Imagining A Better Future - Leo de Bever, CEO AIMCo Calgary Oct 8, 2013 - FEI Canada

Imagining A Better Future

Leo de Bever, CEO AIMCo
Calgary Oct 8, 2013

Alberta Investment Management Corp.

           Alberta Crown Corporation since 2008
                Independent from government policy
                Can pay talent at private sector rates
                Idea: Better governance + good people
                produce higher returns at lower cost

           AUM ~$70 B pensions and endowments
                Manage complex asset mix for ~.50%
                   80% internally managed at 1/4 external cost
                        Active return ~ $2.5 B since 2009
                Focus on capturing opportunities
                with superior return on risk

                                                                 2

AIMCo After 5 Years
“Canadian Model” has taken hold in Alberta
  Attract, retain, and reward talent to find superior return on risk
  Strong exec team, deep technical expertise
      345 total staff with wide range of asset management expertise
  Moved from risk aversion to more entrepreneurial culture
  Close to earning 1.5% / year to market returns

AIMCo adds >$50 million annually to Alberta GDP
  Save $300-$400 million a year in external fees

Now have platform of 8 “best of breed” business systems
  Good data drives our business
  Flipped switch this summer in one “big bang”, after 4 years of planning
  On time, on budget, at lower cost than our peers

                                                                            3

Challenges and Opportunities

Pension Reform
  May lose some clients – will decrease pension sustainability
  May get opportunity to attract new clients

Governance
  Still restricted in our investment tool kit
  But better government understanding that we need more elbow room

Innovation
  Cannot do extraordinary things with ordinary approach and strategy
  We will have to “kick over the traces”
  Will require a further change to our our culture

                                                                       4

Creating AIMCo 2.0 in Next 5 years

What was new in 1990s is conventional now
  Infrastructure, Timberland, Commodities, Private Equity
  Big influx of capital not matched by increase in opportunities

New Investment Frontier
  Combining the profitable with the desirable
  Capturing the economic benefits of new technology
  Accessing opportunities that require more “lateral thinking”
  Daring to take shots, accepting you will miss some
      You miss 100% of shots not taken

                                                                   5

What really Matters
        If You Don’t Like the Future,
            Imagine a Better One
Mainstream Economic Outlook: “Glass Half Empty”
   Many intractable challenges
   “They” are not doing anything about it

The Future does not just happen to us, we shape it
   Don’t need to change the whole world
   We can beat the enemy, because he is us

AIMCo can play a role – at a profit
   Capture the benefits of accelerating technological change
   Apply technology to mainstream assets

                                                               6

Mediocre Growth Outlook
Paradox of Thrift
   Government austerity is not working
       OECD plagued by fiscal strain and confusion on how to fix it
   Consumers reluctant to spend following pre-2008 debt run-up
   Large corporation balance sheets generally strong,
   but lack of confidence is restraining investment

Need “pump priming” to get things going in short run
   Privately financed infrastructure one way to get fast results

Need investment in long-run productivity
   Only way to improve standard of living

                                                                      7

Reasons for Economic Pessimism

Trying to preserve outdated “social contracts”
   Pensions
   Health Care
   Protection for declining industries
   High cost of education

Ineffective social decision making
   NIMBY impediments to building needed social infrastructure

Re-regulation after 2008 bust
   Punishing those deemed responsible is causing collateral damage

                                                                     8

Mediocre Return Outlook

Bonds
  Total returns will be terrible or really terrible
  Stable interest rates mean poor returns, rising rates imply capital losses

Stocks
  Return expected to be average to marginally below average
  Central banks have inflated valuations through cheap money

Unlisted assets
  Too much money chasing too few opportunities has reduced return

                                                                               9

Never in Human History

      Have so Many People

Had Access to So Much Information

       At Such a Low Cost

                                    10

Cost Efficiency of Information Sharing
Before 800 BCE: poor oral transmission of ideas
   Inventions like cement were made and lost
   because of weak intergenerational transfer and unconnected populations

800 BCE: Writing - better intergenerational memory
   Manually transcribed copies of scientific documents still scarce
   Library of Alexandria accelerated distribution - for a while
   Europe only recovered in Middle Ages because of Islamic Science

1400 CE: Printing - increase in access, reduction in cost
   Availability to broad public

1990 CE: Internet - efficiently searchable network
   Massively reduced search costs and accelerated spread of information
                                                                            11

The Future Is Better Than You Think
   Exponential growth in transformational technologies
        Computational systems, wireless networks, biotechnology
        3D-printing, i.e. additive manufacturing

   Increased importance of “do it yourself” innovation
        Scale not as important as before: return of the backyard tinkerer

   Wealth from high-tech revolution is directed to help solve
   impediments to global abundance
        Techno-philanthropy investments in malaria research, education

   A billion people will join the wireless world by 2020
        Faster dissemination of knowledge and locally relevant information
Source: Abundance: the Future is Better than you Think. Peter Diamandis and Steven Kotler, 2012
                                                                                                  12

Innovation is Accelerating

Power generation efficiency of wind turbines and solar panels
Efficiency of energy transmission and use
Carbon neutral fuel from algae and wood fibre
More productive crops
Cost of sequencing a genome has fallen below $1000
Medical diagnostics: lab on a chip
Driverless vehicles already operating in factories, legal by 2025?
Materials 10 x stronger than steel, fraction of the weight

                                                                     13

2013 Announcements

Lockheed is developing low-cost desalination method
   Graphene screen allows low-energy, low pressure salt separation

Philips will have vastly better LED lamp for sale by 2015
   200 lm/W new LED, 75 lm/W small fluorescent,15 lm/W incandescent

“Heuristic” chip will run at 1/5 of current energy cost
   Sacrifices accuracy for speed, e.g. hearing aids, weather forecasting

Reduction in crude oil refining cost
   Lower temperature, lower pressure, lower energy, lower emissions

                                                                           14

How Does This Show up in GDP?

GDP does not account well for value of services and ideas
   Service economy is now 80% or more of total output

Initial impact of technology is disruptive job destruction
   Slow job growth may reflect continuous waves of new technology
   began with cheap microchip technology around 1980

Innovation is all around us
   We cannot wait for statisticians to catch up

                                                                    15

Capital Equipment & Software Price Index

Rapid drop in cost of technology
Source: US BEA 2005=1
                                              Trend annual growth 3.2%

   Low Cost of Technology is Shifting Spending from Labour to Capital

                                                                         16

Canada: This Boat Needs Rocking

Lack of passion for building ideas into great companies
   Entrepreneurs lose drive too early

Too complacent about resource advantage
   Could we cope with $70 oil?

Weak process for making social decisions
   I.e. getting infrastructure approved and built
   No sense of urgency

Oblivious to risk of getting leapfrogged
   The rest of the world wants it more than we do

                                                          17

AIMCo “Big Themes”
Energy
  Technology is changing production, transportation and use of energy
  Energy has always been at the root of major changes in productivity

Food
  Must double supply over next 20 years to meet growing demand
  Must learn to better manage water in a changing environment

Materials
  The global intensity of resource use relative to GDP will drop
  The growth of GDP in the developing world will still drive demand

Enabling Technology, e.g. Robotics
  Ways to relieve labour shortages and gain back industrial production

                                                                         18

Institutional Role in Fostering Change

We can stabilize funding for innovation
   VCs spend too much time fund raising, not enough putting it to use

Institutional capital size matters - to keep cost down
   We can manage assets for 1/3 to 1/5 the cost of the 2 and 20 model

Long run focus: capital committed for many years
   We have cash and patience
   Do not need vehicles with limited lifespan

Our participation is most useful in tech commercialization
   Which is the weakness of traditional VC funds

                                                                        19

Technology: Working with the Machines
           It has happened before, and it will happen again……..

Robert Gordon is probably wrong:
Is U.S. Economic growth over? Faltering innovation confronts the six headwinds
    New technology has limited impact on future quality of life
    Fiscal pressures will limit growth of income per capita to < 1%

Andrew McAfee is probably right:
Race against the Machines
    This is not the first time we have had technological unemployment
    Rapid skill obsolescence will require retraining
    We must learn to work with the machines

                                                                                 20

To be among the best institutional investment
managers and inspire the confidence of Albertans