In 1995, the City of Edmonton created the Ed Tel Endowment Fund. According to Sandy McPherson, this move set the stage for how the City’s investment program would go on to evolve, and he should know, for he’s played an important part in the financial management of Edmonton and other regions himself. It was while completing his master’s degree in economics that McPherson first served as a summer intern for the Province of Alberta’s investment management division, now called AIMCo. He then spent five years rising through the ranks and eventually obtained his Chartered Financial Analyst (CFA) designation before taking on the role of portfolio manager for Edmonton. He’s now the City’s chief investment officer, responsible for an investment program that has ballooned to roughly $2 billion, and it’s some of his very policies and oversight that has helped Edmonton reach such numbers. McPherson feels that it’s his unique background and his strong team that have enabled him to strengthen Edmonton’s financial stability over the course of his nine-year tenure as CIO. “My economics background provided me with a different point of view and more of a macro perspective than if I came from the usual business-school environment,” he says. “I think spending time in the front lines as a portfolio manager in different asset classes and strategies also gave me insights on the capital markets—as well as [insights into] the challenges that portfolio managers face on a regular basis.” McPherson’s unique point of view pairs well with a city that is anything but conventional. Edmonton’s creation of the Ed Tel Endowment Fund made it different from many other cities in the world. According to McPherson, the fund was “visionary,” and Edmonton’s CFO and treasurer, Lorna Rosen, says the program was a win for the city. “The investment program has become an important pillar in supporting Edmonton’s long-term financial sustainability,” she says.
DOs & DON’Ts
Managing City-wide Investments DO Pay attention to risk and fees. At the end of the day, investing is really about risk management. The easiest way to improve the net return is to reduce the fees paid. Seek advice. In the investment process, it’s important to have the right people making the right decisions at the right time. Keep an open mind. An ongoing commitment to innovation and improvement is critical for future success. DON’T Let your ego get in the way. There are two types of people: those who don’t know and those who don’t know they don’t know. The latter are the most dangerous when it comes to investing. Keep your ego in check; the markets can be very unforgiving. Invest without a plan. If you don’t know where you’re going, any road will take you there. You need to know what you’re trying to achieve and how to measure success. Be overly conservative. An investment approach can be overly aggressive, but the opposite can also be true.
Today the program is relatively complex because its structure pools together various assets in order to achieve economies of scale. The program’s challenges, McPherson says, relate to the number and variety of investment funds involved because each has its own specific objective and risk profile. The benefits, however, outweigh the challenges. “The structure allows us to punch above our weight class, as they say,” McPherson says. “For example, the City typically falls within the high value-added and low-cost category in an annual survey of institutional investment managers around the world.” Since 2001, when the city’s funds were brought in-house—coinciding with McPherson’s hiring as portfolio manager—Edmonton has achieved approximately $147 million of added value over its policy benchmarks. Additionally, the fee savings from internal management have amounted to $18 million over the past 12 years. McPherson uses the phrase “good, fast, cheap” often, saying you can only be two out of three, and according to him, Edmonton’s investment program is good and cheap. McPherson says it’s the citizens themselves who have benefited from the investment earnings that flow into the municipal budget. Over the past decade, nearly $720 million in extra funding has found its way into Edmonton’s coffers; by comparison, it would take a property tax increase of more than seven percent to have the same revenue effect. This is not to say it has all been a cakewalk. The complexity of Edmonton and its numerous departments—fire, police, transportation, parks and recreation, and more—means that investments aren’t its sole focus. Sometimes the greatest challenge is simply communicating across departments and with senior officials. But according to McPherson, when all is said and done, his city is still in the business of managing money, and he and his team adhere to their industry’s best practices. “In general, the work and success that’s been achieved can be summarized along two main themes,” McPherson says. “First, the development of internal expertise and the creation of a cost-effective investment-fund structure. Second, the introduction of new and innovative strategies and approaches. The markets are always changing, and it keeps things interesting and forces you to stay on your toes. In these sometimes-stressful environments, it’s the people you work with who make it or break it. In my case, they very much make it.”