City’s new investment fund an early winner

AIMCo’s return on $111 million in 2017 was 7.1 per cent

A new city investment fund produced a 7.1 per cent return in 2017 — well above a target rate of appreciation — on about $111 million in reserve cash.

That’s also three times the rate of return the city previously earned on such funds before the provincial government eased rules that prevented the local municipality from investing in stocks and equities.

The performance of the investments, managed by the Alberta Investment Management Corporation, or AIMCo, are outlined in the city’s 2017 annual report.

Like most major, broadly invested portfolios, Medicine Hat benefitted from soaring stock markets in 2017, though the same markets have already shown a correction in early 2018.

Administrators told the News that initial returns are extremely promising, but they may not keep up the torrid pace.

“Last year, and probably the last eight years were strong years (to be invested in equities), but we’ve seen some correction,” said city corporate services commissioner Brian Mastel. “But last year was certainly a good year for equities, AIMCo. and every other fund manager.”

“Our policy target is (to earn) inflation plus four per cent in the long term and I’d say we’re in line with that.”

Last year, a benchmark of other, comparable funds posted 5.9 per cent return.

The national general inflation rate for 2017 was 2.3 per cent, according to the Bank of Canada, making for gain over inflation of 4.8 per cent.

“That difference is a benefit of being in the different asset pool that AIMCo actively manages for us,” said Mastel.

On Thursday, the Canadian Pension Plan announced that it recorded an 11.6-per-cent annual return, attributed mostly to the surging stock markets in Canada and the United States. AIMCo’s 2017 annual report is due in June.

Previously the city was restricted to low-risk bonds for investing, but after appealing to the province, it was included in higher return investment regulations.

Most of that money is earmarked to close in oil and gas wells, though the same rate of return applies to the initial deposits of a municipal heritage savings fund.

In total, the funds comprise about $130 million generally earmarked to well-retirement money, as well as an initial $1 million “seed” deposit in the Heritage Savings fund.

Since the money was deposited over the course of the whole year to average the cost of buying into the portfolio, the actual dollar return was about $4.9 million at Dec. 31, 2017.

“It’s great news,” said Mayor Ted Clugston, an early supporter of the fund. “But I used to be in the investing business and the thing I learned is that there are good years and bad years.”

“The aim of the City of Medicine Hat going with AIMCo was to get higher returns over time, and these are long-term investments, so there could be years where there could be less return and we need to be prepared for that.”

The city now has two classes of investments: those with AIMCo., and other low-risk bond funds to hold reserves for infrastructure, working capital and government grants.

Those bond funds earned 2.31 per cent in 2017, marking the ninth time in 10 years the portfolio has beaten the TMX Canada Bond Universe index.

In total, investment income for the city in 2017 was $8 million, about $1 million less than in 2016 due to a general decrease in reserve cash used for construction payments and general operations.