Investment Performance
CIO Q&A
As always, we remain committed to our investment objective — delivering persistent, superior risk-adjusted net total returns for our clients, as defined by their needs.”
We saw public markets recover after a difficult 2022, driven by the performance of what’s known as the Magnificent 7 stocks: Alphabet, Amazon, Apple, Meta, Microsoft, Nvidia and Tesla. These companies collectively drove most of the market’s gains as investors flocked to the stocks driving the artificial intelligence boom. Bond markets also had a strong year as longer-term bond yields began to anticipate easier monetary policy.
Progress on dampening global inflation was a notable trend. We came into the year with inflation running at 6.5% in the U.S. and by the end of the year, central bankers managed to push inflation down to 3.4%, while keeping unemployment rates in check. Inflation was a bit stickier in Canada, but still began a downward trend.
Investors monitored the impact of geopolitical events including the Silicon Valley Bank failure, the rescue of Credit Suisse, a government debt impasse in the U.S., China’s military actions with Taiwan, the ongoing Russia-Ukraine war and the Hamas-Israel conflict. While there was plenty to keep an eye on from a risk perspective, overall, markets were resilient. Particularly in the last two months of 2023, equity market performance broadened beyond the core technology stocks as economic growth and market sentiment responded well to easing inflation and the potential rate cuts signaled by the U.S. Federal Reserve.
It was an achievement to deliver a Balanced Fund net investment return of 8.0% despite turbulent macroeconomic and geopolitical conditions. The year underscored the importance of a portfolio that is well-diversified across asset classes. Public markets delivered robust results helping to offset some of the challenges in certain private markets.
Clients’ Money Market & Fixed Income portfolios benefited from active management in a strong bond market, with a 7.7% return, outperforming the benchmark. Public Equities delivered a double-digit return of 15.8% and the core Private Equity portfolio returned a sturdy 11.0%.
With a 9.6% return, Private Debt & Loan benefited from the higher interest rate environment, delivering its best rate of return since inception in 2010.
Lower valuations of many private assets reflected the higher-for-longer interest rate and inflationary environment. For example, clients’ Real Estate portfolios felt the impact of what has been characterized as the worst year for real estate since 2009. With the office sector remaining under stress, the team is focused on portfolio management and remains optimistic about sectors such as industrial and for-rent housing.
We see this rapidly evolving area as a source of attractive investment opportunities. We are in a more flexible position compared to some investors, who have aggressive net-zero carbon targets. Such investors may find themselves having to offload higher emitting assets to reach the targets while we are able to invest in those assets, support them through lowering their carbon emissions where warranted, aiming to reap the rewards of doing so.
Our clients have allocated capital to a new Energy Opportunities Pool that offers exposure to initiatives like industrial decarbonization, renewable fuels, low-carbon energy production and more while continuing to evolve strategies in traditional and renewable energy within other asset classes.
Investment team members rolled up their sleeves in 2023, building out the individual asset class strategies to align with the new Investment Strategy. We are looking forward to fully activating these strategies. That means focusing on total portfolio management (such as capital allocation across asset classes, tactical and dynamic asset allocation, currency, cash and collateral management and centralized trading). The Business Transformation program will support many of these initiatives. In addition, we are broadening our geographic footprint and strengthening our investment partnerships, facilitated by the new offices in Singapore and New York.
As always, we remain committed to our investment objective — delivering persistent, superior risk-adjusted net total returns for our clients, as defined by their needs.
2023 balanced fund INvestment performance
The AIMCo Total fund reflects the aggregate of all client accounts, including clients who exclusively choose fixed income and money market investments to achieve their objectives.
Asset Class Performance
Total AIMCo Fund Aggregate (1)
$153,712
6.9
1.6
5.8
5.0
6.1
6.9
(3.4)
14.7
2.5
10.6
Benchmark
8.7
1.5
3.6
4.7
5.9
8.7
(5.3)
8.0
8.0
11.1
Balanced Funds Aggregate
$120,577
8.0
1.5
6.2
5.3
6.6
8.0
(4.6)
16.2
2.6
11.8
Benchmark
9.3
1.3
3.8
5.0
6.5
9.3
(6.1)
8.9
8.9
12.5
Money Market and Fixed Income (2)
$37,656
7.7
(0.5)
(0.7)
1.3
2.3
7.7
(8.1)
(1.1)
7.8
6.2
Benchmark
7.6
(1.1)
(1.5)
0.6
1.7
7.6
(9.2)
(2.2)
7.3
5.9
Money Market & Fixed Income-Public
$25,559
7.9
(1.7)
-
-
-
7.9
(10.5)
-
-
-
Benchmark
7.0
(2.3)
-
-
-
7.0
(10.8)
-
-
-
Money Market (3)
$1,795
4.9
3.3
2.3
2.0
2.0
4.9
1.7
0.2
1.2
1.9
Benchmark
4.8
3.2
2.2
1.9
1.8
4.8
1.7
0.2
0.9
1.6
Universe Bonds
$14,817
7.8
(2.5)
(2.5)
0.5
1.9
7.8
(11.8)
(2.3)
9.9
7.8
Benchmark
6.7
(2.9)
(2.8)
(0.0)
1.3
6.7
(11.7)
(2.5)
8.7
6.9
Fixed Income Long-Term
$7,412
9.7
(8.1)
(7.0)
(2.4)
0.5
9.7
(23.0)
(4.8)
13.0
12.8
Benchmark
8.8
(8.3)
(7.2)
(2.7)
0.1
8.8
(22.6)
(5.1)
12.1
12.2
Real Return Bonds
$1,152
2.4
(6.3)
(3.7)
0.4
1.9
2.4
(14.2)
1.7
13.7
8.3
Benchmark
2.0
(6.5)
(3.8)
0.1
1.7
2.0
(14.3)
1.8
13.0
8.0
Segregated Assets - Long Term
$383
5.7
0.1
(0.3)
1.1
1.5
5.7
(5.1)
(1.2)
5.6
3.2
Benchmark
5.0
(0.0)
(0.4)
0.9
1.2
5.0
(4.8)
(1.2)
5.1
2.5
Mortgages
$5,445
4.5
(0.3)
0.2
2.4
3.1
4.5
(5.0)
1.2
9.4
6.0
Benchmark
6.0
(0.2)
(0.5)
1.7
2.7
6.0
(6.1)
(1.1)
8.7
6.9
Private Debt and Loan
$6,652
9.6
7.9
8.1
7.5
6.9
9.6
6.2
8.5
5.9
4.4
Benchmark
11.8
5.7
3.4
3.9
3.7
11.8
(0.1)
(0.9)
5.3
3.1
Public Equities & Absolute Return (2)
$57,972
15.8
2.1
8.7
7.5
9.6
15.8
(10.0)
23.4
3.7
18.5
Benchmark
15.9
1.7
6.9
8.2
10.5
15.9
(10.6)
18.1
12.2
20.3
Public Equities
$55,017
16.1
2.2
8.8
7.5
9.6
16.1
(10.0)
23.4
3.7
18.5
Benchmark
16.1
1.9
7.0
8.3
10.6
16.1
(10.6)
18.1
12.2
20.3
Canadian Equity
$11,067
11.7
3.0
11.4
7.5
10.1
11.7
(5.1)
30.5
(3.4)
20.8
Benchmark
11.8
2.6
9.6
8.6
11.3
11.8
(5.8)
25.1
5.6
22.9
Global Equity
$32,379
20.5
3.4
10.5
9.2
11.3
20.5
(11.4)
26.2
5.6
20.2
Benchmark
20.5
2.8
8.5
9.8
12.0
20.5
(12.2)
20.8
13.9
21.2
Global Minimum Variance (4)
$4
15.0
5.9
8.9
7.0
7.5
15.0
(2.4)
15.1
1.5
9.4
Benchmark
(0.5)
(1.6)
3.2
2.4
5.1
(0.5)
(2.7)
13.5
0.1
16.6
Emerging Market Equity
$8,104
7.7
(4.2)
(2.5)
(0.2)
1.9
7.7
(14.7)
1.0
7.0
10.6
Benchmark
6.9
(4.3)
(4.0)
0.7
3.0
6.9
(14.3)
(3.4)
16.2
12.4
Global Small Cap Equity
$3,464
12.9
2.0
8.5
7.6
9.4
12.9
(7.8)
22.8
4.8
17.2
Benchmark
12.7
(0.9)
4.1
6.4
9.0
12.7
(12.9)
14.8
13.9
19.8
Absolute Return (5)
$2,956
4.2
-
-
-
-
4.2
-
-
-
-
Benchmark
4.2
-
-
-
-
4.2
-
-
-
-
Private Equities (6)
$12,983
6.7
3.5
21.8
18.0
15.0
6.7
0.5
68.5
7.2
3.8
Benchmark
10.1
7.1
7.7
7.8
7.9
10.1
4.2
8.8
8.1
8.2
Real Estate
$21,531
(8.4)
(2.1)
3.1
(1.3)
(0.3)
(8.4)
4.6
14.5
(13.6)
4.0
Benchmark
(3.6)
(0.9)
1.9
0.7
1.5
(3.6)
1.8
7.8
(2.6)
4.7
Infrastructure
$19,764
3.8
10.1
13.0
8.6
8.4
3.8
16.8
19.0
(3.5)
7.4
Benchmark
8.0
8.1
7.7
7.3
7.1
8.0
8.2
6.8
6.1
6.2
Renewable Resources
$3,415
1.6
13.0
13.7
8.4
9.9
1.6
25.7
15.0
(6.0)
16.1
Benchmark
8.0
7.9
7.5
7.2
7.0
8.0
7.7
6.8
6.1
6.2
AIMCo Strategic Opportunities Pool
$231
15.0
(4.8)
(4.2)
(3.7)
0.7
15.0
(21.3)
(2.9)
(2.0)
20.3
Benchmark
20.5
2.8
8.5
9.8
12.0
20.5
(12.2)
20.8
13.9
21.2
- Total AIMCo Fund calculations do not include $6.9 billion of assets that do not meet the required conditions for inclusion in AIMCo's excess returns as of December 31, 2023.
- Market Value does not include Tactical & Overlay Program notional exposures.
- Market Value does not include cash held by AIMCo investment pools.
- Global Minimum Variance allocation weight is zero, therefore benchmark return is reported up to and including March 13, 2023.
- Absolute Return inception date is June 1, 2023.
- Private Equities include Core Private Equities, Alberta Teachers’ Retirement Fund Private Equity, Relationship Investing and Venture Capital.
performance Benchmarks
Money Market and Fixed Income
Money Market
Universe Bonds
Long-Term Bonds
Mortgages
Real Return Bonds
Private Debt and Loan
Segregated Assets - Long Term
Equities
Absolute Return (1)
Canadian Equities
Global Equities
Global Minimum Variance
Emerging Markets Equities
Global Small Cap Equities
Private Markets
Private Equity
Private Equity, ATRF
Real Estate, Canadian
Real Estate, Foreign
Real Estate, ATRF
Infrastructure
Infrastructure, ATRF
Renewable Resources
AIMCo Strategic Opportunities
Tactical Asset Allocation Overlays
- Absolute Return benchmark was added as of June 1, 2023.
Asset Class Overviews
Public Equities & Absolute Return
Purpose
The Public Equities team manages $58 billion in public equities assets across a suite of products covering domestic, global developed, and emerging market portfolios. The underlying strategies that make up the Public Equities portfolio are optimized allocations across several dimensions, including factor, sector, market capitalization, and regional exposures as required by the products that clients allocate capital to. Internally managed investments include Systematic, Absolute Return, and Fundamental Active strategies. Externally managed investments include Long-only Equity and Absolute Return strategies that are employed in areas where internal management does not offer both a competitive and cost advantage.
Results
In 2023, global equity markets displayed impressive resilience amid a vortex of economic complexity. For much of the year, investors were vexed by the implications of persistent inflationary signals; the prospect of ‘higher for longer’ interest rates, restrictive credit access, and indeed recession calls initially dominated debate as we entered 2023. Yet despite hawkish central bank activity focused on restoring price stability, a U.S. regional banking crisis that began in the spring and periodically threatened to spread further, and increasing geopolitical tensions on multiple continents, equities globally demonstrated strength and durability, with many markets showing double-digit returns for the full year. Much of this resilience can be attributed to market enthusiasm surrounding the promise of artificial intelligence, and more specifically, actual versus perceived stock market beneficiaries. Buoyant investor risk appetite was most evident in the market leadership of several mega capitalization U.S. information technology companies, which drove many global stock markets to pre-COVID highs and in some cases, to new all-time levels. By year end, a consequence was the narrowest market breadth witnessed in several decades (i.e. the number of stocks advancing versus declining within an index). It is our expectation such market concentration will revert to the mean, which portents for a more diverse array of return streams from active management for the foreseeable future.
The Canadian Equities Master Pool returned 11.7% while the Global Equity Master Pool returned 20.4%. The Emerging Markets Master Pool generated a return of 7.7%, weighed down by largely negative performance from China. Lastly, the Global Equity Small Cap Pool returned 12.9% and the Absolute Return Pool returned 4.2%. The Public Equities and Absolute Return products collectively underperformed their respective benchmarks by 0.1%. Global Equities was the largest detractor to overall value add over the year, while Emerging Markets contributed the most.
Across AIMCo’s strategies, both Fundamental and Systematic performed well. Across the Fundamental mandate, stock selection drove performance. Emerging Market exposure drove relative performance across the Systematic strategies, mainly due to underweight positions across China.
Looking Ahead
U.S. economic resilience, and that witnessed in several other key developed markets, ultimately contributes to our positive global outlook for 2024. However, as evidenced by investor reaction to periodic market shocks over the past year, uncertainties are abundant, and risk tolerance can shift dynamically. Of note, several factors are expected to test market sentiment into 2024, including conflicts in Ukraine and the Middle East, as well as continued uncertainty surrounding the future path of interest rates given mixed messaging from the leading central banks.
Additionally, investors are anticipated to closely monitor the results of forthcoming elections this year, with almost 49% of the world’s population going to the ballot across more than 60 countries. Although we expect interest rates to normalize at levels higher than experienced over the past three decades, equity markets have, in many cases, pulled forward the impact of future rate cuts by pushing asset values to new highs. We believe that caution is advised, and our strategic response to these factors involves sensible and effective allocation of capital across a varied spectrum of risk-adjusted investment opportunities.
Money Market & Fixed Income
Purpose
The objective of the Fixed Income portfolios is to provide our clients with capital preservation, liquidity, diversification, liability hedging, and superior, risk-controlled returns relative to a benchmark.
We actively manage and add value to the portfolios in four principal ways:
- Anticipating interest rates and positioning duration accordingly
- Anticipating the term structure of interest rates
- Active investment in various credit sectors, both public and private markets
- Active individual security selection
The team manages portfolios with global investments seeking diversified return and manages risk through prudent duration, curve, sector, geographic, issuer, and structural selection.
Results
Money Market
The Money Market Pool (MMP) completed its first full year of operation after its inception in October 2022. MMP is managed to provide daily liquidity while aiming to add value over the benchmark. The fund holds primarily short-term securities issued by the Government of Canada, provincial governments, large Canadian banks and investment grade corporations. Money market rates increased over the year with the Bank of Canada raising the target overnight rate 3 times by 0.25% each time, ending at 5.0% for the year. The increase in interest rates and tightening of credit spreads resulted in MMP achieving some excess return for the year. MMP outperformed its benchmark by 0.1% and returned 4.9% for the calendar year end.
Public Fixed Income
Fixed income markets rebounded from poor results in 2022 to produce solid returns in 2023 Returns were negative through most of the year, as central banks continued to hike interest rates to combat stubborn inflation. By early autumn, this resulted in a back up in bond yields to cycle highs. The announcement of unexpectedly large borrowing requirements in the U.S. also provided an extra boost to real yields around this time. As Q4 progressed, the U.S. Federal Reserve signalled an end to its tightening campaign, prompting a dramatic plunge in bond yields across most developed economies. This occurred despite continued solid economic growth, further delaying the onset of the long-predicted recession. This favourable macroeconomic mix resulted in a significant tightening of credit spreads as the year ended.
The Universe Bond portfolio returned 7.8% for the year, including an excess return of 1.1%. The Long Bond portfolio returned 9.7%, including an excess return of 0.9%. Excess returns for both portfolios were helped by favourable duration positioning, tighter credit spreads, outperformance in pockets of the credit market and a rebound in performance for the interest rate relative value portfolio. Excess returns over the 4-year period remained solidly positive.
The portfolios were lightly positioned in credit to begin the year, reflecting the poor macroeconomic environment and the subsequent bank failures in the U.S. in Q1. With credit spreads showing value entering the summer the exposure to corporate credit was increased. This resulted in the primary tailwind for excess returns for 2023.
Real Return Bonds
Real Return Bonds had a more modest rebound in performance for 2023 compared to nominal bonds. The pool returned 2.4% as the solid realized inflation returns were partly offset by the rise in real yields which occurred in most maturities over the course of the year. Activity in the Real Return Bond market was very light in Canada over the year, reflecting the announcement of the cessation of new Real Return Bond issuance by Canada’s Department of Finance.
Private Debt & Loan
Private Debt & Loan invests in private credit as a higher yielding alternative to public fixed income. The products are typically privately sourced and structured, primarily floating rate debt instrument with lower return volatility.
The portfolio generated a 9.6% net return for the year 2023. The return has been persistent and stable in each of the last four years driven by a diversified, resilient portfolio consisting of primarily senior secured, floating rate loans. Compared with the benchmark, the portfolio underperformed largely due to a strong rally of the leveraged loan indices from the negative return of the previous year.
Private Mortgages
The portfolio provides steady cash flow and premium return over government bonds, aligned with the long-term objectives of our clients. The Mortgages portfolio had a positive absolute return of 4.5% during 2023, underperforming its benchmark by 1.5%.
The absolute return of the portfolio was driven by falling bond yields as the central bank tightening cycle concluded in summer 2023. The underperformance was largely attributable to defaults on three floating rate specialty mortgage investments that were significantly impacted by the central bank tightening cycle. The Mortgages team, in consultation with internal and external advisors, is in the process of maximizing recovery of proceeds.
Looking Ahead
Entering 2024, the public fixed income portfolios were positioned lightly with lower-than-average active risk. Duration positioning remains longer than benchmark with the base case remaining the continuation of the disinflationary theme and continued anticipation of central bank easing of monetary policy from restrictive levels. This cautious positioning will enable the portfolio to be nimble and react to the broader economic, inflationary and market dynamics.
The Private Debt & Loan team will continue building up investment capabilities to service clients’ increased allocations to the asset class. This includes building a local team presence in the New York office, focusing on strategic partnerships driving the high-quality deal flow, and investing globally with one integrated team.
The Mortgages group notes significant competition to finance high quality industrial and multifamily assets across markets; however, liquidity remains well below historical levels as many lenders continue to right-size their loan portfolios. This creates ample opportunity to leverage our competitive advantages of speed, size and certainty of execution as we seek to maintain strong risk-adjusted returns in the portfolio.
Real Estate
Purpose
Real estate investments provide clients with exposure to domestic and international opportunities through direct and indirect holdings diversified across property types and geographies.
The domestic portfolio consists primarily of direct investments with joint venture partners in high-quality industrial, retail, office, and multi-unit residential properties in Canada’s major cities. The international program invests directly and through joint ventures with local operating and investment partners that comprises investments in the U.K., Europe, U.S., Asia Pacific, and Mexico. AIMCo also participates in niche market sectors through strategic programmatic partnerships and externally managed opportunity funds.
Results
In 2023, AIMCo’s domestic real estate portfolio generated a return of -4.6% and ended the year with a net asset value of $12.9 billion, as ongoing higher interest rates and recessionary concerns continued to put pressure on capitalization rates, squeezing liquidity and keeping market transaction volume depressed. The domestic portfolio primarily employs a core strategy of assets that are held long term and comprise direct investments in quality industrial, multi-family, retail and office properties located in Canada’s major cities. To a lesser extent, it includes non-core strategies, such as “build-to-core” that includes new construction and renovation value-add projects, which carry varying levels of higher risk and return. The domestic portfolio return was driven by difficult conditions in the industrial and office sector, while retail and residential sectors performed closer in line with the benchmark.
The foreign portfolio generated a return of -10.9% and ended the year with a net asset value of $6.9 billion. Similar to the Canadian market, liquidity and leverage challenged foreign markets and slowed market transactions. The foreign program employs a predominantly non-core approach of opportunistic and value-add strategies. These include development projects and value-add projects that require major renovations and leasing to enhance value. The foreign portfolio return was adversely impacted by office and industrial sectors in the United States, offset somewhat by stronger industrial performance in Europe. A subset of office-oriented fund holdings were re-priced downward at year end, which also had a material impact on returns.
Overall, AIMCo’s Real Estate portfolio generated a return of -8.4% for the year, compared to its benchmark of -3.6%. Over 10 years, Canadian Real Estate achieved a rate of return of 4.2%, compared to a benchmark return of 4.4% and Foreign Real Estate achieved a rate of return of 5.8% compared to a benchmark return of 4.7%.
Looking Ahead
The real estate team continues to reposition the domestic and foreign portfolios toward sectors that are experiencing secular and demographic tailwinds. These include traditional sectors such as industrial, multi-family residential, and grocery-anchored retail centers, and also include growing niche sectors like data centres, life science research office buildings, and alternative housing such as single family build-to-rent homes. This repositioning is ongoing and will ultimately drive toward a more resilient real estate portfolio, built to weather market volatility and remain focused on long-term performance.
While 2023 was a challenging year globally for real estate markets, the impact of higher interest rates may begin to slow down. Higher inflation and elevated interest rates impacted real estate pricing, transaction volumes, and financing availability across the asset class, but certain sectors have been impacted more than others. Traditional office and Class B malls may face further downward pressure given weakening demand, but housing remains severely undersupplied in most markets. In sectors where fundamentals have held up, some sellers may face situational capital market challenges, leading to distressed or special situation buying opportunities.
Environmental, social and governance (ESG) considerations continue to be a growing factor in investor and tenant choices. Lower quality or not-rated assets are likely to trade at lower values and may require major capital investment to remain viable versus top-quality assets.
The real estate team will continue to focus on themes such as technological innovation, demand for housing and healthcare. Sectors such as industrial, multi-family, necessity-based retail, life sciences and data centres continue to be part of a sound investment thesis against inflationary and recessionary pressures.
Infrastructure
Purpose
AIMCo infrastructure investments are made in real assets that typically provide an essential service which, over the long term, generate stable, inflation-linked cashflows for our clients. The portfolio consists primarily of diversified long-term, equity-oriented positions in assets with high barriers to entry, regulated returns or long-term contracted revenues such as utilities, energy infrastructure and transportation.
Results
In 2023, the market for infrastructure remained relatively quiet. The macroeconomic environment was characterized by sustained and elevated inflation, higher interest rates, and concerns over slower growth, all of which impacted the pace of deal activity and return expectations.
The Infrastructure portfolio generated a positive return in 2023 but trailed the performance of the benchmark. Several investments saw significant valuation increases while other investments continue to be impacted by a slower than expected rebound post COVID and changing market conditions, which resulted in valuation declines. The net result was generally flat performance during the period, which demonstrated the resilience of the portfolio. The top investments that contributed to performance in 2023 were AES Clean Energy, Cando Rail and Terminal Services, Grupo Saesa, and Airtrunk.
On a longer-term basis, the Infrastructure portfolio has provided return in excess of the benchmark. This performance reflects the high-quality assets across targeted sectors and geographies that make up the portfolio.
Looking Ahead
Private investment in infrastructure is expected to remain elevated on a longer-term basis, benefitting from some key trend drivers such as decarbonization, deglobalization and digitalization. In particular, many government policies and corporate objectives continue to be supportive for further investment into infrastructure areas that drive decarbonization goals and the reshoring of various supply chains.
We continue to see investments in real assets, including infrastructure, as a key building block to portfolio allocations to providing potentially attractive returns and diversification benefits. As a result, we expect the demand for inflation-sensitive assets such as infrastructure to remain relatively robust through 2024 and beyond.
Lastly, AIMCo’s Infrastructure portfolio is well positioned heading into 2024. A number of the portfolio companies are investigating possible attractive opportunities to capitalize on the many tailwinds benefiting the broader infrastructure asset class.
Private Equity
Purpose
AIMCo’s Private Equity portfolio is comprised of two primary strategies — Private Equity Fund Investments and Directs & Co-Investments.
The team selectively invests with the world’s leading private equity firms and builds deep, lasting relationships with partners. Investments are made across a broad range of sectors including Consumer, Industrials, Business Services, Financial Services, Technology and Healthcare.
Results
The $9.9 billion Core Private Equity* portfolio generated a return of 11.0% in 2023, outperforming the benchmark by 1.0%. The performance of the Private Equity program reflects the benefits of a globally diversified program that is underpinned by committing to proven fund partners and investing alongside them in creating a high-quality co-investment portfolio.
On a longer-term basis, the asset class continues to generate consistent excess return, delivering a 17.7% 4-year annualized net return, 8.5% above benchmark.
The Funds program represents about 64% of the portfolio and invests selectively with some of the world’s leading private equity firms. We primarily invest with well-established large and middle-market buyout funds in North America, Europe and Asia; as well as a meaningful growth equity and secondaries program.
The Directs & Co-Investments strategy, representing 36% of the program, focuses on co-control and minority investment positions in private companies, alongside private equity fund partners and other like-minded institutional investors.
The Private Equity team continues to actively manage investments within Relationship Investing and Venture Capital strategies. We are not making new investments from these platforms and continue to seek opportunistic exits to wind down the portfolios in the most value accretive way possible.
Looking Ahead
The global private equity investment landscape in 2023 continued to be characterized by a slower fundraising environment, lower capital deployment and exit activity resulting in fewer distributions. Uncertain financing markets and macro-economic complexity contributed to this dynamic, leading to lower overall activity in private equity.
As we continue into 2024, signs of stability have begun to emerge, as inflation slowed, and interest rates appear to have plateaued fo r now. Given the elevated level of transaction activity prior to the market downturn of the last 18 months, one of the key themes for Private Equity General Partners (GPs) will be a relentless focus on delivering liquidity to their investors. In addition to seeking traditional exits via IPOs or other sales processes, this is leading to increased creativity and collaboration in deal-making structures, with GPs seeking as many avenues as possible to return capital to Limited Partners like AIMCo. In particular, GPs have increasingly embraced the secondary market as a way to monetize stakes in companies that they do not want to exit completely, while still offering liquidity optionality to LPs.
*All return information is exclusive of ATRF’s segregated account; as well as Relationship Investing and Venture Capital as those are deemed non-core. Information inclusive of that performance is available in the Asset Class Performance Table.
Renewable Resources
Purpose
AIMCo’s Renewable Resources program encompasses a global portfolio of land-centric, high-quality timberland and agricultural assets that are characterized by their low correlation to traditional asset classes, inflation hedging qualities, and a long-term duration match with client obligations. Renewable resources assets serve to provide capital preservation, current yield, and real asset appreciation. The Renewable Resources program is concentrated in developed market OECD Member countries with an opportunistic view on emerging market exposure. Flexibility is ingrained into the Renewable Resources mandate which allows the team to maximize long-term value by optimizing portfolio assets between timberland, agriculture, and strategic investments along the value chain.
Results
In 2023, the Renewable Resources portfolio return was 1.6%, which while positive, did not exceed the portfolio benchmark. The modest portfolio return was influenced by a mixed result of land prices in Australia, specifically, price appreciation in Lawson Grains and price depreciation in Forest Investment Trust. As evidenced by recent valuations, the Renewable Resources team has observed further bifurcation between high-quality, institutional-grade farmland and lower-quality, individual farmland values. This trend was not consistent across the globe and land price appreciation has remained strong despite the persistently high interest rate environment in other geographies. High input costs, constrained labour markets, El Niño weather conditions, and residual impacts from previous storm events also weighed on portfolio returns.
Despite the modest return achieved in 2023, the Renewable Resources portfolio continues to perform well over the long term and has outperformed the benchmark over four years. Overall investor interest in high-quality timberland and agricultural assets remains high, driven by strong and growing global demand for forest and agricultural products and the continued development of alternative revenue opportunities such as carbon, conservation, and biodiversity credits and partnership opportunities with renewable energy producers.
Looking Ahead
The Renewable Resources team is focused on optimizing the existing portfolio through asset management initiatives focusing on landscape management and the conversion of land assets to their highest and best use. The team will also continue to assess opportunities to enhance portfolio diversification through the acquisition of assets that introduce novel sector and geographic exposures. Renewable resources assets are well placed to play a leading role in the ongoing energy transition, and the Renewable Resources team is taking a proactive, climate-forward approach to target investment opportunities with strong tailwinds and limited climate-related risk.