With the coronavirus pandemic creating massive selloffs in global equities in early 2020, volatility and uncertainty pose a key risk to institutional investors. We spoke with Tanya Lai, IMCO’s Managing Director of Public Equities, to discuss 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.