Total AIMCo funds achieved a return of 9.1% or 1.8% over benchmark. Balanced funds returned 10.1%, with 2.1% of value add over benchmarks. The strong results were welcomed as AIMCo expects market returns to be more subdued than in the recent past.
Calendar year 2015 was a roller coaster of market-related events with investors fretting about falling commodity prices, a U.S. rate hike, a slowdown in Chinese growth, and finally, the risks of a European slowdown and global recession. Several countries heavily dependent on commodity sales, most notably oil, were negatively impacted, including Canada.
Canadian economic growth in 2015 was 0.3% below its long-term potential of 1.5% as the economy endured the plight of lower oil prices. The Alberta economy noticeably slowed as a result of a reduction in business investment.
Overall, in 2015, the U.S. matched its 2014 economic growth rate of 2.4% as the U.S. experienced a steady pace of household spending and healthy job gains. The U.S. Federal Reserve signaled a willingness to raise its policy interest rate. However, with unstable global economic conditions following the decline of global stock indices in the summer of 2015, the U.S. Fed held its policy interest rate stable in September, providing some market relief. Finally, in December 2015, with improved U.S. economic and financial data, the U.S. Federal Reserve raised its policy interest rate for the first time since June 2006. Japan and the Eurozone both grew modestly in 2015. China continued to experience an economic slowdown which led to lower oil and other raw materials prices.
For the year ending December 31, 2015, the Canadian S&P/ TSX Composite Equity Index returned a negative 8.3%, while the FTSE TMX Long Term Canada Government Bond Index posted a positive 4.5% return. The precipitous 19% fall in the Canadian dollar in reference to the U.S. dollar boosted equity returns for the international component of AIMCo’s portfolio. While the broad U.S. equities index, the S&P 500 Index, returned a moderate 1.4% return in U.S. dollar terms, in terms of the Canadian dollar, it provided a substantial 21% return. Global equities, as measured by the MSCI ACWI Index in Canadian dollars, also performed well with a return of 17.1%. AIMCo’s balanced fund clients, the pension and endowment fund clients, benefited from foreign currency exposure in assets such as U.S. equities, enjoying a relatively good overall absolute return in the high single digits. Once again, the importance of a diversified investment portfolio is well-demonstrated.
It is AIMCo’s investment thesis that the major developed and emerging economies will continue on the path of normalization in terms of growth and inflation, although at a slower pace than may have been anticipated a few years ago. AIMCo’s long term market view suggests that the U.S., Euro-area, and U.K. will continue to experience near potential economic growth, while China will stabilize at positive, though lower growth rates than it had been experiencing until recently. However, at the time of writing, the U.K. has now voted to end it membership in the European Union (E.U.). On a short-term basis, AIMCo’s expectation is that the U.K. real GDP will likely contract further versus current expectations. The non-commodity export-related economies, although lagging somewhat now, should consolidate and support global growth. Commodity-related regions and economies will begin to pick up once global growth is more entrenched.
Today, equity markets appear to be somewhat overvalued, while bond yields have now compressed to unprecedented levels across the sovereign fixed income spectrum. This would imply moderate equity market returns along with gradually improving corporate earnings stemming from global growth. While with low rates and even negative short-term real rates, such as those in the Eurozone and Japan, there is pressure on financial securities that are making sovereign debt investing all the more exacting. Select strategies within the credit spectrum should provide relief.
One does not need to be particularly bullish on corporate earnings to favour stocks over bonds in the longer-term investment horizon. Although global equity indexes are likely to provide a moderate annual nominal return, the starting point for government bonds is essentially a zero expected real return when one takes today’s government yields and subtracts even moderate inflation. In this investment environment, many investors are turning towards equity markets as a moderate expected equity return outperforms a stressed government bond return.
AIMCo will remain motivated to invest in private real assets, such as real estate and infrastructure, where reasonable cash yields responsive to underlying inflation should drive good long-term returns for our clients. In private equities, we focus on assets and situations that provide very good opportunities relative to public markets, albeit with significantly more risk. Market volatility together with AIMCo’s patient style and the ability to allocate capital quickly provide investing opportunity in private markets for our clients.
Market uncertainty is an opportunity; given the uncharted territory of negative real interest rates and the significant uncertainty we observe today, AIMCo hopes that we can translate this into profitable investments for our clients. This is a unique time with the uncertainty created by very low interest rates coupled with slow economic growth. However, we have experienced and managed market uncertainty before; this is the nature of markets, this is why AIMCo exists, this is what we do – For Alberta.