Page 5 – Top1000funds.com

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

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

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

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

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

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

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

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

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

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

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

Client focused approach

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Dealing with an overweight in private equity

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

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

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

Sustainable real estate pays dividends

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

The current versions of AI are helpful at the “partial automation” of certain tasks, but for them to complete the last mile of training to reach the “full automation” tip of the spectrum, companies and investors should brace for a dramatic escalation of costs.

If investors want to put their capital to work most effectively, there are some ways to spot an AI winner, according to Neil Thompson, who is an Innovation Scholar at MIT’s Computer Science and Artificial Intelligence Lab and the Initiative on the Digital Economy.

“About 30 per cent of all the generative AI applications that people put together are going to fail at the proof-of-concept phase [by the end of 2025] because the economics just don’t work out,” he told the Top1000funds.com Fiduciary Investors Symposium at Harvard University.

“Right now, we’re in an era where everyone is catching up on the things that are already economical to automate [with AI]. We just haven’t done it yet.

“Then we’re going to have this second phase, where we get to… [AI applications] on the margin.”

The exploration of AI applications will be a “gradual expansion”, and there are two areas when the competition between companies will be particularly intense. The first one, perhaps unsurprisingly, is competition over hardware such as computer chips.

“We are scaling up the amount the use of AI way faster than we are scaling up the production of these systems, even though we are doing that as fast as we can,” Thompson said.

Technology companies have huge reserves of chips. According to AI intelligence firm Epoch AI, Google holds around 1.2 million Nvidia GPUs and its own TPUs (tensor processing unit, a type of deep learning processor), Microsoft has around 600,000 Nvidia GPUs, and Meta almost 500,000.

“These are chips that are $10,000 to 40,000 each, so these are huge investments that are going into these areas,” Thompson said.

He highlighted that the scaling law in AI means there is a determined relationship between an increase in computing power and the performance of AI.

“If we see one firm has an advantage on hardware over another, we could actually try and estimate how much of a benefit that’s actually going to give it.”

The second area of competition will be around data, specifically how much is available to a company for training purposes. Thompson recalled a conversation with Nvidia about its autonomous driving capabilities, where the company expressed concerns that competitors like Tesla may have a data lead due to the number of cars they already have on the road.

“So Nvidia made this interesting proposal to them [other car manufacturers]. They said, what we’ll do is standardise the sensors that you put on there. You send us your data, we’ll process it, and we’ll give you back a model that allows you to run it – that meant lots and lots of different car manufacturers were pooling their data at the same time,” Thompson said.

“Even though they started behind Tesla, collectively, they had more cars on the road.”

Thompson tipped that this form of data pooling will become more of a common occurrence to close the data gap with, for example, companies like Google which can collect billions of pieces of feedback via their search engine every day. The consolidation of data could lead to a first-mover advantage.

“We should expect much faster progress in those areas where it’s all the data can be automated, much slower progress in the hands where the data is expensive or rare to get,” he added.

With the development of AI and the pursuit of more computing power, a next step question is the broader adoption of quantum computers, but Thompson is of the view that it will not supersede classical computers, at least for the time being.

“We’re going to have cases where it [quantum computers] is not useful at all before some date… then there’s going to be some particular problem size and some particular year where it’s going to come in,” he said.

“For example, if you say I want to crack modern cryptography, there is a moment where you suddenly start to be able to crack any cryptography faster than the classical computer [with quantum computers].

“We still need to pay lots of attention to classical computers and AI, but it does mean that in a small number of areas, we should expect big differences… so we can start to think about what that’s going to mean for investing in, say, molecular simulations.”

The second Trump administration has given investors plenty to worry about – tax changes, tariffs and diplomatic chaos among a slew of distractions in the US.

But in reality, there is only one threat that could bring devastating damage to portfolios that everyone should be concerned about.

Global geopolitics expert Stephen Kotkin, who is a senior fellow at the Hoover Institution at Stanford University, told the Fiduciary Investors Symposium in Harvard the priority around the globe should be avoiding a hot war between the world’s two superpowers.

“If there’s a war between China and the US, you’re finished. Your portfolios are finished. Everything is finished,” he said.

“In a US-China war, every pipeline in the world is going to go up in smoke and burn. All those oil tankers at sea, they’re going to be sunk in the Strait of Hormuz, the Strait of Malacca, in order to block traffic so the Chinese can’t import energy.

“The whole world game is to prevent war between China and the US. Everything else is just noise and manageable. I’m not worried about it – it’s competition, and it’s just life.”

The US president Donald Trump, despite his unpredictability, has an important role in restoring global balances, said Kotkin.

Since the start of his term, Trump has made threats to withdraw US security promises to NATO allies, which resulted in European nations significantly upping their defence spending.

Europe accounts for 17 per cent of the global GDP, 7 per cent of the global population, but almost half of global social spending, Kotkin said. The countries could maintain its level of welfare partly because its security spending was underwritten by the US.

“The costs of the American security umbrella – those almost 80 treaties – that’s gone sky high. We haven’t even gotten to China, where our adversary has gotten a lot better,” he said.

“America can’t afford its commitments, and it’s got to rebalance somehow.

“These global imbalances are real. Trump is not fixing them, and you think he’s exacerbating them. All he’s doing is revealing them.”

The US dollar’s reserve currency status is a “seduction” for the world’s largest economy, Kotkin said. It has caused the US to live beyond its means and accumulate substantial debt.

“We borrow in our own currency, as if we’re not borrowing any money – as if it’s free money, as if it’s play money,” he said.

“Sure, it enables us to do these sanctions and financial shenanigans against countries we don’t like – which don’t work, but it enables us to do that and exercise our power.

“But what it really does is sucker us into thinking that a $29 trillion debt on a $30 trillion economy doesn’t really matter when, of course, it does matter.”

More currency options is not a bad thing, but the problem is there lacks a real alternative that could be as convertible and liquid as the US dollar. But evaluating the fundamentals of other currencies and assets is a call that asset owners, as fiduciaries, have to make on behalf of their members, Kotkin said.

But he is of the view that there is “zero chance” an alternative currency will replace the US dollar in the short term.

“You got deep fundamental institutional power and values here at play [in the US], and you have to beat that,” he said.

“The only thing that can destroy the dollar is us.”