AIMCo’s next move: As Alberta contemplates CPP exit, investment manager focuses on rebuilding trust

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As the onset of the COVID-19 pandemic sent markets crashing last March, board members of the Alberta Investment Management Corporation realized they had a problem on their hands.

A Crown corporation that manages nearly $120 billion in assets for pension, endowment and government funds, AIMCo had been pursuing a derivative strategy known as VOLTS that aimed to earn premiums from bets on volatility across multiple global equity markets.

It was one of dozens of “value-added” strategies managed internally by AIMCo’s public equities team, but when markets went haywire with a level of volatility last seen on 1987’s Black Monday, the risky strategy quickly magnified losses.

The board approved a decision to wind down the trades and lock in a $2.1-billion loss to avoid further carnage. It was an embarrassing failure of risk management for a fund that size — the loss erased about one-sixth of the investment returns generated by AIMCo for all of 2019 — and sparked questions of oversight, risk-taking and most of all trust with the more than 30 client organizations that park their money there.

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“There’s no doubt that the VOLTS situation shook that relationship,” AIMCo board chair Mark Wiseman said in a recent exclusive interview with the Financial Post. “Our job is to regain the confidence of the clients in that relationship and I think it’s something we have to invest very heavily in.”

Wiseman, who was appointed to lead the board in July, after a review of the VOLTS fiasco landed, knows there is still a lot of work to be done and that the stakes are high: Alberta Premier Jason Kenney is actively considering withdrawing Albertans from the national Canada Pension Plan and to divert the savings to AIMCo, something that would boost its significance in the province.

Wiseman would not comment on the CPP decision, expected this spring, but he said AIMCo’s unique set-up requires a strong partnership with all clients, which range from the pension plans for Alberta judges, teachers, government, and university employees, to the province’s Heritage Savings Trust.

“It only works well when there’s a high degree of trust and collaboration between the client and the asset manager,” Wiseman said, in part because AIMCo works with each to determine an optimal asset mix given their obligations and risk tolerance, before investing accordingly.

Unlike other types of money management, however, most AIMCo clients can’t just take their money elsewhere if they are unhappy, a point made clear last year when Kenney’s United Conservative Party unilaterally moved a number of public sector investment plans including the Alberta Teachers Retirement Fund under AIMCo management.

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“In most cases they can’t (opt out),” Wiseman said. “The rules are different (for each client), but for the most part they cannot, and that puts, in my view, a tremendous amount of responsibility on AIMCo to communicate, to be transparent, to be collaborative and to invest heavily in that relationship with our clients.”

Under Wiseman, a search is underway for a new CEO after current CEO Kevin Uebelein announced he would depart by June, before his contract expires.

In addition, a new position has been created to manage client needs and report directly to the CEO.

Another step taken in the wake of the volatility losses is the formation of a four-member “enterprise” risk committee, created last month to monitor and manage risks to the organization that are not strictly financial — including reputation. Wiseman is also a member as a result of his role as chair of the Crown corporation.

“That (committee) will be charged with overseeing the governance of enterprise risk for the institution — everything from operating risk, (to) reputation risk, (to) systems risk,” he said, adding that these were monitored but not in a coordinated or consolidated way. “We’ve just put it into a single committee, so it doesn’t get lost.”

Keith Ambachtsheer, a veteran pension consultant, said that with AIMCo at such a critical juncture, someone with Wiseman’s experience was a necessity to manage a range of governance, investing and political concerns.

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At 51, Wiseman has been in the senior ranks of large institutional asset managers including the Ontario Teachers’ Pension Plan Board and New York-based Blackrock Inc.

He also spent four years at the helm of the Canada Pension Plan Investment Board, the country’s largest pension management organization — and, like AIMCo, a Crown corporation that operates at arms-length from government. That experience from 2012 until 2016 will undoubtedly help AIMCo should Kenney decide to extract Albertans’ share of CPP and create a home-grown version managed by the provincial asset manager.

While Wiseman’s career has not been without controversy — he joined AIMCo six months after stepping down from his position at Blackrock, the world’s largest asset manager, after failing to disclose he was in a relationship with a colleague as required by company policy — his investment management credentials may be unmatched in Canada.

“He will have strong views on what AIMCo needs to do to regain the trust of its clients,” Ambachtsheer said, adding that Wiseman would also be a good resource to help determine what attributes are needed in the Alberta asset manager’s next CEO.

Malcolm Hamilton, an actuary and former partner at pension consultant Mercer who specialized in the design and funding of public and private pension plans, said he expects AIMCo will ultimately recover from the damage done by the volatility strategy.

“One bad year or one bad mistake is never fatal for a public sector pension plan,” Hamilton said. “You acknowledge your mistake, learn from it … then you move on.”

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But not everyone is happy.

A private members’ bill introduced by Alberta’s NDP finance critic in December sought to get AIMCo clients a seat at the boardroom table, and better access to the investment manager’s governance and how investment decisions are made.

Defeated along party lines at the committee stage last week, the bill sought to boost the 11-member board to 15, with four representatives from AIMCo’s public sector clients. A statement posted by the NDP Caucus said another purpose of the bill was to remove the ability of the province’s finance minister to issue investment directives to AIMCo.

One bad year or one bad mistake is never fatal for a public sector pension plan

Malcolm Hamilton

And that is only part of a far-more politically charged environment Wiseman finds himself in.

There is also discontent at the Alberta Federation of Labour, which has accused the UCP government of beefing up AIMCo with funds — from the pensions pushed under its umbrella to the potential standalone Alberta replacement for CPP — with the intent of pressuring the investment manager to prop up the oil-and-gas industry as global investors turn to more environmentally friendly alternatives.

Wiseman acknowledged that investment managers benefit from size and scale, but he said AIMCo already has those attributes as one of Canada’s largest institutional investment managers.

“My view for AIMCo is that very simply, Albertans — regardless of what assets are managed by AIMCo, whether that’s expanded or not — deserve a world class public asset manager for the province that can benefit from all the scale and scope benefits that are set forth in the Canadian model,” he said.

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A large part of that model, established at institutional investment managers such as CPPIB and the Ontario Teachers’ Pension Plan, is independent governance, meaning decisions are free from political interference and left entirely to the board, he said.

AIMCo’s relationship with Alberta’s government, too, has been established at arms-length, and while the terms could be tweaked to reinforce independence — not just arms-length but “orangutan arms” as Wiseman put it — the investment manager has made all decisions independently since he joined the board.

That includes implementing “changes to the culture” and other recommendations called for by outside experts that assessed what went wrong with the VOLTS volatility strategy that was first undertaken in 2013 and got increasingly risky after 2018, with a “legacy” risk-management system that didn’t spot the problem until it was too late.

I believe in strong, independent public asset management

Mark Wiseman

“I can tell you unequivocally, in my eight months as chair, there has been zero interference, attempt of interference at my level, or as far as I know at the level of management at AIMCo,” Wiseman said. “And more to the point, I believe the government of Alberta is fully aligned with the Canadian model…. That’s what they’ve asked me to help them do.”

He said the independent governance model is a big factor in the investment returns generated by Canada’s large pension funds, which remain among the top-10 in global rankings such as the 2020 Mercer CFA Institute Global Pension Index.

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It is so important to him that Wiseman pledged to leave AIMCo if the government ever abandons the arms-length relationship with the asset manager.

“If it’s no longer the case, I won’t be chair of the board,” he’s said, “because, very simply, I believe in strong, independent public asset management.”

Wiseman said decisions around oil and gas and the energy transition to a lower carbon economy will likewise be made based on investment potential rather than politics, and he sees a “massive investment opportunity” in alternative energy.

“I actually think AIMCo can play, potentially, a really, really unique role because physically of where we sit… in terms of the information flow about these topics,” he said.

“Some of the best technology, some of the best innovation, some of the best thinking in the world, obviously as they relate to energy in particular, are coming out of Alberta.”

He said he believes the organizations whose money AIMCo manages, for the most part, also recognize there is a “home-field” advantage over institutional investors outside the province and the country when it comes to the energy transition.

“I think the clients are laser focused on being a fiduciary to their beneficiaries,” he said. “That decision is being made purely from an investment point of view, not a political point of view.”

Financial Post

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