The extent of fiscal and monetary intervention in the economy in response to the coronavirus crisis is likely to lead to deficits unlike anything seen before and result in asset prices faring better over the near term than the overall economy, said Bert Clark, president and chief executive officer of the Investment Management Corp. of Ontario, during a webinar hosted by the C.D Howe Institute on Wednesday.
“While lower government bond rates may not get people onto planes or into restaurants, they can drive up the value of financial assets. One has only to look to the last 10 years to see the effects of sustained central bank involvement in the capital markets.”
In the current environment, the IMCO is focusing on asset class diversification and ensuring it has enough liquidity, Clark said. “You cannot be a long-term investor if you put yourself in a position where you are a forced seller of risk assets in times of market strain.”
Further, volatility is expected to continue. As a result, the IMCO has entered arrangements with specialist managers to buy high-quality, publicly traded assets during bouts of volatility.
In addition, the IMCO is being targeted about when it pursues net value add. Private markets don’t offer the automatic illiquidity premium they once did, said Clark, noting success in private markets involves lower costs and operational expertise. “Today, we believe there will be real opportunities for investors who are skilled at helping companies rework their balance sheets in a stressed economic environment. We expect these opportunities to emerge over time and we are exploring partnerships now to be ready to pursue these opportunities.”
The IMCO is also focusing on cost-efficiency. “Costs are one of the few things you can control as an investor. And costs matter even more when you are operating in an environment of potentially lower returns.”
He pointed to the common ‘two and 20’ fee structure, which was developed in an investment environment with higher expected returns. “But the fee structure has not evolved.”
In response, the IMCO is eliminating managers or managers and funds on funds and focusing on investing directly and along with a core set of strategic managers.
“We believe that we will be in a stressed economic environment for some time, that there will also be unpredictable public health responses and significant and ongoing fiscal and monetary intervention. All of this makes for a complicated investment environment. We don’t have a crystal ball, but we believe the best overall strategy is to stick to the big things that generate value over the long term — diversification, liquidity management, very targeted investment strategies, cost-efficiency and navigating the big trends.”