A posse of officials from Alberta, including Alberta Investment Management Corp. (AIMCo), rode into Toronto this summer to rustle up Ontario fund management talent. The leader of the gang is Leo de Bever, the new head of AIMCo, Alberta’s government-sponsored pension fund. De Bever took some time out to talk to Jeff Sanford about the business environment in Alberta, what he thinks is driving volatility in energy prices, the new era of lower returns, and the ongoing debate in Alberta over where AIMCo should be investing its money.
You came back from Australia to lead AIMCo, and now you’re in Toronto looking for talent. Things are moving quickly at AIMCo.
This government wanted an organization that the province could be proud of. Ontario has several funds that can hold themselves on the world stage — OTPP, OMERS — and that’s what we’re working on here. Right now, we’re engaged in a talent search. One reason for this showcase is to try to pull back people who have left Alberta. Coming to AIMCo is the perfect opportunity for someone in mid-career to find a fast way to the top.
AIMCo seems to be a part of a general shift in the relative economic weights of Ontario and Alberta.
For a long time, Ontario did well because it had that manufacturing base. That was its comparative advantage. But now it doesn’t have that. The advantage Alberta has is its resource base. It doesn’t have access to U.S. markets like Ontario has. But it does have some real opportunities. For example, the oil and gas industry uses a lot of technology, and so there is an opportunity for AIMCo to not just buy into capital [securities like stocks and bonds], but to bring in expertise and technology. AIMCo’s expansion is a natural reflection of the fact that there is more capital out here these days.
What is the mood in the West with respect to this recession?
The initial reaction was that this was an East Coast, an Ontario problem. That turned into “We’ve got a problem,” and then to “This is hurting a lot.” We should use this opportunity to get things done that don’t get done during a boom. This is the time to do things like roads and infrastructure, when demand is soft for labour and materials. Trying to put up schools and hospitals when Fort McMurray is booming, you’re headed for a disaster.
What about the volatile energy prices?
What strikes you is how the perception of reality changes with the price. When prices are high, the optimism is probably a little too heady. And when prices are low, people are more depressed than they need to be. One-hundred-and-forty-dollar oil didn’t seem right. But $30 oil doesn’t make sense either. The real price is in the middle, obviously. There is still some doubt as to whether the prices are a function of speculators or real supply and demand. I think there is some speculation involved, but it is not a huge factor.
On the gas side, the thinking seems to be that shale gas in the U.S. is going to flood the market and keep prices low for a long time. Low prices will drive demand — natural gas is a good fuel — and increases in demand in the years ahead will balance things out. If the Canadian oil and gas industry has a problem, it’s in productivity. The fields are mature, and the industry needs to ramp up its productivity to keep itself competitive. In the oilsands, the cost to produce a barrel is still too high. To make the oilsands viable, you need to bring the cost to produce a barrel down by 30% or 40%.
What about equity and fixed income markets? What do you see there?
Equity markets have done well. But do we get the profits to follow that up? The challenge going forward is how unusually positive markets have been for the pension funds for the last 25 years. Back in 1982, interest rates were 10%, and the equity risk premium on that was good. But going forward, bond returns won’t be that great. They might be 3% or 4%. And we may run into a new era when bond yields are lower, say 2%–3% a year. We also know we need to shift from an economy where we consumed too much to one where we have pro- ductive investments.
Where is the debate on AIMCo’s Albertan investments? Some countries like Norway invest their entire portfolio outside of the country. And some people seemed to be concerned a government pension plan investing in Albertan companies could lead to favouritism.
I can understand the worry: “Hey, here comes the government again.” But we are set up as an organization that is a step removed from government. And if I stay away from every company in Alberta, I have a problem. I have a mandate to generate returns wherever I can, and the opportunities right now are in resource companies, many of which are in B.C., Alberta and Saskatchewan. But because of these concerns, I’ve got to make sure my governance model is squeaky clean.