By COLLIN GALLANT on March 2, 2023.
The City of Medicine Hat has parted ways with the Alberta Investment Management Corp. as its long-term money manager, instead contracting an array of private investment firms which local administrators believe can provide better returns in broader investments with no more risk.
City treasurer Ryan Wright told Wednesday’s meeting of council’s audit committee a review was launched last year to update expectations for the $375-million portfolio after volatile markets in 2020 and 2021.
A complete “refresh” was approved last year after administrators said private managers in more asset classes could maintain or boost returns while limiting risk of downside, said Wright.
“The rate of return to risk has improved, and part of the reason is just how based a year 2020 was,” he said. “But it’s nice to now that going forward the expectation in more like six per cent, compared to five.
“It’s much higher than we were expecting two years ago, but we’ve set a mid-point target of 5.5 per cent.”
The new mix of managers was engaged after a review by international finance consulting agency Mercer led to seven targeted-asset classes managers. Eventually nine new managers were contracted in the areas of global and Canadian equities and fixed incomes, Canadian commercial mortgages, infrastructure, real estate and currencies.
That risk metric is described as a volatility rating, and was originally set at 8.55 per cent compared to expected returns of 4.9 per cent.
New analysis expected a blended return across classes of 6.21 per cent against a volatility rating of 8.4 per cent.
If achieved, the difference would be an additional $1.2 million in investment income, coupled with a relatively unchanged risk factor.
“It’s a very elaborate, diversified portfolio,” said committee chair Coun. Darren Hirsch.
“It’s phenomenal work … by some great talent that we’ve brought on.
“It speaks to the maturity of the organization to get to a significant investment portfolio.”
The city initially engaged AIMCo. – which handled provincial reserves and public sector pensions – in 2015 when it was granted the ability to broaden its investment mix in large-city investment regulations.
It was also seen as as a soft entry into the practice of equity investing, with a stable quasi-public operator that was trusted by the province.
It initially only held long-term investments generally earmarked for well abandonment and cleanup liability, but several years later the city formed a mid-term investment fund with private managers, and examined a short-term cash management fund.
The city set portfolio allocations, but largely left specific investments up to managers at AIMCo., but also left the fund untouched when it began a major well-reclamation program three years ago.
Instead it borrowed at fixed rates, with the fund eventually used to cover payments after a five-year grace period, and the difference between returns and borrowing cost falling in the city’s favour.