Understanding IMCO's Building Blocks

Yaelle Gang of the Canadian Investment Review reports, The Building Blocks of the Investment Management Corporation of Ontario:
In 2016, when Bert Clark became the Investment Management Corp. of Ontario’s first president and chief executive officer, he was tasked with building the organiza­tion from scratch.

Like a startup, he had the oppor­tunity to begin from square one, free of legacy systems. “I think one of the advantages we have is that we’re 25 years behind all of our peers,” he says.

In 2017, IMCO began managing assets of about $60 billion on behalf of the Ontario Pension Board and the Workplace Safety and Insurance Board.

Both organizations came with separate asset mixes and investment strategies, says Clark, noting IMCO’s approach so far has been managing the assets of both organizations as segregated portfolios.

“And frankly, the reason we decided to do that is you can only do so many things at once and our priority, in the first instance, was to transfer the staff, the investment management responsibilities and launch IMCO.”

IMCO is now working with both organizations and providing asset mix advice. However, both organizations will retain the right to set their own asset mix. “It’s entirely conceivable that different clients with different liabilities will have different asset mixes, as they probably well ought to,” says Clark.

IMCO has developed numerous investment products, which can be used like building blocks that any organization investing with IMCO can assemble in different combinations to meet their particular risk appetite and return objectives. These include equities/growth-re­lated strategies, inflation-linked strategies, rates-related strategies, highly-liquid strategies and absolute return strategies.

“Our view is that the future is very hard to predict,” says Clark, citing a number of macro factors that drive overall risk and returns, including equity markets, credit spreads, inflation, interest rates and foreign exchange.

“Once you accept that you can’t predict the future — no one has a crystal ball — then really what you should be trying to do is construct a portfolio that generates the best risk-adjusted returns, irrespective of what happens in those things.”

IMCO is working with the OPB and the WSIB to construct diversified portfolios from a factor-perspective, he says.

IMCO is now entering phase two of its operations, adds Clark. “We have two segregated portfolios, two different asset mixes — legacy asset mixes — and different investment strategies for each of the asset classes. A year and a half from now, or in 2020, we will have worked with both of the clients to enter into new asset mixes . . . and we will have harmonized the investment strategies for them and we will have pooled assets into common products.”
The article ended with this on the central role of risk management:
IMCO’s chief risk officer reports directly into Clark as a standalone function and plays a role in every investment decision. The investment committee is co-chaired by the chief risk officer and the chief investment officer, says Clark. The risk team also plays a role in helping model portfolios and IMCO has invested in a risk system to monitor portfolio risk in real time. “Ultimately, investment is about taking risk and being paid for risk, and you’re a better investor if you have a better handle on your risk.”
IMCO’s chief risk officer is Saskia Goedhart. When I last spoke to Bert, he spoke very highly of her. Before joining IMCO, she served as Group Chief Risk Officer at AMP Limited in Australia.

The fact that she reports directly to the CEO as a standalone function and plays a role in every investment decision tells you that risk mitigation is central to IMCO's building blocks.

Why is this so important? Because the thing that strikes me the most from Bert Clark's comments above is humility. I can sum it up like this: "We can't predict the future, nobody can. Once you accept this, you need to build a well diversified portfolio that offers your clients the highest risk-adjusted returns no matter what happens to various macro factors."

And Bert is spot on about this: “Ultimately, investment is about taking risk and being paid for risk, and you’re a better investor if you have a better handle on your risk.”

There are a lot of risks out there, some are short-term risks (mostly noise), others are long-term structural risks, but ultimately you need to get a handle on all these risks and be able to take the most appropriate risks across public and private markets to deliver the highest risk-adjusted returns.

The job of taking intelligent risks falls under IMCO's CIO Jean Michel who I met in Toronto last month when I attended the CFA Society's 2019 Annual Spring Pension Conference.

In a nutshell, Jean told me we'd better get used to a low rate, low return world, it's here to stay and that you need broad diversification across public and private markets and all your strategies firing on all cylinders to make your return objectives. He also stated you need to pay a lot more attention to currency risk.

Interestingly, last week, Jean was at the Fiduciary Investors Symposium at Cambridge University discussing why innovation is more important than ever given the heightened uncertainty out there:

At the symposium, Jean said innovation must increasingly focus on better access to private, illiquid markets:
“We need to change how we access illiquidity,” he said. This process will have positives and negatives. Investors like the lack of volatility in private markets but this will change if more investment flows, and price discovery makes private markets look more like public investments. He also sounded the importance of culture in building innovation. “So many organizations have the skills and ideas to innovate, but when it comes to trying to convince stakeholders and move forward, the culture says no,” he said.
Jean knows what he's talking about. Prior to joining IMCO, he was the Executive Vice-President, Advisory Services to Depositors and Strategic Analysis at the Caisse and before that, he was the president of Air Canada's Pension Plan where he and his team had the right culture and strategies to resuscitate that pension plan from near death (it was severely underfunded after the 2008 crisis and they brought it back to fully funded status).

As far as privates, earlier this week I discussed why investors are preparing for a market shift, allocating more into private equity and other illiquid altenatives, and I explained why the right approach is to scale into the asset class through co-investments.

Nicole Musicco, IMCO's Senior Managing Director of Private Markets knows all this. She has extensive experience at Ontario Teachers' Pension Plan and it's her job to make sure they get the right team, approach, external partners, alignment of interests and realize on their value creation plan for each major investment they will undertake.

The shift into illiquids that Jean Michel is talking about is quite profound. When you see BlackRock undertaking its biggest organizational overhaul in years to shift its attention on alternatives to boost growth, you know something seismic is underway.

Below, Barry McInerney, president and CEO of Mackenzie Investments, joins BNN Bloomberg's Amanda Lang for a closer look at the latest quarter and his outlook for the markets.

He shares some excellent insights and discusses why policy risk remains the biggest concern. He also discusses how Canadians can now access liquid alternatives to help them mitigate some of the risks in equity markets.

Yesterday, I had lunch with Brian Cyr, Managing Director of bfinance Canada, and he shared this interesting research paper on alternative risk premia strategies they produced last October.

My thoughts are you need to do your due diligence on liquid and illiquid alts, the future is going to be full of negative surprises and you need to manage your downside risk as best as possible.