One of Canada's largest pension funds is bracing for a rocky year.
Leo de Bever, head of Alberta Investment Management Corp., is warning that his fund will fall far short of the 10-per-cent return it posted in 2012 as developed economies struggle to get back on track and markets continue to fluctuate.
The head of the provincial Crown corporation is more attuned than most to the volatility that continues to grip markets: The job of managing assets totalling about $70-billion, with investments around the world, is made more complicated each day as high unemployment and crushing debt problems bedevil lawmakers in Europe and the United States.
Mr. de Bever, a former chief forecaster for the Bank of Canada who also ran a major pension fund in Australia, has sharpened his stance against austerity programs. He likens Europe to a leaky canoe, with politicians plugging the holes at their own feet and ignoring the holes near their counterparts.
"It was a very confusing year [in 2012], and frankly I have this idea 2013 might be very similar, driven by politics more than anything else," he told reporters Wednesday. "Everything we tried last year worked. And that doesn't happen very often, so we're kind of nervous the expectations have now been set at a level that I may not be able to satisfy."
AIMCo, which is free to invest without direction from the Alberta government, said that if global stocks were to gain 5 per cent or 6 per cent in 2013 (which is below average), the fund could climb by 6 per cent or 6.5 per cent.
Mr. de Bever is especially bearish on bonds in Canada and the United States, calling for a gain of only 3 per cent this year. "I only see two scenarios there: a bad one and a really bad one," he said, adding that he would not be surprised if average bond returns were negative over the next five years.
Mr. de Bever, who stresses the importance of supporting technological advancements, argues that as central banks print money in an attempt to shore up their economies, asset prices climb.
Real estate investments did particularly well in Canada last year, he noted. "But you sort of wonder how much of that is being driven by capitalization rates that are really lower."
The fund manager, who has made many infrastructure investments around the world, said AIMCo is now getting into investments that governments have forced banks to abandon.
"Part of our opportunities, strangely enough, are coming from re-regulation," he said.
"The governments are looking for people to blame for what happened in 2008. They are putting new rules in place and the rules are not always really well-thought out."
As a result, banks are abandoning some businesses and selling assets. This allowed AIMCo, one of the largest pools of capital in Canada, to consider infrastructure financing, reinsurance, and other niche businesses.
The fund is also in the U.S. mortgage market, providing money for projects such as office buildings and retail centres.
Closer to home, Mr. de Bever does not think the heavy oil differential (the difference between the North American benchmark and the price producers in Canada receive for their crude) will narrow any time soon.
Pipeline constraints and the enormous amount of light oil being removed thanks to hydraulic fracturing technology will keep the gap wide, he said. This means oil patch companies will continue to feel pain.
Oil differentials are key to the western economy given how reliant provincial budgets have become on energy revenue. Mason Granger, fund manager and resource specialist at Sentry Investments in Toronto, is more optimistic than Mr. de Bever when it comes to Canadian crude.
"If nothing else changes in terms of global oil prices, the outlook for differentials is going to be that much better a year from now," Mr. Granger said. Projects such as BP PLC's refinery operation in Whiting, Ind., which will soon be able to handle Canada's heavy crude, will help narrow the spread, he said.