This Week's Issue P&I 2024-05-06

Corporate plans are fully funded. Now what?

New era of stability has fund execs pondering how to take advantage

By ROB KOZLOWSKI

U.S. corporate de ned bene t plan executives are mulling over how to take advantage of a new era of funding stability after a second straight year of being fully funded on average, experts said.

The publicly traded U.S. companies with the 100 largest de ned ben-

e t plans can now boast an average funding ratio of 99.9% as of Dec. 31, according to Pensions & Investments’ analysis of the latest 10-K lings.

That’s a slight drop from the average ratio of 100.2% in the P&I analysis a year earlier, but it still represents a level of stability for funding among corporate pension plans not seen in years. While not all the 100 measured plans are fully funded, 49 had funding ratios of 100% or more as of Dec. 31, and 30 plans even have funding ratios of 110% or more. Those are nearly the same numbers as in 2022, when 50 plans were 100%

Active management is needed now, says Man Group’s Grew

‘Unprecedented times,’ political and economic, require custom solutions

By LY DI A TOMKIW

Robyn Grew has helmed the world’s largest publicly listed hedge fund manager, Man Group, for eight months now and contends investors are living in “unprecedented times” that favor active management.

“I think we are in a period of unprecedented geopolitical, geo-economic impact,” Grew said in an exclusive and wide-ranging interview with Pensions & Investments. “I’m not a forecaster, I’m an observer. But ever were that the case in the moment, translating some of the geopolitical events alongside a different market environment alongside things like climate — these are unprecedented times.”

ALL TOGETHER: In times like these, ‘all of the effort and all of the acumen and depth of experience we have across the organization can be put to work,’ says Man Group’s Robyn Grew.

Man Group has changed dramatically from its founding over 200 years ago and grown from its roots

FLEXIBILITY: Jonathan Grabel’s approach has LACERA beating benchmarks.

n  A list of the funding

of the 100 largest corporate DB funds appears on Page 17

or more funded and 31 plans were 110% or more funded.

Even among the 51 measured plans that had ratios of under 100% as of Dec. 31, only three plans had ratios below 80% and all were above 70%.

“(The) combination of improved funding and derisked asset allocation has proven to be incredibly powerful,” said Jared Gross, manag-

ing director, head of institutional portfolio strategy at J.P. Morgan Asset Management, in an interview.

The last time corporate pension plan funded status looked this healthy was as of Dec. 31, 2007, when P&I’s analysis showed an average funding ratio of 108.6%. That all came quickly crashing down, however, with the global nancial crisis. Just one year later, the average funding ratio plummeted nearly 30 percentage points to 79.1%.

Now, however, there is new stability, and it began in 2022. Corporate pension plans bene ted mightily

LACERA CIO’s methodical approach pays off

By A RLEEN J A COBIUS

Jonathan Grabel, CIO of the $77 billion Los Angeles County Employees Retirement Association, which just adopted a new asset allocation re ecting the higher interest rate environment, said pension fund ofcials there take a methodical approach, adjusting its targets rather

than making sweeping changes.

But that doesn’t mean that the Pasadena, Calif.-based pension fund is opposed to change.

In the seven years since Grabel joined LACERA from the $16.3 billion New Mexico Public Employees Retirement Association, Santa Fe, where he was CIO, the pension fund has ditched asset class buckets for a

total fund approach, brought private equity co-investments in-house and launched a cash overlay program that has produced a total of about $500 million in gains so far.

In the pension fund’s most recent performance report, it beat its benchmarks in the one-, three-, veand 10-year time periods ended Feb.

from rising interest rates during the year. The average discount rate rose to 5.25% as of Dec. 31, 2022, from 2.88% the year before, which caused liabilities to plummet and offset poor investment performance during the period.

That dramatic rise in discount rates came primarily as a result of the Federal Reserve’s aggressive ght against in ation, that would eventually reach its end point in July when the central bank raised the federal funds rate to a range of 5.25% to 5.5%.

First lawsuit led against duciary rule; more expected Regulation

By BRI A N CROCE

Stakeholders with competing views and interests expected legal challenges against the Department of Labor’s new duciary investment advice rule, and on May 2 the rst such lawsuit was led.

The Federation of Americans for Consumer Choice, which represents annuity and life insurance rms, and ve insurance agents and rms collectively led the lawsuit in U.S. District Court in Tyler, Texas, arguing that the new rule exceeds the Labor Department’s authority and is arbitrary and capricious, in violation of the Administrative Procedure Act.

Stepping back, one side of the debate says the rule, which covers onetime advice such as rollovers to individual retirement accounts or annuity purchases, will better protect retirement investors by expanding the universe of nancial professionals who have to put the investors’ best interests rst, while the other says it will hurt those investors’ ability to get the advice they seek when making crucial nancial decisions.

“Here’s the bottom line: We’re putting this rule in place to ensure that America’s workers can enjoy the retirement that they’ve earned, paycheck by paycheck, year after year,” said Lisa M. Gomez, who leads the

RELATED CONTENT

ratios

IN THIS ISSUE

ESG

CalSTRS CIO Christopher Ailman said sustainability is integrated ‘in everything, in every way, in every minute of every day’ at the fund. Page 4

Alternatives

Copia Group’s Shundrawn Thomas, during a P&I LinkedIn Live event, said institutional interest in private credit will continue to grow. Page 4

Defined contribution

The U.K.’s master trusts are ripe for consolidation. We look at the recent Smart Pension-Evolve Pensions deal. Page 6

Special Report: Emerging Markets

Managers are keeping a close eye on this year’s elections in particular, the ones in emerging markets Page 12 Economic growth and governance reforms have Asian markets attracting more investors. Page 12 Vietnam is drawing interest, but investors must make the effort to understand the market. Page 13

Managers are split on whether Turkey remains an investable opportunity amid difficult economic conditions. Page 14

Money Management

BlackRock’s cost to provide security for Larry Fink in 2023 more than doubled from the year before. Page 18

Now online: RiskWatch Q1 RiskWatch takes a look at volatility and correlation in the first quarter. Find it at PIonline.com/riskwatch.

Manager survey closing; OCIO survey prepping

Last call for late responses to Pensions & Investments’ annual survey of the largest money managers . Firms managing U.S. institutional, taxexempt assets are eligible to participate. Results will run June 10. Next up, P&I will distribute the annual investment outsourcing survey with responses due by June 7. Firms serving as outsourced CIOs to institutional asset owners are eligible to participate. Results will run July 15. To request a survey or obtain further information, please contact Anthony Scuderi at ascuderi@pionline.com or 212-210-0140, or visit www.pionline. com/section/surveys

Plan to nd workers’ lost 401(k)s

can’t use

By COURTNEY DEGEN

Congress has tasked the Labor Department with building a lostand-found database to help Americans nd their lost retirement savings. It's off to a rocky start.

The database — mandated by the retirement package SECURE 2.0 passed in late 2022 — will allow savers who lost track of their retirement money to locate their plan administrators, which experts agree is a complex problem in need of a solution.

However, the DOL’s recent proposal for gathering information to build that database is laden with obstacles, industry sources said. The proposal, which the department re-

leased April 15, states that the DOL had planned to use existing data that 401(k) plans regularly submit to the IRS and Social Security Administration, in a ling known as Form 8955SSA.

That ling informs the government about retirement savers who left their employer but still have retirement accounts with them, explained Michael Kreps, principal at Groom Law Group and chair of its retirement services group.

“The challenge with the IRS is … they have a lot of statutory restrictions on what they can do with taxpayer information,” Kreps said, and according to the proposal, the IRS decided it cannot share such data with the Labor Department, citing disclosure and con dentiality restrictions.

Consequently, the DOL asked for retirement plan administrators to submit the requested information on

BlackRock, Saudi wealth fund ink compact

Riyadh-based platform aims to invest across asset classes in private, public markets

By SOPHIE BAKER

BlackRock Saudi Arabia intends to establish a Riyadh-based multiasset-class platform investing across public and private markets, with an initial anchor investment of up to $5 billion from the kingdom’s sovereign wealth fund, Public Investment Fund.

The two have signed a memorandum of understanding for the establishment of BlackRock Riyadh Investment Management, a joint statement said. The anchor investment is subject to the achievement of agreed milestones.

A Riyadh-based portfolio management team is expected to manage the assets, with support from BlackRock’s global asset management platform. Recruitment is already underway, with job speci cations already in the market and offers being made for executives to join to set up the operational platform, a BlackRock spokesperson told Pensions & Investments. The investment team will be a combination of existing BlackRock

personnel and new, on-the-ground staff.

In terms of asset classes, the intention is to manage equities and bonds on the public

side, and private debt and infrastructure on the private markets side, the spokesperson

Ohio Teachers dumped by Aon amid board turmoil

By ROB KOZLOWSKI

Ohio State Teachers’ Retirement System, Columbus, has lost Aon as a governance consultant after the rm resigned from the assignment, according to people familiar with the matter.

The $94 billion pension fund’s board recently tilted to a majority of self-proclaimed reformers who want to gut investment staff and move the pension fund to all index funds, citing a desire to restore a permanent 3% costof-living adjustment.

At the April 18 board meeting, Trustee Wade Steen reclaimed his seat after the 10th District Court of Appeals earlier that day ruled that Ohio Gov. Mike DeWine did not have the authority in May 2023 to remove Steen as his appointed investment expert on the STRS board before the completion of his four-year term.

DeWine originally appointed Steen for a term beginning Nov. 25, 2020, and ending on Sept. 27, 2024.

Steen has been vocal in his support of a grassroots movement of retirees and active Ohio teachers angry about reduced or eliminated annual COLAs. After DeWine appointed G. Brent Bishop as Steen’s replacement, Steen led suit in June and stated in his complaint that Bishop “has wrongfully taken and is acting in, the position of the Governor’s appointed ‘investment expert’ to the STRS Board, the public of ce position to which Mr. Steen is legally entitled and from which Mr. Steen has been wrongfully removed.”

Steen’s restoration to the board creates a 6-5 majority in favor of the reformers.

Aon's duciary services practice was retained to implement recommendations by board governance consulting rm Funston Advisory Services, which conducted a ducia-

ry performance audit on the system in May 2022. Recommendations, which Funston said in its report were solely to “improve duciary performance to bene t current and future STRS members and bene ciaries,” included improvements in STRS’ use of committees, including a “revitalization” of investment and audit committees and the creation of a board governance committee.

Aon had already made recommendations on committee structure and made a presentation at the April 18 board meeting on enterprise risk management recommendations, and it had the development of a long-term strategic plan as part of an agenda of future actions. That meeting ended following Steen’s return to the board. Steen halted proceedings at the meeting, citing a desire to take a ceremonial oath of of ce from a retired teacher despite having taken the oath from a STRS of cial

BIRTH ANNOUNCEMENT: BlackRock’s Larry Fink stands with, from left, Yazeed Almubarak, BlackRock Saudi Arabia, and His Excellency Yasir Al-Rumayyan and Yazeed A. Al-Humied, both of Saudi Arabia’s Public Investment Fund, after signing a memorandum of understanding launching BlackRock Riyadh Investment Management.

Money Management

Wilshire Indexes going hard after industry titans

Innovation,

aggressive pricing seen as key to taking share from FTSE Russell, MSCI

DOUGLAS APPELL

Wilshire Indexes, a little over a year since being hived off by consulting and asset management veteran Wilshire Advisors, is counting on a better mousetrap and aggressive pricing to help the benchmark index provider wrest business from entrenched industry leaders at home and abroad, executives say.

“Our goal” is to challenge the dominance of FTSE Russell in the U.S. market and MSCI globally, said Reza Ghassemieh, Wilshire Indexes’ chief benchmark of cer. In the wake of a sharp decline in the number of listed U.S. stocks over the past 25 years, Russell’s use of xed numeric targets to de ne large- and small-cap stocks — with its widely tracked Russell 1000 U.S. large-cap index and Russell 2000 U.S. small-cap index — creates an opening, said Ghassemieh, who joined Wilshire in 2021 following a decade with FTSE in senior roles. Meanwhile, persistent increases in the fees index industry leaders charge clients for using their data could create another opening for Wilshire Indexes, Ghassemieh suggested.

PRICE WAR: Wilshire Indexes’ Reza Ghassemieh said his rm will seek to undercut competitors’ fees, which he says are rising every year.

It’s common for current industry leaders to lift prices by 4% to 5% a year, leaving a client who paid $200,000 in licensing fees a decade before having to pay two or three times that amount today for “exactly the same data,” he said.

In a market where institutional investors and money managers grouse constantly about fees, Ghassemieh says Wilshire Indexes is looking to be a disruptive force, with the intention of being “very commercially competitive.”

For clients using Wilshire Indexes’ U.S. series “in volume,” the company’s fees could be 40% to 50% lower, while offering longer contracts that can give clients con dence the rm won’t come back to them in a year or two looking to extract higher fees for the same data, he said.

By way of example, licensing fee discounts on that scale would slash to $100 million-$120 million from the roughly $245 million that exchange traded fund giant BlackRock paid MSCI in 2023, according to MSCI’s latest annual 10(k) ling.  BlackRock, the lone client out

Allspring’s Burke: AI can’t do business relationships

Despite its potential, arti cial intelligence lacks the personal touch so important

By LYDIA TOMKIW

Kate Burke, president of Allspring Global Investments, thinks deep client relationships and customized approaches are critical for asset management — something that arti cial intelligence may not pick up on.

“It is a relationship business. And knowing your client and having those in-person discussions that pull apart the needs of you as an individual or you as a pension ... I don’t know that AI will ever fully pick that up,” she said in an interview with Pensions & Investments

Burke joined Allspring seven months ago after spending 18 years

AI powers hedge funds to strong performance

to asset management

at AllianceBernstein, where she was most recently the chief operating of cer and chief nancial ofcer. As president, she’s focusing on executing the rm’s transformation as an independent asset manager.

She sees a lot of value for AI across the ecosystem of asset management from operations to automating fund performance and agging inconsistencies on the risk side.

“I think it (AI) will drive productivity and insights and will ideally help modernize many of the processes that are inside an asset manager,” she said.

For Burke, a major focus is developing deep client relationships,

Record keepers turn to smaller plans to sustain 2023’s growth

By ROBERT STEYER

Surging stock and bond markets propelled record keepers’ record performance last year, but what can the industry do for an encore?

Consultants and researchers acknowledged the markets’ impact last year boosted assets under administration, but they said record keepers will need more consistent sources of future growth.

They predict more consolidation among record keepers, more educating sponsors to adopt auto enrollment, greater emphasis on keeping participants’ assets in plans and accelerated efforts in pursuing startup and smaller DC plans.

“The M&A game isn’t over,” said Bill Ryan, partner and de ned contribution team leader at NEPC. “I wouldn’t be surprised if three of the top 15 record keepers are acquired in the next 18 months.” He didn’t offer names.

“Organic growth for participants will be modest,” he added. Among the top 15 record keepers by participants in the latest annual Pensions & Investments survey, for example, ve had headcounts that were down or at from the previous survey.

Among record keepers responding to the P&I survey, almost all had higher assets under administration in 2023, but Ryan said he believes this thin-margin business will take its toll on some providers as competition causes a continued whittling of record-keeping fees.

The largest record keepers rebounded ercely last year, producing aggregate assets under administration of $10.79 trillion as of Dec. 31, 2023, up 23.3% from the $8.75 trillion as of Sept. 30, 2022.

The survey compared the 15 months ended Dec. 31 vs. the 12 months ended Sept. 30, 2022. P&I made the change because most client ows occur during the fourth quarter of each calendar year. Comparisons between 2023 and 2022 were affected by Ascensus ($207.3 billion) and BPAS ($12.9 billion), which provided data

SEE GROWTH ON PAGE 23

Arti cial intelligence has grabbed recent headlines, but it’s been used by hedge funds for many years. The Eurekahedge AI Hedge Fund index, showing returns starting in 2010, consists of funds that use AI and machine learning for their trading practices. While recent index returns have lagged the overall Eurekahedge Hedge Fund index, the AI hedge fund index has generated better long-term risk-adjusted returns.

Short-term woes: The Eureka AI Hedge Fund index underperformed the Eureka Hedge Fund index in nine out of the last 15 months through the end of March. The AI index’s average monthly return was 0.7%, compared with 0.9% for the overall hedge fund index. Additionally, AI’s volatility was higher, at 7.1% vs. 5.3%.

Monthly index returns

Better in the long term: Looking at annual returns, AI hedge funds bested overall hedge funds half of the time, in seven of the last 14 years from 2010 through 2023. Year to date, AI hedge funds returned 3.6% in the rst quarter, trailing overall hedge funds by about 140 basis points.

Annual index returns

Sharpe contrast: The AI index returned 10.1% with 6.2% volatility from 2010 and 2023, resulting in a higher Sharpe ratio than the S&P 500, Bloomberg Agg and overall hedge fund indexes. Even omitting 2010’s 54.2% return, the AI index’s 7.1% return (5.3% volatility) bested the overall index (5.5% with 5% volatility). Index risk & return, 2010- ’ 23

PERSONAL TOUCH: It’s a relationship business, says Allspring President Kate Burke.

‘Mother Nature is slapping us in the face,’ CalSTRS’ Ailman says

CARYL ANNE FRANCIA By

Amid political backlash and rising interest rates, ESG exchange-traded funds and mutual funds have stopped seeing in ows. Some U.S. red states have enacted or sought to pass laws outlawing ESG considerations in investments, while large asset managers have pulled out of climate-focused initiatives.

But at the California State Teachers’ Retirement System, sustainability is integrated “in everything, in

ension erisking

every way, in every minute of every day,” said Christopher Ailman, CIO of the $331.4 billion West Sacramento-based pension fund.

Despite the anti-ESG backlash unfolding across the U.S., CalSTRS is “still marching ahead because the environment isn’t changing,” he said at an April 16 panel held at the BloombergNEF Summit in New York.

A proponent of investing in the energy transition, Ailman will retire June 30 from the nation’s second-largest public pension fund,

where he has worked since 2000. He will continue to serve as an adviser through the end of 2024.

Ailman has said he will continue to press investors to factor in the risks of climate change into their investment decisions. For now, he’s emphasizing that sustainable investing is “all about long-term thinking,” which is important at CalSTRS, given it provides plan participants money for up to “potentially 60 years.” “I always like to share we have

Alternatives

Private credit is not ‘a monolith,’ according to Copia’s Thomas

ERIN ARVEDLUND By

Private credit is set to grow to $2.8 trillion by 2028 from $1.7 trillion currently, according to data from Preqin, and two portfolio managers in private credit believe there will be increased interest from institutional investors in the asset class.

That's due in part to banks retreating from private credit lending.

“Go back to 2013, and roughly 70% of sponsored middle-market transactions were nanced by banks,” said Shundrawn Thomas, founder and managing parter at the Copia Group, on a Pensions & Investments LinkedIn Live event April 17.

“That’s down 11% last year, so you can appreciate the shift” away from banks to private credit lenders, he said.

"There are more eyes on private credit, but it’s not new. it’s been going on for decades,” said Thomas, who prior to founding Copia in 2022 was president of Northern Trust Asset Management, a global investment manager with $1.3 trillion in assets under management at the time.

Private credit “is now much wider, it’s really just lending,” said Stephanie Rader, global co-head of alternatives capital formation within Goldman Sachs Asset Management, and executive vice president of Goldman Sachs Private Credit Corp.

Despite higher interest rates, “the credit markets have been resilient. Companies have been re nancing, enacting extensions, doing creative solutions with lenders. Defaults have ticked up but that’s been benign. Peak rates are behind us, peak leverage is behind us," Rader said.

Some pension funds have embraced private credit, while others want to wait for a market dislocation or other event to lower prices.

“From my time being an allocator, it’s a very attractive return, coming in cash coupons, principal payments, with less volatility of returns and lower drawdowns," said Thomas. Asset allocators "are saying ‘this has a role in my portfolio.’”

Historically, private credit has

IT’S NOT EASY BEING GREEN: CalSTRS’ Christopher Ailman says despite the political backlash, the fund is all-in on sustainability.

RETIREMENT INCOME

SOPHIE BAKER

Consolidation is an often-used term in money management. But right now, it’s also big business in the U.K. for the retirement industry’s master trusts.

Also known as multiemployer retirement plans, the U.K.’s master trust market is only growing as the shift to de ned contribution continues — around 30 plans hold about 75% of trust-based assets in the U.K., equivalent to about £105 billion ($126.6 billion), as of Dec. 31, 2022.

But those 30 master trusts are ripe for consolidation, sources said — and one of the biggest deals in the master trust market last year was Smart Pension's acquisition of

Evolve Pensions.

The U.K. master trust market represents big money already, but with assets owing into DC showing no signs of slowing, it'll only get bigger. The U.K. government estimates that the top 5 master trusts could hold about £300 billion in assets by 2030.

While terms of the deal were not disclosed at the time, Smart Pensions CEO Jamie Fiveash and Evolve Pensions CEO Paul Bannister disclosed the details of the agreement in an

exclusive interview with Pensions & Investments, outlining the work that’s done and what’s still to come.

“We started looking about four

years ago…at the future (of Evolve’s own master trust, Crystal Trust,) how to secure the future for staff, and I couldn’t make it secure,” Bannister said. “I couldn’t do things I wanted to do.”

Conversations with Smart started about three years ago, and it soon became clear that any deal there would be an opportunity — to add tools to the business that Bannister didn’t have time or expertise to do himself, to enable his staff of about 40 people to better their careers, and work on general “things we wanted to do but we couldn’t turn around quick enough.”

Evolve is de nitely the right name for the company, which is not only the parent of the master trust but also provides DC administration, consultancy and secretary services. It’s been through a number of iterations, starting as the JIB Pension Scheme for electrical contractors, morphing into BlueSky Pension Scheme, which transitioned into Crystal in 2020. The BlueSky Pension Scheme and Crystal were two of the rst master trusts to be granted authorization by the Pensions Regulator. Crystal has more than 1,600 employer members and 128,000 participants. The plan has about £870 million in assets.

Then two years ago, Bannister told Jessica Rigby, director of strategy at Evolve, that “now’s the time. We were under more pressure — regulation, (the need to be) building better strategies, better tools — and we couldn’t,” he said. “We were sort of on the edge of standing still — we didn’t have the money, the time,” he added.

And then in January last year, they decided that Smart was the right home. The deal was nalized in June last year, and the rm’s announced in July that Smart would acquire Evolve for an undisclosed amount.

Executives at both businesses are now dealing with the front-end of the integration — systems, interface for employers and other user focuses.

So what else is left to do? The last contributions owed into Evolve for the month of March, and then legacy bank accounts were closed in April. Emails are changing over to Smart, and members and participant communications will be sent out, reminding them of the move. The business will be wound up over the coming months, with the Crystal plan also wound up. August is a big month — the target for the transition of assets to Smart.

It's not just the movement of assets that executives need to be aware of — but the physical movement of people. Evolve is based in Swanley, a town in Kent, England. “We have got to remember we are a local business — most of our staff have only ever worked in Swanley.

into

EVOLUTION OF A DEAL: Conversations between Smart Pensions CEO Jamie Fiveash (left) and Evolve Pensions CEO Paul Bannister began three years before the deal.

THE ENERGY TRANSITION

Sparking Opportunities

Institutional allocators are actively examining investment opportunities across the energy transition value chain, as more companies move to adopt – and improve their progress toward – low carbon goals in the shift toward a net-zero emissions economy. It’s a burgeoning space with expanded usage of renewable energy, advances in technology, more data availability, and global regulatory policy that encourages clean energy and energy security.

This supplement will help asset owners decipher the breadth of energy transition strategies today, from the use of clean technologies in power generation, EVs and renewables, to the clean-energy supply chain and additional sectors leading the way in embracing low carbon and net zero goals. It will highlight current strategies, both listed and private, that investors are pursuing – while also maintaining appropriate riskadjusted return targets.

Panelists will share insights into some current transitionrelated funds and strategies, and they will address challenges such as how investors are positioned for the long investment cycle, valuations, data and measurement issues, and wider economic impacts.

Sponsored by:

DRIVEN TO DELIVER

Blake Moore’s NFL journey helped shape his asset management career

E. Blake Moore Jr., the president and CEO of Touchstone Investments, has come full circle. He now runs an asset management rm in the town, Cincinnati, where he began his pro football career over four decades ago.

He played in the NFL as an offensive lineman in the early 1980s — four seasons with the Cincinnati Bengals (including a trip to the Super Bowl in 1982) and two more years with the Green Bay Packers before retiring in 1985.

Moore, who would later secure a degree from Harvard Law School before joining the ranks of asset management, said his career on the gridiron helps him in his current role.

“The discipline and rigor required to compete in the high-pressure NFL helped shape my career and leadership style long after football,” he said. “The NFL demands the very best out of each player each week, so as an undrafted free agent rookie at tryouts, I knew I had to deliver above-average effort and results to survive the training

camp cuts and make the roster.”

Moore learned quickly that being “average” in the NFL was never going to be good enough.

“The same applies to the asset management industry, where our clients are relying on us to beat the benchmarks and deliver returns that enable them to meet their nancial goals,” he added. “If all we do is deliver average returns, we should expect our clients to cut us and nd a better-than-average manager.”

Moore indicated that he always saw football as a “fun” endeavor, not as an end in itself.

“I went to a Division III school (College of Wooster in Ohio) without a scholarship and

Real estate managers may have increasing access to physical climate risk data but few know what to do with that information, an issue a new paper by the Urban Land Institute and LaSalle Investment Management aims to address.

According to a LaSalle analysis, 34% of the $850 billion in U.S. commercial real estate tracked by NCREIF Property index in the fourth quarter was located in high and medium-high climate risk zones.

This is ULI and LaSalle’s second joint paper on the topic. Their rst paper, released in 2022, focused on obtaining and interpreting reliable climate data.

“What we learned is there is no perfect data,” said Julie Manning, global head of climate and carbon at LaSalle Investment Management. "In fact, one of the mantras that I said like a broken record to my team is that you need to understand what the data is telling you but also what the data is not telling you.”

The new paper provides a framework for incorporating physical climate risk into real estate underwriting.

The rst step is to make sure the data isn’t wrong, Manning said. “You know the building. You know the location it’s in. Does that (data) make sense to you?” she said.

In one instance, climate risk data agged a risk for ooding because the property was a certain distance from a river, she said. What the data provider didn’t know was that the property was on a hill that was several hundred feet from that river, Manning said.

Once the risks have been accurately identi ed, managers need to analyze the cost of mitigating those risks, the report shows.

And that mitigation is very particular to the property in question, she said. For example, LaSalle has a logistics property in Osaka, Japan, which is a at coastal city where buildings are required to be 3 meters above sea level. Due to the coastal ood risk, LaSalle executives decided to raise the buildings another 1.5 meters and located equipment at higher levels, Manning said.

I didn't start thinking about possibly playing in the NFL until my junior or senior year of college,” he noted. “Even when I started training camp at the Bengals, I was all set up to go to law school out of college and pursue a career in law or business.”

After graduating from Harvard Law in 1989, Moore held various executive roles at a number of major rms, including Allianz Global Investors and UBS Global Asset Management, before taking the top job at Touchstone in 2020.

Moore wouldn’t be surprised if more pro athletes followed in his footsteps.

“An athlete’s competitive drive and desire to win, combined with the discipline to put in the hard work required to succeed, can play well in our business, whether in a sales-oriented position or portfolio management role,” he said.

Touchstone, which manages a number of active mutual funds and ETFs, has about $28.9 billion in assets under management.

STAYING THE COURSE

CalPERS’ Frost vows to keep up the ght against climate change

In announcing Michael Cohen’s appointment as chairman of the steering committee for Climate Action 100+, CalPERS’ CEO Marcie Frost told pension fund board members that his appointment comes at “a crucial time.”

Cohen is the chief operating investment of cer at CalPERS, which in 2017 co-founded Climate Action 100+, a coalition of investors that works with the world’s largest corporate greenhouse gas emitters to take steps to ght climate change.

“Not only are we ghting the existential race against the clock, but we are also, sadly, ghting in some corners a creeping sense of complacency,” Frost said at the pension fund’s April 16 board meeting. “But this is not time to be complacent ... The cause of combating climate change will not move forward on its own.”

This is the second time one of CalPERS’ executives has chaired the group’s steering committee.

The role of steering committee chair rotates every 12 months. Anne Simpson, former head of board governance and sustainability at the $491.4 billion California Public Employees’ Retirement System, Sacramento, served as the group’s

inaugural chair. But instead of expanding the number of high greenhouse gas-emitting companies willing to work to reduce emissions, in recent weeks, in uential investors have decided that they no longer want to be part of a global coalition, Frost said.

In March, four of the 20 largest money managers by assets under management — $4.34 trillion State Street Global Advisors, $3.56 trillion J.P. Morgan Asset Management, $1.86 trillion PIMCO and $1.63 trillion Invesco — left Climate Action 100+,  which has more than

compensation trending at U.S. public pension plans?

What are U.S. public pension fund staff earning these days? The National Conference on Public Employee Retirement Systems and CBIZ’s talent and compensation solutions division are teaming up on a compensation survey for U.S. public pension funds to nd out. Both organizations have conducted their own surveys in the past, and the partnership will enable a “uni ed, more robust dataset,” said

Hank Kim, executive director and counsel for NCPERS, in an April 24 news release.

The need for that more robust dataset became clear to NCPERS when its most recent compensation survey showed almost 60% of public pension funds are experiencing signi cant challenges with recruitment and retention, said Kim.

“We hope to increase transparency into compensation and bene ts

700 investors representing about $68 trillion in total assets. The largest money manager in the world, BlackRock, with $10.47 trillion in AUM, shifted its relationship to its international business.

“The constant bombardment of information or political pressure … It has given these investors pause about staying the course and nishing the work,” said Frost. “As our investment team shared with the board last month, we listen to the institutions that recently chose a different path. We can’t speak to their decisions because we see things differently.”

Cohen, she added, serves as steering committee chair at “a pivotal moment” as the group pushes to get consistent information for investors including its effort to create a net-zero benchmark for companies, she said.

“Climate risk can lead to instability for investors, lower returns and higher volatility,” and CalPERS of cials have a duciary duty “to be relentless in examining risk,” Frost said.

“I am honored to be appointed chair of the Steering Committee and eager to help guide the organization through its next phase of investor engagement,” Cohen said in a news release.

ARLEEN JACOBIUS

packages at state and local pension plans to help identify what resources are needed to attract and retain quali ed, high-functioning staff,” said Kim.

The survey will include comprehensive salary and bonus data for more than 80 common positions found at public pension funds. NCPERS plans to distribute the survey in May to the 500 pension funds, sponsors and other stakeholders in its organization.

NCPERS’ 2023 survey provided information on 13 mid- and senior-level staff positions and re ected responses from 176 participants.

ROB KOZLOWSKI

PALASH GHOSH

PUTTING IN THE WORK: E. Blake Moore Jr. played in the NFL for six seasons.

LOCATION, LOCATION, LOCATION: To mitigate flooding risks, LaSalle built a logistics warehouse in Osaka, Japan, higher than mandated.

E. Blake Moore Jr.

Vernon J. Biever/AP

FIGHTING COMPLACENCY: Marcie Frost says CalPERS won’t be swayed by political pressure.

Jayson Carpenter

GLOBAL MACRO PROVIDES ALLSEASON COVERAGE

Even as the U.S. Federal Reserve and other central banks prioritize getting inflation under control, which sets the stage for lower interest rates, institutional investors face no shortage of ongoing global macroeconomic and geopolitical issues that can keep capital markets — and investment portfolios — volatile.

That’s one reason why a global macro strategy can — and should — play a role in institutional portfolios. Not only can it provide juice to a portfolio during periods of market uncertainty, it can also offer a steady anchor to other investment strategies when times are relatively stable. Viewed as such, global macro can be a useful strategy for all types of institutional investors.

“Allocators should consider macro strategies as an important addition to their portfolios,” said Christian Dery, head of macro strategy at Capital Fund Management (CFM), a global quantitative and systematic asset management firm. “First, it can be a consistent source of return and diversification; and second, it can generate insights for other areas of the portfolio exposed to macro risks.”

Those insights are critical, because all asset allocations — equity and bonds, alternatives buckets, real assets — face macro risks.

Global macro seeks to understand specific scenarios — whether economic, political, regulatory or other factors — that will affect financial assets, and it considers all asset classes and geographies to take advantage of those scenarios.

“The opportunity set spans a broad range of liquid asset classes — including foreign exchange, equities, rates, credit and commodities — with the ability to position long or short across the world to construct uncorrelated and diversified strategies,” said Dery.

UNDERSTAND WIDER IMPACTS

“You can think of macro as a strategy that eventually impacts all strategies,” he said. Dery pointed to 2022, when equity long-short strategies underperformed as central banks aggressively ratcheted up interest rates to combat inflation. Many macro investors understand this playbook well and positioned successfully in 2022. Other strategies would have benefitted from a deeper understanding of emerging macro risks.

“For long-term investors with buy-and-hold portfolios, 2022 was a perfect example of macro impacting passiveinvestment portfolios,” he said. “Inflation and the Fed’s appropriate response caused both stocks and bonds to underperform, breaking the flight-to-quality properties of safe bond portfolios.”

“Not paying attention to the macro environment introduces unnecessary tail risk into strategies,” Dery said. Even strategies that appear market neutral will eventually flash macro biases, he added. For that reason, understanding the role that macro strategies can play is “critical” for all types of investors in order to better understand changing economic trends and their impact on markets and portfolios.

SYSTEMATIC FRAMEWORK

The two foremost global macro strategies are systematic and discretionary. It’s important for investors to understand their key differences. Systematic funds follow rules-based strategies, while discretionary funds rely on managers to make day-to-day investment decisions.

The two approaches have generated complementary performance patterns over various market environments, but the systematic approach can provide better comparative returns and broader diversification by leveraging significantly

more data, computing and technology to test ideas and invest in a wider range of instruments and markets.

Another major difference is cost. “Discretionary traders will have competent execution desks,” but as assets under management grow, trades and positions become larger, which can make it more difficult to control transaction costs, he said.

“At CFM, we dedicate significant research and technology resources to understanding transaction costs,” he added. “Investors forget that transaction costs are the largest cost in strategy implementation, higher than fees paid to access strategies. We store a terabyte of tick data daily and have a database of over 250 million executed trades. This information automatically feeds back into our investment processes and improves execution costs on an ongoing basis.”

Because it trades many more instruments globally, a systematic approach achieves significantly more diversity, not only in markets traded but also in the source of ideas.

“Discretionary funds might not be doing this as effectively, leading to performance leakage,” Dery said.

Another key difference is around diversification. Discretionary global macro portfolios tend to be concentrated, making them potentially riskier than a systematic global macro portfolio. And the bigger the discretionary portfolio, the greater the concentration as human risk takers are forced into a narrow set of liquid contracts to express a small number of investment ideas, Dery explained.

“Because it trades many more instruments globally, a systematic approach achieves significantly more diversity, not only in markets traded but also in the source of ideas,” he said.

“There are certain opportunities which are impossible for a human to capitalize on. For example, small, statistically significant opportunities that decay quickly can only be captured with a platform that has achieved a critical technological scale. It turns out that adding up many of these small but statistically significant effects results in high-performing portfolios.”

HUMAN INPUT

Another major factor that sets systematic global macro apart from discretionary is the human factor.

“Our research process is a form of scientific discovery in which numerous ideas are generated and assessed,” Dery said. “The ability to ideate is only limited by the number of researchers and their creativity, the availability of data and our technology stack. Significant investment in these areas has allowed us to achieve scale.”

“A systematic approach is ruthless. It never sleeps, has no emotions and is continuously adapting,” Dery said. “A human trader might get tired or be having a bad day. This can lead to bad decision making and potentially inferior trades. Ultimately, this will leak into performance.”

But that doesn’t mean that every risk can be captured in a model. “The primary function of our market risk group is

Christian Dery Head of Macro Strategy

to identify emerging risks and determine how they will affect our strategies. As a quantitative manager, we rarely override models but in highly uncertain scenarios, we can reduce our overall exposure to an emerging risk.”

THREE-PILLAR FOUNDATION

CFM’s global macro strategy is built on three pillars: research, portfolio construction and execution. The firm uses a quantitative, data-driven approach to identify macro trends and attractive investments related to those trends. The strategy is systematically implemented across a diversified range of financial instruments and asset classes.

The firm not only has a dedicated global macro fund, but it also applies the same scientific approach for its other strategies. The process involves sourcing and analyzing data to create new investment insights and ideas, testing those ideas, validating them and building them into portfolios.

“The research platform allows us to scale and rapidly evaluate insights to determine if they add value to our strategies. The platform determines whether an insight adds new or statistically valid information to our portfolios or not.”

AGILITY ACROSS SCENARIOS

One of the benefits of a global macro approach is the ability to modify positions quickly, including the critical function of being able to identify and react to major economic, geopolitical or policy changes, he said. This is especially true in periods marked by higher levels of uncertainty, when a global macro manager needs to stay agile to assess the pace and flow of data.

Even the most diverse investors — those allocating significantly to hedge funds at one end and those employing buy-and-hold strategies at the other — face ongoing risks that will impact their investment portfolios. That’s where a global macro strategy can make a difference.

“Adaptive statistical approaches are codified into our models and strategies,” Dery said. “This allows us to detect and react to regime changes quickly.”

“We live in a complex world that is continuously changing.” For example, the last few years have featured rising interest rates, elevated inflation and increased geopolitical risks. The investment environment so far in 2024 has been characterized by uncertainty around the timing of central banks’ next moves, improving economic indicators and a raft of geopolitical hotspots.

“Through a combination of insights generated from our strategies and our deep bench of experienced researchers, we strive to stay in front of key macro risks,” he added. “Investors can benefit from these insights as well to help them better understand embedded risks in their own portfolios.”

“Macro strategies can always find interesting investment opportunities irrespective of the environment,” Dery said. ■

OPINION

VIEWS ANGELO CALVELLO

Deepfakes — the next threat for investors

There’s a short video of Jim Dunn, CEO of Verger Capital Management, talking about arti cial intelligence and investing, at pionline.com/ deepfakes

But Jim never made such a video and he never spoke those words (those come from one of my articles). The video is a deepfake. One of my colleagues took a photo of Jim and a short recording of Jim’s voice and, using open-source technology, in about 15 minutes, cloned Jim’s voice and transformed his picture into a video. (For security reasons, we deliberately chose to make a lower quality deepfake of Jim.)

sexual misconduct.

■ A deepfake of a false corporate earnings report or a non-existent M&A transaction posted on social media leads investment managers to make damaging trades.

■ A scammer creates a deepfake of a partner at a private equity rm and, via a Microsoft Teams call, directs the operations group at a pension fund to wire $25 million to meet a capital call.

hard-to-detect deepfake still requires signicant graphics-editing and audio-dubbing skills and the use of a high-quality graphics processing unit (or GPU).

A deepfake is a video, recording or photo the subject never actually participated in, and while Jim gave us permission to create this deepfake, bad actors use deepfakes to create non-consensual pornography of celebrities and ordinary woman and unauthorized political messages.

Deepfakes have the potential to be particularly concerning for allocators and investment managers, as malefactors could use deepfakes to commit various nancial crimes or tarnish a rm’s reputation.

For example:

■ A disgruntled former employee uses voice cloning technology to create a deepfake of a portfolio manager’s voice and calls a trading desk to place unauthorized trades that adversely impact his former employer’s fund’s performance.

■ A PM reacts to a deepfake of a Federal Reserve governor making plausible but false statements about the Fed’s view of in ation and interest rates posted on social media.

■ A bad actor posts a deepfake video of the CEO of a publicly traded asset manager in which the CEO announces his resignation because of accusations of embezzlement and

This last example is derived from a stark real-world example. In late 2023, a scammer used a deepfake to pose as the chief nancial of cer of a multinational rm to trick a nance worker into paying out $25 million. CNN reports that “The elaborate scam saw the worker duped into attending a video call with what he thought were several other members of staff, but all of whom were, in fact, deepfake recreations. … Believing everyone else on the call was real, the worker agreed to remit a total of HK$200 million Hong Kong dollars — about $25.6 million.”

Deepfakes are created by using deep learning technologies (hence the “deep” in “deepfake”), often generative adversarial networks (or GANs). Yet, despite the complexity of the underlying technologies, almost anyone can manipulate videos, audio and images to create deepfakes without the need for extensive programming skills. Free web-based deepfake applications and opensource frameworks like DeepFaceLab make it easy and relatively inexpensive to create deepfakes. (Some platforms are free, while others charge as little as $20 for a simple deepfake and $80 for a more complex deepfake.) However, creating a convincing and

This easy access and advancement in technology will lead to a tsunami of deepfakes, especially in 2024, a “super election year,” with closely watched elections in the United States, Mexico, India and Indonesia. Security experts, like FBI Director Christopher Wray, warn that deepfakes and other AI-generated content intended to sow misand disinformation will intensify because the generative AI makes it easy for “both more and less sophisticated foreign adversaries to engage in malign in uence while making foreign in uence efforts by players both old and new, more realistic and more dif cult to detect.”

Beyond 2024, the International Data Center Authority cites experts who estimate that “as much as 90% of content on the internet may be AI-generated by 2026.” In addition to deepfake technologies, “we're seeing that people are using AI to generate garbage on literally everything, in every format, for the revenue that advertising brings. As AI gets better this content will become harder to distinguish from legitimate content, which will cause problems when people are looking for factual information,” writes data scientist Joel Therrien in response to “Inside the World of TikTok Spammers and the AI Tools That Enable Them.” This ood of garbage content will have

consequences

Calvello

OTHER VIEWS CHARLES E.F. MILLARD

Target-date funds should give private equity a ‘secondary’ thought

Participants in 401(k) plans are generally long-term investors.

Yet, most 401(k)s have no investment in an excellent long-term asset class: private equity — more specically, secondary private equity.

Today the vast majority of 401(k) and other de ned contribution participants are in target-date funds. Target-date funds take the selection of speci c asset categories out of individuals' hands and put it in the hands of the professional investor — the provider of the target-date fund. Target-date funds also take upon themselves the responsibility to derisk the portfolio as the participants near retirement age They do so by gradually decreasing exposure to higher risk securities and gliding the portfolio into lower risk investments.

Charles E.F. Millard is the former director of the U.S. Pension Bene t Guaranty Corp. He is a senior adviser for Ares Management, based in New York.

One would think that such professionals would make appropriate use of a long-term investment like private equity, especially secondary private equity — which provides easier allocation of capital and broader exposure than typical private equity. Few do so. But they should.

Private equity offers exposure to large swaths of the economy that, by using exclusively public equity, most target-date funds are currently missing. They principally focus on index-level exposure to equities for their return-seeking assets. Usually, this is an allocation to a passive index like the S&P 500 or to an active manager that is meant to

that use data scraped from the web as inputs to their investment processes.

Allocators, managers, and the public should expect little protection from regulators, law enforcement, social media companies or technology companies.

Regulatory and policy frameworks are still evolving, making enforcement a challenge. For example, in the U.S., there currently are no federal laws that prohibit the sharing or creation of deepfakes (some states do have such laws, but they are generally limited in scope), and the European Union’s comprehensive AI Act regulates deepfakes through transparency obligations rather than an outright ban. (This source provides updated information on these jurisdictions and their deepfake-related regulations.)

Social media platforms have policies prohibiting the posting of deepfakes that are “signi cantly and deceptively altered, manipulated, or fabricated,” but enforcement of such prohibitions is neither straightforward nor rigorous. (In the U.S., such enforcement likely could lead to First Amendment challenges.) AI startups and big tech

match or beat the index. This is ne as far as it goes. That kind of breadth provides diversi cation and exposure to a large part of the economy. But, by focusing only on publicly traded companies, target-date funds do not get exposure to enough of the economy.

Fewer than 5% of U.S. companies with 100 or more employees are public companies. This is increasingly the case in recent years, as companies are staying private longer than they used to. In fact, there are about half as many publicly traded companies in the U.S. today as there were 30 years ago. In addition, an index like the S&P is market-cap weighted, so the largest companies have outsized allocations. Today the 10 largest companies in the S&P represent over 30% of the value of the index, even though the index contains 500 companies.

Private markets are increasingly markets that nance mature enterprises, building businesses and creating value through organic growth and operational excellence. They have become important pieces of the economic pie, and they drive fundamental economic growth. Additionally, nancial economists have long argued that private equity managers have access to value-creation tools that public market managers lack. They can change or augment management teams, improve governance structures and use capital markets in a more exible way. Investors who are not exposed to private

companies are building technologies to safeguard against the dissemination of deepfakes, but such technologies offer scant protection. Meta, for example, has created a means for placing watermarks (hidden or visible information about the origin of the content) on images to indicate it is generated by AI, yet researchers were able to remove the watermarks in two seconds. Other tech rms are creating deepfake detection programs, some of which are using biological signals (e.g., imperfections in the natural changes in skin color that arise from the ow of blood through the face or phoneme-viseme mismatches) or forensic techniques that model facial expressions and movements that typify an individual’s speaking pattern,” but there are limitations to these systems and these advancements “drive the increased quality of deepfake videos. GANs can catch up relatively easily; by updating the discriminator to evade the detector, the learning capacity based on feedback loops of those GANs will work to produce a deepfake that can fool the detector.”

This leaves allocators and investment managers on their own to develop deepfake survival skills.

The consensus among security experts like Stu Sjouwerman, the founder of KnowBe4, a rm providing security awareness

equity cannot access those tools.

But private equity poses certain challenges for a target-date fund. Investing in a few private equity funds does not provide the kind of breadth in the economy that the target-date fund needs. And most private equity investments require managing capital calls and dealing with the "J-curve." This means private equity investments usually go down on a mark-to-market basis in the early years.

Private equity offers exposure to large swaths of the economy that, by using exclusively public equity, most target-date funds are currently missing .

This is where secondary private equity comes in. Secondary private equity offerings normally include thousands of companies, rather than only the dozens that might be in an individual private equity fund. This offers the breadth and diversi cation that is a necessary hallmark of target-date-fund investing.

At least as important: Secondaries mitigate the J-curve. With secondaries, capital calls have typically already been made, so an investment does not get marked down by the requirement of additional investments.

An additional bene t of secondaries is

training, is for organizations to “train employees on the basics of deepfakes: what they entail, how they’re created, how they are used for malicious purposes, how they can damage the business, and how employees can help. Security teams must also run phishing and deepfake simulations so that employees build an instinct to recognize them. Employees must learn to evaluate lip movements, accents, background jitters, alignment issues, or unusual timing, and report any signs of suspicious activities.” (MIT’s Affective Computing group offers human-centric guidelines to identify deepfakes and other forms of engineered digital content.)

Because allocators and managers depend on third parties (custodians, fund administrators, brokers, etc.) to provide critical services, their due diligence process should include a rigorous assessment of the vendors’ digital security policy and procedures.   Until there are stringent regulations and enforcement or a technological silver bullet, allocators’ and investment managers’ best defense against deepfakes— and all malicious AI-generated content — is the aphorism, “Never trust but always verify.”

that, unlike private equity funds (where the investor is betting that the private equity fund investor will invest well in companies that are typically unknown at the time of commitment), in secondaries, the portfolio companies are already known, and the secondary investors can underwrite the companies in the portfolio that they are buying.

One nal point regarding private equity and DC plans: If it is good enough for the DB plan, it should be available in the DC plan. De ned bene t pension plans have been investors in private equity for decades, and their returns show it.

Georgetown University's Center for Retirement Initiatives published a paper in 2023 that showed a substantial difference in the returns of DB plans using private equity compared with DC plans.

But the bene ciary of the private equity investment by the DB plan is not the pension recipient; it is the corporate plan sponsor itself. The pension recipient will receive the same de ned bene t regardless of the returns of the investments of the plan. The plan sponsor, on the other hand, can mitigate risk or enhance returns through the use of private equity. This has the potential — and the purpose — of helping the plan sponsor manage its contributions to the DB plan.

If the corporate plan sponsor can reap the bene ts of private equity investing, the DC participant should be able to as well. n

This content represents the views of the author. It was submitted and edited under Pensions & Investments guidelines but is not a product of P&I’s editorial team.

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EMERGING MARKETS

Managers keeping close eye on bumper crop of elections

In addition to the U.S. presidential contest, pivotal votes are taking place in India, Mexico and more

By CHRISTOPHER MARCHANT

In a year that is unprecedented in terms of its number of national elections — with roughly half of the world’s adult population due to go to the polls by the end of 2024 — money managers are keeping a close eye on results and the effect of those votes on emerging markets in particular.

Managers said they will be watching for the potential impact of votes in Mexico, India and South Africa on emerging markets assets, adding that, in order to preserve returns, thenancial sector may need to both appreciate long-term risk and understand what immediate turbulence can be caused by national elections.

But by far, the dominant viewpoint that emerged during money manager interviews is that the most signi cant election this year for emerging markets is not happening among developing countries at all: rather, they’re most closely watching the U.S. presidential contest between incumbent Joe Biden and challenger Donald Trump, slated for November.

“The market is probably cheering” for a Biden re-election, said Thierry Larose, a portfolio manager in the emerging markets bonds team at Vontobel Asset Management, which has CHF 103.3 billion ($113 billion) in assets under management. The last few years under Biden’s tenure have been “relatively friendly” for emerging markets assets, while the expectation is that the policy platform would be more “predictable” than a return of Trump to the White House, Larose said.

However, in the four years of the Trump administration, the MSCI World Markets index only showed a fall in annual performance in one year, dropping 14.57% in 2018, a year before the emergence of the COVID-19 global pandemic. In the three full years of the Biden administration, two have shown annual performance declines in the same index (-2.54% in 2021, and -20.09% in 2022).

This data underlines that a Trump victory may not be all bad for emerging markets. Damian Bird, head of the emerging markets growth team at the $66 billion Polen Capital, noted that for all the anti-China rhetoric espoused by Trump during his rst presidential campaign, starting in his rst year in of ce in 2017, the MSCI China index returned 36% — “completely counter to what one might have expected.”

“Experiences like this have taught us to be wary about being too strong on predicting exactly how these election outcomes will move (capital) ows,” Bird said. With this in mind, and in spite of any disruption that may or may not happen with a Trump victory in the U.S. election, Bird feels there are still “phenomenal” opportunities for investment in the Chinese market, with the nation retaining “very interesting” structural growth. Polen’s emerging markets team is marginally overweight in China, having taken these factors into account.

Ted Mann, a senior research analyst on the emerging markets team at Ariel Investments, which has about $16 billion in AUM, noted that the emerging markets team is over-

weight on domestic equities located in China. Furthermore, this is a position they intend to hold regardless of the outcome of the U.S. election.

“As we think about investing in China, the risks are signi cantly greater for companies that have a model that requires growing by exporting to the U.S. For rms with more of a domestic market, we’re comfortable that these risks are quite moderate, even though you certainly will see the (anti-China) rhetoric and policy actions pick up” in the U.S. election campaign, he said.

Elections and inflation

The impact of an election can be closely linked to the strength of a nation’s currency, something to keep a particularly keen eye on in xed income. For example, this relationship was key to understanding the Argentina election, held last year.

Won by rebrand Javier Milei, so far he has taken an aggressive anti-in ationary stance described as “hawkish” by Larose, who at Vontobel oversees local government bonds denominated in local currencies.

Milei’s actions in Argentina may be benecial to emerging markets investors in the short term, such as stopping the printing of money in an attempt to bring in ation down, Larose said. Vontobel has a small exposure to local government bonds in Argentina.

“Not all elections will have a deep impact on an investment, but some occurring this year such as in the U.S. or South Africa are much more uncertain. We can expect the risk

premium of assets (in these jurisdictions) to be repriced before the election. In South Africa, we have seen the valuations being priced with a wider risk premium precisely because of the growing uncertainty about the outcome and what kind of coalition can emerge from the country’s May election,” Larose said.

Dogged by years of economic woes and corruption allegations, South Africa’s ruling African National Congress faces a potentially bruising general election. In its aftermath, it may need to enter into a coalition government with a reduced majority.

A strong showing in South Africa’s election by the Economic Freedom Fighters — an opposition party with a Marxist-Leninist platform — would not signal the nation’s investment potential to emerging markets managers such as Larose, who describes the EFF as “about as market unfriendly as you can think.”

Larose said he “recognizes the uncertain outcome of the elections” in South Africa, but also believes that local asset government bonds display a “fair risk premium.”

India’s impact

Since elections do not take place in a vacuum, attention should be paid to the wider economic factors at play before making investments or withdrawing from the emerging markets asset class.

India, the most populous nation on earth, is set for its largest election this year. Beginning on April 19 and ending on June 1, the voters will decide the makeup of the Lok Sabha, India’s lower chamber of parliament, which in turn chooses the nation’s prime minister.

However, a victory for incumbent Narendra Modi and his Bharatiya Janata Party is widely anticipated. Of the election’s effect on the mar-

In Asia, managers seeing opportunities ex-China

Economic growth, governance reforms driving trend; some rms also bringing Chinese assets in-house

By NATALIE KOH

Underperformance and geopolitical tensions have dampened demand for Chinese assets, but emerging market portfolio managers say there are plenty of opportunities for performance in other Asian emerging markets such as India, South Korea, Taiwan and Southeast Asia.

As a result, some of the largest asset management rms globally in recent years have started up emerging markets ex-China funds. For instance, the $776.2 billion Fidelity International launched a sustainable emerging markets ex-China fund in February 2023 and BlackRock, which manages $10.47 trillion in assets, launched an ex-China fund in March 2023.

More recently, Robeco, which managed €181 billion ($199.8 billion) as of Dec. 31, launched an EM ex-China equities fund in

kets, Peeyush Mittal, a portfolio manager at investment manager Matthews Asia ($9 billion AuM), sees limited impact.

“Elections are something which continue to occupy a certain mindshare of all investors. The expectation here is that Modi comes back to power and comes back with full majorities (in all chambers). If that happens, the Indian election will likely be almost a non-event,” Mittal said, speaking on a “Why The Engine of Emerging Markets are Roaring In India” webinar on March 28. “Yet if opposition were to surprise, it’ll be a negative surprise for the market, and you should expect to see some sort of a correction.”

GROWTH STORY: India is a leading beneficiary of managers’ reduction in China exposures.

India’s weight in the MSCI Emerging Markets index has grown to over 18%, from about 8% in 2020.

March.

The current demand for ex-China funds is likely driven by the strong economic growth of other emerging markets as regulators execute corporate governance reforms and manufacturers shift operations to outside of China. Sources also noted that some allocators have moved to manage their China investments holistically instead of being exposed to Chinese assets across different funds.

Some asset owners now prefer to manage their China assets internally to keep a better eye on them so they are in a better place to explain their investment decisions to their boards or investment committees if they are questioned, said one Asia-Paci c head of a global asset management rm, who declined to be named.

Institutional investors that remain committed to investing to China now have the added burden of constantly having to be

ready to answer questions from the board or

about

they make

China’s underperformance Chinese stock markets have

to recover since 2021 when

on the

and

investment committee

speci c allocations

in the country, the person said.

struggled

Beijing cracked down

property

internet sectors,

CHANGES AFOOT? Incumbent Prime Minister Narendra Modi, from left, and his party are expected to emerge victorious in India’s June elections, while Mexico may elect the country’s rst female president, Claudia Sheinbaum. Managers are also watching South Africa’s election and whether the Marxist-Leninist Economic Freedom Fighters, led by Julius Malema, will succeed.

Overall, Mittal sees signi cant investment opportunities in India, with the country showing “buoyant” growth and conferences held within the country showing high levels of attendance by foreign investors.

Matthews Asia runs an India Fund that is composed of at least 65% stocks and securities located within the country, and its primary benchmark is the S&P Bombay Stock Exchange 100 index. Since its inception in 2011, it has delivered an 8.35% overall average annual return.

However, while Polen Capital’s Bird understands the “phenomenal” investment opportunities in India, the current overall returns potential for the country has him feeling more downbeat: “If you just picked 20 stocks at random in the Indian market and held them for ve to 10 years, I’d actually be very surprised if you did well in terms of investment returns, just given the elevated levels of in valuations at the moment,” he said. “You need to be very, very selective in India, you need to remain true to the fundamentals of investing, which

rattling investors.

The CSI 300 index is up 6.44% year-to-date as of April 30, compared with 3.62% this time last year. However, the index is down 10.57% year-on-year and 37.94% from its peak on Feb. 10, 2021. The Hang Seng Index is up 5.8% year-to-date as of April 30 compared to a year ago, when it was down 1.37%. Foreign ows into mainland China's

Investors make foray into Vietnam with both eyes open wide

While the frontier market is expected to be upgraded to emerging, some see issues

By NATALIE KOH

means being disciplined on valuation. We actually are underweight in India today, because we think the valuation backdrop is too challenging.”

Mexico

On June 2, Mexico will go to the polls to elect a successor to the largely popular incumbent Andrés Manuel López Obrador, who has reached his term limit. He leads the left wing Juntos Haremos Historia coalition, and their nominee for the election, Claudia Sheinbaum, is widely tipped to win and in doing so would become Mexico’s rst female president.

As in India, Mexico’s election takes place against a backdrop of wider economic opportunity in the nation’s markets.

“Mexico has a very well established and technocratic set of institutions: the central bank, the nance ministry, and so on,” said Kristin Ceva, a managing principal specializing in emerging markets debt at investment management rm Payden & Rygel, which has

stocks and exchange-traded funds through Hong Kong's Stock Connect brought in 110.7 billion yuan ($15.3 billion) in the rst quarter, after months of out ows throughout most of the second half of 2023, which totaled outows of 145.7 billion yuan from July to December.

While the country’s 5.3% GDP growth for the rst quarter announced on April 16 pleasantly surprised investors, China’s policy announcements during its annual plenary meeting in March failed to inspire con dence and the U.S. has continued to introduce China-related investment bills.

The post-pandemic reopening excitement has petered out and died down, said WimHein Pals, head of emerging markets at Robeco, based in the Netherlands. China had the largest underperformance last year and its tailwinds are not as strong as they were before, he said.

“We still are rather cautiously positioned to China in our EM core fund, so we are underweight,” he added. The property sector is still oversupplied so Pals said he remains cautious, but other sectors that slumped in recent years such as the education and internet sectors have shown signs of coming back to life.

Some consumer stocks are also appealing, and while electric vehicle producers may not necessarily have attractive valuations, there are a lot of opportunities in battery makers in

ON PAGE 14 SEE ELECTIONS ON PAGE 14

Tailwinds such as GDP growth potential, the rise of arti cial intelligence and businesses diversifying their manufacturing capabilities beyond China are drawing investor attention to Vietnam, but investors must make the effort to understand the market well, fund managers said.

Sources agreed that Vietnam, like other emerging and frontier markets such as Malaysia, Indonesia, India, and Mexico, has had an in ux of foreign direct investments to expand manufacturing facilities as companies diversify their operations beyond China.

“If you look at the cost of labor in China vs. the cost of labor in Vietnam, I mean, there’s an enormous cost advantage happening,” said Varun Laijawalla, emerging markets co-portfolio manager for the $159.2 billion asset manager Ninety One.

“And I think the other thing is Vietnam has been quite smart around how they set up trade agreements with the rest of Asia. And India, on the other hand, has actually been more protectionist with how they set up trade agreements. So when you think about China plus one and who the real winners are, think Vietnam,” he added.

Vietnam’s exports grew 17% year-on-year in the rst quarter of 2024 to $93.1 billion, leading to a trade surplus of $8.1 billion, up from $4.1 billion a year ago, according to an emailed commentary by Vietnam-focused fund manager Dragon Capital, which has £4.3 billion ($5.4 billion) in assets under management.

that are based in the IT services sector, he said.

“And they have quite a strong production of engineers, which typically are focused on IT services and IT transformation, and are now pivoting towards engineering — so computer science and, essentially, semiconductor engineering,” he said in an interview.

Financial sector shows potential

Another sector that shows potential isnancials, the sources said. For instance, a bank that lends to small and medium enterprises and down the supply chain could be a good play, said Daniel J. Graña, a portfolio manager on the emerging markets equity team at the $335 billion Janus Henderson Investors, based in Boston.

Some sources also noted that the number of quality listed companies in Vietnam is limited at the moment, but that there are opportunities to be found in the private markets. The Ho Chi Minh stock exchange had a market capitaliza-

tion of 5.23 quadrillion Vietnamese dong ($210.3 billion) as of March 31.

“Vietnam’s GDP growth hitting a ve-year peak of 5.7% in Q1 2024 clearly demonstrates the sound health of Vietnam’s economy,” wrote the rm’s senior economist Hung Nguyen.

“The encouraging 0.2% fall in March CPI is a testament to the effectiveness of our domestic monetary policies. This keeps the annual in ation rate at 3.8%, comfortably below the government’s target of 4-4.5%. Such positive indicators reinforce our con dence in projecting a 6.5% GDP growth for 2024,” he said.

In addition, the arti cial intelligence theme is bene ting the country, said Kunal Desai, the emerging markets co-portfolio manager of GIB Asset Management, based in London. The fund manager had over $6 billion in assets under management as of Dec. 31.

The country has a number of businesses

For instance, private markets investment management rm LeapFrog Investments, which has raised $3 billion in commitments from investors, in 2021 invested in Vietnamese commercial and retail bank HDBank. Deploying in emerging markets nancial services is also part of a pro t-with-purpose investment strategy, said LeapFrog’s Singapore-based partner and co-head of Asia nancial services Fernanda Lima.

“It is heartbreaking to consider the things we often take for granted here in Singapore and in our daily lives, things that are simply inaccessible to most in emerging Southeast Asia,” she explained in an interview. “We refer to emerging consumers as those earning $2 to $11.20 a day, there is also a group with lower income than this, these groups are especially

BOOM TOWN: Ho Chi Minh City, the largest city in Vietnam, sparkles at dusk. The country’s booming economy, and low labor costs, are attracting investment.

Wichian Duangsri/Getty Images

Turkey’s economic problems have managers split on investment case

Emerging markets managers are split on whether Turkey remains an investable opportunity, amid dif cult economic conditions, an in ation crisis and important local elections for the nation.

Turkey’s local elections, held at the end of March, showed signi cant victories for the opposition Republican People’s Party. This included victory in Istanbul, where the nation’s current President Recep Tayyip Erdogan was previously mayor.

The local election defeats represent a blow to Erdogan, whose presidency has suffered intense dif culties in recent months, including dealing with the aftermath of a February 2023 earthquake that killed more than 50,000 people.

The nancial policies enacted by Erdogan and his Justice and Development Party had various impacts on the economy: Interest rates were kept low for a protracted period during an era of runaway growth, fueling an in ation crisis. Turkey’s interest rate is now 50%, while year-on-year in ation hit 68.5% in March, an increase on February’s 67.1% rise, according to data released by the Turkish Statistical Institute. The Turkish currency continues to plummet in value, as of April 1 being 32 lira to $1, compared to 19 lira to $1 on April 1, 2023.

With all this in mind, can the Turkish market still be considered an investable opportunity? Charles Gelinet, senior credit analyst and co-portfolio manager of the Emerging Market Debt Stars Fund at investment manager J. Stern & Co, believes so.

CONTINUED FROM PAGE 13

vulnerable to crises such as health emergencies, economic downturns, job losses, or the escalating climate crisis.”

LeapFrog Investments invests for pro t and purpose through a number of funds, including several focused on health and wealth creation. The success of these funds are measured by not only nancial metrics but also other metrics that measure how much of a positive impact they make on people’s lives.

For instance, “the reach metric is

Within the fund he manages, Turkish corporates act as a “core component” of the strategy, despite Erdogan’s previous “unorthodox” monetary policy.

“When you look at it from a bottom-up perspective, and you look at some of the underlying corporates in Turkey, they’re incredible,” he said.

Gelinet points to opportunities such as Koç Holdings, the largest conglomerate in Turkey.

According to Gelinet, in spite of Turkey’s economic turbulence, the company is an attractive investment due to advantages such as generating a signi cant portion of revenues in hard currency and being diversi ed across sectors.

However, Damian Bird, head of the emerging markets growth team at Polen Capital, is in a differing position when it comes to viewing Turkey as an investment opportunity.

“Turkey is frankly uninvestable due to the monetary climate,” Bird said. “Operating in a market like Turkey, you’re swimming against the current too much. You will nd high quality businesses, but we think they will be very rare in nature.”

Bird compared the economic situation in Turkey to that of Argentina and South Africa, further emerging markets countries that are struggling with in ation and preserving the value of their currencies. According to Bird, these conditions lead Polen to exhibit extreme caution when investing, despite some “very, very well run” companies headquartered in these nations.

CHRISTOPHER MARCHANT

China still, he said.

“Regulation is becoming less tough than feared so with valuations coming from high 30s to low teens or even single digit P/Es, some of these sectors and companies are interesting,” he added.

Still, China is not a lost destination for investors, he said.

The latest Purchasing Managers' index data showed  there is some pickup in the real economy and “we might have seen the bottom of the economic cycle,” he said.

The PMI rose 1.7 percentage points in March from the month before to reach 50.8%, indicating decent growth in the manufacturing sector.

India overweight

Emerging market portfolio managers have zoomed in on India as they reduce their China exposures.

China’s weight in the MSCI Emerging Markets index has fallen to about 25% from over 40% in 2020, while India’s weight has grown gradually to over 18% from about 8% in 2020, noted Pals.

“India, for us, is probably one of the most powerful domestic stories globally. This is across any emerging market and any developed market,” said Kunal Desai, London-based emerging markets manager at GIB Asset Management's emerging markets manager.

GIB Asset Management managed over $6 billion in assets as of Dec. 31.

Since 1986, the corporate sector has produced a high return on equity, Desai said. “Compared to other markets around the world, its average ROI tends to be 5 or 6 percentage points. … When you look at the variability of its return on equity — how volatile those returns are year over year — it's far lower than what you

Elections

CONTINUED FROM PAGE 13

$162 billion AUM. “The country has also been able to get out of a low growth rut and for the last couple of years has been really improving on that front.”

Data from the International Monetary Fund shows that Mexico’s real GDP grew 5.7%, 3.9%, and 3.2% in 2021, 2022, and 2023, respectively, although that growth rate is predicted to fall to between 1.4% and 2.1% from 2025 onwards.

For Ceva, a Sheinbaum victory

see across other emerging markets,” he said.

He also anticipates that private capital expenditure will return to the Indian market after the elections, which “sets into motion an investment cycle, which is your traditional hallmark of a bull market cycle,” he said.

“This is (signi cant) for a market the size of India, which is a $3.5 trillion economy. The ability to turbocharge growth, which is really predicated on private sector capex, will then ow through to all sorts of subsectors and smaller areas to bene t from … There are very few markets which are blessed with that position on their own capital cycle, where initially, we're seeing this environment of very sharp and improved corporate pro tability as balance sheet restraint remains in place. But this sets up the con dence for the next two years of an investment cycle to take place,” he said.

Despite these tailwinds, Pals from Robeco said that an active investment strategy would work better in India because passive funds are exposed to overvalued sectors, whereas active funds are able to spot sectors and rms that have “a nice growth angle without crazy overvaluations.”

Other economies to consider

Several other economies such as South Korea, Taiwan and those of Southeast Asian nations are also bene ting from China+1 strategies, in which companies diversify their manufacturing facility locations.

“Within emerging markets, you have a big spectrum of countries, you have Korea, Taiwan — which I would argue don't belong in emerging, they should have been developed — and the other extreme that (includes) much earlier stage and economically developed countries. Vietnam would be an example of that,” said Daniel J. Graña, a portfolio manager on the emerging market equity team

also means scal continuity, and even a level of outright scal conservatism that was seen in the previous administration, which dispelled fears that an undue amount of tax dollars would be spent on Obrador’s “pet projects,” according to Ceva.

Payden & Rygel is overweight Mexico, seeing particular value in corporates and local markets. However, Ceva said that the rm “may decrease its allocation somewhat” if Scheinbaum’s party does better than expected in Congress as there may be “lower scal guardrails” in that scenario.

Mann notes that Ariel is under-

just one of many metrics we look at,” Lima said. On Apr. 15, LeapFrog announced that its portfolio companies have reached 537 million people with essential services such as insurance, pensions, healthcare and climate solutions.

LeapFrog’s investors have included insurers such as MetLife, Prudential and AIA Group. In 2021, Singapore’s $287 billion state investment company Temasek committed $500 million to LeapFrog funds.

Re-rating Vietnam

Vietnam is currently rated by the MSCI as a frontier market and is not included in emerging markets indexes, but some fund managers expect it

to be upgraded in the next few years.

“They have to modernize a few areas, especially on the capital markets front, but they are working hard at it to really get to emerging markets status. But we look at fundamentals, at the macroeconomics, at the political stability of the country, and we invest, for example, in nancial services, which are highly regulated, and in industries with low carbon impact,” Lima said.

The team also meets regularly with the central bank and other regulatory bodies to keep abreast of the latest policies and guidelines.

“These are technocrats — they are professional, (and are) individuals who have been highly educated and

understand the need to keep pace with international standards. The Prime Minister and the political party understand that it is a highly technical area that they need to keep systemic risk in check and that nancial services can be the engine of growth and wealth in this country,” Lima said.

Eyes wide open

Despite the tailwinds for Southeast Asia, such as a young population and fast-growing GDP, investing in the region comes with its challenges, the fund managers said. Nearly half (43.3%) of Southeast Asia’s population is made up off people aged 2235, according to a 2024 survey report by Singapore-based think tank IS-

EAS - Yusof Ishak Institute, which indicates a strong workforce in the decades to come.

“What’s lacking right now in Southeast Asia, is the navigation of (whether the region) creates better risk-reward than going to North America or Europe,” said Rick Ramli, acting president and group chief executive, and chief investment ofcer of private and strategic investments at Permodalan Nasional Berhad, Kuala Lumpur, at the Financing Asia’s Transition Conference 2024 in Singapore on Apr. 17.

PNB had 341.6 billion ringgit ($77.4 billion) in assets as of Dec. 31, 2022.

“When we look at speci c projects in the region (Southeast Asia), hon-

RED FLAGS: Sky-high interest rates, and in ation that hit 68.5% in March, have some investors staying away from Turkey.

David Lombeida/Bloomberg

‘India, for us, is probably one of the most powerful domestic stories globally. This is across any emerging market and any developed market.’

GIB ASSET MANAGEMENT’S

KUNAL DESAI

at Janus Henderson Investors, based in Boston.

“Korea, Taiwan are going to be growing at 2 to 3% a year, and that's considered a good year, whereas the earlier stage countries are going to be growing faster, (but) there's probably going to be more volatility, there's going to be more change over on the politics,” he said.

The markets are more comfortable buying a Samsung or Taiwan Semiconductor Manufacturing Co. bond but Grana said that there are opportunities in other sectors such as banking. In Vietnam for instance, credit penetration is very low “so there’s a real need for the banking system”, he said.

“We have circled some other in-

weight in Mexico, even as he expresses excitement over areas such as the country’s nearshoring activity, with industry moving from markets in Asia to Mexico, and in 2023 reclaiming its place as the No.1 nation exporting to the U.S. “At the end of the day, we just nd better opportunities elsewhere. The stocks that we look at in Mexico are not particularly compelling in terms of valuation,” he explained.

While a Sheinbaum-led victory is likely, what is perhaps of more interest to the markets is how this will affect legislation, if not immediately then still within the six-year presidential term, said Anthony

estly, the risk-return did not quite meet the level in which we were comfortable taking further concentration risk in the region, or taking currency risk, or even regulatory risk,” Ramli said.

The fund manager generally looks for certainty in terms of the risk-return when deciding on capital deployment. “We have invested in the past in frontier, semi-infrastructure projects, (then) regulation changed, and we had to write off those investments,” he said.

Investors go into emerging markets with their eyes wide open, Ninety One’s Laijawalla said. “You go into China with your eyes open, you go into Saudi Arabia with your eyes

dustries, such as staples and retailing. We don't feel that now is necessarily the time to buy those. But certainly, those are other sectors that are attractive from a longer-term perspective,” he said.

AI tailwinds

In addition, “anything that enables arti cial intelligence has tremendous tailwinds,” Grana said.

“The chips made are designed in the West but manufactured in Asia, so key parts of the value chain are in Asia, whether it’s servers, memory chips, cooling of servers. Increasingly, people are going to want generative AI on their smartphones, and so those companies in Asia can blend together (their capabilities).”

Varun Laijawalla, emerging markets portfolio manager for the $159.2 billion asset manager Ninety One, agreed that AI is a theme that is here to stay. “When you look at the sheer capacity requirements of large language models that need chips, and it doesn't need old chips, it needs newer chips that are smaller that have higher power. The only business on Earth that can do that today is TSMC,” he said in a video interview from London.

Taiwan Semiconductor Manufacturing is often misunderstood by investors who might not realize the pricing power that it has because of the company’s moat or competitive advantage, he noted.

“The cost of trying to replicate a TSMC by creating a fab and building the technology in order to compete every year becomes more and more expensive every year that technological advantage expands,” he said.

The company could increase prices by 20% but it chooses not to because it could wait to gather more customers that rely on its products, he said. “When TSMC surprises the street positively, it's always around the pricing,” he added. n

Kettle, a senior portfolio manager within the emerging markets team at RBC BlueBay Global Asset Management, which has $432 billion in AuM.

“Mexico in general has a lot of debt outstanding, particularly in the corporate world. So any change in government policy which can impact the corporate sector can be very meaningful,” Kettle said, specifying something such as a shift to greater sustainable energy investment.

RBC BlueBay GAM is currently overweight Mexican corporates, and Kettle does not see that changing in the near term. n

open. The way the law plays out in these markets is something you need to understand and accept. The judgment that you have to make is, am I being compensated to take the risk?”

Judging emerging markets investments on a backward-looking basis to decide whether or not to invest in them today is also a awed way of looking at it, he added.

Mubadala eyes AI, digitization, renewables in Asia expansion

By NATALIE KOH

Mubadala, Abu Dhabi, is focusing its Asian investments on opportunities that arise from the arti cial, digitization and renewable themes, Deputy Group CEO Homaid Al Shimmari said.

The sovereign wealth fund, which has $276 billion in assets, has previously said that it was looking to double its Asia allocation to 25% from 12% of the portfolio by 2030, according to Bloomberg.

“We're looking at countries (such as) China, the second largest economy, but then Japan, Korea, Vietnam, India — those are all big geographies for us, in addition to the Middle East, of course,” Al Shimmari said during a reside chat on April 24 at the AVPN Global Conference 2024.

The wealth fund already has a small investment in renewables in India, he said, and he believes that it is important to create “a bigger stream” of investment to help develop environmentally friendly energy sources.

“India has the largest population in the globe (and) is something of great nancial value for Mubadala, and also great investment impact for Mubadala,” he said. Investing in India also helps build a bigger political relationship with the country, he added.

Mubadala is also looking into data centers and ensuring the energy consumption of these assets is not excessive. “Today we're moving into AI, we move into clouds. And I don't think I have to preach to any of you the amount of data centers and energy consumption of those data centers that we need,” he said.

“Add to the factor that today, every single government says ‘I want to control my data, I want to bring my data onshore, I'm not going to put my data in whatever country or geography outside of my control’,” he said.

“We think about the energy demand, how much data AI and digitization is actually putting up the energy demand for that… We've discovered that we need to still continue to develop energy sources, traditional nuclear gas, solar power, all of that because it is the right thing to develop that emerging sector, but keep the (energy supply stable),” he said.

The fund works with its general partners to help its portfolio companies contribute and adapt to the energy transition.

“As a custodian of a body of wealth, and body of money, we're not just going to have a re sale of that investment and let go,” he said.

Instead, the fund asks its GPs for solutions on how they can reduce the carbon footprint of their investments and what can they do to offset the country’s carbon footprint.

If there are no answers to these questions, the fund will then ask how can we get out of the investment in an orderly manner and deploy those returns.

Sovereign Wealth Funds

Execs discuss how to be a better investor at NBIM conference

Firm also welcomes leading psychologists to take part in annual investment event

SOPHIE BAKER By

Which entity can bring together representatives from Bridgewater Associates, Oaktree Capital Management, Wellington Management and Apollo Global Management — as well as the biggest names in psychology — to discuss how to become a better investor? The Norwegian sovereign wealth fund and its in-house manager, Norges Bank Investment Management, of course.

Government Pension Fund Global, Oslo, which had 17.72 trillion Norwegian kroner ($1.63 trillion) in assets as of March 31, along with NBIM presented its 2024 investment conference on April 23, live-streaming the event as well as holding an in-person conference. The topic was how to become a better investor, and the agenda was bursting at the seams with big names and inspirational speakers.

First up for CEO Nicolai Tangen and his team at NBIM was Greg Jensen, co-CIO at Bridgewater Associates. The executive presented the world’s largest hedge fund’s philosophy, explaining that “excellence” is core to the rm and that the rm measures “excellence by continuous improvement.”

Bridgewater, which has about $120 billion in assets under management, focuses on two things: “to deeply understand how the economic system works, and apply that to build great portfolios.”

PIVOT POINT: Bridgewater Co-CIO Greg Jensen said having a strategy for being wrong is one of the rm’s philosophical tenets.

He said three components are critical to understand the rm’s philosophy: its focus on fundamentals — “what actually drives markets”; then taking that belief in what drives markets and being able to “systemize” it; and nally, having a strategy for being wrong.

"Our strategy for being wrong is diversifying, but there’s different strategies. But you need to know, whatever you believe with whatever con dence, you are going to be wrong a tremendous amount,” Jensen told delegates.

Next up was Howard Marks, co-founder and co-chair at Oaktree, who discussed how an investment philosophy “has to undergird everything we do. My argument is that behavior has to be well thought out and intentional, so our methodology has to be as well.”

Jensen and Marks were then joined by Jean Hynes, CEO at the more than $1 trillion Wellington, and Patrick Healy, CEO of U.S. private equity group Hellman & Friedman. On the panel, Hynes said every company has an “edge — I think our edge is that we are really collaborative ... And that’s the secret sauce. We don’t have one CIO, we have 600 CIOs, and we have normalized debate — having different perspectives on any topic.”

Also on the agenda from the money manager side was Marc Rowan, co-founder and CEO of alternatives rm Apollo Global Management, which had $651 billion in AUM as of Dec. 31. Rowan said he tells his organization: “don’t be defensive, be curious — change is a constant. We as investors, we in nancial services, I think have consistently underestimated the impact of change — we’ve been resistant to change, we’ve denied change, we stick to the status quo.”

He questioned whether past performance and track records remain relevant. “What are the chances that we’re going to print in the U.S. another $8 trillion and everything will go up to the right? Why would track record be relevant?” he asked.

“No matter who you were, your capital market assumptions for emerging markets equities over the last 10 years were terribly wrong and overshot massively. … I think the question is, okay, that’s looking back, but what about looking forward?” he said.

“I’ll give you an example. We own a company that is deeply rooted in production, the whole value chain of petrochemicals... in Spain. And we have been working with them for the last four years and our partners at Carlyle to x the strategy and the evolution of it. So from a pure oil and gas company today to a whole new energy company, where they're investing in renewables (and) reducing their carbon footprint,” he said. n

n

Delegates then heard from Amy Edmondson, Novartis professor of leadership and management at Harvard Business School, on the importance of “psychological safety,” which is needed as investors “because your success depends on your ability to make high-quality bets.” That safety “looks like a sense of permission for candor — it does not look comfortable. It probably looks a little uncomfortable, because it’s not natural and normal to sort of lean in with the thoughts you have that you’re not absolutely sure are right or helpful,” Edmondson said.

Among other speakers were Robert Wallace, CEO at the about $40 billion endowment fund at Stanford University, Palo Alto, Calif., and Kristin Harila, the world’s fastest mountaineer. Tangen said the 2025 investment conference will focus on what makes a great company, with provisional speakers including Tesla CEO Elon Musk. n

Returns, allocation changes combine to boost funding

ment return environment in both public equities and xed income.

Suddenly, corporate pension plans found themselves fully funded on average.

“2022 felt like it changed everything,” said Brian McDonnell, head of the global pension practice at Cambridge Associates. “Plans all of a sudden were fully funded, and they didn’t really anticipate they would have an opportunity to see that in the near term. I don’t want to say it was a scramble, but all of a sudden, they had options on their doorstep that they didn’t think they’d have yet.”

Many corporations with de ned bene t plans have worked for years at derisking their plans, through such methods as liability-driven investing, closing or freezing plans to future bene t accruals, and engaging in pension risk transfers, either through direct lump sums to participants or transferring liabilities to insurance companies.

Those moves, however, require full funding which sometimes can require a large corporate contribution. Those kinds of contributions have not been necessary the last two years, for the most part. Expected contributions for 2024 among the 100 plans totals only $9.5 billion, down from $12.5 billion in 2022.

The health of corporate pension plans in 2023 was also helped by an improved invest-

For the year ended Dec. 31, the Russell 3000 index and Bloomberg U.S. Aggregate Bond index returned 26% and 5.5%, respectively, a signi cant turnaround from their respective returns of -19.2% and -13% the previous year.

P&I’s universe of 100 plans accumulated $74.7 billion in actual return on plan assets in 2023, compared with accumulated losses of $245.7 billion in investment losses in 2022. The average discount rate dropped slightly to 5.18% from 5.25%.

As of Dec. 31, total fair value of plan assets was $1.072 trillion, down from $1.075 trillion a year earlier, while projected bene t obligations totaled $1.073 trillion, down from $1.075 trillion the year before.

Fixed income a stabilizer

Royce Kosoff, managing director, retirement at Willis Towers Watson, said the situation for corporate pension plans is far more stable than the last time they were fully funded on average.

“If you just look at all of the metrics, we can even start with asset allocation, for example,” said Kosoff. “This year was the 16th straight year where we saw a decline in (the allocation of) public equity and an increase in debt. It was

Corporate pension funding at a glance

with xed income or debt, intended to in many cases match the liability movement, so companies are protected from those interest rate swings.”

As of Dec. 31, the average allocation to xed income among the top 100 companies was 49.6%, according to the P&I analysis. Fifteen years earlier, the average allocation to xed income was 33.8%. Also, 51 companies had over 50% allocated to xed income, up from 38 companies a year earlier.

Meanwhile, the average allocation to equities among the top 100 companies was 23.2% as of Dec. 31, compared with the average allocation of 48% 15 years earlier.

J.P. Morgan’s Gross said that while he would

“never say never” to a funding crisis in the future, the changes in asset allocation among corporate plans have made a crisis unlikely.

“There is always some ‘black swan’ event that might harm tensions, but it is becoming increasingly dif cult to identify signi cant areas of risk for what I will call kind of the standard model of de ned bene t allocation in 2024,” Gross said.

That standard model is a large customized hedged portfolio with a large portion allocated to assets designed to resemble liabilities, combined with a smaller portfolio of return-seeking assets that are diversi ed across both public and private markets, said Gross.

SAFEGUARDED: Willis Towers Watson’s Royce Kosoff noted that with the decrease in public equity allocations for 16 consecutive years, funds are more protected from interest-rate volatility.

Carlos Alejandro

The funded status of corporate pension funds

The largest corporate pension plans ranked by funding ratio — plan assets as a percentage of projected benefit obligation — as of Dec. 31, unless otherwise noted.

8

4

3

Notes: 1 As of 9/30/2023; 2 As of 10/29/2023; 3 As of 12/30/2023; 4 As of 5/28/2023; 5 As of 2/3/2024; 6 As of 12/29/2023; 7 As of 10/31/2023; 8 As of 4/28.2023; 9 As of 5/3/2023; 10 As of 6/30/2023.

Security costs for BlackRock’s Fink more than double

DOUGLAS APPELL By

BlackRock’s 2023 costs to ensure the security of Chairman and CEO Larry Fink more than doubled from the year before, according to the $10.5 trillion, New York-based money manager’s April 4 proxy ling.

In the wake of the rm’s emergence in recent years as a focus of anti-ESG political campaigners, BlackRock reported in its latest proxy statement  expenses of $780,350 for the year to protect Fink. That included $216,837 for security personnel and $563,513 to upgrade the home security systems at Fink’s residences.

The latest outlays compare with $376,360 for 2022, with $198,410 for security personnel and $177,950 to upgrade Fink’s home security systems.

The increase in security-related expenses points to continued caution by BlackRock’s board in the run-up to a presidential election in November, after Fink and the company became lightning rods for political pushback against an environmental, social and governance focus that had gone from strength to strength for much of the past decade.

After a period of full-throated support for ESG and climate-related factors in investing, which peaked with Fink’s assertion in his 2020 annual letter to CEOs that “climate risk is investment risk,” BlackRock’s longtime head has striven to counter the narrative that the money manager effectively boycotts fossil fuel companies to the detriment of client returns. Fink stopped using the word ESG, claiming it had

Funding

CONTINUED FROM PAGE 16

“That combination in aggregate delivers modest excess performance with a relatively low level of funding volatility,” he said. “In any dimension of risk that you choose to look at, pension funds are materially safer than they have basically ever been before because the last time we were at these levels of funding, the asset allocation was riskier.”

“So that combination of improved funding and derisked asset allocation has proven to be incredibly powerful at taking risk out of the system,” he said.

Reopening DB plans

Now that more plans have surpluses, executives have more options than ever. One such option, at times unthinkable over the last two decades, is using pension surplus money to reopen a de ned bene t plan.

International Business Machines Inc., Armonk, N.Y., shocked the institutional investing community when it announced its decision in November to reopen its de ned bene t plan with a cash balance component. The company originally froze its de ned bene t cash balance plan to future bene t accruals as of Dec. 31, 2007. Since then, the IBM 401(k) Plus Plan has been the primary retirement plan for active employees, and in 2022, the company contributed just over $489 million to the plan, according to its latest 11-K ling.

In November, IBM announced it was scrapping its 401(k) corporate match and replacing it with a cash

PUBLIC SECURITY: Political pushback against BlackRock’s ESG stance resulted in higher protection costs for Chairman and CEO

been “weaponized.”

He has pointed to the hundreds of billions of dollars BlackRock invests in those companies, while emphasizing that the rm always invests in line with its clients’ preferences.

So far, 2024 has offered mixed signals as to whether that moderated message is resonating.

In March, for example, the $52.3 billion Texas Permanent School Fund, Austin, terminated BlackRock from $8.5 billion in equity mandates to comply with a local anti-ESG statute.

But in April, a committee set up by Arkansas’ state treasurer to identify money managers that boycott fossil fuel rms or other sectors for ESG-related considerations didn’t include BlackRock on its initial list of six money managers — a potentially signi cant sign

balance component called a retirement bene t account. In all likelihood, IBM was spurred on to the decision by a very healthy funding surplus in its de ned bene t plan.

As of Dec. 31, 2022, the company reported a funding ratio of 116.8% in its 10-K ling.

IBM is the only company of its size to make such a bold move, but its signi cant visibility has spurred discussions by some plan sponsors.

Michael Moran, senior pension strategist for Goldman Sachs Asset Management, said that now that ongoing pension surpluses are feasible for the foreseeable future, more companies are evaluating how to use those surpluses.

“They’re asking ‘How can I use that surplus in the most economic manner?’” said Moran. “As you know, just given how the Internal Revenue code works and the ERISA rules work, if a sponsor takes that surplus out, depending on what they use it for, they may have to pay a very punitive corporate and excise tax, but there are some useable uses of surplus and certainly one of them is to pay for future accruals.”

Moran said there are potential other uses for surpluses as well, such as paying for retiree healthcare bene ts or, following the acquisition of a company with an underfunded pension plan, using the surplus money to bring that plan to full funding.

More broadly, Moran said he is seeing a lot of companies discussing what to do with their surpluses, particularly in terms of how they approach asset allocation. The typical idea of a liability hedging glidepath has been to reach a 100% liability hedging allocation at 100% funding. However, plans are considering

that the rm has ceased to be a onestop shop for anti-ESG campaigners.

In addition to the costs outlined for Fink’s security, expenses to ensure the security of Robert S. Kapito, BlackRock’s president, in 2023 totaled $51,464 — with $2,499 for security personnel and $48,965 to upgrade the home security system at Kapito’s residences, the proxy statement said.

BlackRock’s April 2023 proxy ling said home security measures were put in place for Fink from 2022 and for Kapito from early 2023. The proxy statement noted that the steps taken to ensure the security of BlackRock’s top executives were recommended by an independent, third-party security study and supported by BlackRock’s board as “necessary and in the interest of the company and its shareholders.” n

leaving risk on the table to get their funding levels higher as they consider uses for surplus, Moran said.

“Maybe we want to pause for a minute and before we continue to head down that path, see if there’s other uses for surplus we may want to consider,” Moran said.

Offloading pension liabilities

While IBM’s decision has sparked discussions about the feasibility of using surpluses to reopen plans among some corporate plan sponsors, improved funding has primarily meant companies have been able to reach certain derisking goals.

“There are still a number of plans that are, ‘I want to derisk the plan, I want to shrink the liability, and one day I want to get out of the pension business,” Moran said.

The ultimate goal for many is pension risk transfer, whether that is transferring just a portion of pension liabilities to an insurance company or fully terminating the plan. According to LIMRA, the number of U.S. pension risk transfer transactions reached an all-time high in 2023, with 850 transactions completed.

The majority are retiree liftouts, and while there are corporations out there who want to get out of the “pension business,” that isn’t going to happen any time soon for many, said WTW’s Kosoff.

“Many sponsors still have ongoing accruals for some group of participants, even if they’ve closed their plan or partially frozen,” said Kosoff. “There’s still plenty of participants across many of these same companies that have pension accruals so you can’t obviously terminate a plan when that’s in place so that for many organizations will prevent an immediate endgame.” n

Compact

CONTINUED FROM PAGE 2

said. These will be Middle East and North Africa-based assets, but the majority of investments will be Saudi Arabia-speci c.

The move will also contribute to the enhancement of the kingdom’s asset management sector: BRIM aims to support foreign institutional investment into Saudi Arabia, the statement said. It also seeks to broaden local capital markets while driving investor diversi cation across asset classes and develop the market’s Saudi-based asset management talent.

“One of BlackRock’s most important contributions in the countries in which we operate is to bring our knowledge and understanding of capital markets to help drive future economic development,” said Larry Fink, chair and CEO, in the statement. “We are excited to build on the deep partnership we have developed with PIF over many years to launch this rst-of-its-kind international investment management platform in Saudi Arabia.”

The platform will be fully integrated with BlackRock’s investment capabilities and operating platform.

BlackRock has also already

launched a graduate program in Riyadh — the BRIM Graduate Development Program — teaming up on talent development initiatives with PIF.

PIF is an active player in advancing Saudi Arabia’s economic transformation and diversi cation. The sovereign wealth fund has about $750 billion in assets according to the kingdom’s Vision 2030 annual report for 2023. Since 2017, PIF has created 94 new companies and more than 644,000 direct and indirect jobs, the statement added.

“PIF’s relationship with BlackRock is well established and growing,” said Yazeed A. Al-Humied, deputy governor and head of MENA investments at PIF, in the statement. “Partnering with leading global international companies and asset managers like BlackRock is part of PIF’s growth strategy. This new landmark agreement represents a step forward in PIF’s work in making the Saudi investment and asset management market more internationally diverse and more dynamic.”

The nonbinding memorandum is subject to satisfying necessary conditions, regulatory approvals, and the ful llment of speci ed milestones, such as those related to talent development. n

LEADING THE WAY: Shundrawn Thomas said Copia Group ‘is committed to make the majority of our investments in gender-diverse or ethnically diverse rms.’

Credit

CONTINUED FROM PAGE 4

returned about 300-to-500 basis points above public credit, Rader said. “That has tightened and narrowed in the higher quality senior part of the market. But for us, it’s still a very compelling risk reward.”

Thomas said returns on private credit can range from “high single digits up to 20%, depending on whether you’re using leverage, where you are in the capital structure and whom you’re lending to.”

Copia Group, for example, can charge higher rates simply because the rm lends in the lower-middle market, he said, to companies typically with $5 million to $100 million in revenue.

“Larger sponsors can’t roll out of bed to look at those deals. People talk about private credit as a monolith,

and that’s not the case,” he said. That’s partly due to a lack of access to capital among women and underrepresented communities, he said. Preqin data show private credit rms at least 50% woman or minority owned hold a combined 2% of all private credit assets under management. At the same time, women own 40% of all businesses in the U.S. Minority entrepreneurs are also starting businesses at much faster rates than their white male counterparts in the U.S, said Thomas. Copia Group “is committed to make the majority of our investments in gender-diverse or ethnically diverse rms,” he said. Goldman Sachs prefers to lend in recession-resilient sectors such as healthcare, software, business services, industrials and packaging. Copia Group mostly lends to business services, consumer and food sectors, healthcare, nancial services and manufacturing.  n

Brent Kelly

Larry Fink.

EXECUTIVE CONVERSATION with DELIVERING THE VALUE PROPOSITION

Asingular focus on value investing over its 50-year history has positioned Brandes Investment Partners to capture opportunities across the breadth of market cycles — and that’s no different today. Brandes recently completed a leadership transition, with Oliver Murray stepping into the CEO role from his former position as managing director of portfolio management and client services, and prior CEO Brent Woods taking on new responsibilities as president of the firm’s general partner. P&I spoke with Murray and Woods about the value of “value,” what distinguishes a successful value approach and why asset owners should consider exposure to value now — and over the long term.

Pensions & Investments: What differentiates Brandes’ value investment approach, and how do you maintain style consistency?

Oliver Murray: We’ve done one thing for 50 years, and that’s a value-oriented approach to investing in equity and fixed income. Second, we’ve always been employee-owned and client-focused, which has allowed us to maintain a culture that is conducive to long-term thinking and investing, a key part of our edge. Third, our strong fundamental research leads to a portfolio construction process and portfolio weighting that are compelling for the long term. Together, these elements have allowed us to create a culture that is consistent and predictable, making us a reliable implementer of the value strategy.

P&I: Are we at the start of a resurgent value cycle? What are some supportive fundamentals that make it a good time to consider value equities?

Brent Woods: We have seen a long period of growth dominating global equity markets since the financial crisis. But we believe that the long-term outperformance of value versus growth, though it reversed somewhat in 2023, has considerable room to run. First: Value and growth cycles have tended to be multiyear, but the argument for value rests on fundamentals. If you look at how the market prices value versus growth, we’re in an attractive place — in the 70th to 90th percentile relative to history.

The second factor is inflation and the interest rate environment, which we believe are supportive of value stocks. We don’t know where rates will go in the next year, but we expect a more typical rate and inflation environment in the coming decade compared with what we’ve seen over the past decade. In higher-rate and inflationary environments, value tended to hold up well.

Murray: Our 50 years in business tell us that it’s always a good time to have exposure to value in your portfolio, provided it’s appropriate for your risk tolerance and time horizon. Investment styles have tended to cycle in and out of favor. While this most recent cycle was challenging for value investing, there has been a value premium over the long term. Given that many asset owners are likely under-allocated to value or are finding out that their value exposure did not perform as expected, we believe this is a particularly good time to invest.

Our view is that asset owners should consider whether they have a well-diversified portfolio with an allocation to value and select a value manager that has a history of outperforming the value index.

P&I: What’s your process for identifying opportunities, and where are you finding them?

Murray: Our research group is organized into eight global-sector teams. They are the drivers behind identifying potential opportunities for our client portfolios. The bulk of the idea gen-

eration comes from the analysts’ work in their sectors — it’s a bottom-up process. Our analysts develop formal research reports with a detailed fundamental analysis of the long-term business value of a company. To include the company in our portfolio, we demand a meaningful gap between our estimate of the fundamental long-term business value and the price in the marketplace.

We have identified opportunities in the health-care and consumer-staples sectors, both in large and small-cap, and among some mega-cap financials, but there isn’t a common theme as to why a particular sector may or may not show up as value today.

We are currently finding more value potential outside of the U.S. The U.S. market has worked very well for a long time relative to foreign markets, but with capital migrating to the U.S., there are fewer opportunities. A number of non-U.S. markets are now in a particularly interesting place on a relative-valuation basis.

“Given that many asset owners are likely under-allocated to value or are finding

out that their value exposure did not perform as expected, we believe this is a particularly good time to invest.”

— Oliver Murray

P&I: How does the rate environment affect the value universe and more capital-dependent companies?

Woods: Value stocks have tended to do well during periods of elevated interest rates. We are in an uncommon period, characterized by the recent aggressive rate increases [by the Federal Reserve] marking the end of a long period of zero or near-zero interest rates. While that low-rate environment enabled many companies to finance themselves at an unsustainably low cost of debt, the impact of higher interest rates is that many companies with high financial leverage will face higher interest expenses. Our investment teams are always focused on balance-sheet strength.

Value companies tend to have shorter-duration cash flows compared with growth companies, which have longer-duration cash flows because they tend to invest further out in the future. Rising interest rates tend to impact those long-duration growth assets negatively, given their higher interest rate sensitivity. Declining rates are a large factor in why value has underperformed growth in the broad market since the financial crisis, and we expect the converse ought to be true as rates rise.

P&I: What’s the impact of the geopolitical environment on value?

Murray: Geopolitical issues affect all types of investors, including value investors. At Brandes, we’re first and foremost evaluators of businesses. We incorporate the geopolitical environment and how it might affect each company as we conduct our fundamental analysis.

Some investors take a binary decision based on geopolitical issues. They make the top-down call not to invest in a particular country or sector. We take a more nuanced approach.

We do the bottom-up work to uncover businesses that can still be attractively priced even when you take geopolitics into account. As an example, we don’t exclude China, but at the same time, we are underweight China relative to the MSCI Emerging Markets Index.

P&I: What are the greatest risks that concern you?

Murray: We are always concerned about geopolitical risk. On a longer-term basis, equity investors need to pay attention to elevated levels of government debt across many major economies, which could impact a government’s ability and flexibility to manage through economic cycles and crises. That can raise the cost of financing projects and potentially impact economic growth.

P&I: In what ways do you approach ESG integration across your portfolio?

Murray: When we evaluate a company, we think like business owners and we consider anything that is financially material. If there’s an environmental, social or governance issue that could potentially affect a business, we integrate it into our valuation. While there’s a lot of current discussion about ESG, we have always integrated material issues into our work. Our research analysts seek to understand and integrate these issues into company valuations. We leave it to them as opposed to outsourcing it to an ESG group.

P&I: What characteristics should investors look for in a value manager today?

Murray: Over 50 years, we have learned that cycles come and go, and styles go in and out of favor. Our investment process has evolved over our five decades as technology and access to information have improved, but our value-investing principles are enduring and have not changed. Our fundamental principle is buying something that’s priced less than it’s worth. We believe four things are important when selecting a value manager: focus, structure, consistency and results. We are singularly focused on value investing. We were purpose-built for it. It is all that we do. Value investing is very simple in concept — to buy something at a discount — but it’s difficult to implement consistently over time, especially if the value style is out of favor. That’s why we have investment committees that run the portfolios and why we’re an independent, employee-owned firm. Our structure allows us to remain singularly focused: It mitigates individual biases and helps avoid the risks that can come with star managers.

When an asset owner hires a value manager, they need to be confident that the value manager will provide consistent value exposure. It’s understood that when value does well, your value manager should also do well. With our long history across multiple cycles, we can point to our results as evidence that when value did well, Brandes tended to do better. ■

Oliver Murray, CEO Brandes Investment Partners

Brent Woods, President Brandes Investment Partners

CalSTRS

over 450 teachers that are retired on our payroll that are over 100 years old — they live a long time,” Ailman said.

“It is such a challenge, so we think long term, and when we think long term, we take into account all these kinds of risks,” Ailman added. “We have been saying loud and clear that this energy transition is a massive wave coming — both an opportunity and a risk — and it’s something to pay attention to. The board is already improving us to adjust the portfolio in anticipation of it.”

Better despite pushback

Despite pushback from state legislators, the BloombergNEF panelists acknowledged that there have been improvements in terms of getting the U.S. to advance in the climate transition.

For Steven Rothstein, founding managing director at the Ceres Accelerator for Sustainable Capital Markets, this is “kind of the best of times, the worst of times, in the sense of if you just take a broad view a few years ago, there was not a single major institutional investor that had a net-zero plan.”

While the Securities and Exchange Commission did not go as far as his nonpro t organization had wanted it to on the climate disclosure rule it nalized on March 6, he said “what they’ve done is a good rst step” in setting “very strong legal ground.” The enactment of California’s Climate Corporate Data Accountability Act is also a promising

move going forward as it requires public and private companies doing business with the state to submit data, he added.

“What we’re nding is many people, companies (and) investors are continuing to do what they were doing,” Rothstein said. “They may not be talking about it. They may not be holding as many press conferences to talk about it because of pushback, but we’re seeing growth opportunities.”

Ailman noted that “2030 is barely six years from now” and is “going to be upon us,” so the challenges imposed by the natural world will “become a bigger conversation.”

“Mother Nature right now is slapping us in the face,” Ailman said. “I could be wrong, but I bet within about four years, it’s going to be punching us in the face.”

Calling for more transparency on what companies are doing to address climate risks and opportunities “at an increasing rate,” Ailman told investors “you’ve got to focus on educating yourself and focusing it on your strategy.”

Ailman has said he hopes investment terminology expands to “get away from simple initials” such as ESG — environmental, social and governance. From what he’s seen in polling, Ceres’ Rothstein said “75% of people have no idea what the acronym ‘ESG’ means.”

“But if you ask them about the underlying elements, there’s overwhelming support, meaning ‘do you think a company should be pro table and care about the community (and) care about water?’” Rothstein said. Among Democrats and Republicans, he noted support is “over 90%, so the key thing is de ning what you mean.”

Various companies have de ned

tween where the (database) exists and where the relevant lings go,” Kreps said.

a voluntary basis.

“That’s a reasonable approach to getting a new government program off the ground,” Kreps said, but plan sponsors may be hesitant to share information right away.

Tim Rouse, executive director of the SPARK Institute, an advocacy organization for the retirement plan industry, echoed this concern.

“I just don’t know how successful voluntarily asking for plan sponsors to do that (will be),” Rouse said.

The DOL will likely receive many comments on the fact the request is voluntary, according to Kendra Isaacson, principal at Mindset, a Washington-based public policy consulting rm.

“I think it is going to be more difcult on a voluntary basis,” added Isaacson, who previously worked as the pensions policy director and senior tax counsel for Sen. Patty Murray, D-Wash., when Murray chaired the Senate Committee on Health, Education, Labor, and Pensions.

Lost-and-found database

The creation of the lost-andfound database stemmed from a bill rst introduced in 2016 by Sens. Elizabeth Warren, D-Mass., and Steve Daines, R-Mont., according to Kreps.

Under that bill, the Treasury Department would have overseen the database and utilized the data already reported to them in lings. But SECURE 2.0 legislation changed the location of the database to the Labor Department.

“Now, there’s a disconnect be-

for themselves sustainable investing terms such as “energy transition,” noted Valerie Smith, managing director and chief sustainability of cer at Citigroup Inc. The global bank does business in 160 countries, and she said “many of our governmental clients and regulators have de nitions” for the term.

“I don’t know that you can say there’s going to be one de nition for the word,” Smith said. “It’s a business decision, but it’s important to be transparent about that business decision so your regulators, your investors (and) your clients understand your point of view — and it could be a commercial advantage. If you gure this out, and you’re able to help your clients more ef ciently because of it, that’s a transition nance opportunity, right?”

While she noted that ESG-labeled products have faced headwinds, Smith said they are “still quite resilient” and she doesn’t think activities will go away among Citi’s clients based on how the bank is engaging with them.

Seeking longevity

In its portfolio, CalSTRS seeks “companies that will survive over 200 years,” Ailman said. If a company says it will make and abide by its own sustainable goals, he’s “going to want to hold (them) accountable” so they follow through.

“I really like the idea of a transition because we see transition plans from people,” he said. “But I was like, ‘Okay now, enough words. Let’s see. Put up and show us what you’re actually doing about contraceptive planning.”

CalSTRS has invested in certain energy sectors such as the oil indus-

try in an attempt to “turn things around,” Ailman said. The pension fund has been active with a “really tiny hedge fund” to change the board at ExxonMobil.

On investing in gasoline providers, “you start to hear them talk about being a chemical company or a molecule company, you hear different things,” which Ailman said is “not necessarily fast enough for us to be

‘Mother Nature right now is slapping us in the face. I could be wrong, but I bet within about four years, it’s going to be punching us in the face .’

CALSTRS’ CHRISTOPHER AILMAN

happy, but at least they’re changing.”

“If anybody’s going to spend money on new technologies, we can’t wait for the federal government,” he added. “We need the U.S. oil industry to lead that charge because Saudi Arabia is not going to do so.”

In an analogy, the CIO shared that his doctor told him to lose weight, and he ignored it. “Apparently, that didn’t work, so ignoring things doesn’t make it change. You have to do something,” he said.

As part of Citi’s sustainability function for 20 years and watching companies make statements about commitments to sustainability, Smith said corporations “need to resist the instinct to lead with aspiration” in

their communications and marketing “because it almost distracts from the key message.”

“There’s been a little bit of recalibration and less of an emphasis on shouting from the rooftops about your sustainability attributes and more of a focus on the real — and the fact that you’re an investor, you probably want more data and not less data,” Smith said.

Three years from now, Ceres’ Rothstein thinks investors will be talking more about what companies' data actually shows. But while Rothstein and Smith note investors will want more data, CalSTRS’ Ailman cautioned that investors need to consider how much data they’re receiving and how it’s being assessed.

With the internet, the CIO said he nds “students get too much information,” and they have to judge “what’s garbage and what’s useful.” It’s almost “the same problem with my credit team, and my analysts get too much information. They have to discern what’s useful,” he added.

Additionally, Ailman said it’s not helpful to compare two things “having different time periods, different metrics and just all that uncertainty about whether it’s audited.” He also noted investors will have to reconcile with the existence of different disclosure systems across continents, saying that the lack of consistent data is a “nightmare.”

“When you travel, isn’t it fun to take all kinds of little plugs that are all shaped different ways to get them to go on a different wall? It’s all electricity … but the point is uniformity makes life so much simpler, so if we as an investor could have consistent, uniform data on this kind of disclosure around the world,” he said. n

Isaacson, who worked on SECURE 2.0 during her time in the Senate, contended, “DOL was the right place for this (database) to go, because nding missing participants is a duciary activity.”

Since 2017, the Labor Department has recovered more than $6.7 billion for missing participants and beneciaries through its enforcement efforts, according to an April 15 news release.

As for why the database was proposed, “Congress heard from a lot of participants and advocates that have trouble nding their plans, and people move and change jobs a lot more in the modern world,” Isaacson said.

Kreps said that while the request is voluntary right now, the Labor Department “certainly hints” that they might require the information in the future.

Cybersecurity concerns

A top concern about the database is cybersecurity-related, as the Labor Department’s proposal asks plan administrators for a large amount of data about participants and beneciaries, including their mailing addresses, phone numbers, email addresses and Social Security numbers.

“I think a lot of sponsors are going to say ok, DOL…we’ll think about it, but can you tell us more about how you’re going to protect this very sensitive data before we turn it over?”

Kreps said.

“There is a very large amount of information that was asked for, and I think there are some that are questioning whether that volume of information is necessary to connect people to their missing accounts,”

Isaacson said.

DOL’s proposal notes that “multiple security measures will be in place to protect plan participant and bene ciary data,” including “extensive logging and monitoring mechanisms, and sensitive data-masking techniques” to mask personally identi able information.

“I think everyone should be concerned about (this data) being out there, because clearly it’s going to be attractive to hackers and fraudsters,” noted the SPARK Institute’s Rouse, but he added the department has already acknowledged this and said it will work to protect the data.

Kreps said the DOL will need to do more to get plan administrators to submit such sensitive information.

“I appreciate the kind of steps they’ve taken to indicate that they care about (cybersecurity) in that proposal, but they’re going to have to put some more meat on the bones before people are ready to sign on the dotted line,” Kreps contended. Notably, the Labor Department is only helping people nd their accounts, not distribute their assets, so “it’s just a matter of information security,” Isaacson said.

IRS filings raise concerns

While “SPARK and its members are very much in favor of coming up with a solution to limit and reduce missing participants,” Rouse said, the approach the DOL previously planned to take with the IRS ling,

or Form 8955-SSA, “created a lot of concerns among our members.”

The IRS lings regularly have delays at the end of the year, Rouse said, and such delays could result in false positives, meaning people would be incorrectly noti ed that they have money in lost accounts. Because the lings have been around for a while, there may have been confusion stemming from old records, as well, he added.

“We believe that there is potential for automated solutions,” Rouse said, adding there’s at least three companies that have said they would provide an automated solution if the Labor Department requested information on it. One of those companies is the Portability Services Network, according to Rouse.

In October 2022, Fidelity Investments, Vanguard Group and Alight Solutions, in coordination with Retirement Clearinghouse, announced it would launch the Portability Services Network: an auto-portability consortium aimed at reducing plan leakage, the term used to describe when Americans withdraw money from their retirement accounts upon changing jobs.

“We would certainly encourage the department to, at the very least, explore those automated possibilities,” Rouse said.

He has informally reached out to the department with his feedback and will be following up with a formal comment letter from the SPARK Institute.

“I hope that (the) DOL will hear the comments and gure out a path to make this work, because I do think it’s a necessary tool, but it has to work for employers and not add to their liability,” Mindset’s Isaacson said. n

NERVOUS FUNDS: Groom Law Group’s Michael Kreps thinks plan sponsors will be hesitant to share sensitive data with the Department of Labor.

Ciara Cusseaux

CONFERENCE CALENDAR 2024

Join P&I and thought leaders from across the industry for one of these insightful conferences. We look forward to welcoming you to share amazing content and ideas. CONNECT. ENGAGE. INSPIRE.

Insurance Assets Roundtable

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Retirement Income

Chicago | June 18, 2024

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Chicago | September 12, 2024

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Chicago | September 24, 2024

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Pension Derisking

Atlanta | October 8-9, 2024

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in 2023 but not in 2022. Subtracting their 2023 totals produced an aggregate AUA gain of 20.9%.

The stock market drove up the latest survey’s results just like it drove down the previous survey’s results. The S&P 500 rose 35.84% during the 15 months ended Dec. 31 vs -15.47% for the 12 months ended Sept. 30, 2022.

The bond market returned to helping rather than hurting record keepers. The Bloomberg U.S. Aggregate Bond index gained 7.51% for the 15 months ended Dec. 31, 2023 vs. -14.6% for the 12 months ended Sept. 30, 2022.

Getting people in plans

Getting more participants investing in plans and keeping their investments in plans when they leave or retire are strategies for the future as they have been in the past, said Jamie McAllister, senior vice president and de ned contribution consultant in the Chicago ofce of Callan.

In a soon-to-be published survey of 132 DC plans, Callan found that 75% offer auto enrollment. The rest of the industry, she said, “is still working on it.”

record keepers’ call centers,” she added. Call center staff describes all options “but they highlight the bene ts of leaving assets in the plan rst.”

One example of coaxing participants to save more comes from Vanguard Group.

By the end of last year, 59% of Vanguard’s record-kept plans adopted auto enrollment vs. 34% in 2013, Amber Brestowski, head of institutional advice and client experience, said in an email.

Among those plans, 60% defaulted employees at a deferral rate of 4% or higher. “Ten years ago, only 35% defaulted employees into the plan at a rate of 4% or higher,” she said.Vanguard was the fth-largest record keeper in the P&I survey with $719.3 billion assets under administration, up 26.3%.

Last year, “account balances increased by 19%, and 43% of participants increased their savings, an all-time high since we began tracking this metric,” Brestowski said.

Sponsors and record keepers are encouraging participants to increase their savings rates and are taking steps through education and plan design to keep participants’ assets in their plans. Eighty-one percent of survey respondents said they are trying to keep retirees’ assets in their plans while 61% said they were trying to keep former employees’ retirement accounts in their plans.

“We’re seeing more exibility” in plan design discourage retirees or former employees from simply taking a lump-sum payment when they leave their plans, she said. The survey noted that 76% of respondents allow partial distributions of retirement account savings while 78% offer installment distributions, she said.

One example of how record keepers are helping sponsors retain participants’ assets is to change the noti cation communication sent to retirees and departing employees. Sponsors must list all choices but “keeping assets in the plan” is placed at the top of the list along with highlighting the bene ts, McAllister said. “They make similar efforts in the

DC service providers data bank

London is a big change,” Bannister noted.

Master consolidator

Smart Pension launched in 2015, and has about £5.5 billion in assets, more than 1.4 million participants and over 70,000 employer members on its platform. It operates on Keystone, its global savings and investments technology platform, and has grown into a global rm with operations across the globe. It’s also got a different setup to

area. Voya even created a team to educate participants about managed accounts.

In the latest P&I survey, Voya placed sixth in AUA with $519.7 million, up 20.4% from the previous survey. It ranked fth in participants with 6.95 million, up 5.8%. It had the sixth-largest number of sponsors — 54,093 — up 2.6%.

Schwab’s growth

Charles Schwab was another record keeper that scored a trifecta in the latest survey. AUA of $262.3 billion grew by 30.7%, good for a ninthplace ranking. The number of participants in Schwab record-kept plans reached 1.65 million, up 9.2%, while placing 15th. Sponsors grew by 6.4% to 1,225, placing 23rd.

“Even despite market volatility, only 5% of non-advised participants traded, a record low.”

Vanguard achieved its AUA growth even though the number of participants in its record-kept plans remained at: 5.73 million as of Dec. 31 vs. 5.74 million as of Sept. 30, 2022. Brestowski didn’t comment.

Small plans to fuel growth

Smaller plans will play a bigger role in record keepers’ efforts to grow.

Research published last year by Cerulli Associates and the SPARK Institute found that 30% of DC record keepers serve as pooled plan providers and 25% serve as record keepers but not in a duciary role. “That’s pretty large,” said Elizabeth Chiffer, a retirement analyst for Cerulli, whose survey covered 20 record keepers, including nine of the 10 largest.

PEPs can be big business. For example, Ascensus reported in September that its offering crossed the $1 billion AUA level, having registered in 2021 as a pooled plan provider.

The Cerulli-SPARK survey also reported that 80% of the respondents were pursuing startup plans such as 401(k) plans for employers not currently offering a retirement plan but excluding state-sponsored retirement plans.

Over the years, MEPs, PEPs and other groups of plans have grown, reaching nearly $90 billion in assets

some of the other, provider-owned master trusts in the U.K. Its investors include DWS Group, Legal & General Investment Management and Natixis Investment Managers. And Smart Pension has trodden the acquisition trail multiple times since its launch, with seven deals completed to date. But only two of them have added staff as well as assets — Evolve and its takeover of retirement rm GenLife’s master trust in 2015. “That was a scheme in distress, was a bit of a rescue package. But the quality of the staff has been superb,” Fiveash said. So what attracted Smart to bid for Evolve in the rst place — and to take on its staff? “The quality of the

as of June 30, 2023 for Voya Financial, said Douglas Murray, senior vice president and head of wealth solutions, distribution and client engagement. Voya acts as a record keeper, not as a pooled plan provider. “We expect growth in 2024,” he said.

Voya operates in a variety of retirement market sizes and structures — government plans and corporate plans — “which gives us diversi ca-

scheme, the people. For a small scheme, I think it is one that punches above its weight. We are always interested in acquiring customers and assets, but not always the business,” he said.

Smart Pension wasn’t the only interested party — there were 19 when Bannister started the project, and he “whittled it down to ve. Then we went through a six-month period of ve — we were almost being sold to at that point,” he said.

Fiveash added that master trust consolidation is “ ercely competitive.” He foresees further consolidation in the master trust market in the U.K. “We’ve still got consolidation opportunities, winning big-

tion,” Murray said.

Voya enjoyed an overall 98% client retention rate last year, and growth was organic. Murray said the company has been making a concerted effort to expand its middle-market business — plans with $50 million to $250 million in assets.

Voya’s managed account business grew by 28% last year and Murray predicted this will be a big growth

ger clients in the corporate market and trying to disrupt the workplace players,” he said, with the rm’s technology front and center in what it does for the employer member and participant. “We’re driving better member experience,” he added.

But consolidation is “quite difcult," Fiveash mused. One thing that eased the deal with Evolve is that “we were both aligned to do the consolidation quickly. The longer you leave it, the more dif cult it becomes.”

Now that Smart has surpassed the £5 billion mark, the next target is £10 billion. “We always set a target,” Fiveash said.

Schwab bene ted from market gains but also by mergers and acquisitions and by adding new clients. Schwab didn’t buy record keepers, but its existing clients bought other employers, explained Traci Stahl, chief operating of cer, Schwab Workplace Financial Services. Schwab DC clients completed approximately 200 mergers and acquisitions of other employers and their plans last year, she said.

“Our clients want more engagement,” said Stahl, noted that Schwab has redesigned a website that provides nancial information, offers additional student-loan support and conducts more educational webcasts.

Fidelity Investments, the industry leader in AUA and in the number of participants, also posted gains among the three survey categories. AUA rose 28.9% to $3.43 trillion. The number of participants rose 6.1% to 31.75 million. The number of DC clients grew 2.3% to 31,259 plans, placing eighth.

“Improved market conditions certainly have an impact,” Wilson Owens, Fidelity’s senior vice president for strategy, planning and personalized planning and advice, said in an email.”Additionally, we have engaged with a number of new clients over this time period — including one very large plan sponsor — bringing many new participants and their assets to Fidelity,” wrote Owens, who didn’t provide details. Fidelity focused on expanding its presence in healthcare and higher education markets last year, Owens said.

Owens said Fidelity’s growth is built on providing more than retirement services. Clients “can opt into much more than de ned contribution plans,” Owens said. “From stock plan services, health savings accounts and student debt solutions, plan sponsors nd they are able to offer a robust nancial bene ts package to employees by partnering with Fidelity.” n

Beyond the U.K. — where Smart is committed to continuing to grow — the rm is looking at opportunities for business in Ireland and is “starting to look at the Middle East.” Executives are also thinking about “better individual engagement, how we get members to think about retirement, at-retirement products that are relevant,” Fiveash said.

And for the master trust market in general, “typically, individuals aren’t seeing master trusts at the moment as a place they can put everything — master trusts have got to be better-branded” to attract individuals to consolidate their own workplace plans, Fiveash said. n

The Energy Transition: Sparking Opportunities

Wednesday, May 8 | 2:00 pm ET

Institutional allocators are actively examining investment opportunities across the energy transition value chain, as more companies move to adopt – and improve their progress toward –low carbon goals in the shift toward a net-zero emissions economy. It’s a burgeoning space with expanded usage of renewable energy, advances in technology, more data availability, and global regulatory policy that encourages clean energy and energy security.

This webinar will help asset owners decipher the breadth of energy transition strategies today, from the use of clean technologies in power generation, EVs and renewables, to the clean-energy supply chain and additional sectors leading the way in embracing low carbon and net zero goals. It will highlight current strategies, both listed and private, that investors are pursuing – while also maintaining appropriate risk-adjusted return targets.

Panelists will share insights into some current transition-related funds and strategies, and they will address challenges such as how investors are positioned for the long investment cycle, valuations, data and measurement issues, and wider economic impacts.

REGISTER | pionline.com/energy-transition-webinar24

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Solving the Retirement Income Conundrum

Wednesday, May 15 | 11:00 am ET

Three retirement plan providers that look remarkably di erent – operating across di erent Defined Contribution markets with dissimilar employee populations – have arrived at a similar approach to decumulation support. Join State Street Global Advisors and senior leaders from Nest (UK), New Ireland (Ireland) and Unum (US) for a discussion on the drivers and challenges of bringing a retirement income solution to plan members, and how despite the disparate business needs, each of these internal dialogues led toward the same solution set.

REGISTER | pionline.com/SSGA-retirementincome-webinar24

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Emerging Markets: A Supportive Cycle

Wednesday, May 22 | 2:00 pm ET

The investment environment in the emerging markets has widened to include fast-growing companies in the technology, e-commerce and energy sectors, among others, making it more attractive for institutional allocators to achieve attractive risk-adjusted returns. The movement of manufacturing away from China and into a number of EM countries also supports the broader opportunity set. From the macro aspect, the start of an easing cycle in the U.S. and other countries should have a multiplier e ect on the EM economies and continue to help drive consumer demand. This panel of EM experts takes a deep dive into evaluating di erent markets, sectors and assets on a case-by-case basis, while making a strong case for bottom-up active management. Should China be viewed separately from the rest of EM? Which countries are seeing greatest progress on corporate governance? How can investors deal with currency volatility? Join us for this timely and insightful discussion on the emerging markets.

REGISTER | pionline.com/emerging-markets-webinar24

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Wilshire

CONTINUED FROM PAGE 3

of 7,000 MSCI speci cally mentions in its ling, re ecting the money manager’s roughly 10% share of the benchmark index provider’s annual operating revenues, has seen its basis point fee payments to MSCI rise from $170.6 million in 2018 and $91.1 million in 2013.

Meanwhile, according to a widely-read 2022 research paper, “Index Providers: Whales Behind the Scenes of ETFs,” the AUM-weighted licensing fees ETF providers have had to pay rose to 36% of their revenues in 2019 from roughly 31% in 2010. For State Street’s roughly $400 billion SPDR S&P 500 ETF, the report noted, just over a third of the money manager’s 9 basis point management fee, or 3 basis points, goes to index provide S&P Dow Jones.

If Wilshire Indexes’ strategy to gain market share in the U.S. is twopronged, with its market share-driven de nitions of different size cohorts and focus on “pure factors” complemented by lower fees, some say aggressive pricing could prove the more potent incentive.

”The area where they can really help (and frankly the biggest key to adoption by institutional investors) is going to be on licensing costs,” predicted Greg Allen, CEO and chief research of cer with Callan, the San Francisco-based investment consultant and OCIO provider.

terial increases in index costs are tied to signi cant increases in customers’ data usage over time. “The exibility of our pricing structures allows customers with lower consumption or more limited use cases to bene t from appropriately lower costs.”

For Wilshire Indexes’ competition with MSCI, meanwhile, low fees could be the lone prong, as MSCI already de nes different segments of the global equity universe by their shares as a portion of the total opportunity set.

Fewer U.S. stocks

The plunge in the number of listed U.S. stocks — with market capitalizations of at least $25 million and adequate liquidity — to roughly 3,400 now from a March 1998 peak of 7,400 has effectively warped the exposures Russell clients get to different market segments, complicating their ability to actively manage allocations, Ghassemieh contended. By way of example, the market’s continued consolidation has left the Russell 1000 covering over 95% of U.S. stock market capitalization, he said, up from 87% when the shares of more than 7,000 companies were changing hands. Over that span, the 3,000 combined stocks in the Russell 1000 and 2000 saw their share of the total number of listed U.S. stocks surge to almost 90% from 40%, he said.

number of large caps steady while their combined share of the listed U.S. stock universe uctuates.

Determining size cohorts by market share could help institutional investors — which typically set xed target weights for large caps and small caps and stick with them over time — better cope with the consolidation of the U.S. equity market in recent decades, noted Allen.

Growing concentration has seen the Russell 1000, as a percentage of the total U.S. market, rise to roughly 92% today from 85% two decades ago, Allen said, with the result that an investor who set a target allocation of 85% large cap and 15% small cap back in 2004 — at the capitalization weights prevailing at the time — would now be “dramatically overweight small cap relative to the current market weights.”

With Wilshire’s approach, by contrast, “an investor can set their target allocations relative to the market to achieve their strategic view (overweight, underweight or market weight) and their bet relative to the market will stay constant through time regardless of a widening or narrowing market,” he said.

The ripple effects of growing market concentration are on the minds of some asset owners, such as pension funds, as well.

“I’m pretty con dent that the technical differentiators (i.e.: Wilshire Indexes’ market share methodology vs. FTSE Russell’s xed target de nitions of large cap or small cap) aren’t going to be enough to incentivize investors to make a change,” Allen said.

“But if they can come in at 50% or lower relative to the current competition, I think they will signi cantly improve their chances of getting a look,” he said.

If the index “tax” on the teachers and policemen who often have to pay four, ve or six times for the same data used by a variety of service providers can be reduced, a whole bunch of people would probably say “about bloody time,” agreed a benchmark industry veteran of more than three decades, who declined to be named.

FTSE Russell, in an email, said pricing is tailored to customers’ speci c use cases, suggesting that ma-

LACERA

CONTINUED FROM PAGE 1

29. LACERA earned 10% for the year (9.9% benchmark), 7% for the three years (4.1%), 8.4% for the ve-year period (7%) and 7.5%  for the 10 years (6.8%).

Grabel managed LACERA through changes while carefully nurturing its culture.

“The best aspect of LACERA is the team,” Grabel said. “We constantly try to improve our culture.”

“At LACERA, we want to create a learning environment where there is a focus on attracting, motivating and retaining people,” he said. LAC-

”So, you now have massive exposure or massive overreach in terms of Russell (1000) coverage of the U.S. market,” while Russell 2000, which accounted for 10% of U.S. market capitalization in 1998, has shriveled to 5% today, Ghassemieh said.

That steady shrinkage has implications for asset allocation, risk and return analysis as well as portfolio implementation costs in employing, for example, a Russell large-cap index with double the number of stocks presently found in FT Wilshire’s U.S. large-cap index, he said.

Wilshire, in answer to that challenge, opted three years ago to dene different U.S. size cohorts by market share, with the top 85% in terms of market capitalization counting as large cap, the next 13% small cap and the nal 2% microcap. With that approach, the market share of large-cap stocks in Wilshire Indexes’ U.S. large-cap index holds steady while the number of stocks uctuates.

Russell, by contrast, holds the

ERA of cials spent a lot of time identifying best practices for the investment of ce’s internal committees. He said that part of attracting, motivating and retaining people is the intellectual stimulation.

Total fund approach

Having a cohesive team alongside him helped guide the board toward moving to the total fund approach six years ago.

The total fund approach is “why we moved to a function framework and why we focus on total fund diversi cation,” Grabel said.

The functional framework, which LACERA implemented in 2018, is an asset allocation approach where LACERA of cials group like strate-

“Our system’s investment policy emphasizes the importance of having a diversi ed portfolio with broad exposure in size, geography, growth and value characteristics,” said Mark White, executive director of $21.8 billion Arkansas Teacher Retirement System, Little Rock.”As the Magnificent Seven continue to expand market share, it’s worth considering the effect that has on diversi cation and our possible responses,” White said.

Going by Wilshire’s market-share cutoffs, just over half of the Russell 1000’s constituents should be seen as small-cap stocks, Ghassemieh said.

The FT Wilshire U.S. Large Cap index, by contrast, has 489 constituents, followed by 1,232 companies in the rm’s FT Wilshire Small Cap index and 1,686 in its FT Wilshire Micro Cap index.

Dispersion in returns

Returns for Russell and Wilshire’s respective U.S. large-cap indexes have been fairly similar over time, but the gap between their small-cap indexes has been much wider — and in Wilshire’s favor, Ghassemieh said. The Russell 2000 “has underperformed our small cap signi cantly,” in part because — by FT Wilshire’s de nitions — that index contains more than 1,000 microcap stocks, many with less established revenue streams than their typical small-cap counterparts, Ghassemieh said.

gies together, he said. The pension fund’s largest asset category, for instance, is growth, which includes global equity, private equity and noncore real estate.

“We build diversi cation across the total fund rather than overly diversify each asset class,” Grabel said. “For example, we do not need xed income to be equity-like because we have a discrete allocation to equities.”

At its April 10 meeting, the board made several changes to its target asset allocation, which Grabel said were “adjustments, not major changes.”

The largest decrease was to the growth category, which the board lowered by 5 percentage points to a 48% target allocation. Most of the re-

HALF OFF: Callan’s Greg Allen thinks Wilshire will need to undercut competitors’ prices by 50% or more.

Russell executives say there’s no evidence that clients in the U.S. — who currently have roughly $9 trillion in assets tracking Russell indexes — are having doubts about the rm’s methodologies. (Wilshire executives concede that assets tracking FT Wilshire U.S. indexes now account for a small share of the market but insist the information advantages their indexes offer, regarding market size cohorts as well as how factors, industries and sectors are de ned, should position those indexes for growth.)

Catherine Yoshimoto, director, product management at Russell, noted that Russell has continued to offer an ever more diverse set of indexes to give clients the exposures they want, including a top 200 “mega-cap” index, a top 500 index and, just this year, top 10, 20 and 100 offerings as well.

But less than 1% of U.S. client assets track that mega-cap index, while 53% of the $9 trillion U.S. clients have in Russell indexes continues to track the Russell 1000 — suggesting clients still view that index “as an accurate measure of the U.S. large-cap investable universe,” she said.

”The feedback has been that no changes are needed to the methodology of the Russell Index,” Yoshimoto said.

As further evidence in that regard, Yoshimoto noted that Russell’s global equity indexes use market share targets, similar to Wilshire Indexes’ approach, to de ne large-, small- and microcap cohorts, so if clients preferred those exposures they could get them. Instead, demand for the Russell 1000 has remained solid, she said.

Ghassemieh said many gatekeepers have yet to fully explore the implications of what a shrinking U.S. stock universe could mean for benchmarks with a xed number of stocks. “They haven’t caught up with that issue,” he said.

So far, Ghassemieh conceded, Wilshire Indexes has yet to sign up any clients for its U.S. large cap, U.S. small cap or U.S. micro cap indexes. “All of our users have been using the Wilshire 5000” index, which covers all listed U.S. stocks, as opposed to indexes for speci c size cohorts, he said.

But Wilshire Indexes’ emergence last year as an independent company, coming out of a bigger rm where asset management and consulting were the focus, is paving the way for a more aggressive campaign to expand the rm’s index business, Ghassemieh said. “We are rede ning some of these conventions (such as de ning large caps by market share thresholds) because we want to promote this in a big way,” he said. n

duction was taken from global equity, which is now 29% from 32%.  Noncore real estate dipped by 2 percentage points to a 2% target allocation and private equity stayed at 17%.

LACERA also cut by 2 percentage points its real assets and in ation hedges to 15%. That category groups together core real estate, natural resources and infrastructure. Core real estate and infrastructure were trimmed by 1 percentage point each to 5% and 4%, respectively.

“Our approach to asset allocation is to be methodical,” Grabel said.  “We are very deliberate and look at asset allocation through a variety of lenses including where the fund currently is, its capital market

Money Management

Wilshire’s Makepeace nds himself in a familiar role

DOUGLAS APPELL By

Wilshire Indexes, which broke off from Wilshire’s consulting and investment operations a year ago, faces daunting hurdles getting clients of industry titans FTSE Russell and MSCI to switch to its recently revamped FT Wilshire index series, industry veterans say.

The vast installed base of users today makes benchmark indexes a “very, very, very sticky product,” said one industry veteran of three decades, who declined to be named. At the end of the day, “it’s not clear whether driving change in this really sclerotic market is something that can happen,” he said.

Mark Makepeace, Wilshire Indexes’ CEO and arguably benchmark indexing’s most prominent veteran, has taken on those supposedly death-defying odds before and lived to tell the tale.

“They said the same thing to me when I set FTSE up at the end of 1995” — when MSCI was the dominant index provider — and “if I believed people then (that) it couldn’t be done, you wouldn’t have the FTSE Russell you do today,” Makepeace said in an interview.

When Makepeace retired from FTSE Russell in early 2019, assets tracking FTSE’s indexes had grown from a standing start to roughly $16 trillion globally, surpassing the amount of assets tracking MSCI’s indexes, he said. As of Dec. 31, 2023, MSCI had $15.6 trillion in global assets tracking its benchmark indexes. If for now institutional assets tracking FT Wilshire 5000 indexes account for a “small percentage” of a U.S. market FTSE Russell dominates with a share of 70% or more, “that’s the past,” Makepeace said. “I’m a great believer in you look forward. You don’t look back,” he added.

And looking forward, Wilshire Indexes’ team is making the case that its “modernized” indexes, unveiled in June 2021, can attract institutional investors by offering them better information on which to base their investment decisions, effectively staking out the next stage of the industry’s evolution, Makepeace said.

Better measure?

In the U.S. market, Makepeace said, Russell’s use of xed numerical targets for de ning U.S. large cap and small cap stocks — with the 1,000 biggest companies by market capitalization counting as large cap and the next 2,000 counting as small

assumptions and the fund’s liquidity needs. LACERA conducted its most recent asset allocation study over the past nine months.”

The biggest boost was to LACERA’s risk reduction and mitigation functional category, made up of investment-grade bonds, long-term government bonds, hedge funds and cash equivalents. That category increased 5 percentage points to 24% by increasing investment-grade bonds to 13% from 7% and boosting hedge funds to 8% from 6%, while decreasing long-term government bonds to 2% from 5% and keeping cash equivalents at 1%.

The credit category grew by 2 percentage points to 13%.

LACERA’s modeling anticipates

cap — has become increasingly problematic as the number of listed U.S. companies more than halved over the past quarter century.

The Russell 2000, widely seen as the measure for U.S. small cap exposures, is “actually a poor measure … because the most important small caps are at the bottom end of the Russell 1000,” Makepeace argued. Other areas where FT Wilshire’s indexes have looked to move the industry forward include how different factors underlying performance, such as value and growth, are dened, and how industries and sectors are de ned as well, Makepeace said.

Leading factor indexes now capture considerable unintended “off target” in uences such as skewed sector exposures for example, the heavy digital information and services company weighting in leading growth factor indexes now as well as the impact of market concentration. Wilshire Indexes’ modernized “pure factor” indexes look to neutralize those unintended effects and distill down to genuine factor premia such as, in the case of growth, longterm EBITDA and revenue growth as well as forecast EPS growth.

Meanwhile, “you read a lot that value has signi cantly underperformed but I think the way in which value has been de ned in the past is being questioned, and some of the...newer ways of looking at value give you quite different results,” Makepeace said. And that, in turn, should lead to better investment analysis with better in-

that the new asset allocation should maintains the plan’s expected return at the current policy level of 7.5%, and with lower volatility, according to a report for the board’s April 10 meeting. Since the changes were considered moderate, staff said the allocation can be implemented within a reasonable time frame of 12 to 24 months, the report said. LACERA’s board is expected to update its investment policy statement in June to re ect the new asset allocation and implement the allocation between July and June of 2026.

The new asset allocation targets are “based on the notion that with higher interest rates than we had three years ago we have the opportunity to enhance returns or reduce

consultant and OCIO provider. Still, Ghassemieh said he’s condent there’ll be a pickup in pension fund and other asset owner use of Wilshire’s indexes, whether for active strategies increasingly packaged as systematic index funds or plain vanilla market cap indexing.

Ghassemieh said offering competitive licensing fees in a market where asset owners and money managers alike have complained about oligopolistic pricing power by industry leaders could help win over clients.

vestment choices, he said.

“If you take those three big things — your size de nition, the way we should de ne factors, the way in which you think about and de ne industries and sectors — all are incredibly important to the investment process” and institutional investors should be using these tools, Makepeace said. “They shouldn’t be using the older tools” which give them less accurate information, he said.

Still, asking asset owners to do a deep dive on the benchmark indexes they track could prove a daunting task.

While the choice of benchmark is key, “very few people really spend any time thinking about the index they use for portfolio construction,” opting instead for the easy way out of just using what everyone else uses, said the industry veteran who declined to be named.

Long process

Even under the best of circumstances, noted Reza Ghassemieh, Wilshire Indexes’ chief benchmark of cer, a change of benchmark is a long and involved process for plan sponsors, potentially taking three or four years before a decision is made.

“Making a change to the benchmark for a large institutional public equity program takes a lot of time and energy,” a particular challenge at a moment like the current one where other parts of the portfolio are demanding client’s attention, agreed Greg Allen, CEO and chief research of cer with Callan, the investment

risks in the portfolio,” Grabel said.

In-house co-investments

One way LACERA is enhancing returns is its private equity co-investment program, which LACERA brought in-house in 2019. Grabel has experience in private equity. Before he launched his public pension plan investment career, he had been a general partner at a private equity rm focused on growth-stage investments in technology, networking industries, and digital communications.

“Since that time (2019), it has outreturned our PE (private equity) program as a whole,” Grabel said. “It has been additive to returns and additive to returns for the growthiest

Callan’s Allen said he sees pricing as the key. “At this point, the advantages of the index design aren’t compelling enough to spend consulting capital advocating for change,” he said. Instead, “if these indices are going to catch on...the more likely source of momentum (if any) would be from large managers, incented by lower licensing costs, approaching institutional investors directly,” he said.

But Makepeace noted that institutional investors have expanded the number of index providers they do business with in the past as innovations were added, such as the shift in index construction from priceweighting to cap weighting to freeoat weighting methodologies. Newcomers pushing those changes, and FTSE Russell was one of those newcomers in the past, managed to pick up clients along the way, he said.

The next stage of benchmark indexing’s evolution “is now,” Makepeace said. The modern design of FT Wilshire’s indexes gives institutional investors a more accurate way of thinking about their risk, their exposures and how they want to then invest that they should be embracing, he said.

Makepeace said he doesn’t see his current stint at Wilshire as simply setting the stage for a repeat performance of his success with FTSE Russell. Instead, “I always wanted to create something that helped change the industry and make it better (and) I still have that passion,” he said. And “I’m not here to try and undermine” the current industry leaders, said Makepeace, adding he’s proud of what he helped build at FTSE and MSCI CEO Henry A. Fernandez should be very proud of the business his company has built. Instead, “I’m here again because I want to help the industry get better, constantly get better…and I think that’s what really is driving Wilshire.” n

portion of our portfolio.”

At the same time, LACERA ofcials have been able to build a more intentional portfolio making co-investments in private equity that has also saved the plan tens of millions of dollars in fees, he said.

Another program that enhanced returns while reducing risk is its cash overlay program, which uses cash above the pension fund’s three months of bene t payments target to rebalance the portfolio. The overlay is based on LACERA’s asset allocation targets, he said.

“Since we put the program in place in 2019, we have generated about $500 million in gains for the fund from a program designed to mitigate total fund risk,” Grabel said. n

DEJA VU: Wilshire Indexes CEO Mark Makepeace led FTSE’s launch in 1995.

Labor Department’s Employee Bene ts Security Administration as assistant secretary for employee bene ts security, during an April 29 webinar.

“And with this rule, they can rest assured that trusted nancial professionals will be required to provide investment advice on their retirement savings that prioritizes what’s best for them and their families.”

The department on April 23 nalized the Retirement Security Rule and related amended prohibited transaction exemptions. The biggest change concerns the de nition of an investment advice duciary.

Under the Retirement Security Rule, the department revamped the 1975 ve-part test used to determine when a nancial professional is an investment advice duciary. Gomez said April 23 that an update was necessary because the 1975 test was written before 401(k) plans existed and when IRAs were less common.

The department has established a new test where a person will be considered an investment adviceduciary if they provide a recommendation to a retirement investor for a fee in one of two scenarios. The rst is that they state they’re a duciary under ERISA. The second is that they make professional investment recommendations to investors on a regular basis as part of their business, and the recommendation in question re ects professional judgment of an individual’s circumstances that can then be relied upon as in the investor’s best interest.

Retirement Institute, a trade group representing members that account for 90% of annuity assets in the U.S. Berkowitz was referencing a 2016 rule nalized in the Obama administration known as the duciary rule that broadened the de nition of a person or entity taking on duciary responsibilities and replaced the ve-part test. That rule, which swept up virtually any recommendation to a retirement investor, was struck down in 2018 by a three-judge panel at the 5th U.S. Circuit Court of Appeals in New Orleans.

The FACC lawsuit led May 2 argues the new rule is sustainably similar to the 2016 rule, but department of cials say it’s far more narrowly tailored.

Those who read the nal rule objectively, will see that the department has done “our level best to write a rule that takes the teachings of the 5th Circuit, the lessons we learned from the comments and to come up with a nal rule that honors peoples’ legitimate expectations that the advice they receive from trusted advisers is going to be in their best interest without posing undue burdens on folks,” said Timothy D. Hauser, EBSA’s deputy assistant secretary for program operations, on an April 23 call with reporters.

‘They’ve rearranged the deck chairs on the Titanic but we’re still heading for the same iceberg .’

INSURED RETIREMENT INSTITUTE’S JASON BERKOWITZ

The rule will also apply a best interest standard to advice that plan sponsors receive about which investments to include in 401(k) and other employer-sponsored plan lineups. Under the 1975 ve-part test, advice to a retirement plan must happen on an ongoing basis for it to be considered duciary in nature. So when a smaller retirement plan is established, any one-time advice from a professional on how to set its lineup is not covered, the American Retirement Association, which backs the rule, said in its January comment letter.

Sharp pushback

Though modi ed in its nal form, the rule has drawn sharp pushback from the nancial services industry since the proposal on which it was based was introduced on Oct. 31.

“They’ve rearranged the deck chairs on the Titanic but we’re still heading for the same iceberg,” said Jason Berkowitz, chief legal and regulatory affairs of cer at the Insured

that it just de nes a commercial relationship.”

Losing access?

Berkowitz said that while there are some differences between the new rule and 2016 rule, the impacts are the same. “It’s the fact that you’re going to have almost no way for a nancial professional to work with their clients without running into duciary status and that brings with it signi cant additional costs for consumers, if not outright interference for them to get the assistance they need,” he said.

Opponents to broadening the duciary universe say the 2016 rule harmed many investors. A 2017 Deloitte study found that 53% of nancial advisers reported limiting or eliminating access to brokerage advice for smaller retirement accounts as a result of the 2016 rule’s requirements.

Stephen W. Hall, legal director and securities specialist with the nonpro t watchdog Better Markets, doesn’t buy that argument and said small investors haven’t lost advice access when new regulations are enacted, citing the Securities and Exchange Commission’s Regulation Best Interest package that took effect in 2020. The SEC’s Reg BI established an enhanced best interest standard for broker-dealers when recommending any securities transaction or investment strategy involving securities to retail customers.

Washington

White House lauds funds that call for robust labor policies in private equity

COURTNEY DEGEN By

Biden administration of cials met with leaders of ve pension funds, representing more than $1 trillion in assets, that are requiring strong labor standards from their private equity investments, suggesting other pension funds should do the same.

Such labor standards include “guaranteeing the free and fair choice to join a union, freedom of association and the recognition of the rights to collectively bargain, equal opportunity, a safe and healthy workplace, and the elimination of forced and compulsory labor, including child labor,” according to a White House news release April 23.

The Biden administration believes it’s critical that pension funds “emphasize the interests and goals of workers,” the news release said.

posure has increased as well, we are working to ensure that the retirement funds of hardworking New Yorkers generate strong returns by investing with general partners whose portfolio companies treat their workforces with dignity and respect,” added Lander, who serves as custodian and a trustee of the ve independent pension funds in the $266.3 billion New York City Retirement Systems.

The board of the $491.4 billion California Public Employees’ Retirement System, Sacramento, released its own set of labor principles last year, which are outlined in the Appendix to CalPERS’ Governance & Sustainability Principles.

FROM PAGE 2

when he originally took the board seat, according to a video of the meeting. Shortly afterwards, Board Chairman Dale Price adjourned the meeting to protest from the reform trustees. Price said in a May 1 statement

The 5th Circuit judges in 2018 ruled against the department in part because they didn’t agree that there could be duciary status established when there wasn’t a relationship of trust and condence between an adviser and client.

To address that fact, the words “trust and con dence” appear at least 80 times in the new rule.

The 5th Circuit judges also said the 2016 rule didn’t re ect the essence of a duciary relationship and instead de ned a commercial relationship, according to Fred Reish, a partner at Faegre Drinker Biddle & Reath.

In the likely legal battle to come, a court will have to weigh if the department’s new duciary de nition captures the essence of a duciary relationship.

“Is there enough meat there that a court could look at it and say, ‘Yeah, if somebody does all that they’re a duciary,’” Reish said. “Or would a court looking at that say, ‘Nah, it’s a bunch of pretty words but it just denes a commercial relationship.’

That’s where the rubber hits the road. And that will be what’s litigated. And how the court will decide, nobody knows.”

Reish added, “Obviously the DOL thinks it works or they wouldn’t have done it. And the people on the other side of the case, the nancial services industry, are going to argue

that the pension fund “was noti ed last week that Aon is terminating its agreement for the provision of board governance consulting services. The board may discuss next steps at the retirement board’s meeting next month.”

In its 2022 report, Funston Advisory Services in its key conclusions and recommendations said that “continued board dissension may

The DOL said its new rule is needed so that the best interest standard is applied no matter the investment product.

“The reality is that those who launched that argument are in effect saying, ‘We can’t stay in business without taking unfair advantage of our clients,’” Hall said. “That’s just an appalling position for them to be taking.”

Competing views

In addition to concerns that the new de nition is too broad and a rehash of the 2016 rule, opponents say the department rushed the rule-making process and that there are already suf cient regulations covering the marketplace, such as the SEC’s Reg BI and the National Association of Insurance Commissioners’ conduct standards for insurance agents and insurance companies recommending annuities.

Trade groups who oppose the rule say they’re weighing legal challenges.

“If there is a decision on the part of some organization, whether it’s ours or others, to pursue litigation I think there is a very strong case to be made that the department in this case is wrong on the law, wrong on the public policy, and was wrong on the process,” IRI’s Berkowitz said.

Hall had a different interpretation and said that “Although it seems inevitable that it will be challenged in court, we don’t see any valid legal arguments against it.”

He added, “It’s really a terri c step forward to improving the lives of workers and retirees who are desperately trying to save and invest for a nancially secure retirement.” n

demoralize staff and lead to failure to retain/attract needed talent.”

With Aon’s resignation following the April meeting, STRS now currently has no rm to assist the fractured board in improving its governance practices.An Aon spokesperson declined to comment. Rick Funston, managing partner of Funston Advisory Services, could not be immediately reached for comment.  n

New York State Comptroller Thomas D. DiNapoli, one of the pension fund leaders at the meeting, issued a series of workforce management and labor policies for private equity rms April 23, noting that the $259.9 billion New York State Common Retirement Fund, Albany, would evaluate rms’ labor practices along with other factors when making investment decisions. DiNapoli is the sole trustee for the pension fund.

New York City Comptroller Brad Lander also attended the meeting, as did Illinois State Treasurer Michael Frerichs, CalPERS Board of Administration President Theresa Taylor, and Kevin McCormack, executive director of National Electrical Bene t Fund Investments.

“At the White House yesterday, I was delighted and proud to align with the Biden administration, fellow pension duciaries and America’s labor movement to discuss and promote responsible workforce management principles for private equity-owned companies,” Lander said in a statement.

“As private markets have grown in recent years and New York City’s ex-

“We believe these standards speak a common truth about the importance of quality workplaces, as well as those who give their time and talents to work that creates value for investors like CalPERS,” according to remarks prepared for Taylor and provided by a CalPERS spokesperson. “We are sharing the labor principles with all our external managers, and we are asking them to acknowledge receipt and con rmation of broad alignment.”

The private markets have received increased scrutiny over the past few months from those in Washington, including the International Monetary Fund and Congress.

The meeting, led by National Economic Adviser Lael Brainard and Acting Labor Secretary Julie Su, included leaders of investment rms and labor organizations, as well.

North America’s Building Trades Unions, one of the organizations in attendance, just endorsed President Joe Biden for re-election on April 24.

The White House doubled down on the president’s commitment to labor rights in its April 23 news release, stating, “President Biden made it clear that he is leading the most pro-labor and pro-union administration in history.”

Biden also received an endorsement from the United Auto Workers union in January.  n

For institutional clients including pension funds, Allspring has been spending time looking at the correlation of existing managers.

CONTINUED FROM PAGE 3

which means “not going in and selling product, but rather going in and understanding what problems they’re trying to solve,” she said.

Allspring is leaning into customization, which can still be a fairly manual and high service model.

“Where we’re making investments (is) in trying to improve the speed in which we’re able to provide a higher level of customization,” she said.

Allspring, which has $580 billion in assets under advisement, became independent from Wells Fargo & Co. in November 2021. Burke is focused on the rm’s path forward and establishing Allspring’s reputation as an independent company, something she said still requires “a lot of work.”

“The U.S. is our largest market share and the dominant revenue base for us. But we have a very strong footprint in Europe and Asia that we believe is very well positioned to grow and take share,” she said.

“There’s an opportunity then to reduce the number of managers who do similar things, or complementary add a manager then that has the lower correlation,” she said.

Another area, amid the rise of private markets investing including private credit, has been helping institutional investors think through liquidity and the possibility of stress test scenarios.

Burke grew up in Minnesota and didn’t know much about the world of asset management. She was interested in nance and took a summer job as a bank teller to learn more. Now, as the president of an asset manager she wants to see broader gender, ethnic and socio-economic representation in the industry.

“My view is all rms should try to play a role. Whether it’s on the early acquisition of getting them in the door to the retention and development of them, over time will only enrich the whole industry,” she said. n

of being awarded an exclusive contract to supply rum to the Royal Navy. As of March 31, the rm had $175.7 billion in assets under management across alternatives products including hedge funds, multimanager solutions and long-only strategies, up from $167.5 billion at the end of 2023. Institutional investors make up approximately 80% of the rm’s assets under management.

Man Group reported that client out ows totaled a net $1.6 billion during the rst quarter of this year, but investment performance compensated with an increase of $9.8 billion.

Grew believes the current moment of major wars, global elections, a market environment that looks different from the last decade and uncertainty about interest rates favors active management.

These are times when, “active asset managers can lean in and can add value, where all of the effort and all of the acumen and depth of experience we have across the organization can be put to work,” she said.

Grew rst joined Man Group in 2009 and served in multiple roles before becoming CEO on Sept. 1, 2023. She thinks that increasingly the future of asset management will be in customization and working with clients on their speci c needs. Grew is focused on the rm’s investor base and used the words client or clients over 60 times during an hourlong interview.

“Two-thirds of our AUM is now customized in some format and a subset of that is really, really customized,” Grew said. “We see that as a direction of travel. We see that more and more the need is to try and address the particular challenge that a client might face.”

And these days investors are facing challenges including volatility, wider dispersion, balancing liquidity and duration all amid a different market environment. Grew argues that the last 10 years may have been an “aberration rather than the law” and that in the current environment, investors with diversi ed portfolios need to be prepared to have parts perform while others may not.

“Getting used to parts of your portfolio performing at one time and not at another time, bearing in mind, if you’re an asset holder for the last decade or so, you did just ne, risk adjusted or otherwise, you did just ne,” she said. “But recognizing that in a true portfolio that is diversi ed, you are going to see parts of that portfolio perform and you should be seeing parts of that portfolio not performing. That is the point about weathering volatility and market cycles.”

Grew said Man is elding more questions around portfolios that can perform through different market

Money Management

Grew sees generative AI boosting ef ciency, not decision-making

LYDIA TOMKIW By

Generative arti cial intelligence is one of the “most interesting advances” that Man Group CEO Robyn Grew has seen in her career, but she is cautious about overstating its potential and its impact on investing.

“Where we see it most at the moment is in ef ciencies, rather than in investment decision-making,” she said in an interview with Pensions & Investments. “Tech becomes table stakes, but skilled use, skilled application, the ability to know if you’re going to try to nd new datasets, and you’ve got more capability of doing that faster, more effectively — we like. That doesn’t mean that you are going to somehow translate ChatGPT into making investment decisions — no.”

Grew points to issues with the technology when large language models, including generative AI, create misleading outputs. Any technology innovation needs “skilled operators,” she said.

“The most interesting thing about the most skilled operators is they know their own limitations. And they know the limitations of the tech in this instance, that sits in front of them, too. They’re the people I want in the room,” she said. “They’re the ones that get excited ... But they’re also the same people who say ‘yeah, yeah, but…’ and that has been the most interesting thing for us.”

Grew thinks that generative AI “is one of the most interesting advances that we have seen,” and she points to big upsides with faster coding and information aggregation. “But I’m not taking out the skilled operator,” she said.

Grew says Man Group spends approximately $120 million on technology every year, including

environments with investors thinking through correlation risks.

“So active, for sure, credit, for sure, risk free, for sure,” she said. “And getting it in the right combination with the right duration. And then working out whether they want to have any other speci c tail protection or overlay.”

Fewer managers

For the hedge fund industry speci cally, Grew expects that the next decade will mean investors wanting

P&I Events Calendar

employee costs. It had $175.7 billion in assets under management as of March 31.

“The spend that we make is incredibly focused on making us capable at every point in the organization. It’s about taking friction out. And it’s about enabling us,” she said.

Focus on ESG

That data focus is also part of the rm’s work on climate impact and responsible investing. Amid the backlash to ESG in parts of the U.S., Grew says there is a different level of uptake and interest in Europe and coastal America.

“When we think about data, and the ability to make smart decisions, capable decisions, risk-based decisions, there are going to be metrics which are enhanced and capable of having a nancial impact, for example, on an issuer,” she said. “We’re not going to suddenly disregard those, either. But are we comfortable with clients who have no interest in ESG, decarbonization, climate impact, whatever it may be? Sure.”

And amid the tech spend, Grew is thinking about the competition for talent. “The war on talent when it comes to quant, data, tech continues to be hot, no doubt,” she said.

Grew admits that in the past Man lost employees to big tech companies as well as multistrategy hedge funds. But in recent years, some employees have returned from Big Tech.

“That opportunity to work on many things, not just a very narrow thing for technologists is something they enjoy. So when a when a developer or a technologist or a quant, when a data scientist come to us, the eld of opportunity is broad,” she said.

But even for a rm with a quant focus, discretionary investing continues to be an important part of

to work with fewer managers, and get more from them.Man Group made acquisitions last year bringing on U.S. middle-market private credit manager Varagon Capital Partners and acquiring a 51% stake in Geneva-based ESG manager Asteria.

Grew is focused on both organic growth within the rm’s current lineup and is also keeping an eye out for other acquisition opportunities.

“This isn’t about running a single fund. It’s about continuing to evolve,” she said, joking that if Man hadn’t

Man Group.

One of Grew’s rst moves as CEO was to retire the rm’s GLG and GPM brands — something she says it was the right time for — to create a broader discretionary division.

“Quite simply, this is about clients being able to navigate the organization in a much simpler way … when you use up precious time explaining what different sub brands mean, rather than talking about content, that’s a less good use of time,” she said, adding that now the rm is clearly de ned by its discretionary business, systematic business and solutions business.

Workplace dynamics

Grew has spent time thinking about where she works. She spoke with P&I from Man Group's New York of ce in the "speakeasy" room, which is hidden behind a bookcase and in a nod to the city’s history resembles a Prohibition-era bar with leather chairs and metal, ceiling tiles.

“We think carefully about these things because these little things matter,” she said. “It’s not lots of money. It’s not about ash. It’s about being thoughtful about people feeling great about place, their work.”

While some nancial services rms have demanded workers return to the of ce ves days a week, Grew has taken a more exible approach.

continued changing they’d still be making rum barrels on the side of the River Thames.

“We would like to see whether there are more acquisitions we can do, particularly in private credit, particularly in the U.S. Why? Very simply because we believe in continuing to develop and enhance the content we have so that we are more useful, more relevant to our clients,” she said.

Man Group has credit funds in liquid format, in the quant space and now the private space, Grew said.

“There’s no doubt we have low footfall on Fridays. We just do. And I’m OK with that,” she said. “We give people huge responsibility. They’re very, very good. I trust people to do a good job and to know what they need and to ask us if they need more.”

Grew points to the differences between roles, giving the example of developers working on projects who may not need to be in the ofce.

“To force them (developers) to do something doesn’t seem to make a whole lot of sense to me. But you’re not going to see my traders, my execution desk, sitting at home very much,” she said. “So there's a recognition of that exibility between functions and between deliveries.”

Grew is the rst woman to be at the helm of Man Group and she’s committed to surrounding herself with people who are “brilliant and are diverse, have challenged me and made me think about things in a different way,” she said. “And when I sit in a room with those people, I have a high conviction that we’re going to come out of the room with the best answer, the better answer that we can, because of that difference.”

Grew understands the power of seeing someone that looks like them in a leadership position.

“If I am making a bit of a difference, just by turning up to work every single day, I’m turning up to work,” she said. n

Assets total $28.1 billion across the credit offerings.

“And we want to continue to grow what we think is not a trade, but a strategy and an opportunity. And something in which our clients are interested in,” she said, adding that credit offers different opportunities “through the entire credit curve” with “interesting” returns.

But there’s one area that Grew won’t be looking at for acquisitions.

“We’re never going to buy a sports team,” she said with a laugh. n

GAME CHANGER: Robyn Grew says generative AI ‘is one of the most interesting advances that we have seen.’

Keynote speakers: Join the 15th edition of the summit in The Hague!

Debby Blakey CEO HESTA

Michelle Ostermann CEO Pension Protection Fund (PPF)

Sneak-preview of our speaker faculty:

KEVIN BONG Director, Chief Investment Strategist & Head of Singapore ALBERTA INVESTMENT MANAGEMENT CORPORATION (ASIA PACIFIC)

AOIFINN DEVITT Chief Investment Officer LONDON CIV

CAROLINE ESCOTT Senior Investment Manager, Sustainable Ownership RAILPEN

GER JAARSMA Chairman PENSIOENFEDERATIE (FEDERATION OF THE DUTCH PENSION FUNDS)

LARS GERT LOSE Partner COPENHAGEN INFRASTRUCTURE PARTNERS

Thomas Curran Professor of Psychology, Author of the Perfection Trap London School of Economics

DEREK W. DOBSON CEO & Plan Manager CAAT PENSION PLAN

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Annette Mosman CEO APG

SANYA GOFFE Attorney and Eisenhower Fellow PRESIDENT OF THE PENSION INDUSTRY ASSOCIATION OF JAMAICA (PIAJ)

GEETA KAPADIA Chief Investment Officer FORDHAM UNIVERSITY

AEISHA MASTAGNI Portfolio Manager CALSTRS

JEREMY DE PESSEMIER Global Asset Allocation Strategist WORLD GOLD COUNCIL

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