Hrvoje Lakota Managing Director, Head of Portfolio Construction
How IMCO Builds Portfolios Around What Matters Most to Clients
Every client portfolio starts with a fundamental question: what is the client trying to achieve?
For some, the priority is growing assets to meet financial obligations. For others, it’s maintaining a stable funded position, managing contribution requirements or preserving capital. For most, it is some combination of these (and other) objectives.
These priorities shape one of the most consequential investment decisions: how to allocate capital across asset classes. At IMCO, the Portfolio Construction team translates these objectives into a Strategic Asset Allocation (SAA) built around each client’s needs.
In this Q&A, Hrvoje Lakota, Managing Director, Head of Portfolio Construction, explains why SAA matters, how we develop it in partnership with our clients, and what differentiates IMCO’s investment approach.
Q: What goes into developing an SAA, and what value does it provide to a client?
SAA establishes how a client’s portfolio is invested across our public and private investment strategies, which shapes the client’s portfolio’s return potential, risk profile, liquidity and ability to withstand changing market conditions.
We start this process by understanding our client’s financial objectives through a series of conversations to understand their business, what success looks like, their goals, what challenges they are facing and what outcomes would be unacceptable.
A well-designed SAA turns these objectives, which are different for each client, into a portfolio aimed at what the client needs. For pension plans, that can mean keeping contributions stable and affordable while protecting the plan’s funded position through difficult markets. For a client focused on capital preservation, it can mean safeguarding assets across a range of market conditions. In every case, it positions the client’s portfolio to deliver the outcomes they depend on, while understanding the trade-offs involved.
Q: How does IMCO bring together expertise from across the organization to build an effective SAA for each client?
The strength of our approach lies in the different perspectives we bring to the table. While our Portfolio Construction team leads the process, we work closely with our Investment, Research and Risk teams to develop recommendations that reflect each client's objectives, risk tolerance and our long-term market outlook.
Our investment teams provide valuable insights into the opportunities and risks associated with different strategies, while Portfolio Construction evaluates how those strategies work together to contribute to the overall portfolio.
Meanwhile, our Research team provides a long-term economic perspective that informs our capital market assumptions and portfolio strategy, consistent with the World View, our flagship research report exploring the macroeconomic forces and investment themes shaping the investment landscape. Complementing these perspectives, our Risk team provides an independent assessment of portfolio risks, helping ensure investment decisions are evaluated within the context of the broader portfolio and its long-term objectives. Importantly, we look beyond what we expect markets to do and consider what could happen under a wide range of conditions. Through stochastic analysis, we assess thousands of plausible scenarios involving investment returns, interest rates, inflation and other economic factors that impact both our clients’ assets and their liabilities, and through this financial position and cash contribution requirements. This allows us to evaluate how different asset mixes may perform in both favourable and challenging environments, giving clients a clearer understanding of the potential benefits and risks of their investment strategy.
By bringing these perspectives together, we develop asset allocation recommendations that are best positioned to meet each client’s objectives and reflects their ability and willingness to take on risk.
Q: How does IMCO decide which asset classes belong in a client’s portfolio?
Once a client's priorities are established, the first allocation decision is how much to allocate to ‘defensive’ assets, like Fixed Income, and how much to allocate to ‘growth’ assets, such as Public Equities and private market strategies. Through our global investment platform, clients have access to a diversified range of public and private investment strategies, providing flexibility to construct portfolios that reflect their individual objectives and constraints. This process considers the role different asset classes can play within the broader portfolio, including their expected return characteristics, risk exposures, liquidity and contribution to diversification.
Importantly, portfolio construction also involves understanding how investment strategies interact with one another as well as our clients’ liabilities. Rather than assessing each asset class in isolation, we consider how different combinations of investments influence total portfolio outcomes across a range of market environments.
We also consider fees, complexity, regulatory constraints and client restrictions (such as around the use of leverage).
Q: Why is understanding pension liabilities important when developing an SAA, particularly for mature plans?
For a pension plan, investment success is not simply about growing assets. It is about having the resources to pay benefits when they are due. That means SAA decisions need to start with a deep understanding of the plan’s liabilities and how those liabilities respond to changes in the market environment.
This is especially important for mature plans that may be trying to match assets more closely to liabilities or may be trying to immunize surplus. Matching does not eliminate every risk, but it can help protect the funded position and reduce the likelihood of unexpected deterioration in the plan’s financial position.
Q: Does IMCO use total portfolio leverage?
Total portfolio leverage is a tool that we use in some of our clients’ SAAs. It allows our clients to obtain a broader range of market exposures than could be funded with their available capital alone. For example, it allows a portfolio to retain exposure to assets that help match liabilities while also holding a diversified mix of return-seeking investments. Without that flexibility, adding one exposure requires giving up another.
It is also important to note that using total portfolio leverage does not necessarily mean an increase in overall portfolio risk. Used effectively, it can support a more diversified and better liability-aligned portfolios at a similar or lower level of risk.
Q: What sets IMCO’s investment approach apart?
Our business model is built solely around the interests of our clients. As an independent, not-for-profit investment manager, we were established to improve investment outcomes, enable access to sophisticated investment strategies, and reduce costs for Ontario’s public sector institutions. That purpose shapes how we invest, the advice we provide and the relationships we build with clients.
Unlike traditional investment managers, we have no products to sell. Our investment recommendations are guided by each client’s objectives, risk tolerance and financial obligations. Through our cost-recovery model, clients also benefit from specialized portfolio construction expertise and strategic asset allocation advice, without additional advisory fees.
Just as importantly, we believe clients should have a clear understanding of the decisions shaping their financial future. We work closely with them to evaluate investment options, understand trade-offs and develop strategies that reflect their priorities.
Ultimately, our value lies in bringing together investment expertise, strategic advice and a cost-efficient operating model within a single investment platform. For clients, that means having a long-term partner focused not simply on investment performance, but on achieving the outcomes that matter most to them.
