Page 7 – Top1000funds.com

At CalPERS, the largest pension fund in the US, the rationale for investing in the energy transition is as compelling as it was for technology investors in the early 1990s. The $500 billion pension fund for California’s public sector workers has pledged to invest $100 billion (up from $50 billion) in climate solutions by 2030, convinced the sector can generate alpha and help reduce emissions in the portfolio.

“If you go back 30 years and asked an asset allocator if they should have overweighted technology, the answer today would be that would be a good idea. We are at a similar point now as we were in the early 1990s, and we want to position the portfolio,” says Peter Cashion, managing investment director, sustainable investments at CalPERS on a Top1000funds.com webinar in partnership with Pictet Asset Management.

Pension funds like CalPERS’ growing commitment to the transition is reflected in a recent paper by Pictet Asset Management and the Institute of International Finance.

Although more investor capital is flowing into the transition, the authors also flag the yawning shortfall. Moreover, financing the energy transition is gobbling up most institutional capital, leaving sectors like agriculture and transport struggling to finance change.

“In order to meet 2050 net zero goals an additional $8 trillion needs to mobilize annually,” says Emre Tiftik, director of sustainable research at the IIF. “For each one dollar invested in fossil fuels we currently invest one dollar in clean energy and this needs to grow from 1:1 to 1:7.”

It’s not only the lack of capital that signposts the risks ahead, it’s also the source. Tiftik adds that if governments continue to finance the transition at current levels it will add an additional $200 trillion to global sovereign debt by 2050.

“This is not reflected in governments long term projections.”

Active investment

Tiftik argues that active investment is a helpful tool for investors seeking to pick winners in the early years of the transition. A strategy endorsed by Pictet Asset Management (Pictet AM) where stock picking begins by using the SDGs to measure the extent to which a company is aligned to the transition.

“We have an internally developed tool that assesses SDG alignment for all companies in the benchmark index MSCI ACWI” says Yuko Takano, senior investment manager of Pictet AM’s Positive Change strategy also speaking on the webinar. “It’s possible to see that higher-aligned companies have higher returns,” she said, explaining that alignment refers to corporate “leaders” – businesses that are already aligned with net zero and benefit from a green discount in their capital costs.

Pictet AM’s Positive Change team also buckets companies into “improvers” and “opportunities” categories. Opportunity stocks have the lowest level of alignment to the SDGs and lower valuations, and the team engages and nudges management in the direction of change. Investors should seek to hold a mix of opportunity and improver stocks because these companies represent a valuation opportunity.

Takano describes a bottom-up stock picking process based on fundamental research. The team particularly hunts for proof of sustainable business models that can profit in the new economy. Another element of research includes robust analysis of company financials.

“Transitioning takes a lot of capital,” she said. If the company has a weak balance sheet or high levels of leverage, it will be screened out.

“Being an active manager allows us to probe and question, and try to get more insights,” she says.

CalPERS is also developing a more active approach to climate investment, weaving in climate risk and scenario analysis into portfolio construction. For example, the team believes it is possible to generate outperformance by investing in companies that are climate aware and have efficient energy and water usage.

“Companies that are resource efficient [have a] lower cost structure and are more profitable. Companies focused on this have significantly outperformed in the last five years,” says Cashion, adding that strategy at the pension fund is shaped around partnering with managers that lead in the space. “It comes down to material knowledge asymmetry. Us as investors having knowledge that the market hasn’t factored into decision making.”

In another approach, in July CalPERS invested $5 billion in a climate transition benchmark put together with FTSE. The platform underweights high emitters without a transition plan and overweights high emitters with a transition plan and is sector neutral.

In public equity the team are looking at active managers with a view to working with a handful in a concentrated portfolio where the manager takes active bets on which companies will outperform because of the transition.

CalPERS augments its approach with a bespoke taxonomy that defines the three key areas it will invest. One is around mitigation and investing in renewables for example, where the pension fund has seen most deal flow. Another is shaped around adaptation, focused on investments at the forefront of innovation like heat resistance crops or reinforced infrastructure. The third classification is investing in companies prepared to transition like high emitters with credible decarbonization plans.

“We are investing in high emitters today with a clear path on how to reduce emissions over time. This supports decarbonisation of the whole economy, not just in our portfolio and this is where the largest capital investments are needed,” explains Cashion.

In private markets, CalPERS has already or will invest $5 billion, mostly focused on infrastructure and private equity. In private equity the deal sizes are smaller, but the number of investment opportunities is significant and offers diversification benefits. CalPERS is also opening up to new managers in this space.

“We are now looking at more mid-market asset managers; more niche or those that have a dedicated climate strategy.”

Other points in the report

The Pictet AM-IIF report also details the impact of carbon pricing, an essential element in the transition. The IIF’s Tiftik says carbon prices will cause energy prices to increase by as much as three times over the next 30 years with implications for economic activity and labour markets, and potentially reducing political will around the transition.

Although carbon prices will drive up energy prices, the impact on inflation will be limited because the transition will lead to output losses with significant implications, particularly socially.

He also flags that the inefficient use of capital in the green revolution could lead to bubbles. All revolutions have a habit of creating bubbles because of asset misallocation.

“We are worried about this and need to monitor it closely,” he concludes.

Published in partnership with Pictet Asset Management

New Zealand Super’s new chief executive Jo Townsend inherits an organisation with a strong culture but facing some challenges posed by rapid growth. An internal project aims to reduce complexity and focus on simplicity for a fund already rated by WTW as operating at global best practice levels.

New chief executive of New Zealand Super, Jo Townsend, is aware of the fine balancing act her role requires: managing organisational change, as an aftermath of growth, in an organisation that has grown up with an embedded and very particular culture.

At 20 years old New Zealand Super is a young organisation, and for 10 of those years the partnership of Adrian Orr and Matt Whineray was the backbone of the organisation, growing a culture and investment process from the ground up.

With a great legacy to work with, including record five-year returns, Townsend inherits an organisation of 200+ staff (with 55 appointments made in 2023 alone) and assets of $79 billion with all the complexity of fast-paced growth and capital market headwinds.

“As a new CEO one observation of the organisation is it has grown quickly in the last five years in headcount, and complexity can be a function of rapid growth in an organisation,” she says in an interview with Top1000funds.com.

“I understand the importance of culture and it is a key area of focus in the organisation. As a new CEO top of mind is how to maintain that through a period of change.”

Townsend, who started as CEO in April this year, is taking a considered approach to understanding the organisation, involving staff in the evolution but also bringing a new perspective.

“I am looking at processes with a fresh set of eyes. I’m asking everyone ‘why do we do it that way?’ And having good chats about what the change challenge is in the organisation, and getting people to think about ‘how and why’, not ‘what we need to…’.”

While she says it is still early days there is a common realisation and acceptance there needs to be change to be successful.

An internal project, with the grand Oscars-like name of Guardians of the Future, focuses on key initiatives for continuous improvement.

“It is internal language we use when talk about continuous improvement and what we need to do to be able to be successful over the next 20 as we have for last 20 years,” Townsend says.

Key areas of focus include reducing complexity and focusing on simplicity; strengthening the investment approach through evolving the total portfolio approach and sustainability; and maximising the organisation and focusing on culture and a learning mindset.

The successful evolution of these three key elements of the organisation – culture, technology and the total portfolio approach – were also reflected as areas of improvement in the fund’s recent independent review, as required by law, with the fund receiving a WTW Global Best Practice rating.

The review was very complimentary in its report, including an acknowledgment that New Zealand Super is operating at global best practice in its activities, a state it has maintained for the past five years, and that WTW has the view the “investment process is completely exceptional among the asset owner community”.

But it also said a focus on new leadership, improving system design, maintaining a strong culture in a more complex organisation, and undergoing a technology transition, were all factors that can make the organisation more resilient.

CIO hire

One of the principal challenges for the organisation is filling the vacant CIO position, following Stephen Gilmore’s defection to CalPERS. Chair of the fund, John Williamson, has only been in the role since February this year, so how the three key individuals, all new to their roles, interact will be crucial to the future of the culture.

Townsend says there has been a huge amount of interest both internally and externally in the CIO position, but she is taking her time with the process.

“I want to make sure we are doing the most thorough process we can,” she says. “We are trying to conclude as soon as possible but we won’t rush.”

One of the consequences of the CIO vacancy is a 12-month delay in the usual five-year review of the reference portfolio.

“We will do a full review of how we do that strategic setting of our risk appetite and objectives and how to achieve that through our total portfolio approach,” she says.

Townsend says one of the WTW recommendations was to incorporate more horizon-scanning of systemic risks in the lead up to the review of the reference portfolio.

“We have a long lead time in that reference portfolio review, and will start with some of that scenario planning,” she says.

“We take that on board and are working with the asset allocation team and economics team to work out the best way to produce that information for board.”

Technology transition

For a couple of years the fund has been conducting a strategic project, dually supported by the technology and investment teams, to build and strengthen investment data.

“We are migrating away from legacy systems and putting a Snowflake database in,” Townsend says.

“This is a big investment data program, that will be foundational and extremely important to deliver. We are hoping to move out of project phase into BAU in mid next year.”

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As part of this, staff are being upskilled in certain areas of technological ability, including Python.

Overall Townsend says the WTW reviews have been beneficial to the fund as a guidepost or health check that it is heading in the right direction.

The last review in 2019 also provided recommendations including a review of beliefs; a review of the compensation structure; making greater use of a risk factor framework and allocating more resources to focus on responsible investment; and greater use of stress testing. All of these have been addressed by NZ Super in the time between reviews, with various responses by the fund. A review of investment beliefs and a remuneration review were both completed in 2020.

Townsend says she entered the CEO role knowing this process, which is a co-creation with WTW and sharing of views and drafts going back and forth, was underway.

“It’s been a very useful process. WTW could get a full picture with the co-creation, and it was helpful for me in getting up to speed as new CEO,” she says.

“The process overall was extremely valuable, and there have been strong levels of involvement from Treasury which was fantastic. Overall, the process has added benefit to the Guardians, giving assurance to the government that the path we are on is solid and robust.”

More innovation originates from the US than in Europe, says Timo Löyttyniemi CEO of the €21.6 billion Finnish State Pension Fund (VER), and while Europe has made several attempts to respond to the dominance of US tech giants, the US venture capital market is stronger, and most IPOs take place in the US.

But although European innovation has not been as attractive an investments as US tech Löyttyniemi argues in a recent post on the fund’s website, that could change.

In the US most patents are registered by start-up companies, and fostering a European growth market for start-ups is one way of promoting innovation he says, suggesting a five-point plan to boost European innovation.

Information and communications

For innovation and venture capital investments to be attractive, they must be profitable. According to the latest statistics from Invest Europe, European venture capital funds have outperformed US funds over the past 10 years, returning over 20 per cent per annum.

In the preceding period, it was the other way round.

“Sound profits attract investors. Information about healthy profits should be actively distributed and made readily available. The 2021 and 2022 venture funds are likely to prove disappointing, but if interest rates fall, the investment environment will offer improved opportunities for innovation and its financing.”

Investment products readily available

Löyttyniemi says that investing in venture capital funds is often a difficult decision for European investors.

“Newly established funds are initially small. For an institutional investor, analysing these funds is an arduous and time-consuming task.”

For this reason he advises creating fund of funds, allowing investors to be collectively involved in the start-up sector.

“In Finland, such a solution is offered by the Finnish Industry Investment’s fund of growth funds. Its counterpart at a European level is the European Investment Fund.”

He says that BlackRock’s purchase of Preqin could offer investors new opportunities. BlackRock has typically operated as an asset manager focused on the public equity and fixed income markets. Now it is making a foray into the illiquid markets where Preqin has been a leading information provider.

“Hopefully, the acquisition will generate easy and cost-efficient investment products for the unlisted market.”

A single strong technology exchange

Löyttyniemi argues that Europe needs a strong European ‘Nasdaq’ where growth companies can list. In a report published in June, McKinsey highlighted the wide gap that exists between US and European exchanges. The stock exchanges differ both in terms of the number of technology companies going public and valuation levels.

“We could create a perception of a single exchange even if it were a combination of many,” he says. “The important thing is to establish a highly visible and prominent marketplace whose star companies become the talk of the town.”

The challenge Europe faces is where to set up this exchange. Pre-Brexit, London would have been the obvious choice but the location is not obvious today.

A single strong technology index

A strong stock exchange creates a strong, easy-to-follow index that allows investors to make investment decisions based on that benchmark index.

“If there are too many indices, there will be no sufficiently strong benchmark that would generate sound investment products. A strong stock exchange equals a strong index. It is also possible to create a robust virtual index based on several technology exchanges and local ‘Nasdaq’ exchanges. This would be the second-best option if a single strong exchange fails to materialise.”

“Nasdaq is a household concept. So is Silicon Valley. Where are Europe’s innovations?” he asks.

Information marketing

The efforts to create a European Capital Markets Union (CMU) is a long-standing project. The problem is that the proposed solutions are limited and isolated without an overriding idea of how the European capital market should be created.

One solution, he says, is the ‘innovation market.” Innovation market infrastructure is a chain of layers which consist of stock exchange, market, benchmark indices and investment products by which investors are attracted to invest.

Europe possesses huge potential in terms of knowledge and skills, he concludes.

“This fact can be used to create a roadmap for the kind of progress outlined above to increase the attractiveness of European growth companies from an institutional investor perspective at the various stages of development.

“When there is a good and functioning market for innovations, it will drive workers and researchers to innovate. A pre-condition for a sound market is a multi-tiered, highly functional capital market infrastructure.”

Douglas Rivers, chief scientist at pollster YouGov, said data coming out of the current US presidential election confirms significant cultural and demographic shifts that are reshaping the political map. Rivers told the Fiduciary Investors Symposium that the once-popular “demographics is destiny” mantra predicting permanent centre-left majorities has lost meaning in the Trump era.

Rivers, who is also a Professor of Political Science at Stanford University and senior fellow at the Hoover Institution, told the Fiduciary Investors Symposium that the general election underway in the US between former president Donald Trump and current vice-president Kamala Harris is the “most momentous” in living memory.

“It’s been scripted to generate more surprises than anything I can remember, but it is serious business,” Rivers told the symposium, hosted by Top1000funds.com and held on the Stanford campus in Palo Alto, California, last month. “It’s been amazingly devoid of discussion of issues, but a feast for anyone that likes following elections.”

Rivers presented insights from a historic data set called ‘Say 24’, compiled via a major survey of 130,000 voters jointly administered by teams at Yale, Arizona State and Stanford universities.

He described the poll results for much of the past year as a “snooze” as Trump and previous Democratic frontrunner President Joe Biden seemed to enjoy peculiarly entrenched support and preconceived perceptions, both unable to shift deeply held opinions about them in the electorate or persuade new voters to join their respective coalitions.

But Rivers said the race was thrown on its head by the presidential debate in June, after which President Biden suffered sustained negative press commentary about his performance and age, and high-profile defections of allies and donors, leading to his withdrawal and endorsement of Harris as Democratic nominee, which she clinched at the party’s convention in August.

“Harris started down about four points relative to Trump, and then quickly overcame him, and then now leads, typically by two, three, sometimes four or five points in the polls,” Rivers said. “What Harris has done – and they’ve run an amazingly good campaign over the last six weeks – is to improve her positives. The views of Harris were pretty negative as being a ‘lightweight, inarticulate, unprepared’ and so forth. Since then, she really has done extraordinarily well.”

Demographics is destiny (or is it?)

However, he added that the data suggested Harris, who is perceived as more left-leaning than Biden, still faced a “problem on her ideological positioning” given that the US electorate has an inherent Republican advantage.

“The US is a centre-right country – that is, about a third of American voters describe themselves as being ‘conservative’ [and] about a quarter is ‘liberal’. So, there’s about an eight-point gap there,” Rivers said.

While the traditional right-wing/left-wing schism that has dominated electoral politics in liberal democracies throughout the 20th and early 21st centuries still holds sway in the US, Rivers said the data suggested there have been profound shifts in allegiance and sentiment since Trump entered, and disrupted, public life.

“20 years ago, you heard about ‘demographics as destiny’, which was that if Democrats maintain the majorities among these two minority groups [Blacks and hispanics] and were able to just do reasonably well among whites, they would have a permanent majority,” Rivers said. “What happened is completely different since then.”

Following an “autopsy” of the 2012 election – at which Barack Obama won a second term and former Massachusetts Governor Mitt Romney was defeated – Rivers said Republicans embarked on a new strategy to woo latino voters, with some success.

Trump has also gained support from Black males, and has a near 80 per cent stranglehold on rural voters, Rivers said, both of which are new developments that overturn historical allegiances. Similarly, under Trump, Republicans are now seen as broadly isolationist on foreign policy, while Democrats are more globalist, also overturning traditional norms.

The growing support for Trump and Republicans among working class and minority voters reflects similar dynamics emerging other Anglosphere democracies. In the UK, for example, the right-leaning Conservative and Reform parties have attracted more support from working-class and non-tertiary educated voters, as has the conservative Liberal party in Australia.

On the flipside, these declines in support for Democrats among traditional bases have been offset by increases in support from university-educated and suburban middle-class voters, especially women, he said.

Notwithstanding the dynamics signalled by the data, Rivers added the caveat that polling can be an inexact science.

“It’s beyond our ability to make precise predictions,” he admitted. “The dirty little secret of counting votes is only accurate to about a 10th of a point. If you recount a state, you can expect movements of about a 10th of a point on a recount. So, whenever an election is that close – it’s anyone’s guess who actually won.”

Finding ways to accommodate neurodiverse individuals within investment teams could be the key to unlocking better investment performance, as well as bringing the benefits of better collaboration and creativity, the Fiduciary Investors Symposium at Stanford University has heard.

Stanford Research Initiative on Long-Term Investing executive research director Ashby Monk said exploring the benefits of neurodiversity is an avenue of research that builds on the work already done to help asset owners become better at what they do.

He said the asset owner community controls about $140 trillion of capital and they are “quietly becoming the most important organisations in the world”.

The core of the research Monk oversees at Stanford is about “how do I help you make more money?”.

“We focus on your governance,” Monk said. “We focus on your culture, your technology and your ability to innovate.

“Some people think of my work as sitting in the category of behavioural finance. At times, it feels that way. But [while] behavioural finance academics do a fabulous job of diagnosing your biases, cognitive and behavioural, they may not have the solutions ready made to de-bias your organisations, to tune your decision makings, to make smarter, more efficient decisions, to generate higher performance.”

Monk said neurodivergence is the latest topic of research.

“Neurodivergence is not – let’s get it out there – a disorder,” he said. “It’s like biodiversity. [It is] the normal range and variation of human brains. We see it as a superpower.”

Monk said that although he doesn’t love the idea of putting a label on neurodivergence, sometimes that’s what must be done to enable organisations to recognise, harness and value it in their ranks.

“You do need to accommodate different things in your organisation in order to get the most out of these talented individuals,” Monk said.

Fremont Group managing director of quantitative analytics and risk Joseph Saénz told the symposium that it is typical for neurodivergent individuals to learn about their own neurodivergence through their children.

“The reason that neurodivergence is so important to me is through my son, as is the method for many that I started to meet, I started to find out that I myself was neurodivergent, and then eventually I also found out that the specific type of neurodivergence that I had was I’m actually autistic,” Saénz said, courageously revealing that for the first time in public.

Working in collaboration with Monk, Saénz said that “what I’m hoping to do is by identifying how neurodivergent individuals can assist in the in the investment arena, we can identify how we can accommodate so that they can better find that alpha”.

Monk said the objective of the research is to work out how organisations can find and bring in neurodivergent individuals and “give them safe spaces to innovate and create”. In the case of pension funds, that goal is to “meet target returns and pay pensions; it is about performance”.

Saénz said a key lesson is that “built different builds different”.

“At the heart of this is, new perspectives can come up with innovative stuff,” he said.

“I hire differently, and I have, as a result, a bunch of people that come up with fresh ideas all the time, and they bring them to me, and we try to put them in an arena that’s well hemmed in so that these ideas can create a strong portfolio that can withstand drawdowns but can also produce alpha.

“Folks can build their portfolios individually from the bottoms up, but as I said, it’s hemmed in from around the sides. It’s innovation, but with control. It’s a new approach, but with all the same people in the room allowing to say, ‘Well, have you thought of this? Have you thought of that?’ It’s new perspectives.”

Saénz said organisations must develop specific capabilities to recruit and retain neurodiverse professionals.

“I hire based on intellectual horsepower,” he said, but the exact metrics are “different with each and every candidate”. In one case a candidate claimed to have achieved a 1000 per cent return trading Pokémon cards.

“He buys rare Pokémon cards, holds onto them for a little while, and then flips them in Japan,” Saénz said.

“I told him that a 1000 per cent return is a terrible metric, and to come back to me with an IRR. So, he came back to me with an IRR, and then I hired him.”

Saénz described this sort of criteria as “non-standard information”.

“I used to say they’re going to at least need a graduate degree, to get into the quantitative group, because everybody else in the organization needs one less degree, and the quantitative group needs more math than everybody else,” he said. “Every time that a new person comes on, all of the problems that the last person came on to solve have been solved, so the newer problems are harder than the previous problems. The math is going to be harder.

“I need people with strong math skills, but they were too expensive. I recognised that I had to teach everybody that was coming, no matter what. I had to look at the cheaper end of the spectrum, which means I had to get more creative with the data that I was looking at.”

Only two months into the job and presenting to the board for only the second time, CalPERS new chief investment officer Stephen Gilmore has outlined his plans to overhaul talent and culture in the investment office, putting people and their development at the heart of his leadership.

Gilmore, who has taken the reins of the $502 billion portfolio following Nicole Musicco’s abrupt decision to leave this time last year after less than 18 months, said his focus on talent development is rooted in his belief that getting “the people, processes and portfolio right,” will ultimately support a strong performance.

Signs of change are manifest in an internal initiative called the Culture Club, set up seven months ago but enthusiastically embraced by Gilmore. It is focused on nurturing fresh values in the investment team around engagement, developing talent and sharing ideas across the office to create an atmosphere that allows innovation to flourish and breaks down silos to share skills and knowledge.

New talent has already arrived into the investment team witnessed in the presence of Stanford fellows linked to a partnership created by Ashby Monk, senior research engineer in the School of Engineering at Stanford University and executive and research director of the Stanford Research Initiative on Long-Term Investing set up three months ago. Elsewhere, the investment office now hosts a rebooted internship program and formalised mentoring program.

New arrivals joining the investment office can look forward to a more formal and improved onboarding process; their suggestions being welcomed, and everyone being given the education, development and opportunity to further their careers. Above all, Gilmore seeks to oversee an investment team where everyone knows what each other is working on – and an office that is known and celebrated throughout the wider organisation.

Gilmore said that talent didn’t only manifest in formal qualifications among the investment staff. He aims to build a team that has a breadth of skills and perspectives, better equipped to solve today’s complex problems. Yes, gaps in the team would be filled by external training, but on-the-job learning and recognising the aspirations of team members to fill those gaps will also come to the fore.

And talent development will go beyond a focus in finance and economics to value other skills too.

As well as cutting the number of weekly investment team meetings, Gilmore has slashed the number of strategic initiatives from nine to four. The smaller number of initiatives – still based on innovation and resiliency themes – are now run by a tag team of individuals who will be able to work together to get results.

The four initiatives that have dropped away, including private market innovation and private debt strategies, have been integrated into the standard operating processes of the investment office.

Drawing on his vast experience at the Future Fund and New Zealand Super. Gilmore said the investment office will be run in accordance with four key themes: people, process, portfolio and performance. Overhauling talent and culture (people) will be followed by new processes around how CalPERS integrates data and technology to support efficiency and reduce risk; portfolio resilience and sustainability, and how to better measure performance of the dollar value add of the portfolio and any improvement in the funded status.

Over the next 18 months, Gilmore will spend much of his time coming to understand the liabilities and assets in a deep dive ALM study.

“We have to have to design portfolio that [can] reduce the unfunded gap as we go forward,” he said.

He added that CalPERS has invested less in data and technology compared to peers, and new IT systems will enable the team to conduct more analysis, increase efficiency, reduce risk and innovate. His priority will be taking user-focused technology off the shelf rather than introducing bespoke processes.

Gilmore wants to enable CalPERS’ investment team to draw more on their vast internal knowledge.

“We touch so many parts of the economy and market, we should be able to collect that information to help us invest,” he said.

He also wants to improve stakeholder engagement. A unit within the investment office is now charged with engaging with stakeholders in a new formalised process. When a member of the public comes before the board with a big issue, the investment team have a process to engage and track stakeholder reactions.

This article was edited on October 4 to correct the date of CalPERS’ partnership with the Stanford Research Initiative on Long-Term Investing, the establishment of the Culture Club internal initiative and the fact Stephen Gilmore’s comments were made in a presentation to the board.