In 2023, readers embraced our in-depth analysis and Investor Profiles as we continue our quest for a deeper understanding of institutional investment best practice and driving the industry to produce better outcomes for stakeholders. Thank you to all our interview subjects, readers and supporters over the last year. Below is a look at the most popular stories of 2023.

One of our defining characteristics, and main objectives, at Top1000funds.com, is to provide behind-the-scenes insight into the strategy and implementation of the world’s largest investors. Our access to senior investment professionals globally and our understanding of the context of their decisions is unequalled.

In 2023 we continued to deliver in-depth Investor Profiles showcasing the thinking of global CIOs, and we focused in on some new initiatives including our Asset Owner Directory and the Global Pension Transparency Benchmark.

We now have readers at asset owners from 95 countries, with combined assets of $48 trillion, and we are also pleased to say that in 2023 we significantly increased our pageviews and our user base with our readers spending more time on our site.

ESG remained a key focus for institutional investor readers this year, a subject we have been writing about since 2009. But as investors in the US in particular came under greater political scrutiny for their decisions around ESG we explored the topic from a number of new angles.

A candid interview with Utah Retirement Systems’ CIO John Skjervem was the most read story of 2023, Utah Retirement Systems: Why ESG is a waste of time. In the interview Skjervem said the only way to solve the climate emergency is to keep investing in fossil fuels. He said divestment doesn’t work, Scope 3 reporting will tie companies in regulatory knots and ESG integration threatens pension funds’ long-term returns and their ability to finance the transition.

Our deep dive into The politicisation of investments at US public funds revealed the complexity of the impact of partisan politics on the ability of CIOs to do their jobs. The analysis highlights the need for improved governance practices particularly around delegated authority to prevent the undue political influence over investment decisions.

“From an investment perspective I’m trying to use every tool I can to make better investment decisions – any other CIO will say the same thing,” says Andrew Palmer, CIO of the $63 billion Maryland State Retirement and Pension System. “Politicians are taking the ESG bat and hitting each other with it. And that has made the life of people trying to make investment decisions more difficult.”

On a more practical level the UK’s Universities Superannuation Scheme has produced new climate scenarios that are more informative for investors by focusing on shorter-term scenarios and switching the focus from temperature pathways to the complex interplay of physical and human factors. See How to rewrite Modern Portfolio Theory to integrate climate risk. After a University of Exeter commissioned report, the £75.5 billion fund aims to develop a long-term investment outlook informed by the scenarios and draw out investment implications for capital markets expectations, top-down portfolio construction, and country/sector preferences.

Other stories that readers were most interested in this year included the search for CalPERS’ next CIO, which at the time of writing had still not been resolved; celebrating the successes and evolution of the CFA institute; and the results from our CIO Sentiment Survey which is released every February with our partner Deloitte/Casey Quirk.

From an investment perspective the work of CPP Investments’ active equities team; and the new team structure at CalSTRS were of most interest as investors around the world grapple with the tough macro economic conditions and organisational pressures.

Last year we launched the Asset Owner Directory which is an interactive tool to give readers an insight into the world of global asset owners. It includes key information for the largest asset owners around the world such as key personnel, asset allocation and performance. Importantly, for context and depth, the Asset Owner Directory also includes an archive of all the stories that have been written by Top1000funds.com about these investors over a period of more than 12 years, allowing readers to better understand the strategy, governance and investment decisions of these important asset owners. This initiative was very well received by the industry and is now the most visited part of our site.

The third edition of the Global Pension Transparency Benchmark , a collaboration between Top1000funds.com and Toronto-based CEM Benchmarking, revealed that increased scrutiny on public disclosures is driving measurable improvements. More than three-quarters (77 per cent) of the reviewed organisations improved their total transparency scores in this year’s iteration of the results which look at four factors: governance and organisation; performance; costs; and responsible investing; which are measured by assessing hundreds of underlying components. We focused on transparency because we believe transparency and accountability go hand in hand and lead to better decision making, and ultimately better outcomes.

In 2023 we hosted three in person events in Singapore, Stanford and Oxford, bringing together asset owners from all over the world to discuss investment risks and opportunities.

One of the defining aspects of our event programs is the integration of academia alongside our industry thought-leaders and next year we will introduce our Research Hub which will be a curated resource showcasing the work of all the academics we partner with across our event programs.

All of our initiatives are aimed at providing a deeper understanding of best practice and driving the industry to produce better outcomes for stakeholders. Thankyou to all our speakers, spsonsors and delegates that made those events such a massive success. We’re going to do it all again next year and kick off our event calendar with the Fiduciary Investors Symposium in Singapore from March 12-14. Hope to see you there.

Helmsley Charitable Trust is meeting a cohort of new investment managers, many of whom it has never invested with before, with an eye on developing different strategies in response to the new economic regime.

Inflation looks difficult to tame; growth elusive, and the strategies that worked in the past at the $7 billion charitable trust set up in 2009 by colourful real estate billionaire Leona Helmsley who bequeathed most (not all though – her dog also inherited millions) of her and her late husband Harry’s vast wealth to pioneering healthcare initiatives, no longer apply.

Convertible bonds offering bond-like characteristics alongside an upside kicker that is less volatile than equities but will help the trust achieve its return objectives are on the list, says CIO Roz Hewsenian speaking in an interview with Top1000Funds from her New York office on the eve of her retirement after 13 years in charge.

She is also meeting managers to discuss private equity opportunities in Japan where Helmsley hasn’t ventured for years. She believes opportunities for Japanese buyout managers are finally coming into view (after a long wait on the sidelines) thanks to overhauls in Japanese corporate governance. That could mean more companies embrace efficiencies and accept the tough, hands-on approach these managers deploy, she predicts.

“Many buyout managers went there already but it was too early because Japanese corporates’ management style has only recently changed; managers are only now able to buy into companies and effect change.” she says.

Elsewhere she is interested in meeting speciality fixed income managers with strategies that could benefit from the economic rebound after the gap out in rates. “We are waiting for investment spreads to gap out,” she says, explaining. “When credit declines in value enough so that relative to Treasuries you are getting paid to take the risk, we will invest in credit.”

New managers must navigate Hewsenian’s forthright style. For example, she will only meet hedge fund managers that have demonstrated alpha in their short book. “It eliminates so many candidates I can’t tell you,” she says. “We are only interested in returns from the short book and if they aren’t there, we see no reason to pay 2:20 and offer the manager a long-only mandate for half the fees. Not surprisingly, I’ve never had a taker!”

Moreover, the process reveals how many hedge fund managers don’t understand how to short stocks. “It’s not the opposite of buying long, it’s a different kind of trading strategy. The mindset is different, and many managers don’t get that.”

Managing manager relationships in private capital has become one of the most challenging corners of the portfolio. Rules decree that US foundations must allocate 5 per cent of their assets annually to chosen causes or lose their tax exemption, and Helmsley’s overweight in private markets is having an impact on these liquidity priorities.

It means the team have grown much pickier when it comes to choosing which managers with whom to re-up and are also selling assets in the secondary market. Helmsley’s 35 per cent target allocation to private equity is currently 42 per cent because of capital appreciation in the underlying programme, exacerbated by the selloff in public equity although she has reduced public equity exposure.

The problem is compounded because exits strategies in private capital are limited, she continues. Many managers don’t like current valuations, so they are sitting on companies because they don’t want to have to write them down.

“There is a lot of embedded value in our private capital portfolio that is not being recognised and won’t be until there is an IPO or M&A. Managers are saying the company is too attractive to go out at this price, but if they don’t exit, it’s very hard for us to rebalance.”

The decision when to sell is wholly at the manager’s discretion. She says all Helmsley’s GPs are well versed in the fund’s liquidity constraints and know sitting tight on assets impacts their ability to raise the next fund as money remains locked up [in the previous fund.] “One of the problems is that M&A has slowed because it requires debt, and debt is more expensive,” she adds.

She is also wary of managers talking their own book. “We are having interesting conversations with new mangers, but they all believe what they are selling will do really well. It only gets interesting when we take what each of them says, getting the pros from one manager and the cons from another, and then applying our own thinking with our own resources.”

In another sign of the times, Helmsley is also exploring investment opportunities in environmental technology, forecasting a spike in demand for green tech solutions as companies integrate net zero. “Our focus is on investing in green tech that can help companies that have committed to net zero targets reduce their carbon footprint.”

Still, she says most of Helmsley’s venture and sustainability exposure is focused on healthcare, in line with its mission.  “Sustainability can be expressed in several ways, and we express it through our mission in healthcare and medical research. Of course, our trustees are mindful of environmental impacts, and thankfully that is not at odds with our investments that focus on our mission.”

It leads her to reflect on the risk inherent in shifting investment strategy away from a foundation or trust’s core mission. One of the biggest challenges facing peer foundations is pressure to divest from fossil fuels, she says.

Foundation boards have become activist and are using the assets to drive home a point about which they are passionate that may or may not relate to the foundation’s mission. It leaves investment teams divesting from fossil fuels and undoing their investment programmes in line with the board’s objectives – all the while trying to earn back what is spent every year when divestment can hurt returns.

Like others, she also argues that divestment of fossil fuels is short-sighted because it puts assets in the hands of less scrupulous investors and raises the price of energy going forward. “Impeding access to capital for fossil fuel companies means that the price of energy will go up, which will impact people on fixed incomes the most.”

Helmsley’s board has been a constant and steady support of the investment team, headed by celebrated investor Linda Strumpf, former CIO of the Ford Foundation who chairs Helmsley’s investment committee.

“Linda has sat in the chair and can deal with anything; she has been a stalwart supporter of staff, and Helmsley; she believes in what we stand for and truly supports the investment team to do its best. I couldn’t ask for better.”

Something her team surely say about her, too.

Joshua Fenton, director of investments, will assume the role on January 1, 2024.

 

 

 

In the ever-changing investment landscape, the role of traditional bonds is challenged by declining returns as global central banks unwind their excess monetary stimulus to boost interest rates after the pandemic.

Fixed income, once a stabilising force for asset-rich Japanese corporate pension funds, now struggles to counter stock and currency volatility. They are also reducing fixed income and heavily diversifying their portfolio in asset class alternatives as high currency hedging costs prompt caution, with them seeking shelter in short-term strategies amid uncertainties surrounding rising global interest rates and central bank policies.

The question of the expected role of fixed income investments was generally the same one for any investors in the past when they allocated most of their funds into traditional four assets – domestic and foreign bonds and equities.

However, this traditional strategy doesn’t work now as expected returns on fixed income have declined and global central banks’ unprecedented monetary stimulus has undermined expected returns on bonds. In addition, the increased correlation with stocks has made it almost impossible to control the volatility of equities with conventional bonds.

Many Japanese corporate pension funds treat fixed income as core assets with bonds accounting for more than 30 per cent of domestic corporate pension funds’ total assets. This indicates both domestic and foreign, including non-hedged bonds, and there is no doubt that this is an important asset for the pension industry.

Shifting into alternatives

However, the 538.6 billion yen ($3.6 billion) Daiwa Houses Industry Pension Fund, has already slashed its allocations for fixed income while the fund has diversified its portfolio excessively by sharply pouring into alternative investments.

“For my part, I think it would be better not to have the same excessive expectations for bond investments as we had in the past,” Toru Yamane, investment management director of Japan’s largest homebuilder, said in a panel discussion during the second day of the 17th Global Fiduciary Symposium in Tokyo on November 14, 2023.

“Our domestic and foreign bond allocation for both domestic and foreign bonds only accounts for 5.5 per cent of our entire assets,” Yamane told a panel discussion. “From anyone’s eyes, this doesn’t look like a core asset, but this doesn’t mean that we treat the asset class as unnecessary.”

He went on to explain the fund’s strategy in fixed income, saying the pension fund considers bonds as one of the components to diversify its portfolio but it also takes exposures in fixed income through alternatives on top of traditional bond investment of 5.5 per cent, bringing the overall total of bond products to 11 per cent.

Normal yield curve

A chief investment officer of a corporate pension fund based in western Japan, who spoke on the condition of anonymity, said he was looking for an opportunity to take exposures to traditional US bond investment. High currency hedging cost has made the pension fund difficult to buy US fixed income, forcing the fund to park their assets into short-term US MMF.

The chief investment officer is now looking for the timing for the yield curve to normalise to start full-fledged investment in US fixed income.

“Pension funds should take a long-term strategy but it’s not appropriate to their strategy frequently,” he said. “We have to wait until the yield curve normalises and if that happens, we’ll start investing in US long-term bonds.”

Rising global interest rates and currency hedging costs have given headaches to other portfolio managers, prompting them to refrain from currency-hedged foreign bond investments and seek shelter from Japanese government bonds. They were closely watching the Bank of Japan’s monetary policy to see when the bank would start raising its interest rates.

As for Gakuji Takahashi, chief director at Nikkei Pension Fund, he recently parked about two billion yen worth of funds from proceeds gained from domestic and foreign equities into domestic bonds.

Potentially, there is more of a likelihood of dealing capital loss from domestic bond investment as the BOJ is expected to alter its excessive monetary stimulus policy and see raising interest rates, with uncertainty prevailing about when the Japanese interest rates will settle down.

“In any case, domestic bond investment could deal capital loss,” Takahashi said. “In such a condition, we chose the strategy to focus on short-term domestic credit. Until the BOJ’s monetary policy is clear, we’re planning to take such a strategy as a precautious measure.”

After 18 years working with Japan’s leading pension funds and asset managers Chris Battaglia, president of the Global Fiduciary Symposium in Japan, is well placed to observe the pressures on the country’s retirement system and observes its evolution.

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日本の企業年金基金が資産運用先を模索している。足元で国内金利は上昇してきたものの、債券投資は日銀の政策修正による金利上昇（価格下落）リスクが大きい。外債は為替ヘッジコストが高すぎる。「運用難」の中、一部の基金は、オルタナティブやクレジットなど非伝統的資産に活路を見出そうとしている。

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Almost a year ago I wrote a piece titled Phase down or phase-out: Is there a difference? where I concluded that “phase out is a choice to save the living planet, while phase down is an attempt to save our unsustainable way of life”. I presume you will have noticed that this language has consumed a lot of column inches over the last two weeks at COP28.

Much could be written about COP28 – from its size (around three times more attendees than previous record), to the controversies (the president also being the head of a state-owned oil company, or the large number of fossil fuel lobbyists in attendance), to its wide scope (health and food have been notable focuses), to its successes (loss and damage fund launched on day-1). However, a sizable group of people have gone on record to state that only one thing matters as far as COP28 is concerned: whether or not the closing statement included the words “phase out of fossil fuels”.

We now know the outcome of COP28 and the first global stocktake. The language has shifted, and there is now a unanimous agreement to transition away from all fossil fuels to reach net zero emissions by 2050. Where does that leave us, and what happens now?

It would seem that we should bet on a continuation of the status quo, at least over the short-term. Investment organisations already have their net-zero investment strategies, so no need for significant change. However, all fossil fuel producers will still be seeking to maximise their income, so they will still be pumping. And politicians will likely still be driven by short-term incentives. Therefore, each of us should add a new belief to our set. Do we believe that the push for eliminating fossil fuels was a passing anomaly, killed off by the new language of ‘transitioning away’? Or is it a groundswell of understanding – that the pumping needs to stop, and sooner rather than later – that will eventually get its way? These have different implications. The latter would require us to plan for what eliminating fossil fuels actually means.

I would like to explore what elimination means by starting somewhat abstract. There is a significant difference between a natural transition and a forced transition. Natural transitions are what complex adaptive systems do. We used to use candles for lighting, now we use them for decoration. We have been through several transitions in the energy system through history. They take around 100 to 150 years to complete. While I am labelling these transitions as ‘natural’, they are not disruption, or pain, free. Individuals can still find themselves victims of involuntary unemployment, and find that their knowledge and experience is a stranded asset.

If we assume that the transition to renewable energy started, say, 40 years ago (solar panels were an expensive joke back then) then in 60 to 90 years we should be pretty much done. Renewables are cheaper and cleaner, so will grow as a proportion of energy used. As for the candles, we may choose to retain fossil fuels at the margin, perhaps for long-haul flights.

The problem, of course, is that the climate scientists are insistent we have already produced too many cumulative emissions, and there are other thresholds (eg planetary boundaries) we have crossed. The natural transition path will breach the small remaining carbon budget, with severe consequences for the Earth’s natural systems. Hence the need for a forced transition, of which ‘net-zero by 2050’ is an example. We are attempting to force the system to a place, or a timescale, that it wouldn’t get to on its own. As a tiny example, in the UK we were going to be forced to buy only electric vehicles in 2030 – currently weakened to 2035. It is reasonable to assume that a forced transition will be more disruptive (painful) than a natural transition. It follows that the social goal (decarbonisation) has been deemed more important than the pain and disruption that will be caused by the implementation.

This abstract treatment allows us to see clearly that elimination has nothing to do with profit, or return, maximisation. It is an entirely separate social goal. A goal that will have massive ramifications for the economy, finance and investment portfolios:

  • Volatility, in the real economy and in markets, is likely to be meaningfully higher
  • Political interventions are likely to increase in frequency, scope and impact
  • Together, the above points suggest uncertainty will go way up (ie forecasting will be more difficult / less accurate) potentially creating a reinforcing feedback loop
  • Eventually, the market will price in climate risk
  • Eventually, we will come to realise that we are not talking about a gentle transition of the energy system but a wrenching transformation of all aspects of life – yes, economic, but also food, water, health, justice etc.

All very interesting, but post-COP we are newly on a ’transition away’ journey so can we ignore all that I have written above? I don’t think so. I think transition away is a higher-emissions pathway, so I would invite you to replace the first bullet with ‘higher, and non-linear, volatility in Earth systems’. The following bullets we can probably leave as they are.

The language has changed as a result of the COP, but in essence we are still debating ‘down vs out’. The investment industry needs to decide whether the transition away will be too little, too late and we breach the net zero by 2050 part. Or whether we will truly be net zero by 2050, with all the associated transformational consequences. It is time for us to get really good at intertemporal risk management.

 

Tim Hodgson is head of research and founder of the Thinking Ahead Institute.