This Week's Issue P&I 04-15-2024

How U.S. election could affect energy investing

Did 5 grad students just cook up a x for Chicago’s pension funding troubles? Pension Funds

By ROB KOZLOWSKI

A team of ve University of Chicago graduate students won a Harris School of Public Policy competition with a proposal of nine initiatives designed to save the city of Chicago between $200 million and $400 million a year to shore up its woefully underfunded pension funds.

The team of graduate students — Syed Ahmad, Anthony Beaupre, Liam Gluck, James Karsten and Greg Rudd — was awarded the $10,000 rst prize in the inaugural Harris Policy Innovation Challenge, which tasked graduate students to come up with solutions to the city of Chicago’s pension funding crisis.

The team was one of eight that competed in the challenge and one of three nalists that made presentations at an April 3 event at the school.

The nalist teams were judged by a panel that included Dominic Garcia, former CIO of the New Mexico Public Employees Retirement Association and current chief pension investment strategist at CBRE Investment Management.

In his presentation, Ahmad said the team generated 28 different ideas speci cally intended to increase funding and growth and decrease liabilities.

“The advantage of taking a simpli ed view like this is it makes diagnosing root

Uncertainty surrounds incentives linked to In ation Reduction Act

By BRIAN CROCE

Asset managers and consultants are closely watching how the U.S. presidential election could impact renewable energy investing.

Those with a focus on the sector are trying to discern whether politics around, and speci c economic incentives borne out of, the In ation Reduction Act and its myriad tax credits for clean energy will change after the November election.

”I think anybody that is going to sit there and wait until December to adjust their portfolio could really face some adverse outcomes because elections can change policy, and policy can change economics, and that can really change valuations and so forth for renewables,” said Tyler Rosenlicht, a senior vice president and portfolio manager for global listed infrastructure who also serves as head of natural resource equities at Cohen & Steers.

Rosenlicht said he and his colleagues are very focused on what could happen after the election between President Joe Biden and former President Donald J. Trump, who have vastly different views on renewable energy.

Cohen & Steers is positioning itself to ensure it comes out ahead after the election, Rosenlicht said, adding that is “why we come to work every day.”

“There are situations where if the IRA gets rolled back it’s a dramatically, dramatically negative outcome for the existing stock. There are situations where if the IRA gets rolled back it’s not a big deal or really good. So our day to day is spent trying to understand that range of outcomes and where the mispricings are.”

Cohen & Steers manages an $8.4 billion infrastructure portfolio.

Retirement

Tax incentives and state mandates driving surge in new 401(k) plans

Cerulli projecting a gain of 230,000 plans by 2028, raising hopes of closing ‘coverage gap’

By MARGARIDA CORREIA

The age of startup retirement savings plans may just be getting started.

Cerulli Associates, for one, anticipates a surge in 401(k) plans, projecting more than 900,000 by 2028, or roughly 230,000 more than there were in 2022.

“By the end of the decade, we could be looking at close to 1 million 401(k) plans,” said Shawn O’Brien, Cerulli’s director of retirement, during a March 21 webinar on the U.S. retirement market.

Record keepers for retirement

goal is to convert as many of the top-performing interns to full-time as we can.’

plans are also bullish. Guideline, a San Mateo, Calif.-based digital record keeper, for example, is seeing sharp growth in rst-time plans, signing up roughly 13,195 plans in 2023, more than double the 6,510 plans logged in 2020.

“We’re seeing continued rapid growth in new plan creation,” said Jeff Rosenberger, Guideline’s chief operating of cer. Other record keepers are also

Some

More on the energy transition:

n The election notwithstanding, investing in energy is going full speed ahead. Page 14

n Like ESG, energy transition investing means different thing to different people. Page 16

Fired employees detail concerns on Bridgewater Hedge Funds

Complaint over termination of execs airing dirty laundry

By LYDIA TOMKIW

Two former Bridgewater Associates executives allege their criticism of the giant hedge fund’s performance and transactions costs were part of why they were red, and the insiders’ complaint has raised fresh concerns among pension funds and other institutional investors.

Last year, Bridgewater’s agship Pure Alpha II fund lost 7.6% while its All Weather fund returned 10.6%.

Although Pure Alpha II notched one of its worst annual declines since its 1991 inception, the fund rebounded almost 16% in the rst quarter.

Bridgewater is currently managing approximately $120 billion in assets for 260 clients, according to a February presentation for the Alaska Permanent Fund Corp. Alaska Permanent remains a client and declined to comment.

Houston Police Of cers’ Pension System has terminated hedge fund giant Bridgewater Associates from two underperforming portfolios. The $7.5 billion pension fund’s board approved terminating its investments in Bridgewater Pure Alpha and Bridgewater Major Markets Fund at

HANNAH DINARDO: ‘Our

AT RISK: The tax credits contained in the IRA may not survive a second Trump presidency, some observers said.

Rachel Jessen (Biden), Christian Monterrosa (Trump)/Bloomberg

Hedge Funds

Applicants for summer internships at some hedge funds are facing long odds, with some acceptance rates below 1%. Page 6

The stock market has changed, says Eminence Capital CIO Ricky Sandler — and his rm is changing with it. Page 18

Money Management

GMO’s Ben Inker is excited about the number of cheap stocks he sees in the markets a strong statement for the evenkeeled, value-centric manager. Page 4

Asset-management executive search rms

BraddockMatthews and David Barrett Partners have merged. Page 16

Polus Capital Management, born from the 2021 merger of Cairn Capital and Bybrook Capital, is thriving. Page 17

Awards

P&I and DCIIA have opened nominations for 2024’s Excellence & Innovation Awards, which recognize DC executives and their teams for projects that help participants prepare for retirement. Page 4

ETFs

Single-country ETFs that focus on Japan and India are gaining in ows from investors wary of concentration risk in U.S. Page 12

Regulation

SEC Commissioner Hester Peirce criticized the agency’s “dwindling” engagement with the public, saying it sti es discussion. Page 18

Alternatives

Jim Smigiel, CIO at SEI, thinks the booming private credit sector is no longer as attractive as it seems. Page 17

Private credit, while not a risk to nancial stability, could potentially worsen a future recession, said an IMF of cial. Page 18

Time is running out to submit a money managers survey

Pensions & Investments is still accepting late responses to the annual money managers survey. Firms managing U.S. institutional, tax-exempt assets are eligible to participate. Results will run June 10.

To request a survey or obtain further information, please contact Anthony Scuderi at ascuderi@pionline.co m or 212-210-0140, or visit www.pionline. com/section/surveys

of credit and markets says investors are making permanent allocations

By LYDIA TOMKIW

With interest rates likely to stay higher for longer, it’s a great time for investing in credit, said Christopher Sheldon, partner and cohead of credit and markets at KKR & Co.

And amid that favorable environment, institutional investors are moving from tactically allocating to private credit to creating permanent allocations, he said in an exclusive interview with Pensions & Investments

“We are going to have more dispersion in the market. Defaults will increase, but I don’t think they are going to spike,” Sheldon said. “And it’s a credit picking market. It’s about making sure you have scale, differentiated origination, making sure you have choices.”  KKR has seen credit assets grow meaning-

fully over the last ve years to $219 billion as of Dec. 31 from $59 billion at end of March 2018. The assets under management include the rm’s acquisition of retirement and life insurance company Global Atlantic Financial Group and a joint venture it formed with FS Investments.

Credit accounts for approximately 40% of KKR’s total assets under management as of Dec. 31, according to the rm’s April 10 Investor Day presentation. KKR divides its credit business into leveraged credit, which accounts for $123 billion in AUM; private credit, which stands at $86 billion; and strategic investment at $9 billion.

asset-based nance strategies and bespoke capital solutions, he said.

With uncertainty around valuations and the nancing markets, companies are looking for bespoke capital solutions.

“They may not want traditional debt, but are willing to have some type of structure, whether it be a preferred, or actually an equity, but just with a lot of bells and whistles on it,” he said.

“The roots that we have in the ground today should fuel growth for the next decade,” Sheldon said.

Two areas where KKR has been busy are

Pensions & Investments has opened registration for the 2024 Best Places to Work in Money Management program.

Now in its 13th year, the program shines a light on top employers within the money management industry and how they are elevating their workplace culture, attracting talent and developing employees.

For the 2024 program, P&I has enlisted Workforce Research Group as its new research partner and will work together to identify great places to work. The Humble, Texas-headquartered independent research rm will engage with employers and employees to determine winners through a two-step assessment.

In the rst part, employers complete a questionnaire that covers topics such as population demographics, practices and organizational bene ts. In open-ended questions, employers may provide greater detail on their practices.

There are several market tailwinds favoring increased institutional credit allocations, Sheldon said. Higher rates for longer along with ongoing bank deleveraging and a pullback from noncore lending, record levels of private equity dry powder globally, and developing Asia-Paci c capital markets are all

SEC halts climate disclosure rule pending legal challenge

By BRIAN CROCE

The Securities and Exchange Commission said it will voluntarily halt implementation of its new public company climate disclosure rule while a federal court considers multiple legal challenges on a consolidated basis.

The SEC said in an April 4 ling that it “has determined to exercise its discretion to stay” the nal rule pending judicial review.

After the SEC nalized its rule March 6, nine lawsuits were led in six different circuits. A lottery was then held and determined that the challenges will be heard on a consolidated basis in the 8th U.S. Circuit Court of Appeals in St. Louis.

The rule in question will require public companies to disclose a host of cli-

In the second part, employees complete a survey designed to quantify their engagement and satisfaction with their rm. Employee responses will be anonymous.

The employee survey will account for 80% of a rm’s total score; the employer survey will carry a 20% weight.

To participate, rms must have at least 20 U.S.-based employees and have at least $100 million of discretionary, institutional assets under management or advisement. Participants must also be in business for at least one year.

mate-related information in their periodic reports and registration statements. That information includes material climate-related risks; activities to mitigate or adapt to such risks; information about the company’s board of directors’ oversight of climate-related risks; and information on any climate-related targets or goals that are material to the company’s business, results of operations or nancial condition.

The nal rule didn’t go as far as the March 2022 proposal on which it was based, but it still drew sharp pushback.

A bulk of the lawsuits, like those from energy companies, business groups and Republican attorneys general, make similar arguments, claiming that the SEC doesn’t have the authority to issue such a rule, that the rule is arbitrary and capricious under the Administrative Procedure Act, and also violates the First Amendment by effectively mandating discussions about climate change.

But the SEC also received a challenge

Participants must register to participate by June 7 and pay a nonrefundable $199 registration fee.  Results will be published by P&I online and in its Dec. 9 print issue, which will include pro les and photos of the winners.

For further questions and more information on the program, please reach out to Julie Tatge, executive editor

Firms may register to participate in this year’s program at pionline.com/bptw2024 Frequently asked questions and answers, a timeline of the survey process, plus a sample survey are available there as well.

Danish funds mulling defense investments

Upping allocations to the sector seen as a way to support peace by funds following responsible investment policies

By SOPHIE BAKER

Danish pension funds are re ecting on how defense-related investments reconcile with their responsible investment policies, against a backdrop of signals from the European Commission and Danish government to help strengthen defense and security, and the war in Ukraine.

Some pension funds in the country have been upping their allocations to the defense sector, explaining that they’re increasing exposures in a quest to contribute to a peaceful and safe society and secure a sustainable future.

“Since the outbreak of the Ukrainian war, broad political support in Denmark and throughout the Western world for rebuilding defense capabilities has increased

signi cantly and many Western countries are now reaching or trying to reach” the 2% of GDP commitment to defense spending made by NATO heads of state and government in 2014, said Tom Vile Jensen, deputy director of Danish pension and insurance association F&P.

“This of course also impact(s) investors and has opened up new opportunities for pension funds as well,” such as the construction of new military buildings and facilities, nancing shipbuilding in cooperation with other private entities, and investing in global companies “which provide Denmark and other allies with material/ weaponry,” he added.

Last month, the EC proposed its rst European defense industrial strategy, which

New CalPERS CIO has funding ratio in his sights

By JENNIFER ABLAN

CalPERS has tapped Stephen Gilmore, the chief investment ofcer of sovereign wealth fund New Zealand Superannuation Fund, as its new chief investment of cer.

Gilmore has spent the last ve years as CIO of NZ Super Fund, which is owned by the New Zealand government and valued at more than NZ$73 billion ($43.5 billion). He is is expected to start at CalPERS, the nation’s largest public pension fund, in July.

Gilmore will succeed Nicole Musicco, who left the Sacramento-based California Public Employees’ Retirement System in September and became the second straight CIO to leave after only 18

months on the job.

“Stephen has worked in very public roles during his career for organizations where transparency and resiliency are essential,” said CalPERS Chief Executive Of cer Marcie Frost, in an April 2 news release. “He brings not only a wealth of investing knowledge to the job, but he also has the temperament to understand the needs of our members and public sector employers who depend on CalPERS to be a steady, long-term partner.”

As chief investment of cer for NZ Super Fund, CalPERS said Gilmore has overseen the world’s best-performing sovereign fund, with annual investment returns of

Japan’s government bond yields on the upswing

AT&T, Lockheed Martin suits facing hurdles, experts say

By ROB KOZLOWSKI

U.S. corporate retirement plan sponsors are full speed ahead on pension risk transfer transactions despite recent lawsuits that legal experts say face hurdles to avoiding early dismissals.

In March, two groups of AT&T retirees led separate lawsuits against the telecommunications giant and independent duciary State Street Global Advisors, alleging a violation of duciary duties related to a 2023 pension buyout transaction; and four Lockheed Martin Corp. retirees led a lawsuit against the defense company alleging similar violations related to two recent pension buyout transactions. What the lawsuits have in com-

mon is the two companies each purchased group annuity contracts from Athene Annuity and Life Co. and Athene Annuity & Life Assurance Co. of New York.

The AT&T purchase from the two Athene Holdings subsidiaries transferred $8.1 billion in U.S. pension plan liabilities and the responsibility of paying bene ts to about 96,000 AT&T retirees and bene ciaries, and the two Lockheed Martin purchases in 2022 and 2021 transferred a combined $9.2 billion in U.S. plan liabilities and the responsibility of paying bene ts to about 31,600 retirees and bene ciaries.

Each lawsuit alleges Athene is not safe.

Japan recently ended its negative interest-rate policy after a period during which other central banks hiked rates to combat in ation. Recently, Japan set a zero to 0.1% targeted short-term rate and loosened controls on 10-year yields. While economists expect Japan and the EU’s long-term yields to increase, they project them to fall in other developed countries, providing investors an opportunity to lock in higher yields.

Locking in yields: Government bond yields have risen over the past few years, with the U.S. 10-year yield the highest at 4.55% as of April 10. Japan’s 10-year yield is the lowest among those examined at 0.81%, but economists project they’ll keep climbing through the end of 2025 while yields in other countries, including the U.S., will drop. 10-year yield comparison**

Falling in ation: Japan’s consumer price index rose 3.3% last year, and economists expect it to slow to 2.3% this year. That’s much higher than the country’s 0.73% 10-year yield.

Economists also expect CPIs in the U.S., EU and the other countries to continue slowing.

Developed country CPI

De cit spending: A number of countries as well as the European Union have budget de cits, which some economists expect will impact long-term yields in the future. Last year, the U.S. de cit accounted for 6.5% of gross domestic product.

Deficit as % of GDP

Funds’ holdings: The median pension plan had 11% of its xed-income allocation in non-U.S. developed markets, based on the 22 de ned bene t plans that provided this information in P&I’s survey of the largest plan sponsors.

% of fixed income in nonU.S. developed markets

By

U.S. large-cap growth stocks have been hogging the investment limelight in recent years but Ben Inker, partner and co-head of asset allocation at Boston-based quant rm GMO, says his team has been looking elsewhere — and nding a lot to like just now.

“We are excited because there are

a lot of cheap stocks out there,” both at home and abroad — even as a relatively narrow group of mega-cap U.S. growth stocks keeps lifting the benchmark S&P 500 index to new highs this year, Inker said in an interview.

And it’s not just stocks. “You’d have to go back to 2000” to nd such a range of assets — including lowrisk bonds and the cash returns underlying liquid alternatives — paying investors this well for taking risk, Inker said.

It’s the rst time in a very long time that, when looking to add exposure now in attractive market seg-

ments such as European deep value stocks to GMO’s multiasset portfolios, “we’re faced with this problem of saying, oh, but we like everything in our portfolio so much already. It’s painful nding the thing to sell in order to buy this,” Inker said.

That kind of enthusiasm isn’t entirely expected of GMO, given the rm’s value-centric reputation for keeping animal spirits in check and irrational exuberance at bay, Inker concedes, asking rhetorically “how could GMO be talking about how excited we are when the market is making all-time highs?”

Jeremy Grantham, GMO’s found-

er, provided a possible explanation in a March 11 “viewpoint” analysis of the market moment, noting that the “current (arti cial intelligence) bubble…limited to a handful of stocks, is totally unprecedented, so looking at history books may have its limits.”

So, if the S&P 500 is substantially overvalued now, “we don’t have to own any of those stocks…and there’s a lot of other stocks that aren’t trading at those kinds of valuations,” Inker said.

U.S. value stocks, for example, are “as cheap versus the market as anything we have ever seen,” apart from

Entries are judged on innovation as well as excellence in execution.

Last year, P&I and DCIIA honored four individuals and one team for projects that sought to provide a guaranteed income solution, to offer a retirement-plan lifeline to smallbusiness employees and to pay a corporate match if employees paid off student debt or increased contributions to their 401(k) accounts.

Other winners implemented retirement plan design changes that made fees more transparent and equitable and gave employees or retirees a chance to select an investment usually available only to dened bene t plan participants.

The winners of the 2023 program can be found at www.pionline.com/ excellence-innovation-awards

P&I and DCIIA will review projects that were implemented on or after Jan. 1, 2023. Winners will be recognized at P&I’s West Coast Dened Contribution Conference, which will be held from Oct. 20 to Oct. 22 in Pasadena, Calif.

Entries for this year’s awards are due May 17. Participation in the program is free.

More information and the nomination form are available at pionline. com/excellenceinnovation2024

For questions or further help, please contact Julie Tatge, executive editor of P&I, at jtatge@pionline.com

Self-nominations are encouraged. The program will also accept nominations from colleagues and people outside the organization who are familiar with the work done by a dened contribution plan sponsor.

Only DC plan sponsors and their teams are eligible to win an award.

For plan sponsors looking to showcase communications excellence in de ned contribution campaigns, the 2025 Eddy Awards will open for nominations in September.

Funds Summer intern applicants are learning a lesson on long odds

conference in recent months. It’s all part of an effort to recruit the next generation of employees amid the erce ght for talent — and this year's summer intern class is shaping up to be the most competitive ever.

Hedge fund rm co-founder and CIO Dmitry Balyasny visited three college campuses and gave a keynote address at the London School of Economics alternative investment

Navigating the Evolving Regulatory Landscape for Retirement Income Solutions and Beyond

An insightful discussion and update on current and upcoming regulatory changes impacting retirement income solutions. This session will bring you up to speed on the latest developments, including:

• Observations on the Department of Labor’s current challenges and priorities

• The continuing saga of the fiduciary rule

• In-plan annuities and other lifetime income products

Internships at top multistrategy hedge funds, including Balyasny Asset Management, Point72 Asset Management, Citadel and Millennium are among the hardest jobs to land on Wall Street with some accep-

• Developments in ERISA litigation (and non-ERISA litigation a ecting the regulatory landscape)

• Other Department of Labor regulatory updates

tance rates below 1%, sources said. The roles can come with ve- gure monthly pay and perks like trips and attending Mets baseball games.

“It’s incredibly competitive,” said Gary Goldstein, who started recruiting in 1979 and is the founder and CEO of Whitney Partners, an executive search rm. “There has been a shift away from going to the investment banks where that was a very hot segment of the market for a long time.”

There is a huge uptick in interest to snag these sought-after jobs on the buy side, Goldstein said. “There’s a real appetite for going into hedge funds.”

With summer only a few months away, Pensions & Investments spoke with Balyasny and Point72 about their programs. Millennium and Citadel provided information about their programs.

Balyasny: 40,000 applications

Balyasny will host approximately 100 interns this summer with many coming from quant-focused backgrounds. The rm received over 40,000 applications and accepted under 0.5%.

It was the highest application year on record and a 15% increase yearover-year, said Hannah Dinardo, head of campus recruiting at Balyasny. Balyasny himself visited Princeton University, the Massachusetts Institute of Technology and New York University. The majority of interns are rising seniors along with masters and Ph.D students.

“We are in search of top talent anywhere we can nd it,” Dinardo said.

THE 2024 DOL UPDATE

That means going through thousands of applications, without using AI, to nd candidates with a passion for the industry who have more than good GPAs, she adds. They are seeing applicants building trading bots and algorithmic strategies and pursuing certi cates and research.

“Times have changed, and it is very competitive for them,” she said. “We are really looking for the people who want to break into this industry.”

Most interns will start June 10 and work with the rm for 10 to 12 weeks. Pay ranges vary up to $25,000 a month and up to a $25,000 sign-on bonus for some groups of interns.

Interns focused on macro, commodities, technology and data management will go through customized week-long training groups with case studies and trading simulations and dive into areas ranging from options trading to swaps with the goal of bridging the gap between what is taught in school and market application, Dinardo said.

Every Thursday, interns will hear from people across the rm’s business. “It’s a way for them to better understand the hedge fund industry,” she said.

Balyasny expects around half of its interns to accept full-time roles.

“Our goal is to convert as many of the top-performing interns to full-time as we can,” Dinardo said. “It’s very intentional and strategic.”

The $21 billion in assets rm will start accepting applications in Au-

Julie Stapel Morgan Lewis Bockius LLP

Elizabeth Goldberg Morgan Lewis Bockius LLP

FIXED INCOME STRATEGY

A COMPELLING MOMENT

Institutional allocators in fixed income are always scanning the horizon for signals on macroeconomic shifts and the next central bank moves. Even in the midst of the very positive resurgence of fixed income, they need to carefully navigate this transition period for interest rates and inflation so they can remain on track to achieve their long-term objectives. It’s an opportune time to reach for quality with reasonable risk exposure across several segments of fixed income, and stretch out on the credit spectrum into high-yield, emerging markets, and other sectors.

Our panel of fixed-income experts cuts through the market complexities to share what’s top of mind for the di erent types of institutional clients today. You’ll also learn what’s current in fixed-income indexing and the use of actively-managed ETFs, new developments in systematic indexing, and opportunistic segments –including private credit.

Read

pionline.com/fixed-income-report2024

Sponsored by:

BIG

BUCKS

HSA assets grew 18.6%, hitting new high in 2023

Health savings account assets achieved a record last year of $123.3 billion, up 18.6% from the previous record of $104 billion in 2022, according to an annual survey by Devenir Group, an HSA research rm and investment consultant.

The investment component of the HSA assets rose to $46.4 billion, up 37.3% from the $33.8 billion in 2022, thanks to a strong stock market, according to a March 26 report describing the survey results.

Investments — as opposed to deposits — accounted for 44.6% of total HSA assets in 2023, according to Devenir, which conducted a survey in January of the 100 largest providers of HSAs. Survey responses are self-reported by the providers.

The number of HSA accounts reached 37.4 million last year, up 5% from 2022. Devenir also reported that about 2.9 million HSAs have “at least a portion of their HSA dollars invested” compared to almost 2.6 million accounts in 2022.

ROBERT STEYER

Coffey takes stage to offer advice and re ect on career

Hedge fund manager Greg Coffey has some advice for younger traders: “trade smaller and let trends run longer.”

Coffey, founder and CIO of Kirkoswald Asset Management, spoke at the Sohn Investment Conference held in New York April 3 and re ected on how he has changed as a trader over the years. He said that advice is something he follows now that he wishes he had done earlier in his career and that these days, “we no longer take big swings.”

Coffey, who started his career in 1994 and previously worked at GLG Partners and was also co-CIO of Moore Europe Capital Management, shot to prominence as a macro trader and was nicknamed the “Wizard of Oz.” He rarely gives interviews.

Asked on stage at the Lincoln Center when he started believing in himself, the Australian investor answered, “I don't know that anyone ever believes in themselves. I think that that's the key to this business is understanding that the markets are there to teach you how bad you are at your job.”

His risk appetite now is “signi cantly differ-

THE NEXT GENERATION

ent” to when he was younger and focused on being a “money maker.” Now, Coffey said, “my focus is more on risk management.” The key to running a macro hedge fund, Coffey said, is not being stopped out — exiting a position with a loss — and ensuring your size is never big enough to get near a stop/loss area.

Coffey came out of retirement and launched Kirkoswald, a macro hedge fund, in 2018.

Stanford-CalPERS join forces to develop future investment pros

CELEBRATING A HALF-CENTURY ERISA 50th

Stanford University and CalPERS have teamed up to offer students a one-year program called the Long-Term Investing Fellowship designed to help them explore nance and investment careers at organizations such as public pension funds, university endowments, charitable foundations and sovereign funds.

Ashby H.B. Monk, executive and research director at the Stanford Research Initiative on Long-Term Investing, said he will direct the program, overseeing all aspects of selection and administration.

Noting it is a brand new fellowship, Monk said the

Anniversary Symposium seeking research paper submissions

The ERISA 50th Anniversary Symposium & Gala has issued a call for ERISA-related research papers, one of which will be presented at the Sept. 12 event in Washington celebrating the 50th anniversary of the signing of the Employee Retirement Security Act of 1974.

The invitation-only event at the National Building Museum in Washington is intended to celebrate the retirement security legislation signed by President Gerald Ford on Sept. 2, 1974.  Hosting the event are 11 organizations including the American Council of Life Insurers, American Bene ts Council, American Retirement Association,

De ned Contribution Institutional Investment Association, Investment Company Institute, SPARK and the U.S. Chamber of Commerce.

The host committee is seeking ERISA-related research papers from individuals and organizations that “will further inform and enhance the dialogue around opportunities and challenges for employer-sponsored retirement and health plans,” according to an April 3 news release from the American Retirement Association.

One project will be presented at the symposium, others will be included in an ERISA 50th digital journal, and there will also be

opportunities for other research to be covered in webcasts leading up to the Sept. 12 event, the news release said.

The deadline for submitting a research topic is April 30, and the research must be completed by Aug. 15. The ERISA 50 Research Committee, which is chaired by Barb Marder, CEO of the Employee Bene t Research Institute, and consists of representatives from the host organizations, will review submissions.

Submissions should be made online at the Call for Papers website.

Questions should be directed to Marder at marder@ebri.org

Kirkoswald has approximately $8 billion in assets under management. Coffey has been in talks to acquire Emso Asset Management to create a $13 billion rm.

Amid audience laughter, Coffey said he was once asked what he would tell his younger self and he answered, “I don’t want to be anywhere near my younger self.”

— LYDIA

purpose of the program is twofold. “First, it will provide CalPERS and public pensions generally with a new and unique pipeline of highly talented candidates for employment,” he said. “Second, it will help to raise awareness among graduating students and recent graduates about this extraordinary world of long-term investing and offer them a new pathway to work for these organizations.”

A spokesperson for the $494.6 billion California Public Employees' Retirement System, Sacramento, said the ultimate goal of the program — a fully paid work experience — is to develop the next generation of institutional investors.    Stanford will select and hire candidates in the spring of each year, the CalPERS spokesperson said. “Students will design a project, engage in an intensive apprenticeship at CalPERS, and return to Stanford to present

their ndings to the next group of incoming fellows,” he added.

The program is open to all graduating university students and recent graduates from around the world, not just Stanford students, Monk said.

Stanford and CalPERS, Monk added, have partnered on this project because both organizations “see it as part of their mission to develop this talent pipeline.”

This program will mark the rst partnership between these two organizations. Monk said the success of the program will be measured by how much it grows, “such as the four fellows this year growing to eight next year and 16 the year after that, with other pensions joining CalPERS leadership in this domain.”

By 2034, Monk said, he would love to place 100 of the world's best graduates at pension funds for a year-long fellowship.

— PALASH GHOSH

TOMKIW

DIFFERENT FOCUS: Kirkoswald’s Greg Coffey, right, chats at the 2024 Sohn Investment Conference in New York.

David Madison/Getty Images

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Registration will open June 2024!

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Howard Moore Associate editor,

With public exits more than 70% lower than the record highs of 2021, it’s understandable why everyone from venture capitalists to limited partner investors to entrepreneurs on the brink of generational wealth is turning to a crystal ball. But even before interest rates and valuations started going in a more rational direction after the funding glut of the recent past, the public exit was no longer the promised land it once was.

In fact, the public market is markedly failing to meet the needs of today’s high-growth businesses, creating a growing vacuum that private markets writ large are lling. While so many are focused on the IPO window being closed, we’re missing the more important point that the window is broken! And with the public markets no longer hospitable to their arrival, should small- and midcap companies be aiming for the public exit at all?

Today the positive storylines outside of the Magni cent Seven are few and far between, and M&A is an increasingly dif cult regulatory journey. Simply being a public company today is onerous, putting unnecessary strain on small- and midcap companies, in particular. For example, companies must contend with the high cost of compliance, extensive required governance including multiple independent board members, exorbitant directors and of cers liability insurance (or D&O insurance) and costly quarterly reporting and lings. A 2022 Cato Institute research brief found that regulatory costs represent more than 4% of a rm’s equity value on average and can exceed 10% of earnings for small-cap companies.

Sarbanes-Oxley, Regulation Fair Disclosure (FD) and labyrinthine rules around IPOs and being public also diminish the attractiveness of this path to liquidity.

Add to that the challenge of employee compensation schemes that have a short-term orientation and are devised by costly consultants, all of which impair public companies from focusing their executives and employees on long-term value creation. The result? The number of publicly listed companies traded on U.S. stock exchanges has dropped dramatically — more than 50% — since its peak in 1996 with 8,000; in 2023 there were only 3,700, according to the Center for Research in Security Prices. When taken in the context of the sharp rise in business creation during the last two decades of low interest rates, it is clear this market is not working as it should be, leaving retail investors and smaller institutions that don’t partake in the private markets out in the cold.

Today there stands $1.6 trillion of unrealized value from 2015 to 2019 vintage year startup investment, and this large and growing pool of companies are seeking a private capital partner to support them in the next phase of their growth journeys given the unattractiveness of the public alternative. With only 3% of venture-backed companies pro table at the end of 2023, many companies will need to raise capital in the next 12 months or will go out of business.

Despite a persistent bad rap fueled by an antiquated pop cultural portrayal of robber barons and liquidators, private markets have been critical to helping companies shoulder

Does this mean the end of the public company? No. Private equity depends on the public markets and vice versa — but we’re facing a historic imbalance that stands to negatively impact the American economy.

more risk and drive innovation — and provide much needed capital in a challenging environment. Despite declines across the board in deal volume, private equity in North America still showed up in 2023 and invested $693.5 billion. Globally, $3.9 trillion in dry powder stands ready to transact across all global private capital strategies, according to data from PwC and Preqin.

The same way that Dodd-Frank gave rise to a massive private credit market, the deterioration in the public market option has opened the door for private equity to step in and ll the void. As a result, private equity has also had to mature and evolve its craft, with each stage from venture capital to growth equity to buyout expanding its investment horizons, getting sharper about differentiation and introducing a panoply of value-add services to portfolio companies over the past decade that greatly enhance the outcomes for companies of all sizes and stages.

Today, private governance is winning out because small, agile boards with active investors tied closely with management are fundamentally more effective for higher-growth businesses. Long-term incentives for management and investors are far superior to options and restricted stock units (or RSUs) in a public context, which can be much shorter sighted, favoring near-term wins over sustainable growth that makes our economy stronger and more productive.

Does this mean the end of the public company? No. Private equity depends on the public markets and vice versa — but we’re facing a historic imbalance that stands to negatively impact the American economy.

The American capital markets are a vital competitive advantage for our economy and the envy of the world. We need the entire spectrum prospering to generate liquidity and spur commerce — that means a vibrant public market with lots of IPOs every year. And a growing private market at every stage of private equity, from venture capital to growth equity to buyout, working to realize the full value of the innovations it has driven.

To achieve this will require active collaboration among politicians, regulators, Wall Street bankers and investors. We need to take a hard look in the mirror to acknowledge these challenges and then work together to make measured, growth-positive decisions that encourage innovation and unlock better access to capital to foster a healthy economy that works from Main Street to Wall Street. No crystal balls required.

Beyond compliance — where stewardship and regulation collide

Last month, the U.S. Securities and Exchange Commission issued its highly anticipated climate-related disclosure rules for U.S.-listed companies. With 4,500 unique letters and 18,000 form letters submitted during a yearlong consultation period, the proposed rules were intensely scrutinized. While the outcomes from the consultation are often portrayed in binary terms of whether they “strengthened” or “weakened” the initial requirements, this dichotomy is the wrong frame of analysis. A better approach would be to consider whether the requirements promote the introspection and dialogue that an issue like climate change demands.

performance. Given this, it’s surprising that in 886 pages, the word “science” is only mentioned 21 times, almost all in deliberating whether to require disclosure of targets certi ed by the Science Based Targets initiative (or SBTI). By contrast, “burden” is used 306 times — as in the burden of prospective reporting requirements.

with glee.

By giving companies options regarding what they can choose not to disclose with a vague materiality caveat, the SEC also gives companies various knots to tie themselves in. How does a company determine if something is material without rst assessing it?

It is timely then that the following day, the EU’s Copernicus Climate Change Service announced that February 2024 was the hottest on record, the ninth consecutive month to break the record for its time of year. Thus, the 12 months through February were also the hottest on record, more than 1.5 degrees Celsius above preindustrial levels. While it would take a decade of average temperature anomalies above 1.5°C to technically breach the goal set in the Paris Agreement, severe impacts caused by past carbon pollution are already being felt globally. Scientists also warn that the climate system is approaching tipping points that would result in irreversible and signi cant changes with far-reaching impacts on communities, companies, economies and other species.

The nal SEC rules (which have been temporarily halted while a federal court considers multiple legal challenges on a consolidated basis) aim to ensure investors have consistent, comparable and reliable disclosures and acknowledge that climate change can impact a company's operations and its current and future nancial

In Memoriam

Rightly, in the case of SBTI, the SEC argues companies should have the exibility to choose a framework and should not be required to disclose if they have set an SBTI target speci cally. Unfortunately, the SEC then missed the opportunity to ensure companies explain the scienti c (or any other) basis of targets and only requires disclosure of targets that “materially affected or is reasonably likely to materially affect the registrant’s business, results of operations, or nancial condition.” Given the signi cance of the economic and social transformations required to meet emission reduction goals, one might wonder whether a target that wasn’t worthy of disclosure would meet the need for rapid reductions.

In an effort to balance concerns around the originally prescriptive requirements, the rules have become confusingly circular. Companies must now disclose material risks to their strategy, business model, and outlook but not their supply chain or products. However, if the risks from suppliers or products could materially affect the business, they should disclose those risks. Yet, companies don’t need to disclose the emissions arising from them (scope 3) or what they plan to do about them. However, if they decide to do something about those risks and it materially affects the business, they should disclose their plans. While we might pity company executives navigating these directives, their lawyers and consultants will rub their hands

If a company nds climate change risks are not material, surely the reasons are of legitimate interest to their shareholders, given materiality relates to what shareholders need to make investment and voting decisions. While disclosures produced by following the rules may be “consistent, comparable, and reliable,” the deeper question is whether they are decision-useful for investors.

Bottom-up analysis necessitates understanding a company’s business model and the quality of its management team, franchise and nancials. Sustainability goes beyond operational environmental, social and governance factors. It sits at the heart of a company’s culture and the impact its products and services have on people and the planet across its entire value chain. What a company tells its investors (or not) is one indicator of quality and a legitimate area for shareholder engagement.

When climate-related disclosure requirements are distinct from climate science, they create a disconnect between a company’s compliance obligations and its place in the world. This is because supply chains, customers, employees and communities are essential in the decarbonization effort, and will also experience the negative effects of a changing climate. As stewards of clients’ capital, the role of investment managers is to understand and engage with company leaders on these issues. When disclosure obligations con ict with stewardship efforts, the risk is that companies may put up walls to prevent potential legal action, relying on the letter of the law as a shield from scrutiny.

Today, more than half the capital in U.S. stock markets is held in passive funds, and time horizons have collapsed, as evidenced by shorter average holding periods.

Ryan Selwood, Bregal Investments CIO, dies at 51

Ryan Selwood, chief investment of cer of Bregal Investments, has died at 51, according to a statement from the rm.“At the time of his passing, Ryan was in Portugal with Alain Carrier, CEO of Bregal Investments, and Delaney Brown, head of capital solutions for Bregal Investments,” according to an April 5 statement from the Bregal Investments management team. “Both are grieving the loss of their longtime friend

Ryan Selwood

and colleague.Bregal added in the statement that “Ryan was not only a respected leader at Bregal, but a prominent and longstanding member of the nancial services industry.” A spokesperson for Bregal con rmed that Selwood left behind a wife and two children.Further details of his passing or his potential successor were not available.

Since joining Bregal in March 2023, the statement added, “Ryan left an indelible mark on our organization

By giving companies options regarding what they can choose not to disclose with a vague materiality caveat, the SEC also gives companies various knots to tie themselves in .

Long-term, bottom-up, active investors who take the time to understand the nuances of companies and their business models are best placed to assess if a company can navigate and thrive in a net-zero carbon economy and whether it is resilient to increasingly severe climate impacts. A principles-based approach, which the SEC rejected, could have been designed to encourage companies to consider various issues and articulate what it means for their businesses, fostering more engagement with their stakeholders. While a prescriptive approach doesn’t preclude this, it can lead to a box-ticking mindset by companies.

It is unrealistic to believe that

disclosure requirements, no matter how prescriptive, will trigger the type of action required by companies that have so far neglected to act. After all, the SEC’s rst guidance on climate disclosure was issued in 2010 with limited effect. In the U.S., a range of investors have sought to engage with companies on these issues and, when unsuccessful, have turned to tools like shareholder resolutions to drive change. Yet, with some notable exceptions, most of the market has not supported these efforts. More recently, support has also declined among some large passive investors.

The SEC rules may fall short of promoting the introspection and dialogue needed by companies, but rather than criticize the rules on technical grounds, we must step back and recognize that disclosure is not a panacea for managing rapidly accelerating climate risks. Moreover, the failure is not a lack of disclosure regulation, but a lack of investor stewardship. The best lever asset managers have for supporting the transition to a net-zero carbon economy while protecting and growing client assets is to invest in and engage with high-quality companies that are driving climate solutions. n

and the individuals he worked with.”As reported, Selwood was Bregal's rst CIO, which was a newly created position when he joined the rm.

According to his biography on the Bregal website, prior to joining the rm, Selwood was a partner and chief development of cer at Carlyle. Prior to Carlyle, he spent more than 15 years at CPP Investments.The international private equity rm has more than €18 billion ($19.4 billion) of assets under management, according to the rm’s website.  n

Pablo Berrutti is a senior investment specialist at Stewart Investors. He is based in Sydney.

EXCHANGE-TRADED FUNDS

Investors taking new look at single-country exposures

By ARI I. WEINBERG

What’s old is new again. Single-country funds, among the earliest niche products introduced to the exchange-traded fund market, have reemerged as tactical tools to overweight or underweight speci c economies across the world.

Since the end of 2022, U.S.-listed ETFs investing in Japan and India have added $10 billion and $7 billion of net in ows, respectively, while other single-country funds have experienced net out ows of $4 billion, including $2 billion from China ETFs alone, according to State Street Global Advisors.

“The distinct allocations to Japan and India equity exposures are supported by economic, fundamental and price momentum,” said Matthew Bartolini, head of SPDR Americas research at SSGA. “The last few years, non-U.S. equity exposures have been a hindrance on returns, but we nd investors are reviewing those allocations as they become more skeptical of concentration risk in the U.S.,” Bartolini said.

In recent months, market returns

in both Japan and India have validated ETF ows. For the year ended March 31, the MSCI India index was up 36.8% and MSCI Japan up 25.2%, while economic news in both countries continues to support the momentum story.

Gross domestic product growth in India closed the year at 8.4%, compared with 7.6% in the prior quarter. In Japan, the Bank of Japan’s end to negative interest rates in March was seen as a critical step in its ongoing push for monetary normalization.

Since the end of 2022, the $17.1 billion iShares MSCI Japan ETF has added $3.9 billion of net in ows and the $1.9 billion Franklin FTSE Japan ETF added $694 million of net inows, according to FactSet Research Systems.

Renewed interest in Japanese ETFs has also sparked ows back into currency-hedged offerings. For example, the $4.6 billion WisdomTree Japan Hedged Equity ETF added $1 billion in net ows in the rst quarter, compared with $511 million for all of 2023, according to FactSet, and the $49 million Franklin FTSE Japan Hedged ETF added

$14 million in the quarter, compared with just over $400,000 for the prior year. These ows have been rewarded with performance that more than doubled unhedged Japan indexes since the beginning of the year, but the history lesson of hedged currency ETF volatility nearly a decade ago still looms large for ETF investors.

“Our unhedged Japan fund appeals to most international investors who have stronger long-term views on the country's fundamentals, more so than layering a tactical view on the yen and currency impacts,” said Dina Ting, senior vice president and head of global index portfolio management at Franklin Templeton.

On India, Ting said that clients are exploring exposures that “reach further into the midcap range,” through the $913 million Franklin FTSE India ETF. The fund counts among its largest holders Israeli insurance companies Menora Mivtachim Holdings and Migdal Insurance and Financial Holdings, according to SEC lings.

More notably, the Tennessee Department of Treasury is the largest holder of both the $9.6 billion iShares MSCI India ETF and the $873 million iShares India 50 ETFs within a portfolio that includes 21 separate country or regional funds.

China outflows

Counter to assets owing to Japan and India single-country ETFs, interest in exposure to Chinese equities through both single-country funds and emerging markets funds has been waning. Since the end of 2022, the $4.9 billion iShares MSCI China ETF saw $1.6 billion of net out ows. Over the same time period, the $13 billion iShares MSCI Emerging Markets ex-China ETF added $8.5 billion of net in ows.

But just like picking stocks, picking country exposures is challenging.

“There's little evidence that investors can time their buys and sells well enough to make (single-country ETFs) work for them,” said Elisabeth Kashner, vice president and director of global fund analytics at FactSet.

“In most cases, the ETF fees and spreads complicate the job further, as most country funds cost 0.50% or more per year, with the exception of Franklin's 0.09% expense-ratio country suite,” said Kashner, “and spreads can be unexpectedly wide.”

Still, quants and stock pickers aren’t letting market dynamics impact their ETF product strategy.

Non-U.S. equity exposures are coming to the fast-rising actively managed ETF market. Recent launches include ETFs from Rayliant Global Advisors, Pacer Advisors, Hartford Funds Management Co. and Avantis from American Century Investments.

“The market wants disaggregated exposures to developed market companies,” said Andrew Skatoff, founder and chief investment of cer of Bancreek Capital Advisors. The rm launched a large-cap international equity ETF in March to follow its December 2023 launch of a U.S. large-cap product. n

LONG-TERM VIEWS: Franklin Templeton’s

Dina Ting said investors who are optimistic about Japan’s fundamentals are interested in the rm’s unhedged ETF.

BY THE NUMBERS

Pension risk transfer activity

Total completed transactions (billions)

THE ENERGY TRANSITION

Transition projects gaining speed and winning investors

IEA records more than $1.7 trillion in clean energy investments in 2023, outpacing spend on fossil fuels

B y HAZEL BRADFORD

Energy transition investing may go by different names or strategies, but one thing is clear: The money is there, and the investing is poised for impressive growth.

Of the roughly $2.8 trillion invested in all types of energy in 2023, more than $1.7 trillion went to clean energy, according to the International Energy Agency. “For every $1 spent on fossil fuels, $1.7 is now spent on clean energy. Five years ago, the ratio was 1:1,” said the IEA, which counts renewable power, nuclear, grids, storage, low-emission fuels, ef ciency improvements and end-use renewables and electri cation in that group.

For investors, the energy transition includes energy markets and their supply chains, climate-related decarbonization strategies in other sectors like transportation and manufacturing, and opportunities addressing infrastructure needs and technological innovation. Investors also see a role for arti cial intelligence to help identify demand and supply, process improvements and more, industry sources said.

“We see a lot of opportunity with the energy transition,” said Chris Ireland, senior managing director, green eld investments and renewables, for Ontario Teachers’ Pension Plan, Toronto, with C$247.5 billion ($186.7 billion) as of Dec. 31.

“Most countries are either transforming their own energy systems or looking at building new businesses to help elsewhere. A huge amount of capital is needed for all of this,” he said.

Most investors are focusing on the energy transition in some way. Nuveen’s annual EQuilibrium Global Institutional Investor Survey released March 21 found that of the more than 800 global institutional investors overseeing $18 trillion in assets, a scant 7% did not plan to address it and a few contrarians were sticking with fossil fuels. Survey respondents included decision-makers at corporate as well as public pension funds, insurance companies, and endowments and foundations, as well as sovereign wealth funds and central banks.

On the ip side, 55% think they can “signicantly in uence” the energy transition’s rate of progress. More than half, 57%, already have or are seeking exposure to alternative energy, including renewables, nuclear and hydrogen power, and 51% want to allocate to new infrastructure projects, including new energy storage projects, grids and battery storage.

The rate of progress was mixed, with 9% considered rst movers, 23% just getting started and 19% meeting regulatory requirements, the Nuveen survey found.

There were also big regional differences, with corporate pension funds in the Asia-Paci c region showing more interest in nature-based solutions while pension funds in Germany favored carbon credit markets, and North American public pensions leaned to-

ward legacy infrastructure upgrades, Nuveen found.

Powering up

The IEA projects a lot happening in the next ve years. By 2028, nearly 3,700 gigawatts of new renewable capacity will come online, and renewable energy sources will account for more than 42% of global electricity generation. For context, one gigawatt is the equivalent of 1 billion watts. In 2023, new global annual renewable capacity reached nearly 510 gigawatts.

Solar photovoltaic and wind will make up 95% of that growth, thanks to supportive policy environments and their “improving economic attractiveness,” the IEA said, with new solar PV and onshore wind additions more than doubling in the United States, the European Union, India and Brazil by 2028. Meanwhile, wind and solar PV will generate more electricity than hydropower, coal and nuclear before then, it projected.

Other technologies including batteries, heat pumps and nuclear power have helped, but “solar is the star performer,” the IEA said, with more than $1 billion per day expected to have been invested in 2023, overtaking spending in upstream oil for the rst time.

Ontario Teachers’ will keep investing in wind and solar, but also continue to explore a wide range of technologies, including energy storage solutions, hydrogen technology, advanced nuclear energy and renewable fuels, Ireland said.

For the $259.9 billion New York State Common Retirement Fund, Albany, roughly 70% of

its sustainable investments program has a climate orientation — including renewable energy generation, transmission, distribution and storage — across seven asset classes: public and private equity, public and private debt, real estate, real assets and opportunistic. An initial goal of $20 billion recently was doubled to $40 billion invested by 2035.

For the $494.6 billion California Public Employees’ Retirement System, Sacramento, a plan to be net zero by 2030 calls for nearly doubling climate-solutions investments to $100 billion by 2030, with new investments across asset classes in climate control strategies and transitioning away from fossil fuels.

CalPERS of cials caution that they could even underweight or exit an investment at some point if a company’s failure to present a credible net zero plan or invest in the energy transition poses a nancial risk.

And it’s not just the biggest asset owners jumping in. In December, the $2.7 billion Stanislaus County Employees’ Retirement Association, Modesto, Calif., committed $20 million to a renewable and sustainable energy non-

core infrastructure fund managed by Carlyle Group.

“The demand for that capital is growing and higher than I have ever seen. We seem to be at a tipping point,” said Steven Porto, a partner with Ares Management Corp.’s infrastructure opportunities. “I think the story right now on climate infrastructure and energy transition is a story about capital and the cost of that capital,” said Porto, whose background includes clean energy development.

Understanding risk

Ares, with $16 billion in infrastructure assets under management, takes development and scaleup risk but avoids the technology risk associated with rst movers, Porto said. That approach has been steadily growing in related infrastructure, particularly in Europe where regulations and taxonomies are clear.

Offsetting the risks are in ation protection, yields and relatively stable returns, Porto said. “I think the story is going to be institutional investors allocating a higher percentage of their portfolios to climate infrastructure because of the value it provides.”

It is important to understand risk, said Coen Weddepohl, managing director at Schroders Greencoat’s North American renewable energy infrastructure group. Energy or climate transition strategies can be “a shiny new object in an institutional investor’s portfolio,” so investors should look beyond returns to understand where it ts in a portfolio and the risk factors associated with new technology and providers, he said.

The investment risk of climate change is also driving renewable investments at the Oregon Investment Council, Tigard, which oversees the $97.7 billion Oregon Public Employees Retirement System.

Aiming for a 60% emissions intensity reduction by 2035 for the entire portfolio, Oregon has more than doubled the amounts invested in renewable energy, including a tripling of those in real assets and private equity, and it dedicates at least 10% of active and 30% of passive public equities to companies geared to a clean energy transition, according to a report from Oregon Treasurer Tobias Reed.

Oregon will also “use our leverage as limited partners” to push for credible net-zero transition plans from private market investments that get more than 20% revenue from fossil-fuel activities. By 2035, it will expect real asset and private equity managers to have credible plans and will incorporate that into manager and fund selection processes, Reed said in the report.

Diversification benefits

Energy transition investments can also help to diversify portfolios impacted by geopolitical tensions, higher interest rates and market volatility, sources said.

In infrastructure, “the diversi cation bene ts of this asset class are signi cant. The wind blows, the sun shines. It is less prone to commodity price cycles and recession. The demand for power is everlasting,” said Schroders Greencoat’s Weddepohl. “The opportunity window right now is the strongest we have seen in a decade.”

Collaboration between asset owners is likely, too. In January, the $331.4 billion California State Teachers’ Retirement System, West Sacramento, was part of a $15 billion investment in Generate Capital’s sustainable infrastructure platform along with Australian superannuation funds HESTA and AustralianSuper, government-owned Queensland Investment Corp. and others.

Sovereign wealth funds from Norway to Sau-

di Arabia are getting increasingly active in the energy transition as well, according to a survey released March 14 by the International Forum of Sovereign Wealth Funds and the One Planet Sovereign Wealth Fund Network.

The two groups heard from 40% of the world’s 95 sovereign wealth funds, which represented 90% of the roughly $7 trillion in total assets under management, and found that in 2023, 29% had a speci c mandate to address climate change, more than double the previous year. The majority saw it as consistent with their investment mandate and 68% expected it to improve long-term returns.

While private equity is still the preferred asset class for addressing climate change, sovereign wealth funds are expanding beyond unlisted assets like private equity and real estate to listed markets, including xed income and hedge funds, the survey found.

“We have seen the institutional investment community come from zero maybe 10 years ago to where we are now,” said Ed Levin who along with Thomas Emmons is managing director and co-head of direct infrastructure investments at Voya Investment Management, with $322 billion under management.

“We harbor optimism about this sector because it has grown over the last 20 years through various market cycles, administrations, lots and lots of regulations, and more,” Levin said.

“Investors just have to look at it, it’s so important,” Emmons added.

One “really important change” was the Ination Reduction Act in the U.S., said Sean Klimczak, global head of Blackstone’s infrastructure group. The “IRA gave us 10 years of policy certainty. That allows us to take a longer-term view on large scale, transformative energy transition projects.”

Blackstone, with more than $1 trillion under management, addresses the energy transition through infrastructure investments that include utilities, wind and solar projects and contracted pipelines; credit funds that nance renewable projects; and its private equity energy transition business.

Creating new positions

The energy transition is a growth industry for asset managers as well, with newly created positions continually popping up.

While Norges Bank Investment Management has invested in unlisted renewable energy infrastructure since 2020 on behalf of the 15.27 trillion Norwegian kroner ($1.48 trillion) Government Pension Fund Global, Oslo, it recently created the position of global head of unlisted renewable energy infrastructure.

A new role at Carlyle Group is chief strategy of cer focusing on energy pathways, and TPG added the new position of partner and head of infrastructure for TPG Rise Climate, the rm’s dedicated climate investing platform.

Ireland with Ontario Teachers’ advises institutional investors considering serious involvement in the infrastructure and renewable energy sector to have an investment team experienced in the sector.

Ontario Teachers started in the renewable sector 10 years ago because it recognized the potential for long-term value creation and mission alignment, Ireland said. “As a responsible investor, we are committed to deploying capital towards initiatives that not only generatenancial returns but also contribute to positive environmental and social outcomes on a global scale.”

With just 29% of energy supply coming from renewables today, “There are a ton of tailwinds at the back of this industry. Decarbonization is a megatrend that’s not stopping,” said Blackstone’s Klimczak.

“Energy transition is not a light switch, it’s a dimmer switch. It’s something that’s going to happen over time.”

Election

Democrats in 2022 passed the In ation Reduction Act, or IRA, which included tens of billions of dollars for loans and grants related to emissions reductions and climate resiliency, and a host of new and expanded tax credits for renewable energy projects, such as wind and solar farms, electric vehicles and carbon capture initiatives.

Political divide over approach

On the campaign trail in recent months, Trump has criticized the IRA and said he would roll it back if given the opportunity. Speci cally, Trump questioned the effectiveness of electric vehicles and last year released a plan that he will “work to stop the ow of American tax dollars that are subsidizing Chinese electric vehicle battery companies through Joe Biden’s so-called In ation Reduction Act.”

Though Republicans would need to control the White House, Senate and House simultaneously to try and repeal the IRA, a second Trump administration could use executive action and regulatory guidance to curtail the law.

On the other side, a Biden win in November would further ingrain the IRA and the federal government’s commitment to renewable energies.

Of note, in March the Biden administration issued a rule concerning tailpipe emissions to effectively ensure that a majority of passenger vehicles sold in the U.S. by 2032 are EVs.

Treasa Ní Chonghaile, senior portfolio manager within KBI Global Investors’ environmental strategies team, said the Biden administration’s vehicle emissions policy will lead to more investment in the space, which is good for the active equity manager and its investors.

“Any emissions standards that increase the needs and ef ciency standards required is absolutely bene cial to our companies because typically these require more technologies and more spend and they’re exactly the companies that we invest in,” she said.

But when it comes to a potential rollback of such policy, Ní Chonghaile said it’s part of overall risk KBI monitors for its $9.1 billion sustainable and natural resource portfolio.

Orhan Sarayli, head of North America for Barings’ global infrastructure group, which manages an $11.6 billion infrastructure debt portfolio, said his team is avoiding deals that could have negative consequences if there’s a change in administration.

“The clean energy industry has been dealing with uncertainty around tax credit renewals for a long time, but there has been such a drastic change in how the tax credits are dealt with the IRA, that it is a potential concern about how that could change in a different administration,” he said.

“But right now, that’s where being a debt lender might be a little more comforting because we’re going to go where we think the cash is coming regardless of political regimes,” Sarayli added. “We’re going to stick to traditional infra bellwethers — contracts, sticky customers, an essential service — so we’re venturing very carefully in the clean energy space where those boxes are checked.”

Confident about the future

Regardless of what happens in November, managers and consultants who focus on renewables and infrastructure broadly said they are bullish on its future.

While a Trump win would be a shift for energy sector, “infrastructure as a whole has had a lot of bipartisan support, so I would be surprised if there weren’t good opportunities in infra going forward, and it’s hard to deny that no matter who’s in power,” said Larissa Davy, senior investment director of real assets at NEPC.

Her colleague Matt Ritter, partner and head of real assets investments at NEPC, said the potential political and regulatory risk is something the rm is taking into account in its underwriting.

“The strategies that we’re recommending and looking at we believe are viable even if there were to be political or regulatory change,” Ritter said. “That’s not to say necessarily that every asset out there is in the same position, but we’re very focused on strategies that are not reliant on those subsidies or those sorts of programs to be viable.”

Even if the IRA tax credits were rolled back under a second Trump administration or Republican Congress, there are still viable investments in the renewable space, ac-

cording to Davy.

“A fund investing today in renewable power is not going to suddenly not be profitable if Trump was to win this year going forward,” she said. “Over the long term that could change, but certainly that would have to be a consistent repeal of some of these types of policy agreements, like the IRA, over a 10-year term.”

Since the IRA’s enactment, portfolio managers have been incorporating IRA tax credits as add-on bene ts, not as the driving force behind a given investment, said JingLin Huang, a director in Segal Marco Advisors’ alpha investment research group.

“They wouldn’t rely on the tax credits to get to their base case target return, but it’s excess returns on what they would typically underwrite as their target,” she said.

Areas with increased interest due to the IRA’s tax credits include nuclear generation, energy storage, wind and solar plants, EVs and digital infrastructure, sources said.

These days, the challenge is to sift through all the opportunities in the renewables space and pick the winners.

“Just yesterday, we had a call where we went over four different opportunities in the renewable developer side, so we’re very busy,” Sarayli said. “It’s an exciting time, but the amount of deal ow and the amount of information we need to process to decide how to deliver that best portfolio to our investors is as challenging as we’ve seen in a long time.”

BIG OPPORTUNITY: According to KBI Global Investors’ Treasa Ní Chonghaile, the Biden administration’s vehicle emissions policy will lead to greater investment.

Michael Glenwood

Steve Langan

Climate investor preferences vary

What’s in a name? Opinions differ on how to de ne energy transition

Like ESG, energy transition investing can mean different things to different investors, and for now, the eld is wide open.

It is a topic that “a couple of years ago no one was talking about,” said Hortense Bioy, London-based global director of sustainability research for Morningstar.

The overall idea is the need to transition from an economy powered by fossil fuels. “It is really a transition from energy to clean energy. You can think about the whole value chain, from producing energy to distributing it, and anything that uses energy,” said Bioy.

According to the International Renewable Energy Agency, 75% of global investment in renewables from 2013 to 2020 came from the private sector, typically in technologies and countries where the risks are considered manageable.

A lot of that investment comes from private markets like private equity, infrastructure and credit, where some managers call it energy transition and others put it under a climate umbrella.

“The recent surge in private funds with climate-related names and their investment in renewable solutions both demonstrate the role that private nancing could play in the energy transition space,” said Abdulla Zaid, vice president at MSCI Research.

It is a diverse universe of strategies available, he said, ranging in scope and focus from portfolio decarbonization to offering exposure to climate solutions and clean energy. “One of the main takeaways from our research was that private funds with climate-related names had considerable exposure to the subindustries best positioned to bene t from the energy transition. For example, renewable electricity accounts for about 41% of net asset value of this group of private funds,” Zaid said.

BloombergNEF, Bloomberg's research service covering commodity markets and disruptive technologies in the energy transition,

ALL IN: Morningstar’s Hortense Bioy said energy transition investing encompasses ‘the whole value chain, from producing energy to distributing it.’

calculates that 93% of the $532 billion in new investment in the renewable energy sector globally in 2022 came from private debt and investment, while public markets accounted for just 3.3%.

Still, a look at listed markets offers an idea of how investors approach energy transition investing in general. In a September 2023 report on climate transition funds, Morningstar noted that “the menu of options for climate-focused investors across the globe has ballooned in the past ve years.” By mid-June, there were more than 1,400 open-end and exchange-traded funds with a climate-related mandate, compared to less than 200 in 2018.

Morningstar subdivides that universe into ve mutually exclusive groups based on investment objective and policy, diversi cation and sector exposure: low carbon, climate transition, climate solutions, green bond, and clean energy/tech.

There were signi cant differences by regions.

European investors tend to favor decarbonization strategies and funds focused on both risk and opportunities over those that exclusively offer access to opportunities. Those climate transition funds account for 45% of European climate fund assets vs. 19% for

climate solutions and 9% for clean energy/tech funds.

It is almost the reverse in the U.S., where investor preference for clean energy/tech funds accounted for 47% of total U.S. climate fund assets as of June 2023. That is down from a record 78% of market share at the end of 2020 due to falling valuations and some out ows.

By the end of 2023, that U.S. preference for clean energy/tech funds represented $10 billion in assets, compared to Europe’s $38 billion. In this category, “it’s about betting on companies that will bene t from higher demand for clean energy products as opposed to companies that operationally are more ef cient or reduced their carbon footprint,” said Bioy.

Globally, clean energy/tech mutual funds and ETFs added up to $64 billion by the end of 2023, down from $74 billion the previous year, Morningstar found. In public markets, “the renewable energy sector has been challenged by the macroeconomic situation following Ukraine. They tend to be growth-oriented companies so it’s harder for them to raise money,” said Bioy.

Still, she said, “the best funds invest in companies that are preparing for the transition, or they have transition plans.”

HAZEL BRADFORD

Money Management

David Barrett Partners, BraddockMatthews form combined search rm

Chris Renton Asset-management executive search boutiques BraddockMatthews and David Barrett Partners have merged to form a rm with strengths across a broad spectrum of industry segments.

The combination of BraddockMatthews, led by Derek Braddock and Bill Matthews, and David Barrett’s eponymous rm creates a buyside search partnership with roughly 30 employees, including nine partners, consultants, research and administrative professionals, at ofces in New York, Boston and London.

In an interview, the three search veterans said BraddockMatthewsBarrett will meld BraddockMatthews’ strengths in fast-growing market segments such as private equity and private credit with David Barrett Partners’ strengths in asset owner segments such as endowments, foundations and family of ces.

“Both rms have been thinking about how do we grow our businesses,” with BraddockMatthews active in areas David Barrett Partners had been looking to expand into and David Barrett Partners established in markets where BraddockMatthews was looking to grow, Barrett said.

That complementary nature should make the merger a “one plus one equals four kind of thing,” Braddock said.

By way of example, Barrett noted, in CIO searches for college endowments, David Barrett Partners — lacking BraddockMatthew’s deep private markets expertise — had had limited room to follow up with “the head of XYZ private equity rm” serving as the endowment’s investment committee chair “to then talk to them about their own business” and potentially serve them going forward.That’s “the extra that the combination allows us to give,” he said.

The ability to marry the GP side, the GP know-how and the LP knowhow, is just a better way to source talent and triangulate ideas among investors and asset management rms, Braddock agreed.

Braddock and Matthews, meanwhile, cited the London of ce David Barrett Partners has maintained since 2009 as a considerable attraction.

Matthews said BraddockMatthews has done work for European

alternatives managers looking to expand in the U.S. and furthering those relations by having a presence in London will help facilitate that business.

Barrett likewise highlighted the synergies from his rm’s combination with BraddockMatthews, noting that David Barrett Partners’ London team has focused so far on public managers and asset owners. “We have not done anything in private equity or private credit over there … so (the BraddockMatthews team’s) expertise and credibility in that context” will provide further bene ts, he said.

Braddock, Matthews and Barrett all declined to provide details on searches they have done.

But publicly available information showed David Barrett Partners placing chief investment of cer candidates since the start of 2023 with the $8.6 billion Getty Trust, Princeton University’s $34.1 billion endowment, Virginia Tech’s $2.8 billion endowment, the $3.7 billion Mott Foundation, Brandeis University’s $1.2 billion endowment and the $4.2 billion Carnegie Corp.  Braddock, in an email, said while his rm had promised clients not to use them as a marketing tool, today his team is working with four of the largest private equity and private credit rms in the world, a number of leading middle market PE rms and one of the ve largest global hedge funds, as well as two of the world’s largest traditional money managers.

Barrett, Braddock and Matthews called their decision to combine a “merger of strength” more than necessity. “Both rms are coming off of record three year periods in terms of activity levels” and revenues, said Barrett.

And they said their familiarity with one another in the tight-knit search community — Barrett noted that he and Braddock had even worked together 20 years before at Barrett’s previous rm, Higdon Barrett, before he departed in 2005 to found David Barrett Partners — gave them con dence that the combination would be a good cultural t. BraddockMatthews brought 15 people to the merger while David Barrett Partners brought 16, with 26 of the combined staff to be divided between Boston and New York and ve to work out of the London ofce.

DOUGLAS APPELL By

SEARCH PARTY: From left, BraddockMatthews’ Derek Braddock and Bill Matthews, and David Barrett.

Three years post-merger, Polus is thriving while looking ahead

SOPHIE BAKER

By SMOOTH SAILING:

Money manager M&A is often fraught with problems, with talk of synergy as a code word for cost-cutting, high turnover of staff and problems pulling together the technology and infrastructure of platforms.

But Polus Capital Management, born out of $6 billion leveraged nance and structured credit manager Cairn Capital’s acquisition of special situations and stressed/distressed credit manager Bybrook Capital in 2021 — feels different.

Cairn was majority-owned by Italy’s Mediobanca (which still holds a stake in the combined rm), while Bybrook was formed in 2013 by Robert Dafforn — now CIO at Polus — with the backing of alternatives giant Blackstone. Bybrook had about $2.5 billion in AUM when the merger was announced.

The team identi ed three things they wanted to accomplish: synergies associated with having performing credit and stressed/distressed credit investment specialists sitting alongside each other; to compete by achieving scale; and to appeal to institutional investors by becoming more relevant to them and their needs.

“It’s all played itself out exactly as we would have hoped,” said Nicholas Chalmers, CEO at Polus, in an exclusive interview. The rm has shown good performance — although Chalmers declined to comment on numbers.

It runs about $10 billion across three core business lines, with its largest a $5.5 billion leveraged loans unit, the bulk of which is in collateralized loans obligations, and the rm’s CLO platform “continues to be one of the most regular issuers in Europe, even in a dif cult year for the new issue market” thanks to strong support from equity partners, Chalmers said. Polus also has an about $4 billion special situations business, comprised of absolute return ($3 billion) and long-only, and about $700 million in structured credit.

Now that the integration has happened — with minimal turnover of staff, Chalmers said — business is as usual, but with a few ambitions to realize.

First, the team wants to expand the CLO business globally, expanding the successful European business into the U.S. market. An investor letter seen by Pensions & Investments said the rm’s platform priced two new European CLOs in 2023 totaling €800 million ($863 million), in a year that others managers “struggled to come to market.” The European CLO captive equity strategy has delivered a 17.6% distribution yield since inception in 2014.

The unlevered European senior loan strategy made a net total return of 12.5% in 2023.

More deals ahead

Chalmers said in the interview that the European business expects to issue another two to three deals this year.

And building out the U.S. business is a “long-held ambition for us.” Polus hired David Kim to lead that business. He said the rm has the capital in place to support the launch of that business.

“In Europe, we have to recognize that the market is capacity-constrained. Even the most proli c issuers are rarely doing more than a handful of deals a year due to the depth and breadth of the market. Those same issuers are doing multiples of that in the U.S. — they have a much deeper market in the U.S. And also (it’s investor-driven) — institutional investors are generally more global than that, and very

CEO Nicholas Chalmers said the merger that formed Polus Capital Management has played out as hoped.

few will look at CLO equity vehicles in a regional context,” Chalmers added.

On the special situations side, Chalmers and Dafforn are “mindful … (of) not growing for the sake of growing. To retain the best talent, you have to grow and give people opportunities for career progression,” Chalmers said.

“We’re mindful that capacity is naturally constrained in that strategy — at some point in the near-to-medium term, we will probably be looking to close fundraising for that strategy. It’s not a de ned number, but judgment-based relative to” the size of the opportunity set and capital under management, Chalmers said.

That awareness of capacity constraints comes as “we continue to see a lot of opportunity on the long side within that business, gravitating towards more private credit-type structures,” which will be the focus over the next year or so, Chalmers added.

And for structured credit — the $700 million unit where Polus’ risk transfer/capital relief strategy has delivered a 14.9% net total return for 2023, according to the investor letter — the team has not been actively raising dedicated capital for some time.

“But over the coming quarters, we anticipate coming back to the market given client demand” and building on the team and track record Polus has in place, Chalmers said, although he reiterated that there are “no de ned plans except a medium-to-long-term ambition to grow this business.”

‘A team sport’

Dafforn, who founded Bybrook more than a decade ago, has always been focused on the importance of culture in a manager of its type. “Investing is a team sport and requires a lot of different perspectives and skill sets,” he said in the same interview.

There has been another happy surprise “if it could be called one: A lot of the things on the synergy side, especially in mergers, live in the theoretical realm and don’t always become practical. On our side, it actually has come to fruition,” he said. “The reason why we did it (the merger) was that stressed and distressed required feed stock — that comes from stressed and distressed loans, and it is a private market and so access to information is limited. As a standalone rm, you have … less access.”

The CLO team, however, has insight into the universe of available loans, and that can be an advantage for the stressed and distressed business where those op-

portunities arise. “We understood in advance that we could have theoretical horsepower for our business: that has become practical horsepower,” Dafforn said.

Polus’ leadership has also seen a “subtle shift” in mindset among investors in private markets and credit — and Dafforn believes it may also explain why the rm has already achieved top ratings from certain investment consultants post-merger.

“We view the world (through) a slightly more all-weather, robustness framework, where we can excel through the cycle. In a way, we are investing in those things where we feel very con dent we can get investors’ money back in a worst-case scenario. The subtle shift you notice from investors is they have more anxiety than historically about the ... deployment part of investing — that’s not us. We don’t get involved in fads,” Dafforn said.

That attitude has seen Polus’ units maintain the infrastructure to invest in stressed and distressed situations over the last decade “where there hasn’t been a lot of distress,” Dafforn added. And now, he’s seeing a “transition from the heady days of QE — which was really capital deployment in (terms of) who can deploy the most quickly; to more QT — who can deploy in the safest manner and be all-weather to the cycle.”

Rebranding work

But it hasn’t all been smooth-sailing — coming up with the name for the merged rm was tough. The team tried different names out, but to no avail. While Greek mythology has been a “well-trodden path” for money managers in terms of names, the rm went through a process with its press agency Greenbrook and settled on Polus — a name that represents “an inquisitive mind, resolve and foresight,” which resonated with Chalmers and Dafforn as the attributes of the rm’s core values, Chalmers said.

Polus is also the inspiration for Rodin’s The Thinker sculpture, Dafforn added, which is the derivation of the rm’s logo.

And the leadership wanted a new identity for the merger. “People form opinions about things quickly, and it takes a long time to change them. Putting the rebrand together … (we) needed to do that under a fresh coat of paint — to engage and get them (investors and consultants) to listen. Otherwise people default to what they think, (and it’s) hard to readjust perceptions unless you go about something that’s new,” Chalmers said. n

Jim Smigiel, chief investment of cer at SEI, describes himself as the curmudgeon in the room who is pouring cold water on the party in the booming private credit sector.

Smigiel admits he’s getting a reputation as being “super negative” on private credit but said that’s not really his outlook. Private credit is an asset class that has served investors well, he said. But Smigiel sees other options that are more attractive from a risk and liquidity perspective.

“Today, it's just not as compelling,” he says from his perch at a total portfolio level that involves asset allocation as well as allocating a client’s fee budget and illiquidity budget.

Smigiel oversees traditional and alternative investments offerings. SEI had approximately $432 billion in assets under management and approximately $943 billion in assets under administration, both as of Dec. 31.

Investors looking at private credit need to think through questions around how long they want to lock up capital, if they want to take on “a signi cant lack of transparency” as well as concentration risk and the issue of dry power, he said.

“Starting from scratch today, which a lot of people are, your 10% allocation is going to take you years to get allocated to,” he said. “I can mimic those exact same returns, low teens, mid-teens, in some cases, high teens, in something like the CLO market that is very, very diversi ed from an individual loan perspective, that is actively managed during the launch and reinvestment period of time.”

Smigiel admits he has a horse in the race. SEI’s structured credit business launched a CLO equity hedge fund in 2007 that is managing approximately $1.7 billion.

The private credit market has seen rapid growth over the past decade and assets under management now stand at nearly $1.7 trillion, according to Preqin data as of June 2023. That’s up from only $435 billion at the end of 2013.

And investors who allocated to private credit some time ago are likely happy, Smigiel said. But as the space continues to grow, he said lending standards can potentially start getting diluted and take a backseat.

“Right now, we are not allocating to private credit,” he said. “We have in the past. So, we're de nitely familiar with the asset class. We have our clients who are invested in private credit. It's just that from the starting point today, that's not something we'll be allocating to.”

With private credit garnering so many headlines, there will be more regulatory scrutiny on the space moving forward, Smigiel predicts.

“It certainly isn't lost on the SEC that there’s some pricing discrepancies between a direct lending of the same exact corporate entity in one vehicle vs. another,” he said. “These things are going to have to catch up in the private space.”

And he expects that scrutiny to happen no matter who is leading the Securities and Exchange Commission following the November election.

Smigiel says it does feel like some “branding” is taking place making private credit feel new and interesting to catch investor attention. He points to conversations with credit managers in the hedge fund space and long-only space who are discussing getting into private credit.

“All of the boxes are being checked that we are late cycle in private credit,” he said.

Smigiel says he is just observing the market and pointing out what he thinks are better alternatives.

“Dare I say, I think you'll be hearing more of the likes of me throughout 2024, I would bet,” he said. n

SEC’s Peirce slams ‘dwindling’ engagement with the public

By

COURTNEY DEGEN

SEC Commissioner Hester Peirce staunchly criticized the agency’s “dwindling” engagement with the public April 2, contending that the commission’s rule-making process, along with other factors, sti es public discussion.

“We go out with very broad proposals; we give unreasonably short comment periods for these broad, far-reaching proposals,” Peirce said at The SEC Speaks conference, hosted by the Practising Law Institute. “And then we pare back the nal rules … pulling out substantial elements, but then replacing them with other elements that really have not been the focus of commentary.”

The SEC has faced a slew of lawsuits seeking to overturn various rules nalized this past year, which sometimes contend that the agency substantially changed the nal rule from its original proposal without considering public feedback.

“The commission should think about each rule proposal as an op-

portunity to foster a public discussion with the goal of developing the best solution to a carefully identi ed problem, not as the opening bid in a hard-driving negotiating strategy (with the public),” said Peirce, who serves as one of two Republicans on the commission.

In addition, the SEC sometimes fails to identify what problem it aims to solve with a proposed rule, “so that makes it really hard to comment and offer more workable alternatives,” Peirce added.

She speci cally referenced the predictive data analytics rule proposal as an example in which industry groups have questioned what issue the SEC is trying to address.

That rule, which has faced both industry and congressional pushback, would require investment advisers and broker-dealers to “eliminate or neutralize” con icts of interest that arise from the use of certain technology in investor interactions.

Aside from the commission’s rule-making, Peirce said that SEC staff also lacks genuine, productive

conversations with the industry it regulates.

“When individuals and entities come to the SEC with their novel ideas, their feedback, their concerns, their objections, their questions about implementation of a new rule or application of an old one to new circumstances, too often they’re met with crickets,” she said, mostly blaming the “culture” at the SEC for discouraging discussion with the public.

“We're scaring people off from coming to talk to us,” Peirce added, citing the SEC’s recent enforcement actions against cryptocurrency rms.

Peirce listed a number of recommendations for the commission to improve, namely paring back its rule-making and focusing on the rules that are most important, which would “(enable the SEC) and the public to devote the appropriate attention to each proposal.”

Speaking at the conference via video conference, SEC Chair Gary Gensler said in separate remarks

Private credit could worsen a recession — IMF of cial Alternatives

By

COURTNEY DEGEN

Private credit is not a risk to nancial stability, but it could potentially worsen a future recession, said Fabio Natalucci, deputy director of the monetary and capital markets department at the International Monetary Fund.

“I think we don’t see a nancial stability risk, but … from a macro- nancial standpoint, we don't know (how) the sector, given the size, would operate under a severe prolonged recession,” Natalucci said at an April 4 event on private credit hosted by the Brookings Institution.

“Do you mean if we have a recession, could this make the recession worse?” asked David Wessel, director of Brookings’ Hutchins Center on Fiscal and Monetary Policy and senior fellow in economic studies.

“Yes, that’s what I mean,” Natalucci responded, adding that private credit could be an “ampli er,” given nancial interconnectedness.

Wessel brought up the “unusual” recession which occurred at the beginning of the COVID-19 pandemic, which Natalucci agreed was unusual, citing the high level of intervention from the Federal Reserve.

“So (private credit) hasn’t really been stress-tested?” Wessel asked Natalucci.

“It hasn’t been stress-tested in a prolonged recession where the authority would not react that massively,” Natalucci said.

Critics grow

Critics of private credit are emerging, including a March study from the National Bureau of Economic Research that found “rates at which private debt funds lend appear to be high enough to offset the funds’ fees and

risks, but not high enough to exceed both their fees and investors' risk-adjusted rates of return.”

The private credit industry has attracted new critics in Washington as well. Earlier this week, Sen. Elizabeth Warren, D-Mass., said, “I have been warning about the dangers of private equity for years,” while participating in a congressional hearing April 3 discussing the negative consequences of private equity-owned healthcare facilities.

And in November, Senate Banking Committee Chair Sherrod Brown, D-Ohio, and Sen. Jack Reed, D-R.I., who serves as a member of the committee, urged federal regulators to monitor the risks that private credit could pose to the nancial system, citing what they said is a lack of regulatory oversight.

Natalucci also identi ed the private credit market’s opacity and lack of data as two risks of the asset class, naming liquidity mismatch and leverage as others. But Natalucci acknowledged there are some bene ts to private credit.

“One (bene t) is the viability of funding, so you expand the set of funding opportunities so (there’s) less concentration of funding from the banking sector, for example, that has been at the center of a number ofnancial crises,” he said, adding there are various bene ts to private credit borrowers as well.

Natalucci noted that the IMF is set to publish its Global Financial Stability Report on April 8. The fund’s Global Financial Stability Report from April 2023 partly echoed Natalucci’s concerns about private credit, as the report said it’s “a relatively new asset class, with performance untested in a prolonged economic downturn.” n

‘The commission should think about each rule proposal as an opportunity to foster a public discussion . . . not as the opening bid in a hard-driving negotiating strategy (with the public).’

that the SEC is constantly updating “the rules of the road” for the industry, naming a number of recent rules as examples.

One rule he referenced, nalized in February 2023, will accelerate the settlement cycle to T+1, settling a trade one business day after it is executed, shortening it from T+2, or

two business days. That change takes effect on May 28 this year, or the Tuesday after Memorial Day.

“We're aligning stocks, municipal bonds, corporate bonds, mortgages to that which we have in mutual funds, derivatives and treasuries,” Gensler said, noting the latter group largely settles in one day. n

Eminence saw changes in the stock market — so the rm shifted, too Hedge Funds

By

ERIN ARVEDLUND

Ricky Sandler, CIO of $6.4 billion Eminence Capital, says the stock market has changed — and his rm is changing with it.

Eminence has a 25-year history of investing in the long/short arena. The rm has three funds, the agship long/short fund launched in 1999, a long-only fund launched in 2012 and an alpha extension vehicle launched last year called a 150/50 strategy.

The new strategy incorporates what Sandler believes are fundamental changes in the structure of the stock market.

“The market is not broken. It is changing,” he told Pensions & Investments. Fifteen years ago, 75% of the stock market was actively managed assets, whereas today that’s dropped to 40%. The other roughly 60% is now controlled by passive index funds, algorithmic and quantitative funds, hedge fund trading “pod shops” and thematic investors, according to Eminence data.

In the short run of between three to nine months, “stock prices are not being driven by bottom-up fundamentals,” he said. Individual stocks are exhibiting much greater price volatility, and that is a poor signal for fundamental investors. The rm’s typical holding period is two to three years, he added.

quired for single-name short portfolios, and they manage short portfolios with smaller position sizes (a 2% limit for one short position, and roughly 115 shorts). The rm has a dedicated short research team and collaborates with the quantitative research team. Eminence Capital's 150/50 strategy, which is 150% long and 50% short, with $700 million in assets under management, was set up to appeal to institutional investors.

“This is a substitute for investors’ long bucket with leverage,” he said. Institutional investors in the new strategy include the Virginia Retirement System, Richmond, and the investors “like the potential alpha and t into the allocator models. Plus, we only get paid if there’s alpha.”

FUNDAMENTAL TRUTH:

Eminence CIO Ricky Sandler said stock prices have become much more volatile.

The dynamics of shorting also changed after 2021, and the rm has evolved its portfolio construction and management. The agship fund was down 11% in January 2021 as a result of retail investors squeezing short positions, but ended up for the year.

“We see how markets have changed and allocators have changed. They used to prefer long/short strategies with a better Sharpe ratio and now that has changed.”

”In the rst half of Eminence’s existence, mispricing (of stocks) were largely coming from bad judgments by bottom-up investors. Whereas today, they are still mispriced for that reason, in addition to mispricings that are driven from trading from quants, pod shops and hedge funds.”

As a result of the new volatility, Sandler and his team changed the way they short now. Scale is re-

In Eminence's alpha extension strategy, the rm charges a 0.5% management fee and no performance fee unless the fund outperforms the market. Above that hurdle rate, Eminence keeps 30% of the outperformance as its fee.

Eminence Partners was up 6.1% through February ( agship hedge fund), and 13.4% in 2023, for an annualized return of 11.4% over 25 years; Eminence Partners' long-only fund was up 5.6% through February and 30.2% in 2023, for an annualized return of 12.6% over 10 years; Eminence's alpha extension strategy was up 7.5% through February, and 21.5% in 2023, according to people familiar with the funds.

Sandler personally has taken board seats on companies such as Entain, in which Eminence holds a 4% to 5% stake.

“Activism is a tool in the toolkit. But we never go in to an investment expecting to be an in uencer,” Sandler said. “We engage constructively to help improve outcomes and get needed change. If constructive engagement doesn’t work, our choice is a more public and traditional form of activism or (to) sell.

“On rare occasions, it’s an attractive enough business and situation where activism is a better choice. Entain is on that spectrum. It is a strong business that has been poorly run for the last 3½ years. I went on the board a few months ago. The search for the new CEO is ongoing. It needed a shakeup.”

SEC COMMISSIONER HESTER PEIRCE

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Defense

CONTINUED FROM PAGE 3

aims to make the European defense industry stronger, more responsive and more innovative.

Also that month, Danish Prime Minister Mette Frederiksen outlined a push to strengthen the country’s defense industry.

A number of Danish pension funds told Pensions & Investments that, while their principles and responsible investment policies remain unaltered, changes in the geopolitical environment have pushed defense investments onto their radars.

“Denmark, Europe and the rest of the world is in a process of rearmament, and it is obvious that further investments in defense (are) needed,” a spokesperson for PFA Pension, Copenhagen, said in an email. “PFA is prepared to follow suit if it can go hand-in-hand with a competitive return for our customers’ pension savings and the UN convention on conventional weapons.”

PFA had 778 billion Danish kroner ($115.2 billion) in assets as of Dec. 31.

PFA has invested in conventional weapons companies, such as traditional weapons and ammunition. The fund has about 4 billion kroner invested in companies for which part of the rm’s revenue is derived from defense-related industries. PFA also holds about 1.5 billion kroner in more direct exposures, such as aerospace and defense. That’s increased from about 500 million kroner last summer, the spokesperson said.

Defense investments were already a focus for the €42.2 billion ($46.7 billion) PensionDanmark, Copenhagen, prior to Feb. 24, 2022, “but Russia’s invasion of Ukraine has undoubtedly emphasized and reinforced the need for this focus,” a spokesperson said.

The pension fund is directly involved in two major defense-related projects. It is part of a consortium — together with Danish weapon and aerospace manufacturer Terma and consulting rm Odense Maritime Technology — that has a contract with the Danish Ministry of Defence Acquisition and Logistics Organisation to design new patrol ships for

Cheap

CONTINUED FROM PAGE 4

a few months in 2000 and 2020, even if they remain more expensive that their European and Japanese counterparts, Inker said.

The strong U.S. dollar, meanwhile, adds to the attractions of overseas stocks now, whether developed or emerging markets. “If you’re buying Japanese stocks, if you’re buying European stocks, you’re…investing in companies that bene t from having an undervalued currency” — a big tailwind, he said.

“We can put together a portfolio outside of the U.S. of really highquality companies trading at 11 or 12 times earnings, with dividends of approximately 4% (and) you don’t need wonderful things to happen to get good returns out of that,” he said.

GMO’s asset allocation team expects the multiasset portfolio they’ve been able to assemble now to out-

The Royal Danish Navy. The second project is alongside construction engineering rm MT Hojgaard Holding and property management company DEAS Group to construct and operate new headquarters for the Danish Defence Intelligence Service.

PensionDanmark also has equity exposure to a “number of companies in the defense industry,” the spokesperson said. Aerospace and defense holdings include a €17 million investment in U.S. company RTX Corp. and a €12 million holding in U.K. rm BAE Systems, according to the fund’s equity list as of Feb. 7.

Good stewards

Scandinavian pension funds have always been held up as shining examples of good stewardship and responsible investment. And geopolitical developments such as the war in Ukraine mean defense is now an increasingly important part of that ESG-focused conversation.

“The security situation in Europe has changed dramatically over recent years,” said Mikkel Svenstrup, CIO at the 712.2 billion kroner ATP, Hilleroed. “The importance of a strong defense has become very clear,” he said, citing the EU’s new defense strategy.

Defense investments have been a part of ATP’s investment universe in various ways for many years, within the framework of international conventions. “They are important for ATP, and we are open to the possibility that such investments may increase in the future, provided they can contribute to a good return for our members,” Svenstrup said.

The fund’s executives “prioritize social responsibility highly, and one could also say that investments in European security represent the highest level of social responsibility. The EU strategy approach is that investments in weapons can be investments in security and therefore something positive — this is a strong signal to send,” he said.

The pension fund does not hold speci c positions on the matter but adheres to international conventions, Svenstrup added.

It also “seems that there has been a wider acceptance among investors and in society in general in terms of investments in the armed forces and Western arms manufacturers,” said Peter Lindegaard, CIO at the 225 billion kroner Industriens Pension,

perform a passive 60-40 global index by an astounding 5 percentage points a year over the coming seven years — a degree of bullishness Inker said they haven’t had in more than 20 years.

“With regard to our portfolio’s potential to beat the passive alternative, this is about as good as it has ever been,” he said.

If that outperformance comes to pass, it would repeat a pattern the rm has experienced before with Japan’s stock market bubble of the late 1980s and the U.S. internet bubble a decade later — suffering underperformance and the loss of some clients for eschewing high- ying stocks with nose-bleed valuations, only to be rewarded when a retreat from irrational exuberance favored their value-focused portfolios.

By way of example, when internet-enamored investors pushed the S&P 500 to record highs in the late 1990s — with a stock such as internet protocol networking company Cisco Systems trading brie y at 100 times earnings — GMO lost roughly

Copenhagen.

Western defense companies have always been part of the fund’s investment universe, and executives “ nd it natural to have Western defense companies that comply with all international conventions acceded to by Denmark as parts of our investment universe,” he said. Executives will continue to be open to investments in companies that “contribute to Denmark’s and our partners’ defense policy, but only on the condition that they comply with our policy for responsible investments and that they are not involved in weapons that violate conventions acceded to by Denmark.”

The fund will look at potential public-private partnerships with the armed forces “with an open mind if speci c projects arise — for example on construction, maintenance and operation of the armed forces’ buildings,” Lindegaard said. “But it obviously depends on the speci c investment cases. In addition, we already have investments in a number of companies that contribute to Western arms production.”

Adjusting to changes

AP Pension’s responsible investment approach remains unchanged, and is guided by its policy on responsible and sustainable investments — in turn guided by interna-

$2.5 billion in client assets, only to garner more than $20 billion in inows over the three years following the market’s March 2000 crash.

The rst half of that two-act bubble drama has been in evidence over the market’s current run by mega-cap growth companies.

GMO has seen more than $10 billion in out ows for the ve years through 2023 as it either avoided those high- ying behemoths in its benchmark-free offerings or aggressively underweighted them in strategies such as GMO’s $8.8 billion Global Asset Allocation offering, 65% benchmarked to the MSCI All Country World index and 35% to the Bloomberg Global Aggregate.

For many asset owners now, looking too different from their benchmarks remains an uncomfortable prospect, Inker said.

“Not everybody is buying into our argument” even if more are showing some receptivity to considering that, for example, deep value stocks in Europe are cheaper now than they’ve been 98% of the time versus the overall market, he noted.

ecutives will use its framework “more actively to nd investments within the defense sector, which can hopefully contribute to an overall good return for customers. It is still too early though to talk about speci c investments,” the spokesperson said.

And while PKA, Hellerup, with 440 billion kroner, has no intention on changing its approach to investments in weapons — it invests in companies that are involved in the production of conventional weapons and military equipment, but not in non-conventional weapons such as chemical and biological weapons — “with our current policy we are fully capable of contributing to an expansion of the Danish defense, for example in the form of” public-private partnership projects, a spokesperson said.

Reputational issues

The case for investing in defense assets can be complicated, however.

tional guidelines and principles such as the Organization for Economic Cooperation and Development’s multinational guidelines, and the United Nations Guiding Principles for Business and Human Rights, a spokesperson said.

“However, a pension fund with our mission — to deliver high, longterm investment returns while taking into account sustainability factors in our investment approach — has to adjust to changes in the world surrounding us,” a spokesperson for the Copenhagen-based 178.8 billion kroner pension fund said.

“The new investment signals from EU and the Danish government, on the backdrop of the tragic attack on Ukraine, has caused us to re ect on how we can achieve our goals. We see safety and a peaceful society as a necessary requirement for achieving other goals related to sustainability considerations — not least transforming our energy system to achieve the Paris Agreement over the coming years. On that background, AP Pension does not see any contradiction between having high ambitions related to sustainability and ESG-related factors for the investment portfolio, and at the same time seeking out potentially attractive investment opportunities in defense-related investments.”

Going forward, pension fund ex-

‘With regard to our portfolio’s potential to beat the passive alternative, this is about as good as it has ever been .’

GMO’S BEN INKER

“Look, in 2000 they certainly weren’t” buying that argument: “we were talking about how excited we were and clients were ring us,” Inker said.

Over the ve years or so following the market’s March 2000 peak, GMO’s global asset allocation strategy bested its benchmark by more than seven percentage points annually, he said.

“I would say that dynamic (of losing clients) is happening much less and we are having interesting conversations with sophisticated inves-

“The area has undergone rapid development — we have gone from strong disarmament to strong rearmament. Investment in weapons is an area full of dilemmas, and we are therefore constantly considering our investments and policies,” PFA’s spokesperson said.

F&P’s Vile Jensen said there are “dilemmas and reputational issues at stake when you invest in defense and security,” adding that there is hesitance among its members and many other investors “to move into this area due to ESG discussions and reputational concerns. Weapons, defense and war are serious matters. But there is a wider understanding of the necessity to rebuild defense capabilities of our Western societies — and the government cannot do this alone, but has to cooperate with private companies and investors.”

Sources were clear, however, that controversial weapons remain rmly off the investment table.

“Defense-related investments must be subject to the same ESG screenings as all other new investments,” PensionDanmark’s spokesperson said. “And speci cally, PensionDanmark has a rm policy of excluding companies involved in the production of anti-personnel mines, cluster bombs or chemical weapons.” Industriens Pension’s Lindegaard agreed, adding that “there is a clear line here, as we have chosen to follow Denmark’s defense policy line.” n

tors who recognize the fact that, yeah, when something gets really extreme there’s money to be made betting that things are going to revert,” Inker said.

Grantham, in his latest market analysis, sounded a more cautious note, contending that while there’s a “reasonable choice of relatively attractive investments” for asset owners who must own U.S. stocks, despite a stratospheric Shiller price-earnings ratio of 34 as of March 1, the imperative would be to “take our pro ts” before market threatening issues such as climate-related catastrophes and rising prices for scarce resources succeed in bursting the latest stock market bubble.

Inker said his team isn’t looking to time the market. He concedes that if a bubble-bursting catalyst sends the S&P 500 plunging 30% or 40%, the attractively valued companies GMO owns will be hit as well. But if GMO holdings fall alongside the S&P, they will become a massively attractive buying opportunity, he said. n

SECURING RETURNS: ATP CIO Mikkel Svenstrup said investing in security represents the highest level of social responsibility.

Lawsuits

CONTINUED FROM PAGE 3

Nancy Ross, partner at law rm Mayer Brown LLP, said the three lawsuits claim that Athene is unsound in part because it’s a subsidiary of Apollo Global Management, whose co-founder and former CEO Leon Black was alleged to have contributed to the failure of Executive Life Insurance through the sale of junk bonds to its parent company by Black’s rm Drexel Burnham Lambert.

The collapse of Executive Life in 1991 and the resulting losses to policyholders including liabilities transferred from pension funds led to the publishing of the Department of Labor’s Interpretive Bulletin 951, which relates to the duciary standards under the Employee Retirement Income Security Act of 1974 and provides guidance regarding plan sponsors purchasing the “safest annuity available.”

Ross believes that plaintiffs face multiple challenges.

‘High hurdle’

“Plaintiffs will face a high hurdle proving constitutional standing under Article III of the Constitution because they have not and cannot show the requisite injury to bring a lawsuit since they are receiving the vested bene ts to which they are entitled,” said Ross.

“Plaintiffs also will face a high hurdle in withstanding early dismissal of the lawsuit since their allegations do not mention any acts of the defendants showing misconduct by the duciaries,” she said. “Plaintiffs may be allowed the opportunity to bolster their complaints, but it is questionable whether they have the facts to do so.”

Kent Mason, partner with law rm Davis & Harman, said in an interview that the law does not state that a company is speci cally required to nd the safest available annuity.

and if the suits survive that motion and they move to discovery, an even greater urry of similar lawsuits are likely to follow. Mason said this was not an “Athene-only” issue, that other insurers in the PRT space that have received similar criticism as Athene could be targeted.

Ties to private equity firms

That criticism has primarily targeted insurance companies owned fully or in part by private equity rms. Athene was established by Apollo Global Management in 2009, which remained a minority shareholder in the insurer until January 2022 when it closed a deal to fully acquire the insurer, which has been by far the highest-pro le rm of this type.

An Athene spokesperson said regarding the lawsuits, “While Athene is not a party to any putative class action lawsuits involving pension derisking, we believe these cases are without merit.”

“Athene is well capitalized, properly reserved, soundly invested and highly rated. We are a safe and secure provider of annuity bene ts,” said the spokesperson. “All plan participants and bene ciaries continue to receive 100% of their expected bene ts. Our outstanding

cause some sponsors to say, maybe just to avoid some headline risk, just go with a ‘more traditional insurer,’” said Moran.

Noting that there really is no de nition for “traditional” necessarily, Moran said, “Maybe someone who has been at this for a longer period of time.”

Thriving market

Moran and others, however, said the PRT market remains robust. Two recent transactions will likely result in a record dollar volume for any rst quarter of a calendar year. Transactions have historically taken place in the second halves of calendar years.

In February, Houston-based Shell USA purchased a group annuity contract from Prudential Insurance Co. of America to transfer about $4.9 billion in pension plan liabilities, and in March, New York-based Verizon Communications announced the purchase of group annuity contracts from Prudential and RGA Reinsurance to transfer about $5.9 billion in pension plan liabilities.

Prudential has been a long-time player in the PRT space, while RGA just entered the PRT market in 2023.

According to a new report from Aon, U.S. pension risk transfer transactions totaled $45 billion and set a new record with a total of 773 transactions for 2023, an impressive 36% more transactions than the previous year.

“A court is not going to say, ‘You found ‘Number Two’ and it wasn’t ‘Number One’ and therefore, you are wrong,” said Mason. “What the law requires, and this is very clear, is that you use a prudent and diligent process to try to identify the safest available annuity, and that’s what the law is. If your process has been diligent and thorough and prudent, the fact that you may not have hit ‘Number One’ is not the point.”

Mason said the plaintiffs make it very clear in the court lings for the three lawsuits that they don’t know what that process was, and that their allegation is that process must have been poor since Athene was chosen as the insurance company.

What happens next, he said, will be the defendants’ motion to dismiss, saying there is no legal basis for the complaint.

“So, the question is, can you survive a motion to dismiss when you don’t know anything about the process that used to make the selection? And in my view, the answer is no,” said Mason.

Regardless, he said that critical point will be the motion to dismiss,

nancial strength, our commitment to customer service and our well-diversi ed investment portfolio have made us a trusted provider of choice among pension plan duciaries.”

Experts in the pension risk transfer space, meanwhile, are not commenting on the lawsuits but see some questions ahead for plan sponsors.

Matt McDaniel, U.S. pension strategy and solutions leader at Mercer, said in an interview, “I think one of the open questions is: Will the headline risk of litigation make companies think twice either about doing a deal in 2024 or the insurer that they select if they do do a deal?”

“I think it’s too soon to say but certainly plan sponsors are aware of what’s going on there and are thinking about these kinds of things,” said McDaniel.

Michael Moran, senior pension strategist at Goldman Sachs Asset Management, said in an interview he doesn’t think the lawsuits will cause the volume of PRT transactions to slow down.

“It could at the margin maybe

Interns

CONTINUED FROM PAGE 6

sis for its 2025 internships.

Point72: Being selective

Point72 Asset Management is already recruiting interns for 2025. For this upcoming summer, the hedge fund will host its largest group to date of 55 interns. Only 0.6% of applicants received an internship offer this year. The $32.3 billion rm declined to provide total application gures.

“It seems more rms now are hiring undergrads on the buy side directly,” said Jaimi Goodfriend, head of investment professional development and the director of the Point72 Academy, who added that Point72 has seen “this almost rocket ship of applications.”

The rm launched both its Academy summer internship program and its full-time Point72 Academy, an initiative that recruits new grads and give them accelerated training as long/short equities investors, in 2015. The goal is to “educate young aspiring investors to see if they want to join this business,” Goodfriend said.

from internships as well as a virtual freshman insight program in the U.S. “Assets, plus talent, equals hedge funds,” she said.

Citadel: Another record year

Ken Grif n’s Citadel is on track for “another record-setting year” in terms of applications and “the most distinguished class yet,” a spokesperson told P&I in an email.

In a letter sent to investors on April 1, Grif n noted that Citadel received over 100,000 applications from undergraduates and graduate students for positions in “full-time and internship programs within the Citadel family” and that only “a small fraction of one percent” of applicants would be selected “maintaining the exceptionally high standards we set for talent.”

Grif n said in his letter that Citadel takes pride in “in having built one of the most formidable teams” in hedge fund history. Grif n underscored the rm’s ability to recruit noting “we have enjoyed tremendous success attracting gifted graduates from the premier colleges and universities.”

While total dollar volume was down from over $50 billion in 2022, that dip was primarily due to the previous year’s pension buyout transaction by International Business Machines, Armonk, N.Y., which transferred $16 billion in liabilities to Prudential and Metropolitan Life Insurance Co. in 2022.

That was the second-largest transaction of its kind in U.S. history, and the AT&T deal — about half that size — was the largest in 2023.

The number of transactions, however, re ect how much interest there is among corporate plan sponsors in executing deals, and the continuing entry of new insurers into the marketplace that are doing deals — there are now 21 insurance companies doing PRT, compared with only six insurers in 2012 — show there is enough room for more transactions.

“I think 15 of the 21 insurers were over a billion dollars last year,” said McDaniel. “So that gives you a sense of not only is it a robust market in terms of number of players but also in terms of participation and insurers actually bidding on deals and winning these deals.”

Ari Jacobs, senior partner and global retirement solutions leader at Aon, said in an interview that the average estimated funding ratio among S&P 500 companies with de ned bene t plans is currently 104.4%.

With many pension funds fully funded and sometimes overfunded, that makes pension buyout deals much more palatable, said Jacobs. Funding is often the largest obstacle in transferring pension liabilities.

“We continue to see the market thriving,” said Jacobs. He expects deal volume to be at least $40 billion again in 2024. n

The eight-week summer internship includes a boot camp, rotation with a portfolio management team and work on project for an investment team. Goodfriend says they are always adjusting the program and thinking through areas including data incorporation. “We have to think about the analyst of tomorrow and what that means,” she said.

TAKING OFF: Point72’s Jaimi Goodfriend has seen an ‘almost rocket ship of applications.’

Summer interns start after their junior year and if they receive an offer, come back the next summer as an Academy associate for the 10-month program with successful grads becoming analysts.

From last year’s summer intern class, 74% of interns received an offer to join the full-time academy and 97% accepted. The rm has seen higher retention rates for Academy graduates than external analyst hires. In 2023, Point72 saw its largest application pool to date with over 30,000 applications for the Point72 Academy.

Goodfriend advises applicants not to use ChatGPT when answering application questions because each one is reviewed by a human.

“We really want to hear about people and who they are authentically,” Goodfriend says. Recent academy participants have included a concert-level musician and an Association of Tennis Professionals (ATP)-ranked player, she added.

Firm founder Steven Cohen donated $100,000 to three separate long/ short funds run by student investing groups at Brown University, the University of California, Berkeley, and MIT, to give students early exposure to running a long/short strategy.

And Cohen’s ownership of the New York Mets baseball team means interns will get a game excursion along with an offsite experience.

An online job posting for a 2025 Academy investment analyst summer intern role in the U.S. lists an annual base salary of $120,000 to $140,000, an amount that gets prorated to the length of the candidate’s internship.

“We are not alone in educating people earlier through internships and insight opportunities,” Goodfriend said, pointing to an upcoming insight program in London for students who are still two years away

That comes after Citadel had approximately 69,000 applications in 2023 with an acceptance rate of approximately 0.5%. The rm had more than 300 interns last year across divisions. The 11-week program which starts with offsite visits in Florida, paid interns a median wage of $120 an hour last year. In 2023, the rm also covered signing bonuses, in-of ce food, and the value of corporate housing.

A role currently posted on Citadel’s website for a quantitative research analyst intern pays up to $5,000 a week not including other compensation and bene ts.

Millennium: 150 interns

Izzy Englander’s Millennium will host approximately 150 interns across technology and core infrastructure roles during its 10-week global program this summer in New York, Miami, London, Dublin, Tel Aviv, Hong Kong and Singapore. The rm has plans to add Bangalore to the list this year. The program formally began in 2016 and has tripled in size since 2019. The goal is to offer successful interns offers for the rm’s full-time analyst program that starts after graduation. Millennium declined to comment on the number of applicants and acceptance rate.

A trader/analyst intern role posted on Millennium’s website had an annual salary range of $125,000 to $200,000 speci c to New York.

Since 2020, Millennium has run a partnership program with UBS for entry-level research analysts. The analysts spend two six-month rotations within UBS’ research division and then are matched with one of Millennium’s equities portfolio management teams in New York, London, Hong Kong or Singapore. Millennium has hired over 40 people onto its trading teams since the program began.

New this year, Millennium is launching a 12-week intern program for masters level quant and math students to join investment teams as quantitative researchers in New York, London and Hong Kong. The inaugural class of almost 30 is set to start in May and will get on the job training along with classroom training in markets and technical skills. n

THINK AGAIN: Mercer’s Matt McDaniel wonders if recent lawsuits will make plan sponsors think twice about making deals, or the insurer that they select.

Eric Forberger

Here’s why outsourced CIO works differently in Asia

Asset owners reluctant to hand off management of their entire portfolios

they need to play a more active role in running the endowment and take on more of an operating and execution responsibility than in other parts of the world, he said.

By Jackal Pan/Getty Images

NATALIE KOH

Asian asset owners are showing increasing interest in outsourced chief investment of cer services, but they aren’t entrusting their entire portfolios to providers, sources said.

Instead, asset owners in Asia are showing a preference for carving out segments of their portfolio — for instance, alternatives or impact investing — to be managed by OCIO providers.

“We manage close to 50 university and school endowments around the world. For more than 40 of them, we manage the entire endowment,” said Singapore-based Emmanuel Pitsilis, managing director and cohead of Asia-Paci c at Partners Capital. Asian endowments and foundations, however, seldom outsource 100% of their portfolios to a single provider, so the rm  has had to readjust its service model to manage only a portion of endowment portfolios in Asia, he said.

Partners Capital managed roughly $55 billion in assets globally for clients as of Dec. 31.

Even in the ultra high-net worth space, investors in Asia are used to having multiple service providers and balancing capital between them, whereas in Europe and the U.S., investors are more comfortable relying on one, or in some cases, a small number of providers, Pitsilis said.

“The OCIO market as we conceptualize it is a bit of an artifact of the structure of the U.S. endowment and foundations markets, where there are a lot of small- to mid-sized asset pools that are just too small to build their own team cost-effectively (anyone with AUMs below $1.5 billion-$2 billion) and that are overseen by an investment committee staffed with sophisticated, timepoor people who know they cannot manage such a portfolio effectively as a part-time job,” Pitsilis said. Not all endowments in Asia approach their investments in this way, even if the more sophisticated ones do, he added.

“The term ‘outsourcing’ can also have more of a negative connotation in Asia,” said Adam Watson, partner and co-head of Asia Paci c at Partners Capital during the same interview. “Outsourcing in general can appear like an admission that you’re not doing your job, rather than an active decision to partner with a group with complementary expertise,” he said.

In the U.S., the investment committee’s role is to set structure and governance, whereas in Asia, investment committee members often feel

Climate

CONTINUED FROM PAGE 2

from the Sierra Club, claiming the rule falls short of the agency’s statutory mandate to protect investors; maintain fair, orderly and ef cient markets; and promote capital formation.

In issuing the stay, the SEC said it

A senior executive at an Asiabased allocator agreed with the characterization of OCIO perceptions in Asia. “I have a little bit of dif culty in understanding what OCIO actually means to a certain extent,” he said. “I always nd it interesting when someone comes and try to pitch an OCIO solution, which means the CIO is out of a job, and I wonder why they would do that.”

However, he said that he does see value in using OCIO services on speci c areas of interest such as alternatives, for instance, and that certain types of allocators where executives do not have a background in investment management — such as family of ces, foundation and endowments — could nd OCIO more useful.

Alternatives push

OCIO providers generally agreed that they have seen a growing demand for OCIO services in Singapore among endowments, foundations, pension funds and family of ces, driven by the increasing complexity of the market environment.

“When rates were rising in 2022, the 60/40 or traditional equities and bonds (model) would have done very badly. … They were down around 1618% — both equities and bonds — and what would have protected (the portfolio)?” said Damien Tan, managing director and co-CIO of client portfolios at Cambridge Associates in Singapore.

Alternative assets and diversifying asset classes such as hedge funds were among the few options investors had for portfolio protection, he added. Hedge funds could go long and short, and global macro funds, for example, could navigate the interest rate environment and generate positive returns during that year, he said.

As a result, asset owners in Asia started looking seriously at alternatives and, without in-house expertise, needed to engage external rms to help with entering the space.

“Many of my clients saw the tangible bene t of having alternatives in their portfolio in periods like 2022. … Back to why Asia is a little bit more nascent in terms of OCIO — alternatives were more widely embraced earlier in the West than in Asia, so as comfort and familiarity for alts moved over to Asia, all these tied together, especially during this time in this market environment where we think that alternatives can indeed add alpha and value to portfolios,” Tan said.

Cambridge Associates had $569 billion in assets under advisement and management, and managed $72

is not departing from its view that the nal rule is “consistent with applicable law and within the commission’s long-standing authority to require the disclosure of information important to investors in making investment and voting decisions.”

The SEC said it will continue to vigorously defend the rule in court, but added that issuing a stay at this point will “facilitate the orderly judicial resolution of those challenges

billion in discretionary funds as of Dec. 31.

In-house costs

The rising cost of managing assets in-house — which is closely tied to the increasing complexity of the investment landscape — has also driven the need for OCIO services, said Hong Kong-based Robert Ronneberger, head of investment sales for Asia at Mercer, which had $16.2 trillion in global assets under advisement as of June 30 and $420 billion in AUM as of Dec. 31.

“Based on our experience globally and in the region, investment solutions, including OCIO services, provide a more cost-effective solution for clients. While different service providers have different approaches, one of the cost bene ts to OCIO services is the ability for the provider to negotiate fees due to their size and scale,” he said in an email.

Institutions are also seeking partners to help them build more agile portfolios, said Nikhil Mehra, BlackRock’s Singapore-based head of APAC multiasset strategies and solutions.

These investors seek support from partners that can provide duciary oversight, enhance risk management and compliance frameworks, provide access to alternative investments and reduce costs, he added. “Many of our clients would oftentimes nd themselves getting more control over their total portfolio than if they do this alone,” he said.

The rm has observed more interest and mandates from institutions in Asia such as endowments, foundations, charities, family of ces,

and allow the court of appeals to focus on deciding the merits.” Also, a stay avoids “potential regulatory uncertainty if registrants were to become subject” to the rule’s requirements during the legal proceedings.

The rule’s earliest implementation date is slated for March 2026, but with the SEC’s stay and a legal process that could take more than a year to conclude — not counting

and corporate pensions to learn more about OCIO services, he added. The cost has not been a headwind to clients pursuing outsourcing — the bene ts matter more, he said.

OCIO fees differ across providers, according to sources, ranging between 0.25% and 1% of assets. One provider said it does not charge more than the average asset manager and that whether the fees make sense depends on how much OCIO services cost as compared with the cost of setting up an internal team.

Another said that OCIO fees are usually structured as a percentage of assets vs. a traditional consultant that charges a xed retainer fee with additional fees for additional projects. Some OCIOs also include an element subject to absolute or relative performance targets being hit.

Several sources noted that the interest in OCIO services in Asia was not limited to a particular type or size of institution. Small institutional investors employ providers because they lack the resources to manage the entire portfolio on their own, but large institutional investors also need providers to help with new asset classes in which they do not have expertise, sources said.

They also observed that some Japanese and South Korean corporate pension funds have started to think about a move to an OCIO model.

In Japan, this could be driven by the government’s push to introduce fundamental reforms within the investment management industry, Mercer’s Ronneberger said.

“This initiative includes improving investment practices of asset owners with more focus on the ful-

any potential appeals — the implementation date will likely get pushed back, said Christian D. H. Schultz, a partner at law rm Arnold & Porter Kaye Scholer and former assistant chief litigation counsel in the SEC’s enforcement division.

In the meantime, Schultz said market participants should still be cognizant of climate disclosure requirements out of California and

llment of their duciary responsibility. Investment solutions (such as OCIO) are a potential practical solution for asset owners,” he said.

OCIO in a different form

Additionally, there is less transparency around performance across Asia. In the U.S., university endowment performance is tracked, for example, through the National Association of College and University Business Of cers report and endowments in the bottom quartile have a very strong incentive to reassess how they want to operate, said Partners Capital’s Pitsilis.

In Asia, however, endowment funds seldom publish their performance or even their exact size publicly, so this incentive is not present, he said.

Because of differing operating model requirements and differing client preferences, Partners Capital seldom refers to their services as “outsourcing” in Asia. “We are a global investment of ce, and we simply work alongside our clients to help them achieve their investment objectives,” Pitsilis added.

Cambridge Associates’Tan added that the de nition of OCIO differs among different groups of investors in Asia. Some asset owners view OCIO as truly outsourcing where the provider has full discretion over the portfolio, while others retain the authority to make the investment decisions, he said.

But even in the cases where the provider is only given a non-discretionary fund to manage, the asset owner follows most, if not all, of Cambridge Associates’ recommendations, Tan said.  n

Europe, and noted that the SEC will still be focused on the topic.

“The SEC has a panoply of anti-fraud tools that it can use to monitor company’s disclosures,” Schultz said. “Just because these are stayed doesn’t mean the SEC won’t continue to have its of ces and divisions, particularly the enforcement division, paying close attention to what companies are saying” with respect to climate risk. n

Fixed Income Strategy: A Compelling Moment

Wednesday, April 17 | 2:00 pm ET

Institutional allocators in fixed income are always scanning the horizon for signals on macroeconomic shifts and the next central bank moves. Even in the midst of the very positive resurgence of fixed income, they need to carefully navigate this transition period for interest rates and inflation so they can remain on track to achieve their long-term objectives. It’s an opportune time to reach for quality with reasonable risk exposure across several segments of fixed income, and stretch out on the credit spectrum into high-yield, emerging markets, and other sectors.

Our panel of fixed-income experts cuts through the market complexities to share what’s top of mind for the di erent types of institutional clients today. You’ll also hear what’s current in fixedincome indexing and the use of actively-managed ETFs, new developments in systematic indexing, and opportunistic segments –including private credit.

REGISTER | pionline.com/fixed-income-webinar24

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Navigating pension risk in today’s economic climate

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Bridgewater

its Jan. 11 meeting.

system was “reviewing the situation” involving Bridgewater but did not have a comment.

The former executives, Jeffrey Gardner and Paul Ross, led their petition for a bill of discovery on February 22 in Connecticut Superior Court.

Gardner and Ross have claimed their terminations were “for unlawful and discriminatory reasons” and that their internal criticisms about Bridgewater’s performance and handling of required disclosures to clients “about the large transactional costs impacting the rm’s returns” motivated their rings.

Bridgewater claims that both Gardner and Ross signed employment agreements with compensation totaling “many millions of dollars in which they contractually agreed to resolve all disputes they had with Bridgewater through condential mediation and binding arbitration,” according to a Superior Court ling.

Bridgewater has alleged that Gardner and Ross led their claims in order to pressure the hedge fund to offer them a “large payout.”

Last week, Bridgewater led in federal court with the U.S. District Court for the District of Connecticut to compel their claims to arbitration.

A spokesperson for Bridgewater declined to comment.

Closely watching

So far, pension funds and consultants invested with or monitoring Bridgewater say they are closely watching the situation.

The Ohio Police & Fire Pension Fund is aware of the case and “in regular contact with Bridgewater,” as it is with all its investment managers, said communications direct David Graham in an email to Pensions & Investments

“They are not on what is considered a ‘watch list’ with us,” he added. Ohio Police and Fire has $962 million invested with Bridgewater as part of its $17.7 billion total portfolio, as of Feb. 1.

A spokesperson for the Indiana Public Retirement System said the

CONTINUED FROM PAGE 1 Gilmore

CONTINUED FROM PAGE 3

more than 12% a year over the past decade.

At CalPERS, Gilmore will oversee a team of more than 300 investment professionals and a portfolio valued at $494.6 billion. His arrival comes shortly after CalPERS’ launch of a sweeping Sustainable Investments 2030 plan, which includes investing $100 billion in climate solutions over the next six years.

In an interview, Gilmore said the position represented an “exciting opportunity,’’ not only because of the sheer size of the pension system but also because of its leadership in sus-

Several other pensions that are investors in Bridgewater either did not respond to requests for comment or declined to comment, including The Oregon Public Employees Retirement Fund which allocated $250 million to Bridgewater in December 2022, according to the most recent P&I data.

Discerning the merits of legal cases is “dif cult but necessary for diligence analysts” and a major consideration in the case of Bridgewater is assessing the rm’s “culture and processes during an unprecedented, extended management transition period,” said Chris Cutler, founder of investment consulting rm Manager Analysis Services.

The world’s largest hedge fund saw founder Ray Dalio hand over control to the rm’s next generation in 2022 after a bumpy transition. Nir Bar Dea serves as Bridgewater’s sole CEO.

“The complainants surely were aware that their litigation would open multiple dif cult lines of inquiry for the CEO to address,” Cutler said.

“Sometimes involuntary transparency is the only way to address the sort of misalignments that occur in very large, insular organizations, whether that organization is Bridgewater or Boeing.”

New spotlight

The case has again put a spotlight on Bridgewater after many on Wall Street were buzzing in November 2023 about the publication of a book, “The Fund,” focused on the history and culture of the rm.

Bridgewater issued a statement about the book saying, “the overall narrative in this book is ridiculous and couldn’t be any further from the truth.”

The current legal situation features long-time Bridgewater employees pitted against one another.

Gardner had worked at Bridgewater for 28 years and was a partner and head strategist in the client services department at the time of his termination last year.

Ross worked at Bridgewater for

In his first 100 days, ‘I really want to spend a lot of time listening. It’s always very dangerous to have preconceived notions before you actually talk to people.’

CALPERS’ STEPHEN GILMORE

nearly 20 years and was a partner and head of the investment engine at the time of his ring, according to legal lings.

Garder and Ross raised accusations of favoritism, sex and age discrimination and alleged that Bar Dea’s of ce romance with another employee and a rm restructuring pushed them out of their roles.

As part of the bill of discovery, Gardner and Ross asked Bridgewater and the hedge fund’s board members Margo Cook and Michael McGavick to produce documents tied to their claims.

As part of the restructuring, Gardner and Ross accused Bar Dea of elevating his former romantic partner, Erin Miles, and her ex- ancé, Sean Macrae.

They also alleged age discrimination, claiming the restructuring was based on their age as senior managers.

An attorney for Gardner and Ross, Brendan O’Rourke of O’Rourke & Associates, said his clients were pleased that the Connecticut Superior Court “entered orders that pave the way towards an evidentiary hearing at which they can show the grave mistreatment and retaliation they suffered by the CEO and board at Bridgewater.”

O’Rourke added, “the issues raised by Paul and Jeff go far beyond their personal stake in being treated fairly. The issues they have raised about the new CEO and the new board have a profound impact on the other employees and clients of Bridgewater.”

Bridgewater said in its court lings that Ross was given three justications for his ring in February 2023 as part of a broad restructuring, including that his multimillion dollar compensation package could not be justi ed amid making reductions and that amid restructuring the rm’s Investment Engine should be led by people with signi cant investing experience.  Bridgewater also claimed that amid restructuring Gardner was offered multiple positions to remain at the rm but he did not accept them and also asked for a high severance payment. 

really want to spend a lot of time listening,” he said. “It’s always very dangerous to have preconceived notions before you actually talk to people.”

Before joining NZ Super in 2019, Gilmore was chief investment strategist at Australia’s Future Fund. There, he oversaw efforts such as portfolio strategy, portfolio overlays and investment risk. He has also held senior international positions with AIG Financial Products and Morgan Stanley, as well as assignments with the International Monetary Fund and the Reserve Bank of New Zealand.

tainable investing and its long-term focus. “California has been a leader in a lot of spaces,” Gilmore said. He told P&I that a priority will be looking to improve CalPERS’ funding ratio, which was estimated at about 72% as of June 30, rising from 70.9% in 2022, but still re ecting a signi cant decline from 81.2% in 2021.

“If I look at the amount of active risk that’s being taken through time, it’s relatively low,’’ he said. “It’s hard to generate a lot of outperformance without taking some active risk, so I will be thinking about that.”

In his rst 100 days at CalPERS, “I

“Stephen brings an unmatched knowledge of global investing and managing diverse and high-performing investment professionals,” CalPERS President Theresa Taylor said in the release. “We conducted an exhaustive, worldwide search for a deeply skilled leader to continue our mission of providing retirement bene ts to California’s public sector workers, and we are con dent Stephen is the right person for the job.”

The annual salary for the position, not including incentives based on fund performance relative to established benchmarks, is $718,750.

ESG

ESG has long been part of the DNA of faith-based funds

Amid political restorms, church-based investors are keeping the faith

PALASH GHOSH By

As the controversy over employing environmental, social and governance factors in investment decisions by institutions continues to swirl, a number of church-based pension funds have asserted that ESG forms a core part of their strategies and raison d’etre.

“Faith-based investors can be seen as the rst socially responsible investors beginning with screens against the ‘sin stocks,’” said Josh Zinner, CEO of Interfaith Center on Corporate Responsibility, a coalition of faith- and values-based investors. Now, Zinner noted, virtually every major faith-based investor has some commitment to align the investments of their pension funds with their faith and values.

“These investors are all able to clearly articulate not only the business case for corporate accountability but also the moral case given their missions and their strong connections to impacted communities around the world,” he added.

The Church Pension Fund is the sponsor and administrator of pension and other bene t plans for the Episcopal Church. CPF and its af liated companies, collectively the Church Pension Group, provide retirement, health, life insurance, and related bene ts for almost 39,000 clergy and lay employees. CPF is one of the largest faith-based pension funds, overseeing about $17 billion in assets.

“At its core, the mission of a faithbased pension fund is the same as that of any other — to act in the best nancial interest of its bene ciaries,” said Christopher Rowe, managing director, investments at CPF. “As a faith-based pension fund, there are additional considerations in the context of that duciary obligation. We are committed to supporting church values in all that we do. Consistent with that commitment, we manage the investment portfolio to generate long-term returns sufcient to keep the promises made to bene ciaries.”

And as part of that commitment to church values, CPG adheres to a socially responsible investing strategy.

“We seek to make direct investments with a positive social impact, re ect ESG issues in investment analysis where these issues arenancially material, advocate for corporate social responsibility, advance best practices in SRI, and catalyze socially responsible investments,”

Credit

CONTINUED FROM PAGE 2

major factors.

Approximately 80% of nancing in Asian markets is done by banks. It’s an area where there is not a lot of exible capital and there will be demand for private credit, Sheldon said.

“Asia-Paci c credit markets are going to be a decadelong” focus

Rowe said.

According to a fund fact sheet, as of March 31, 2023 (the latest date for which data is available), CPFs largest allocations were in xed income (24%), private equity (22.4%), global equities (17.8%) and hedge funds (12.8%). These were followed by real estate (9.8%), absolute-return strategies (9.7%), private specialty strategies (3.4%) and the remainder in cash.For the 10-year period ended March 31, 2023, CPF returned an average annualized 8.4%, above its benchmark of 6%.

Jake Barnett is the managing director-sustainable investment strategies at Wespath Bene ts and Investments, which serves more than 100,000 active and retired clergy and lay employees of the United Methodist Church and oversees over $26 billion in assets, one of the largest faith-based investors in the world.

“Our investments aspire to align with our church’s values, and seek to support a sustainable global economy, which is essential for healthy nancial markets.” Barnett said. “A sustainable global economy seeks to promote long-term prosperity for all, with equal opportunities for advancement; social cohesion, with reliable access to basic necessities; and environmental health, with resilient ecosystems.”

As of Dec. 31, 2% of Wespath’s assets under management were managed in-house, while 98% were managed by external asset managers, said a spokesperson.

Monica Buonincontri, director of marketing and communications at The Board of Pensions of the Presbyterian Church, said her organization provides a full range of employee bene ts and serves a total of 65,000 individuals. The Board of Pensions assets totaled $12.5 billion as of Dec. 31.She said the board is linked to a concept called Mission Responsibility Through Investment, which implements policies on socially responsible investing by engaging corporations in which the church owns stock.

“This is accomplished through correspondence, dialogue, voting shareholder proxies and recommending similar action to others, and occasionally ling shareholder resolutions,” Buonincontri said.In essence, the concept promotes the pursuit of peace; racial, social and economic justice; environmental responsibility; and securing women’s rights, she added.

Always been important

ESG has always been an important element of faith-based investing, long before that acronym was even coined.Rowe said the Church Pension Fund is 100% externally managed and the investment team be-

where KKR is looking to continue growing, he said.

Tactical to permanent

Amid the boom in private credit, Sheldon says a powerful shift is taking place with institutional investors moving from tactical allocations to private credit to permanent allocations. “I think private credit, particularly direct lending, has proven to be a permanent place in people’s asset allocation,” he said.

The private credit market has un-

lieves ESG issues can present both material opportunities and risks to investors. “As part of the investment analysis and review process, CPF works with current and prospective investment managers to evaluate how they understand and re ect ESG issues in their analysis,” he added.

CPF also actively engages with companies in their investment managers’ portfolios in order to monitor their progress on issues, said Rowe. Rowe also noted that CPF’s shareholder engagement efforts “cover a broad range of topics.”

Faith-based pension funds have heavily engaged with companies in

Faith-based investors

‘are all able to clearly articulate not only the business case for corporate accountability but also the moral case .’

INTERFAITH CENTER ON CORPORATE RESPONSIBILITY’S

JOSH ZINNER

one of the key ESG themes — the transition to clean, renewable energy and a gradual reduction in the carbon footprint by corporations.

Led by Catholic and Protestant investors, Zinner said, ICCR members began engaging with “heavy emitters such as Exxon, Chevron and other oil and gas companies in the early 1990s when the irrefutable connection between the burning of fossil fuels and climate change was rst established."

Indeed, he cited that these were some of the rst investors to engage on the topic and they led the earliest proposals citing “planetary global warming” as a risk to people and the planet.

In some cases, these engagements include a large group of investors who have “respectful and productive dialogues” regularly, and in others, as has been the case with Exxon, they

dergone rapid growth in the last decade from only $435 billion in assets under management in 2013 to nearly $1.7 trillion as of June 30, according to Preqin.

With the swift growth and new managers coming onto the scene, Sheldon said scale matters.

“(T)hose that have proven to have a breadth of origination and a diversi ed portfolio, I think are going to outperform,” he said.

Sheldon, who started working in credit over 25 years ago, has wit-

are “contentious, resulting in numerous shareholder proposals,” Zinner said.

Wespath is a member of both Climate Action 100+, an investor group that seeks to have the biggest corporate greenhouse gas emitters in the world take necessary steps to ght climate change, and the Net-Zero Asset Owner Alliance, a group of asset owners that commits to having their investment portfolios attain net-zero emissions by 2050.

Wespath has also adopted a “climate change guideline,” which excludes investments in thermal coal companies, due to their excessive sustainability risk. For example, Wespath will exclude any company that generates at least 50% of its revenues from extraction and/or mining of thermal coal. As of Aug. 31, Wespath excluded 94 companies under the climate change guideline.

In addition, Wespath has partnered with asset managers Wellington Management Co. and Impax Asset Management to actively manage public equity strategies that invest in companies seeking to accelerate the transition to a low-carbon economy. A spokesperson said Wespath has about $2.8 billion invested in low-carbon solutions, including renewable energy, sustainable agribusiness and forestry.

In 2019, the Presbyterian Board of Pensions also became an investor signatory of Climate Action 100+, Buonincontri noted.

Other issues

Faith-based pension funds are also concerned about other issues such as human and worker rights. Indeed, these have been a “core engagement topic for our faith-based members dating back to our genesis in 1971 when several Protestant groups coalesced around disrupting apartheid in South Africa,” Zinner said.

“They have (also) been actively engaging companies with global supply chains on the risks of forced labor including child labor and on securing better protections for workers here in the U.S. including a living wage and paid sick leave,” Zinner said.

Together with the Heartland Initiative, a not-for-pro t research organization that promotes the fundamental rights and freedoms of people impacted by armed con ict, repression and violence, Wespath directly engaged with HeidelbergCement, a German building materials rm, about human rights risks at the company. When talks broke down with Heidelberg, Wespath took action by ling a countermotion at the company, akin to ling a shareholder resolution with a U.S. company. Subsequently, HeidelbergCement resumed discussions and hired a

nessed immense change from a market mostly focused on high-yield bonds to one today with many structures where broader asset managers are grabbing more market share.

“When I started in the business, pensions couldn’t build a diverse portfolio of credit across public, private, asset-based in scale,” he said. “I’d say that that’s the big difference (today). It’s nice to see that they can build a really diversi ed, scaled, multiasset-class public-private credit portfolio.” n

human rights program of cer.

In addition, in partnership with ICRR, Wespath helped lead engagements with discount store chains Dollar General and Dollar Tree calling for improved store safety and employee well-being. “These dialogues are still ongoing but have witnessed both companies make pledges to address conditions in their stores,” Barnett added.

“A respect for human rights is a key part of Wespath’s mission to fulll its duciary responsibilities and reinforce its commitment to the values of The United Methodist Church,” Barnett stated. “Wespath’s commitment to human rights is underlined by the terms of the United Nations Guiding Principles on Business and Human Rights, which details how governments and businesses should act to guarantee human rights are upheld.

”In addition, some faith-based funds have also engaged the nancial services sector to promote strengthened risk management structures to “prevent the type of reckless behaviors that caused past nancial meltdowns and that may exacerbate income inequality,” Zinner noted.

And, they have “a long history of engagements with pharmaceutical companies to ensure that medicines remain accessible and affordable for those that need them,” Zinner said.

Rev. Jeff Thiemann, executive director of Church Bene ts Association, a membership association of 50 church pension boards, religious orders and denominational bene t programs for clergy and church professionals, noted that some faithbased pension plans screen out companies engaged in payday loans, which often charge exorbitant interest rates.

“(Medieval German priest and prominent Protestant gure) Martin Luther was critical of usury and viewed excessive interest as exploitative and immoral,” he said. “(Founder of Methodist Church) John Wesley advocated for earning money in a way that does not harm one’s health, mind, or neighbor.”

Other examples of screens include companies engaged in producing pornography, egregious polluters, tobacco, alcohol, and weapons of mass destruction, Thiemann added.

Backlash to ESG

ESG tenets have faced a political backlash, especially from conservative lawmakers in the U.S.

Zinner explained that ICCR members, both faith-based and secular, are long-term investors that are evaluating company performance in relation to their entire portfolio and the context of broader systemic risk.

“This will not change because ESG has recently been adopted as the punching bag for corporate-funded politicians looking to score points and sow division,” he said. “The material environmental and social risks created by corporate irresponsibility will still be there, as will a growing group of active investors who take theirduciary responsibility to mitigate long-term portfolio risks seriously.”

Responsible investors, Zinner added, have “faced periodic headwinds and transcended them.” The common denominator for most investors, he said, is risk mitigation and “ESG is a tool to do precisely that.” n

U.S. funds face ‘mixed signals’ on sustainability

By

CHRISTOPHER MARCHANT

A culture of “mixed signals” in U.S. politics has contributed to an uncertain environment for pension funds when it comes to sustainability, according to a report by the United Nations Principles for Responsible Investment.

The UN PRI report followed research from 2020 and 2021 that found “policy, structural and market barriers” to sustainability in the U.S., U.K., and Australia. The latest work identi ed 10 separate priorities these jurisdictions needed to address when it came to sustainability.

The U.S. pension fund system was found to have "mixed signals" when it came to ensuring that pension funds have adequate incentives to

Startup

CONTINUED FROM PAGE 1

posting robust growth. Human Interest, a San Francisco-based digital record keeper, served a total of 10,204 startup plans in 2023, up 33% from 7,646 in 2022. Principal Financial Group had approximately 7,800 startup plans in 2023, up fourfold from 1,800 in 2020, said Lance Schoening, Principal’s director of policy.

“I think that momentum is just going to continue to grow,” he said.

The uptick is welcome news for an industry that has long struggled to close the “coverage gap,” a reference to the roughly 50% of private sector workers who do not have access to a workplace retirement savings plan.

Legislation passed in 2019 and 2022 known respectively as the SECURE Act and SECURE 2.0 Act included generous tax incentives to motivate small business owners to offer plans, a perk that industry observers say is now factoring into the decision-making of entrepreneurs. The tax incentives are generous, but complex, experts said.

Another powerful force pushing new 401(k) plans stems from the proliferation of state-run retirement savings programs, better known as auto-IRA programs. Employers operating in auto-IRA states are required to enroll their workers in the state-run program if they don’t offer a workplace retirement savings plan themselves.

Other factors are also boosting new plan formation. A competitive labor market and a demanding young workforce that expects a retirement plan as part of their bene t packages are also driving the momentum.

‘The right

thing’

Take Jonathan Halpert, owner and chief medical of cer of independent urgent care practice Priority 1 Urgent Care, which he launched in 2019.

Halpert, 61, is looking to have a retirement plan in place for his staff of 15 full- and part-time employees by midsummer for a variety of reasons, beginning with his own desire to see employees start saving for retirement sooner than he did.

Halpert said he wanted to do whatever he could to support people’s retirement in “some way, shape

support sustainability objectives.

In an interview with Pensions & Investments, Rene van Merrienboer, director of sustainable markets at UN PRI and a contributor to the report, said of the the U.S.: “It’s fair to say that the political landscape and the uncertainty around it is making it a very dif cult operating environment for pension funds (for sustainability oversight).”

The report highlighted the lack of speci c regulatory incentives for long-term investment horizons in the U.S.

“Market practitioners such as investment managers tend to have short horizons, with a continuing focus on quarterly performance in client reporting, which can have an impact on pension funds’ longer-term objectives,” the report said.

or form, or at least get that into people’s heads, so they’re thinking about it and acting on it in some way.”

Tax credits and the labor market dynamics also factored into his decision to offer a workplace plan but not to the same extent as the feeling that it was simply the right thing to do for his staff.

“If there’s a tax break for it, we’ll take it. Obviously, we’re not going to thumb our nose at that, but that’s not the motivating factor necessarily,” Halpert said.

While Halpert acknowledged that the tight labor market made it hard to retain people for any meaning

A ruling from the U.S. Department of Labor in January 2023 restored the understanding that duciaries of retirement plans regulated under the Employee Retirement Income Security Act may consider ESG factors when these are relevant to a risk-return analysis.

However, a Donald Trump victory in November’s U.S. presidential elections might reverse that. In addition, there may be the passing of national anti-ESG legislation directed at pension funds similar to laws already passed in states such as Texas.

The UN PRI assessment of the U.S. pension fund sustainability landscape contrasts with Australia, which was described as “a successful system that ticks a lot of boxes” Van Merrienboer said.

Australia was commended in ar-

“a healthy amount of new plan creation” in Colorado, which launched its program last year and drew those of Maine and Delaware to its interstate auto-IRA consortium.

However, activity has also been strong in Florida and Texas, which don’t have auto-IRA programs. “They’re two of our larger states where we have customers,” Rosenberger said.

The demand for rst-time retirement plans in these two “great, big, sizable states” is likely due to tax credits and labor market dynamics, he said.

Principal’s Schoening also attri-

said ful period of time, he wasn’t entirely convinced that a retirement plan would make a difference in recruiting and retention.

“We don’t know if it’s going to help, but it’s not going to hurt,” he said, adding that “there’s no slamdunk formula for success” in today’s post-pandemic period.

It’s hard to determine what is most driving small business owners to offer new plans, Guideline’s Rosenberger said, explaining that tax credits, state mandates and other factors are all “helping to accelerate new plan creation.”

Guideline has seen momentum in both auto-IRA and non-auto-IRA states, he said.

The rm saw an enormous uptick in rst-time plans in California in the rst half of 2022, which aligned with the state’s deadline for employers with ve to 50 employees to register with CalSavers, California’s state-run auto-IRA program.  It is also seeing

eas such as pension funds' bene ts of scale, while being able to share resources and maintain goals related to sustainability. The report also found that in the U.K., “extensive” activity by policymakers and regulators since the UN PRI’s 2020 report meant there were now “relatively few” gaps in the U.K. policy framework related to climate risk. However, the report also claimed that the framework “remains incomplete” in terms of consideration of wider sustainability risks, such as nature related risks and sustainability outcomes.

In 2021, the U.K. became the rst country to mandate larger pension schemes to report in line with the requirements of the Task Force on Climate-related Financial Disclosures. n

man Interest.

But will they file for credit?

Even for employers aware of the credit, some industry experts wonder whether they would go to the trouble of ling for the credit.

“A tax credit for small employers might seem generous, but if the employer has to pay an upfront fee for starting a plan but cannot get the tax credit for several months due to the time it takes to le the tax return and then processing the return, the credit might be less appealing,” said John Scott, project director of retirement savings at the The Pew Charitable Trusts.

That’s why Guideline’s Rosenberger is pushing for the tax credit to be available at the point of sale, much like the credits now available for the purchase of electric vehicles.

“To the extent there’s an opportunity to do something like that, we think that could be incredibly impactful and accelerate new plan creation even more dramatically than we’re seeing today,” he said.

Generous, but complex

Federal saver’s match could spur 8.5 million to start saving

An estimated 8.5 million people who aren't saving for retirement are likely to start saving when the saver's match under the SECURE 2.0 Act kicks in, according to a study released April 9 by the Retirement Clearinghouse and Boston Research Technologies. In addition, 90% of retirement savers eligible for the saver’s match would be very or somewhat likely to save more, the study found.

The saver’s match program, which goes live in 2027, will allow quali ed Americans participating in an employer-sponsored retirement plan or contributing to an individual retirement account to receive a 50% federal matching contribution up to a maximum of $1,000 if ling individually. The money is deposited directly into the taxpayer’s retirement plan account or IRA.

The program was designed to help lower-income savers or those with an adjusted gross income of $71,000 or below if married and ling jointly, $53,250 or below if ling as head of household, or $35,000 or below if single or married but ling separately.

butes the upswing in rst-time plans to factors including tax incentives and state mandates.

In particular, Schoening sees tax credits as an inducement to get employers to the nish line. “We do know that costs are a top-level concern for small- and medium-sized businesses when they’re evaluating retirement bene ts, and clearly the tax incentive helps to offset that,” he said.

However, he and other record keepers note that many employers are not aware of the tax credit, making it essential that they educate their clients about the incentive.

“What we’re nding is that many business owners aren’t fully aware of the massive bene ts these incentives provide and how readily available they are to those who qualify if they’re familiar with the tax credits at all,” said Wendy Baker, associate general counsel, retirement products and compliance, at Hu-

The enhanced tax incentives under SECURE 2.0 are generous but complex. Employers with up to 100 employees can receive a maximum tax credit of $5,000 annually for three years. Those with 50 or fewer employees receive a tax credit equal to 100% of their plan start-up costs, up to the $5,000 annual cap, while those with more than 50 employees receive a tax credit equal to 50% of their costs, up to the $5,000 annual cap.

On top of that, employers with 100 or fewer employees that add auto-enrollment to their plans are eligible for an additional $500 annual tax credit for three years.

In addition, there’s a perk for employers that make contributions. Employers with 50 or fewer employees receive an additional tax credit based on a percentage of employer contributions made to employees, up to $1,000 per person. For employers with more than 50 employees, the credit is reduced by 2%  for each employee in excess of 50.

“It is a little complicated,” Rosenberger said, making a nal pitch for a different way to make the credits available to entrepreneurs.

If the credits were given at the point of sale, “it just comes off the net purchase price, which is very easy for a small business owner to see,” he said.

“The results of the study clearly show that the saver’s match can have a substantial impact on the target populations’ retirement-saving behaviors,” said Warren Cormier, CEO of Boston Research Technologies, in a news release.

The saver’s match would have an especially strong impact on Black and Hispanic savers, who represent 25.6% of eligible match savers.

The study found that 93.6% of Black savers and 92.3% of Hispanic savers would contribute more to their retirement accounts if they could receive a federal matching contribution, as compared to 89.1% of White savers.

Among nonsavers, 78.2% of Hispanic Americans and 76.9% of Black Americans would be more likely to begin saving for retirement in order to receive the federal matching contribution, higher than the overall 73.5% of workers who are not saving but otherwise would be with a saver’s match.

The survey represents 3,061 Americans who would qualify for the saver’s match based on their income and ling status. Of the 3,061 respondents, 1,667 had saved during 2023, and 1,394 had not. The survey was conducted between Feb. 5 and Feb. 17. n

BIG MARKET: Guideline’s Jeff Rosenberger said plan creation has been strong in Florida and Texas, two states that don’t have auto-IRA programs.

Fink took a pay cut in 2023 even as rm surpassed $10 trillion in AUM

By

DOUGLAS APPELL

BlackRock Chairman and CEO

Laurence D. “Larry” Fink’s total compensation for leading the world’s largest money manager in 2023 slipped roughly 18% from the year before, according to BlackRock regulatory lings April 4.

The decline, despite a strong rebound last year which lifted BlackRock's assets under management to over $10 trillion, re ected — in part — the SEC's preferred approach of tabulating the value of all compensation received during a given calendar year.

In its proxy statement, BlackRock provides those calendar year gures

Chicago

CONTINUED FROM PAGE 1

causes and solutions a lot more intuitive,” said Ahmad in his presentation.

“For example, problems in a pension fund must arise from one of three reasons: Either not enough money is being put in, it’s not growing fast enough or too much is being paid out. In the case of the city of Chicago, all three have been true at various points in time. And correspondingly, solutions are going to do one of three things. They’ll either generate revenue, improve returns or decrease liabilities.”

Ahmad said the team narrowed down those 28 ideas to nine initiatives, seven of which were intended to increase contributions, one to improve investment management and one to decrease liabilities. Ahmad, as well as the other two nalist teams, noted the greatest constraint in their proposals are protections in the Illinois Constitution. The constitution prohibits cuts in bene ts for active and former employees and current retirees.

To decrease liabilities, the team proposed introducing a new tier for newly hired city employees that creates an adjusted vesting schedule. According to the team’s presentation, pension fund participants earn between 2.4%-2.5% of their baseline annuity per service year, and the team proposed a graduated percentage: 2% for one to 20 service years, 3% for years 21-25, 4% for years 26-30 and 5% for 31 or more years. This would save between $20 million and $25 million in liabilities annually, according to the presentation.

For growth, the team proposed consolidating the investment man-

— which showed Fink's total compensation slipping to $26.9 million from $32.7 million the year before — as well as numbers using the money manager's preferred method, showing Fink's base salary of $1.5 million for 2023 and the variable compensation the company awarded him in January 2024 for his performance that year.

The numbers in line with BlackRock's preferred method showed Fink's total compensation for the latest year rising 9% to $27.6 million, rebounding from a 30% plunge the year before to $25.2 million.

By contrast, by calendar year tabulations, Fink's total compensation for 2022 — a year when BlackRock

together with the vast majority of its competitors suffered a sharp drop in AUM as stock and bond prices alike plunged under the weight of central bank rate hikes — actually edged up by 0.4% to $32.7 million.

The latest proxy statement, meanwhile, showed a handful of top executives cited as likely to play “critical roles” in BlackRock’s future garnering multimillion-dollar performance-based stock options under a new program established last year, led by senior managing directors Robert L. Goldstein, BlackRock’s chief operating of cer, and Mark K. Wiedman, the rm’s head of global client business.

Among executives cited as hav-

agement functions of the four pension funds under one board, which would save between $55 million and $140 million annually in administrative and fee costs.

For funding, the team proposed seven different initiatives that would save a total of between $130 million-$230 million per year. Those include increasing employee contributions for the $3 billion Chicago Policemen’s Annuity & Bene t Fund and $1 billion Chicago Firemen’s Annuity & Bene t Fund to 11.5% from 9%, which would bring those into line with the 11.5% employee contribution for participants in the $3.5 billion Chicago Municipal Employees’ Annuity & Bene t Fund and $1.1 billion Chicago Laborers’ Annuity & Bene t Fund. That would create the largest inows of cash of the funding-related ideas at $40 million to $45 million a year.

Other funding-related initiatives include adding a toll to the city’s DuSable Lake Shore Drive, securitizing tax revenue streams to raise funds and deregulating marijuana licensing to grow the market and increase tax revenue.

Justin Marlowe, a research professor in the University of Chicago Harris School of Public Policy, where he also serves at the director of the Center for Municipal Finance, oversaw the Policy Innovation Challenge and said the competition was motivated by Harris School nance faculty’s desire to hear from the next generation on what should be done regarding Chicago’s pension funding crisis.

“That was really what motivated a lot of folks who said, you know, people who will probably be having to deal with this most directly are your

ing critical roles to play in BlackRock’s future, Goldstein and Wiedman led the way, garnering $8.5 million in awards each. Martin S. Small, senior managing director,

current students,” said Marlowe, “and so when they had a chance to sound off on this, what would they say?

Poor funding ratios

The city of Chicago’s four pension funds have been beleaguered for decades with plummeting funding ratios. As of Dec. 31, the re ghters, general employees, police of cers and laborers’ pension funds had funding ratios of 20.8%, 22.8%, 23.8% and 44.5%, respectively, according to their most recent actuarial valuation reports. The funding ratios, which plummeted over the previous decade even during a record-long bull market, forced them often to liquidate invested assets just to pay bene ts.

The worst funded was the $1 billion Chicago Firemen’s Annuity & Bene t Fund, at 20.8% on an actuarial value, followed by the $3.5 billion Chicago Municipal Employees’ Annuity & Bene t Fund at 22.8%, the $3 billion Chicago Policemen’s Annuity & Bene t Fund at 23.8% and the $1.1 billion Chicago Laborers’ Annuity & Bene t Fund at 44.5%.

The crisis was nearly a century in the making. The four pension funds were founded between 1887 and 1935, and until 2016, the city only made statutory required contributions that fell well below those actuaries had said for decades were necessary to stay fully funded.

It wasn’t until 2017 that the city nally addressed the contribution shortages, when it passed an ordinance that called for an increase every year until reaching actuarially determined contribution amounts in 2022. That year, the city paid the actuarially determined rate — $2.3 billion — to the four pension funds for the rst time in the city’s history. The total for 2024 is $2.7 billion, which

chief nancial of cer and global head of corporate strategy, received $6.5 million in options. Gary S. Shedlin, vice chairman, received just under $2 million. n

includes $307 million in advance payments.

The competition started in September as a class that met every two weeks and featured presentations by industry leaders such as Keith Brainard, research director of the National Association of State Retirement Administrators.

“There’s a basic rubric that we’ve been following all along that has four criteria,” said Marlowe. “One is political feasibility, obviously important, another is salience. Does the proposal actually address the problem or deal with the issue? Innovation or creativity. Is it something new, or if it’s something that’s been proposed before, had it been framed or presented in a kind of unique and maybe more attractive way? And the fourth criteria is presentation. Was the memo really well written? Is the idea clear? That sort of thing.”

Each team also worked with a professional mentor who advised them throughout the process. The winning team’s mentor was Jack Brofman, executive director for global treasury operations at the University of Chicago.

“The students really took after this challenge,” said Marlowe, “and it’s a tough issue, and it’s an issue you might expect young people when they dig into it to be really disheartened and really frustrated, but they weren’t. They see this as a really important challenge, but a manageable challenge. A lot of the solutions they propose are pretty bold and yet also pretty pragmatic.”

“I was thrilled by them,” he said. “We were admittedly a little bit concerned that once they got started to get into the details, they would throw their hands up in the air and say, ‘What’s the point? This is an intractable problem!’ But in fact, quite the opposite.” n

PROXY PARTICULARS: BlackRock Chairman and CEO Laurence D. “Larry” Fink’s total compensation slipped about 18% from the year before, regulatory lings show.

PROBLEM-SOLVERS: The winning team of students, from left: Syed Ahmad, James Karsten, Liam Gluck, Anthony Beaupre and Greg Rudd, with mentor Jack Brofman.

Michael Montiel

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