The Local Authorities Pension Plan is reporting a $3.4-billion loss in an “exceedingly difficult” first quarter, reducing the size of the fund by 6.5 per cent.

The LAPP reported $47.2 billion in assets as of March 31, down from $50.6 billion at the beginning of the year.

However, it said the impact on the fund would have been worse if it hadn’t directed its investment manager, the Alberta Investment Management Corp., to implement a downside protection strategy. The AIMCo sustained a 10.2 per cent loss, or about $5.1 billion during the quarter, but the LAPP said the strategy reversed about four per cent of the AIMCo’s losses, saving almost $1.9 billion.

Read: AIMCo earns 10.6% return for 2019, underperforms benchmark

“Putting LAPP’s strategy aside, the remaining $3.4-billion loss is still significant and sets LAPP Corp. back in its goal to further de-risk the plan,” said Chris Brown, chief executive officer of the organization, in a press release.

“We will continue to work with AIMCo to achieve LAPP’s goals and we are considering all available options for attaining better alignment with AIMCo on its approach to taking risk in investing LAPP’s assets. The upcoming review of our investment management agreement required by legislation provides a timely opportunity for LAPP and AIMCo to explore those options.”

The AIMCo reportedly sustained significant investment losses on a volatility strategy that performed poorly amid the pandemic-related equity market volatility in the first quarter of the year. Kevin Uebelein, the investment manager’s CEO, said in late-April that the losses, reported by other Canadian publications, were overblown.

Read: AIMCo calls reports of losses on volatility strategy ‘dramatically’ overstated

“Realized and unrealized losses combined to date are approximately $2.1 billion of the $118.8 billion of assets we manage on behalf of our clients. While that figure will likely change, we have actively taken a number of steps to limit the eventual loss. Actual losses will not be finalized until the strategy is completely wound down, which should occur by mid-June.”

Despite the loss, Brown emphasized that the plan’s funded status is still strong, at 109.6 per cent — down from 119 per cent at the beginning of the year — and members’ pensions are secure.

The LAPP’s public equities portfolio lost 24.1 per cent in the first quarter, in comparison to its benchmark’s loss of 16.5 per cent. The plan attributed the heavier underperformance to the AIMCo’s volatility trading strategy, as well as a factor strategy to be overweight in value stocks, when the value factor underperformed.

Read: What opportunities does the oil glut offer Canadian pension portfolios?

While the LAPP’s fixed income portfolio returned 0.2 per cent for the quarter, it underperformed its benchmark, which returned 1.7 per cent. The LAPP said this was due to the AIMCo underperforming money market, universe bonds, long bonds and private debt and loan mandate benchmarks. As well, the fund manager was relatively overweight in corporate credit at a time when investors were fleeing to safety in government bonds, which caused paper losses, noted the LAPP.

The fund’s real estate portfolio was down 4.1 per cent in the quarter, compared to the benchmark’s 1.8 per cent return, as the economic impact of the coronavirus hit both Canadian and foreign real estate sectors. The LAPP said it expects its investments in retail properties such as shopping malls to be particularly vulnerable to re-pricing in the coming months given prolonged social distancing measures, as well as Alberta-based real estate, due to the hit to global oil prices during the quarter, though the full impact of valuations on real estate assets in its portfolio may not be clear for several quarters.

Its private equities portfolio lost 1.5 per cent and private infrastructure lost 3.5 per cent during the quarter, both underperforming their benchmark returns of 2.2 per cent and 1.7 per cent, respectively. The LAPP noted that the illiquid nature of both asset classes meant it might take several quarters to fully assess the impact of the pandemic on its assets.

Read: Why are institutional investors ramping up allocations to private equity?

Copyright © 2020 Transcontinental Media G.P. Originally published on

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