Singapore’s sovereign wealth fund GIC is bracing for a period of “profound uncertainty”, as the fund looks to rely on more “granular” diversification and maintaining price discipline to traverse the environment.

In its 2023/ 2024 annual report the fund’s chief executive Lim Chow Kiat warned there are “no maps” for investors to navigate the volatility ahead, and the fund is looking to play into its strength as a provider of long-term capital.

The report said that several key markets had priced in a very positive outcome for the macroeconomic environment since the short-term probability of recession in the global economy had been reduced. Lim highlighted the benefits of nimble capital and a more bottom-up approach in this environment.

“Credit spreads in the US and Europe, in particular, are below or close to their lowest quartile in the past decade,” the report read. “However, there is a wide dispersion across markets and within asset classes.”

“This dispersion favours a more bottom-up approach, alongside more nimble capital allocation across different opportunities.”

In the report Lim said many markets are primed for a Goldilocks economy and “have not yet priced in the level of uncertainty investors face”.

“It is a plausible scenario, but only one of many,” he said.

“This signals a potential mismatch between investor confidence and the range of plausible outcomes.

“In such an environment, GIC must practise price discipline.”

The fund indicates that it intends to remain level-headed in the well-documented AI hype, as Lim said some early-stage AI businesses are commanding a lofty valuation.

“Hardware makers, including semiconductor firms and the infrastructure layer businesses such as cloud platforms, have less downside, though their valuations have also expanded recently,” he said.

“Each case requires careful assessment of its potential risk-return trade-offs.”

GIC has a total portfolio approach and when it comes to diversification, its process is to start with understanding of the real underlying risks, then stress test different combinations of investments in various amounts.

Lim said the fund won’t stop at diversifying on an asset class level but really digs into the “granularity” of investment opportunities, especially in private markets where the fund has built comprehensive capabilities over the years.

“Take real estate as an example. We have picked our spots across different sub-sectors — including data centres, student housing, and logistics — and different geographies,” Lim said.

“In a world where uncertainty has shaken the foundations of the investment environment, our response is to be ever more sure of who we are and to abide by our core investment principles.”

In the year to March 2024, GIC cut exposure to nominal bonds and cash by 2 per cent while upped allocations to inflation-linked bonds by 1 per cent. Private equity is also occupying a bigger part (up 1 per cent) of the portfolio due to capital deployment and returns.

The funds that take a total portfolio approach added 1.8 per cent per annum over 10 years above those that use strategic asset allocation in a recent Thinking Ahead Institute study of 26 asset owners, including the Future Fund. And the systems-thinking TPA approach, with the benefits of dynamism and joined-upness, will help asset owners in an environment of increasing complexity according to the report’s author, Roger Urwin.

Urwin said the institute has research to back up those claims with the results of the TAI’s recent Global Asset Owner Peer Study in conjunction with the Future Fund the latest data in support. The study examined 26 asset owners and found the 36 per cent with a total portfolio approach (TPA) produced superior returns that make Urwin’s estimate of value add look conservative.

“It’s a crude test, but the TPA organisations outperformed the SAA organisations over the last 10 years by 1.8 per cent. And 1.8 per cent per annum is just a very, very substantial margin in our industry,” he said. “Quite honestly I’ve never seen a margin out of one factor as big as that before.”

Urwin emphasised that in part the two portfolio allocation approaches solve different problems.

“SAA basically solved a governance problem, and it did it well. But it didn’t solve the investment problem,” Urwin said. “TPA is a really important design feature by which organisations can probably get better performance.”

The most recent asset owner peer study found that the number of funds doing SAA was half what it was when the same study was conducted seven years ago, and the trend to TPA was continuing, with 20 of the 26 funds stating they were either at their maximum TPA or moving more towards TPA.

The benefits of the TPA approach include a more dynamic portfolio and more “joined-upness” which were both useful in a more complex environment, Urwin said.

Managing complexity was the number one concern of the 26 funds, cited by 73 per cent of the CEOs and CIOs who participated in one-on-one interviews.

“When we did this study in 2017 it wasn’t on the list, it wasn’t anywhere,” Urwin said. “But over that time complexity has become one of the most difficult things for organisations to cope with.”

One of the key takeaways from this result, according to Urwin, is that individuals are spending most of their time on business as usual and not enough time thinking about whether their organisations are adapting to the changing world.

The study also showed that 88 per cent of the fund’s investment teams expect systemic risks will grow in number and size. These include geopolitical confrontation and climate change.

Building more resilience including more agile organisational design, better culture and stronger risk frameworks – combined with the systems-thinking TPA approach – will help position asset owners in this environment, he said.

Joe McDonnell, CIO of Border to Coast, says the £45 billion  fund can help fill the gap in funding UK private companies wanting to IPO. It’s part of an investment strategy by the new-ish CIO that sees a focus on putting capital to work innovatively and intentionally for its underlying funds.

Small and mid-market companies in the United Kingdom have been starved of capital for years and it is more difficult than ever for private companies that have proved themselves and need £20-£30 million to push through to an IPO to attract investment, says Joe McDonnell, chief investment officer of the £45 billion Border to Coast, touching on one of the hottest topics on the UK investment landscape.

“It has been a tough ride for these smaller companies. The Financial Conduct Authority and others have woken up to it far too late. It should have been red flagged a long time ago,” says McDonnell who joined Border to Coast in 2023 following long stints in asset management and in-house pension management at Shell and IBM.

Under his leadership the asset owner is readying to fill the gap that he says naturally falls to the £400 billion LGPS (86 local authority pension schemes now amalgamated into eight mega pools) as corporate DB pension funds continue to de-risk and DC funds, keenly focused on the lowest cost provision, struggle to move into private markets.

“We’d like to focus on this segment of the market, and we think if a company has proper UK institutional investment on the private side, they’d consider a UK listing as this is where their sponsors are,” he says, in a nod to that other much talked about absence – the lack of IPOs.

The rot is evident in the falling number of companies listing on the FTSE 250, continues McDonnell. Back in 2018, 198 of FTSE 250 constituents were companies and 52 were funds. Today the number of companies has fallen 15 per cent to 168 and the number of funds jumped nearly 60 per cent to 82, resulting in a market cap drop of companies on the FTSE 250 of 32 per cent.

“All that money has flowed to the US,” he says. “It’s had a dramatic effect on how the UK is perceived.”

Investment in the space will require a deep expertise that is out of reach for many investors and McDonnell estimates it will take two to three years to deploy money.

Although the premium offered for investors in small and mid-cap companies over large cap has slipped away over the last 20 years in favour of mega large cap like banks and oil giants, he is convinced it still exists and will play into Border to Coast’s small to mid-cap structural bias.

direct real estate

Border to Coast is also doing its part to invest in other areas of the UK too. This October it will begin running an initial £1 billion internally managed direct pooled UK real estate allocation for its 11 partner funds.

It is the final asset class to pool and involves client funds handing over around 70 direct real estate positions each in a much more complex process than building a portfolio from scratch. Like the fact each investment requires fresh environmental and legal due diligence. “We have to get comfortable with each piece of real estate before we accept it into the pool,” he says.

Correctly valuing these existing portfolios in today’s volatile real estate market with valuations moving more than at any point in the last 10 years is another headache. Selling indirect individual fund holdings so clients can assign fresh capital to the new direct allocation is also difficult, he explains.

“The market is not great for selling so it’s been a gradual process. Investors that have invested a significant amount in funds don’t want to hurry along redemptions that put a stress on the market”.

Still, it also makes for an opportune time to build out the portfolio helped by DB funds selling up as they go for buy out. “We don’t time the market, but it’s a great time to launch a real estate strategy with fresh capital because there are lots of sellers in the market.”

McDonnell says Border to Coast will make all the decisions but will be supported in terms of origination and execution by asset manager Aberdeen which has worked with some of the partner funds in the past.

He won’t define the portfolio from an asset allocation perspective and strategy will be shaped around a “go anywhere do anything” multi-asset approach. Pricing is so attractive he wants the freedom to move between segments and diversify the portfolio over time. Moreover, UK real estate is often backward looking.

“Data centres or last-mile logistics didn’t exist 10 years ago. We don’t want to be tied to a single segment of the market.”

He is mindful of the possible conflict of interest within the LGPS where pools seek to invest in infrastructure, social housing, regeneration opportunities and renewables in their own geographies. Warning that all investments must make sense from a risk/return perspective, he suggests a “national multi-asset programme with regional sensitivities.”

A centralised template where every decision on where to deploy is consistent would also help identify the best opportunities, and was the approach Border to Coast used when it launched its UK Opportunities portfolio in Q1 2024.

Future innovation

With 80 per cent of Border to Coast’s partner funds’ assets pooled – the remaining 20 per cent lies in passive equity and bonds and will stay with the individual pension funds who have “terrific pricing” with large passive managers – McDonnells says all future innovation will be around strategy.

For example, in global equity he is planning to launch a multi-factor equity index solution and is also exploring global sustainable bonds.

“You can get the same risk/return yield/duration/credit quality from a global sustainable portfolio as you can from an aggregate bond portfolio and as funding levels are at record highs, we expect to see an increase in the allocation to fixed income in the coming years.”  The portfolio would also meet two objectives – diversification in fixed income and a great opportunity to transition to net-zero climate targets.

He says all strategies and funds are chosen based on communality not proliferation – he won’t launch niche strategies that aren’t scalable across multiple partner funds.

“We are conscious of using the active resources we have including dedicated research teams and internal portfolio management teams as effectively as possible,” he says. “We don’t’ think ‘let’s not do private equity and cut costs’. We make no apologies for having the right resourced team with the right headcount that allow a broad exposure to these strategies.”

Some LGPS pools have adopted a hybrid approach to pooling, or outsourced everything to a consultant but he believes Border to Coast’s model has created a resilience within the organization that sets it up for the future

“Which is the best model? This is the model I like,” he concludes.

The synergy of talented individuals working together is the key to unlocking organisational and portfolio alpha, according to an indepth new study of 26 asset owners including the Future Fund. The study’s author Roger Urwin of the Thinking Ahead Institute discusses the challenges and opportunities of this combinatorial power.

The Thinking Ahead Institute collaborated with the Future Fund and 25 other asset owners in an in-depth exploration of asset owner practices, the TAI Asset Owner Peer Study. These asset owners were carefully chosen for their robust governance, substantial size, and global perspectives. The group included nine from the Americas, eight from Europe, and nine from the Asia Pacific region—a well-balanced representation drawn from major pension funds and sovereign wealth funds. My privilege as the author was to get considerable attention from C-suite executives working through peak busy times.

The soft stuff

Among the peers, a recurring theme emerged: “the soft stuff is the hard stuff.” In conversations with CEOs and CIOs, people-related issues surfaced a remarkable 436 times. The context centred on how asset owners attract, develop, and deploy their professionals to achieve the hard-won “organisational alpha” via a combination of people, processes, and capital. This synthesis occurs through effective governance, organizational culture, talent management, leadership and technology.

The study examined alpha from two perspectives: the portfolio (how it is constructed to add value) and the organisation (how the organisation is able to add value in creating the portfolio). One success factor stood out: the synergy of talented individuals working together.

While managing complexity and workload growth remain the top challenge for 73 per cent of the group, attracting and retaining talent closely follows at 65 per cent. The quality of asset owner teams is definitely improving, but it must continue to do so given growing complexity and shifting risk landscape. An overwhelming 88 per cent of respondents believe that systemic risks – such as climate change and geopolitical tensions – will increase over the next 5-10 years, while all the peers present to discuss the results thought that systemic risks are seriously under-estimated and need urgent attention. In an investment landscape marked by heightened risk and uncertainty, critical thinking is paramount. Relationship capital, supporting innovative ideas, becomes very valuable. The group emphasized the need for risk management to broaden, deepen, and lengthen its scope.

Organisations’ successful evolution hinges on self-awareness, informed by peers and competitors. As we face an uncertain future—one that may differ significantly from the past and won’t be as kind as the past has been —this self-awareness becomes even more critical.

Our study highlighted the importance of collaboration and combinatorial benefits in a myriad ways. Teams play the central role in decision-making; insourcing and outsourcing complement each other; investment and tech specialists require a shared language; collaborative stewardship models are on the rise; collective action and systems leadership gain prominence. Being joined-up has developed a golden aura in which the whole truly exceeds the sum of its parts.

But this combinatorial power is a big ask in three respects: first, in requiring integrative thinking – adapting to inevitable trade-offs between opposing points and building creative combinations that work better than siloed answers; second, in applying systems thinking – connecting dots, spotting patterns, and socialising solutions; and, third, in using systems leadership to see problems as shared challenges and approaching them holistically to produce cooperative solutions.

To adapt, CEOs and CIOs need to work on cultivating inward savvy (authenticity, self-awareness, critical thinking, visionary insight, and emotional intelligence), and outward agility (acting as ambassadors, authoritative voices, collaborators, diplomats, and experts).

The hard stuff

These asset owners are very capable organisations. For 73 per cent of them, governance is a strength. For the remainder governance comes with constraints more to do with the organisational settings from the past than the board of the present.

These organisations, by and large, have good boards although the proportion of independent experts should surely be higher – the group average came in at around 49 per cent. If these asset owners are going to do justice to their increasing challenges, they will need boards with greater domain knowledge and cognitive diversity. One hopeful sign is that most boards have increased their female representation to 41 per cent.

Two significant challenges loomed large to all funds: portfolio construction and sustainability integration. Regarding portfolios, the trend leans toward total portfolio approaches (TPA) in which every investment competes for capital based on meeting fund goals rather than the benchmark comparisons that drive strategic asset allocation approaches (SAA). Currently, 35 per cent have adopted TPA, and a further 54 per cent are moving in that direction.

Sustainability-wise, 65 per cent of these funds embrace universal ownership and 3D investing where funds seek to balance risk, return and real-world impacts on the premise that “the returns we need can only come from a well-functioning system, and we, alongside others, can contribute to its success.” A total of 69 per cent have a commitment to net-zero.

The peers all recognise their transformation to a more complex business model pursuing multiple objectives. Achieving this transformation demands vision, process, and above all innovative thinking. Like the use of balanced scorecards to mark progress and support decisions (this had total support in the peer discussions). And like the deepening of investment beliefs to dial in systems thinking.

But here’s the rub: just when change is paramount, asset owners are grappling with peak busy conditions. Business-as-usual grows ever more complex, so the critical initiatives in business-beyond-usual struggle for attention. Asset owners need to work on a simplification response to complexity; and to streamline the investment model using total portfolio thinking and 3D investing; and address risk in both its traditional shape and its systemic form in which climate risk and geopolitical risk have escalated. This will involve assessing risk more broadly, deeply and accurately with long-term considerations ascendant. They will need to think in systems terms to build the resilience for the rocky road ahead.

These asset owners are smart and know the direction of travel required. They know they need a system to manage a system. They are prepared to adapt but they will need agility and grit to be successful with the re-set button.

Roger Urwin is global head of investment content at WTW and co-founder of the Thinking Ahead Institute.

The UK’s new Chancellor of the Exchequer Rachel Reeves didn’t waste any time approving the £7.3 billion National Wealth Fund aimed at funding the herculean costs of the energy transition and creating green jobs. Senior UK pension executives including group chief executive of the Universities Superannuation Scheme, Carol Young, and David Vickers, CIO of Brunel Pension Partnership have begun helping shape the new fund. Top1000funds.com takes a closer looks at the new sovereign wealth fund.

The fund aims to seed investments in green industries like steel, hydrogen and batteries. This will then crowd in  private sector finance by de-risking projects where investor peril ranges from technology maturity risk to revenue uncertainty and unknowns in the upstream supply chain.

“Building a green economy requires a step-change in coordination between the government and investors, so that the policy and regulatory environment is truly enabling for long-term investors,” said Vickers who has long advocated for engagement between government and investors to achieve net zero and for policy to create the best environment for the transition.

Structuring a SWF

According to a report  the new SWF will have an investment mandate rather than fixed sectoral funding allocations. Its strategic objectives and investment priorities are comparable to the Canada Growth Fund and Australia’s Clean Energy Finance Corporation.

Policy makers are weighing how to manage the fund. This could include creating an in-house operation that prioritises appointing individuals with private sector investor expertise and market credibility; relaxing pay constraints and building a culture which enables and encourages risk taking. This structure could lead to the partial outsourcing of funds.

In an alternative approach, the SWF could be managed by one or more of the existing public development finance institutions.

Another suggestion floats having it managed by a public pension fund in line with the Canadian model where the Canada Growth Fund is a subsidiary of the Canada Development Investment Corporation (CDEV) but is actively managed by PSP Investments.

GLIL Infrastructure (a joint venture founded by the Greater Manchester Pension Fund and London Pensions Fund) represents the closest equivalent to PSP in a UK context. The Pension Protection Fund, whose mandate is to protect the pensions of those on defined benefit schemes in the case that their pension becomes insolvent, is another example of an institution that could have responsibility for management of a portion of the capital.

Governance

The report has also highlighted the importance of arm’s length governance from government with independent operations and decision-making capabilities. This will include an independent investment committee to make investment decisions and an independent board – government should be represented on the board, providing an ability to influence but not veto, it suggests.

Amid industry enthusiasm for the initiative, critics flag concerns. Like the belief that slow investment in the transition and green innovation isn’t a consequence of a lack of capital, but more a lack of supply or opportunities for investors to put their capital to work.

“I’m not totally sure the problem is a lack of available capital,” says Neil Lee, Professor of Economic Geography at the London School of Economics who points to the dearth of projects coming to market, and blames a lack of capacity at a local level and difficulties bringing projects to a level whereby they become investable.

Lee also raises the risk of investments becoming pet projects that don’t attract institutional capital, like investment in green steel.

Investors always voice unease if they are told where to invest or subject to regulation that steers allocations to particular assets, arguing they need the freedom to invest where they think best captures the winners and losers of the transition.

The SWF fund is designed to jump start the market and illustrates the government taking risk, but tax payers will also question what the government is doing with their money if it fails to make a return, concludes Lee.

The UK’s new fund, which is part of a push by the new Labor government to focus on building the investment sector in the UK, shows that SWFs are no longer the preserve of resource-rich countries and is comparable to a Sovereign Development Funds (SDFs) that seek to catalyse investment and growth in their own economies. For example, Ireland’s €15 billion ($16.1 billion)  Strategic Investment Fund (ISIF) was established in 2014 with a double bottom line to both invest commercially and support economic activity and employment in Ireland.

Elsewhere, India’s government-seeded National Investment and Infrastructure Fund (NIIF) crowds in infrastructure investment in a unique model that rests on a GP/LP structure whereby anchor LP investors are also NIIF’s majority owners.

In a statement Reeves said: “We need to go further and faster if we are to fix the foundations of our economy to rebuild Britain and make every part of our country better off… Britain is open for business – and the work of change has begun.”

Florida State Board of Administration (SBA) is exploring innovative new strategies in its $18 billion private equity portfolio like Collateralised Fund Obligations (CFOs) and “NAV loans” to tap liquidity and reposition the portfolio as an alternative to selling in the secondaries market where investors continue to get clobbered with massive discounts.

The SBA doesn’t have the statutory authority to put these strategies in place because they involve issuing securities. But speaking to the Investment Advisory Council during an asset class update in June, John Bradley, senior portfolio manager in private equity, said the investment team will resume the conversation with the Legislature next year, adding that these types of strategies have become much more common in the past few years.

Bradley explained that the highly complex CFO process typically involves GPs bundling stakes in private equity-owned companies into a single ($1 billion, for example) portfolio, contributing it to an SPV and securitising the cash flows, marketing interest-bearing securities to new investors to return cash to existing investors.

He added that these types of strategy offer a better cost of capital than the secondary market where in contrast to earlier years when investors used to sell at a premium, they now risk giving up a significant return.

The challenging secondaries market reflects the markedly changed conditions in private equity where the boom of the last decade has swung into reverse.  Low interest rates and high growth led to “massive multiple expansion” but the decade ahead will be characterised by higher interest rates and slower growth, requiring portfolio companies to add value through their operations.

“The value created by GPs in the future won’t be same as in past,” predicted Bradley.

Strategies shaped around borrowing, M&A and growing the EBITDA are over. Today it is much more about being good owners of a business and driving value through operations, he said.

The SBA is preparing for more churn in its  GP relationships. But forming new partnerships and creating access with top GPs is a laborious process alongside working down the existing list of GPs coming back to market.  In the last year, SBA only closed with four new funds after  a journey that began with 326 meetings and calls.

Manager due diligence is detailed and process orientated, striving for a consistent approach in how the investor reviews fund opportunities. At each stage the team debate if the opportunity is worth taking to the next level in a process that takes 3-4 months.

At the end of last year, the SBA was invested in 243 funds managed by 71 GPs  of which 45 count as core relationships. Fifty three per cent of the private equity portfolio is concentrated in ten firms including names like Lexington Partners, Truebridge Capital and SVB Capital. These top ten names together represent 32 per cent of SBA’s committed capital today.

Contrarian strategy

SBA prides itself on a contrarian strategy.

For example, the team dug deep into traditional energy assets in 2020, snapping up secondary oil and gas assets, buying into fund and co-investments, as ESG-minded LPs bailed out of the strongly performing sector. But Bradley warned the benefits of active management and repositioning are often not felt for years.

Like overhauling the European portfolio in favour of regional, and country-focused funds. The SBA “took advantage of the 13-year bull market” to conduct six secondary sales over the past ten years, creating $5 billion in proceeds.

“We sold to realise value in the face of extreme valuations,” said Bradley. “The next evolution in European private equity is sector-focused fund investment.”

An exploration of how these assets sold in the secondary market went on to perform under new ownership revealed these funds went on to perform well. However, sharp falls in the euro produced an FX win that offset subsequent fund performance.

That contrarian approach is also visible in venture.  In 2010 the SBA increased its exposure to venture at a time many other investors were throwing in the towel. The team put together creative investments via SMAs and fund-of-one to gain access.

“It turned out that venture wasn’t dead, and we reaped huge rewards ten years later,” said Bradley.

In 2021 the SBA reduced the venture portfolio via the secondary market, selling $1.8 billion in tech and venture assets.

The SBA’s bias to early-stage venture  makes up two thirds of the portfolio. The majority of the allocation is in IT and software, largely around Silicon Valley, New York and Boston.

Bradley said that although the venture portfolio is down on the year, it has outperformed peer benchmarks and is the strongest performing sub strategy within private equity, an envelope of the portfolio that includes allocations like distressed and secondaries.

The future

The committee heard how the integration of IT into the private equity portfolio is another key focus and will include the modernization and cloud migration of legacy systems. Technology is leading to changes in how the SBA updates PE fund data, and is creating efficiencies.

Bradley concluded that the SBA will remain active in the secondary market and bring more co investment in house where two staff members now oversee co-investment.