Reversal of investment themes demands investors change their assumptions

Investors are currently facing the end of uncertainty around assumptions they have made for decades, and need to shore up their portfolios with greater inflation protection, more active management, and by fostering innovation, according to chief strategist at the Investment Management Corporation of Ontario.

Investable themes that have pushed down inflation for decades are reversing, forcing investors to build more resilient portfolios that hitch a ride on new, emerging global trends, according Nick Chamie, senior managing director at the Investment Management Corporation of Ontario which manages $79 billion of assets.

Speaking with Top1000funds.com editor Amanda White on the Fiduciary Investors Series podcast, Chamie said long-term investment trends and themes began changing dramatically in 2020 and 2021, with a move away from the “Reagan Thatcher policy view where governments were engineering a move towards more competition, towards smaller governments, towards lower barriers to international trade, and an overall penchant for lower taxes.”

This has been in train since the early 1980s, coinciding with a long-term decline in inflation and interest rates, Chamie said. As IMCO’s senior managing director of total portfolio and capital markets and chief strategist, Chamie leads several top-of-the-house functions including investment research and economics, portfolio construction and strategic asset allocation, total portfolio management, fixed income and currency portfolio management and centralized trading. He was speaking about some of the trend’s driving the fund’s view and recorded in the recent document, IMCO’s World View.

“What we saw beginning in the late 2010s, and then deepening and accelerating as we came through Covid in 2020, was a true reversal in many of those trends.”

This has major implications for inflation, he said, with companies and governments replacing a focus on the lowest cost producers with a prioritisation of closer and more secure supply chains, strategic goods and critical resources, due to geopolitical and strategic objectives.

“This reprioritisation, we believe, is going to ensure that inflation doesn’t return durably back to the kinds of lows that we experienced in the last decade, where inflation was stubbornly stuck around 1 per cent,” Chamie said. “Instead, we see inflation being meaningfully elevated compared to that.”

In response, IMCO began to focus on income inequality as a driver for changes in policy and the focus of governments. Deglobalisation was also becoming more entrenched, ESG and climate change became more important, as was the trend of disruptive technologies, Chamie said.

IMCO has been looking for opportunities to build inflation protection, including increasing exposure to inflation-linked bonds, prioritising infrastructure assets which have some natural inflation linkage, and looking at equity sectors that correlate with inflation.

Cash, as an allocation, is also more important, Chamie said, having been “a four-letter word for decades [and] shunned as an asset class.”

“I think investors, and long term investors in particular, understand that one of the main implications of the new world is that liquidity has become a much more important element of portfolio management,” Chamie said.

Greater dispersion accompanying higher market volatility has improved the odds for active investment approaches, Chamie said.

“There really is a much broader universe of assets and markets within asset classes than there has been at any time in the past,” Chamie said. “Ensuring that you have the flexibility to be able to pivot and seek out the best opportunities with the best reward to risk trade-off is one of the important ways in which we’re implementing for this new regime.”

Having a “nimble and empowered culture” has been critical to enabling the team to respond efficiently to investment opportunities, he said.