In a year forecast to be volatile, and with the spectre of recession still very much on the cards, Top1000funds.com finds CIOs exploring new strategies, paring back on active equity, investing in technology and wrestling with the many disparate approaches to sustainability.

“We will get through it, even if bad things happen,” said Richard Hall, president, CEO and CIO at the University of Texas Investment Management company (UTIMCO), the $69.2 billion asset manager and of one of the largest public endowments in the US, voicing the uncertainty many investors feel heading into 2024 in a recent board meeting. 

Against the backdrop of contrasting analysis from UTIMCO’s trusted advisors, amongst which JPMorgan and PIMCO predict a soft landing but BlackRock and Bridgewater Associates skew to a hard landing where high rates pitch economies into recession, Hall’s team are maintaining a neutral position – alongside modelling how much the S&P500 could potentially decline should corporate earnings take a pounding. 

UTIMCO’s correlation to equity means that in a worse-case scenario if the stock market falls 20-50 per cent it could equate to an $11-24 billion decline in the value of assets under management. 

“It’s a lot of money,” warned Hall, whose preparation for a recession includes ensuring UTIMCO 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. 

Asking Top1000funds.com interviewees focused on the long-term to share their thoughts on the year ahead is often met with reluctance, given commentary is so quickly out of date. While gathering opinions mid-December, the Fed signalled extensive rate cuts through 2024. But Hall’s advice to “hope for the best but prepare for the worst” in a likely volatile year echoes broad CIO sentiment where others counsel on the importance of diversification and warnings that AI and ESG will continue to fuel inflation. 

Exploring different strategies

With inflation still not firmly beaten, growth elusive, and allocations that worked in the past no longer as effective, asset owners will increasingly integrate different strategies to fit the new economic regime. Take Helmsley Charitable Trust, the New York-based $7 billion charitable trust, now exploring convertible bonds offering bond-like characteristics alongside an upside kicker that is less volatile than equities. 

Helmsley is also hunting buyout opportunities in Japan, opening up thanks to governance reforms that are forcing Japanese companies to embrace efficiencies and accept the tough, hands-on approach these managers deploy. 

In another reflection of uncertainty ahead, investors are boosting their ability to take advantage of opportunities as they arise by increasing and readying their tactical asset allocation. Like the $38 billion Iowa Public Employees Retirement System (IPERS) where CIO Sriram Lakshminarayanan said the ability to tactically invest requires a change in mindset that is rooted in constant communication with managers and their views on the market. 

Although there is a growing consensus that borrowing costs will fall in 2024 (“monetary tightening is over,” declared Timo Löyttyniemi, CIO of Finland’s VER in a LinkedIn post) for now higher rates continue to impact the interplay between cash and bonds. 

For the first time in years, many investors go into 2024 holding more in cash and will continue to do so as long as rates stay high. If recession comes into view and the Federal Reserve and other central banks lower rates, the environment will become better for bonds and worse for cash and asset owners will likely position to benefit from the price appreciation in bonds. 

For now, higher borrowing costs will continue to impact how pension funds approach leverage in 2024 which remains more expensive than in the past and by extension, less beneficial. It’s something front-of-mind at the $71.9 billion Pennsylvania Public School Employees’ Retirement System, PSERS and Canada’s TTC Pension Plan (TTCPP), the $7.8 billion defined benefit fund for employees of Toronto’s public transport network. 

Some investors spoke about paring back on active equity in 2024, arguing it is difficult to pick winners in a market dominated by the leading tech stocks. “We are hoping to implement decent-sized passive allocations by year-end,” said New York-based Geeta Kapadia, CIO of Fordham University’s $1 billion endowment. “I don’t think looking for long-only US equity managers that outperform is a great use of our time. I’d rather take active risk in private markets than in public equities or credit.” 

But even if investors question the value of active equity, there is much talk of enduring and compelling US equity opportunities. Technological leaps like LLM (large language models) powering the AI revolution and the new generation of life-changing drugs will continue to offer unprecedented opportunities in public markets. 

“A rising tide will lift all boats, just be invested in boats, just be invested in equity,” said Charles Van Vleet, CIO of the Textron pension fund, who will run an active stock picking strategy through 2024 but says passive allocations will also benefit from unprecedented corporate innovation. 

“Who is going to reap the benefits of this productivity? It’s not going to go to labour – it’s going to go to the capital providers; to the equity investors, and it’s already priced into the market.” 

Adjustments in private equity

Investors predict a mixed year ahead for private equity – an asset class Norges Bank Investment Management, investment manager of Norway’s $1.5 trillion wealth fund Government Pension Fund Global, hopes it will finally get a green light to invest in after years of petitioning the Ministry of Finance. 

Higher interest rates mean a higher cost of doing business that will continue to impact portfolio companies’ performance and multiples, and may not feed into valuations until 2025-2026. Meanwhile, investors are unclear if exit strategies via IPO and M&A activity will open up in 2024. 

“I have to remind our senior managers and board that returns will be more challenging going forward.  Yes, private equity is the best performing asset from an absolute return perspective, but you must also look at it from a risk adjusted basis, and private equity is the most risk-taking allocation in the fund,” said Suyi Kim, global head of private equity at Canada’s CPP Investments. 

Many asset owners go into 2024 overweight their allocations because of capital appreciation in the underlying programme and GPs sitting on companies because they don’t like current valuations, and don’t want to write them down. It means the year begins with many LPs choosing fewer managers with whom to re-up as well as selling assets in the secondary market. Still, one LP’s challenge will be another’s opportunity. For some, 2024 will open the door to invest with sought-after GPs for the first time and support fee negotiation. 

Recruitment and talent acquisition, particularly around technology, will be a key issue through 2024. At ADIA, tech prowess can be seen in its purest form in the quantitative research and development team and the asset owner says it will continue to recruit globally respected experts in diverse areas such as machine learning, strategy development and portfolio construction through 2024. 

Elsewhere Industriens, the DKK 217bn ($30.6 billion) Danish pension fund, will spend 2024 continuing to explore AI models to optimize its asset allocation, uncover anomalies in data, perform automated text analysis and put in place restraints, for example around ESG at a level impossible to replicate in Excel. Meanwhile the quest to fill CIO openings at US public pension funds including CalPERS is likely to get easier as the tide finally turns in favour of recruiters. 

Will asset owners increase their allocation to China? Investors respond that strained geopolitics, complex regulation, the increasing cost of doing business not to mention the inability to forecast exits makes direct investing in private assets in China challenging. 

Sustainability in 2024

This year may see the term ESG increasingly give way to more coherent themes around sustainability. Elsewhere, investors look forward to applying new tools to support sustainability in their large allocations to sovereign debt. 

The investor-led ASCOR project (Assessing Sovereign Climate-Related Opportunities and Risks) has just published its first independent academic assessment of 25 countries’ climate targets and policies. The analysis offers investors data and insights spanning the extent to which emissions are declining to a country’s regulatory focus. 

Adam Matthews, co-chair of ASCOR and chief responsible investment officer at Church of England Pension Board, believes it is one of the most important sustainability initiatives in years. “Investors haven’t had an academically rigorous, transparent and publicly available holistic lens through which to assess climate mitigation and adaptation in their sovereign holdings until now,” he said. 

Sustainability teams will also spend 2024 wrestling with their approach to emerging markets. For many pension funds on a net zero trajectory, emerging market holdings have a disproportionate impact on their total carbon footprint, explains Mirko Cardinale, head of investment strategy at USS. 

“The easiest way to reduce that footprint would be to sell carbon intensive companies in emerging markets, but this does little for the real world impact. We are keen to see real world change and that’s why we continue encouraging the highest emitting companies we invest in to reduce their carbon emissions.” 

The focus for investors this year will be engagement with national issuers, but also recognising the importance of emerging markets being treated fairly in current frameworks. 

“We need differentiated pathways for companies in emerging markets,” concludes Matthews. 

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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