Imagining A Better Future

Leo de Bever, CEO AIMCo Calgary Oct 8, 2013

Alberta Investment Management Corp.

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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

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

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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

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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

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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

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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

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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

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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

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Never in Human History

Have so Many People

Had Access to So Much Information

At Such a Low Cost

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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

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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

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Source: Abundance: the Future is Better than you Think. Peter Diamandis and Steven Kotler, 2012

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

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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

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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

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Capital Equipment & Software Price Index

Rapid drop in cost of technology

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Source: US BEA 2005=1 Trend annual growth 3.2%

Low Cost of Technology is Shifting Spending from Labour to Capital

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

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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

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Institutional Role in Fostering Change

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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

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

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To be among the best institutional investment

managers and inspire the confidence of Albertans