Aimco CIO Marlene Puffer, centre, with head of International Investment David Scudellari and CEO Evan Siddall on July 27, 2023.Jason Franson/The Globe and Mail
Major investors are still having a hard time agreeing on prices as a drawn-out period of high interest rates continues to stall deal making and weigh on private asset values, says Alberta Investment Management Corp. chief investment officer Marlene Puffer.
AIMCo reported a 6.9-per-cent return across its funds in 2023, which includes clients with varying tolerance for risk. Its balanced fund, which reflects a typical mix of client assets, earned 8 per cent. Both returns missed the internal benchmarks AIMCo uses to measure its performance – by 1.8 percentage points for the total fund and 1.4 percentage points for the balanced portfolio.
Even so, Ms. Puffer said she is “quite content” with where the funds landed. Strong returns from public stocks, which earned 15.8 per cent as markets surged, and bonds that returned 7.7 per cent were the driving forces behind AIMCo’s gains. By contrast, returns from privately owned assets were uneven. Real estate lost 8.4 per cent, private equity gained 6.7 per cent and infrastructure – an asset class that has typically performed well through a period of high inflation – earned 3.8 per cent.
“It’s always a bit of a challenge when public equity markets are the leader and all of our strategies around diversification are the laggards,” Ms. Puffer said. “When you look at that, you have to remind yourself that the reason for diversification is when the opposite happens.”
AIMCo invests on behalf of 17 pension, endowment, insurance and government clients in Alberta. It now has nearly $161-billion in assets, up from $158-billion a year earlier.
Investors have been eagerly anticipating a pivot among central banks to cutting interest rates now that inflation shows signs of coming under control. But the timeline for that has dragged out, adding to the uncertainty and keeping dealmakers in “a little bit of limbo,” Ms. Puffer said.
“The common theme … is the adjustment to the higher interest rate environment,” she said in an interview. “That’s producing challenges in agreeing on prices: What’s the correct valuation for any asset in the private asset space?”
That is even true in the secondaries market, where fund investors buy and sell stakes in pools of private assets before those investments are realized, usually at a discount. That can help free up cash for pension funds to put into other investments. In recent months, the Canada Pension Plan Investment Board, the Caisse de dépôt et placement du Québec and the British Columbia Investment Management Corp. have all tapped the secondaries market to sell upward of US$1-billion of fund stakes.
“Activity is picking up” in secondaries, Ms. Puffer said, and AIMCo is active as both a buyer and seller. But with valuations in flux, “it’s a very careful analysis on thinking about what kind of discount you’re willing to take on some of your assets in order to redeploy that capital. … We will take some modest discount in order to redeploy in other areas, but we’re very thoughtful about how we do that.”
Real estate continues to be a prime example of the gap in expectations between buyers and sellers. AIMCo’s losses in that portfolio last year were driven in part by the adjustment to hybrid working arrangements during the pandemic. There have been few transactions to reset expectations for market prices, and some investors are looking to take advantage of the pressure on the sector and buy assets at low prices.
“We’ve suffered some pain in our valuations at year-end. It seems to be moderating somewhat now,” Ms. Puffer said. “There’s still challenges in really finding where assets will actually trade. … There are players out there who are interested in owning some office but owning it at a very deep discount, and those trades have not really cleared yet.”