“Michael is one of my best hires not once, but twice. First, I hired him at IBM and now at GE. In both cases, he was instrumental in helping me transform the hedge fund program. He is a very well-respected investor in the hedge fund community and has played a critical role in design, construction and implementation of our hedge fund programs. Given the multi-asset-class approach and his focus on strategy and portfolio construction, these skills are very suited for him to one day take on a CIO role.”
—Harshal Chaudhari, President and CIO, GE Investment Management
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 Michael Cimmino.
CIO: How are you dealing with rising interest rates and economic uncertainty?
Cimmino: As a corporate pension plan with a focus on liability-driven investing, rising interest rates are not necessarily a negative for us, as rising rates have a positive impact on the present value of our liabilities and increase our funded status, all things being equal.
That being said, a changing interest rate regime and heightened economic uncertainty surely increase the distribution of outcomes around our target rate of return. To compensate, we have been increasing our exposure to certain emerging markets where we are looking to benefit from the long-term secular trends occurring within specific countries. This dedicated country exposure presents a good opportunity to take advantage of attractive demographic trends, strong export growth, supportive fiscal spending and higher consumption via a growing middle class. We have also added exposure to macro-based EM strategies to capture moves in local rates, and FX as the direction of monetary policy is a bit clearer than in the U.S. Finally, we continue to search for compelling and differentiated investment opportunities where we can create upside optionality through the structuring of mutually beneficial seed/anchor economics.
CIO: What asset classes offer the best options for avoiding or mitigating drawdown risk in an institutional portfolio?
Cimmino: Outside of our strategic asset allocation that includes a healthy allocation to privates, we aim to limit drawdowns through a sizeable allocation to risk-mitigating strategies, such as directional macro, relative value credit and certain systematic long/short strategies. While each of these strategies is active in different parts of the market with complementary trade expressions, the common thread between them is a positive-skewed, convex return profile offering negative downside betas to traditional markets. Importantly, they do not possess the negative bleed associated with typical tail hedging strategies and are capable of generating positive returns in more benign environments as well.
CIO: What traditional and/or alternative asset classes do you think are most important for institutional investors, and why?
Cimmino: Exposure to illiquids remains the most important alternative asset class, given the collective share they represent within institutional portfolios. However, instead of underwriting new opportunities at record pace, investors will spend an increasing amount of time triaging their current portfolio and reassessing their go-forward return expectations.
Commercial real estate is clearly under stress as higher interest rates and tighter lending standards reverberate through the sector. Private credit continues to perform as managers continue to disintermediate more traditional sources of capital and investors trade duration risk for credit risk. Nevertheless, it remains to be seen whether borrowers can endure double-digit debt servicing costs into a slowing economy with elevated inflation pressures. Within private equity, marks have yet to reprice meaningfully following several years of elevated transaction multiples, but programs are no longer self-sustaining through distributions, and investors are broadly struggling to maintain vintage year diversification.
While headwinds clearly exist, the one bright spot within the illiquids complex remains infrastructure. Investors should continue to benefit from its defensive characteristics due to stable demand for the underlying asset and the long-term nature of contracts that include protections from inflation. Investors can further capture long-term secular trends occurring within the global economy while also diversifying away from traditional buyout and private debt strategies.
CIO: What should be an investment trend, but isn’t (yet)?
Cimmino: The inclusion of cash hurdle rates within the typical 2 and 20 fee structure. We are a long way from getting there, if ever, but it is becoming particularly important for those asset owners with a cash-plus benchmark.
CIO: What investing decision have you made for your organization that you’re most proud of?
Cimmino: Overseeing the transformation of our absolute return program has been a notable career highlight that has enhanced the organization’s overall strategic direction.
In relatively short order, a new strategy framework was introduced to transition the book from a high equity factor portfolio with limited downside protection to one that is more suitable for a corporate pension nearing fully funded status. As a result, the objective of the program was no longer to generate equity-like returns, but to deliver an uncorrelated and all-weather return stream. With a substantial deployment budget in hand, we focused on onboarding non-directional relative value and equity market neutral strategies, as well as risk-mitigating strategies to hedge out residual equity betas. We are now running a book that is much more balanced, where we are realizing a significant downshift in correlation metrics alongside a material increase in idiosyncratic return drivers.
CIO: Which asset manager (exclusive of their firm) has most influenced your growth as an institutional asset manager?
Cimmino: My CIO, Harshal Chaudhari. Harshal has been instrumental to my career, as he provided the initial opportunity for me to break into the corporate pension space when I joined his team at IBM. He then opened another door at GE when he was building out an in-house investment team. We both share a passion for this industry and the intellectual curiosity that it brings. I appreciate his encouragement to remove the “bucket approach” to investing and to think in a non-consensus and unconstrained way. I have also seen firsthand the importance of establishing a well-functioning governance structure that balances oversight with the ability to aggressively deploy into short-lived market dislocations. Finally, he has made me a better investor by his readiness to ask the probing questions, challenge underwriting assumptions and dissect investment theses.
