True diversification has become more important than ever to investors, especially amid expectations of an uneven COVID-19 economic recovery. We caught up with Oleg Mogilny, Managing Director, Public Market Alternatives and Factor Investing, to talk about how public markets alternatives help IMCO diversify and manage its risk profile while uncovering opportunities to drive returns.
Tell us a little bit about the strategy you oversee at IMCO, what you’re trying to achieve and how you’re going about it.
The Public Market Alternatives strategy that I manage is an absolute return strategy intended to provide diversified returns uncorrelated to the equity markets for our clients. Our overall approach is made up of a number of distinct strategies, such as global macro, credit relative value, equity relative value, insurance-linked securities and royalty strategies.
We work with a select group of managers to ensure we’re finding opportunities to create and deliver value while ensuring the overall strategy remains diversified. For example, we look for relative-value opportunities in credit, but also across other asset classes where credit is involved—there are times when we might see a mispricing between convertible bonds and the underlying equity. On a geographic basis, to use another relative value example, we look at whether it makes sense to buy bonds of one country versus another, not only because of return but also because of what it might mean to IMCO from an overall diversification perspective.
What sort of client benefit do public markets alternatives provide?
In a world in where virtually all asset classes are expensive and interest rates are at all-time lows, it’s really important to have diversification in your portfolio as well as strategies that can deliver an absolute-return profile. Public market alternatives are one such strategy, in addition to being liquid, which is always a desirable characteristic because it enables investors to be agile to changing market conditions.
Agility and risk management were definitely top of mind in 2020, as investors grappled with the pandemic. What do you see in terms of 2021 and a potential recovery?
Last year certainly highlighted the importance of diversification in portfolio construction. Managers with robust risk management and strong portfolio construction capabilities generally performed well when the crisis hit, and many of them were able to pursue new opportunities. We carefully vetted and selected managers with this sort of profile as we continued our work to gradually shift our portfolio from holding funds of funds into direct investments.
Now that we’re in 2021, it’s clear that there are still pockets of volatility and uncertainty that persist in the market. Although last year’s stimulus was significant, we are not out of the woods yet. Yes, vaccinations have started, but there is a country-by-country differentiation in terms of the pace of recovery.
Finding attractive opportunities to deploy capital in this sort of market is as important as ever, but also more difficult than it was in 2020. Still, we are making sure we are not focusing on just picking cyclical opportunities, or over-rotating into a single strategy. Diversification is critical.
Does an uneven and shifting economic recovery pose challenges or create opportunity for an investor like IMCO?
We’re certainly seeing a K-shaped recovery, where only parts of the economy reap the full benefit of the rebound, while others are locked down or disproportionately impacted. Think of the banking industry, for instance, which has been hurt but continues to operate, versus a retailer that has been completely locked down because of the pandemic. Other industries like technology have done extremely well as organizations shifted to working from home. I would say this is true on a sector-by-sector basis, but also on a country-by-country basis to an extent, as the economic recovery has been uneven, and the governments varied in their response.
At the same time, the success of public-health initiatives – like vaccination, for example – has the potential to change the shape of that recovery, which obviously helps to bring us closer to normal. The markets seem to focus on the eventual vaccine roll-out success and tend to look through some of the initial setbacks and new virus variants, despite potential challenges these risks can present. In a new normal, it’s possible that macro risks such as inflation may potentially dominate the narrative.
How does IMCO’s structure help in a volatile market like this one?
The benefit of the way IMCO is organized is that we have a great range of asset class specialists and generalists who collaborate with each other. The team also has strong relationships with the best external managers who can surface opportunities in most market environments. Both these capabilities enable us to construct a strong and resilient multi-asset absolute return portfolio for clients.
It is also extremely important for us to ensure that risk transparency and strong portfolio monitoring is in place. The market is very fast right now, which creates a momentum-driven mentality among some investors, and a willingness to take excessive risk. So, across IMCO, we’re keeping a very close eye on that to ensure we remain both diligent and agile.