The Investment Management Corporation of Ontario (IMCO) achieved a 5.4% net return in 2020, boosted by strong returns in private equity (+34.2%) and global credit (+11.1%) and meeting its return benchmark index; AUM grow to C$73.3 billion (US$58.2 billion), from C$70.3 billion. As it continues its portfolio overhaul and slashes external management, the relatively small Ontario fund manager now has its eye on diversifying into renewable energy and US and European real estate via direct and co-investment.
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 also reduced its number of managers from 200 in mid-2019 to 124 by end-2020 with plans to have approximately 80-85 managers by mid-2021. As a result, IMCO managed to exceed its cost savings target by 25%.
IMCO is conservative asset allocator relative to most other Ontario fund managers with less than 40% of AUM dedicated to alternatives, although it has rapidly scaled up its exposure to foreign markets. Regional allocation saw US assets rise from 29% to 37% of the portfolio, while Canadian assets fell from 48% to 42%.
While posting a solid performance, IMCO's annual return was not as high as most Ontario peers - although unlike IMCO, OTPP and OMERS both reported performance well below their benchmark returns. The running theme across the Ontario PPFs’ success – or failure – was the ability to deploy liquidity to take advantage of the slump in public equities in February and March and benefiting from high yields in fixed income positions in H1.
Yet, weaknesses across Ontario funds, including IMCO, were related to exposure to domestic commercial real estate. IMCO is already in the process of rebalancing its real estate portfolio, which is heavily weighted towards office and retail space and saw a negative return of -12.1%, 4.7 percentage points below its benchmark. While property prices weakened in the face of the pandemic, commercial portfolios were vulnerable to the impact of the crisis. IMCO was also underweighted in residential and logistics which enjoyed better market performance. In 2021 and beyond, the fund will be targeting European and US multi-residential and logistics assets, both directly and in co-investments.
Real estate is not the only class set for major overhaul. Having approved an ESG framework in 2020, IMCO will ramp up exposure to renewables in coming years. Climate change may not be the only factor that will drive its move to decarbonize its portfolio. IMCO noted outperformance in renewable energy, while energy infrastructure assets were hurt by lockdowns and reduced economic activity. It added that its global infrastructure portfolio’s “heavy investments in energy and transport infrastructure led to low portfolio returns on an absolute basis.” For an investment manager eager to deliver value added yield, a move towards clean energy makes perfect sense.
IMCO is set to gain far more attention as it addresses areas of weakness – and continues to learn from the experience of peers and co-investors. We expect IMCO to start to make its mark globally as its portfolio diversification efforts look to rebalancing and responding to a changing, post-pandemic environment.