extraordinary results are not possible using ordinary means.”
He pointed to the C$17.5 billion Alberta Heritage Savings Trust Fund, a sovereign wealth fund from provincial oil and gas revenue managed by AIMCO, that’s investing C$500 million in Alberta-based technology with a 10- to 15-year time horizon.
“There’s no nice, neat recipe” for finding such investments, Mr. de Bever said. “These things often come out of thin air, where people are looking to solve problems before they happen. For example, it’s less expensive to find a solution for potential gas line leaks than it is to clean up a gas leak.”
He pointed to the difficulty in getting pension trustees on board with such investments. “Is it easy to find these? No. Internal resistance is pretty strong. People have a tendency to work in silos.” But, he added, “if a strategy makes your board comfortable, it needs updating.”
AIMCO has 20% to 25% of its assets in what Mr. de Bever called “non-traditional asset classes,” which he said provides 30% of the overall portfolio’s risk. “But if these innovative themes pan out, a small investment now could earn AIMCO more in 10 years than we’ve returned overall in six years.
“Unusual investments can never be the dominant part of your portfolio,” he said. “They have higher risks, but it’s a smart way to make risk because the expected return should be much higher than other investments. If it’s not, you shouldn’t be doing it.”
Mr. de Bever called on pension fund investors to avoid the mainstream economic expectations that point toward trouble ahead. “The idea of a mediocre future is unwarranted,” he said. “If you don’t like that future, imagine a better one and try to make it happen.”
Among more traditional investments, Mr. de Bever said the future risk/return of stocks will be better than bonds over the next 10 years, and he warned against loading up on fixed income. His clients “are coming around to the notion that maybe we’re right on this,” he said. “Here on in (for bonds), I think it’s going to be worse ... There are two ways to go, terrible or really terrible.”
That also won’t bode well for plans looking to employ liability-driven investment strategies, Mr. de Bever added. “Derisking strategies like LDI are OK with high rates. It’s much harder to do now,” he said. “LDI has probably seen better days.”
Below, Leo de Bever discusses taking the long view on pensions. Take the time to listen to this presentation, it's excellent.