Lisa Johnson of the Canadian Press reports on a how Alberta is setting up a new Crown corporation to oversee Alberta’s Heritage Savings rainy day fund: 

Alberta Premier Danielle Smith announced a new Crown corporation Wednesday to oversee the province’s rainy day fund.

The Heritage Fund Opportunities Corporation is to direct policy for the Heritage Savings Trust Fund, which will still be managed by the Alberta Investment Management Corp., or AIMCo.

The new Crown corporation is also mandated to independently manage the investment of new deposits.

Smith said she aims to grow the fund to at least $250 billion by 2050 in order to wean the province off the resource revenue roller-coaster.

“No matter how far into the future, there will come a time that we may be unable to rely on those revenues, and we cannot hide from that reality now,” the premier said in Calgary.

The fund’s assets were valued at $23.4 billion as of September, and the government pledged another $2 billion that is now earmarked for the new corporation’s investments.

Finance Minister Nate Horner said its board can invest that seed funding in a different way than AIMCo, the province’s public pension fund manager.

“That’s beyond AIMCo’s mandate, more in a sovereign wealth (fund) style,” said Horner.

The new Crown corporation will operate at an arm’s length and publicly report results, Smith said.

Horner told The Canadian Press in an earlier interview the goal is not to “de-risk” pet projects that have difficulty getting financing, as Smith has previously mused.

“This will be return-focused,” he said.

The finance minister said the new corporation will create global investment opportunities that wouldn’t have been offered to a manager like AIMCo.

When asked Wednesday whether the new corporation’s goal to support “areas that matter to Albertans” means investing in more Alberta-based assets, Horner said “not necessarily.”

“It’s about leveraging opportunities where those partnerships could provide great opportunity for the province down the road, but that isn’t necessarily the goal,” he said, pointing to the province’s advantages, like its knowledge base in artificial intelligence and water infrastructure.

He said the plan represents a return to the original vision of the heritage fund.

It was created in 1976 by former premier Peter Lougheed to set aside a portion of resource revenues, but subsequent governments have dipped into the piggy bank as needed, particularly when the price of oil crashed.

The Heritage Fund Opportunities Corp. will be chaired by Lougheed’s son Joe, board chair of Calgary Economic Development and a partner at Dentons law firm in Calgary.

Smith’s United Conservative Party government has committed to not skimming interest earnings from the fund to prop up the province’s general revenue.

It estimates that if all the Heritage Fund’s income had been reinvested from the start, it would be worth upwards of $250 billion today, generating more than $20 billion annually.

Opposition NDP finance critic Court Ellingson told reporters in Calgary he supports the government’s efforts to grow the long-neglected savings fund, but the province already has a body in place to do that work.

“We didn’t need a new corporation,” he said.

Wednesday’s announcement comes after Horner sacked the chief executive officer and entire board of directors of AIMCo in November.

Less than two weeks later, the province hired former prime minister Stephen Harper as the new chairman of AIMCo.

In addition to the Heritage Fund, AIMCo also handles about $118 billion in investments for public sector pension plans representing thousands of Albertans, including teachers, police officers and municipal workers.

Barbara Shecter of the National Post also reports Alberta unveils new investment entity with aim to boost Heritage Fund to $250 billion:

The Alberta government is seeding a new investment vehicle with $2 billion as part of a plan to boost the province’s resource investment fund tenfold to at least $250 billion by 2050.

The money to be invested and managed by the new Heritage Fund Opportunities Corporation was previously earmarked for the Alberta Heritage Savings Trust Fund, which was started in 1976 to invest a share of the province’s resource revenue for the future and diversify the economy.

For now, the rest of the nearly $24 billion in the Heritage Fund will continue to be managed by Alberta Investment Management Corp. (AIMCo), a Crown corporation that also manages the pensions of public servants across the province, under the direction of the new corporation. 

“As the investment model is proven, more funds could potentially be moved from AIMCo,” a government spokesperson said.

At a news conference Wednesday, Premier Danielle Smith said the new investment vehicle is necessary, in part, to ensure returns generated by the Heritage Fund are reinvested over a long horizon, allowing the fund to grow larger and faster than it has in the past when this wasn’t always the case. 

Her plan, laid out alongside Finance Minister Nate Horner, is that the fund will have a strong focus on maximizing growth “while supporting areas that matter to Albertans, such as technology, energy, and infrastructure.”

Horner added that some of the investments will be “beyond AIMCo’s mandate,” adding that they will be “more in a sovereign-wealth style,” which could lead to joint investments with other long-term sovereign wealth funds.

However, Smith stressed that the fund will operate at arm’s-length from government.

“It is critical that the Heritage Fund Opportunities Corporation be free to make the right decisions for long-term growth without interference from government, which is why we’ve set it up as an arm’s-length agency,” she said. “A broad group of directors will bring deep financial experience so that it can focus on improving long-term Heritage Fund investment growth outcomes.”

Smith said the new Heritage Fund Opportunities Corporation will be chaired by Joe Loughheed, a Calgary lawyer and son of the former premier who created the Heritage Fund. The goal, she said, is to ultimately create a wealth fund that can forge global partnerships, and will supplement and potentially ultimately replace unpredictable resource revenue.

A document laying out the plans further suggests that a retail investment product could be developed “to allow Albertans to invest directly in the Heritage Fund, subject to public interest and feasibility.”

Sources say Smith’s idea to boost the returns of the Heritage Fund, which she has been speaking about publicly for months, were discussed with AIMCo before her government took the unusual step in November of ousting the entire board and the investment manager’s chief executive, Evan Siddall.

Reasons cited by the government included that rising costs of AIMCo were not commensurate with returns, though this was disputed in a letter sent to Horner by ousted chair Kenneth Kroner.

According to sources familiar with the proposals, AIMCo’s game plan included taking in more money and increasing returns through additional investments in private assets such as infrastructure. 

Following the November purge, Horner installed former prime minister Stephen Harper as AIMCo’s chair and senior civil servant Ray Gilmour was named interim CEO.

A new unpaid position was established on the board for the deputy minister of treasury board and finance as a way “to ensure more consistent communications between AIMCo and Alberta’s government.”

In addition to discussing a Heritage Fund overhaul with AIMCo before the shakeup, Smith’s government was also working with outside consultants, according to news reports.

In May, the Calgary Herald reported that the government had retained a firm called BERG Capital Management, an investment consultant for pensions and sovereign wealth funds that changed its name to PNYX Group, to do a “deep dive” on the Heritage Fund.

Then, in November, after the UCP government passed an order-in-council approving the incorporation of a provincial corporation for the purpose of managing and investing all or a portion of Crown assets, Smith told the Herald that “a hybrid investment strategy” was possible, with pension funds invested in a very conservative way while Heritage funds would be invested in a manner that would allow them to grow tenfold by 2050.

Chris Varcoe of the Calgary Herald also reports Alberta drafts blueprint to grow Heritage Fund to at least $250B by 2050, establish Crown corporation:

It’s never too late to start saving for the future and the Alberta government aims to follow that advice, setting out a blueprint to grow the Heritage Savings Trust Fund to at least $250 billion by 2050.

As part of its strategy, the UCP announced Wednesday the creation of a new Crown corporation that will govern and guide the rainy-day account.

The province wants to grow the fund’s value 10-fold in the coming decades from more than $24 billion today, largely by leaving income inside the account, instead of tapping it once the rain begins to fall and oil prices drop.

However, once the province hits the $250-billion target, a portion of the fund’s annual interest could be used to offset future resource revenue volatility or to invest in infrastructure.

“The best time to plant a tree was 20 years ago, and the second-best time is today,” said Finance Minister Nate Horner, comparing it to the province’s investment goals.

“If we are diligent, and we grow this to $250 (billion) or more, by 2050 we’ll be able to take off $10 billion annually, while continuing to grow the fund and replace at least half of the royalties we receive now.”

The new Heritage Fund Opportunities Corp. (HFOC) will be chaired by Calgary lawyer Joe Lougheed. It will operate at arm’s-length from government to ensure independent decision-making, according to a provincial document.

The Crown corporation will be seeded with $2 billion — money the government previously earmarked during the budget to the Heritage Fund — and will have its own investment objectives and a small management team, Horner said.

Existing Heritage Fund assets currently managed by the Alberta Investment Management Corp. (AIMCo) will remain under its oversight. AIMCo was recently overhauled by the province.

The province says the new corporation will make strategic investments “that maximize growth, while supporting areas that matter to Albertans, such as technology, energy and infrastructure.”

It will also work with other institutional investors and sovereign wealth funds “to access premier investments.”

The corporation’s benchmark return will be the same as AIMCo’s objective — at 9.3 per cent annually — “but my expectations are higher,” Horner said in an interview.

“The $2 billion will be invested by HFOC in a sovereign wealth-style investment — with its own board, with its own governance . . . It’s a different type of investing,” he said, noting it will have longer-term horizons than a pension fund.

 “We’re not going to be involved in any way in making actual investment decisions.”

However, the idea of establishing HFOC and supporting specific sectors has raised Opposition questions.

“We didn’t need this new corporation,” said NDP MLA Court Ellingson.

“We have real concerns about the Heritage Fund being used to invest in projects that otherwise can’t secure financing.”

The Heritage Fund was worth $24.3 billion at the end of September. It was created in the mid-1970s by the Progressive Conservative government of Peter Lougheed — Joe Lougheed’s father — to save growing resource revenue.

However, initial goals that the fund would receive up to 30 per cent of non-renewable resource revenues were dropped by ensuing Alberta governments, often during economic downturns.

Since its creation, more than $45 billion of investment income from the fund has been transferred into the government’s general revenue account for day-to-day spending.

“Fundamentally, the government is going back to the main principle that my father’s government set up in 1976 when they established the Heritage Fund,” Joe Lougheed said in an interview.

“The vision was to grow those assets for future generations of Albertans, such that it would grow to a large pool of assets, which, over time, could reduce the roller-coaster of resource revenue dependency that Alberta, quite frankly, still has.”

The job of the HFOC board will be focused around governance, establishing a new statement of investment policies and goals, such as asset allocation and oversight of risk.

“The next 10, 15, 20 years in Alberta are going to be very, very strong,” added Lougheed.

“When you’re doing well, that’s the time to save money.”

A graphic in the road map document shows that if the current fund expands over time, with a projected annual net return of nine per cent, compounded yearly, it could be worth more than $50 billion by 2032, and top $100 billion by 2040.

Horner says it’s vital for the fund to retain its income, which will let it continue to grow over time.

“I think it’s conservative,” Horner said of the $250-billion target.

“All that it requires — other than diligence — is our government and the governments that follow (to) have the diligence to leave the retained earnings in the fund and be patient.”

University of Calgary economist Trevor Tombe said he’s encouraged to see the province think about its long-term fiscal future and indicate it won’t withdraw earnings from the fund for government spending.

However, he wonders about the language surrounding the HFOC goals of strategic investments being made in areas such as technology, energy or infrastructure, and what that will practically mean.

“The $250-billion goal is reasonable and achievable, but it’s all contingent on returns being sufficiently high,” Tombe said.

“And that makes the decisions that the government takes around the mandate to this new entity, around what its objective is, more important than anything.”

You can read more on Alberta's Heritage Savings Trust Fund here.

Alberta's government put out a publication, "Renewing the Alberta Heritage Savings Trust Fund : a roadmap to securing Alberta’s future" which is available here.

Alright, on Tuesday I discussed AIMCo's latest DEI shakeup and today I am trying to figure out this latest move by the Alberta government and how it will impact AIMCo.

First, before I begin, I posted an update to that comment which I will post below:

Janet French of the CBC reports AIMCo job cuts raise questions about commitment to inclusion, critics say:

Helen Ofosu, a human resources consultant and adjunct psychology professor at Ottawa's Carleton University, says removing leaders in charge of inclusion and diversity sends the message those principles don't matter to the organization.

"That's basically telling people who may be dealing with a disability, being a visibly racialized person, a religious minority — any of those people all of a sudden start to feel like, 'Hmm, what is my place here? Do I matter?' "

 It definitely doesn't send the right signal. Read more here.

Also, someone made a good point on LinkedIn, namely, AIMCo is a large fiduciary that needs to keep track of many companies and use its proxy votes to raise concerns. DEI is a serious concern with any investment, public or private, so why get rid of the Head of DEI?

In other news, AIMCo was named one of Canada’s top employers for young people as well as one of Alberta’s top 85 employers:

Edmonton – The Alberta Investment Management Corporation (AIMCo) is pleased to announce it has been named one of Canada’s Top Employers for Young People as well as one of Alberta’s Top 85 Employers, both distinctions awarded by the Canada’s Top 100 Employers project.

AIMCo was recognized for its fulsome programs to support the professional development of its employees. These include entry-level programs that allow new graduates to gain experience in multiple departments across the organization, and support for all employees to enroll in skills development courses related to their roles. Initiatives such as these reinforce a culture that prioritizes professional development, which in turn drives AIMCo’s overall success. The Canada’s Top 100 Employers project is the largest Canadian editorial endeavour to recognize top-performing workplaces across the country. The project has been running for 25 years and now includes 19 national, regional and special-interest competitions.

For more information about AIMCo’s recognition as a top employer, please click here. 

Well, I think we know who deserves the credit for this but he's gone now.

Now, on to the new Heritage Fund Opportunities Corporation which will be chaired by Joe Lougheed, the son of Alberta's former premier Peter Lougheed who created the Alberta Heritage Savings Fund back in 1976.

I don't know Joe Lougheed (featured above), thought very highly of his father Peter Lougheed and I'm sure he's a smart lawyer and will make an excellent chair of this newly established Crown corporation.

They are going about it the right way, naming a chair first and nominating a board of directors who will then hire a CEO to ramp operations up.

My comments are the same as the NDP finance critic Court Ellingson who said why do they need to create a new Crown corporation?

And God knows I'm no NDPer or Liberal for that matter!

It's common sense, AIMCo is doing a great job at managing the savings of the Alberta Heritage Fund so why create a new and separate Crown corporation to take over?

Apart from being costly, you need to pay new board members and staff which admittedly is negligible over the long run, but is it really necessary?

Don't forget, AIMCo has all the strategic relationships with peers and top funds, it has staff covering every asset class and risk managers and has the same return target as the Heritage Fund. 

So why create a new Crown corporation to take over the Alberta Heritage Savings Fund? 

One person I talked with said "if you look at how Alberta's government is acting, they're gutting AIMCo slowly, firing people, taking away assets, it's awful."

But that doesn't make sense either, why would they want to gut or get rid of AIMCo? 

The problem is they are weakening the organization and the long-term effects are going to to hurt active and retired members.

Of course, I could be wrong, maybe AIMCo will come out of this stronger and this new Crown corporation will be a long-term success but it certainly seems very strange to do all this unless it's part of a master plan to intervene in both these funds (they say they will continue to operate at arm's length but let's see).

I'm curious to see who AIMCo's next CEO will be as well as the new CEO of the new Heritage Fund Opportunities Corporation.

All I know is Alberta and the rest of Canada have much bigger fish to fry, we better brace for impact because February 1st is right around the corner.

Below, Alberta Premier Danielle Smith and Finance Minster Nate Horner announce a new plan forward for the Alberta Heritage Fund.

Next, Canada can work with US President Donald Trump’s administration to reshape global trade and weaken China’s dominance of supply chains, according to Chrystia Freeland, the Canadian politician who’s vying to replace Justin Trudeau as prime minister. 

She spoke with Bloomberg's David Gura about Canada's role in global trade, and reacted to Trump's administration -- including his Treasury Secretary pick Scott Bessent.

Needless to say, I agree with Premier Smith's approach on how to negotiate with the Trump administration to avoid tariffs and worry when I hear our federal government preparing for a protracted trade war and calling for a "pandemic-like relief program" for Canadians which will be impacted by tariffs.

Lastly, Denis Girouard and Stéfane Marion of the National Bank of Canada, take a closer look at Canada's trade balance in the context of the US deficit, to clarify Canada's marginal role in this dynamic, and explain that these uncertainties are not just negative. Current economic and trade tensions offer a unique opportunity for Canada to reassess its industrial policies, notably by strengthening its manufacturing sector and tackling provincial trade barriers, which represent the equivalent of a 21% tariff. 

Great discussion, take the time to watch it.

Sarah Rundell of Top1000Funds reports on why CPP Investments CIO Ed Cass says they are cutting back on emerging markets:

CPP Investments, the C$675.1 billion asset manager for the Canada Pension Plan, has already hit its reduced long-term strategic exposure to emerging markets of 16 per cent in a quick paring back of the allocation from 2023 levels when emerging markets accounted for 22 per cent of assets under management. 

Edwin Cass, chief investment officer at CPP Investments tells Top1000funds.com that although the investor still believes there is both an opportunity to diversify and generate alpha in emerging markets because of inefficiencies, that window of opportunity is narrowing.

“This is changing over time due to a number of factors, including geopolitical risk and improving market efficiency,” he says.

On one hand, deglobalisation can be positive for emerging market investors because it adds to diversification by decoupling relationships between various trading blocs, he explains. However, geopolitical risk is the “flip side” to deglobalisation and brings real complexity.

“We need to understand the impact that deglobalisation and regional trading blocs will have on sectors and specific assets within the countries we invest in. Due diligence and appropriate investor protections become even more important.”

Successful emerging market securities selection during the past several years has been a source of alpha, and he says CPP Investments has found the strongest returns in emerging market infrastructure, notably through investments in toll roads. For example, the asset manager owns toll roads in Mexico, Chile, Indonesia and India that Cass says “are performing well.”

The energy transition also continues to present opportunities. Investments include renewable energy providers, such as Renew Power in India, and Auren Energia, one of Brazil’s largest platforms for renewable energy and energy trading.

However, more expensive active management in emerging markets is important because these markets are less efficient. And successfully navigating the risks is an intense process that relies on an in-country presence resting heavily on “boots on the ground” to stay close to political and regulatory developments and monitor any impact to existing assets.

CPP Investments has opened emerging market offices in Mumbai and São Paulo to allow it to “do its homework,” better understand the businesses it invests in; the environment in which they operate and sensitivity to local risks. Cass explains that offices in emerging markets also allows CPP Investments which manages assets both internally and with external partners to position itself to partner with the best regional and national firms.

“We also spend time building relationships with governments to understand the regulatory environment in the countries where we invest. These local and regional factors are incorporated into our organisation-wide integrated risk framework, which covers a wider variety of investment risks and includes various types of stress tests on our portfolios.”

“Our presence in the regions where we invest combined with our company-wide focus on building relationships with governments and monitoring regulatory changes also enables us to mitigate issues as they arise.”

CPP invests across 56 countries with more than 320 investment partners. Just over 50 per cent of investments are in North America.

If I read this right, CPP Investments is going to start trimming its massive exposure to emerging markets which stood at 16% for base CPP (bulk of assets) and 11% for enhance CPP (all figures from F2024 Annual Report):

 

Most of the exposure in emerging markets is in passive global equity indexes which you can find here and below (click to enlarge):

CPP Investments also has made meaningful investments in infrastructure in India but the bulk of the assets are passive exposures to emerging market equity indexes.

Ed Cass cites two reasons for cutting back exposure: geopolitical risk and increased market efficiency (ie security selection is becoming tougher there).

He doesn't get into details on how much they plan to cut, we will have to monitor that in every subsequent annual report.

He does state that these markets provided meaningful alpha for the Fund over the last several years but provides very little detail on how much alpha was produced there:

Successful emerging market securities selection during the past several years has been a source of alpha, and he says CPP Investments has found the strongest returns in emerging market infrastructure, notably through investments in toll roads. For example, the asset manager owns toll roads in Mexico, Chile, Indonesia and India that Cass says “are performing well.”

He states they need to understand deglobalization and the risks and opportunities that brings and they have boots on the ground in key areas to build relationships and monitor government regulations.

My thinking? It all comes down to US interest rates, the lower they go, the more exposure you want to risk assets including emerging markets.

Conversely, the higher they go, the less exposure you want to emerging markets and other riskier assets.

Interestingly, as US rates normalize, the trend in emerging market equities is lower:

 

Of course, I'm oversimplifying but that's how these funds think in terms of Risk On/ Risk Off and it makes a lot of sense because higher US rates go, less risk you need to take (just buy more long-dated US Treasuries and hold to maturity).

There's another risk in emerging markets and we saw it last year as CDPQ got embroiled in a large bribing scandal in India where three former executives there were accused of taking part in bribing scheme to bribe Indian government officials by US regulators. 

I can assure you that this rattled the boards of the Maple Eight and many board members raised concerns about investments in India and other emerging markets.

At the end of the day, governance, rule of law and a stable regulatory framework are critical to making large investments in private markets and some countries are a lot more advanced than others in that regard.

In my opinion, this might require a rethink in emerging markets on whether you want to be a direct owner of a platform there or indirect owner of assets through funds even if you pay fees.

On a related topic, CPP Investments and  and MGRV, a leading Korean rental housing provider, recently announced a KRW 500 billion (C$500 million) joint venture to develop rental housing projects in Korea:

CPP Investments will hold 95% of the venture and MGRV will own the remaining 5%.

The joint venture, CPP Investments’ first direct investment in the residential sector in Korea, aims to develop properties in key corridors of Seoul, close to major business districts and leading universities. CPP Investments has committed up to KRW 133 billion (C$133 million) to the joint venture’s seed projects located within Seoul.

“This joint venture offers an excellent opportunity to enter the residential sector in Korea and meet the strong demand for high-quality rental housing in the greater Seoul area where half of Korea’s population resides,” said Sophie van Oosterom, Managing Director, Head of Real Estate at CPP Investments. “We are pleased to work alongside an experienced local partner like MGRV to enter this market segment, which we believe can generate attractive long-term returns for the CPP Fund.”

MGRV CEO Cho Kang-tae said, “this strategic partnership marks a significant step in demonstrating the high growth potential of the Korean rental housing market and MGRV’s competitive operational capabilities on a global scale,” adding, “we will continue to drive the ecosystem innovation in the market by expanding community-centered properties.”

Rental housing market is huge everywhere nowadays, including in Korea. This is a smart long-term investment.

Below, Bloomberg Daybreak Asia podcast explores where opportunities lie in emerging markets with Rahul Chadha, Founder and Chief Investment Officer at Shikhara Investment Management. Plus, a look at how the week's US eco data will play into the Fed's policy path with Rob Haworth, Senior Investment Strategist at US Bank Wealth Management.

Next, Commerce secretary nominee Howard Lutnick was asked about the potential impacts of tariffs at a hearing on Wednesday. Lutnick, who appeared to suggest tariffs could come in phases, pointed to border issues with Canada and Mexico as a ‘short term’ issue. Lutnick cited both fentanyl and undocumented migrants as areas of concern for the Trump administration but did not provide details about his assertions beyond calling for an end of movement of fentanyl into the US.

Lastly, watch FOMC Chair Jerome Powell's presser from earlier today after the Fed kept rates unchanged.