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Shoppers take an escalator in an empty shopping mall in Calgary, Alta., on March 18, 2020, amid a worldwide COVID-19 flu pandemic.Jeff McIntosh/The Canadian Press

Alberta’s government-owned money manager has lost more than $4-billion on what clients are calling a wrong-way bet against sharp swings in stock prices, dealing a heavy financial blow to a province already reeling from falling oil prices and the COVID-19 pandemic.

Alberta Investment Management Corp., known as AIMCo, suffered far larger losses than comparable funds after investing in contracts that pay off only if stock markets remain stable. It lost billions of dollars when the economic collapse wrought by COVID-19 sent the S&P 500 and other stock benchmarks on a roller coaster ride, putting it on the losing end of the trades, according to several senior pension plan officials and other sources who are familiar with the situation.

The Globe and Mail is not naming the people because they aren’t authorized to speak publicly about AIMCo’s investing strategies.

The Edmonton-based Crown corporation manages about $119-billion on behalf of 375,000 members of provincial public retirement programs as well as public accounts such as the province’s $18-billion Heritage Savings Trust Fund. With investment decisions that affect pension beneficiaries as well as Alberta taxpayers, the loss raises questions about whether the strategy was too risky.

The sources said that AIMCo now acknowledges its executives were not fully aware of the risks they were taking.

A $4-billion loss would equate to more than a third of AIMCo’s 2019 net investment income of $11.5-billion.

AIMCo’s hit on volatility-based investment strategies came on top of a sharp drop in the value of its traditional equity, bond and real estate investments in March, when virtually every investor lost money. The average Canadian pension plan lost 8.7 per cent of its value in the first three months of this year, according to consulting firm Mercer. When it formally reports quarterly results to clients later this month, AIMCo is expected to be down far more than this.

AIMCo declined to discuss details of its investing strategies. However, its director of corporate communications, Denes Nemeth, said it has not breached any internal or external rules or regulations related to the risk it can take on as a fund manager acting on behalf of pensioners and government accounts.

“The level of volatility that markets experienced in March, 2020, the result of the COVID-19 pandemic, during which volatility rose faster, and on a more sustained basis than at any other time in history, is exceptional,” Mr. Nemeth said in an e-mail. “AIMCo acknowledges that it is not immune to the challenges, unique as they may be, that institutional investors around the world have experienced.”

AIMCo executives have kept clients apprised of the market conditions’ impact on investment performance, he said.

Markets were relatively placid in recent years, and clients said AIMCo made consistent 6-per-cent to 7-per-cent returns on the volatility strategy, which is meant to be a low-risk way of generating dependable results that are not linked to the performance of public market investments such as stocks or bonds.

AIMCo’s past returns on the strategy are now overshadowed by losses on the unprecedented moves in stock prices that played out in March, when volatility reached all-time highs, exceeding records set in the 1929 stock market crash.

AIMCo told clients in early April it is terminating the money-losing approach. However, it some of its contracts with institutions such as global investment banks will not expire until June.

The sources said AIMCo already booked about $2-billion in losses in March on this one strategy, and expects $2-billion or more in additional losses as the remainder of its contracts expire, although calmer markets could reduce that. AIMCo’s results are known in the industry because it reports to clients every three months, while most other plans disclose performance numbers once a year, or semi-annually.

Sheri Wright, vice-president of the Edmonton-based Local Authorities Pension Plan, known as LAPP, would not discuss specific investments, but said plan officials were briefed on the impact of the market meltdown in early April.

AIMCo invests $50-billion on behalf of LAPP’s 275,000 members, who include Alberta’s hospital workers and other current and retired government employees.

“We have heard from AIMCo, in a preliminary reporting, that the first-quarter report is likely to show significant losses as a result of the severe market volatility that characterized the first few months of 2020, in reaction to COVID-19,” Ms. Wright said.

“AIMCo is fully aware, and we communicate to them on a regular basis, that our risk tolerances are as much a reflection of our pension obligations as the need for positive investment gains," she said.

Alberta regulations require LAPP to use AIMCo as its fund manager. The pension plan has flagged poor performance as a problem for many years, noting in its most recent report that “AIMCo has been short of LAPP’s value-added expectations for 46 consecutive quarters, or 11 years and 6 months.”

Other clients gave AIMCo qualified support. The fund manager oversees $150-million for the city of Medicine Hat, and city controller Dennis Egert said AIMCo provided a recent update on its performance. In an e-mail, Mr. Egert said: “We appreciate the unique COVID-19 impact on the financial markets, however, we also appreciate the nature and behaviours of the capital markets.”

Early this month, AIMCo reported a return of 10.6 per cent for its 30 pension-plan, endowment and government clients in 2019. It warned in its report that 2020 would be “unparalleled” because of the impact of COVID-19 and the oil-price crash on all asset values. AIMCo warned it was dealing with “a period of sudden and unprecedented volatility” in investment markets.

“Our team is responding decisively in an effort to protect our clients’ liquidity and assets in the near and medium term, while still identifying longer-term investment opportunities that will come out of these challenging market circumstances,” chief executive officer Kevin Uebelein said in a statement announcing the 2019 results.

Investment industry experts are warning pension plan members to brace for a shock when they see recent performance numbers, and focus on their long-term goals. Andrew Whale, a principal at Mercer, said in a recent report: “There is no doubt that funded positions are down and almost every defined-benefit plan will feel this economic and public health crisis, but we’re optimistic that plan sponsors can avoid a pension crisis with smart and strategic decision-making.”

AIMCo has been at the centre of controversy over the past year. Union leaders and Alberta’s opposition NDP opposed legislation passed by Premier Jason Kenney’s UCP government in late 2019 that brought teachers’ pensions under the AIMCo umbrella. The government said the move was aimed at saving taxpayer dollars.

The Alberta Teachers’ Association has argued that its members have been well served by the Alberta Teachers’ Retirement Fund, which has managed their pensions for decades and has modelled itself on the Ontario Teachers’ Pension Plan. The transition is not due to be completed until the end of 2021, so AIMCo’s loss does not affect Alberta’s teachers and retirees.

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