Page 22 – Top1000funds.com

This article was produced by Capital Group without involvement from the Top1000funds.com editorial team.

Asset allocators are facing heightened uncertainty in almost every conceivable direction.

President Trump’s tariff agenda looks to be here to stay in some form, but in reality, its longevity is difficult to predict – as is its precise impact on economic resilience across global regions.

Now tariffs have increased the threat of a slowdown or even a recession, bond futures markets reflect expectations of faster and further rate cuts from the US Federal Reserve and European Central Bank. However, the likelihood that tariffs will exacerbate already sticky inflation in the short term creates a difficult balancing act for central bankers.

Meanwhile, global equities have experienced extreme levels of volatility and credit spreads have widened amid concerns of a tariff war.

Against this backdrop, our global Fixed Income Horizons Survey (with research done over February, March and April 2025) finds that asset owners are, on a net basis, increasing allocations across fixed income sectors, seeking geographical diversification – particularly those in Asia-Pacific and EMEA – and trusting bonds to provide ballast against equity risk in portfolios. They are also taking a more active stance in portfolios, as rebalancing and risk management become a bigger priority.

Our headline findings

Asset owners’ 12-month outlook points to heightened uncertainty

Amid an increasingly uncertain economic backdrop, the vast majority of asset owners (72%) say they will be highly selective and cautious in their approach to credit risk over the next 12 months. Most plan to keep credit risk exposure unchanged (54%), and slightly more are adding (25%) than reducing (21%) their exposure.

Portfolio positioning indicates upweighting fixed income and leaning into duration as asset owners hedge risks

In aggregate, more asset owners plan to increase than decrease allocations across all fixed income sectors – including public and private – with high-quality credit favored. This may partly be in response to heightened volatility in equity markets, as 49% think stock-bond correlation will weaken over the next 12 months, meaning fixed income will provide more effective diversification. And more than twice as many asset owners are extending (38%) as shortening (17%) the duration of fixed income portfolios, enabling them to lock in income while potentially helping to preserve capital in the event of a market shock.

Asset owners are rethinking the regional balance of bond portfolios – with those in Asia Pacific and EMEA particularly focused on diversifying internationally

Overall, 44% of asset owners are planning significant regional rebalancing of bond portfolios over the next 12 months, rising to 51% among Asia-Pacific respondents and 47% of those in EMEA. This internationalisation is reflected within investment grade credit, with 47% of EMEA asset owners increasing allocations to the US as well as within Europe (38%), and 34% of Asia-Pacific asset owners increasing allocations to the US and 42% within their home region. It is reflected within high yield credit too, where allocators in Asia-Pacific and EMEA are prioritising global and US high yield alongside their home region. North American asset owners are maintaining their typical home bias, but it is notable that 26% plan to grow their European high yield allocations.

Traditional portfolio buckets are being reassessed as the private credit market continues to evolve

Private credit is playing an increasingly important strategic role in asset owners’ portfolios, with 72% saying it should play a complementary role alongside public credit. However, there are still knowledge gaps in terms of optimising the blend of public and private credit in portfolios, with only 54% confident they know how best to achieve this, dropping to 44% among DC pensions. Further, more asset owners agree (39%) than disagree (28%) that public and private credit will ultimately be treated as a unified credit bucket in portfolios.

Emerging market debt is seen as a source of diversification – with appetite for hard and local currency assets

Those asset owners increasing or adjusting emerging market debt allocations over the next 12 months say diversification benefits (52%) are a key driver, alongside attractive yields (62%). There is significantly stronger appetite for investment grade than sub-investment grade assets, possibly due to concerns about the vulnerability of sub-investment grade credits if global growth were to weaken. Asset owners are clearly looking at a balanced mix of exposures within investment grade, with 61% increasing allocations to sovereign hard currency debt, 53% to corporate and 49% to sovereign local currency debt.

Active management will play a more dominant role in portfolios as rebalancing and risk management come to the fore

As they seek to navigate deeper and more varied sources of risk, 49% of asset owners plan to increase the share of active strategies in their fixed income portfolios, versus just 5% decreasing this. A majority of investors think active strategies will add value over passive across all public fixed income sectors over the next 12 months. This view is strongest in relation to high yield credit (87%), emerging market debt (86%) and investment grade credit (81%). When asked an open question about the future role of active management in fixed income, 74% of respondents indicated it will be central to their portfolios, for a combination of reasons, including enhanced returns, risk management, the changing market environment and ability to customise strategies.

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The transition to a net-zero carbon economy is often thought of as inevitable given the overwhelming scientific consensus that mitigating climate change is necessary to avoid catastrophic consequences.

However, justice within this transition is not guaranteed. The concept of a ‘just transition’ represents a difficult ethical and systemic challenge, and the pathway to achieving it is full of tensions, contradictions, and conflicting incentives.

The term ‘just transition’ encapsulates the idea of ensuring fairness and equity in the shift towards a sustainable economy, particularly for those who may bear the brunt of the transition’s disruptive effects, such as workers in carbon-intensive industries, marginalised communities and populations in developing economies.

When surveyed, members of Thinking Ahead’s Climate transition working group agreed unanimously that a just transition and inequality are systemic risks which will impact the carbon transition and have the potential to derail it. Justice directly intersects with the global push for decarbonisation and climate resilience.

When it comes to responsibility for action, however, there is a stark division in perspectives on the roles and responsibilities for addressing the just transition. Approximately 25 per cent of the working group viewed the issue as the responsibility of governments, arguing that public institutions possess the necessary tools, authority and resources to address such complex social challenges. On the other hand, 75 per cent acknowledged that governments cannot tackle this challenge alone, emphasising that investors and private institutions also hold a critical role in shaping solutions.

However, despite this broader acknowledgment of shared responsibility, a substantial tension emerged when it came to action. The majority expressed an unwillingness to compromise their financial outcomes in pursuit of just transition objectives. This highlights a critical ethical dilemma for investment organisations: balancing fiduciary duties to maximise returns with the broader societal need to mitigate systemic risks. The current reality, shaped by the incentive structures that dominate financial markets, underscores a collective inertia that prioritises short-term gains over long-term systemic stability.

The reluctance to share the pain stems from several factors – current incentive structures, perceived lack of responsibility, unclear benefits, which are diffused and long-term.

Meanwhile, there are also cultural norms. Societal values that emphasise material wealth and individual success over collective wellbeing hinder the cultural shift needed to prioritise equity and sustainability. This mindset discourages actions that appear contrary to personal economic interests.

Addressing the systemic risks of inequality and climate transition requires a fundamental cultural shift – from decades of prioritising wealth accumulation to valuing well-being, relationships and societal harmony (and, possibly, the value of accumulated wealth over the long term).

Such a transformation is difficult and takes time. It involves redefining success and aligning economic incentives with sustainable and equitable outcomes. For instance, the integration of environmental, social, and governance (ESG) considerations into investment frameworks appeared to be gaining traction, but it ran into stiff opposition from the dominant mindset that prioritises financial returns. A meaningful cultural shift would require embedding principles of justice and equity at the core of financial systems.

The recognition of a just transition as a systemic risk is an important step, but it must be followed by meaningful action. Investors, along with other stakeholders, possess agency within the system. Through lobbying, advocacy, and innovative financial instruments, they can influence the rules and incentives that shape market behaviour.

By reallocating capital to support a just transition and by investing in climate solutions in emerging markets, they can accelerate the shift and contribute directly to equitable outcomes. Engagement with industries and policymakers allows investors to push for higher standards in corporate practices and shape regulatory frameworks that incentivise sustainable and inclusive practices.

Reconciling the tension between ethics and practicality in investment strategies requires a significant shift in perspective. Investors must recognise that justice and sustainability are essential elements of long-term value creation and move towards action. While the current incentive system reinforces the primacy of short-term financial returns, there is growing recognition that such a narrow focus is unsustainable in the face of mounting social and environmental challenges.

Addressing systemic risks, such as social inequity and climate injustice, demands a move away from short-term profit maximisation towards a broader, systemic approach that acknowledges the interconnectedness of economic, social, and environmental factors.

The interplay of all these factors in the transition to a sustainable economy will shape the trajectory of our collective future. The costs of inaction can be profound, so the question is not whether we can afford to act but whether we can afford not to.

Anastassia Johnson is a researcher at the Thinking Ahead Institute at WTW, an innovation network of asset owners and asset managers committed to mobilising capital for a sustainable future.

Amidst managing liquidity and risk levels, investors have also been looking for opportunities to deploy capital into the market. Investment team meetings at Railpen, asset manager for the £34 billion pension scheme for employees of the UK’s railway, have involved rattling a tree and seeing what comes down.

Investing in currencies has landed in the opportunities bucket, as well as long short equity strategies given the emergence of corporate winners and losers as tariffs drag down revenues for some companies more than others.

“Currencies move in this space,” Mads Gosvig, chief officer, fiduciary and investment management tells Top1000funds.com, adding although it’s difficult to see the long-term impact on the dollar’s safe-haven status through the noise “the suppression of the dollar could be one theme [of the Trump administration].”

Longer-term, the team is also exploring whether to have the same reliance on the US in a portfolio that invests around 44 per cent of assets in equities.

“The MSCI benchmark has around a 60 per cent weighting to the US. Is this a good idea or would it be better to skew the weight to other regions? European equity has already outperformed US equity this year,” he says.

In uncertain economic times, he is also increasingly wary of private debt where looser lending standards and a vast amount of capital has flooded in recent years, worrying investors.

Over the past five years, Railpen has gradually built out its interest rate/credit exposure in the portfolio and the externally managed allocation will be rolled out further.

“Some of the returns in private debt are almost just as good as what we have seen in private equity. Investors get the same type of promises in a trend that is being driven by the way managers structure these portfolios and develop the underlying exposure. It is interesting to see how this will develop.”

Yet his enthusiasm is tempered by concerns that private credit which took off after banks retreated from lending post GFC has never experienced a full-blown crisis like 2008. “Private debt remains untested. I think there are probably many private debt providers out there, big and small, that if there was some kind of crisis would fall off,” he says.

In today’s challenging economic climate he is also concerned about long-term growth prospects in the UK where Railpen invests around one third of its assets (£11 billion) across stocks, private equity and infrastructure. Echoing concerns voiced by other large UK investors like £45 billion LGPS pool Border to Coast, he reflects that small and mid market businesses that have proved themselves are struggling to access the capital they need to grow.

“To create growth, capital must flow to where it is most needed. UK and foreign capital is flowing down into the system, but it is still not reaching right down to the lowest level like start- ups that need £5-20 million to capitalize on all their good ideas. We need intermediation on how capital gets to where it is needed most to create a system that is more efficient.”

Client focused approach

Railpen undergoes an actuarial evaluation every three years and is approaching its next one. The process is a chance to adjust the asset allocation and this time around the team are particularly focused on taking down the risk level of some of the well-funded, mature and closed DB pensions in the pool.

“Amongst our client group we have mature, closed defined benefit pensions. They are now well enough funded to take off risk, and we want them to consider moving towards buy-in or buy- out. We are currently adjusting the portfolio to be able to deliver on the needs of this group.”

Meanwhile with the open sections, his focus is on ensuring access to illiquid and liquid growth assets in a process that involves repositioning what it is in the portfolio to deliver to different needs, rather than “buying new things.”

Other focus areas include enhancing efficiency in the liquid multi asset pools that account for around £22 billion, fine tuning FX hedging and rebalancing stratgies, for example.

Elsewhere, he is working on improving processes in public equity. For example, a quant solutions team is exploring new technology. “They are working on different ways to apply newer tech. It’s not as sophisticated as AI, but we are running models and improving and enhancing our quant processes.”

Public funds in Texas can work with BlackRock once again after legislators removed it from a blacklist of companies accused of “boycotting” the oil and gas industry. The decision comes as Texas’s administration found alignment with the asset manager which backed key economic initiatives including the Texas Stock Exchange.

Texan pension and state funds can invest with and buy shares in BlackRock once again after legislators removed the $11.5 trillion asset manager from a blacklist of companies accused of “boycotting” the oil and gas industry.

The decision, announced by Texas comptroller Glenn Hegar this Tuesday, reflects a new alignment between Texas’s Republican politicians and BlackRock.

Hegar declared the rollback a “meaningful victory” for the energy sector which is the biggest contributor to the state’s GDP, adding that the decision to allow the state’s pension funds to invest with BlackRock again is partially related to the asset manager stepping back from climate commitments. BlackRock dropped its participation with Climate Action 100+ in 2024 and the Net Zero Asset Managers alliance earlier this year.

BlackRock is a founding investor of the new Texas Stock Exchange set to debut in 2026 alongside Citadel Securities, Charles Schwab and other investors. The asset manager also plans to launch an exchange-traded fund that will invest in companies based in Texas. The iShares Texas Equity ETF will track the investment results of the Russell Texas Equity index, which will measure the performance of equity securities of US companies headquartered in Texas.

Hegar acknowledged BlackRock’s role in the local economy but said the decision to reinstate the asset manager was “unrelated.” He added, “[These actions] nonetheless show a real commitment to overall policy changes and a desire to act as a trusted partner in the growth of the Texas economy.”

“The firm also has acknowledged the real social and economic costs, both in Texas and globally, that come from limiting investment in the oil and gas industry. In short, it is engaging in a more intellectually honest conversation.”

Investors, including the $56 billion Texas Permanent Fund, $33.2 billion Employees Retirement System of Texas, $35 billion Texas Municipal Retirement System and $211 billion Teachers Retirement System, can also turn to the asset manager for financial advice and risk management.

The rapprochement came three years after the comptroller’s office added BlackRock to a list of names that still includes BNP Paribas, Schroders and UBS, from which public agencies should divest due to their environmental policies.

Last year, the $53 billion Texas Permanent School Fund (PSF) moved $8.5 billion from BlackRock to other asset managers in line with the law.

“Companies pushing anti-Texas policies and woke indoctrination have no place in Texas public education, whether in the classroom or as investments in Texas Permanent School Fund,” Tom Maynard, chair, Texas PSF said at the time. “We will continue to defend our Texas values while generating more resources to support the school children of Texas.”

In 2023, TRS sold its direct ownership stakes in BlackRock and the other companies identified by the Comptroller as boycotting energy companies.

However, the law also contained carve-outs and allowances for continued business under fiduciary obligations.

According to its most recent 2024 annual report, TRS still uses BlackRock to manage assets, naming the asset manager in its list of external managers. “We have adhered to Texas law around this,” said a spokesperson from TRS.

Investors subject to pressure on how they invest from politicians have withstood similar laws. For example, in 2023 the board of $11 billion Kentucky County Employees’ Retirement System informed state Treasurer Allison Ball it would not divest from BlackRock citing fiduciary duty. The manager oversees about 30 per cent of the pension fund’s international equity portfolio.

BlackRock’s chief executive Larry Fink, once a vocal supporter of corporate action on the environment, partnered with the state on a PowerGrid Investment Summit last year and BlackRock has remained a significant source of capital for Texan companies. According to its website it invests over $400 billion invested in the state of which public energy companies account for around $134.6 billion.

BlackRock is still blacklisted by other Red states including Oklahoma and Indiana due to ESG investments. At the end of 2024, $46 billion Indiana Public Retirement System voted to remove BlackRock from managing the pension fund’s $969 million global fixed-income portfolio.

NN, the €140 billion, 180-year-old Dutch insurance group headquartered in the Hague, is the latest long-term investor to flag concerns in private credit.

Marieke van Kamp oversees NN’s €50 billion allocation to private markets which spans a large allocation (around 60 per cent) to Dutch residential mortgages alongside smaller real estate, infrastructure and private equity and debt portfolios. These Europe-focused allocations have been steadily built out since 2010, fanned by low interest rates and NN’s long-term liabilities and comfort holding illiquid assets.

Van Kamp observes that many investors have jumped into private credit and she believes some asset managers, desperate to build up their book, have not focused enough on downside protection. The large amount of capital in the market has resulted in strong competition for deals amongst managers and borrowers have become accustomed to easier lending contracts.

She doesn’t believe the shift away from bank lending to institutional lending has created more risk in the system. But she is concerned about the amount of private credit that has flowed into private equity, where private credit funds now compete with banks to meet private equity’s funding needs, lending to individual funds as well as their portfolio companies. “In private equity we are seeing additional lending taking place at different parts of the structure which could pose additional risk in the market.”

Still, she notices that the amount of private debt used to finance the M&A activity that secures exits in private equity has recently slowed down.

“The expectation with President Trump was that it would be good for business, but the large IPO and M&A market has been put on hold.”

Because NN’s private debt managers have as long as four years to deploy commitments, a crucial element of van Kamp’s strategy comprises capital planning to ensure enough liquidity on hand to meet capital calls. She says strategy is carefully shaped around working with “prudent managers” in relationships focused on valuations and an understanding that deploying money “takes time.”

The investment period is also around three to four years, which means NN gets its capital back relatively quickly. Investment involves constant reups over time in a process that is smoothed by deliberately working with a few managers in selected partnerships.

Under this partnership model, managers also share their insights on the market, offer access to a wide range of products and it’s possible to negotiate on fees. It creates a programme that is more tailored to NN’s needs with built-in flexibility like the ability to dial commitments up or down, and NN is less dependent on the investment period typical in fund investment.

In the early days, NN’s allocation to private debt comprised investment-grade corporate loans, infrastructure and real estate financing. Over time, this has gradually expanded to non-investment grade lending including direct lending to finance real estate and infrastructure investment supporting the energy transition.

“Today we have broadened out to a wider spectrum of investments and select managers that are specialists in their fields,” says van Kamp.

Dealing with an overweight in private equity

In private equity NN invests in (mostly) European closed-end funds with local and regional specialists. The private equity portfolio is overweight because of the numerator effect, whereby the strong performance of the portfolio has pushed it to the top of its band relative to other holdings.

As a result, the team have re-evaluated how they manage the allocation, choosing not to sell in the secondary market and lowering new commitments over time to get back to target. NN decided not to move quickly to halt allocations because it opens up gaps in exposure to the best vintages.

“We are 1.5 times over our allocation and decided on a middle way to re-up with managers we work with but just tweak the sizes lower. On balance we will still be present in all vintages but we will just do a little less than we did before.”

Sustainable real estate pays dividends

NN’s Europe-focused real estate allocation comprises joint ventures in funds and directly held assets. She says demand for European residential assets is particularly strong, and the allocation has a high level of churn as assets which are no longer considered strategic are sold and replaced. NN has also spent time building up strong relationships with external managers focused on partnership agreements where NN is often the seed or anchor investor.

“We get a good allocation and can also have good discussions on what’s on offer to shape the best strategy for us. In some situations, we build a strategy together with the manager. We seed the fund as sole investor at the beginning and then overtime others follow and join in a strategy we have helped tailor. We focus on a few managers, and we bring the advantage of size and large individual commitments which helps us get a good seat at the table.”

Around €13 billion of the private market portfolio is in climate solutions spanning renewables, green bonds and affordable and sustainable real estate. Drawing on her expertise in real estate (she holds a master’s degree in real estate management and sustainable development), sustainability has become a key theme and the real estate portfolio targets carbon neutrality by 2040.

“We strongly believe that integrating sustainability into real estate means we are positioning our assets for the future. They will be more resilient to climate change and attract tenant demand; banks will be more prepared to finance these types of properties, and they also adhere to regulations. It is about positioning our assets at the forefront of what the market demands.”

NN knows the GHG emissions for each property and each asset’s net zero pathway – many of the properties produce renewable solar energy and one new development has integrated biodiversity. NN has signed up to the Carbon Risk Real Estate Monitor (CRREM) which provides a framework for real estate investors and asset managers to set and manage ambitious decarbonization targets aligned with the Paris Agreement.

“We have put the portfolio on this path because it shows us what we have to do to make our investments as climate efficient as possible and how we can build this into our capex plan over time. It’s a really good programme, and ensures we take into account the refurbishments that are needed,” she concludes.

Norges Bank Investment Management (NBIM) is tipping the US stock market will continue to outperform Europe in the next two decades, despite a cautious attitude among allocators toward US assets post-Liberation Day.

“I’m positive for Europe over the next three years,” Paul Marcussen, head of NBIM’s New York office, told delegates at the Top1000funds.com Fiduciary Investors Symposium. “We don’t give official market outlooks. But if I want to bet on the US versus Europe over the next 20 years, my money would be in the US. It has the innovation, it has the creativity, it has the willingness to let people fail and pick themselves up and try again, which we don’t have in Europe.”

Marcussen is lead portfolio manager in the sovereign wealth fund’s external active equities team which allocates $90 billion to a roster of 110 managers. He personally is responsible for $15 billion.

As a mammoth fund with $1.8 trillion in assets under management, most of NBIM’s listed equity – which accounts for 71 per cent of the total AUM – is passively invested. It owns 8,500 stocks and about 1.5 per cent of all listed equities. But the fund has carved out an active allocation of around 5 per cent for external managers.

Because the fund is looking to add pure alpha, it has a different approach to funding the external mandates, essentially sourcing it from the passive portfolio.

“If we want to fund a manager in, for example, healthcare, we go to the index team as a source of the funding and the country, sector, market cap segment and beta can all be adjusted for from the passively managed portion of the fund. So then when the active manager is funded, there is no sector bet. All the fund is buying is alpha,” he said. “So what is left in the beta portfolio is like a Swiss cheese with like pockets taken out and they run a completion portfolio for the remaining parts.”

An extraordinarily lean team of only eight manage the external portfolio, and Marcussen said the fund has its own way of ensuring accountability.

There is no form of investment committee – which it believes could hinder the formation of non-consensual or contrarian views – but instead puts emphasis on individual responsibility. The team has delegated authority to hire and fire managers and their incentive compensation is tied to the performance of the managers.

“We decided early on that we would ban every form of investment committee in the organisation. It does not exist at all,” Marcussen, who has been at Norges since 2002, said. “We took a different approach, instead of having a lot of eyeballs in the sense of having a committee, let’s just take the fund and split it into a bunch of small entities and give individual responsibility to that person.”

Marcussen said the fund finds a better alignment of interest with boutique managers, set up from scratch, and often founder-led.

“We prefer solo PMs over team decisions but we do prefer if they have a team around them for sparring ideas,” Marcussen said. “We also have a preference for clear primary research, which means going to see the unions of the company, the suppliers, the competitors, we expect our managers to be out there.

“It’s easy to sit there right and watch your Bloomberg screen, read sell side reports, see companies on the roadshow when they come through town. Like what the heck is that. It’s just like my teen sitting at home watching TikTok and TV.”

NBIM has adopted AI across the organisation including in manager selection and monitoring.

Each portfolio manager has real time data flows of the performance of very single manager throughout the day, with AI risk models for monitoring on top of that.

“AI is massively important we have massively adopted it internally already. It is ingrained in every single operation and manager selection. We all use cursor and anthropic and are building it into systems.

“Those tools are just becoming part of the game. I would view it as table stakes. If you don’t do this, you are out of business. I don’t’ think it necessarily gives you an edge, but not doing it is not an option.”