Page 20 – Top1000funds.com

The private markets allocation at the United Kingdom’s Brunel Pension Partnership, one of eight Local Government Pension Fund pools set up 2017, is valued at £8 billion ($10.7 billion) spread across 162 investments, including prized sustainable investments in wind, solar green hydrogen and waste.

The allocation is split between different fund types – primaries, secondaries and co-investment – as well as direct co-investments and fund secondaries, overseen by Richard Fanshawe who joined Brunel as head of private markets seven years ago. Back then, the combined allocation to private markets (excluding property) amongst the ten client funds in the partnership was just £1.3 billion.

Fanshawe credits much of the growth in the allocation to private markets to Brunel’s “innovative model”, characterised by selecting fund investments internally alongside working with strategic partners (that are also global leaders in their asset classes) to select co-investments and funds where applicable. He says their expertise complements and acts as an extension of Brunel’s internal team of 12 private markets investment professionals – there were just five at the start.

“We are already able to achieve what the Canadian model aspires to,” he says in a reference to Canada’s model which combines robust governance with independent managers and large teams who select investments themselves to create a deep allocation to private markets and has helped create the second-largest pension system in the world, according to the OECD.

The pool’s own resources and those it can tap with its partners, plus Brunel’s combination of leadership in responsible investment and a dual investment committee process, has created a proven track record of scalable, resilient and cost-effective investment, he continues. Moreover, co-investing with a wider number of sponsors adds a critical layer of diversification that single-sponsor platforms can’t replicate. Similarly, he says access to “top-class, voluminous deal flow” is fundamental to the ability to be highly selective when choosing investments.

To date, Brunel has made 32 co-investments in global infrastructure projects and platforms, nine of which are in the UK. Co-investing is saving the pension funds in the pool around £5 million annually. In private equity, flagship investments include cornerstone Neuberger Berman Impact Private Equity (PE) Funds 1 and 2 which are 60-70 per cent co-investments.

“Co-investing is most certainly not just an extension of fund selection, but a spectrum from basic post-deal syndication to the upper end of complexity – it is an entirely new ball game requiring distinct expertise, continuous primary allocations to funds in their investment periods and compensation structures that are beyond pension funds in order to make them sustainable.”

Net returns of early realisations from Brunel’s more mature vintages already offer an early indication of success, but he says Brunel won’t increase the allocation to private markets anymore at the moment. Around 33 per cent of partner funds assets are invested in private markets, and he says there is “little more capital available to deploy until capital is recycled or strategic asset allocation weights change.”

For all the growth in Brunel’s private markets allocation over the last seven years, Fanshawe flags an enduring lack of opportunity in the UK. “There have been few exciting UK investment opportunities during the last seven years, and certainly not as many as there could have been,” he says.

He traces the lack of opportunity in UK infrastructure to the shift away from private/public partnerships in social infrastructure projects renowned for highly attractive ‘availability payments’. Now the focus is on energy, economic and utility-related assets with “fundamentally different return profiles and drivers.”

It means there are more attractive opportunities in Europe and the US with “fundamentally different business models” to those in the UK where, according to asset manager Equitix, there is now a backlog of between £50 billion and £300 billion of capital maintenance in the public sector and social infrastructure facilities.

Brunel has invested 50 per cent of all infrastructure capital in the broad energy transition, diversifying across geographies, regulatory regimes, technologies, stages, vintages and GPs. However, Fanshawe concludes that putting money to work in the transition has grown more challenging.

The consequences of the review of the UK’s electricity market arrangements are looming into view. Other challenges include “the urgent need to focus on energy efficiency measures,” the lack of proven long-duration energy storage technologies with subsidy arrangements to support higher renewable penetration and few new low-carbon baseload opportunities.

“Lack of certainty will discourage further investment,” he says.

Norges Bank Investment Management (NBIM) which oversees Norway’s sovereign wealth fund managing the country’s oil and gas revenues, is expanding its investments in hedge funds to include mandates to Asian, US and European long/short external managers. The number of managers and invested value will depend on market opportunities, said Erik Hilde, global head of external strategies at NBIM.

NBIM already invests in internally managed long/short funds. The investor also allocates approximately $90 billion to 110 external fund managers, all of whom follow bottom-up fundamental investment strategies.

“Everything will continue to be managed within our mandate and within the limits we have for deviations from the index,” said Hilde, who added that fees will be structured similarly to NBIM’s existing external mandates.

The strategies will be held in separately managed accounts. Hilde said that under the strategy, NBIM’s external managers will borrow stocks held in NBIM’s large index portfolio to position on falling prices, selling them in the market. “This way the fund avoids being net short in any company, even though some of the mandates will be long/short,” he explained.

According to NBIM’s public invitation to tender, the investor plans to award mandates across long/short and market-neutral strategies with initial funding for each mandate ranging from $150 million to $500 million. NBIM is looking to allocate mandates to single-country long/short equity strategies in Australia and Japan, regional long/short strategies focused on Europe, and long/short equity strategies in the US, where it is looking for expertise in healthcare and technology in particular.

The open invitation to external managers reflects growing investor interest in long/short equity strategies as market volatility and stock dispersion create fresh opportunities for active managers. NBIM’s move also comes as some investors grow increasingly concerned that equity market valuations look stretched, increasing the risks for long-only investors at a time when the impact of President Trump’s policies on the US economy, particularly his tariff plans, remains unknown.

Equities account for 70 per cent of the total assets under management. NBIM has a 27.7 per cent allocation to fixed income and a 1.9 per cent allocation to unlisted real estate. Last April, Norway’s finance ministry rejected NBIM’s petition to invest in private equity citing higher fees, lower transparency of information, and the need for a broad political consensus.

Today’s new uncertainty contrasts with last year. NBIM attributes its 2024 return of 13 per cent to gains in global equity markets supported by solid corporate earnings, more optimistic growth expectations and declining inflation expectations.

Still, in 2024 the overall contribution from security selection was negative. External management made a positive contribution, but the negative contribution from internal management was larger. “The security selection strategy is not expected to contribute positively to the fund’s relative return every year, and the results for 2024 followed a period of five consecutive years of positive contributions from security selection,” states the fund.

NBIM has delivered annualised returns of 7.5 per cent over the past decade.

The fund had a 0.6 per cent loss in the first quarter of 2025 largerly weighed down by equities, which recorded a loss of 1.6 per cent or 415 billion kroner ($39 billion) driven by fluctuations in the tech sector.

With investment markets uncertain, being an investor with a global view and the flexibility to take advantage of opportunities has seen OPTrust “doing well”, its chief investment officer James Davis says. An evolution of its total portfolio approach keeps it focused on the key metric that matters to members: generating the return needed to pay pensions.

The evolution of the total portfolio approach used by OPTrust has been critical to the investment team’s ability to take advantage of the current uncertainty in markets according to chief investment officer, James Davis.

“Markets are absolutely crazy, everyone is hoping we will see something to alleviate the uncertainty, but we are doing well through it,” Davis says. “Being a global investor makes all the difference in this type of environment.”

The most recent evolution of the TPA journey, that began a decade ago when Davis introduced the member-driven investing strategy, is folding all the liquid market asset classes into one fund with a single investment objective.

“The team has a lot of flexibility, if it wants to be in credit, or gold, or equities or whatever they want to be in as long as it is liquid, they have huge freedom,” Davis says.

The newly named total portfolio management group, formerly the capital markets group, has flexibility to adjust the portfolio so long as it is within the risk budget that the CIO decides is acceptable, considering input from the portfolio and market review committee. This committee which includes senior management across investments, finance and risk meets every two weeks to discuss the overall portfolio and macro environment, and dynamically sets the desired risk profile and foreign currency exposure.

More recently the total portfolio management group has been dialling down credit exposures significantly, Davis says, recognising that credit spreads were quite tight especially late last year.

“It wasn’t something I directed them to do,” he says.

Another recent example is the geographical exposures within equities.

“They have been concerned about the situation in the US especially the concentration risk in the Mag 7, and have been exploring opportunities outside of the US,” Davis says.

They have also recently been allocating more to external hedge fund managers, looking specifically for uncorrelated alpha.

“The way the team approaches external managers is very different given this TPA mandate,” Davis says. “They are very focused on absolute return and finding uncorrelated strategies and managers that complement the beta strategies that we run internally.

The structure also allows the fund to look at assets that don’t fall within an asset class.

“It allows us to look at the spectrum,” Davis says.

“For example, are data centres real estate or infrastructure? Some people didn’t invest because they couldn’t decide what it was,” he says.

“We were early movers in gold and that served us well last year. We had more than 6 per cent in gold last year, and that was because the TPA process doesn’t force us to hold things in a benchmark or relative to the benchmark.”

Davis says the investment team is focused on excellence and continuous improvement.

“We can always be building on something better, striving to be more and more innovative,” he says. “We were early movers in machine learning and we are focusing on that and more recently in developing our AI capabilities.”

Systematic investing supports the focus on portfolio resilience and being able to adjust the portfolio through the portfolio completion team.

“It’s great to have something rules based when difficult times come.”

The evolution of TPA

Davis joined the fund as CIO in September 2015 and introduced the member-driven investing strategy and so began the decade-long evolution of its own unique total portfolio approach.

The idea was to stay focused on the key metric that was important for members, the funded status.

Davis says that naturally led to TPA because the aim is not to beat a benchmark but a focus on “the mission that really matters”, which is earning the return needed to pay pensions.

In a slightly unique take on TPA, and to take advantage of the fund’s natural strengths, the approach starts with the ideal illiquid assets allocation and then the portfolio is completed with liquid asset exposures to get the best portfolio to meet objectives.

“While in the perfect TPA-world all capital is at competition, I was always challenged by that because there’s a different liquidity horizon for different assets. So I felt we had to treat liquid and illiquid assets differently,” Davis says.

Private equity and infrastructure were already managed by the same team, and the private markets group uses skills from both asset classes.

“It’s one of our secret sauces in our overall recipe,” Davis says. “It allows us to look at the entire spectrum of private markets as a continuum, as a single pool of capital.”

To manage the overall risk in the fund it was necessary to be able to adjust the liquid portfolio due to changes in the illiquid portfolio or the macro environment. So a capital markets team was internalised, as a kind of portfolio completion group, allowing the use of leverage which was important for managing risk.

“That is something difficult to do if you don’t have internal capabilities,” Davis says.

The fund still uses external hedge funds and credit managers, as well as external managers in private markets.

The maximum potential allocation to illiquid assets is currently 60 per cent, but the actual allocation is less.

“We have a higher allocation to assets we think offer the highest possibility of value creation for the risk we take. We try to maximise that if the opportunities are there, but teams don’t have to be invested,” he says.

“If there’s no good opportunities within the illiquid portfolio then the overall allocations will go down and the allocation to the liquid completion portfolio will go up.

“Right now we have an abundance of liquidity which is important given the uncertainty in this current environment.”

Davis believes that opportunities will present themselves in infrastructure and private equity “in the next little while”, so OPTrust is well positioned to be able to capture some of those.

In addition he’s confident that the uncertainty in public markets will present opportunities.

“Volatility and uncertainty allows for bargain hunting, and more differentiation,” Davis says. “Before if you weren’t in tech stocks you were missing everything, now more variation and less correlation across different stocks and asset classes creates opportunities. There are also opportunities in the commodities space as well, so we are keeping a close eye on those.”

Davis says a concern about inflation is ever-present at the back of his mind.

“It’s hard to predict which way the economy will go, but the potential for inflation is higher now than the past several decades,” he says.

“Positioning the portfolio to capture gains in an inflationary environment is difficult but it can done.”

Private equity fees and a lack of high-quality, United Kingdom-focused fund managers targeting the scale-up sector is impeding UK pension funds’ ability to invest in private equity, according to a new report published by LGPS pool Border to Coast Pensions Partnership which has gathered views from its investment team, partner funds and senior executives at nearly a dozen leading asset managers.

The UK attracts a large slice of global private equity and venture flows into sectors like fintech, creative industries, life sciences and software, but very little of that money comes from domestic pension funds which are deterred by high fee structures that don’t accommodate defined contribution (DC) funds.

UK pension funds also have a statutory duty to cap fees which ignores the additional returns that investments with higher fees can deliver. Calling for clearer guidance from government and regulators, the paper argues pension schemes should assess value for money in their investments so that the focus isn’t just on management fees and value in isolation.

Government and regulators must lead the charge on highlighting the importance of considering net returns and the gains delivered after all costs, which in turn will ensure value for members both financially and in terms of broader economic benefit, says the paper.

“The Local Government Pension Scheme (LGPS) is already a significant investor in the UK, deploying a greater proportion of funds domestically than private defined contribution equivalents. But if government wants to unleash the full potential of the LGPS – and its £425 billion of assets – it should continue in its active engagement with the industry, and take note of the current blockers outlined in this report,” says Border to Coast CEO, Rachel Elwell.

Positively, large pension schemes, including the LGPS, are already significant investors in the UK. Border to Coast, for example, has already invested more than £12 billion (23 per cent of total pooled investments) on behalf of its partner funds into UK public and private markets to date. This includes nearly £1.3 billion directly into UK private markets, making up 17 per cent of its partner fund’s pooled global private markets investment programme.

Since launching its private markets programme in 2019, Border to Coast has reduced the fees paid by its partner funds by 28 per cent relative to the industry standard. This success is down to the scale that pooling brings and the in-house team of investment experts that can build strong relationships with the right managers for the job. Expertise includes the design of bespoke investment vehicles with clear UK mandates like its UK Opportunities strategy, as well as access to co-investments offered by asset managers which were hard for partner funds to access individually.

Border to Coast aims to outperform a public market benchmark by 300 basis points and achieve annual net returns of 10 per cent from its private equity portfolio.

Limits to the UK asset management ecosystem

It’s not just fees that deter local private equity investment. Another challenge comes from the underdeveloped UK-focused asset management ecosystem. The report points to limited size, strength and number of domestic private equity managers – in particular those focused on earlier-stage companies in comments voiced by Border to Coast CIO Joe McDonell last year.

Fast-growing, young UK companies needing large-scale capital injections of over £20 million often struggle to find UK investors. Ensuring that more UK funds emerge to fill this expansion capital gap should be top of the agenda for the British Business Bank.

“Right now, UK pension schemes allocate so little to venture and growth equity that even the most in-demand UK-based managers are raising the bulk of their capital from overseas investors,” states the report.

It suggests that the government should also consider France’s Tibi scheme as a blueprint for channelling more capital into UK businesses. The scheme provides incentives for institutions that back innovative French technology companies and has significantly boosted France’s asset management ecosystem.

The report also highlights the need for reform in the UK’s planning system to encourage more infrastructure investment at home. Echoing other investors like IFM Investors, part-owned by DC-fund NEST, Border to Coast states that investment is being held back by the uncertainty created by the UK’s complex planning system and historical changes in government policy in areas like the green transition timeline. The report argues that these issues could be addressed by a more stable policy environment.

The authors call for a rapid passage of the Planning and Infrastructure Bill in a form that unblocks the UK’s planning system and the roll out of a well-designed ‘catalytic’ initiatives managed by the UK National Wealth Fund and GB Energy to develop infrastructure projects to the point where private sector capital can step in, de-risking greenfield projects and enabling the ’crowding in’ of private capital.

Amendments to the tax regime to incentivise wider infrastructure investment, akin to the Contracts for Difference regime for renewable energy infrastructure, would also support more investment.

As aggressive US “Liberation Day” tariffs weighed on China’s stock market, Beijing rallied its most reliable financial market troops to stop its domestic equities from nosediving.

This is the “national team”, a term loosely used to refer to government-affiliated investors.

Central Huijin Investment, a subsidiary of the $1.3 trillion sovereign wealth fund China Investment Corporation (CIC), first announced to state media on 7 April that it had increased A-share holdings. The fund declared itself as a national team investor and said it intends to “fully unleash its function as patient capital and long-term capital” to stabilise the market.

Within two days, state pension investor the National Council for Social Security Fund (NCSSF) said it would also increase its domestic equities allocation, as well as state investment managers China Chengtong Holdings Group and China Reform Holdings Corp. The funds collectively pledged hundreds of billions of yuan to invest in A-shares.

The national team first emerged as a market rescue force in June 2015 at the height of an extraordinary market rout, fuelled by a comedown in A-shares’ frothy valuation and a government crackdown on leverage, which saw the Shanghai Stock Exchange Composite Index losing 30 per cent of its value within three weeks.

Its approach has pivoted from direct share purchases to broad indices support via ETFs in recent years.

Senior lecturer at Australia’s La Trobe Business School Michael Li says the national team has played a pivotal role in maintaining the short-term health of the Chinese stock market. In a recent study examining the 2015 intervention, Li estimated that the national team’s ownership helped reduce stock crash risks by 30 to 45 per cent in the following three years.

But like any complex strategic government intervention, Li says it is possible that the national team’s actions can lead to some unintended consequences.

The network

The national team is not a defined list of investors but can include sovereign wealth funds, state investment arms, brokers, regulators and banks whose capital can be mobilised by the central government during times of market stress.

Some of the most prolific members are Central Huijin, NCSSF, foreign exchange regulator the State Administration of Foreign Exchange (SAFE) and stock lending provider China Securities Finance.

These institutions have interwoven ownership and reporting structures. Central Huijin was established by the central bank PBoC in 2003 and later transferred to CIC to effectively become its domestic equity unit – although there are “strict firewalls” between Central Huijin and CIC’s overseas investment activities.

Central Huijin acts on behalf of the central government to exercise shareholder rights in major commercial banks and other strategically important financial institutions.

China Securities Finance was owned by major market operators such as Shanghai and Shenzhen stock exchanges, who this February collectively transferred 67 per cent of their shareholdings to Central Huijin.

Meanwhile, SAFE operates under PBoC and manages the state foreign exchange reserves which at the end of this March amounted to $3.2 trillion, and NCSSF is a unit under the Ministry of Finance.

Central Huijin, the NCSSF and China Securities Finance held close to 4 trillion yuan in A-shares by the end of 2024, according to estimates from Wind data. The position represented approximately 4 per cent of China’s stock market value and is likely to have increased with recent stabilisation efforts around the US tariff. These holdings also have a significant sectoral bias as close to 80 per cent are bank shares.

The national team is an important anchor in a market like China where, according to official data, 70 per cent of equity trading is traced back to fast-moving retail money.

“Because [the national team’s] motivation, remember, is to stabilise market, not to gain profit,” Li says, but acknowledges this could have some negative short-term effects.

“Generally speaking, because the share price should be determined by its fundamental value like cash flows and other economic factors, the purchase of these national team investors will temporarily distort the share prices,” Li says.

“It’s not good for the overall market because it reduces the informativeness of the share price… it contains these deliberate trading.”

In the long term, while these rescue efforts likely do not have negative impact on A-shares – as the temporary boost from the national team will wear off and prices will revert to reflect fundamental value – it’s also hard to determine if they’ve contributed to the development of a more mature stock market or better beta, Li says. The MSCI China A index has had a zero per cent 10-year return despite volatile performance.

Goldman Sachs’ China equity strategist Fu Si told Chinese financial press that the national team acts more as a safety net and expected the buying to slow down after the market stabilises, while a sustained market recovery needs to be driven by improvements in consumption and real estate.

Global influence

While short-term asset price stabilisation is important, Li suggests it needs to work with government stimulus to boost investor sentiment should the US-China economic conflict escalate.

But the national team’s domestic influence is only part of the story as some members are prolific global investors, and there are already signals that the Chinese government is seeking to exercise the funds’ influence to exert pressure on the US.

Some of the state-backed funds are looking to exclude private equity investments in US companies, even if they are made by investment managers based outside of the country, the Financial Times reported on Tuesday.

CIC was among the investors reportedly pulling back from the US. The fund allocated close to half of its portfolio in alternatives at the end of 2023, which is the latest disclosure, which makes it one of the world’s largest investors in the asset class.

It seems that the national team is an important leverage for the Chinese government to not only maintain peace in the domestic market but also fight economic war overseas if needed. With no end in sight for the tit-for-tat trade war and little willingness from both sides to negotiate, balancing the duties of global investments and national interest will be a complicated subject for these sovereign investors in the near future.

The $34 billion Khazanah Nasional, the sovereign wealth fund of Malaysia, has been increasing its public and private equity exposure to developed markets for the past eight years.

It is a pivot away from its traditional focus on emerging markets, including its home country and other Asian economies, that was made somewhat out of necessity because underperformance in the past decade was hurting returns.

As of this March, the US accounted for approximately 40 per cent of Khazanah’s global portfolio, and it has plans to increase overall developed countries exposure to in line with the MSCI ACWI benchmark at 88 per cent.

But while the allocations are increasing chief investment officer Hisham Hamdan is very realistic about what the fund can and cannot achieve by allocating to developed markets. He sees it as sufficiently rewarded beta but not the place to look for an edge and is “spending more time on allocation, less on selection”.

“That’s one thing that I think most organisations need to ask themselves, do you really believe that you can outperform the index in efficient developed market countries?” Hisham tells Top1000funds.com, adding that it is why Khazanah prefers to access developed markets via cheaper and passive options.

As of the end of 2024, 57.5 per cent of Khazanah’s main investment portfolio was domestic public markets,17.4 per cent was global public markets, 16.5 per cent was private markets and 8.6 per cent was real assets.

In contrast, emerging markets is where Khazanah wants to take on active risks due to inefficiencies, but the problem in these countries is that higher risks and volatility haven’t been rewarded with higher return. The momentum in developing economies, which accounts for two-thirds of the world’s GDP growth, also has not translated into higher company earnings. And this creates a dilemma for investors like Khazanah located within the region.

Khazanah has traditionally had a high allocation to China, but investments in the country in particular have come under significant strain since 2021, following a slow COVID-19 recovery and the real estate market crash.

India however, where the fund also has an office, has been the bright spot in emerging markets with strong returns in public markets, Hisham says.

The last decade of emerging markets performance has been “out of whack”, Hisham says, but he still believes investing in emerging markets will bring higher returns over the long term. Khazanah itself has a role to play, as Malaysia’s sovereign wealth fund, part of its responsibilities is to invest in and help develop its domestic equity markets and promote economic activities in its home region.

So despite the momentum of the past few years, and an increasing allocation to the US and other developed markets, uncertainties in US markets supercharged by tariffs could signal an opportunity to allocate more to emerging markets, which are showing signs of rebound. Notwithstanding fear of a trade war with the US, China’s benchmark CSI 300 index has still outperformed the S&P 500 in 2025 so far.

“If you are a US-centric [allocator], chances are you are probably underweight emerging [public] markets. Maybe instead of having 12 per cent [in EM], you have 7 or 8 per cent,” Hisham says. “If you see China has done well this year, maybe it’s time for you to pivot.”

“That depends on who the fund is and where they are, but we are obviously happy to see China’s numbers coming back.”

On the private equity side, it is reducing exposure to venture capital and increasing buyout and secondaries investments. “Private equity is definitely higher active risk than public market, but the dispersion of return is wider,” Hisham says.

“Increasingly, the median return of PE is not beating the public market benchmark, it could also be because the public [market] has been very strong because of the Mag Seven.

“We always invest into an asset class, [where] if the risk is higher, you want to make sure that the risk is rewarded.”

Compared to its global sovereign wealth fund peers, Khazanah’s $34 billion of assets under management is modest, and it doesn’t have the luxury of inflows from resource revenue or access to foreign exchange reserves, but its existence is closely linked to the prosperity of the Malaysian market where the fund plays a role to improve its beta.

Hisham considers that Khazanah’s mandate could be likened to a combination of three Singaporean sovereign and state investors, GIC, Temasek and the Economic Development Board (EDB). It needs to juggle between transforming Malaysian listed companies, developing new economic sectors and bringing foreign capital into the country alongside the government, while ensuring a globally diversified portfolio and meeting return targets.

The overall Khazanah portfolio has four components. Apart from around $31.5 billion in the main investments portfolio with commercial return targets, $1.3 billion is allocated to the ‘Dana Impak’ fund which executes investments around six socioeconomic themes such as healthcare and food security; ‘developmental assets’ which are companies that Khazanah is helping to strengthen their financial sustainability; and ‘special situations’ where assets are under stress and need active management to improve profitability.

“Some of the things that we do, you don’t necessarily get the return. The return can be captured in the form of jobs that we created, in the form of new skill sets [in the economy] that we created,” he says.

“But at the same time, we have to make sure that we generate those cash returns, pay dividends to the government and take care of our balance sheet.”