A clear focus on and commitment to diversity, equity and inclusion (DEI) is helping the $480 billion CalPERS support its senior staff and managers to optimise the performance of the teams it already has, as well as providing a valuable framework for attracting and recruiting a diverse range of new talent. 

When CalPERS chief diversity, equity, and inclusion (DEI) officer Marlene Timberlake D’Adamo presented a DEI activities and accomplishments review to the $480 billion pension fund’s board of administration in January, she could reflect on 18 business plan initiatives, 18 strategic measures and 57 deliverables across the 2022-23 year. 

These were achieved across the fund’s five DEI pillars: culture, talent, health equity, supplier diversity and investment. CalPERS’ DEI roadmap for 2023-24 encompasses 20 business plan initiatives, 21 strategic measures and 95 deliverables. 

It’s a full program, and one on which Timberlake D’Adamo provides regular progress reports. 

“We go to our board, and we provide updates of all the activities that we’re doing, where we think we’re going, where we’d like to go, with the work that we’re doing,” Timberlake D’Adamo says. 

“Our framework is centred on our mission, and our mission is to pay pension and health benefits to members and their beneficiaries. We’re a [$480 billion] pension plan, as well as we have a health program that is very significant. We cover about a million and a half people in terms of health benefits, both active members – so those are members that work for the state and local municipalities – as well as retirees.” 

Timberlake D’Adamo describes her role as “the architect, conductor, quarterback, if you will” of CalPERS’ DEI activities.  

“Our framework has five different pillars that we’ve identified as what are the things that are critical to us being able to deliver on our mission,” she says. 

“What we do during the course the year is, really underneath the framework, different initiatives that are geared toward improving the efforts that we see and the impacts that occur with respect to those five pillars.” 

Among the range of initiatives and deliverables outlined in its Diversity, Equity, and Inclusion Activities and Accomplishments Review, dated January this year, CalPERS said it ran “uncovering unconscious bias in recruiting and interviewing” training, and used an augmented writing tool to reduce biased language in job ads and descriptions, with the aim of attracting candidates from a broader pool of talent. 

Timberlake D’Adamo says CalPERS is interested in “making sure that our leaders are bringing the most positive things that they can to their teams”. 

“I’m thinking about different opportunities for training, say, that we have about inclusive leadership, and thinking about different ways that we actually can help our managers,” she says. 

“A lot of times, as a manager, it’s really hard, because you’ve got a lot of things that you have to do. Sometimes a team member who is asking a lot of questions, or just doesn’t seem to be going along with the program, slows you down.  

“A lot of what we do is…like building a bridge, between the manager, who really is focused on getting the work done and making the results, and the team member who is focused on the same thing but is just seeing it in a different way.” 

Timberlake D’Adamo says CalPERS creates opportunities both formal and informal for training managers. 

“There’s leadership training, but then there’s also opportunities to have dialogue with managers, opportunities like bringing in speakers that we do on an enterprise-wide basis that helps folks to understand how do you make sure that you’re actively managing your team in the best way possible,” she says. 

But Timberlake D’Adamo adds that “the best way possible” is necessarily a subjective assessment. 

“One manager might feel they have certain things that they want to see or expect; and then another manager maybe has different expectations,” she says. 

“A function of bringing all that together into the organisation [is] how do we allow managers to operate independently, as they do with their teams, but then also set some clear norms.” 

Timberlake D’Adamo says the benefits to CalPERS as an organisation, or to any organisation, from equipping senior staff and managers to understand and integrate diversity, equity and inclusion into how they manage teams is clear. 

“The team is more engaged, I think that there’s better communication, there is an opportunity for the team to really thrive,” she says. 

Timberlake D’Adamo says that a clear and committed DEI focus helps the organisation support employees, who at the end of the day “want to have value, they want to have input, they want to be heard”. 

“If there’s one thing that I’ve realised, it is the extent to which people really want to be heard – the need, actually, the drive to be heard,” she says. 

“The benefits of getting it close to right or right, if you’re able to do that, is just that: creating a team [ where] people really feel valued, they feel respected.  

“And again, those are the things that people should feel. When you’re on a team, and you’re really contributing, it creates an opportunity for that to be felt. That that helps the organization. It definitely helps the organisation.” 

Recognition of DEI issues not only helps an organisation make the most of the teams it already has, but it’s also a critical tool in improving the strike rate of new hires. Timberlake D’Adamo says all organisations are looking for ways to make better decisions on who to bring in, to reduce the complexity, cost, and hassle of turnover from not hiring the most suitable people in the first place. 

“What everybody is trying to do in their own way is trying to get some insight and some intel so that they can make a decision, a hiring decision…they’re not going to regret at end of the day,” she says. 

“Everybody’s trying to figure out how do we make the most out of the opportunities that we have in terms of creating a team. [If] there’s 10 slots, how are we going to pick the 10 best people that fit into this? What is the matrix? What is the combination that we’re going to build that is going to get us that result?  

“Turnover, as we all know, costs a lot of money – not just money, but think of time and think of historical knowledge. It is 100 per cent one of the most important decisions that organisations make.” 

Politicisation at US public pension funds has taken a turn for the worse after a new law threatens to put politicians in charge of the Public Employees’ Retirement System of Mississippi (Mississippi PERS) the $30 billion pension fund for state employees, by sweeping away the existing board.

The new law would replace the 11-member trustee board, primarily made up of PERS members and retirees, with political appointments whereby PERS members and retirees on the board would drop from eight to two, and political appointees jump from two to seven. Currently, the only two political appointees are the state treasurer and one member appointed by the governor.

Unlike at some other US pension funds, this time the nub of the issue isn’t ESG. The main reason politicians in Mississippi want to get involved in governance at the pension fund is “insinuations of mismanagement.”

Their particular beef is the decision to increase employer contributions to try and shore up PERS’ under-funded status. As well as removing the existing board, the proposed House Bill 1590, now awaiting Senate approval, seeks to revoke a board decision passed last August to increase employer contributions.

Employer contributions are set to rise by 5 per cent over a three year period, beginning this July with a 2 per cent increase. The goal – to try and resolve PERS’ long-term funding ratio of 56 per cent.

Pension fund CIOs insist funding and investment strategy must go hand in hand. They say even with healthy returns, it’s impossible to invest their way out of poor funding policies and larger contributions from employers are essential to close the gap between pension funds’ liabilities and assets, especially given the decline in active members compared to retirees.

“The board has always acted in accordance with their statutory and fiduciary duty, and PERS will continue to serve its membership to the best of its ability,” PERS executive director Ray Higgins told Top1000funds.com. “Regarding the scheduled rate increase, appropriate funding in some manner is very important for the long-term needs of the plan. We all want to be a part of the solution.”

In a statement, PERS’ trustees argue that the new law would prevent essential funding, as recommended by the actuary. “As fiduciaries, we believe this is unacceptable,” they write.

“By rejecting the board’s proposed rate increase, this approach not only would jeopardize the membership, it would also hurt all taxpayers. The longer the plan goes without proper funding, the more it costs and the harder it gets, leaving future citizens with the liability.”

The current system works

The trustees argue that the current board structure has been in place for many years and the system has proven resilient, continuing to pay benefits through times of adversity like the GFC and pandemic. Moreover, they argue any change in leadership should be done openly and transparently.

They say PERS has a history of good returns, and low fees. One-, three-, five- and 10-year annualised returns are 7.76 per cent, 9.36 per cent, 7.63 per cent and 8.47 per cent respectively. Last fiscal year, investment manager fees were only $0.31 for every $100 under management –  less than 75 per cent of PERS’ peer group.

The trustees argue that any change in governance would indirectly shift more power to politicians, in effect turning control over to the governor and lieutenant governor, especially since all appointments would be with advice and consent of the senate.

“This change has the appearance of an attempt to politicise the PERS board. Removing most of the current board members results in the loss of institutional knowledge and continuity,” they argue.

In August last year PERS lowered its assumed rate of return from 7.55 per cent to 7 per cent assuming that its investments (its primary source of revenue) will grow at a lower rate.

Governance and pension fund design expert Keith Ambachtsheer has flagged governance issues at US pension funds for years, arguing there are a few US states that have people who understand the principles around arms length governance, but that they are in a minority. 

“The fundamental problem is a structural one. If PERS is not operationally arms-length from the Mississippi government, it turns the PERS board into a politically-motivated organization and mixing politics and pensions tends to produce winners and losers rather than ‘value for money,” he says.

While developed markets’ aging population problem becomes increasingly pronounced, Asian countries are witnessing a rapid rise of youth with some sub-regions’ median age staying firmly under 30. Global strategy advisor and economist Parag Khanna said Asians’ movements around the world and their increasingly deep intra-region relationships will have massive geopolitical and workforce impacts on global markets. 

 While developed markets’ aging population problem becomes increasingly pronounced, South Asian and ASEAN countries are witnessing a rapid rise of youth with the regions’ median age staying firmly under 30.  

There will eventually be “more Asian youth than any other category of human being” according to global strategy advisor and economist Parag Khanna speaking at the Fiduciary Investors Symposium, and their movements around the world will have massive political and workforce impacts on global markets.  

“When people ask this big, weighty question of what the future of humanity is, you’ll hear lots of philosophical answers. People will say things like religious wars or capitalism, which are lofty kinds of ideas,” he told the symposium in Singapore.  

“I think the factual answer to the question is literally two words: Asian youth.” 

While the world is used to the Chinese diaspora being the largest community numerically, Khanna said that will cease to be the case “imminently” as more Chinese retreat to Asia, not to mention the country’s median age (40) is older than the rest of region.  

Instead, South Asians (with youth giants like India, Pakistan and Bangladesh) will play a bigger part in the global markets from this point on, especially in regions like the US, Canada and Europe where they already occupy a greater share of the workforce than the Chinese. This is thanks to various outbound motivation drivers like pollution, economics and corruption. 

Apart from demographic advantages, Asia also has economic perks such as low currency volatility. The Gulf countries have long pegged their currencies to USD to underpin continued currency stability, and long-term low interest rates across Asia’s major economies have enabled steady credit availability and flows.  

Asia also accounts for most of the emerging market equity growth. Khanna said longer-term factors including capital account liberalisation and accelerated privatisation will unlock new investment inflows into fresh Asian listings. 

“[Emerging markets] is a term I hate, and I only use it in quotes,” Khanna said. “Because you throw a bunch of countries together as if there’s any kind of correlation between what’s happening in Brazil, Nigeria, or South Africa today versus the [Asian] region.” 

“Think regionally, think geographically, and that’s going to serve you a whole lot better.” 

Asianisation

Khanna said many people have considered the rise of China as the megatrend of the century. However, it was only a part of a broader “Asianisation” trend, marked by the resurrection of the Asian system and deepening relationships between states and subregions.  

“The further we look into the future and look back from that future, the more apparent it is that Asia has multiple drivers, multiple anchors and multiple pillars. The overall systemic quality that they are building or rebuilding – that is the great story of the 21st century,” he said.  

This also provides an alternative perspective to ongoing geopolitical tensions such as the Russo-Ukrainian War. Even since the seizure of Crimea in 2014, the increasing Western sanction has persuaded Russia to pivot towards being more of a North Asian country, rather than Eastern European, Khanna said. 

Russia has huge leverage as Asia’s “gas station and grocery store”, he said. 

“What you’ve noticed in the past two years is that India has embraced Russia, and countries have been trying to find exemptions to the oil cap. So how can you possibly presume that Russia is isolated and is destined to collapse?  

“Whether you want it to or not is your own personal point of view… but the world’s largest country has 14 neighbors, many of them Asian, and the Asians view it as a very vital provider of energy, commodities, food, access to the Arctic. 

“So Russia, again for better or worse, is not going anywhere.” 

Asset managers are spending vast sums of money to develop artificial intelligence systems to help them make better investment decisions. At a Top1000funds.com event in Singapore, Bridgewater co-CIO Greg Jensen discussed applying AI in financial markets as well as Bridgewater’s artificial intelligence efforts. He noted that AI could help contribute to a much needed productivity miracle.

Asset managers are spending vast sums of money to develop AI technology to support better investment decisions but applying AI to financial markets remains, according to Bridgewater’s co-chief investment officer Greg Jensen.

Jensen told the 2024 Fiduciary Investors Symposium in Singapore that AI is “great if there is a tonne of data and the future is like the past”.

“This problem is not like that,” he said. “There’s not that much data; realistically, there’s only a few cycles. You can maybe go back 150 years, and the future is not the same as the past.”

Jensen demonstrated Bridgewater’s artificial intelligence system, AIA (pronounced eye-a) to delegates at the symposium and said it had been developed to fill in the gaps in effective application of AI in financial markets.

Jensen said Bridgewater developed its own AI technology by combining the strengths of tabular data AI – which focuses on analysing classic table data sets – and large language models like ChatGPT, which offer complimentary features.

He said the strength of tabular data AI models is the ability to utilise data to understand past trends, but its flaw is an inability to offer future insights.

“This makes applying AI to financial markets quite a challenge,” Jensen said.

“If you take the best AI model… and take the best one for tabular data and you use it to predict equities, basically it can describe history incredibly well. It explains every move in the market. If you unleash it on data it’s never seen before and it doesn’t know about anything going on… it will have no idea what will happen.”

Jensen said this was despite AI being good at extracting complex dynamics and isolating impacts of individual variables in large datasets.

“They don’t know a thing about what’s happening,” Jensen said. “They’re bad at correlation versus causation. It’s important to understand them, but it’s more important in our world not to use them this way.”

Jensen said this where other forms of AI – in particular, large language models – come into play to “constrain the overfitting problem” by using data to make future predictions.

“Language models have totally different strengths to tabular data models – language AI can actually understand context and transfer human understanding from different spheres,” Jensen said.

“It can talk about markets and say something like ‘fear’ and know what fear means in a way a data series doesn’t. Of course, it’s bad in certain things. It’s bad at analytics tasks…they’re getting better, but they can also make things up. The good thing about tabular data models is they don’t make things up, they’re very precise. But language models do make things up.”

Real jeopardy

Jensen said the core of Bridgewater runs on a systematic process where computers do most of the work, but the intuition of the investment process is still all human driven.

He said the firm first started considering how AI could help humans on the intuitive part of this problem back in 2012.

It hired former IBM computer scientist David Ferruci, who led the development of the computing giant’s Watson which famously won US quiz show Jeopardy, to help design this system.

“He was sick, however, over the direction [Watson] had been taken and the things he couldn’t do – it was designed to beat Jeopardy, it wasn’t designed to do a lot of other things,” Jensen said.

“He was passionate about doing that right. He came together with me, and we’ve been thinking about how to create reasoning in artificial intelligence since then, or essentially a reasoning engine.”

Jensen was also part of the early development of OpenAI, before it pivoted to a capped for-profit company that sought to build scale. He later helped bring in the chief scientist to another AI start up, Anthropic, who would be tasked with working on the solution of dealing with small data sets in AI.

Capital space race

Jensen said the risk of capital loss in AI development would be part of the ebbs and flows of capital investing.

“If you look what it takes to have the best language model…right now OpenAI had the best model; then what Anthropic just released is pretty incredible,” Jensen said. “Staying on top of the best language model is unbelievably expensive and it has a shelf life of a couple of weeks.

“They’re going to build it. Whether that build ends up worthwhile, that’s a much, much trickier question.”

While Ferucci was recruited to help develop a system that could have a greater societal impact than winning a TV gameshow, Jensen noted a potential ceiling that still exists for AI.

“People are making the argument, which I think is a pipedream, that it will democratise intelligence – not all AI is the same, better AIs are going to win out from the worst AIs,” Jensen said.

“It’s unfortunately a winner-take-all technology because if you can do it and get the money/resources to do more of it, that is of huge benefit. How do you deal with a winner take all technology society and how do you spread that benefit? A lot of the people building this technology have the best intentions, but you don’t want to rely on that.”

Jensen believed this is where government policy should come into play to prevent the “massive economic gains” that could arise don’t end up being concentred in the hands of a few wealthy parties.

“How do you do that right now so it’s not a surprise to people when it happens? Tax the robots, tax the AI, distribute that in high quality ways and make sure the world benefits,” Jensen said.

On the impact AI will have on jobs and the general livelihoods of the working and middle classes, Jensen said society needs a workforce that is flexible enough to change as jobs fall in and out of demand.

While there’s numerous examples in history of technology replacing jobs, Jensen referred to AI being used in the US postal service to help with mail sorting.

“They started working on AI in 1998 on handwriting recognition,” Jensen said.

“Took a long time but by 2013-14, AI could recognise handwriting better than people in the post office could and nobody cared except the postal service, but the AI reads your letters. It’s not a human reading where to send the mail.”

Impact on productivity

Jensen said inflated US asset prices have created a mismatch with productivity which will require a ‘productivity miracle’ to reconcile. This is a problem AI could help to address if it can drive a modest, 1.5 per cent boost to GDP.

“If you take US asset prices, we need a productivity miracle – the only way to reconcile what is priced into asset prices is a productivity miracle,” Jensen said.

“Inflation is going to be able to fall/stay steady while earnings grow at a rate that hasn’t been priced in for a very long time. How can you get great earnings and great low inflation at a time where you’re starting with pre-used up capacity and a low unemployment rate? Basically, you need productivity.”

This is why Jensen believes even a modest 1.5 per cent boost to GDP from AI could reconcile this difference.

“That might happen, that’s probably too optimistic, long term equity prices are too high in the United States relative to what’s likely, but you at least get a sense of the line,” Jensen said.

“What I’m trying to do in my business is get an AI that learns and create that loop – it can learn, generate revenue and then learn again and get better. If you have a self-improving artificial intelligence, it of course creates a flywheel like nothing that’s ever happened before, so there is at least some chance.

Asia is going through its own sustainability journey, and it’s different from the transition pathways in Europe and North America. Robeco head of fixed income, Asia, Thu Ha Chow told the Top1000funds.com Fiduciary Investors Symposium in Singapore that this means investing in the region requires a unique, regional perspective. 

Asia is going through its own sustainability journey, which is different from transitions in Europe and North America, and those nuances should not be lost on investors, according to Robeco’s head of fixed income, Asia, Thu Ha Chow. 

Chow told the Top1000funds.com Fiduciary Investors Symposium in Singapore that it is challenging to get people in parts of the region such as the Middle East and other sceptics to participate in the debate and transition. 

“They never felt the dialogue really related to them,” she said.  

“I spent 15 years in Europe as a fund manager before I did the last 12 years here in Asia and a lot of people feel disenfranchised. If you understand the history of how sustainability developed within Europe and in that context, you can understand the adoption and history that’s there.” 

Instead, Asia is going through its own sustainability journey, Chow said, noting it’s important everyone understands what that looks like. 

“This is the most high-emitting region in the world,” she said.  

“It also hosts 60 per cent of the population. There’s also the manufacturing base, as we know that’s also a highly intensive sector. Actually dealing with the issues we have in this region is going to make or break our own net zero issue.” 

Additionally, Chow said, a lot of the standards and definitions adopted for ESG investing have not been helpful for the Asian region. 

“There’s a big issue to deal with and there’s a lot of research that needs to be done to actually focus on this very high impact area,” she said. 

“What Robeco has done over the last few years is expand our Asian presence to make sure that we actually understand the importance of regional IP.” 

While global pathways for the net zero transition have been laid out, Chow said it is a flaw that they haven’t been regionalised. 

“We know that technology, not only costs, but availability is very regional,” Chow said. 

“Some places you can have solar; some places, like Indonesia, that is not actually a viable strategy. It needs regionalisation from both technology and costs and that’s another piece of work we’ve been working on.” 

Asset owners and asset managers need to be working together on the transition, Chow said, but the shift in the last five years in Asia has sped up significantly. 

“That’s probably because the impact is going to be felt more acutely here in this region,” Chow said. 

“We’ve seen lots of regulations and definitions come to force. Things are beginning to happen and the region is beginning to start engaging in the dialogue that before they felt was not so important. With that is going to come some very interesting developments.” 

Chow said the proportion of green social bonds issued in Asia is still small as a proportion of total issuance. 

“What can asset managers do in response to this kind of challenge that we talked about?” Chow said. 

“We’re beginning to do a lot of the work…but we do need to develop frameworks that actually help clarify those definitions for this region. We actually have to start embracing that there are multiple dimensions to transition as well as regional differences.” 

The key to constructing investment portfolios with resilience to rapid and unexpected changes is to remain humble, interrogate the data, and not be fooled into thinking the future can be predicted perfectly, according to head of multi-asset strategy APAC for Wellington, Nick Samouilhan.

In the midst of the COVID-19 pandemic, Singapore-based Wellington Management managing director and head of multi-asset strategy APAC Nick Samouilhan says “his team decided to take a step back and think about what was going on”.

Samouilhan told the 2024 Fiduciary Investors Symposium in Singapore last week that their aim was to analyse whether it could take what was happening in the moment and “try and work out the next five to 10 years – not trying to be too prescriptive, but can we directionally try and understand some of the big changes, which we think will really matter over the next, say, five to 10 years”.

Samouilhan said the multi-asset strategy team have identified four key themes that continue to hold true today.

“It was clear three years ago, [and] it is absolutely clear today, that governments all over the world are potentially going to be far more activist in determining winners and losers and directing capital,” he said.

“And it means that when we invest in a company, that company’s outcome may not be about shareholder maximisation, it may be something else, we need to realise that and address that.”

Samouilhan said it was “clear back then [and] it’s clear now that climate is an increasingly important consideration in driving risk and return in capital allocation.

“We need to address that in our portfolios,” he said.

“What we were seeing back then and, again, we’re also seeing that now, [is] governments all over the world focus on their own economies, their own objectives.

“Because of that, we’re starting to see policy cycles, interest rate cycles, economic cycles, regulatory cycles start to diverge. And that has an increasingly important impact on say, regional allocations, and currencies, and so on.”

This analysis prompted a discussion between Samouilhan’s  multi-asset team and the macro team because it led them to believe that “something’s going on, beneath the surface on the macro economy” – and it might be that the principles of investing and portfolio construction that have served investors well in the recent past might not be appropriate in future.

Building portfolios with resilience requires that possibility to be taken into account, and Samouilhan said investors should bear in mind three things when considering how to build resiliency into portfolios.

“First, you should expand the number of asset classes in your portfolio,” he said.

 “For instance, there was long discussion yesterday about commodities and how the allocations have generally disappointed over the last decade.  But that is because we haven’t spent time in regimes when commodities are helpful.”

Samouilhan explains the second point: if we are in this world where beta is challenged, we need to really look at how are we going to meet return expectations, if beta doesn’t get us there,” he said.

“That might mean alternative ways of getting different returns – hedge funds, and so on. It may mean more skill-based approaches; it may mean more privates. If we can’t rely purely on beta, because the world is slightly different, we need another engine to drive the returns.”

Samouilhan said the final point is that “once you’ve allocated to different asset classes, perhaps we can be a bit more thoughtful on how these asset classes are expressed”.

“For instance, in hedge funds, if we are in this world that’s tougher, maybe ’leaning towards long-short strategies that can potentially discriminate between good and bad companies, where that difference will start to matter.

Can we be better at the expression on the equity side? Do we lean to things like quality, because that tends to do much better in certain regimes?”

Samouilhan said that all of that means that “if we are going into a slightly different world – and perhaps we’re leaving an anomalous world, maybe the world we’ve just lived in is the weirdness and we’re going back to a more normal world – we do need to look at some important things in the portfolio: correlations; the construction of the portfolio, reliance on beta and perhaps the expression; and how we do risk management.”

Samouilhan said the key to success for investors for the coming year was to “be humble”.

“It’s to interrogate the data, to think long and hard, but not to think we can guess the future correctly,” he said.

“Say we’re five years from now, and our expectations on the macro economy proved incorrect. It would not be the first time; I would not be embarrassed by that.  If it is completely wrong, I think looking back what we would have missed was this: perhaps most of the inflation we’ve seen recently was entirely cyclical, and COVID-related, and that will wash out of the system; and that all this talk about regionalisation of supply chains is only marginal, and countries continue to trade with each other.”

Samouilhan said it’s also possible that developments in AI could “offset many of the issues around constrained supply”.

“So perhaps inflation goes back to being a non-issue,” he said.

“And, if and if that’s the case, most of what I’ve just said goes away, because central banks then don’t need to worry about re-inflating the economy, because they just can’t, because there’s no inflation.

“We do need to question whether that’s right. This is just a nice, helpful thing to say – well, maybe the last few decades were the anomalous period, and we’re going back to a more normal period. What does that more normal period look like?”