Alaska Permanent Fund Corporation (APFC), the sovereign wealth fund set up in 1977 to channel state royalties earned from the mining and oil industries into financial investments for future generations, has one-fifth of its $89 billion portfolio in private equity.

For the last 15 years, the fund has steadily pushed into private markets of which private equity is now central to its long-term growth and diversification. Yet Allen Waldrop, deputy chief investment officer, private markets, tells Top1000funds the current 18 per cent target allocation and annual deployment of $1.5 billion is likely to edge down in the next cycle given the size of APFC’s allocation to private markets.

Still, any significant move will be complicated by the fact that moving in and out of private markets is challenging.

Extracting from legacy GPs

Although APFC only actively invests with around 50 GPs across private equity and venture, the fund still has over 125 managers on the books. That includes GPs APFC has decided it is not going to re-invest with but which still run legacy funds committed to back in 2010 or 2015, explains Waldrop, speaking from Sacramento, where he oversees a team of six based in Anchorage, Juneau and Boston.

“We have managers that we have stopped investing with, but they don’t go away. There is legacy stuff hanging on in the portfolio. It’s hard to get them off the books.”

Old investments made in funds years ago contribute to unrealised gains. Of APFC’s $11 billion in unrealised gains reported in 2023, almost $6.3 billion (57 per cent) was from the private equity portfolio.

These funds also have a long life, and are still captured in the manager count, because GPs now extend the life span of funds through continuation vehicles. Managers have become frequent users of CVs given the challenges around traditional exits like IPOs or M&A, and CVs, explains Waldrop, allow managers to create a separate entity that they can sell and bring in third-party investors.

“CVs are not inherently good or bad – they can be useful tools in the right situation. But they can also be abused and used for the wrong reasons which means we have to look closely at what the manager is actually doing,” says Waldrop who brackets CVs with other criteria in fund documents like NAV loans that have also crept into the small print and are now commonplace.

“A fund might have borrowed in the past via subscription lines, but they are now borrowing money against the existing portfolio in a NAV loan with longer terms. Most agreements hadn’t contemplated this ten years ago,” he says.

A way out via the secondaries

APFC is prepared to sell in the secondaries market rather than invest in a continuation vehicle. Although Waldrop says he uses the secondaries market to trim the portfolio or raise cash, it’s not his preferred approach.

“We aren’t active sellers in the secondary market in terms of using it as a tool to manage the portfolio. But when we are presented with an opportunity to roll our interest in a continuation vehicle or take liquidity, we tend to take liquidity. We will only roll or invest after looking at what the transaction is, who the manager is and whether we like the company. We’ve taken opportunities to get liquidity through secondaries, but we are not really active sellers or buyers.”

He is even less enthusiastic about buying in the secondaries.

The abundance of capital in the market, and the presence of investors able to draw on tools APFC doesn’t have, like leverage or the ability to fashion highly structured transactions with deferred payments that ensure a particular return at a higher price, put APFC out of the bidding.

“We have a high return expectation for secondaries, and our cost of capital is different,” he says.

The arrival of interval funds with periodic liquidity, active buyers in the secondaries off the back of retail investors arriving in the space, is another reason to be wary.

“We’ve noticed the advent of interval funds that are aggressively buying secondaries.”

Managing the managers

Stuck with a large stable of managers, APFC evaluates its managers by rating them according to different categories in a focused strategy that Waldrop says prioritises the best.

“Good terms don’t save you from a bad investment. Our approach is to get in with the best managers – and then get the best terms we can.”

It’s an approach that APFC has particularly honed in venture where a wholly opportunistic strategy is shaped around openings with the best managers rather than trying to fill an allocation.

“We have some great managers in the portfolio now. If we can expand it we will, but we will only do it if we can access the best managers. We don’t see a need to just put money into venture.”

He believes writing smaller cheques in private equity also helps drive outperformance in an environment where fund sizes are creeping ever higher. Not so long ago, a $500 million fund was considered large. Now fund sizes stretch to $25-billion plus.

“Once fund sizes go beyond $15 billion it can be more difficult to outperform,” he says.

Writing smaller cheques also keeps investments simpler and more transparent given the many components that now characterise large funds.

“Generally speaking, we don’t need to make really large commitments so we can be more selective and find managers in the lower and mid-market that will outperform and who we can invest with on their third, fourth and fifth fund.”

Even though APFC avoids the competition of mega funds by carving a niche lower down the rung, he says competition to invest with the best managers remains fierce because the best GPs remain over-subscribed.

“There are numerous cases where we are targeting over-subscribed funds and trying to get a reasonable allocation. Those folks can drive terms,” he says, adding that fees haven’t moved in favour of LPs. Sure, there has been a slight decrease in management fees and other things that count as expenses, but only around the edges.

Private equity doesn’t allocate based on what is happening today

Another inherent challenge of the allocation is the fact that commitments are sometimes made long before the money is put to work. It means that the investment landscape has often changed by the time the money is finally drawn down.

It’s encapsulated in the shift in sentiment in the European buyout portfolio, for example. APFC focuses on mid-market and lower mid-market buyout opportunities in European growth equity where private equity funds poured targeting European companies on the basis they would expand into the US or Asia. Only that growth trajectory for these companies has changed because of de-globalisation.

“Tariffs make expanding into the US more complicated for European companies, which can no longer rely on expansion into China and other Asian markets either. It’s also one of the effects of deglobalization. Companies are having to rethink the landscape, and we are seeing more companies expand to be pan-European or regional,” he concludes.

The board of CalPERS has approved a momentous structural change that gives the $556 billion fund a single reference portfolio for judging performance, delegated authority to investment staff to construct the portfolio, and a simplified measure of success.

The fund’s chief investment officer, Stephen Gilmore, has been behind the fund’s shift to this approach which he says can add 50 to 60 basis points to portfolio returns.

In a long and detailed interview, Top1000funds.com editor Amanda White spoke to Gilmore about how a TPA mindset can add value, simplify accountability and open new opportunities for investments.

For the related and detailed story on the fund’s approach click on this story

How CalPERS aims to add 50-60 bps using TPA

 

 

 

Stephen Gilmore says he can add 50 to 60 basis points to portfolio returns by using a total portfolio approach. In a long interview, Amanda White spoke to the CIO of CalPERS about why a TPA mindset can add value, simplify accountability and open new opportunities for investments.

In November this year, the $556 billion CalPERS’ board approved a momentous structural change that gives the fund a single reference portfolio for judging performance, delegated authority to investment staff to construct the portfolio, and a simplified measure of success.

The headline news is that CalPERS has adopted a total portfolio approach, but beyond the headlines this mindset and implementation undertaking is a huge transformation, especially for a fund of its size.

Importantly, with TPA comes governance changes, including delegated authority to management that hones accountability and focuses staff on executing the one unified objective. For the board, it means letting go of ingrained decisions, such as setting the asset allocation, in return for more transparency and singular focus.

The ultimate benefit will be increased added value through a shared focus by all investment staff on the same goal.

As much as anything, TPA is a mindset, says Stephen Gilmore, chief investment officer of CalPERS, the largest pension fund in the United States.

And while under a strategic asset allocation approach there might be an intention for all investment staff to stick with the same objective, in practice that wavers when individual asset class benchmarks are introduced.

“They might start with the same objective, but what happens is people focus a lot on individual benchmarks, and there’s a danger they lose sight of the bigger picture,” he tells Top1000funds.com in an interview.

“The biggest advantage of TPA is mindset – you are actually building a portfolio that achieves the objectives [of the fund]. Everyone is pulling together to achieve the overall portfolio outcomes.”

TPA has been in vogue over the past few years, with stalwarts such as CPP Investments, New Zealand Super and the Future Fund believing it creates a framework for decision making and capital allocation beyond the boundaries of SAA. Others question the craze, simply saying isn’t TPA what we do anyway (see TPA just a new acronym for ‘common sense’.)

Gilmore says a lot of people will have their own definition of TPA, but his experience has been influenced by his tenure at the Future Fund, which he joined in 2009, and New Zealand Super, where he was chief investment officer before joining CalPERS. Both funds have used TPA to great effect, with strategic tilting, arguably only possible with a total portfolio view, the biggest value add at NZ Super over the past decade.

“I was very influenced from my early days at the Future Fund. At that time CEO David Neal always focused on the potential disadvantages of having intermediate targets, and lots of benchmarks, because the benchmark could potentially end up being the objective itself, but it’s not really the true objective,” he says.

“So for me, TPA is aligning the portfolio with that overall objective. Most people try to do that but depending on how you structure the governance you can end up inadvertently getting distracted from the big picture objective.”

For CalPERS -which returned 11.2 per cent to June 30, 2025, and 7.6 per cent over 30 years – the responsibility, or objective, is to pay the pensions of its 2.5 million members, and to make the pension fund sustainable. Changing the current structure, which includes 11 asset class benchmarks, and focusing on that overall objective is the essence of TPA. The fund is only 80 per cent funded, so any potential increase in returns will take the pressure off contributions.

“The idea is that [TPA] improves the likelihood of us doing that,” Gilmore says.

Active risk

A WTW Thinking Ahead Institute peer group study of 26 asset owners, quoted by CalPERS in its press release announcing TPA, showed the asset owners using TPA added 1.3 per cent in performance above those using SAA over 10 years.

“[That] 130 basis points is based on a small sample over a specific time, so I wouldn’t place too much reliance on that,” Gilmore says. “Conceptually however, if you’re optimising the portfolio as a whole rather than via asset classes, you should be able to do better by optimising for the whole.

“In terms of how much, I don’t think 130 basis points is likely. It’s ambitious. I’d like to be able to add somewhere between 50 and 60 basis points. It also comes down to how much active risk you take and what you expect to be rewarded. But I do expect there to be value add.”

While TPA is officially slated to come into effect on July 1, 2026, the implementation begins now with workstreams in place around strategy, risk budgeting, and communication.

“We have passed one milestone but there’s a whole period now of implementation,” Gilmore says.

The CalPERS’ board approved a reference portfolio of 75:25 equities:bonds and a limit of 400 basis points active risk around the reference portfolio, according to Gilmore.

“Our portfolio right now is equivalent to about a 72 per cent allocation to equities and the rest being government bonds or cash. The reference portfolio is around 75, so we are slightly below that at this point in time,” he says. “In terms of identifying where we want more or less exposure, the key thing is to have the understanding of all the underlying strategies and how they fit together, to identify if there are any duplicates or gaps. I have some views on that: it’s a process we are undertaking and it will inform us with respect to the portfolio as we go live post the first of July next year.”

Improved data and analytics – one of three priorities for Gilmore alongside TPA and culture since arriving in Sacramento in July 2024 to take the top job – is key to that.

“We embarked on a very big initiative to try and consolidate our data and analysis and try to improve the whole-of-portfolio focus. We need good data to be able do the analytics, to think about the exposures, to look at the factors. So that is an ongoing effort and I’m really pleased with how the investment team are engaging with our technology people, they see the benefits of improved data sets,” he says.

“That will allow us to have a better understanding of all the portfolio components – how they interact together and allow us to do things we perhaps find difficult to do right now.”

There are some obvious top of the house changes that the fund is looking at, including balance sheet and treasury management, and dynamic asset allocation. It has also recently done a lot of work on liquidity management, which has allowed it to take on less liquid positions with more confidence.

“I think there are things we can do there in the future that would add value – we have that potential,” he says of the treasury function. “With dynamic asset allocation there is stuff we can do there as well but to do that successfully you need the right governance arrangements in place.”

Changes to investments

While at the outset Gilmore doesn’t think there will be material changes to investment allocations, he believes CalPERS can lean into its natural advantages, which he identifies as scale, a long horizon and brand.

“Given our size and connections, we have a lot of information and we don’t always use that optimally,” he says. “Putting all that together there are lots of things… and you’ll see some areas we are already trying to use those advantages.”

One example is the fund’s approach to private equity, where it has embarked on a revamped strategy focused more on partnership relationships.

“This is paying dividends,” he says. “We have more focus on partnership relationships, also on co-investment because of that alignment with partners. We have also made some changes in terms of reorienting the focus more towards growth and venture and mid-market rather than large buyout. I think the team has done a good job on manager selection. All that plays into size and branding and horizon that I talked about.”

Gilmore sees stronger collaboration between teams, such as across private equity and private debt, as a great benefit in the change of mindset beyond an asset class patch and towards the total portfolio goal.

“Teams will be more collaborative than in the past because they are thinking about things at the total portfolio level and have a common framework for thinking about capital use and required rates of return,” he says.

“Ultimately everyone should be asking, is this is a good investment? Then if it is, you want it in the portfolio and it matters less exactly where it fits in the portfolio.

“The TPA approach gives us an advantage in thinking about investments that might not easily fit into a particular bucket and helps with integrating themes into a portfolio.”

Further, if everyone is focused on the single purpose portfolio outcomes, there is potential to have asset classes doing things they wouldn’t otherwise be doing, he says.

There are already a number of internal committees in place – such as a total fund management committee, which looks at the top down and an investment underwriting committee looking at deals of a certain size – but Gilmore sees the biggest challenge to the new structure is trying to encourage more collaboration.

“The most complicated thing is fostering that collaboration and thinking about how the governance arrangements work. In the past, if you ran a particular asset class you could go away and just allocate your capital and didn’t really need to check in with the other teams,” he says.

“So the big thing now is having to be more collaborative in the interests of building up a better overall portfolio. So we are doing a lot of work on that and also doing a lot of work on having a unified, or consistent approach to identifying the cost of capital.”

In addition, collaboration between teams is encouraged through individual performance assessment.

“When it comes to assessing the performance of people we look at various competencies – collaboration is one of those. Within the leadership of the investment team, we have explicitly called that out and given that more focus in terms of incentives people are eligible for. Collaboration and communications and mindset – we are all in this together trying to build the best portfolio.”

Accountability and delegated authority

No matter which way you try to get your head around the total portfolio approach, it all leads back to the same place: good governance. Nothing is implementable without it.

The board at CalPERS is now giving the investment staff the delegated authority to set the asset allocation and implement the investment strategy. In return, they have a more simplified measure of accountability in one benchmark (the reference portfolio) and can easily measure management’s value add.

“What stands out to the board is [that this approach] makes management more accountable, so there is more transparency in terms of this is what the reference portfolio has generated and how has management done with respect to their mandate,” Gilmore says.

“We are still figuring out what exactly gets reported to the board. We know we need to be more transparent and that we also need to spend more time on why we have adopted a particular strategy and how that has panned out.

“So I think the board will get a better quality of discussion. It’s the quid pro quo. The board is giving the management team more discretion to create the portfolio, so the management team has to be more transparent and accountable as a result of that.”

Gilmore is confident he has the right team internally, although two crucial positions – deputy CIO of private markets and managing investment director, total fund portfolio management – are currently vacant.

“One of the things with the TPA is it can be quite empowering. It involves change, but I’ve been really impressed by how people have responded to that change. There’s engagement and the team is really good at just getting it done – that is very rewarding. It’s a good place to be: nice people, capable people, with a really good mission.”

But he’s not one to rest on his laurels, and if you talk to his former colleagues at the Future Fund and NZ Super they’ll tell you Gilmore likes a challenge. He’s adamant the team needs to adopt a continuous improvement mindset.

“We are never there in terms of the final destination because we are going to be incorporating more information, more capabilities and the external environment will continue to change. TPA is not a case of ‘it’s done’. People are working hard.”

In a long and detailed interview, Top1000funds.com editor Amanda White spoke to Gilmore about how a TPA mindset can add value, simplify accountability and open new opportunities for investments.

Listen now.

In September, the board of the $28 billion West Virginia Investment Management Board agreed to divest Chinese state-owned companies from its portfolio, six months after the motion was put forward by Governor Patrick Morrisey who called the Chinese Communist Party “our biggest geopolitical foe” posing “a national security risk to West Virginians and Americans”.

With an effective exposure of around $77 million, chief investment officer Craig Slaughter says the divestment’s impact will be “de minimis” but he has reservations about the decision for a couple of reasons.

He says it is one of the rare occurrences where a motion was approved by the board without staff or consultant endorsement. It is at odds with the fund’s long-term approach whereby individual managers are given the discretion to make specific investment decisions with the fund handing out broad mandates.

Two external managers, Axiom Investors and Numeric Investors, look after the fund’s emerging markets allocation where most of the Chinese exposure sits. Slaughter says those managers can handle the change without significant disruption, for example, by replicating the same beta in a portfolio without state-owned entities. Ultimately, how the $77 million will be reinvested is up to the managers.

“For us to overlay our opinion on that [mandate] assumes that we have a better understanding than the managers of what the risks and rewards are with respect to those geographies,” he tells Top1000funds.com in an interview from the fund’s Charleston office.

“Conceptually, it just doesn’t make sense for us to do that, unless we did it all the time.”

With $550 million in Chinese listed equities as of June 2025, China was the fund’s largest single country exposure outside of the US, accounting for 13 per cent of the $3.2 billion international equities allocation.

State-owned entities are generally not the most attractive companies in China but occasionally valuations can make them attractive buys, Slaughter says.

While the basis for excluding China might be ideological or its capital market structure, he believes there are plenty of other countries which share similar issues.

“Are we going to divest from all these other places too? If the answer is yes, and I do believe some of my peers have done something like that, then that would be intellectually consistent,” he argues.

“But not to do it and just choose one geography [to exclude] seems to be logically problematic.”

The China divestment directive came from Governor Morrisey who not only sits on the 13-person board, but also appoints the 10 members who are not elected officials.

The bigger issue

Slaughter voiced similar concerns around the independence of retirement plans in 2023 when West Virginia’s Republican government introduced legislation limiting the WVIMB’s discretion with regard to proxy voting to foreclose any consideration of ESG criteria. [See The politicisation of investments at US public funds].

Slaughter sees the China divestment directive as tangentially related to the biggest long-term threat currently facing investors: a “decline in liberal democracy, which means a decline in the vitality of capitalism. That ultimately means less wealth for everybody”.

“Liberal democracy limits State power over private rights. The integrity of those limits is critical to capital as much as to individuals,” he says.

“Any uncertainty in the application of the rules of this [liberal democracy] system makes it less efficient. Less efficiency means less production and less wealth.

“We’ve seen a decline in liberal democracy around the globe, including the US,” he says. One manifestation of the risk is when corporations that have operations in the US stop investing capital and growing their operations because rules around trade and foreign investments are changing “in a chaotic fashion”, Slaughter says.

Companies that have been heavily reliant on global supply chains have been hit in the past year, due in part to President Trump’s volatile trade policies. For example, Nike and Ford have projected billions of dollars in losses from US tariffs in their latest earnings.

“I would expect that a lot of companies are sitting on their hands because they don’t know where things are going,” Slaughter says.

With that said, Slaughter is not planning on making significant changes to the asset allocation. The fund does not manage any capital in-house, leaving micro-level security selection decisions to external managers, while it focuses on the macro-level decisions with a focus on the long-term.

“We rely on equity exposure to generate return over the long run, and we plan to stay with it. We’ve consistently maintained more or less the same strategy for many, many years. The movement away from liberal democracy is a structural problem that will play out over the long term, most likely impacting markets at a somewhat glacial pace,” he says.

Managing market volatility is, for the WVIMB, really about managing stakeholder expectations, in Slaughter’s view. The fund invests on behalf of some 25 pension plans, insurance funds and endowments among which the biggest is the $10 billion Teachers’ Retirement System.

“Our view is if we can maintain our strategy over the long term, we’ll be winners. When markets are exceedingly difficult for a long period it is a challenge but one we think we can manage.

“My message would be that, as investors, we can probably expect lower returns if this decline in liberal democracy and the efficiency of capitalism persists. We try to make sure that stakeholders know that, so that if things do go south and stay that way for a while, we can manage expectations and maintain the portfolio until things change.”

Investors that focus on decarbonising their portfolios won’t change real world decarbonisation and would have more impact on climate change by buying transition investments.

In a recent report, The Policy Challenges of the Energy Transition, the investment team at £76.8 billion USS Investment Management which oversees the main pension scheme for the United Kingdom’s university and higher education sectors, together with Transition Risk Exeter, a commercial spin-out from Exeter University, argue that asset owners should focus most on collaborating and engaging at a macro level with governments and regulators to help to bring about policy change, rather than spend time on reducing portfolio emissions.

The easiest way for investors to reduce emissions from their portfolio investments is to sell high-emitting assets to other owners. But this does nothing to advance the low carbon transition or reduce the systemic risk of climate change that threatens all investors’ long-term returns, argues the report which endorses comments that USS chief investment officer Simon Pilcher shared with Top1000funds.com earlier in the year.

Moreover, emissions are a lagging indicator. In contrast, investment in renewables like solar and wind and clean technology where USS invests around £2 billion, is a leading indicator of the low carbon transition.

an urgent need for action

Climate change brings complex risks for investors. For example, it is non-linear in nature so a small increase in an underlying variable such as global temperature, or sea level, which changes gradually over time, can lead to a large increase in the probability of an extreme event, driving up risk.

“A fundamental mistake is to assume that any effect on the economy must be marginal, involving only small changes within the existing system, rather than recognising that it is system stability that is at stake,” states the report.

Nor do climate risks tend to have normal distributions: the likelihood of extreme impacts can be relatively high, or unknown, meaning that expected values often cannot be meaningfully calculated.  Research by Norges Bank Investment Management similarly highlighted the challenge of reconciling the order of magnitude of climate risk exposures using top down vs. bottom-up approaches.

Instead, climate risk assessments should focus on identifying plausible worst-case outcomes for assets, supply chains, or regions of interest, and working backwards to assess their probabilities.

Government leadership

For the energy transition to continue and accelerate, governments must create the right conditions for clean technologies to replace fossil fuels.

“Only decisive action by governments can substantially reduce these risks and accelerate the growth of the clean energy economy,” states the report.

In the UK, this requires specific actions.

Early-stage policies should include support for research and development of new technologies, and measures such as targeted subsidies and public procurement to enable their first deployment.

In the middle stage of a transition, regulations can be even more powerful in driving the reallocation of investment on a large scale. For example, zero emission vehicles (ZEV) mandates have proven outstandingly effective in growing markets for electric vehicles in California, Canada and China. Yet in the UK, demand for electric cars is constrained by inadequate charging infrastructure and expensive upfront and insurance costs.

In the buildings sector, the ‘clean heat market mechanism’ is designed to shift investment from gas boilers to heat pumps, supported by heat pump subsidies. However, this effort is undermined by government levies.

In the late stage of a transition, a deeper restructuring of markets is often needed to make best use of the new technologies. For example, in the UK expensive gas sets the electricity price 98 per cent of the time, despite generating only 40 per cent of the power.

The authors argue that policy action to support the transition would bolster the UK economy, making the UK a more attractive market for global investment.

As a net importer of fossil fuels, the UK stands to benefit significantly while also boosting energy independence and security, which is itself of great value in the current geopolitical environment. “A fast transition to clean technologies could result in an estimated $12 trillion in savings globally by 2050.”

What is USSIM doing to respond

At USS, the reallocation of capital has already begun. In collaboration with the University of Exeter, USSIM has also pioneered a new approach to understand the risks and opportunities from the energy transition through scenario analysis.

This has involved modelling the macroeconomic and financial markets implications of different scenarios, in which alternative trajectories of the low carbon transition interact with pathways of global economic growth and recession.

USSIM uses this analysis to inform its strategic asset allocation, aiming for a resilient portfolio that is sufficiently robust to the various alternative future scenarios for the macroeconomic and investment landscape.

“We seek to assess our portfolio’s flexibility to handle boom-and-bust cycles, withstand market shocks, and seize opportunities as they arise.”

As set-out in USS’s latest Task Force on Climate-related Financial Disclosures (TCFD) report, the investor has examined sector level patterns in outcomes across the various scenarios, and plans to use these to help to inform sector and possibly even company-level investment decisions.

Stranded assets

The macroeconomic effects of the transition are likely to vary substantially across countries.

Dynamic modelling of the global economy suggests that countries that are currently net importers of fossil fuels (including the UK) are best placed to gain in productivity, growth, and economy-wide employment. Those countries that are major exporters of fossil fuels are at greatest risk of negative effects of the transition. These risks are largely outside their control, depending not on national policy, but on changes in global demand for fossil fuels.

But the report also calls for better understanding of energy transition risks and opportunities driving into  the macroeconomy; the sectors in which the transition to clean energy is taking place; and the assets or companies in which investments are held.

A recent analysis by Transition Risk Exeter in partnership with the UK Sustainable Investment and Finance Association (UKSIF) found that even with only policies that have already been announced being implemented and with governments’ existing emissions targets being met, over $2 trillion of oil and gas asset value could be lost as investor expectations are realigned with the reality of lower profits between now and 2040.

The UK is disproportionately exposed due to UK-based companies’ investments in overseas oil and gas assets.

The falling cost of renewable energy

Meanwhile the costs of the core technologies of the energy transition are falling rapidly. The cost of solar photovoltaics (PV), wind turbines and lithium-ion batteries fell by 78 per cent, 59 per cent and 82 per cent between 2013 and 2023, respectively.

These falls continue long-term trends: the cost of solar PV has fallen by a factor of ten thousand in the past 60 years. As clean technology costs fall, demand for them increases; investment follows demand and drives innovation; and costs fall further; thus creating a reinforcing feedback. The implication for investors is clear: assessment of risks and opportunities of the energy transition must be built on an expectation of non-linear change, and an understanding of its drivers.

Engagement pays

USSIM also engages with the companies in which it invests.

This stewardship-based approach to responsible investment is a complement, not an alternative, to integrating rigorous climate and transition risk assessments into investment decisions.

“We aim to help companies identify the right steps to take at each stage of the transition in their sector,” states the report.

USSIM also uses insights gained from the companies in which it invests to inform policy advocacy and how it collaborates with other investors .

“Strong government policy is essential to make faster progress towards a clean energy economy. The best available economic evidence points to a large net saving from this transition globally, as well as further gains being available from innovations in clean technology. We urge the government to double-down on its commitment, and act in all sectors to accelerate the growth of the zero-emission economy,” it concludes.

Returns from one allocation have outshone all others at the $230 billion Teacher Retirement System of Texas over the last year. TRS’s tiny $403 million allocation to gold sits in a commodities sleeve which posted a one-year return of 59.8 per cent, trouncing the Goldman Sachs Commodities benchmark which returned 10.1 per cent.

“One word there: gold,” said Jase Auby, at TRS for 16 years and chief investment officer since 2019, speaking during the pension fund’s December investment committee meeting that celebrated stellar one-year returns across the board with 10 of TRS’s 14 asset categories returning above 10 per cent.

The gold allocation – which was doubled this year – comprises a special gold fund launched back in 2009 to provide a strategy independent of commodities. The fund is invested in gold and silver (via ETFs) and precious metals equities where TRS owns core large cap quality stocks like Agnico Eagle Gold and Wheaton Precious Metals, but also promising exploration and early development stocks.

This year other investors have also tapped into the benefits of an asset that sees its value rise in a world worried by inflation, geopolitical instability and government debt levels, as well as de-dollarisation.

For example, Australia’s A$223 billion ($143.2 billion) Future Fund added exposure to gold. European pension funds, particularly Swiss institutional investors, are long-time gold investors like Migros-Pensionskasse (MPK) the CHF29.4 billion ($31 billion) pension fund for Switzerland’s largest retailer, Migros.

Strong returns across the board

TRS posted a one-year return of 10.7 per cent which equates to a 150 basis point excess return above the benchmark. The fund’s three-year return came in at 11.5 per cent with 190 basis points of excess return. The best three-year return in TRS’  history, it resulted in an additional $66 billion coming into the trust, $55 billion from the market and $11 billion from alpha.

TRS’s highest one-year performers included non-US developed market equities (22.3 per cent) which outperformed US equities for the first time since the GFC. Absolute return also did well, returning 18.2 per cent. Real estate and government bonds were poor performers, and US treasuries have not only dragged on the portfolio but also increased risk because they haven’t provided the diversification they were meant to.

Borrowing from the future

The majority of the outperformance came from security selection: although asset allocation is the primary driver of returns, security selection adds additional value. Still, strong returns in recent years indicate lower returns in the future, and trustees were reminded that the returns should be viewed through a rear-view mirror.

“Sometimes it feels like we are borrowing from the future,” said Mika Malone, managing principal and Meketa Investment Group, presenting to TRS with managing principal Colin Bebee.

Moreover, even though TRS’s one-year returns from private equity still hit double figures (10 per cent) the portfolio’s underperformance relative to public equity will prompt analysis going forward. TRS has a 12 per cent long-term target to private equity that is currently overweight at around 15 per cent.

Risk Parity in action

The board also had an update on the $11.3 billion allocation to risk parity, recently pared back to 5 per cent from 8 per cent of the portfolio. Two-thirds of the diversified, liquid portfolio designed to function well in any market environment due to the balance between different asset classes is managed internally.

Although long-term returns have been up and down, recently it has done well with a positive one-year (10 per cent) and three-year (13 per cent) return.

Auby explained that the allocation is particularly useful in times of need. For example, the TRS team leaned into the allocation for liquidity during the pandemic. It is also the biggest holder of commodities in the trust.

“Risk parity is an alternative way to allocate assets,” he said, explaining that most pension funds allocate in a traditional way without leverage, in equity-heavy strategies that are “tried and true.” But by allocating a small amount to risk parity TRS is able to keep the door open to the strategy, and track its performance against the rest of the portfolio.

In contrast some pension funds like Denmark’s ATP use a risk parity strategy across their entire portfolio.