In October 2020, AIMCo, the C $ 118 billion Canadian fund appointed its first director of investment strategy, dividing the investment function between top-down strategy and bottom-up implementation responsibilities. Amanda White talks to Amit Prakash about how the new feature will provide clients with valuable investment information.

Although AIMCO previously created this position late last year, the foundations and drivers of the investment strategy function at AIMCo have been around for a long time. With the appointment of Amit Prakash as Senior Director of Investment Strategy, they are now present in a focused and deliberate manner. The main objective of the function is to bring the organization to better align with the investment objectives of its clients.

“Our end goal is for us to be seen more as a trusted advisor, rather than just an investment manager on behalf of our clients,” said Prakash. “The way we describe what it offers to our customers is to extend the conversations we had beyond the deliverables we presented to them. Look beyond the delivery of the alpha to help them with their decisions, with their strategic and top-down visions.

This makes it easier for AIMCo to add a top-down strategic view of the portfolio to what it already does for clients in alpha generation.

“We think combining these is a more robust combination than doing either,” Prakash says.

The fund is now six months into the process of building the team and infrastructure for the strategy function and has started reviewing investment objectives with clients, including reviewing their risk appetite, their mix. policies and their alpha targets.

“We are starting from zero. It is a journey that we will be taking in the short term, ”said Prakash. “Understand our clients’ goals and create the framework to assess the effectiveness of our current solution sets and identify gaps and go from there. “

AIMCo’s clients – which include nine public sector pension funds and a number of endowments – remain fully responsible for their policy mix. The strategy function and top-down view allow AIMCo to provide an advisory function to better align customer needs and proposed solutions. The same process will be used in the longer term to examine portfolio tilts.

The top down view

Prakash says that, from a top-down perspective, AIMCo believes that over the longer term, risk assets are a better place to be and that illiquid assets offer better value.

“A lot of the positioning of the portfolio is done within the current strategies that we manage, this is where if you look up and down we have a very marginal overweight in equities. We have been able to do this lately as the markets have become much more volatile and things have started to look more exuberant than in the past. But in the long run, we are positive about risky assets. “

Unsurprisingly, Prakash has a weak outlook for bonds, but he believes any potential inflation will be fleeting.

“We think inflation would be transient in nature as some of the secular drivers haven’t really changed, such as aging populations, technology and globalization. We may have an increase in inflation, but it’s not something that we think of as a permanent increase. “

The fund has a negative long-term outlook for fixed income and over the past few years has spread across adjacent asset classes such as private debt and loans, which are by the point more attractive. risk return perspective.

“It played well,” he says. “And at the margin, we were slightly underweight bonds and a shorter duration helped.”

Since the COVID crisis, AIMCo prudently manages its active risk budget and reduces risk a bit, while improving its liquidity.

“We are way ahead of the liquidity characteristics compared to what we were before COVID. We are careful where we take risks. We are currently well positioned, we have brought the active risk back, which allows us to intervene again if opportunities arise. We’ve done a lot of this over the past 12 months given their exciting opportunities. “

The team has been active in private equity and private debt, where they looked beyond North America and took advantage of some middle market opportunities in Europe.

She was also active in real estate where she moved to reduce retail and add more logistics and industrial holdings.

“One of the advantages of AIMCO is that many of our clients have long investment horizons and this allows us to use our cash more efficiently, we weren’t forced to sell during the pandemic. On the contrary, we have deployed capital and are well positioned at the margin to do so now if the markets slow down further from where they are now, ”he said.

There are some investment opportunities that AIMCo is exploring but not yet invested in, such as emerging market debt.

“We have EMDs, but we use them as an alpha driver in existing funds rather than a permanent beta delivery. “

But the real role of the Prakash team, is not so much on the tactical changes, but to look at the risk appetite of longer-term clients and the strategic mix of the portfolio.

“We have seen clients increase the allocation to illiquids, and so mirroring that is the assessment of the liquidity profile of the portfolios. Being long term helps not to need cash, but as illiquid allocations increase, it pays to keep an eye on clients’ liquidity profile.

There is other information that clients can glean from a top-down view, such as an assessment and a better understanding of their factor exposures across the portfolio.

“The first step is to understand the factor exposures versus the liabilities and whether it is possible to adjust some of them,” he says. “What can come out of that, clients may want to manage their rate risk or their growth factor for example, and that’s one of the things that some of our clients are interested in. You need a top-down view for the balance to be right. . “

Having a department dedicated to managing the top-down view means that all the associated tools can also be managed by project. Prakash and his team are working with the in-house technology team to create a robust and scalable client investment dashboard, which would allow them to look at all of the different exposures in the portfolio, such as sectors, factors and duration exposures. .

“We can do it now, but we want a more robust and scalable process. This is the start of this process of working with the technical team.

Another ongoing project is the implementation of a new risk model which will be operational this year. The risk system will be added to Ortec Finance’s asset-liability analysis system which was also added relatively recently.

“This will give us more flexibility and tools from a risk measurement point of view,” he says.

Governance structure

Over the past year, AIMCo has undergone many changes in its senior rankings. Mark Wiseman, former CEO of CPPIB and Global Head of Active Equities at BlackRock, was appointed fund president in July of last year, and last month the former CEO of the Canadian fund. HOOPP, Jim Keohane, has been appointed to the board.

In November, she appointed a new chief risk officer, Andrew Tambone, and a new chief financial officer, Paul Langill.

With the appointment of a Director of Investment Strategy, the investment function has been split and Prakash and CIO Dale MacMaster report to the CEO of AIMCo and are equal partners in investment capabilities and fund performance. Evan Siddall was recently appointed CEO and will succeed Kevin Ubelein in July.

“The IOC and I work closely and well together and this is one of the conditions for us to be successful,” says Prakash. “It is extremely important that we are joined at the hip.”

For clients, Prakash supports top-down long-term forecasting and policy mix views and the CIO’s investment team implements bottom-up.

All client reviews are carried out jointly between the two teams and a governance structure is now in place where all portfolio advice related to clients goes through a committee co-chaired by Prakash and MacMaster.

“We are co-chairing this meeting to make sure it has the right level of oversight and that clients have a 360 ° view that also includes the Client Manager and the Chief Risk Officer. This ensures that investment conversations with customers have full control across the store.

Previously, the top-down activities were also carried out by the CIO and the investment team, but the separation allows for equal focus and commitment on strategy, alpha delivery and active risk.

“It improves and expands the way we interact with customers,” Praksah says. “Most of our customers don’t choose between alpha and beta. Without the right beta, most customers would have a hard time meeting their obligations. Historically, they were mainly focused on beta through the policy mix and we mainly focused on alpha through investments. We want to look from the top down so that beta decisions are more informed. This way we can improve the betas we offer and the alphas. “