View Point: Return From Oz

The shift from government department to a crown corporation with an independent board has created expectations that may be hard to meet in the short run. The first order of business should be to ensure the new AIMCo has a client focus and the expertise to deliver superior long-term results.

AIMCo’s employees have literally signed on (with a new employment contract) to the new business model. They probably did so with both anticipation and trepidation. So have I. We quickly need to do a reality check on how much can be accomplished how fast, and where we are as an organization. AIMCo has a good operational and risk management infrastructure. It has done reasonably well financially, but there is a feeling it can do better. That will require organizational remodelling. I firmly believe we should not do tomorrow what we could have done yesterday. Still, creating a good investment culture is like making good wine: even under optimal conditions it requires time.

What will be your greatest challenge?

Encouraging an innovative culture focused on maximizing long-term return on risk. That means, tolerating the market zigs and zags and the empirical reality that even great long-term managers get it wrong 40% of the time. Edmonton is far from a major financial centre. Yet, if Warren Buffett can do great things from Omaha, we can do it from Alberta.

Communications technology has greatly reduced the importance of physical proximity. Still, finding the talent to complement existing staff may require a different approach than you would take in Toronto or New York. The AIMCo opportunity itself should attract good people, much as energy opportunities brought talent to Alberta’s energy industry. Longer term, we should work closely with universities in Alberta to create a broader talent pool, in co-operation with other financial institutions in Edmonton and Calgary.

How will your past experience with the Ontario Teachers’ Pension Plan and Victoria Funds Management Corporation help in your new role?

Teachers’ taught me that the scarce resource we manage is the limited risk tolerance of our clients. We should aim for maximum-expected, risk-adjusted return. One can debate how that risk should be measured, but the last 12 months have shown the high cost of ignoring risk, particularly the risk of leverage.

At Victoria, I became acutely aware how difficult it is to motivate people to take risk, and how influential a board can be by demonstrating that it recognizes that measuring long-term progress against short-term market returns is rough justice at best.

How does Australia’s pension landscape differ from Canada’s?

Australia has an old-age pension but lacks the equivalent of the Canada Pension Plan. Instead, compulsory contributions equal 9% of salary. The industry is 87% defined contribution (DC) in Australia. Growth in non-public pension assets has been faster than in Canada. Most people have a DC account through superannuation funds, [and] the average individual balance at retirement is low. Individual registered retirement savings plans are prohibitively expensive for most people unless they have a $200,000 balance because of required annual accounting at a cost of $2,000.

And in terms of pension investing?

The Australian industry is very fragmented and in need of consolidation. DC vehicles are mostly organized by industry and typically very sub-scale. Investment costs are lower than in the North American mutual fund model, but much higher than for the larger global defined benefit (DB) funds. Clients can shift between DC vehicles. Competition for funds creates a layer of extra marketing costs and focus on doing well relative to short-term peer results.
Could the Australian superannuation model work in Canada?

A more efficient, scaled-up Australian industry superannuation model with a good balanced fund default and longevity insurance would be a good starting point for the fund structure of the future.

We’ve seen a great deal of volatility in the market recently. In your view, how can pension funds achieve a good balance between risk and return?

If the return on risky assets were non-volatile, it would be low. Volatility ebbs and flows in the short run. Taking downside risk by investing in stocks will likely continue to yield a persistent long-term equity premium. Being patient will make you better off than investing in risk-free assets, if you can stand the short-term volatility.