IMCO World View: Active strategies, diversification and liquidity focus

Pension funds navigating today’s complex investment environment face the likelihood of higher interest rates, stronger inflation and higher prices that will fan a jump in bond yields and steepen the yield curve. Elsewhere, passive investors face increased risks from a lack of diversification and heightened exposure to a narrow set of companies, countries, and risk factors, and investors should also adjust their portfolios in preparation for a weaker US dollar, exploring potential alternatives like the Swiss franc and the Japanese yen.

That’s according to the Investment Management Corporation of Ontario (IMCO), one of Canada’s major pension investment organisations in its latest IMCO World View paper, a timely lens for interpreting change and guiding investment decision-making.

“Before, the risk-free assets paid you almost nothing. And so you were being forced further and further out on the risk spectrum in order to build a portfolio that provided a reasonable rate of return. With risk-free assets now paying something meaningful, it has meaningfully changed the risk-return trade-offs when you look across asset classes and geographies,” said report co-author Nick Chamie, chief strategist and senior managing director at IMCO, in conversation with Top1000funds.com editor Amanda White in a podcast.

Inflation is near the top of IMCO’s list, likely to return off the back of policies like the relocation of supply sources and production to pursue national strategic goals rather than corporate efficiency and profits. It could lead to less efficient and more expensive production, while the Trump administration’s aggressive use of tariffs adds impetus to this re-shuffling, as companies seek to maintain competitiveness by shifting production over the higher tariff walls.

Expect the US dollar to get weaker

Investors should expect US policy to weigh on the dollar in the years ahead, too.

“A couple of weeks ago, the President suggested he would be comfortable with an even weaker dollar, that he wouldn’t stand in the way of that,” said Chamie.

A weaker dollar is another way to make American goods and services relatively cheaper, and IMCO flags how reducing foreigners’ appetite for the dollar aligns with broader US policy goals. In addition to making American goods more competitive and reducing the current account deficit, it can also prompt global investors to diversify away from US financial assets and reduce the capital account surplus.

In parallel, Trump’s team is considering new digital finance tools that could help their rebalancing efforts, particularly dollar stablecoins, the token representations of dollars backed by USD-denominated holdings like T-bills and deposits. In the administration’s view, establishing these digital rails can help the USD remain the most widely-used currency in global trade and markets.

A weaker dollar will see investors explore potential alternatives to the dollar as a store of value and safe haven during periods of market stress. Possibilities include currencies such as the Swiss franc and the Japanese yen, in addition to traditional safe-haven assets such as gold. Consider assets tied to production and the physical economy, including in strategically important areas such as AI- and energy-related infrastructure, technology and health care, states the report.

Opportunities could also arise in commodities, materials, energy and other natural resources as governments look to build their country’s productive capacity while securing supply chains. Many of these assets tend to fare relatively well through inflationary periods, providing a potential complement to other inflation-sensitive assets such as real return bonds.

IMCO also suggests investors shift fixed income exposure to shorter maturities, given the potential for yield curve steepening.

Diversification and active management; liquidity focus

In another theme, the authors cite the importance of diversification, liquidity and “prudent” active management in the current environment.

“Diversification is much more important now than it’s ever been because the dispersion has widened out so much. It’s not just asset class diversification or even geographic diversification, but it’s diversification across what types of factors are you exposed to or even what kind of legal risks you’re exposed to, regulatory risks, and market risks of all kinds,” Chamie said to White.

IMCO espouses the value of investors rebalancing geographic exposures away from the US to take advantage of opportunities in countries and regions pursuing new, often fiscally-supported, growth strategies. IMCO also pointed to new opportunities in its own market.

Canada has introduced initiatives to improve infrastructure, boost defence, and expand industrial capacity. In addition to the Canadian government’s proposed $100 billion trade diversification plan which seeks improvements around existing (non-US) free trade agreements, policymakers have also reduced inter-provincial trade and labour mobility barriers in the hopes of stimulating trade within Canada.

“From an investment standpoint, these policy inflections could expand the opportunity set outside the US, especially in regions where demand support (in Europe for example) or domestic trade and infrastructure investment (in Canada) has lagged,” states the report.

Chamie also explained the importance of liquidity in the current environment.

“Liquidity is one of those risks that if you don’t pay attention too closely, it’ll give you a cut deep enough that you will die from it. Because if you can’t meet your cash calls, that’s it. You’re in outright liquidation mode. And now you’re doing things that you wish you had never exposed yourself to, like selling assets at distressed levels just to make a capital call.”

The dangers of passive investment

US policy has raised ‘stroke of the pen’ risks for companies, sectors and countries facing sudden shifts in operating conditions that have particularly exposed passive investors to risk. By assigning higher weights to the relatively expensive names, these market cap-based rules can amplify concentration risks.

“How particularly should you factor in that sort of stroke of the pen risk? I think it’s much more important than it has been in a very, very long time,” said Chamie.

These risks are intensifying as US companies – tech ones in particular – outperform and account for a growing share of global indices. This erodes diversification and heightens exposure to a narrow set of companies, countries, and risk factors. Private markets also face rising concentration and contagion risks, which could intensify if retail access expands.

IMCO suggests investors use custom indices to gain broad-based liquid exposure that aligns with investors’ beliefs, while also potentially limiting undue concentration risks. Investors should also complement passive exposure with active strategies that selectively allocate capital and dampen country risk via active management and capping country weights.

Investors can also diversify by identifying structural themes such as energy transition, digitalisation, or demographic shifts to participate in long-term returns resilient to cyclical volatility. IMCO also espouses the importance of a research-driven process, that regularly reviews capital market assumptions and tests them against portfolio objectives and risk tolerances as conditions change.

The investor implications of America’s new SWF

IMCO also highlights key themes investors should unpick from America’s new SWF, “an industrial policy tool” to “catalyse strategic domestic investments.” The envisioned SWF reflects a hands-on, interventionist approach that is unlike “typical” SWFs funded by commodity-driven trade surpluses as per Norges Bank Investment Management or the Abu Dhabi Investment Authority.

While falling under the Defense Production Act, the US government’s 2025 purchase of a stake in MP Materials, the country’s sole rare earth producer, provides an example of the types of investments that might flow through its new SWF.  The administration has also hinted at using the SWF to accumulate foreign assets to promote global rebalancing.