The US$57 billion Investment Management Corporation of Ontario (IMCO) is ramping up its allocation to actively managed public credit markets with a US$1 billion allocation to two global credit managers, it announced today – a move that Global SWF expects to see across the state-owned investor universe.

The Canadian public pension fund, which achieved a benchmark-beating 9.6% return in 2021, is investing US$550 million with Loomis Sayles and US$450 million with Beach Point with a view to boosting its exposure to the structured credit and leveraged loans markets. IMCO said the mandates include investment-grade and high-yield debt, structured credit and leveraged loans.

Last May, IMCO committed US$500 million commitment to Ares, including US$400 million to a Fund of One structure and US$100 million to Ares Pathfinder Fund, a flagship global alternative credit fund. In October, it committed US$500 million to Antares Capital LP, a leading provider of financing to mid-market private equity-backed companies in North America. In 2021, the Global Credit portfolio achieved a 2.9% return, nearly double its benchmark.

The fund is looking to raise its global credit portfolio from C$6 billion (US$4.6 billion) – representing 7.8% of AUM at end-2021 – to at least C$8 billion by 2025. Today’s announcement is a major leap towards that target. The portfolio will be split between internally managed private credit assets and externally managed public credit investments. Currently, IMCO’s private credit portfolio has a low risk of threat and is mostly in investments with floating rates.

IMCO said, “IMCO’s Global Credit portfolio invests across a range of public and private credit market segments to achieve higher yields than traditional fixed income. The Global Credit program is differentiated by its broad approach to portfolio construction, making strategic allocations to liquid/illiquid securities and geographies across the risk spectrum.”

IMCO’s announcement came on the day that the Bank of England raised its policy rate by 25 basis points, while the Federal Reserve hiked rates by 75 basis points, representing the biggest increase in nearly three decades. The raising of interest rates to combat soaring inflation in the wake of rising energy prices has prompted a fall in stocks and raised the prospect of recession and increased vulnerability for high-risk debt.

Treasury bond markets have witnessed a massive rout amid high inflation. Debt prices have plummeted and spreads in global investment grade debt have reached high levels in historical terms, which IMCO believes offers long-term opportunities that chime well with the inter-generational horizons of public pension funds.

The investment manager is younger than its PPF peers and was created to oversee two Ontario public sector funds. With one office and 250 employees, IMCO is a small operation, yet is proving to be increasingly nimble and quick to identify and address weaknesses.

The manager is in the process of diversifying its portfolio as well as build up its in-house investment team. Amid the pandemic crisis, IMCO introduced new strategies across asset classes with a complete overhaul of public equity portfolio and the elimination of its costly fund-of-funds. It has also reduced its number of managers to slash costs.

As well as ramping up its global credit portfolio, IMCO has targeted C$6 billion in private equity by 2025. By end-2021, it had a portfolio of around C$4 billion, putting it on course to reach the target ahead of schedule as it aggressively moves from North American into European markets, particularly the UK.

By asset class, private equity was its best performing asset class in 2021, returning a net 19.2% and 2.3 percentage points above its benchmark); followed by public equities, which returned 16.3% (0.7pp above its benchmark); real estate, 13% (8.8pp); and global infrastructure, 12.3% (-9.4pp).

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