Adam Matthews, chief responsible investment officer at the £3.5 billion Church of England Pensions Board, a UK asset owner and a long-term shareholder in mining giant Anglo American, is concerned about the impact of a potential sale of the 107-year old company to Australian mining industry leader BHP.

Anglo has rejecting BHP’s approaches twice, and in the latest twist, unveiled a sweeping break-up plan. In a bid to defend itself it has laid out plans to focus on energy transition metals like copper and spin out or sell its less profitable coal, nickel, diamond and platinum businesses.

But as the corporate drama continues to play out and if the two firms do merge, Matthews flags worrying long-term consequences to asset owners interests.

“Anglo is a globally significant diversified mining company that operates in key parts of the world, particularly in some important emerging and developing markets, and seeks to do so to the highest standards. Losing Anglo as a distinct entity may serve short-term financial interests, but as an asset owner we are not convinced that such consolidation will serve our long-term interests as a pension fund,” he writes.

Matthews is an expert on the complexities of investing in the hard to abate sector which is also essential to the energy transition. He has previously voiced his concern that risk-averse investors may avoid the sector because they are worried about tripping net zero and ESG pledges.

Yet estimates suggest that over the next decade overhauling electricity transmission will require the equivalent of all the world’s copper used to date. It means capital and finance needs to continue to flow into the mining sector for a successful energy transition.

One area Anglo has played a distinctive role in driving best practice is in tailings dams, the vast toxic lakes used to store the by-products of mining operations and which illustrate one of the sustainability challenges in the industry.

“The company was one of the first to support institutional investor calls for a different approach following the Brumadinho tailings disaster. It recognised that the social license of the sector was under threat and that the key to addressing challenging issues and building trust required multi-stakeholder approaches. It is also Anglo that has championed the development of a multi-stakeholder approach to standards through initiatives such as IRMA Initiative for Responsible Mining Assurance .”

Matthews also draws attention to the enhanced role mining could play in key economies especially in Africa.

“We need more companies like Anglo that are willing to grasp the opportunities of operating in emerging and developing markets such as Africa, not fewer,” he writes. “The sector benefits from there being a race to the top among the major mining companies, and consolidation at this level removes a key actor in pursuit of a socially and environmentally responsible mining sector.”

Anglo employs around 60,000 staff globally of which slightly more than half are based in South Africa, according to its most recent annual report.

“As a UK pension fund we are keen that the LSEG (London Stock Exchange Group) remains a premium market for mining companies.  Rather than the prospect of losing Anglo, it would perhaps be more appropriate to consider what enhanced role Anglo and other companies could play in benefitting local and national populations, generating broader long term value and supporting economic development in mineral rich countries.”

Matthews has previously argued that corporates operating in emerging markets can be unfairly treated by investors targeting net zero. Carbon targets that focus on numbers rather than nuance impact these companies because they typically have a higher carbon footprint in a portfolio, and reducing exposure is an easy win on the net zero road.

“Measuring local companies in emerging markets against globalised benchmarks doesn’t allow for these companies’ differentiation in-line with the Paris agreement,” he told Top1000Funds.com, arguing current frameworks, including the Net Zero Asset Owner Framework, need enhancements to ensure they offer differentiated and fair pathways consistent with the science for these companies.

The Church of England Pensions Board recently decided to divest from oil and gas companies following sustained engagement.

In 2021, the Church Commissioners excluded 20 oil and gas majors from its investment portfolio. Then it decided to exclude BP, Ecopetrol, Eni, Equinor, ExxonMobil, Occidental Petroleum, Pemex, Repsol, Sasol, Shell, and Total, after concluding that none are aligned with the goals of the Paris Climate Agreement, as assessed by the Transition Pathway Initiative (TPI).

“It was our fiduciary duty to take the decision we did,” says Matthews.

The UN-backed Principles for Responsible Investment (PRI) is in the process of an identity refresh as it looks to shift its primary function away from driving ESG accountability among investors (which it has been doing for the past two decades) to facilitating collaboration.  

In an interview with Top1000funds.com, the organisation’s chief sustainable systems officer Nathan Fabian says the pivot is necessary “in a world where regulators of financial services are stepping in and where they have the actual substantial mandate on supervision”.  

The PRI’s signatories have all committed to a set of responsible investing standards, including practicing active ownership and encouraging appropriate ESG disclosures internally and in companies they invest in.  

Now a network of some 5,500 asset owners, investment managers and service providers, the PRI’s expansion is a good indicator that responsible investment is becoming increasingly mainstream. But Fabian says this development has also caused a lot of divergence in ESG approaches from investors. 

“If you put all of those things together, it’s easy to understand why there’s accusations of greenwashing and even pushback on ESG in some quarters,” he says. 

“Even though that anti-ESG is a politically motivated campaign, there are reasonable questions around who is doing what and why on responsible investment. 

“There’s an acceleration of practice and diversity, and our role is better served in helping signatories’ progress. 

“So we’re trying to move away from accountability being the primary basis of our relationship to our assistance to signatories’ progression being the primary basis of what’s valuable about the PRI, which means providing collaborative spaces.” 

Fabian says working closer on the ground with prospective emerging markets signatories will be a focus in the year ahead. The PRI just made new hires in the Middle East and Africa, and while it has an established team in South Africa, the organisation is looking to ramp up its presence ahead of the Brazil COP 30 in 2025.  

Working with developing world signatories requires a different approach, Fabian says. 

“[In these markets] You’ll have some managers with foreign capital, and you’ll have some who are maybe managing a little bit of sovereign savings. When that’s the dynamic, there’s a smaller base of local investors to work on that financial system on incorporating ESG,” he says. 

“So what we’re finding is that we need to work with a broader range of collaborators, and much more time spent with regulators, stock exchanges, and international development finance institutions.” 

For example, stock exchanges can bring together listed companies, financial advisors and regulators on ways to improve market infrastructure, Fabian says. He concedes that these are not usually the priority partners for the PRI, but they are essential if the organisation “wants to do something meaningful around the role of [responsible] finance in emerging markets”. 

“In the past, we would have just recruited the big signatories to be part of the PRI, provided some guidance, and allowed them to start developing their practice,” he says. 

“But we just realised we need to be far more present, far more hands on, bring in far more expertise and share much more dialogue.” 

With that said, the work is far from done in developed markets. The US Securities and Exchange Commission (SEC) last month stayed the implementation of its climate-related disclosures by public companies in the face of multiple legal challenges from attorney generals of several Republican-led states.  

“The US is a difficult place at the moment,” Fabian says.  

“I don’t believe there’s any doubt in the minds of investors in the US about the importance of climate disclosure for their investment activities… and I think the SEC, by attempting to bring forward a climate disclosure rule, also believe that’s relevant to investors into companies. 

“The fact that the speed of transitioning on fossil fuels is the source of a political argument is not surprising. We’ve seen that in lots of countries of the world over the past few years, and the Americans have not fully emerged from that argument. 

“But that’s a transition issue. Investors will still expect companies to disclose, whether the SEC makes the rule or not, and I think they’ll default to the ISSB standards.” 

After five years as deputy CIO, Scott Chan has been appointed to the top investment job at CalSTRS. Top1000funds.com takes a look at his leadership style and his influence so far on the team and the fund’s investments.

Scott Chan has been named chief investment officer of the $332 billion CalSTRS, replacing long-time investment leader, Chris Ailman, who will retire after 23 years at the helm.

In the past few years Chan, who has been deputy CIO since 2018, has been instrumental in restructuring the investment team with a particular eye on positioning for future growth; as well as directing the fund’s ‘collaborative model’ which has saved more than $1.6 billion in costs since 2017.

Like Ailman, Chan is deeply committed to the mission at CalSTRS of providing a secure retirement to California’s educators (on average, members who retired in 2022–23 had 25 years of service and a monthly benefit of $5,141). Chan also has a personal connection to the fund as the husband of a California educator, and his wife is a member.

In his new role, Chan will be responsible for developing and implementing CalSTRS’ investment policies, strategies and initiatives; managing a significant and complex budget; fostering a collaborative culture of excellence and diversity, equity, and inclusion; and overseeing all CalSTRS investment portfolios.

“I am honored to oversee CalSTRS investments and lead our amazing team,” Chan said in a statement. “I am committed to driving excellence in how we invest, including advancing sustainability practices and promoting diversity across CalSTRS, our portfolio companies, partners and the industry. I’m humbled to follow Chris Ailman, a great friend and mentor, in maintaining our collegial and inclusive workplace culture and continuing to work with our CEO, Cassandra Lichnock, and our board’s Investment Committee to achieve our goals.”

Chan has always been supportive of his team and quick to give praise to others.

“We had built solid strengths across asset classes, and we have deep expertise. I think we have the number one team in the country – I’m bullish on our team,” Chan said in an interview last year. “We want to make sure we build upon that. And what stands out is we have such a strong culture, focused on the mission and a great set of values in how we operate.”

An investment team restructure last year was deliberate in its focus on how to position the fund for future growth with assets doubling every eight to 10 years. It also intentionally took a close look at the ongoing complexity of the portfolio and the skills required to manage it effectively in the future.

One of CalSTRS’ identifying factors is its ‘collaborative model’ which includes more internally managed assets, with 62 per cent of the portfolio now managed internally. But as the fund moves more into private assets, the collaborative model has focused not just on internal management but how CalSTRS can partner with external providers in innovative ways to achieve similar benefits.

SMAs and co-investment have been a feature of the model so far and Chan has said as the fund moves into the next phase of the collaborative model it will move more into joint ventures and revenue share and ownership.

A direct result of the collaborative model is that CalSTRS internally is taking on more execution risk, which has a direct implications for the size and quality of the team.

In its most recent five-year plan, the fund outlined 91 new hires and has developed a plan to hire more staff to manage and mitigate the execution risk and to train and equip the current staff. The CalSTRS investment team currently numbers 225 and Chan has said a focus will be on hiring people with a background suited to those types of investments, such as a recent portfolio manager hired from KKR.

In an interview last year about the collaborative model he said: “All the credit goes to the team; they have executed this excellently. We have a great team and culture, they feel empowered and have delegation up and down the chain. We have a streamlined decision-making process and they can be nimble in the marketplace.”

Like many large institutional investors, CalSTRS is paying more attention to overseeing management of the total fund including short and medium tilts and whole of portfolio challenges like taking advantage of the energy transition and diversity of managers and internal teams.

ACCESS, the United Kingdom’s £35 billion Local Government Pension Scheme (LGPS) pool, is seeking two private equity managers in its latest push into private markets following mandates to infrastructure and real estate managers in the last year.

ACCESS, which outsources all investment management and has mandated to a pool operator to run its outsourced processes, is planning a multi-vintage private equity programme.

The 11 pension funds in the pool, all located in the east of England, will be able to commit to different vintages on an ongoing basis over the terms of the mandate. Each vintage will be globally diversified with investments across primary and secondary funds and co-investments.

Annual commitments to both external managers will average around £500 million in the first five years but the total allocation over time will reach £4-6 billion.

“Considering the potential ultimate scale of the mandate, it is anticipated that total assets across all vintages across both allocators could exceed £4-6 billion, based on potential asset growth and/or increases to individual authorities target allocations,” states the pool.

ACCESS pool, one of eight LGPS  pools, is under the radar compared to better-known sister pools like Border to Coast, Brunel Pension Partnership or LGPS Central.

Yet with a potential £56 billion in assets under management if all assets in the 11 pension funds are pooled and representing 3,400 local authority employers, it is one of the largest LGPS partnerships. Pooled assets represent 85 per cent of all listed assets held by the individual pension funds and 59 per cent of total assets have been amalgamated so far.

In comparison, Brunel Pension Partnership now runs around 80 per cent of total member assets.

A government consultation published last year found only £145 billion, or 39 per cent, of total LGPS assets had been transferred from single funds to the pools. If the LGPS was a single fund it would have around £365 billion assets under management.

One of the reasons behind slow progress by some pools is that the government never laid down clear rules around how the pools should be structured. And although assets have been pooled, other functions including administration or governance remain in the hands of the individual pension funds.

For example, at ACCESS strategic oversight and scrutiny responsibilities remain with the individual pension funds as does all decision-making not only on their individual asset allocation, but on the timing of transfers of assets into the pool.

ACCESS’s own, modest, internal team comprise a handful of full-time staff sitting in its support unit providing program and contract management support. Neither its joint committee (the formal decision making body) nor the support unit have FCA authority.

The three pension funds making up Northern LGPS have also been slow to pool – like £18 billion West Yorkshire Pension Fund. Apart from two pool mandates in excess of £10 billion each, West Yorkshire continues to invest the bulk of its assets via its own 20-person in-house team based from its Bradford office.

ACCESS uses Apex Investment Advisory to advise on implementation for the pooling of illiquid assets including private equity, private debt, infrastructure, and real estate. As implementation advisor, Apex provides support in selecting individual investment opportunities and investment managers to build portfolios in a range of illiquid assets.

Infrastructure

Earlier this year ACCESS allocated £1.5 billion to two infrastructure fund vehicles managed by IFM Investors and J.P. Morgan in its second push into private markets in allocations focused on core plus and value add investments spanning transportation, social infrastructure, energy and telecommunications utilities, GDP sensitive assets and contracted power and energy assets.

In November last year ACCESS selected real estate manager CBRE Investment Management to manage both a UK core real estate and a global real estate mandate for its first illiquid asset class.

 

The $8 billion Kellogg Foundation is pushing the frontiers of technology and financial theory in its 20 per cent allocation to hedge funds, using AI to write algorithms in its quant strategies. Systematic funds crunch through vast amounts of data and use algorithms, typically written and tested by humans, to automatically detect trends across different markets.

Now the foundation, established by the cereal entrepreneur in 1930 to support children, families and communities in need, is investing with a handful of cutting edge investment managers that use machines rather than people to figure out what the algorithms should say.

“We are working with a handful of investment managers active in this new frontier. Only a couple of firms are doing this, and it’s of great interest,” explains Carlos Rangel, CIO of the Kellogg Foundation in an interview with Top1000Funds.

The strategy is supported by the evolution in data. Still, Rangel says one of the challenges is the lack of data in financial markets.

“Financial markets are just a subset of what is going on in the world and there are much fewer data points than other areas. Medical research through computer simulations or climate models have more moving elements and complexity in the data. Talk to someone at Google, and they say there is so little data in finance. It is a tiny data set!”

The Kellogg Foundation runs about a dozen different hedge fund mandates, a couple with the same manager, and focuses on strategies spanning zero beta, momentum, long/short and credit. The portfolio targets 0.2-0.3 beta to the stock market with equity market returns.

“When the market goes down, we still need to generate cash flow to send capital to the communities we serve,” says Rangel.

Another area he is keenly focused is fixed income, where the foundation has aggressively built its allocation to 6 per cent – up from 1-2 per cent per cent in 2020 and 2021. Back then there was no duration in the portfolio and the allocation comprised government bonds for emergency liquidity and a few credit spread strategies lending to small businesses.

As rates climbed higher, Rangel extended the duration to three years and is targeting five-six years in 2025.  Investments include residential mortgages in strategies that manage the mortgage spread relative to other alternatives in the fixed income space. US corporate bonds are also in the portfolio as a source of liquidity and income and a few credit mandates where the team buy spread on top of what they see in the liquid market.

Transition opportunities are also front of mind.  He notices assets are starting to reprice to reflect climate change, revealing winners and losers. The investors who rushed into electric charging stations may not get their money back on capital intensive charging projects, for example.

He believes optimistic pricing and sales forecasts lag the reality of US electric vehicles sales, and hybrid is emerging as the realistic, mass market solution in commercial and private auto sectors. “The data suggests that a wholescale change to electric is both prohibitive from a cost perspective, and has a massive ecological impact,” he says.

Elsewhere, he flags the changing economics in assets like forestry, now more valuable left standing as a source of carbon credits than for their cut timber “Monetising the new opportunities in the transition is one of the best career opportunities in decades,” he enthuses.

Meanwhile, he also links “very attractive” pricing in re-insurance assets to climate change increasingly causing damage to property. Here the foundation invests in the insurance companies insuring the insurers exposed climate-related insurance risk like fire and flood. “This provides attractive returns not related to the economy. It shows the market is pricing the physical risk of climate change,” he says.

Another corner of the portfolio of enduring focus is diversity.

Thirty of the foundation’s 50-100 investment managers have partnered with Rangel and the team under an Expanding Equity Programme to create a more inclusive workplace in an industry where gender, racial, and socio-economic diversity is poor.

“We are working with leaders and managers to create a more empathetic workplace where people feel free to learn and make mistakes,” he says. Milestones include these asset managers now recruiting form a broader selection of schools for the first time. “They are excited about the talent they are bringing into their organizations.”

The foundation also runs a diverse manager programme, mandating a third of its total AUM to investment managers that are owned by underrepresented groups. “There is $70 trillion of assets managed in the US but less than 1 per cent is managed by people from under-represented groups,” he says, describing a programme that includes coaching diverse managers, and supporting them scale.

Rather than running a separate emerging manager programme where few managers ever graduate to the main portfolio from the “kid’s table,” at the Kellogg Foundation, diverse managers start off in the endowment from the get-go where they face the same scrutiny as any other manager in the portfolio.

Nor does the investor try and negotiate reduced fees with emerging managers, like many other asset owners.

“When we started the programme in 2010 we did focus on trying to negotiate fees especially if they were an early investor but we realised it was counter-productive. By banking a manager and then beating them down on fees, you are not ensuring their success.”

He sympathises with the challenge emerging managers face being both a business owner and investor, and says the long-term nature of venture capital and private market relationships make gaining entry into a portfolio very difficult. “Emerging managers have to displace an existing manager,” he says.

Rangel concludes with a nod to a few of the risk on his radar.

He says too much capital has flowed into private credit (it accounts for around 1-2 per cent of the portfolio) resulting in his very selective approach.

Around 3-4 per cent of the portfolio is invested in China with two long short public equity managers and three venture relationships comprising investments in industries especially chosen as important to the Chinese economy – but not in the cross hairs of geopolitics.

“We have pulled away from China in a reflection of regulatory restraints. Although we still have exposure. we do worry about venture investment because it might not be possible to repatriate in 15 years,” he concludes.

Sweden’s AP Funds are recognised internationally as a role model in sustainability and have continued to develop this important aspect via both responsible investment and responsible ownership, said the CIOs of the four main funds that make up the country’s buffer system, Kristin Magnusson Bernard, CEO AP1, Eva Halvarsson, CEO AP2, Staffan Hansén, CEO AP3 and Niklas Ekvall, CEO AP4, in a recent joint statement.

The funds most recent average returns are 8.1 per cent after costs for the year.  “Our collective result for 2023 shows that all of us, with our different management strategies, navigated well in unsettled financial markets and can summarise a stable year,” they said in the joint statement.

At the end of 2023, the total fund assets of the AP Funds amounted to SEK 1,880 billion ($182.8 billion) and during 2023, the AP Funds paid out SEK 19 billion ($1.8 billion) to cover the pension system’s deficit.

The CEOs stress how cost effective management can provide good returns, and also builds confidence in the system. In 2023, total management costs amounted to 0.08 per cent of assets under management. They add how the AP Funds are also cost-effective compared to international benchmarking. Other 2023 milestones include the carbon emissions of the portfolios falling by a further 8 per cent.

AP1

At AP1 the team recently increased currency hedging and option strategies in response to the stronger krona. “Our allocation to emerging markets was also lowered last year, based on our evaluation that there would be better returns from developed markets,” writes Magnusson Bernard.

Through 2024 she predicts uncertainty, stronger market volatility and a high cost of capital even though she believes the peak in interest rates has probably been reached for this upward cycle ahead.

“Innovative solutions and productivity advancements will become more crucial to growth and prosperity than in the period we have just lived through when market growth was driven by constantly falling interest rates and other stimulation measures,” she says.

SEK 454.4 billion ($44 billion) AP1 achieved a 2023 return of 9.1 per cent with positive earnings contributions from listed equities and fixed income particularly. Gains which offset the negative returns from unlisted assets such as real estate, infrastructure and private equity funds. After holding more conservative positions, gains also came from AP1 gradually increasing its allocation to equity and duration from neutral to somewhat higher levels.

AP1’s expense ratio came in at 0.06 per cent, supported by investing in the fund’s IT capacity and infrastructure.

AP2 cuts costs

SEK 426.0 billion ($41 billion)AP2 recently reported a total return after costs of 5.9 per cent for 2023 benefiting most from the allocation to Swedish and foreign developed equity markets and negatively impacted by real estate.

Eva Halvarsson comments that the fund has carried out extensive work on reshaping governance and organisation in order to better cope with a changing world. In 2023 the investor also reviewed its asset management strategy, with the aim of generating a better return using a more dynamic and efficient approach and bringing more assets in-house.

“One further change that affected 2023 was our efforts to cut costs. Before the start of the year, the Board decided to reduce the total cost budget by 16 per cent, which is a result of our decision to bring most of our externally managed mandates in-house, and to discontinue management of Chinese A shares. We have been able to achieve this without any additions to our internal resources. Relocating our office to new, smaller premises also means a cost reduction,” she says.

Climate reporting has also been a central focus at AP2 which now reports emissions data for more asset classes, and Scope 3. AP2 has also signed up to the new framework Taskforce on Nature-related Disclosures, TNFD.

At AP3, CEO Staffan Hansén notes how global equity markets bolstered performance. AP3 has spent much of the last year focused on corporate governance, climate, human rights and biodiversity. It has procured  new system infrastructure, an important step in future-proofing the fund’s operational support. Meanwhile a new head of asset management,  Jonas Thulin, replaces Pablo Bernengo who abruptly left AP3 at the end of the year.

AP4 leans into expertise in local markets

AP4, founded in 1974, returned 9.6 per cent after costs. “The good return that our portfolio has delivered is the result of the year’s favourable financial markets and the ongoing management work we conducted during the year. To a significant extent, this is also due to our many years of work to continuously improve the portfolio’s return and risk characteristics,” says Ekvall.

Until 2001, AP4 was essentially a pure asset manager of Swedish equities. This strong  tradition in management of Swedish equities continues to drive the fund’s culture with a strong focus on responsible corporate governance. Keeping costs low is another essential strategy pillar.

“AP4’s cost level was 37 per cent lower than that of corresponding pension funds internationally,” says Niklas Ekvall.

Reducing emissions (decreased by 11 per cent compared to 2022) has also been a key focus. AP4 has reduced emissions by a total of 65 per cent since 2010. AP4 takes responsibility as owner and served on 56 nomination committees during the year.

“AP4’s efforts to manage climate risks in the investment portfolio continue to yield results over time. In 2023, the portfolio’s carbon dioxide emissions decreased by a further 11 per cent. Since 2010, this decrease has been as much as 65 per cent,” says Niklas Ekvall.