IMCO CIO on Why They're Reconsidering Their US Exposure
The C$86 billion ($62 billion) Investment Management Company of Ontario (IMCO) is re-considering its portfolio’s US exposure as the Trump administration’s trade war and ballooning US debt and deficits threaten the US market’s long-term outperformance.
The fund’s record annual return of 9.9 per cent was driven by surging equity markets last year despite an underweight position in the Magnificent Seven. However, CIO Rossitsa Stoyanova says the fund is now carefully deliberating its geographical weights, given question marks around the role of the US in capital markets.
The 9 July deadline that the US set for completing trade talks is rapidly approaching, but the Trump administration has only secured two trade frameworks – with the UK and China – with a dozen more to be completed in the next 10 days.
IMCO is heavily invested in North America with 52 per cent of its investments across all asset classes in the US and 29 per cent in its homeland of Canada. Its US exposure is more dominant in its equity portfolio, accounting for 60 per cent of the exposure, followed by the Asia-Pacific (16 per cent), Europe (12 per cent), and Canada (9 per cent).
“We were pretty comfortable to have a pretty big concentration to the US, and it worked great until February,” Stoyanova tells in an interview with Top1000funds.com. “Now we are considering whether we should have a US target… which we don’t. We need to figure out how comfortable we are to be exposed to the US.”
Equities (which make up 23.2 per cent of the fund’s assets) returned 24.2 per cent for the year against the 27 per cent benchmark, with an underweight position against the Magnificent 7 one factor that dampened returns, although IMCO then employed a portfolio completion overlay strategy to bring its Magnificent 7 portfolio exposure closer to the benchmark.
“The portfolio was very resilient during April – a lot of the things that we set up for the portfolio worked: we had enough liquidity so we didn’t have to sell. We have a rebalancing methodology which is very systematic. So some of the systems and processes that we put in place worked as intended.
“What I’m certain of today is that we should have a US exposure target, which we don’t. We need to figure out how comfortable we are to be exposed to the US.”
Similarly, Stoyanova and her team are assessing their approach to currency. The appreciation of the US dollar against the Canadian dollar contributed to the 2024 returns. Now, the fund’s exposure to the US dollar and US treasuries is attracting more scrutiny, given they may no longer offer the same diversification benefit in a downturn.
“Our expectation today for the long term is that the US dollar will depreciate from where it is today, and this is a long-term trend. So we’re considering how much we have in US dollars, and also what other assets could be used as a diversifier and as s safety in a downturn or in that crisis.”
Central to the fund’s activities is its regular thematic analysis of global markets – the IMCO World View. It pinpointed 12 themes which inform its long-term investment strategy, including accelerating deglobalisation and addressing inequality trends, as well as decelerating climate change and sustainability.
“The trends have materialised – what we didn’t expect is this massive acceleration of the trends,” Stoyanova says.
A growing focus on private markets and internalisation
Private markets are central to IMCO’s strategy to weather this environment of potentially higher volatility and inflation, given its long investment horizon and tolerance for illiquidity and complexity.
IMCO’s exposure to global credit, infrastructure, and private credit has tripled in the past five years with private assets now almost half of the total portfolio.
“Private markets will remain a focus for the fund. We think they bring diversification that we cannot get in the public markets.”
While the absolute performance of IMCO’s private market portfolio was strong in 2024, its net value-add was 244 basis points below its benchmark, largely given the outperformance of public markets in comparison. However, it expects those valuations to converge over the long term.
The organisation also now runs about half of its private market portfolio internally to save on fees and invest in assets that align with its worldview. Its mid size means it co-invests alongside its managers and now has an expedited process to approve smaller investments under C$50 million.
“We are very clear on what kind of co-investments we like to do. We’re nimble and we are reliable, and they appreciate that, which means that they know exactly what we’re looking for. So when they offer it to us, we’ll either quickly say ‘yes’ or ‘no’, and if we say ‘yes’, we’re going to be there in the time frame that they need and that’s important.”
IMCO will co-invest alongside its partners but does not have the scale of other Maple 8 funds to take full ownership of assets. It recently identified a need for more exposure to infrastructure utilities but deal flow is lumpy and requires larger investments than it typically makes (IMCO does own 10 per cent of Australian energy transmission network AusNet).
IMCO has instead taken a novel way to meet that goal through publicly-listed proxies.
“We do a program with our public equity factor team that invests in public US utilities. It’s a diversified basket of stocks that sits in infrastructure, and it fills that need that they identified in the portfolio for utilities. We might do more of that in privates.”
Similarly, IMCO’s private equity and credit teams work closely together given they’re investing in the same kind of companies, just across different areas of the capital structure.
“I think it’s going to become more important because the public and private worlds are coming closer and closer together. So these artificial definitions might make less sense in the future.”
Strengthening advisory role, a more nimble approach
IMCO has faced more than its share of challenges since it was created in mid-2017 to manage the assets of local public sector bodies.
“We had Covid,” says Stoyanova. “We had the first war in Europe. We had inflation for the first time in a long time – and Liberation Day.”
They not only created a challenge to performance, but also made it difficult to build internal investment teams during such volatility. Yet the fund has taken those setbacks in its stride to build a strong foundation and culture.
“With that volatility, our portfolio and strategies have done really well – 2024 was our best year of performance,” Stoyanova says from the fund’s offices in Toronto.
“We’re big enough at C$86 billion ($62 billion) to help our clients and do interesting things that are not just investing in an index, but we’re also small enough that we all sit in one room. It’s a big room, but we still fit in one place.”
IMCO last year added four new public sector clients, joining long-term clients such as the $C31.7 billion Ontario Pension Board – a defined benefit plan for Government of Ontario employees – and the Workplace Safety and Insurance Board, an insurer which helps Ontario people get back to work after a work-related injury or illness.
The majority of its clients are now also taking IMCO’s strategic asset allocation advice, shifting from overweight allocations to underperforming assets such as real estate to newer asset classes like global credit and private equity.
Stoyanova says it is now talking to clients about taking a more responsive asset allocation approach given the increasing pace of change across markets.
“We don’t market time, but we’re market aware, which means that we have a worldview that we think gives us an idea of what the world and the markets will look like for a medium time period, say three to five years – and guides our investing.
“One of our objectives is to – together with our clients – come up with a methodology where we can adjust the asset allocation more to respond to market conditions without going through an elaborate process every three years by doing the asset-liability study with them.”
Excellent interview with IMCO CIO Rossitsa Stoyanova, she touches on all the important points.
I'm going to go into a bit more depth here so my readers can understand the key factors at play and what is left out of these discussions (not purposely).
First, I went over IMCO's 2024 performance here noting the following:
[...] solid results reflecting an asset mix that is almost 50% in Public Markets (23% Public Equities, 24% Fixed Income) and global equities were on fire last year:
As shown below, Public Equities, Private Equity, Infrastructure and Credit led the charge with Fixed Income coming in flat and Real Estate down a little less than 1%:
Again, solid year even if IMCO underperformed its benchmark by 240 basis points (9.9% vs 12.3%).Among the asset classes, the biggest underperformance relative to the benchmark was in Global Infrastructure (8% vs 16.4%) which tells me they have a listed Infrastructure benchmark with lots of beta but if you look at 5-year returns, they outperformed their benchmark there (6.8% vs 4.7%).
Real Estate still has ongoing issues with legacy assets in Office and Retail but it seems to be getting better there as they reposition that portfolio (takes time).
Bert Clark addressed the $400 million hit from Northvolt -- the biggest exposure there along with OMERS -- and said it didn't impact overall returns as they are diversified.
You'll also notice that Private Equity underperformed its benchmark last year despite delivering a return of 16.4% (benchmark return was 17.9% because of strong US equity performance).
In the interview above, IMCO CIO Rossitsa Stoyanova discusses US exposure and if they need to implement a target given how well those assets have performed (led by Mag-7 and other growth stocks).
No doubt, concentration risk remains high in 2025. The latest data show Mag-7 as a percentage of the S&P 500 bounced back after the Liberation Day turmoil and now stands at 33% of the S&P 500:
How long can this concentration risk last? Nobody knows, there's a secular AI spending cycle which is propelling these and other related stocks up.
Does this mean you should reduce your US exposure? Maybe but I'm hardly convinced, there is no bubble going on here remotely close to what happened in 1999-2000 as massive earnings and revenues are propelling these stalwarts higher but there's definitely speculative froth in some corners of the market.
The reality is the US equity market has a huge advantage over other global stock markets, it's called top tech stocks and all those big and not so big tech companies are the envy of the world.
It's also the deepest, most liquid market in the world and that will never change.
Also, if you look at this year, the rally is broader with Financials, Industrials, and other sectors contributing to index gains.
Trump and his tariffs are a distraction, even his policies can't stop the US market from surging higher.
Of course, there is a debt problem, but it's hardly unique to the US. UK and Japanese long bond yields are surging to new highs, there's a global debt problem.
As far as the US dollar, some think it's headed lower:
There were a lot of reasons as to why the dollar sold off strongly post-Liberation Day, but it was way overdone and has been coming back recently:
I remain bullish on the greenback, think it will continue to climb higher in the second half of the year and while the debt problem is real, it's a global problem.
There are a lot of moving parts to the macro economy, IMCO invests with the best hedge funds in the world, I'd be grilling them hard here to gain some long-term perspective on their thinking.
As far as private equity, it remains an important asset class and IMCO has the right approach, investing with top partners and co-investing on larger transactions.
Here is a good question to ask Rossitsa and Bert: what percentage of IMCO's PE portfolio is fund investments relative to co-investments.
For smaller funds, the ratio tends to be 70% fund investments/ 30% co-investments, but for larger Maple Eight funds, it tends to be closer to 50/50 although some have a much more mature program than others.
As far as purely direct PE deals, those days are over, almost everyone is leaning on their fund partners to gain access to great co-investment opportunities to reduce fee drag and retain a healthy allocation to the asset class.
In the interview, Rossitsa states IMCO's public equity factor team that invests in public US utilities, but if that's the case, their performance benchmark should be the utility ETF (XLU) which is on fire last few years as it too benefits from AI trend (energy side).
Lastly, I agree with Rossitsa, tactical asset allocation over shorter periods is very difficult and not worth it, but they can help their clients think things through over the next three to five years through better insights that will help orient them on their asset mix decisions.
Over the short run, most of the added value comes through normal rebalancing activity which is critically important over the long run as well.
Alright, I'll end it there.
Below, CNBC's "Closing Bell" team discusses market trends and investment strategy with Chris Hyzy, chief investment officer at Bank of America Private Bank and Merrill.
Also, Barry Knapp, Ironsides Macroeconomics director of research, joins 'The Exchange' to discuss the CPI report and the pressure on Fed to cut rates.
Third, Neil Dutta, Renaissance Macro Research, joins 'Closing Bell Overtime' to talk today's CPI read and what it is signaling about the consumer.
Fourth, CNBC's "Closing Bell" team discusses the latest inflation report, including the impact of tariffs and the future of interest rates, and more with Torsten Slok, chief economist at Apollo Global Management.
Lastly, Jim Bianco joins CNBC Fast Money to recap today's CPI Report, rate cuts and the bond market.
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