University Pension Plan Ontario, the C$12.8 billion ($9.3 billion) plan that invests on behalf of five Ontario universities, doesn’t own many US treasury bonds, and the largest single exposure in the portfolio is Canadian.

But US policies under the second Trump administration have got CIO Aaron Bennett thinking differently about risks and opportunities in asset classes, and the team are incorporating different scenarios into their modelling and analysis.

The threat of additional taxes on foreign holdings of US assets outlined in Trump’s “big, beautiful tax bill” could drive some asset prices lower, for example.

Elsewhere, new investment opportunities have emerged in the rest of the world off the back of US policy like Germany’s “whatever it takes” plan to increase defence spending and overhaul German infrastructure, financed by the largest economic stimulus in decades.

Closer to home, UPP is already investing in Canada’s own nation-building projects, particularly in renewables.

“We are stress testing hard and thinking about wider risks and opportunities from the current US administration’s polices, and being careful about investments priced in such a way that reflects incremental risk,” Bennett tells Top1000Funds.com.

UPP has just posted its second consecutive double-digit return (10.3 per cent) and the strategy at the fund that was set up in 2021 shares many of the hallmarks of the Maple 8. Governance is independent and arms-length; there is a keen focus on purpose as well as a risk approach, rather than a dollar allocation approach, to investment. Indicative of UPP’s high allocation to private markets and direct participation models in the quest for low to no fees, the investor has also committed over C$1 billion to new private market strategies since 2022.

Yet unlike its much larger Canadian peers, UPP has much less internal investment and prides itself on tapping niche strategies, sometimes investing as little as C$100 million in a new fund commitment and a co-investment of just C$10-15 million.

A focus on active management

UPP currently has around 35-40 per cent of the portfolio across public and private markets in active strategies.

Bennett believes active managers performed well during the recent market volatility, successfully navigating sector concentration, accumulating cash and waiting for the opportunity to buy back into the market.

“We pay fees for additional return, additional diversification and risk management. It paid off during the recent market volatility when active managers were very well positioned.”

But he’s keen to fine-tune active management to ensure UPP “gets paid” for active performance in excess of the benchmark given the cost of active management. “Sometimes you can end up paying a lot more in fees if you are not careful,” he says.

UPP will increasingly allocate to managers that want to get paid to beat their benchmark with a performance fee, rather than a management fee. “We’ve moved a number of large active managers over to fee schedules that are more focused on getting paid when they do what we expect them to do – which is beat the benchmark.”

As UPP’s assets under management have grown and more pension funds have joined the investor has merged around 22 different benchmarks. Today those benchmarks are consolidated into one benchmark for each asset class. They are reviewed every year to ensure they make sense from an overall asset allocation and risk management position, and Bennett reflects that “by and large” they do the job.

For example, inflation-sensitive assets comprising real estate and infrastructure are typically benchmarked to inflation. “In infrastructure and real estate, we are focused on finding assets that have cash flows, value and distributions which are correlated to inflation over time, so a CPI+ benchmark is sensible.”

Still, looking ahead he is considering the benchmark for private credit. “Private credit is an evolving space, and the benchmark should be aligned to strategy. Overtime we might change the benchmark to better suit our criteria.”

A cautious approach to internal management

Internalisation of the investment process to foster greater control, transparency and lower costs is being built out slowly and Bennett describes a lean and efficient investment team with “every person counting.” To date, he has concentrated on the basics, internalising currency hedging and derivatives, and some passive equity and fixed income.

Looking ahead, he wants to manage UPP’s cash exposure to money market funds and build out fixed income and derivative in-house management to support total fund risk management internally, spanning leverage and overlay strategies.

“This way we can manage risk at the top of the house, while actively deploying externally to asset classes.”

He is confident UPP will be able to draw top talent as it expands despite Canada’s competitive market. He says staff are attracted to the organisation because of the opportunity to build something from scratch, as well as the investor’s forecast growth as more university plans decide to partner with UPP.

Another draw to talent is UPP’s modern appeal. “We have established investment beliefs in the context of a modern world. For example, we have a clear view of responsible investment and are not having to integrate a programme around change management.”

He adds that DEI at the investor where two women (CEO and board chair) occupy senior roles encourages the belief that people can grow their careers. “Young professionals can see themselves reflected in senior management at UPP in a way that might not be the case at other organisations. Talent recruitment and retention remains a focus and this has made it easier for us.”

Bennett is also focused on growing the allocation to climate solutions where UPP has already poured C$650 million, on track to have invested $1.2 billion globally by 2030.

Strategy is shaped around being careful not to invest in assets heavily reliant on, or that require, subsidies from governments. Diversity is ensured by a global approach that spans different tech, countries and regulatory regimes, he concludes.

Our North American Capabilities

In this short video, John Ma, Partner & Co-Head North America, and Varun Sablok, Managing Director discuss opportunities in North America for middle-market infrastructure investors highlighting the strong potential in four key sectors; Digital, Transportation, Power, and Water & Waste.

Why Direct Infrastructure?
Michael Ryder, Partner & Co-Head North America, and Hamish Wilson, Partner, Head of Europe share the key characteristics they seek in direct infrastructure investment opportunities. They explain why they believe these investments offer clients a well-balanced mix of risk and return and leverage Igneo’s 30-year track record of investing in the lower-middle market.

The $206.5 billion Korea Investment Corporation (KIC) has become the latest asset owner weighing a shift into the total portfolio approach (TPA) in an attempt to boost investment returns.   

KIC put out a request for proposal for a TPA consulting partner in May. A fund spokesperson confirmed that the review is underway and will continue into early next year, telling Top1000funds.com: “We are considering the introduction of this new investment framework to expand our role as a fiduciary manager and to enhance investment returns.” 

The deliberation came as KIC celebrated its 20th anniversary in Seoul this week, where CEO Park Il Young outlined the fund’s goal to boost financial and organisational performance in the next decade.  

Its asset allocation as of last December was 39.5 per cent equities, 31.8 per cent fixed income, and 21.9 per cent alternatives whose build-out has been the fund’s focus in the past few years. It previously set a target of having a quarter of its portfolio invested in alternatives by 2025. 

Under the overarching goal to find a feasible TPA framework for KIC, the review will look to introduce a reference portfolio and a factor-based approach to dissect asset class exposures to risk and return drivers. It will also examine new ways to classify investments other than by asset classes as in SAA.  

The fund also wants to develop liquidity forecasting models by asset class and strategies and understand how risk and liquidity will be considered on a total portfolio level.  

KIC’s current risk management process considers market risks for traditional assets, namely equity and fixed income, and alternative investment risks separately. Market risks are managed through the SAA framework of tracking errors and portfolio volatility, while alternative risks are contained by designating allocation limits for external managers relative to total value of assets in each alternative asset class, and by monitoring factors like concentration, region, sector and vintage.  

Organisationally, the TPA review will determine whether it’s necessary to introduce an “integrated portfolio management” division and define their roles. KIC wants to align its framework with global practices so the review will involve extensive case studies of asset owners with existing TPA models. 

TPA organisations outperformed their SAA peers over the last decade by 1.8 per cent per annum, according to a study by WTW’s Thinking Ahead Institute of 26 asset owners. Despite its onerous demand on asset owners’ investment, risk, governance and even sustainability models, more funds are pondering the adoption of TPA (such as CalPERS) due to benefits including better alignment of portfolio goals and room for nimble, opportunistic investment.  

Well-known practitioners of TPA in Asia Pacific include Singapore’s GIC, Australia’s Future Fund, and New Zealand Superannuation Fund.  

Direct investments take centre stage 

Another key focus in the next few years for KIC is the ramp-up of direct investment activities within its $45 billion alternatives portfolio. This will be across all private market asset classes: private equity, real estate, infrastructure and private debt. 

KIC will leverage its five overseas offices and establish strategic partnerships with global asset managers, the fund spokesperson said. Three of those international offshoots are entirely dedicated to private assets investments: the San Francisco office homes in on private equity and venture capital due to its proximity to the Silicon Valley, while the Singapore and Mumbai units offer on the ground insights to real assets and private equity deals in emerging markets.  

The alternatives bucket has delivered an annualised return of 7.7 per cent between its inception in 2009 and the end of 2024, according to KIC’s latest annual report. Private equity was the bundle’s top performer with a 9.4 annualised return, where KIC began direct investment in 2010 and co-investments with GPs in 2011. 

Private debt was carved out as a standalone asset class in 2024 and the roughly $4 billion portfolio is still at an early stage of construction. The fund is looking to expand into areas like direct corporate lending and is seeking co-investment opportunities alongside asset managers. It acquired a minority stake in US direct lending and credit asset manager Golub Capital in 2022 to secure stable cash flows via loans to blue chip companies. 

In real assets, KIC is exploring emerging markets and niche sector infrastructure opportunities on top of those in mature markets including North America and Europe, focusing on residential real estate, logistics and data centres.  

Jonathan Grabel, CIO of the $87 billion Los Angeles County Employees Retirement Association, believes good processes form the bedrock of successful investment. Processes govern how investors identify the best opportunity and underwrite investments; they shape liquidity management, operational effectiveness, building the team and how staff provide information to the board, he tells Top1000Funds.com from the investor’s Pasadena offices.

“Investment involves an uncertain future state. Good processes don’t necessarily guarantee the best outcomes, but they are critical.  Strong processes, likely, increase positive outcomes by reducing impacts from uncompensated risks – mostly operational ones,” says Grabel, who has overseen America’s largest county pension fund since 2017.

Perhaps the most important element of the process is strategic asset allocation, where LACERA staff completed implementation of the latest asset allocation in January. The new allocation has built out investment grade fixed income and credit (both now 13 per cent) and reduced the allocation to global public equity to 28 per cent.

The adjusted portfolio allows LACERA to draw a greater contribution from higher interest rates both in terms of return and diversification and is the culmination of the triennial re-appraisal of multiple factors including changes in capital market assumptions, new philosophies to emerge in terms of asset allocation or best practice, and any movement in LACERA’s liabilities where the mature fund’s benefit payments exceed contributions.

“Our current asset allocation is set to perform in a period of heightened uncertainty. If you look at the environment over the last five months, you hear the word uncertain a lot and the best strategy during times of uncertainty is diversification. You never know what markets are going to do, but we take comfort in the excellent process behind our SAA that supports building and monitoring the portfolio,” says Grabel.

LACERA allocates to asset categories comprising a 48 per cent allocation to growth (global equity, private equity and noncore real estate) a 15 per cent allocation to to risk mitigation (core real estate, natural resources and infrastructure and TIPS) and a 24 per cent allocation to risk reduction (investment grade and government bonds, diversified hedge funds, and cash) as well as the 13 per allocation to credit.

The cash overlay (1 per cent) also showcases process in action.

LACERA created a cash overlay in 2019 to support liquidity needs and eradicate cash drag in a low-interest-rate environment. The overlay was also created to support rebalancing and help reduce over and underweights on a daily basis to better adhere to the strategic asset allocation. It was put in place as a risk mitigant rather than a source of alpha, but the overlay has generated over $500 million of gains.

“The cash overlay allows us to best manage liquidity by being able to hold more than our 1 per cent allocation yet no be penalised by a drag on performance. The cash we hold above 1 per cent is equitised based on our SAA so we can offset under and overweights at the functional asset category level.”

LACERA has also introduced a 90-day rolling cash forecast to ensure it has at least three months of cash equivalents on hand for benefit payments, operations and investment purposes. “It’s something we have maintained since 2020 and ensures we have sufficient liquidity at all times,” he says.

Staff must ensure their direct portfolio does its job and performs based on the mandate, without losing sight of the indirect asset classes that influence their portfolio and the wider contextual environment, he says. For example, a good private equity investor needs to understand the cost of capital and credit markets because it’s a key component of financing private equity.

Gabel says the biggest driver of the whole portfolio is beta, which sets the direction of the portfolio’s performance.

Sources of alpha

That said, the most important source of alpha has come from LACERA’s 13 per cent allocation to credit, the best-performing functional asset category for the last three years. The allocation doesn’t differentiate between private and public credit (analysis showed that the private allocation was actually more liquid) and focuses on moderate risk, eschewing distressed assets.

“A key return component is yield.”

The standalone allocation was set up in 2019 when Gabel brought all LACERA’s disparate credit exposure and benchmarks that spanned high yield to syndicated bank loans, hedge funds and real estate debt into one allocation with a single benchmark to mandates to 12 key relationships. The core element of the portfolio is allocated to separately managed accounts in evergreen structures rather than having to continuously invest in funds. Benefits include hard fee hurdles and more profit retention for LACERA than investing in funds, he says.

Elsewhere, numbers show alpha is much higher in private equity co-investment rather than fund investment, but in another example of process at work, the allocation to funds supports co-investment and is an example of LACERA using “all the tools” at its disposal. LACERA has a 17 per cent target allocation to private equity, divided between direct (co-investments and secondaries) and fund investments.

The benefits of investing with emerging managers

LACERA allocates to emerging managers in credit, public equity and hedge funds, and is about to roll out emerging manager mandates in real estate and real assets for the first time. Relationships are based around revenue sharing and securing capacity rates for subsequent investments.

“The goal of the emerging manager program is to enhance returns for the fund as a whole. By investing with emerging managers, we aim to find opportunities that might be capital constrained or more niche. We don’t want to just enhance returns, and we also seek investments that mitigate risk. Our goal is to have these programmes outperform underlying categories and hopefully secure future investment rights for LACERA,” he says.

Allocating to smaller firms that are earlier in their cycle is supported by policy statements and a belief that inclusive and equitably run firms that diminish groupthink will outperform because they tap into human capital alpha.

“LACERA’s investment policy statement says that effectively accessing and managing diverse talent leads to improved outcomes. We want to tap into human capital alpha. It is a dimension of our underwriting across the entire portfolio that reflects that we think that people matter. We believe that we have a fiduciary duty to have the best collection of people manage assets on behalf of our members.”

The C$86 billion ($62 billion) Investment Management Company of Ontario (IMCO) is re-considering its portfolio’s US exposure as the Trump administration’s trade war and ballooning US debt and deficits threaten the US market’s long-term outperformance.

The fund’s record annual return of 9.9 per cent was driven by surging equity markets last year despite an underweight position in the Magnificent Seven. However, CIO Rossitsa Stoyanova says the fund is now carefully deliberating its geographical weights, given question marks around the role of the US in capital markets.

The 9 July deadline that the US set for completing trade talks is rapidly approaching, but the Trump administration has only secured two trade frameworks – with the UK and China – with a dozen more to be completed in the next 10 days.

IMCO is heavily invested in North America with 52 per cent of its investments across all asset classes in the US and 29 per cent in its homeland of Canada. Its US exposure is more dominant in its equity portfolio, accounting for 60 per cent of the exposure, followed by the Asia-Pacific (16 per cent), Europe (12 per cent), and Canada (9 per cent).

“We were pretty comfortable to have a pretty big concentration to the US, and it worked great until February,” Stoyanova tells in an interview with Top1000funds.com. “Now we are considering whether we should have a US target… which we don’t. We need to figure out how comfortable we are to be exposed to the US.”

Equities (which make up 23.2 per cent of the fund’s assets) returned 24.2 per cent for the year against the 27 per cent benchmark, with an underweight position against the Magnificent 7 one factor that dampened returns, although IMCO then employed a portfolio completion overlay strategy to bring its Magnificent 7 portfolio exposure closer to the benchmark.

“The portfolio was very resilient during April – a lot of the things that we set up for the portfolio worked: we had enough liquidity so we didn’t have to sell. We have a rebalancing methodology which is very systematic. So some of the systems and processes that we put in place worked as intended.

“What I’m certain of today is that we should have a US exposure target, which we don’t. We need to figure out how comfortable we are to be exposed to the US.”

Similarly, Stoyanova and her team are assessing their approach to currency. The appreciation of the US dollar against the Canadian dollar contributed to the 2024 returns. Now, the fund’s exposure to the US dollar and US treasuries is attracting more scrutiny, given they may no longer offer the same diversification benefit in a downturn.

“Our expectation today for the long term is that the US dollar will depreciate from where it is today, and this is a long-term trend. So we’re considering how much we have in US dollars, and also what other assets could be used as a diversifier and as s safety in a downturn or in that crisis.”

Central to the fund’s activities is its regular thematic analysis of global markets – the IMCO World View. It pinpointed 12 themes which inform its long-term investment strategy, including accelerating deglobalisation and addressing inequality trends, as well as decelerating climate change and sustainability.

“The trends have materialised – what we didn’t expect is this massive acceleration of the trends,” Stoyanova says.

A growing focus on private markets and internalisation

Private markets are central to IMCO’s strategy to weather this environment of potentially higher volatility and inflation, given its long investment horizon and tolerance for illiquidity and complexity.

IMCO’s exposure to global credit, infrastructure, and private credit has tripled in the past five years with private assets now almost half of the total portfolio.

“Private markets will remain a focus for the fund. We think they bring diversification that we cannot get in the public markets.”

While the absolute performance of IMCO’s private market portfolio was strong in 2024, its net value-add was 244 basis points below its benchmark, largely given the outperformance of public markets in comparison. However, it expects those valuations to converge over the long term.

The organisation also now runs about half of its private market portfolio internally to save on fees and invest in assets that align with its worldview. Its mid size means it co-invests alongside its managers and now has an expedited process to approve smaller investments under C$50 million.

“We are very clear on what kind of co-investments we like to do. We’re nimble and we are reliable, and they appreciate that, which means that they know exactly what we’re looking for. So when they offer it to us, we’ll either quickly say ‘yes’ or ‘no’, and if we say ‘yes’, we’re going to be there in the time frame that they need and that’s important.”

IMCO will co-invest alongside its partners but does not have the scale of other Maple 8 funds to take full ownership of assets. It recently identified a need for more exposure to infrastructure utilities but deal flow is lumpy and requires larger investments than it typically makes (IMCO does own 10 per cent of Australian energy transmission network AusNet).

IMCO has instead taken a novel way to meet that goal through publicly-listed proxies.

“We do a program with our public equity factor team that invests in public US utilities. It’s a diversified basket of stocks that sits in infrastructure, and it fills that need that they identified in the portfolio for utilities. We might do more of that in privates.”

Similarly, IMCO’s private equity and credit teams work closely together given they’re investing in the same kind of companies, just across different areas of the capital structure.

“I think it’s going to become more important because the public and private worlds are coming closer and closer together. So these artificial definitions might make less sense in the future.”

Strengthening advisory role, a more nimble approach

IMCO has faced more than its share of challenges since it was created in mid-2017 to manage the assets of local public sector bodies.

“We had Covid,” says Stoyanova. “We had the first war in Europe. We had inflation for the first time in a long time – and Liberation Day.”

They not only created a challenge to performance, but also made it difficult to build internal investment teams during such volatility. Yet the fund has taken those setbacks in its stride to build a strong foundation and culture.

“With that volatility, our portfolio and strategies have done really well – 2024 was our best year of performance,” Stoyanova says from the fund’s offices in Toronto.

“We’re big enough at C$86 billion ($62 billion) to help our clients and do interesting things that are not just investing in an index, but we’re also small enough that we all sit in one room. It’s a big room, but we still fit in one place.”

IMCO last year added four new public sector clients, joining long-term clients such as the $C31.7 billion Ontario Pension Board – a defined benefit plan for Government of Ontario employees – and the Workplace Safety and Insurance Board, an insurer which helps Ontario people get back to work after a work-related injury or illness.

The majority of its clients are now also taking IMCO’s strategic asset allocation advice, shifting from overweight allocations to underperforming assets such as real estate to newer asset classes like global credit and private equity.

Stoyanova says it is now talking to clients about taking a more responsive asset allocation approach given the increasing pace of change across markets.

“We don’t market time, but we’re market aware, which means that we have a worldview that we think gives us an idea of what the world and the markets will look like for a medium time period, say three to five years – and guides our investing.

“One of our objectives is to – together with our clients – come up with a methodology where we can adjust the asset allocation more to respond to market conditions without going through an elaborate process every three years by doing the asset-liability study with them.”

It’s the goal of every allocator to deliver alpha and beat their benchmarks, and one way to achieve this is to home in on the amount of tracking error taken across different parts of the portfolio.

It’s why Frank Mihail, CIO of the $8 billion North Dakota Department of Trust Lands, a sovereign wealth fund that invests North Dakota’s oil revenues to finance public schools across the state, is rolling out a core-satellite approach to portfolio construction that he believes will have an instrumental impact on controlling tracking error.

Mihail oversees a diversified all-weather portfolio comprising a 75 per cent allocation to alternatives, divided between private market (45 per cent) and long short active management (30 per cent) with the remainder in passive strategies. In conversation with Top1000funds.com from the fund’s Bismarck offices, Mihail turns to North Dakota’s public equity book to illustrate the strategy in action.

The endowment has three line items in the US equity allocation – one passive large cap and two (large cap and small cap) actively managed long-short extension allocations, he explains.

“The idea behind the barbell strategy of passive, and long short extension strategies which come with more tracking error than traditional long only active management, is that it gives managers the tools to be able to make money in a bear market.”

The extension managers run at 6-8 per cent tracking error, but when this is blended with zero tracking error in the passive allocation, it reduces to a 3 per cent tracking error for the total US book. “This is where we feel comfortable right now, but if we want more tracking error next year, we can dial up by reallocating more from passive to active.”

Mihail, who joined North Dakota in 2023 from the Public Employees Retirement Association of New Mexico (PERA), introduced the same portfolio construction in the real estate portfolio that same year. The allocation had an investable benchmark from its fund of funds manager. This became the passive beta, or home base, for the allocation. Based on this, two satellite managers allocate to secular tailwinds like industrial and were then tasked with driving excess returns beyond passive beta.

The problem with infrastructure benchmarks

Mihail has now turned his attention to infrastructure, where North Dakota has a 7 per cent target allocation. Yet the core-satellite portfolio construction is more complicated in infrastructure because of the lack of benchmarks that accurately reflect the volatility and risks investors face in the asset class.

For example, public market volatility is often benchmarked to a private market portfolio which can destroy total portfolio alpha. Risk mismatch is another issue. “In infrastructure, there is a spectrum of risk from core to core plus, value add and opportunistic and investors want to home in on their target risk profile. The benchmarks available don’t’ meet the need for allocators for different reasons.”

To get around the problem, Mihail is working on developing a bespoke infrastructure benchmark on which to build the same core-satellite approach. He says the CFA Institute’s seven properties of a valid benchmark under the acronym SAMURAI are guiding a construction process where he is particularly mindful of the importance of making it investable – many benchmarks that get constructed are just theoretical and therefore don’t reflect a true opportunity cost, he says.

“The Russell 1000 is investable – you can go out and buy 1000 names and ETF products. One of the most popular infrastructure benchmarks is CPI +3 per cent, but you can’t buy this if you want to invest in it. Only with an investable benchmark that reflects a true opportunity cost is it possible for boards to measure outperformance and align incentives with staff. Investable benchmarks allow for incentive compensation to become a reality.”

Instead of throwing “darts at a board” and hoping for the best, investable benchmarks that reflect zero tracking error support consistent alpha generation and the wider goals of the portfolio, he continues. With a clear definition of how much active risk they want to take away from the benchmark, investors can target active managers who can deliver those excess returns.

“There is no alpha unless you can define what the benchmarked, or index beta, is first. This is the North Star, and once you have defined this, you can go and allocate to active managers that you believe can deliver excess returns. If these managers deliver more tracking error than you want, investing in passive beta becomes a portfolio construction tool that allows you to dial tracking error back to target.”

The benefits of only a few line items

Mihail attributes his ability to dedicate time to devising benchmarks and fine-tuning tracking errors to another unique characteristic of North Dakota’s portfolio: the lack of line items. There are only 40 in the whole portfolio so he is not buried in operational issues like setting up new accounts or issuing capital calls.

The administrative burden of investment is also contained by his preference for evergreen structures that don’t have the same operational intensity of closed-end funds, where managers return to market for repeated vintages.

In the venture capital allocation, the fund invests with just three blue chip managers across sectors and stages in a highly concentrated book and Mihail relies on the managers to provide underlying diversification via different products and sectors, seed and later stage exposure.

It’s a similar story in private equity which comprises just one line item with a fund of funds manager.

“The liquidity challenge is big in private equity right now, and a lot of our peers are overweight. We are not facing the same challenges partly because we don’t have any liabilities and don’t have to touch our principal to meet distributions.”

He recently expanded private credit (it has a 20 per cent target) with additional exposure to asset-backed and opportunistic strategies in the secondaries space.

Mihail concludes that the portfolio held up well during recent market volatility, partly because of the low allocation to public equity and being well-positioned for the rotation out of the US into international equity.

“The ACWI index is about two-thirds US one third international, we target a 50:50 split which positioned us quite nicely going into US sell-off,” he says.