A pension fund manager will invest the money to achieve returns. Holding cash as savings won’t cut it. Otherwise, there won’t be enough pension payments in the long run. However, it’s also the fund manager’s lookout to be aware of the risks and manage them.
A case in point is Alberta Investment Management Corp. (AIMCo), one of the largest and most diversified institutional investment fund managers in Canada. The investment portfolio, consisting of pension, endowment, and government funds in Alberta is worth approximately $120 billion.
The pension fund manager hit the headlines in 2020 after reporting $2.1 billion in losses. The outsized losses are unprecedented. Some sources are saying that AIMCo executives were not fully aware of the risks they were taking. Meanwhile, external reviewers point to a single investment strategy as the reason for the fiasco.
Volatility-based investment strategy
On March 14, 2020, the board of AIMCo learned of the significant losses incurred on the Volatility Trading Strategy, or VOLTS. To mitigate further losses from the one public equities strategy, the board approved a plan to wind down and permanently close VOLTS. AIMCo lost about 2% of the value of assets under management.
A major criticism against VOLTS is that it was a money-losing approach. Christina Gray, a Member of the Legislative Assembly of Alberta who sits on the heritage fund committee, said AIMCo took an unacceptable risk. The strategy jeopardized pensions in Alberta.
After pulling the plug on VOLTS, AIMCo is reviewing its strategies to prevent the re-occurrence of the blow-out. Affected pension funds are expressing outrage over the considerable losses. Meanwhile, the woes of Alberta are compounding. The province is already reeling from a weak economy, mass layoffs, and low oil prices.
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Never a money-losing approach
The losses are regrettable, because the hard-working people in Alberta anchor their retirement on the fund. Investors or fund managers should, at all times, be mindful of the risks and use the appropriate strategies to contain them. No one should be using a money-losing approach.
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Fool contributor Christopher Liew has no position in any of the stocks mentioned.