In the last few years, Ivanhoé Cambridge, the $70 billion real estate subsidiary of $283 billion Caisse de Depot et Placement du Quebec (CDPQ) has turned its portfolio on its head. Five years ago, two thirds of the allocation was invested in return-dragging office and retail assets. Now, in a complete reversal, two thirds is invested in logistics and residential real estate alongside a growing allocation to alternative life sciences facilities and office and retail assets are in the minority.

“Over the last few years, we have pivoted the portfolio to make sure we are aligned with longer term trends,” says Michèle Hubert, chief operating officer at Ivanhoé Cambridge in an interview with Top1000funds.com.

The intensive churn of transactions as assets with less potential or that had reached maturity were sold and money redeployed to growth areas required a keen investment focus and adrenaline-fuelled, long hours to get the volume of deals over the finish line.

In 2022, the team executed more than 70 transactions totalling over $15 billion investing either directly, with strategic partners or via real estate funds.

New priorities

The process highlighted new investment priorities that are now central to strategy.

For example, Ivanhoé Cambridge increasingly seeks property assets that can adapt and evolve, able to change in use alongside changing demand and changes in society. Like the potential conversion of office assets into residential – or malls (which have a 11 per cent weight in the portfolio today compared to 22 per cent in January 2020) doubling up as logistic centres or places to work as well as shop. Similarly, assets should be able to adapt to incorporate new social impacts like the rehabilitation or public spaces, she says.

“Many assets are not designed to allow this conversion, but I’d like to see a new way in how we plan developments to incorporate a mix of uses that could evolve, opening the door to flexibility,” she says.

“The way we use real estate in a post pandemic world is changing. We must make sure we position the portfolio to not just play on current trends but align with future needs of people and communities.”

Risk spotlight

Alongside the physical churn in the portfolio, Hubert highlights another profound change now always influencing decision making.

“Geopolitical and ESG risk have come to the fore, shining the spotlight on the risk team,” she says.

From the fallout of Russia cutting off gas to Europe to de-globalization trends or an asset’s physical vulnerability to climate change and climate regulation, geopolitical and climate risk are now integral to how the investor assesses opportunities.

She says her approach to risk has become increasingly prescriptive, evolving in a forward-looking approach. New tools include Ivanhoé Cambridge’s bespoke risk premium model, that has sharpened how the team rate risk and opportunity, judging and challenging the expected return against external risk models and assumptions.

Rather than have a centralised risk team sitting in the Montreal headquarters, risk teams are present in all key markets, working alongside local investment teams. The risk function is also connected to other teams in the organization – notably the sustainable investment team.

“They have become an integral part of how we manage risk,” she says.

Climate risk

Integrating climate risk (Ivanhoé Cambridge targets a carbon neutral portfolio by 2040) is well underway.

As of December 2021, low carbon buildings account for around $17 billion of the portfolio and 56 per cent of the portfolio has green building certification.

New initiatives to cut carbon emissions are regularly rolled out. A current pilot involves trialling energy efficiency technology in the electric motors that drive water pumps, air conditioning and heating in buildings that uses algorithms and intelligent control systems to reduce utility bills.

Still, measuring carbon remains a key challenge, and is difficult to integrate into the valuation process.

“We are convinced integrating ESG in this way will increase the resilience of the portfolio,” she says. “But the industry is still using traditional measures to assess risk and return and doesn’t integrate carbon.”

granualrity of Data is essential

Data is an increasingly crucial component in risk analysis, offering insights on the market and Ivanhoé Cambridge’s own portfolio.

From a property’s energy and water use to occupancy rates and tenant habits, the construction of smart buildings and the rollout of apps to improve life for tenants is giving a new granularity to the information feeding up to the investment team. Occupants can stay connected to their building via exclusive concierge services allowing them to reserve parking spaces remotely, order a meal or enrol in a group class. It amounts to a vast store of strategic information that will go on to shape the spaces of tomorrow.

The challenge, she says, is making sure data is used correctly and linked to decision-making.

“There is a value lying there that we have to harness,” she says. “It involves taking data from external sources and layering it with data from our own portfolio.”

risk drives Governance evolution

Integrating geopolitical and ESG risk into investment decision making has required an evolution in Ivanhoé Cambridge’s governance.

She is responsible for an investment process whereby investment leaders and the risk and sustainability teams present all material issues to committees overseeing strategy and investment decision making. Governance, she says, must be robust and solid, but also able to evolve to align with changing priorities. Governance and investment decision making is always viewed through a ‘one portfolio’ lens rather than regional portfolios and pipelines to better optimize risk-return, she says.

“A one portfolio view is critical to us taking better decisions,” she says.

She is also responsible for ensuring staff spend time on asset management and extract the maximum return from existing assets in the portfolio – particularly in the wake of a pivot that demanded such an intense investment focus

“When you keep an asset, you make a decision not to sell,” she says. “It should be seen as a decision to constantly re-buy and we are trying to make sure our committees and governance also looks at assets we own, dedicating time and space to go through important decisions.”

There are many elements to being a successful real estate investor, she concludes. It involves selecting the right opportunities and being intentional. It requires playing to different horizons and adjusting the execution and tilting strategies to play on different time frames. It also requires a global view, identifying areas that can perform better in particular regions and sourcing investments aligned to cyclical (the inflation proof revenue growth in the logistics portfolio, for example) and structural trends that could play out over the next decade. In short it requires building a portfolio that comes together to generate a superior performance.

“We  strive to have a selection of good deals that together lead to something even more,” she says.

Australia’s second-largest superannuation fund, the A$240 billion Australian Retirement Trust, will likely “do more, not less” investing in China, said the fund’s head of strategy, following significant internal debate over geopolitical developments and how they will impact the portfolio.

Speaking at Conexus Financial’s Fiduciary Investors Symposium held in Singapore, Andrew Fisher, head of portfolio strategy at ART – formed last year after the merger of Sunsuper and QSuper – said debate is ongoing about whether and how to invest in China and “the narrative and the position has moved so rapidly” over the past 12 months.

“We will keep investing in China, is my thorough belief, and I think we’re going to do more, not less, because China is going to be bigger as a part of the global economy,” Fisher said, in a panel discussion with heads of funds from Canada and Malaysia. 

When Russia invaded Ukraine, the newly merged ART decided immediately to sell all of its investments in Russia, figuring “why are you investing in a country that’s sanctioned and invading other countries?” Fisher said.

He asked hypothetically if it would it be the same playbook if China invades Taiwan, and even whether the fund should “be out of China already” so it doesn’t get “caught out in a similar fashion.”

But the conversation around China is different, he said, as there are no sanctions on China, there is a lot of posturing, rhetoric and propaganda on both sides, and while it is “romantic and compelling to get caught up in all of that…the reality is as Australia, we are right in the middle of this, and…it’s very hard to take sides.”

The fund’s exposure to China is relatively small, making it easy to say the fund will increase its exposure, he noted.

With a lot of uncertainty about the future direction of markets, the fund is focussed on diversification to build resilience, he said. ART was “a little concentrated in terms of the defensiveness  in our portfolios…fixed incomes have been quite short duration for a few years now and quite long foreign currencies, underweight Australian dollar.”

The fund is now moving towards a “more balanced position”, and looking more favourably on bonds than previously, he said.

Marlene Puffer, chief investment officer at AIMCo from Alberta, Canada, said AIMCo is working through plans to set up a Singapore office to “have boots on the ground to have a more direct, clear understanding of the complicated region that is Asia and South-East Asia.”

Eliminating home bias is a clear focus at the moment to build resilience through geographic diversification, as the fund has “more Canadian equities than we should,” Puffer said.

Innovation is driving growth across the region in areas like food and agriculture, she said. “We think of Singapore as a hub of investment activity where many managers who are permeating the rest of the region have been settling here.”

The office, which the fund expects to have between 15 and 20 people over the next couple of years, will focus primarily on infrastructure and renewables, public equities and private equity, and further diversification within some of the fund’s private asset strategies.

The fund previously had a Hong Kong office but “it’s much easier to make a choice for Singapore rather than Hong Kong at this moment,” Puffer said. “China’s growth is a complicated story at this time, and we’re definitely underweight China.”

Also on the panel was Abbas Ramlee, chief strategy officer at Permodalan Nasional BHD, one of Malaysia’s largest fund management companies. With a focus on the retail market, the fund has around a third of Malaysia’s population as contributors, Ramlee said.

Close to 95 per cent of the bank’s assets are located in Malaysia, and the bank is “close to business owners ourselves,” which helps drive value creation activities. However in the past five-or-so years, PNB has started gradually diversifying outside of Malaysia, and increased exposure to other asset classes, “trying to give better optimised risks to our unit holders.”

Investors in South-East Asia need to develop an understanding of each country, he said, as there is enormous variation between countries in the region, and in the investments that are favourable in each country. 

Ramlee said employing dynamic asset allocation helped the bank take advantage of macro trends. “So, for instance, going a bit more aggressive in inflation protection assets, real estate, infrastructure, things like that to really try to provide resiliency in our portfolio.”

There is a plunge in confidence among CIOs that they will meet their return targets, with only 36 per cent of participants in the 2023 CIO Sentiment Survey expecting they will.

This is almost half the response from the previous year where 63 per cent of CIOs were confident in meeting their return targets.

The 2023 CIO Sentiment Survey, a global collaboration between Top1000funds.com and CaseyQuirk, part of Deloitte Consulting, finds asset owners keeping their allocations static but focusing on agility as they observe dramatic market changes not seen in a generation. And only 11 per cent are taking on additional risk to achieve return targets due to the uncertainty of markets.

With a majority lacking confidence that they will meet their return targets, respondents are re-evaluating their equity exposures, re-structuring their fixed income allocations and de-emphasising private markets.

While most investors were in a wait and see holding pattern regarding allocations The data found liquid equity exposures in a holding pattern, but 31 per cent said they are considering shifting their equities to more inflation-proof sectors.

They are also de-emphasising private markets and expecting write-downs to continue until at least the end of 2023.

Fixed-income allocations are also being re-structured due to fundamental changes in the rate environment, leading to a resurgence of high-quality active fixed income, and tactical increases in active emerging market debt to take advantage of high yields.

Chris Ailman, chief investment officer of CalSTRS, which is the second largest public pension fund in the United States, said fixed income allocations had shrunk in recent years but higher returns are now reversing that trend.

“Now that [fixed income] will have 4-6 per cent return, people will be putting in more money,” Ailman said. “It’s not a massive asset allocation change, the 80/20 portfolio was creeping to 85/15, and it will go back to 80/20. That return on cash and fixed income will help with overall returns.”

Internal management and external relationships

The ongoing shift towards internal investment continues, with 75 per cent of respondents saying they plan to decrease or retain the number of managers on their roster – a figure that is 8 per cent higher than in 2022.

Understaffed internal teams and a talent shortage are the top challenges impacting investment teams, cited by 58 per cent of respondents.

While asset owners have been working hard to build improved technology into their investment process, 57 per cent feel digital advancements have not significantly enhanced their manager due diligence process.

Not a single respondent is running a fully remote operation anymore, with 40 per cent requiring their employees to be in the office between 3-4 days a week, and 35 per cent requiring 1-2 days. Most of the remainder had relatively flexible policies, with only 6 per cent requiring employees to be in the office 5 days a week.

Only 20 per cent of respondents feel it is “important” or “very important” for asset management partners to require their investment teams to be in the office.

The survey asked CIOs extensive questions across their asset allocation, costs, ESG, manager relationships, operations and risk.

The full results can be found here.

 

Global pension funds are increasingly looking to private assets to build resilience, stress testing various scenarios to manage the liquidity risks that come with increasing private market allocations.

In a panel discussion at Conexus Financial’s Fiduciary Investors’ Symposium held in Singapore, Anne-Marie Fink, chief investment officer, private markets and funds alpha at the State of Wisconsin Investment Board, said SWIB has the advantage over many other US pension plans that its liabilities fluctuate with its assets, with the amount it pays out based on a five-year return with a base level that it cannot go below.

That “gives us a certain amount more flexibility relative to somebody who has got to pay X amount regardless of what’s going on in the markets,” Fink said, in a discussion chaired by Amanda White, director of international at Conexus Financial.

SWIB manages around US$143 billion in assets. The fund has roughly 28% private assets and is debating internally to increase that allocation to 35% or even 40%, Fink said. The fund’s liquidity allowed it to increase its allocation from 20% during 2021.

“Our teams have been really talking to all of our GPs and essentially saying, ‘we have liquidity, and if you have other partners that maybe are over their skis on their private assets, we can provide liquidity.’”

The fund’s hedge fund strategy is “portable alpha” with virtually no beta in its portfolio, Fink said, along with some passive allocations. This is sensitive to the cash rate, so now that the cost of capital has risen, the fund is now “pruning” its portfolio and looking for ways to increase return per dollar committed, potentially using leverage and accepting some extra volatility.

Also on the panel was John Greaves, head of investment strategy and research at Railpen in the United Kingdom, which manages about $50 billion of assets and administers several pension schemes including the UK’s Railways Pension Scheme.

Improved resilience versus governance and liquidity costs

Adding the appropriate amount of liquidity is an important consideration for Railpen, Greaves said, with illiquid assets like real assets potentially improving macro resilience, but at a governance cost and a liquidity cost.

The fund has pensions to pay, so it cannot ignore short-term risk outcomes, he said, and “liquidity risk is one of those reasons where you can become unstuck in the short term.”

“Funding liquidity risk” came to the fore last year in the UK, he said, proving it is critical for funds to think through, and stress test, their expected short term cash flows.

“That was really challenged in the UK in September and October last year with the volatility in the UK Government Bond Market,” Greaves said. “So that was a really good reminder to think what what might happen, what your risk models might say is impossible, and think through the unexpected. But that aside, it’s usually managed very prudently.”

“Market liquidity risk” is also a critical consideration, being the amount of illiquid assets a fund considers appropriate, Greaves said. These assets may take “many months or years to sell, sometimes you have some control, sometimes you don’t,” he said. 

Managing relationships is critical

The fund balances and differentiates among these assets where some assets may be very illiquid, while others may have strong secondary markets or provide significant income. Managing relationships with general partners is critical, and investing one year but not the next can stress these relationships.

“It was mentioned earlier that you want to avoid the bottom quartile managers,” Greaves said. “You better believe that you need to be investing almost every year to kind of do that, and to maintain those relationships in the top quartile managers. That’s just the way it is.”

Stress testing also involves looking at the possibility that illiquid assets may suddenly become cash flow negative, and “you’re not getting that return of capital because your general partners aren’t exiting because the environment isn’t favourable to do that,” Greaves said. 

The fund needs to limit exposure to illiquid assets at about 40%, he said, noting this approach differs from some Canadian schemes that have much higher levels of illiquidity.

“That model, I think, relies on being fairly proactive on secondary sales and exiting assets, and that is a very resource-intensive and quite a different investment process, so it wasn’t a good fit for us,” Greaves said.

Ding Li, senior vice president, total portfolio policy and allocation, economics and investment strategy, at Singapore sovereign wealth fund GIC, said taking a total return perspective, and looking at the total fund outcome, is also critical.

“For the long-term investor, especially for those kinds of pension plans which have some kind of payout liability, I think the total return is actually the focus for the investment outcome rather than alpha only,” Li said. “Because even if you pick out the right Alpha, if you don’t really capture good market beta, then your total outcome still does not meet your client’s objective.”

Muslim consumers comprise a young and enormous population, and there is a growing opportunity for startups that cater to their needs, argues one of Asia’s most impressive venture capitalists, Thomas Tsao.

Tsao, one of Asia’s most well-known venture capitalists, has been increasingly involved with “TaqwaTech” startups, which build products to serve muslim consumers. He co-founded Gobi partners in 2002–a regional platform that supports entrepreneurs from early stage to growth stage–with 13 offices and locations around Asia.

Tsao has invested in nearly 350 companies in Asia including Aerodyne, Airwallex, Animoca, AutoX, Carsome, GoGoX, Kumu, Prenetics, Sandbox VR, Sastaticket.pk and WeLab.

Speaking at Conexus Financial’s Fiduciary Investment Symposium in Singapore, Tsao said Gobi in its early days had a significant focus on the innovation going on in China along with its massive market.

“It’s a huge opportunity, and look at it now, but what’s a bigger opportunity than that?” he said. “It’s focusing on Muslim consumers, and it’s a $2 billion population opportunity. So that’s something we’re very, very excited about.”

Some of Gobi’s TaqwaTech investments include Durioo, which is “trying to become the Disney for Muslim children…creating animation around Muslim values for a younger audience,” Tsao said.

Ratings for Muslim-friendliness

Another, Tripfez, caters to Muslim travellers by providing a rating system for hotels based on Muslim-friendliness, he said, noting hotels in Muslim countries typically provide prayer mats and an arrow pointing in the direction of Mecca, among other Muslim needs. These are often not provided by hotels outside Muslim countries.

The pace of innovation is accelerating, Tsao said, with technological developments allowing emerging markets to learn from each other and the paths of other nations and build tech ecosystems much more quickly than their forbears in Silicon Valley or even China.

Another of Gobi’s investments is Carsome, a South-East Asian e-commerce platform for buying and selling cars. While some high-end cars can be bought online, the majority of brands are sold through auto dealerships, which Carsome wants to disrupt, Tsao said.

“If you talk about it from an ESG standpoint, a car manufacturer should never build a car until it actually has an order,” Tsao said. “But in order to do that, you need perfect information and you need a lot of traffic and we see that as a real breakthrough that’s going to come in and will then also tie into the next big phase of mobility, which will be autonomous driving.”

In the future, consumers will be able to buy an electric vehicle with autonomous facilities, and rent that car to an autonomous network during the times it isn’t being used, so it can pick up passengers from Grab or Uber and generate money for the owner, he said.

Early-stage VC not affected as much

While large tech platforms have seen massive corrections in the past year, Tsao said the early stage universe – where venture capitalists write cheques for $500,000 up to around $25 million – has not been affected as much.

He said “one of the most interesting investment opportunities in China today” is in China’s Greater Bay Area, a megalopolis that will combine Hong Kong, Guangdong and Macao into a super-economic zone of around 70 million people.

“I think this is going to be one of the most interesting opportunities and there’s a lot of tech sectors that people are going to be investing into,” Tsao said. “And again, for all of those who are doubling down on China, you should be looking at the Greater Bay Area.”

Bonds are starting to play a more interesting and meaningful role in Healthcare of Ontario Pension Plan’s (HOOPP) $103.7 billion portfolio once again.

Given current levels in real interest rates, real return bonds (namely Canadian government bonds and US TIPS) represent an “incredible” return compared to the underlying risks, HOOPP plans to build on its exposure says chief investment officer Michael Wissell in conversation with Top1000funds.com as the pension fund for Ontario’s healthcare workers reveals its latest results.

This after a torrid couple of years when HOOPP’s large allocation to liquid bonds – part of an LDI strategy that seeks to hedge liabilities via a heavy weighting to fixed income – had lost its efficacy.

Despite selling “a lot of bonds” through 2021 and 2022 the fund still suffered thanks to some of the worst declines on record in both public equities and fixed income in 2022.

But HOOPP’s conviction in LDI hasn’t waned and now, as higher interest rates “start to bite,” the relationship between stocks and bonds is changing again.

Although Wissell notes inflation remains a risk, bonds are starting to wear their traditional hat as an asset that will go up in value when expectations of future growth diminish.

HOOPP reported a -8.6 per cent loss (it’s first since 2008) and a funded status of 117 per cent. Wissell attributed the loss to “extraordinary” market movements and said it should be seen in the context of strong returns over a long period of time. “It’s disappointing to have a loss, but it comes in the context of really having a strong surplus,” he said.

In 2001, HOOPPs net assets were $17 billion. By 2011 they had grown to $40 billion and surpassed $100 billion in 2020, amounting to an increase of more than $83 billion in less than 20 years. HOOPP’s 10- year annualized return as of Dec. 31, 2022 is 8.35 per cent.

long-term Opportunities

Moreover, near term losses create long-term opportunities.

“It is a paradox of investment that it takes poor years to create opportunities going forward and HOOPP is digging in now for returns ahead,” he said. Private markets, particularly infrastructure, will be a key focus given HOOPP’s liquidity and capital to deploy. “We have a lot of dry powder seeking opportunities,” he said.

HOOPP was relatively late to infrastructure, first investing in 2019. It has now deployed over $4 billion in the asset class – with a focus on digital and communications infrastructure, transportation and utilities.

Climate strategy

Climate investments will be another increasing focus. The fund’s climate strategy includes deploying $23 billion in green investments by 2030 in an approach Wissell said is integral to HOOPP’s fiduciary duty to asses risk and find the best possible return.

“Sustainable investing is investing. We don’t see it as a standalone process. We are constantly integrating a move to a lower carbon future.”

By 2030 HOOPP expects to have 50 per cent of its infrastructure and private equity portfolios with credible transition plans. HOOPP will no longer invest in thermal coal or oil exploration from 2023.

Better disclosure amongst investee companies is essential to support outcomes in the medium term. But he is encouraged by the “tailwind” to better corporate disclosure.

“We are not doing it by ourselves. We are working with peers and our holdings on an ever-confident path. We are on they journey together,” he concludes.