IMCO executive says geographic diversification must be pursued for the right reasons
Investing outside Canada can be very beneficial to portfolios of clients however, Investment Management Corporation of Ontario (IMCO), the pension fund for Ontario’s public sector workers, says that certain factors should be taken into consideration.
“It is important to ensure that geographic diversification is pursued for the right reasons and that all the implications of doing so are considered and planned for in advance,” said Bert Clark, president and CEO at IMCO.
Clark stated that the global market was likely to be shaped by factors such as higher geopolitical risk, deglobalization and the growing importance of ESG in the upcoming years. This highlighted the importance of having a focused approach when it comes to making investments outside of Canada.
The IMCO executive noted that investors needed to consider whether they have any real advantage when they intend to invest in certain countries. Such advantages included operational leverage, relevant sectoral expertise, the ability to leverage scale, and the ability to invest directly and effectively oversee investments.
“Just as only a very few companies can operate effectively in many jurisdictions, most investors can only leverage real investment advantages in select geographies,” said Clark.
The impacts of foreign currency movements should also be taken into consideration since they affect investment risks and returns. Longer term foreign currency losses can be material while near-term currency movements in exchange rates can possibly lead to gains and losses in material investments.
“Near-term currency gains and losses for most developed market currencies can be efficiently mitigated through straightforward currency hedging transactions. But emerging market currencies are more difficult to efficiently hedge,” said Clark.
“Investing in Emerging Markets often brings both exposure to those asset classes, as well as local currencies, which can be more volatile than developed markets,” he added.
Another important factor to take into consideration are the political risks that come with investments in other countries.
“In many Frontier and Emerging Market countries, there is less political and policy stability, less ability to rely on the courts to protect property and efficiently settle commercial disputes, and the barrier between the government and private enterprise is more fluid. These are risks that are very difficult to analyse and mitigate,” said Clark.
“Investors need to consider whether these geopolitical risks are ones they are willing to accept and are adequately compensated to take,” he added.
