After $2.1-billion trading loss, AIMCo board hires outside experts to audit fund manager

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Alberta’s government-owned money manager is launching a formal investigation into a recent $2.1-billion loss and promising to fix what ails a fund plagued by poor performance.

The board of directors at Alberta Investment Management Corp., known as AIMCo, announced that accounting firm KPMG LLP and former Ontario Teachers’ Pension Plan chief risk officer Barbara Zvan were brought in to “to identify lessons learned and corresponding enhancements to AIMCo’s investment and risk management processes.”

In its first public comment on the loss, which came to light in early April, the board said a report is expected by the middle of June and will be shared with AIMCo’s clients and the provincial government.

Edmonton-based AIMCo oversees $119-billion on behalf of 31 clients, including pension plans for health care workers and police officers and the $18-billion Alberta Heritage Savings Trust Fund, the province’s war chest fund derived from oil royalties.

In late March, stock markets plummeted and then soared in reaction to the COVID-19 outbreak. AIMCo posted outsized losses when an investment strategy linked to volatility “performed particularly poorly,” the board said last Thursday in a press release. In the derivative-based strategy, now discontinued, AIMCo earned small returns when markets were calm, but suffered heavy losses when the economic collapse wrought by COVID-19 sent the S&P 500 and other stock benchmarks on a roller-coaster ride, putting it on the losing end of the trades.

In early April, AIMCo clients said the fund manager faced losses of up to $4-billion but AIMCo has subsequently revised the estimate.

After learning of the loss, many of AIMCo clients met with the fund’s executives and subsequently said they were frustrated with a lack of disclosure on who was responsible for the volatility-linked strategy and what, if anything, went wrong with risk management.

AIMCo’s board took ownership of the trading losses last week and committed to improving performance at the fund manager. “Oversight of AIMCo’s investment strategies and risk management is the responsibility of the board,” the directors said in a press release. “We deeply regret this result and are determined that the lessons from this experience will improve the corporation’s management processes and prevent any similar occurrences.”

AIMCo’s board is led by former Enbridge Inc. chief financial officer Richard Bird and includes retired executives from a number of financial institutions, including BlackRock Inc., Sun Life Financial Inc. and Manulife Financial Corp. The board said it hired senior partners from KMPG’s financial risk management team to conduct "an independent review,” in additional to an internal audit by the fund’s executives. Ms. Zvan, an actuary by training, volunteered to help the Alberta fund’s board after spending 24 years at the $201-billion Ontario teachers’ fund before leaving in January. She is known as one the country’s top risk management experts.

Last month, AIMCo executives also said the fund manager planned to change its approach. “Let me be clear, the performance of this investment is wholly unsatisfactory,” chief executive Kevin Uebelein said in an open letter to clients. “Please know I am fully focused on one thing: making any and all changes to ensure AIMCo is stronger and that we avoid a repeat of this outcome.”

AIMCo incurred its high-profile loss at a time when Alberta’s economy is reeling from the combined impact of the global pandemic and oil price war. The fund manager is a central player in the ruling United Conservative Party’s plans to revive the province.

Last year, Alberta Premier Jason Kenney announced the previously independent pension plan for the province’s teachers is moving into AIMCo next year, a plan the teachers’ union opposes. Mr. Kenney has also been considering moving the province’s contributions to the Canada Pension Plan into AIMCo.

Investment performance is a continuing issue at AIMCo. The firm’s biggest client is the $50-billion Local Authorities Pension Plan, known as LAPP, which oversees retirement savings for the province’s health care workers. Alberta regulations require LAPP to use AIMCo as its fund manager. The pension plan has flagged poor performance as a problem for many years, noting in its most recent annual report that “AIMCo has been short of LAPP’s value-added expectations for 46 consecutive quarters, or 11 years and six months.”

AIMCo is expected to release financial results for the first three months of the year by the end of May, and clients who have been briefed on performance say the fund manager lagged comparable funds across most sectors, in addition to taking a significant hit on the volatility-linked strategy.

The median pension plan return was a 7.1-per-cent loss in the quarter, according to data compiled by a division of Royal Bank of Canada. However, there was a wide range of results, with top fund managers down just 2.9 per cent and the poorest-performing pension plans off by 12.7 per cent, according to RBC Investor and Treasury Services.

“It has been an exceptionally difficult period for Canadian pension plans to navigate, as the markets have been experiencing an unprecedented amount of volatility across asset classes,” RBC executive David Linds said in a release. Canada’s stock benchmark, which is heavily weighted to energy companies, was one of the worst performing markets in the world, with the S&P/TSX Composite Index declining 21 per cent in the first three months of the year.

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