Sweden’s Fund Selection Agency, the government agency charged with procuring and monitoring the funds on offer on the country’s €100 billion premium pension platform has embarked on a re-tendering process that promises a bonanza for global fund managers.

At the start of 2024, the agency will award the first mandates from its inaugural search launched last summer and plans a further six searches totalling €20 billion through the year. It will kick off with €5 billion worth of global and European index funds, likely divided between four to six managers in each category.

Over the next three years the Agency plans 25-30 RFPs that will amount to around $100 billion worth of mandates (the whole portfolio is being re-tendered)  in a concerted effort to raise the quality of the funds, reduce fees and benefit Sweden’s pension savers.

“We will be one of the largest fund investors in the world over the next three years,” Erik Fransson, executive director at the Swedish Fund Agency tells Top1000Funds.com. “We have spent the first year setting up processes, recruiting and making our name known outside Sweden. Our goal is to create the best fund offering possible for our savers by procuring the best products from all over the world.”

Working Swedes have paid into the mandatory DC state pension fund ever since it was established in 2000 and assets on the platform are forecast to double by 2040. Today the entire “premium pension system” accounts for around $190 billion split between the Agency and ($90 billion) default fund AP7 for savers who eschew an active choice.

The overhaul is rooted in a handful of fraudulent and other poorly performing funds on the platform in the past, a consequence of lax requirements on the funds offering their wares – daily liquidity and UCTIS certification aside. In recent years, the number of funds on the platform has dropped from 900 to around 450 in a drive for quality that resulted in many falling away.

Funds that have remained are all being re-tendered, with managers competing for the mandates.  The value of assets under management in the categories won’t change under new management so managers have a clear idea of the amount of assets they will be able to manage from day one if successful, helping the Agency secure the best price.

“We ask a lot of questions, and at the end of the process we conduct a site visit with shortlisted managers to make sure what they have written in their answers is aligned with reality,” says Fransson, describing the new due diligence. “If a fund manager doesn’t have professional Tier 1 clients, the tender process will be time consuming and onerous but if they have done it before, they will find a lot of similarities.”

New mandates

The 25-30 RFPs scheduled over the next three years will include tenders for most flavours of equity, fixed income, target date funds; balanced funds and liquid alternatives. “A lot of our savers are young so there is a lot of equity risk in our savings products,” says Fransson. All funds have a daily NAV, and most will be UCITS compliant.

Fransson believes the drive for fewer, higher quality funds on the platform and a more competitive process will deter managers without a good chance of success from going through the lengthy RFP process. All managers applying pay a tender fee and if they are successful a platform fee, based on assets under management.

“All our costs are being financed by an annual fee of 0.5-1.5 bps of assets under management on the platform.,” he says.

Managers are free to charge whatever fee they want but Fransson hopes competition will drive down charges. Moreover, weeding out weaker managers from the application process means the ticket size of mandates is likely to go up. “Our job is to get the right combination of quality, price and funds offering sustainability on the platform.”

Ensuring choice

Another balancing act involves ensuring enough sophistication in the fund choice alongside selecting strategies based on genuine demand. New strategies include liquid alternatives, but savers choice is also crimped. The platform doesn’t offer access to private markets and some liquid public market allocations are deemed too risky, niche or not suitable for the long-term. “We can’t spend money tendering and monitoring a strategy if clients aren’t interested because it is too expensive or too complex.”

Fransson hopes to reduce the average fee charged across the platform under the new model. But he says the main benefit will come from increasing quality rather than cutting fees. “You can lose a lot more by picking a poorly managed, underperforming fund. Poor performance can end up being more expensive than the difference in fees you might achieve.”

Still, he believes the combination of better performing funds and lower fees could add another 50 basis points onto beneficiaries’ annual return.

“That is a significant number. If we can increase returns by 50 basis points based on $100 billion, we can add a lot of value going directly to the savers.”

The selection process is governed by Swedish law and follows European principles around procurement including equal treatment and transparency, and Fransson has spent the last year and a half honing the process, finding the people and building teams to select funds and monitoring quality and performance.

Still, although it is important to terminate poor quality managers in time, he says the monitoring team are also mindful that even the best managers suffer bouts of poor performance. “It is more than just numbers,” he concludes.

The $171 billion (A$260 billion) Australian Retirement Trust, which sets itself apart from its Australian peers with the identifying investment features of lower infrastructure allocations and less internal management, is looking to opportunities in digital infrastructure and the energy transition.

Head of investment strategy, Andrew Fisher says his biggest concern for this year is whether central banks, particularly the US Federal Reserve Board, can deliver the transition to lower inflation with a soft economic landing.

But he sees digital infrastructure and the transition to a low carbon economy as potential new areas of investment for the fund.

“Digital infrastructure wasn’t a thing five to 10 years ago, but it is possibly the biggest opportunity set we see at the moment,” he says.

He sees the transition to a low carbon economy is another area which will be a “huge opportunity in the infrastructure space and, in an economic sense more generally, over the coming decades.”

Fisher says ART historically had a lower exposure to infrastructure as it was not structurally tied to the $216 billion industry super investment vehicle, IFM Investors.

ART’s Queensland origins have seen it partner in some investments with the state’s sovereign wealth fund QIC, and ART has more money invested in private equity and private debt compared with many other Australian funds.

“There’s a tendency in most of our peer universe to be a little bit more heavily weighted in the unlisted asset space,” he says.  “We have tried to be a bit more diversified. We certainly have large allocations to real assets, but we try to offset that with reasonably sized allocations in private equity and private debt,” he says.  “We’ve probably not moved as quickly and as aggressively into infrastructure as some other funds.”

In a wide-ranging interview with Top1000funds.com sister publication, Investment Magazine, Fisher, who has been with ART and its predecessor fund Sunsuper for more than 13 years, says returns of 8-9 per cent were still possible over the longer term – a much more optimistic scenario than expected given many funds have warned members to be prepared for larger falls in investment returns.

“We have a more constructive forward-looking view looking out than we have had for some time, in terms of expected returns,” he says. “10 per cent is probably high relative to our long term expectations, but 8-9 per cent is not.”

Fisher’s role includes responsibility for managing strategy, asset allocation and investment risk at ART, working closely with the fund’s chief investment officer, Ian Patrick.

He says ART, which has its origins in the merger of major Queensland-based funds QSuper and Sunsuper in 2022 was delivering its returns through a different approach to investing than other funds – including relatively less investment in infrastructure and more in both listed equities and private equity.

Keeping it external 

Unlike some other big industry funds, such as the $310 billion AustralianSuper, ART has no great plans to bring its investment management in-house beyond the current level of around 36 per cent, despite the fact that it is now the country’s second-largest fund.

“It is always something we will always question [whether to take more investment in-house], but we are not necessarily thinking of doing more today,” he says.

“At a certain size and scale there is arguably less benefit to internalisation in some areas because you are so big, you can’t be active.”

“I think our reticence, or lack of enthusiasm for internalisation, relative to some other funds probably gives us a bit of an advantage in terms of being quite tactical around where we think internal management will work best for us and our members.”

“We’re much more focussed on building the best external partnerships we can, and using them in the best ways we can, as opposed to the prioritisation of internal management just for the sake of being internal.”

Some industry fund chief investment officers have argued that one of the benefits of internalisation means funds are approached at an earlier stage about coming into big deals, potentially on more attractive terms.

But Fisher points out that the two funds which formed ART were invited to be part of two major deals – QSuper in the $25 billion bid for Sydney airport and Sunsuper in the $10 billion takeover of AusNet – in 2021, before the merger went ahead in February 2022.

He says the two deals were so large that they were not ones which ART would consider doing on its own these days despite its larger size.

“If you think about our participation in the [Sydney airport] consortium- even if we doubled our participation, we would not be doing it on our own.”

Fisher says the increasing size of the fund has meant that ART is being approached with “a different style of inbound inquiry” on potential investment deals.

He says ART was willing to work with external managers including paying the higher fees needed to invest in private equity.

“We certainly don’t like paying fees, but we think we can be adequately rewarded for the fees we are paying. We think that diversification is worth it.”

ART has about 51 per cent of its assets in equities, a factor which was behind the 10 per cent returns it was able to deliver in 2023 for its balanced option.

This helped counter the writedowns in commercial office blocks last year which occurred at ART and most of the rest of the super fund sector.

Fisher says the returns of 2023 had come in higher than expected because of the stronger than expected performance of equities.

“Equities have outperformed a lot of people’s expectations,” he says. “We have underestimated the capacity for equities to be a reasonably good inflation hedge. We have underestimated the capacity of earnings to capture inflation and offset [inflation].”

Origin story

ART’s different approach to investing to some other industry funds was highlighted in its decision to vote in favour of the bid for Origin Energy by Canadian investment giant Brookfield Asset Management and its US partner, last year.

But its support was not enough to see the deal go through following strong opposition by AustralianSuper, which boosted its stake in Origin to 17 per cent, with its vote supported by several other industry fund investors.

This meant the bidders were unable to garner the 75 per cent of shareholders to succeed despite the support of the Origin board. (Origin’s shares have continued to trade below the offer price since the bid was rejected.)

ART did not make its view on the bid known before the vote, in contrast to AustralianSuper which actively opposed it, staying out of the public arena during the bid where its voice could have been influential had it chosen to speak out.

“It’s a matter of public record that we did vote in support of the bid,” Fisher says.

“It was our view that it was in the best interests of our members to accept the offer. We thought it was a good price,” he says. “But these things happen all the time- some takeovers get up and some don’t.”

Fisher says ART is “relatively neutrally positioned in equities” at the moment.

“There’s always reasons not to want to invest in equities,” he says. “But (at the moment) we are not underweight, we are not overweight [in equities]. What we are increasingly focussed on is trying to be as diversified as possible. If you take bond yields for example, they seem relatively evenly poised. They’re probably a little bit lower than we think is fair but not low enough to take a position on it.”

He says ART’s appointment of former Australian Reserve Bank deputy governor Guy Debelle as an external adviser to its investment committee in March 2023 was an example of a high-quality personnel investment the fund could make given its larger size.

Debelle has had a long interest in the economics of climate change and green energy, leaving the Reserve Bank in early 2022  to join Andrew Forrest’s green energy arm, Fortescue Future Industries.  He left the full-time role at FFI a few months later and the FFI board last year, and is now a company director and adviser specialising in green energy.

Fisher says the global economic outlook is “delicately poised in terms of whether inflation is well and truly finished or not.”

“There is certainly a growing body of evidence that the inflationary challenge is under control, particularly in the US,” he says. “The concern we have is that there is still a sizeable elevated geopolitical uncertainty around the world.  It doesn’t take much for something to happen to create some sort of supply side impact on inflation. We are seeing it now with regards to shipping costs.”

His biggest concern for this year is whether central banks, particularly the US Federal Reserve Board, can deliver the transition to lower inflation with a soft economic landing.

“Soft landings are really hard [to engineer],” he says.  “The Fed has done a really good job to this point, but the US is still facing a difficult election year, an insane fiscal situation. I don’t think it will be as easy as the market thinks for the Fed to deliver a soft landing in the next 12 months.”

Arizona State Retirement System (ASRS) the $50 billion pension fund for some 600,000 public sector employees in America’s Four Corners region, will opportunistically increase both US and international public equity exposure in line with its moderately bullish view on public equities and a new strategic asset allocation that targets 44 per cent of AUM in the asset class.

The global public equity allocation is mostly passive in line with a belief in the efficient market hypothesis. However, the investment team does introduce marginal enhancements to index weights and takes advantage of trading opportunities within the tactical asset allocation in what executive director Paul Matson calls “enhanced passive”, that isn’t a fundamental approach but still seeks to add small, incremental returns where possible. The strategy has helped the fund achieve a 10-year return of 8.45 per cent, amongst the top 6 per cent of US public funds.

Similarly, ASRS’s public fixed income allocation (with a target range of between 3-12 per cent) is also passive but “enhanced” by marginal duration and credit decisions. All US equities and two-thirds of the bond allocation (around one third of total assets) are managed in-house where strategy is driven by a “house view” on capital markets.

The development and articulation of macro views on interest rates, corporate spreads and asset valuations ensures consistency among investment decisions, clarity of direction, baselines for debates, and conformity of understanding, Matson, a Canadian native who joined ASRS as CIO in 1995, tells Top1000funds.com.

“Portfolio managers should understand macro level fund management issues,” he says. “Judgement counts; it is more than just data, and most common practice is typically and harmfully confused with best practice.”

MANAGING overweight in Private markets

ASRS’s risk-on strategy runs alongside a similarly large portion of AUM (around half the total fund) in private markets where Matson is currently tweaking the pacing program in a bid to decrease over-allocations.

Costs in private markets are kept low by focusing on relationships with a smaller number of highly qualified managers. Investment is shaped around bespoke separate account partnerships at reduced fees that also come with custom investment criteria and favourable liquidity terms. The approach gives ASRS rights to influence or determine the pace of investment and liquidation of the partnership, he says.

ASRS views all management fees, carried interest, revenue sharing, transaction spreads and commissions under the umbrella of “market frictions.” Combined, they can be significantly detrimental to investment performance, and as a result transactions are only based on the conviction that they will increase investment returns or decrease risks net of all market frictions.

“The key things we consider when investing in private markets include sector/style allocations, quality of management, organizational structure, liquidity, terms, and limited partner rights,” he lists.

Matson has built the organisation’s culture around both consistency and agility, and says he’s comfortable diving into whatever comes up across the 11-person investment team; customer service or governance.

“My role is multi-faceted, consisting of investment management from all angles and views, actuarial analysis, cyber oversight, cost containment, customer service, and governance. One of the most interesting parts of this is the opportunity to integrate all of these into a consistent organizational culture. Working with agile colleagues is fun!”

Other key leadership priorities include ensuring the production of all research and reports is always fed into decision-making. And he’s just as mindful of not wasting time in decision-making as he is managing resources or talent. Communication, he says, should be “concise and affable” and he insists all senior executives (outside the investment team) also understand how the various portfolios work and integrate.

Asset owners collaborating to influence labour rights in investee companies have another string to their bow with the release of the Committee on Workers’ Capital report examining large fund manager voting performance.

The report, designed in part to help investors hold fund managers to account, looked at 13 resolutions in the 2023 proxy voting season examining the number of supported resolutions, as well as the consistency and transparency of behaviour in manager proxy voting. For example only three of the asset managers examined, Blackrock, LGIM and UBS Asset Management, actually disclosed their proxy voting rationale.

One clear result was the disparity in the behaviours of the US versus non-US fund managers, with the report acknowledging the drivers of that behaviour including the regulatory differences.

The largest five asset managers, all headquartered in the US – Blackrock, Vanguard, Fidelity, SSgA, JP Morgan – demonstrated low support for proxy votes related to fundamental labour rights in 2023. But the non-US cohort that was examined – Amundi, LGIM, UBS, DWS Group, SUMI Trust – voted in support of the proxy votes most of the time.

Hugues Letourneau, associate director of the CWC said the large shareholdings these firms have in the S&P500 meant it was essential for asset owners to engage their managers on labour rights. And he said the influence of managers is increasing, demonstrated by the AUM of the largest fund managers growing by 150 per cent in the 10 years since 2013, compared with pension assets in OECD markets which has grown by 46 per cent in that time.

“We do think when a large shareholder votes against a resolution it makes it easier for a company to turn around and say ‘our top 10 shareholders don’t care about this’,” he said. “It makes it easier to sweep it away. We want asset owners to share this report with managers and ask them what they are doing on the key issues we raise in the report.”

One of the resolutions examined was the freedom of association resolution at Amazon.com, co-filed by Canadian pension fund BCI, marking the first time a Canadian pension fund has filed a labour rights resolution according to Letourneau. About 20 per cent of Amazon is owned by Vanguard, BlackRock, SSgA, Fidelity Investments, and JP Morgan Asset Management.

In this case two asset managers, Blackrock and JP Morgan AM, demonstrated uneven and confusing shareholder engagement escalation pathways. They disclosed that they had been engaging with Amazon on social issues since January 2022 and yet they didn’t vote on that resolution.

The Amazon case also demonstrated an example of split voting with JP Morgan AM voting differently depending on its funds. In the case of both Amazon.com and Netflix shareholder resolutions the JP Morgan Large Cap Growth Fund voted against both resolutions, and the JP Morgan Sustainable Leaders Fund voted for both resolutions. Letourneau said this demonstrates the important role of ESG teams within fund managers to coordinate messaging and voting positions.

Letourneau is also the founder of the CWC Asset Manager Accountability Initiative, convening asset owners from around the world to engage with global asset managers on investment stewardship practices.

In the past two years it has brought groups of 15 asset owners from around the world to directly engage together with fund managers, including Macquarie, UBS, SSgA and Blackrock, in structured clients meetings. It has a scheduled meeting to discuss labour rights with Blackrock this February.

Investing outside Canada can bring important benefits to client portfolios, but the $73.3 billion pension fund for Ontario’s public sector workers, IMCO, also believes that this should be balanced by careful considerations including an overwhelming bias to developed markets – and staying mindful that forecasts of GDP growth rates are not a good enough reason alone to venture outside Canada.

So outlines president and CEO Bert Clark in a recent posting on LinkedIn where he describes a global investment environment characterised by higher geopolitical risk, deglobalisation and the growing importance of ESG.

Around 65 per cent of IMCO assets are invested outside Canada most of which is in developed markets (approximately 93 per cent) thereby avoiding heightened currency, ESG and geopolitical risk inherent in some jurisdictions leaving just 7 per cent of assets under management in emerging economies.

Clark argues that large Canadian pension funds significantly increased the amount they invested outside of Canada in recent decades, driven by the elimination of federal tax restrictions, and the belief that large parts of the world were converging towards free markets and democracy. Tectonic shifts like the fall of the Berlin Wall in 1989, China joining the WTO and economic and monetary union in Europe signposted the way.

“In retrospect, it is hard to believe that so much progress occurred in such a short period of time. The sad postscript to the era that was thought to be the end of history is well known to us today. In recent years, globalization has waned, and geopolitical tensions and risk have risen,” he argues pointing to Brexit, US tariffs on Chinese exports and Russia’s invasion of Ukraine as examples.

In today’s context, he argues Canadian investors need to have a well-considered approach to where and why they are pursuing geographic diversification. A quick return to the optimistic years at the turn of the millennium seems unlikely today.

The need to invest outside Canada

Still, the benefits of investing outside Canada are compelling. Particularly because of the relatively small size and concentration of Canadian capital markets. The total market capitalization of the MSCI All-Country World Index (MSCI ACWI) is US$82 trillion while the market capitalization of the Toronto Stock Exchange (TSX) is only about 3 per cent of that of MSCI ACWI.

Meanwhile, financials and energy account for approximately 50 per cent of the S&P TSX index. The 10 largest companies in the TSX represent more than 35 per cent of the index but the top 10 companies in MSCI ACWI (which include behemoths like Apple and Microsoft) represent only 18 per cent of that index.

“An investor that only invests in Canadian public equity is investing in a very narrow subset of global equities, with a high concentration in financials and energy and a high concentration in a small number of companies,” he explains.

In addition, some important public debt market investment opportunities in Canada have been getting smaller.

One of the most important advantages of geographic diversification is the access it provides to private assets. For example, the nine largest Canadian pensions have reported investments of over $400-billion in private equity and $100-billion in private credit. The Canadian private equity and credit opportunity set simply would not have accommodated this level of investment. The Canadian government still owns assets like airports, ports, power utilities, roads and bridges that Canadian investors have been able to snap up overseas because of privatization programmes in other jurisdictions.

Clark warns that the correlation between economic growth and equity market returns is not strong enough to be the sole driver of investment decisions – especially in emerging markets. For example, from 2003-2021, Chinese GDP grew at an annualized rate of 8.55 per cent vs. 1.95 per cent in the US, but equity market price returns (based on MSCI indices) in the two countries were essentially the same over that period.

“Higher GDP growth did not result in higher equity returns.”

Many factors other than GDP growth drive equity market returns, including relative central bank policy, valuations, tax policy, competition policy, foreign investment and currency restrictions, the size and efficiency of domestic pools of capital, location of revenue source, international tax treaties, labour policy, geopolitical risk and ESG considerations.

Where to invest?

In answering the question where to invest outside Canada, investors should consider whether they have any real advantage investing in the jurisdictions they are contemplating.

Real investment advantages include things like operational leverage (the ability to leverage centralized risk, legal, HR, IT, back and middle office capabilities), relevant sectoral expertise, the ability to leverage scale (by making large commitments to best-in-class partners to reduce fees, for example) and the ability to invest directly and effectively oversee investments in the geographies being contemplated.

Just as only a very few companies can operate effectively in many jurisdictions, most investors can only leverage real investment advantages in select geographies.

Not having the ability to leverage any real advantage in a geography doesn’t mean it should be entirely excluded from an investor’s portfolio. But, because the opportunities for outperformance are less, it should mean investing less in those places and more in jurisdictions where they can leverage their advantages.

“This is why IMCO tends to focus its investments outside Canada in select jurisdictions, including the US, Europe and Australia. These are places where we are able to leverage our investment advantages, particularly our ability to partner with best-in-class investors, invest directly alongside our partners in private assets and participate in energy transition investments,” he says.

Investors should also be mindful of the impacts of foreign currency movements because these can have material impacts on investment risks and returns. Longer term foreign currency losses can sometimes be material (the Argentine Peso has declined by 97 per cent vs. the USD over the past 10 years) and in the near-term, movements in exchange rates can create material investment gains and losses that need to be planned for.

Near-term currency gains and losses for most developed market currencies can be efficiently mitigated through straightforward currency hedging transactions. But, emerging market currencies are more difficult to efficiently hedge.

Even in jurisdictions where hedging is more feasible, hedging currency requires access to liquidity to post as collateral. Investors who invest in foreign markets and hedge the related currencies will need to consider the liquidity requirements of doing so, which may mean owning more liquid low return assets like government bonds.

Today, investors who pursue geographic diversification also need to consider their ability to do so in a way that is consistent with their ESG beliefs. In some countries, particularly in frontier and emerging Markets, the laws and practices relating to environmental, labour, corporate disclosure, corruption and corporate governance make that more difficult.

Investors also need to consider the political risks associated with investing in some countries.

For example, Clark says the geopolitical risks associated with investing in some countries like Russia and China are much higher today than they have been in recent decades. Investors need to consider whether these geopolitical risks are ones they are willing to accept and are adequately compensated to take.

“IMCO does not invest in Russia and restricts investments in China almost exclusively to public equities and to a very small percentage (2 per cent) of the total assets we manage,” he concludes.

University of Texas Investment Management Co (UTIMCO), the $69.2 billion asset manager and one of the largest public endowments in the US, is hoping for a soft economic landing but planning for a recession. That means honing a playbook that ensures the investor has ongoing liquidity to make distributions; is not over its skis in terms of capital calls and commitments and has the firepower on hand to invest in opportunities.

In a worse-case scenario, given UTIMCO’s correlation to equity, if the stock market declines 20-50 per cent that could equate to an $11-24 billion decline in the value of assets under management. “It’s a lot of money,” said Richard Hall (pictured), president, CEO and CIO in a recent board meeting at the fund’s Austin headquarters.

Against the backdrop of contrasting analysis from UTIMCO’s trusted advisors – JPMorgan and PIMCO, for example, predict a soft landing but analysis from BlackRock and Bridgewater Associates is skewed to a hard landing – the investor is maintaining a neutral position but modelling how much the S&P could potentially decline should corporate earnings take a pounding.

“We will get through it, even if bad things happen next year,” he said.

Rebalancing in action

In an example of UTIMCO’s determination to invest in opportunities (and classic rebalancing strategy) Hall detailed how the fund pocketed a $2.3 billion gain out of the sharp fall in equity markets at the end of 2022.

UTIMCO steadily bought around $2 billion of stocks, continuing to buy even though the market’s continued fall exposed losses on earlier purchases. At the bottom, that collective purchase program had lost a negative P&L of about $200 million, he said.

The subsequent rally provided a $450 million total uplift on that basket of purchases which the team have gradually unwound overtime to maintain its neutral position.

“We sit today with a $238 million gain from having done that,” he said, underscoring the importance of staying neutral when clear market signals are absent and demonstrative of classic rebalancing and buying assets as they get cheaper in the belief that markets recover.

Under the hood of UTIMCO’s rolling asset allocation the team have introduced modest changes. For example, UTIMCO has bought down bonds by 3 per cent and is slowly adding real estate and infrastructure. “That stability doesn’t mean not doing anything. We rebalance month to month, selling expensive assets,” he reiterated.

In another corner of the portfolio, Hall has an eye on the interplay between cash and bonds. If rates stay higher for longer the fund will continue to hold cash. But if recession comes into view and the Federal Reserve begins to lower rates, the environment will become better for bonds and worse for cash and UTIMCO will position to benefit from the price appreciation in bonds.

Hall said that the recent performance in the equity market could hold clues as to what lies ahead. Struggling fundamentals in many smaller companies could be “the canary in the coalmine,” flashing trouble ahead.

Still, the team shared that the recent outperformance in the equity market (driven in the main by 10 stocks) underscores the importance of fundamentals; reaffirming that corporate sales, growth and margins bring the best returns – and that investors in a cap weighted index will do well as long as large companies pull returns higher. “What the market did was reward fundamentals,” said Hall. “Fundamentals matter and companies with better fundamentals appreciate more in value, most of the time.”

Looking into recent returns

Hall said that UTIMCO’s returns have been knocked by legacy portfolios in emerging markets and poor returns in natural resources, where although oil and gas did well, metals and mining worked against the portfolio. In contrast, public equity supported the portfolio once it reverted to solid trend.

“Long-term we try to run the portfolio at 100 basis points of alpha,” he said.

The bulk of UTIMCO’s assets are in an endowment funds portfolio which returned 6.7 per cent.

Public equities, one of UTIMCO’s biggest portfolios, experienced strong returns in developed markets and good returns in emerging markets. Private equity performed “slightly negatively” because although buyouts and private credit did well, venture and emerging markets allocations dragged.

In private markets, Hall predicts tougher times ahead for venture capital as companies seek to raise cash against the backdrop of lower valuations. In contrast, he said buyouts will remain stable.

Turning to hedge funds, he said managers are finding good spread opportunities between companies they are long and companies they are short. In real estate, UTIMCO is long-term bearish on office, more bullish on industrial and multi-family with a focus on US growth markets.

Still, as a contrarian investor, the team has begun to explore opportunities in office which might just be the right point in the cycle to go back in.