IMCO's Experts Share Their Insights

IMCO has started a new section on its website providing some very valuable insights on the economy and asset class strategies.

IMCO Insights feature in-depth interviews with their experts and I think it's worth going over them.

First, Tanya Lai, IMCO’s Managing Director of Public Equities, discusses how IMCO is building its public equity portfolio and keeping a long-term perspective during this unprecedented time:
How do you navigate an environment like this one, with the coronavirus pandemic causing daily significant swings in major global equity markets?

With any market dislocation, we have to view it as an opportunity. If you look at it only from the risk and loss perspective, you miss the opportunity to capitalize on what’s happening.

So, for example, we examine whether the selloffs mean we should be rotating out of certain sectors and into others. We are also looking to see if we should slow the implementation of some of our strategies because doing so might allow us to hold on to a certain exposure we find appealing.

It’s also not just the coronavirus. We’ve also got the recent volatility in global energy markets, which obviously impacts equities and creates new potential opportunities for us as well.

How would you describe your fundamental goal as a public equities investor?

We have a two-pronged goal. First, like everyone else, we want to beat the benchmark over the long term. Second – and this is what sets IMCO apart in our view – we are striving to deliver a Sharpe ratio net of cost that is better than the benchmark (at its most basic, the Sharpe ratio measures how much excess return an investor earns in exchange for holding a riskier asset). We’re trying to pull down cost and become efficient with how we take on risk, all to deliver better returns for our clients.

Tell us more about the portfolio your team is building at IMCO. How do you balance cost while pursuing above-market returns?

We’re working to create a portfolio that encompasses a number of complementary strategies that give us and our clients diverse global equities exposure on a cost-efficient basis.

One way we’re managing expenses is by allocating a part of our portfolio to low-cost, factor-based investing. We believe exposure to factors like momentum, value, quality and size will generate outperformance over a generic benchmark index in the long run.

We’re also building an internal fundamentals team that will focus on relationship-style investing, taking more of a private-equity approach to public investing. They’ll take chunky, minority ownership in small and mid-cap firms in North America or Europe; they will be expected to sit on boards and constructively work with management to grow the business and make it stronger. We’re looking for high-quality companies with predictable cash flows. Each year, we will grow this portfolio slowly by three or four stocks at most, because it’s an intensive, in-depth process.

We also work with external managers who offer high-conviction strategies focused on portfolios of 25 or 35 stocks globally and who take smart active risk that helps drive returns. We are looking for those who are doing something really targeted and different that we cannot easily replicate ourselves.

And then last but not least, there’s the index completion piece that rounds out the portfolio.

Is it difficult to make real-time decisions in the moment while being mindful of the fact that your clients’ investment horizon is much more long-term?

I think the biggest risk is trying to be too clever and trying to time things too precisely. Our key is to keep the long-term perspective in mind. We’ve stayed away from making trades on a day-by-day or even week-by-week basis because we measure success over years, not days.

Ultimately, our clients are attracted by our people, our performance and our process, combined with excellent risk management and governance. That’s what we’re focused on building at IMCO.
Next, Jennifer Hartviksen, Managing Director of Global Credit, and Christian Hensley, Senior Managing Director of Equities and Credit, discuss opportunities in the credit space:
How has the coronavirus pandemic impacted your view of the private and public markets? How is it shaping conversations with clients?

Jennifer: From a credit perspective, the current market volatility represents a great opportunity for capital like ours, that can take advantage of both structural complexity and illiquidity in the market. It creates the potential for us to structure some favourable deals that will look good over a five-year horizon.

It also lets us take advantage of IMCO’s “one-stop shop” approach and collaborative culture to think across asset classes. For example, one of our infrastructure colleagues recently came to us to discuss a co-investment. The transaction involved access to capital markets, which of course has been impacted by the pandemic, which in turn created a potential opportunity for us to lend money. So being part of an integrated team free of silos is a benefit in surfacing these sorts of situations.

Christian: The pandemic has brought significant disruption to the financial markets, and that volatility is driving very different outcomes for companies with different liquidity and fundamental profiles. As a potential provider of liquidity, we’re poised to capture some really interesting market opportunities. Even high-quality names have sold off significantly, which presents an opening for us.

So far, I think our clients are pleased we’re quickly adapting to market conditions, exploiting our liquidity and going after some interesting investments.

How else does IMCO differentiate itself from other asset managers? What’s unique about your offering?

Christian: We differentiate ourselves on speed, quality and cost. In terms of speed, we can help our clients get to opportunities and asset classes more quickly and cleanly than they might otherwise. When it comes to quality, we’re always going to be a friendly, constructive and strategic investor in the companies we support. We have a long-term point of view, certainty of capital, and perspective and insight. And lastly, we have a very effective cost of capital, which lets us be competitive in the markets that we’re addressing.

Our product offering is also definitely a part of our secret sauce. We have a flexible, adaptive and really compelling menu of products, which means we don’t force our clients into a “one size fits all solution.” Instead, we’re able to match almost any risk and liability profile and adjust as the client’s needs evolve.

Why is it so important to think about the long term in an environment like this one?

Jennifer: Simply put, it’s impossible to call a top or a bottom in the market. Instead, we believe it’s important to have an investment process with a long-term horizon that permits averaging into investments and being positioned to react to opportunities when the market presents them.

Being able to deliver scalable, risk-managed, long-term oriented products that can take advantage of these dislocations is a central feature of what we offer. We’ve got a really strong team focused on executing on the market insights we’ve developed, enabling us to deliver attractive exposures our clients might not be able to access themselves.

What segments of the credit universe are attractive at present?

Jennifer: We see both immediate public market dislocation opportunities and longer-term private market situations. We have the opportunity to capture an illiquidity and complexity premium in private credit, and there are also private deals that don’t come to the public market for a variety of reasons like size or flexibility of borrower requirements.

Christian: I would add that we’ve also been cautious for some time of cyclical and commodity-driven parts of the market. We generally prefer to find a great business and a great management team to invest in over a number of cycles, and to patiently build value over time by supplying them with capital. It just fits much better with our culture and our long-term horizon.
Third, Patrick De Roy, Senior Managing Director of Total Portfolio and Capital Markets, discusses how investors can build diversified, well-balanced portfolios for the current environment:
How are you thinking about portfolio design given the COVID-19 pandemic and the current period of extreme volatility?

It’s clear that diversification is key right now. This volatile period hasn’t changed the way we start discussions with clients or how we’re working with them to design their portfolios, but it’s certainly reinforcing that message in a big way.

One way we’re helping clients diversify is through our products. For example, we separated government fixed income strategies from the credit strategy. Typically, you see these asset classes together in a combined bond portfolio. To us, that’s not optimal. So instead we are offering a fully dedicated credit product and a fully dedicated government fixed income offering in a more “purified” way to clients diversify more effectively.

We’re seeking to build an “all-weather” portfolio at IMCO. We know that the macro environment will be challenging from time to time, that recessions will happen, and so on, but our portfolios are built to withstand those cycles while staying true to our clients’ risk appetite and long-term objectives.

Rebalancing client portfolios in an environment like this one takes significant discipline. What is your approach?

First of all, we’re focused on maintaining liquidity, and our decision to separate government fixed income from the rest of credit was driven in part by that focus. That’s because government fixed income really acts as the liquidity pool that we use for rebalancing.

We believe that rebalancing overall is extremely important. Every month, we rebalance to our clients’ agreed target because we have a long-term investment horizon, as I mentioned. In a down market like this one, it might feel like trying to catch a falling knife at times, but we think in decades, not weeks or months. We strongly believe that over the long run, this creates value for our clients.

Can this approach to rebalancing constrain your ability to seize on emerging opportunities you see in the market?

Not at all – we’re always looking for value-add opportunities across every asset class and have access to the liquidity required to pursue these potential opportunities. In a market like this one, with lots of noise and new distractions on an almost hourly basis, our clients rightly ask us many questions about this topic. While our baseline is to rebalance at month-end, if we decide to deviate from that, it’s because we’ve got an active view on a particular asset class. Importantly, from a governance standpoint, my team also has clear accountability for every active decision we make at the total portfolio level.

IMCO has streamlined the number of investment solutions to clients. What drove that decision?

We decided to offer fewer strategies, but to ensure that they have compelling breadth and that they don’t place a heavy implementation burden on our clients.

That’s different from the traditional approach. Let’s say you’ve got separate large cap and small cap equities products. Typically, the client then has to decide how much money to allocate to each. We believe that that allocation should actually be the job of the investment management company, not the client. This allows clients to leverage our full investing expertise, and I think it has resonated very well with them.

The IMCO team individually has an extremely impressive track record of success, but because we’re a relatively new organization, we don’t have a collective track record just yet. That will of course change over time, but right now we’re being humble, working hard, leveraging our past expertise and building for the future
Fourth, Tim Formuziewich, IMCO’s Managing Director of Infrastructure, discusses his perspective on infrastructure:
How are you thinking about infrastructure as the year unfolds? Where do you see the opportunities for this asset class?

There’s no question that investor appetite for infrastructure remains strong. We’ve got up to a $10-billion allocation to this asset class and we are well underway in deploying this capital. We’re being prudent, methodical and responsible, and are doing this both directly and through funds.

Our strategy is global, and we’re seeing a lot of activity across the asset class. When assets are fully valued, there are many willing sellers and that has been the case for the last two years, especially in North America and Europe. There are significant amounts of capital chasing deals in those markets, which has driven this trend.

What we’re trying to do right now is two-fold. First, we’ve been looking at our existing portfolio to determine which assets we’d like to keep and own more of, and which ones we’d like to sell. And then second, we’re looking at assets that offer clients improved diversification, opportunities that are strategic in nature for IMCO and, given the current market environment, value-oriented opportunities.

Wherever you look in the private markets, there’s talk of significant amounts of “dry powder” capital – money that large institutions are waiting to deploy. Does that make infrastructure investing more challenging for IMCO?

There certainly is a lot of dry powder in the infrastructure world, but generally I would describe most of the market as appropriately pricing risk. It’s forcing everyone to be more disciplined, and that’s really where we excel. We believe there’s still good value to be found among the largest transactions in the world, as well as select regions in the world such as Latin America, pockets of Europe and a number of emerging markets. The pandemic has created challenges for some sectors that ultimately translates into potential investment opportunities at valuations that were not available a few months ago.

What’s guiding your investment decisions in this sort of environment? Are there sectors or industries you’re focused on?

We are trying to deliver absolute returns to our clients and offer portfolio diversity in doing so. Our portfolio view does not change from a fully valued environment to a dislocated environment.

In terms of sectors, we’ve been generally cautious on transportation assets over the last year, as we have been on the back end of a long bull run. We think other private investors view the world in a similar way. This cooling off could end up translating into some interesting transport opportunities in the next year or two.

There is also significant opportunity in what I’d call defensive or neutral transactions. This includes technology – fibre buildouts, data centres, cell towers and so on. We believe that investment is going to happen regardless of whether or not the economy is going to grow or flatten over the next couple of years.

We’re also looking closely at renewable energy. We believe the transition to renewables or low-carbon energy will be much faster than what some anticipate.

IMCO has a long-term investment horizon. When you look ahead five or 10 years out, what do you think will be your areas of focus thematically speaking?

I think again that the change in the power and energy industry will be a big theme. My view is that any systemic alpha in renewable development is gone, with the exception of select opportunities in developed markets and certain emerging markets. At the same time, the influx of intermittent renewable energy assets such as wind and solar have created system stability challenges that regulators have begun to address. We’re spending a lot of time studying what an energy business will have to look like to be successful in five or 10 years.

Next is the unfolding telecommunications buildout. In our view, the fiber buildout in particular is happening now in scale and potentially will only be required once. In 10 years, we’d like to look back and see a portfolio that has thoughtfully and constructively invested in the space.

And the third theme would be greater exposure to greenfield development. The current dislocation will not last and when markets revalue, the option to invest at cost as opposed to multiples of cash flow would be extremely valuable to our clients.
Lastly, Brian Whibbs, IMCO’s Managing Director of Real Estate, discusses his insights about how investors are approaching this asset class.
Let’s start at a high level – what are some of the driving forces in real estate today?

Real estate is the oldest class in the world. At its core, it’s quite simple: it’s land, and what you do with it. What drives it all is demographics – where and how people want to live and work. Today, that means global urbanization. That has created enormous support and growth for markets like New York, Vancouver, London and other global urban centres. The living and working preferences of Millennials and Gen X are setting the tone, with industrial and retail following along wherever the people go.

What happens to the appeal of real estate in a highly volatile environment like the one created by COVID-19?

I think real estate becomes more appealing in this sort of market. It’s a hard asset backed typically by long-term contracts, so I’d say it will be the least affected for the longest period of time. Everything gets affected eventually, especially if the economy is under exceptional strain and in uncharted territory. As governments order the closure of most businesses, we are seeing many of our retail tenants struggling to pay rent and asking for deferrals or abatements.

The retail industry has undergone a dramatic disruption in recent years. What is your view on what that means for real estate in this sector over the long term?

E-commerce, driven by shifting customer expectations and the desire to satisfy shopping needs immediately, has upended the status quo. There’s still a place for brick-and-mortar retail – but it’s clear at present that there’s too much of it. The nice thing about big regional shopping centres is that they’re in excellent locations. We think that at first, those locations will be intensified with residential development, and over time the market will dictate what else goes there. The underlying land is excellent, so it’s a shift in use more than anything else.

How does industrial real estate fit into the retail shift?

There is a big demand for industrial right now – warehouses, specifically – which is obviously being driven by e-commerce and its distribution needs. It’s quite interesting because while it’s typically not enjoyed top-of-mind attention from investors, many are rushing to it now. It’s very quick and inexpensive to build and in some ways it’s actually replacing retail.

What about the office real estate market? How sensitive is it to factors energy prices or crisis like this year’s COVID-19 pandemic?

Office real estate is sensitive to short-term shocks and longer-term structural issues as well, but impact varies from market to market. So, for example, in New York or Toronto, you have high barriers to entry where it’s relatively difficult to build new product, job growth has been strong and rents have trended upward. That’s a stark contrast to markets like Calgary, where the energy crisis has led to a dramatic oversupply.

It’s too early to tell how the pandemic will affect the office environment. We’ll likely see more social distancing and working from home, but whether this leads to tenants taking less space overall is unknown.

How are you thinking about residential real estate and housing demand when considering investing in this asset class?

There are compelling opportunities in residential, perhaps more so than even five years ago. People have become more accepting of renting for life or living in a multifamily residential building like a condo. We’re evolving away from the desire of having a single-family home, so I think you’ll continue to see more multifamily residential development globally.

How do you see the real estate asset class evolving over the coming decade? What considerations are you factoring into your long-term investing strategy?

I think the trends we’re seeing today will continue, and that we will see more urbanization. People want to live in the city; that’s where the growth is. People are seeking cosmopolitan convenience and the ability to satisfy their work- and personal-life needs without having to commute.

I also think the retail transformation is far from over. Ultimately, there will be a balance between e-commerce and physical retail, but I think unfortunately we’re still a number of years from away from finding that balance.
These are all great insights from experts across public and private markets.

I applaud IMCO for posting these insights and would like to see others follow their lead but I doubt it will happen because unlike IMCO, their clients are captive clients.

IMCO has to search for new clients to grow its assets and needs to market its expertise. This is why you're reading these insights, part information, part marketing sharing their expertise across public and private markets.

Also, it's no secret that IMCO has had some high profile departures over the last year. Nicole Musicco, the former head of Private Markets, left the organization to join RedBird Capital Partners. And Saskia Goedhart, IMCO's former Chief Risk Officer, left the organization.

These are two exceptionally qualified women and Nicole's departure in particular left a big hole in private markets.

I'm not privy to everything that went on at IMCO but I did hear grumblings about micromanaging at the very top.

I don't know, all I know is I like IMCO's CIO, Jean Michel, even if he typically hires people he knows well who are more academic in nature.

Jean (not someone reporting to him) should have hired my buddy in currencies, not because he's a great guy and my buddy, but because of his experience and judgment, and the fact that most academic portfolio managers at Canada's large pensions can't consistently deliver alpha in currencies if their life depended on it!

Oh well, that's a shame and IMCO's loss, but overall, I think highly of Jean Michel and Patrick De Roy (don't know the rest of them).

These IMCO insights are excellent. I obviously don't agree with everything but agree with a lot and think we need more transparency in terms of the thought processes of senior managers at Canada's large pensions, especially when the going gets rough.

CPPIB is the only other large Canadian pension that does anything like this but not on such a granular level across all asset classes.

Anyway, great stuff, so keep IMCO's insights in mind, hopefully they will continue delivering them on a regular basis.

Below, Jonathan Golub, chief US equity strategist for Credit Suisse, joins "Squawk Box" to discuss how investors are approaching the markets during the uncertainty of the coronavirus pandemic.

I'm tired of people telling me the Fed's balance sheet will go to "$10, $20 or $30 trillion" and the market will "make new highs" despite the coronavirus depression we will experience. I still think the great market disconnect won't continue for long but admit, the Fed is backstopping risk assets and nationalizing markets (corporate/ private equity/ hedge fund socialism).

I think most pensions like IMCO will rebalance come month end and take money off the table. My personal advice is sell in May and stay away and if markets continue melting up, who cares, at least you'll sleep well and stop playing this irrational momentum/ quant/ algo game.