“Currently, as the deputy chief for asset allocation, Ms. Kabuto is an integral part of the senior management team in the investment office of the International Monetary Fund and oversees all asset classes, including both public and private investments. Ms. Kabuto is a multi-skilled investment professional who brings comprehensive experience in asset allocation, investment management and investment operations. Her focus is always on idea generation and innovative solutions with respect to managing asset allocation and embracing emerging opportunities to ensure the continuous efficacy of the total portfolio. Ms. Kabuto is a strategic thinker who understands portfolio construction, managing the risk-return tradeoff across asset classes and, most importantly, being a prudent investor safeguarding the IMF retirement and benefits plans for the benefit of participants and beneficiaries. Ms. Kabuto’s knowledge, experience and leadership abilities make her an exemplary candidate who is well-suited to be among the next generation of leaders in institutional investing.”
—Derek Bills, CIO, International Monetary Fund
The CIO Editorial Team shared a dozen questions with all our NextGen nominees and asked them each to pick six to answer. Their answers informed our decision to include them as a NextGen. Below are the answers from Toshie Kabuto.
Note: The views expressed herein are those of the author and should not be attributed to the IMF, its Executive Board, or its management.
CIO: How are you dealing with rising interest rates and economic uncertainty?
Kabuto: We always deal with uncertainty, whether it is related to macroeconomic or geopolitical. Our job is to build a geographically diversified, resilient portfolio that can respond to the changing market conditions, including rising interest rates and/or economic uncertainty. We stay in balance across all asset classes and avoid investments that utilize high financial leverage to magnify low fundamental returns. We also manage liquidity to avoid becoming a forced seller of fundamentally sound assets at the wrong time. We would like to be a provider of liquidity and a buyer when good assets are sold at a discount. Having a geographically diversified, well-constructed portfolio with a good liquidity position allows us to be patient and stay focused on the long-term horizon in volatile market environments.
CIO: What is the best way to bring more diversity to the financial industry?
Kabuto: It is encouraging to see increasing initiatives in the financial industry to bring more diversity into the workforce. Private equity and hedge funds seem to be most lagging in terms of diversity, especially at the top management level. We all know cultures that lack diversity are prone to herd mentality, blind spots and sometimes fatal business mistakes. While most firms have been able to hire employees from diverse backgrounds, that is just a first step. Creating a corporate culture to empower them and embrace diversity in thinking would take constant efforts and strong leadership at top managements. Our office has 19 staff members, representing 17 nationalities. Women make up 63% of the staff across all levels. We hire people from diverse backgrounds and nationalities and train them to become multi-faceted investment professionals who understand long-term portfolio construction. We encourage them to embrace diversity in thinking based on objective analysis, questioning group think and setting high standards, rather than rigid rules, to generate new ideas or innovative problem-solving. We believe that leading by example and sharing the success stories with peers will also encourage more diversity in the financial industry.
CIO: What asset classes offer the best options for avoiding or mitigating drawdown risk in an institutional portfolio?
Kabuto: The largest drawdown risk in an institutional portfolio primarily comes from public equities. There are a few asset classes which typically have low correlations with equities, such as developed markets sovereign bonds, market neutral/absolute returns and real assets, that typically provide drawdown mitigation. However, the problem is the correlations across asset classes could become unstable and even break down when we need them most, especially in times of market distress. Having geographic diversification in the portfolio is one way to mitigate drawdown risk, because there are always countries or markets that do well while others struggle. Furthermore, at the strategy level, we use portable alpha index overlay strategies, where the sources of alpha and beta are unrelated, to mitigate downside risk in the market. Finally, objectively understanding what you have in your portfolio and how each asset will respond to market disruptions is the ultimate risk mitigant
CIO: How can allocators address the growing global tailwinds of aging populations, geopolitical tensions and changing global trade?
Kabuto: From the asset allocation point of view, I think aging populations, geopolitical tensions and changing global trade are headwinds, rather than tailwinds. At the portfolio level, impacts of such trends are incorporated in the long-term capital markets assumptions when we develop and review the portfolio’s strategic asset allocations. While the future is unknown, and there is no way to measure all the impacts accurately, it is important to focus on a long-term market view and build a diversified portfolio that provides the best protection against unknowns. We constantly monitor the efficacy of the long-term capital markets assumptions and strategic asset allocations to ensure the portfolio can continue to deliver the long-term target return. Our assumptions are based on 5- to 10-year terms. It would be very difficult to predict anything beyond that. At the individual strategy level, we can often find opportunities in the midst of regime changes. Finding such opportunities and evaluating their risk and return tradeoffs, which could supplement the existing set of strategies, are part of asset allocators’ responsibilities.
CIO: What traditional and/or alternative asset classes do you think are most important for institutional investors, and why?
Kabuto: It is important to remember that not all institutional investors are the same. Each institutional investor has its own investment objectives, including liquidity needs, time horizons and acceptable risk level, as well as types of risks. An allocator’s job is to structure and manage the optimal portfolio which would best meet their own investment objectives with acceptable risks. Asset classes in our portfolio are grouped into growth-oriented assets, which will help grow the portfolio assets, and diversifying assets, which will mitigate the market drawdowns. They are both important, but public equities will still be a key driver of return and risk for most institutional investors. Alternative investments, including private equities, also provide returns but are not readily accessible when you want to add them, and it is hard to adjust the allocation or provide the right levels of allocation when you want them.
CIO: What asset class or investment troubles you most right now, and why?
Kabuto: With the persistent labor market tightness, interest rates may stay higher and longer. In this environment, we are cautious of any investments which use a high level of leverage to generate returns, especially in areas where refinancing has become more challenging. Private equities could be an example, as they use financial leverage as part of their strategy. Moreover, their cash flows are unpredictable, and reinvestment risks are difficult to manage. Private equity managers are focused on churning investments to maximize the short-term IRR and carried interest, rather than longer-term return compounding. On the contrary, if you invested in the S&P 500 Index since Apple was included in 1982, you would have had owned Apple for 40 years, compounding the return. How many private companies did we hold for more than 10 years unless the GP could not sell them?
