This Week’s Issue P&I 2024-07-15 by pensions-and-investments

SPECIAL REPORT OCIO MANAGERS

Outsourcing managers look beyond DB funds

Total assets hit $3.07 trillion, a 16.7% increase, but assets from DB plans dropped 1.9%

y B DOUGLAS APPELL

Institutional demand for outsourced CIO services motored ahead in 2023, even as the baton in the race to drive industry growth showed signs of passing from defined benefit pools to endowments, foundations and defined contribution plans.

Pensions & Investments’ annual survey of leading OCIO managers for the year through March 31 showed worldwide outsourced assets under management rebounding 16.7% to $3.07 trillion, from a 2.8% drop the year before.

Outsourced AUM for U.S. clients, meanwhile, rose 14.4% to $2.15 trillion, following a

OCERS’ Molly Murphy prefers taking the road less traveled

Outside-the-box style shapes her approach to investment management

B ARLEEN JACOBIUS

Molly Murphy says that she is more of an investor than an allocator at heart and the Orange County Employees Retirement System’s outside-the-box approach to investments seems to reflect her preference for diving into the details.

Since she joined the $23.3 billion Santa Ana, Calif.-based pension fund as its chief investment officer in 2017, the board has become a partner in Capital Constellation, a consortium of institutional asset owners investing in emerging alternative investment firms, as well as helped seed Collective Global, a venture capital firm.

“Higher-for-longer makes everything easier because every risk asset has reset from zero to a 5% risk-free rate. You don’t have to

This year’s proxy season sees investors stress governance

y B CARYL ANNE FRANCIA

When the United Nations coined the term “ESG” in a June 2004 report, it called on corporations to adopt “environmental, social and corporate governance principles and policies.” It also asked investors and asset managers to “explicitly request and reward research that includes” ESG factors, and to develop proxy

voting strategies on such issues.

Twenty years later, shareholders seem to be embracing the “G” in ESG more than the “E” and the “S” on the ballot, according to proxy advisory service providers.

Investors this year voiced their say on issues affecting the companies in their holdings, voting on governance topics such as who should be on the board of directors at Exxon Mobil

and how much compensation Elon Musk should receive as the CEO of Tesla.

With more than 90% of annual general meetings completed, many proxy advisers are still tabulating and analyzing the full results of the 2024 season.

The number of proposals related to environmental and social issues in 2024 is

NORTHWESTERN UNIVERSITY’S AMY FALLS: ‘When you’re really siloed I think you have trouble identifying opportunities across markets.’ Page 3

Post-Chevron, the challenges facing DC plans could get worse

y B ROBERT STEYER

More lawsuits and more uncertainty affecting plan management. That’s the expected outcome for defined contribution plan sponsors now that the Supreme Court has tossed out the longstanding Chevron deference standard, attorneys said.

Given the trends in ERISA litigation, “this decision is likely to lead to continued claims that courts should not defer to regulatory guidance to resolve lawsuits, thus potentially causing significant burdens for plan sponsors and fiduciaries,” said David N. Levine, principal at Groom Law Group.

The Supreme Court’s majority opinion said scrapping the Chevron deference would create more predictability for businesses because they wouldn’t be whipsawed by the changing policies of changing political administrations

BANNER YEAR: Mercer’s Rich Nuzum said 2023

Orange County Employees’ Molly Murphy says the firm has embraced AI.

IN THIS ISSUE

Economy

Global credit portfolio managers are forecasting increased defaults over the next 12 months, according to an IACPM survey. Page 4

Pension Funds

Fresno County’s Donald Kendig is very concerned about debt hitting a tipping point “that we cannot recover from.” Page 23

Regulation

Republican AGs and the federal government argue over the DOL’s ESG rule and whether its tiebreaker provision violates ERISA. Page 4

Sovereign Wealth Funds

Investors need to consider geopolitics in portfolio construction, according to the Future Fund. Page 6

The Indonesia Investment Authority saw assets increase, and doubled its deployed assets in 2023. Page 27

Special Report: OCIO Managers

The largest OCIO managers see scale as driver of growth, but niche providers say it hampers the search for alpha. Page 16

Outsourced CIO reporting standards could make the market segment easier to navigate. Page 17

Some executives see a chance that IBM’s about-face could start a trend. Page 19

President of NTAM on a mission to raise firm’s profile

view at the firm’s European headquarters in London’s Canary Wharf.

Investors could be forgiven for associating Northern Trust with asset servicing or wealth management rather than investment management — even some of the firm’s own clients don’t realize the business is there.

But Northern Trust Asset Management President Daniel Gamba is on a mission to change that, relishing the challenge of building what he describes as a “startup” with the backing of a global corporation — and more than $1.2 trillion in assets under management.

“I feel like a kid in a candy shop,” Gamba said in an exclusive inter-

“The culture is very client-centric, and the opportunity is huge. I’ll tell you one headline I always say: We are the $1 trillion asset manager that no one knows — which I love. When you look at my background, I’ve enjoyed — the most — jobs where the expectation is low and people don’t even know where that’s coming from,” Gamba said. “This (NTAM) has everything — it’s a great platform, people love what they do, so the culture is actually very, very nice. People stay in their jobs for a long, long time.”

In fact, he’ll sometimes leave the ‘trillion’ off the firm’s AUM when talking to non-asset management clients, adding that they will ask whether he means billion.

“So people don’t know that we have an asset manager — not even institutional clients, as much as I

ty is enormous,” Gamba said. That’s a big change from his previous role at household name BlackRock, the largest manager in the world with $10.47 trillion in AUM. He joined Northern Trust in 2023, leaving his most recent role as cohead of fundamental equities and a member of BlackRock’s global operating, portfolio management group executive and human capital committees.

High on the agenda is to globalize the private assets capability, look more closely at retail and the exchange-traded funds franchise, and build on the fixed-income business.

wish they did, they don’t. Which is great, because we have built a great platform without big awareness — if we just articulate to clients the business we have, I think the opportuni-

As of March 31, the firm’s AUM was made up of equities ($721.9 billion), fixed income ($149.6 billion), cash/liquidity strategies ($302.7 billion), multiasset funds ($62.3 billion) and alternatives ($11.1 billion). Active AUM was $466 billion, while

BlackRock’s Fink: Preqin acquisition

BlackRock said its proposed acquisition of privately held London-based alternative markets data provider Preqin could lead to the indexing of private markets, while assuring that BlackRock’s clients will also have the ability to access Preqin as a stand-alone service once the transaction closes.

On June 30, BlackRock said it agreed to acquire Preqin for $3.22 billion in cash in a transaction slated to close by the end of the year. The deal is expected to strengthen the giant asset manager’s “expansion into the fast-growing private markets data segment,” citing that the fast growing alternative asset market is projected to reach almost $40 trillion by the end of the decade.

In a call with analysts on July 1 after the planned acquisition was announced, Laurence D. Fink, Black-

Rock’s chairman and CEO, said: “We believe we could index to private markets,” adding “just as index has become the language of public markets, we envision we could bring the principles of indexing, even iShares, to the private markets.”

Fink added: “We anticipate indexes and data will be important future drivers of the democratization of all alternatives. And this acquisition (of Preqin) is the unlock.”

Fink further indicated in the analyst call that this acquisition is “about driving evolution and growth in the private markets by measuring them, understanding their drivers of performance and making them more investable.”

Fink also pointed out how the public markets were transformed by data, benchmarks and risk analytics. “They made markets more accessible from the developed to the

The Department of Labor's Employee Benefits Security Administration is continuing its work implementing a host of SECURE 2.0 provisions, including items to modernize retirement plan disclosures and set up a retirement plan lost and found, according to its latest semiannual regulatory agenda.

The agenda outlines EBSA's shortterm and long-term priorities and notes it's working on six items in the pre-rule stage, five in the proposed rule stage and six in the final rule stage.

Under SECURE 2.0, a retirement security package passed in late 2022, the department was directed to build a lost-and-found database to help

savers who have lost track of their retirement money to locate their plan administrators.

The department has hit a snag in trying to get the information to populate the database, said Lisa Gomez, assistant secretary for employee benefits security, at an ERISA Advisory Council meeting July 9. It had planned to use existing data that 401(k) plans regularly submit to the IRS and Social Security Administration, but those agencies had concerns over sharing the data due to disclosure and confidentiality restrictions.

In April, the department asked for retirement plan administrators to submit the requested information on a voluntary basis and solicited public feedback on how to improve the in-

formation request. Department staff are reviewing those comments now, the agenda noted.

The department is also analyzing comments it received after a 2023 request for information it issued concerning disclosure-related SECURE 2.0 provisions that will impact defined contribution, defined benefit and pooled employer plans.

The agency plans to finish working through the comments by September, according to its agenda. “Any later action by the department on these SECURE 2.0 provisions, whether rule-making or otherwise, will be better informed by responses to this request for information,” the department said. And, along with the IRS and the

Pension Benefit Guaranty Corp., the department plans to issue a proposed rule to improve Form 5500 reporting.

“Modernizing the financial and other annual reporting requirements on the Form 5500, making the investment and other information on the Form 5500 more data mineable, and potential changes to group health plan annual reporting requirements are part of that evaluation,” the department said in its agenda. “The project is also focused on enhancing the agencies' ability to collect employee benefit plan data that best meets the needs of changing compliance projects, programs, and activities.”

The department plans to issue the proposal by September.

‘KID IN A CANDY SHOP’: Northern

BNY taps Minaya to lead investments and wealth units

Former Nuveen CEO’s new role will unite asset management unit, U.S. private bank y B

SOPHIE BAKER

Jose Minaya will join global nancial services rm BNY as global head of investments and wealth, effective Sept. 3. Minaya’s appointment follows Hanneke Smits’ decision to retire, a spokesperson con rmed. Smits will continue in her role as global head of investments until Minaya joins, and she will then become chair of BNY Investments through the end of the year.

Minaya will report to Robin Vince, president and CEO of BNY, and will be a member of the executive committee. His role brings together the $2 trillion money management unit and the U.S. private bank. BNY had $309 billion in wealth management client assets as of March 31. Catherine M. Keating, global head of BNY’s wealth unit and a member of the BNY executive committee, will continue in her role and report to Minaya, the spokesperson con rmed.

“BNY manages money, moves it and keeps it safe, and with the global wealth segment continuing to grow rapidly, we are uniquely poised to serve clients in the segment across the entire nancial lifecycle,” Vince said in a news release. “As we unite our top 15 global asset manager and our top 10 U.S. private bank, I believe Jose’s leadership will enable us to be more for our clients around the world.”

Minaya is “an investment veteran with decades of diversi ed experience leading a major asset manager,” Vince said. He was CEO at Nuveen, the $1.2 trillion money management arm of insurance company and retirement rm TIAA. William Huffman was named as his successor last month, an internal promotion from his role as president of Nuveen Asset Management and head of equities and xed income. Minaya stepped up to CEO in January 2020 from his role as president and CIO. He joined TIAA in 2004 as a xed-income

A NEW LOOK: Northwestern University’s Amy Falls says she’s ‘blowing up all those baskets’ that are no longer helpful.

Endowments and Foundations

Northwestern’s Falls avoids distinction between public and private equity

Investing based solely on ownership structure could create blind spots, she says

Amy Falls, chief investment of cer of Northwestern University, strikes a balance between generalist and siloed approaches to portfolio construction and has divided responsibilities among her investment team.

Falls, who oversees the Evanston, Ill.based university’s $14.9 billion endow-

U.S. private equity exits remain depressed

ment, said that since her arrival in early 2021, she has changed the organization of the investment staff to allow for a more generalist approach to investment management than in the past.

There are, however, risks to a purely generalist approach, just as there are risks to the old siloed approach to managing different asset classes.

“When you’re really siloed I think you have trouble identifying opportunities across markets,” said Falls, “and in many ways, markets evolve and relevant criteria change.”

One of those changes, she said, is the

At 20, the ESG movement nds itself at a crossroads ESG

y B CARYL ANNE FRANCIA

What had become an ever-increasing popular strategy for some of the biggest institutional investors over the years has now become a lightning rod of criticism from politically conservative circles.

ESG investing has been embraced by pension funds such as the $337.9 billion California State Teachers’ Retirement System, West Sacramento, and endowments like the $16 billion Ford Foundation, New York.

Not all embrace the concept though, as some state government of cials — including in Florida — as well as federal lawmakers have criticized or taken actions to ban consideration of ESG factors in investments.

While the practice of ESG investing has existed in some form for more than half a century, “ESG” as a term was only introduced in June 2004, when the United Nations Global Compact published a report, titled “Who Cares Wins.”

Representing 18 institutions with more than $6 trillion assets at the time, a working group of nancial professionals provided recommendations to “better integrate environmental, social and governance issues” in asset management, securities brokerage services and nancial research rms.

The report called on corporations to provide information and performance on ESG principles and policies. It also “urged” investors to “explicitly request and reward research” related to ESG aspects, adding that asset managers should integrate research on these aspects into their decisions.

“In 2004, many of us had become convinced that a number of criteria applied by socially responsible investors with an ethical lens also

U.S. private equity exits, while picking up in the second quarter, remain low. They have been hindered by high interest rates that raised borrowing costs, among other factors. A pickup in exits, long anticipated by market participants, is one of several considerations in generating higher returns, which have lagged public equity markets recently.

Exit volume low: U.S. exit volume has dropped since 2021’s $828 billion peak. Through the rst half of 2024, exits totaled $141.4 billion, at vs. a year ago. Public listings totaled $16.8 billion in the rst half, but picked up steam in the second quarter with $15.3 billion.

U.S. exit volume by type (billions)

Median values up: During the rst half of the year, the 424 exits had a median value of $493 million. For all of 2023, 1,231 exits had a median $350 million value.

U.S. exit value, in millions, and total number of exits

Returns falter: U.S. PE funds have underperformed public equities. The Cambridge Associates Private Equity index returned 9.3% net in 2023, trailing the Russell 3000 (25.9%) and Russell 2000 (16.9%) indexes. Over 10 years, PE returned 15.6%, beating both indexes.

U.S. private equity IRR*

Allocations rise: Pension plans have increased private equity allocations over the years, based on data collected by Pensions & Investments’ annual top 1,000 survey of the largest plan sponsors. Private equity made up 14.3% of 2023 assets vs. 6.5% in 2008.

Average U.S. pension plan PE allocation**

NEW CHALLENGE: Jose Minaya, BNY’s new global head of investments and wealth, had helmed Nuveen since 2020.

Republican AGs, feds argue over DOL ESG rule in court

After a loss at the District Court level in September, a group of 26 Republican attorneys general, along with several energy companies and private individuals, in January led an appeal in the 5th U.S. Circuit Court of Appeals in New Orleans.

Lawyers representing Republican-led states and the federal government on July 9 argued in federal court whether the tiebreaker provision in the Department of Labor’s rule permitting retirement planduciaries to consider ESG factors when selecting investments violates ERISA.

The original lawsuit — State of Utah et al. vs. Su et al. — was led in January 2023 in U.S. District Court in Amarillo, Texas, and argued that the Labor Department's rule undermines key protections for retirement savers, oversteps the department's authority under ERISA, and is arbitrary and capricious.

Department of cials and retire-

ment experts contend that the rule, which took effect in January 2023 and allows ERISA duciaries to consider environmental, social and governance factors, is neutral and maintains the department's position that duciaries may not sacri ce investment returns or assume greater investment risks as a means of promoting collateral social policy goals.

The District Court judge who heard the case sided with the department, but the plaintiffs appealed the decision and focused their argument on the rule’s tiebreaker provision that allows duciaries to consider collateral bene ts that are not

related to the risk-return analysis when weighing different investment options in the event of a tie.

The new tiebreaker standard requires a duciary to conclude prudently that competing investments, or competing investment courses of action, "equally serve the nancial interests of the plan over the appropriate time horizon." In such cases, the duciary is not prohibited from selecting the investment or investment course of action based on collateral bene ts, meaning bene ts other than investment returns, according to the Labor Department.

The Republican attorneys gener-

al take issue with the change.

“The ’22 rule was issued to make it easier for duciaries to funnel American workers’ retirement savings toward the ESG funds that many of those money managers prefer,” said Jonathan Berry, managing partner at Boyden Gray, who argued on behalf of the plaintiffs.

“Once prudence has narrowed the options down to things that are … economically indistinguishable, the duciary has broader reign to invest for collateral reasons related to climate change, or diversity or anything under the heading of ESG,”

Credit defaults up but managers see little chance of a recession

y B ROB KOZLOWSKI

Global credit portfolio managers are witnessing rising defaults, particularly among smaller borrowers, and they are forecasting a further increase over the next 12 months, according to the latest quarterly survey from the International Association of Credit Portfolio Managers. Even larger borrowers are beginning to show some weakness, the survey said. Managers said sectors that are beginning to show some strain include transportation — especially trucking — automotive, healthcare and commercial real estate, according to a July 11 news release from IACPM.

However, despite that sentiment, managers say borrowers have held up remarkably well in the face of rising interest rates and a genuine global recession seems less likely in the near future, said Som-lok Leung, IACPM’s executive director, in an interview.

“It’s not as bad as they were expecting,” Leung said. “It’s still relatively a lighter credit cycle. Yes, we’re seeing some (defaults), but I think they were preparing for worse.” That has led most managers to say they do not expect any kind of global recession, Leung said.

Globally, 50% of managers see default rates going up over the next 12 months (up from 45% in the rst-quarter survey), while 36% say they will remain unchanged (down from 37%) and 14% say default rates will go down over the next 12 months (down from 18%).

The IACPM Aggregate Credit Default Outlook index, which measures the likelihood managers say default rates will rise over the next 12 months, is -44.1 for the second-quarter survey, compared with -36.5 the prior quarter.

A negative number indicates credit conditions are expected to worsen, while positive numbers mean conditions are expected to improve.

The survey was conducted among IACPM members, who are credit portfolio managers at 144 nancial institutions in the U.S., Europe, Asia, Africa and Australia.

CALENDAR 2024

The

Future Fund drills into geopolitics to shape strategy

Australian fund’s paper outlines 4 big trends and their growing relevance

Changing trade dynamics, a rise in strategic competition and growing populism have made it crucial for investors to consider geopolitics in portfolio construction, according to the Future Fund, Melbourne.

The sovereign wealth fund, which had A$223 billion ($143.2 billion) in assets as of March 31, published its

third position paper on June 28 titled “Geopolitics: the bedrock of the new investment order.”

But geopolitics does not refer solely to con icts or the risk of conict, Craig Thorburn, director of research and insights and lead author of the paper, said in a phone interview.

“A lot of people fall into this view that when they’re talking about geopolitics, they actually talk about conict. What we’re trying to do with this paper is to be a lot more nuanced in trying to get people to understand that, at least in our view, there is much more to geopolitics,”

he said.

The paper outlined four main trends — of which the risk of conicts is one — that have made geopolitics “a more relevant frictional in uence” today and in the future compared to the preceding three years.

Changing trade dynamics, for instance, can be observed through the onshoring or friend-shoring of manufacturing facilities, particularly in critical industries such as semiconductors.

The world order is also shifting from unipolar to bipolar, and potentially multipolar in the future, which leads to rising competition over natural resources and technology, and selective decoupling from certain industries such as electric vehicles or companies for instance in social media. The paper also highlighted that the fund was

keeping an eye on currency interventions as a possible guise of strategic competition.

Growing populism in all parts of the world could lead to greater polarization and, combined with new communication channels such as social media and arti cial intelligence that have led to the spread of misinformation, could also lead to acute and chronic political instability, the paper wrote.

Lastly, the increasing risk of conict is a consideration for investors, which the fund has observed for years since the great nancial crisis, as the U.S. drew back on its hegemony.

“The rst paper was done towards the end of 2021. But we actually did the work internally in May 2021. So we presented that work, (which you now know) as The New Investment Order, that was actually presented to our board in May 2021. And we talked about those types of futures or that possibility, even back then,” Thorburn said.

At that point, major con icts such as the Russia-Ukraine war and in the Middle East had not yet escalated, but all the other themes had become noticeable enough that the team thought it was worth spending the time looking at the trajectory of the trends, he said.

The paper also highlighted a series of actions that the wealth fund has taken to build resilience in the portfolio in light of these themes. For instance, to address the rst three trends, the fund leans towards a bias to own more assets that can outperform in an in ationary environment, domestic assets, energy transition assets, private equity in the technology sector, and alternatives with greater diversifying characteristics.

To address the increasing risk of con ict, the fund also plans to add exposure to gold, commodities, and different regional and currency allocations.

In 2023, the fund made A$60 billion of changes across all asset classes in the portfolio to build resilience after the launch of its rst two papers published in 2021 and 2022, according to its 2023 Year in Review report.

For instance, the fund shifted back to active management in listed equities with a focus on small-cap equities in Australia to seek more alpha in a higher interest rate market. The fund also reduced exposure to China due to increased intervention in certain market sectors and challenges to the country’s economic growth model, while seeking more domestic assets to nd regional differentiation in its portfolio, which included energy transition opportunities, the report wrote.

Future Fund had 10.1% of its portfolio in Australian equities, 27.1% in global equities, 15% in private equity, 5.7% in property, 9.5% in infrastructure and timberland, 11% in credit, 14.7% in alternatives and 6.8% in cash as of March 31.

DEFINED CONTRIBUTION

WELCOME KEYNOTE: Money – How to Make the Most of Never Having Enough

Kelly Goldsmith, Ph.D.

Behaviorist, E. Bronson Ingram Chair; Professor of Marketing, Faculty Director Hoogland Undergraduate Business Program Owen Graduate School of Management, Vanderbilt University

REGULATORY UPDATE: Key Issues – Now and Down the Road – for DC Plans

Ali Khawar Principal Deputy Assistant Secretary U.S. Department of Labor, Employee Benefits Security Administration (EBSA)

Last chance to nominate a NextGen plan sponsor colleague: P&I has extended the nomination deadline to July 19 for members of your retirement benefits team with less than 10 years of experience managing DC savings. Nominate by visiting pionline.com/2024NextGen. Selected members of the esteemed 2024 NextGen Leader Program will be hosted during DC West in Pasadena, CA, October 20-22, 2024.

PASS THE CAKE

BNY marks 240 years by opening markets globally

Financial services rm BNY had the privilege of ringing bells at stock exchanges across the globe on June 26 to mark its 240th anniversary — and Pensions & Investments was granted an invitation to join the celebrations in London.

This year marks 240 years since the rm’s founding, evolving from America’s oldest bank to a global nancial services company with $48.8 trillion in assets under custody/administration and $2 trillion in assets under management. And it turned 240 with a refreshed umbrella brand as BNY — changing from BNY Mellon — and a new logo.

To mark the anniversary, BNY Investment Management’s Hanneke Smits, global head of

investments, rang the bell at the London Stock Exchange, marking the market opening, while the same privilege was extended to colleagues across the globe, including in Hong Kong, Paris, Frankfurt and New York.

BNY employees from across the business gathered on the balcony of the LSE and, after a short introduction to the LSE and U.K. stock markets, Smits was invited to “ring the bell” (actually, press a button), which launched a 10-second countdown to the market opening at 8 a.m. U.K. time.

Employees joined in the countdown and cheered as market prices were then displayed onscreen, indicating the start of the day’s trading.

“We have changed a lot since we

PROMOTING EQUALITY

Iceland’s new gender bond aims to help improve women’s welfare, income

were founded in 1784,” Smits told employees as she prepared to sign the LSE’s welcome book and was presented by the exchange with an engraved glass statue to mark the occasion.

The rm would be unrecognizable to founder Alexander Hamilton, she joked, highlighting that there are now “more services, including investment management — which I’m very proud to run.”

NEW BOSS AB looks to the future with new chief AI of cer

Andrew Chin has been named AllianceBernstein’s rst chief arti cial intelligence of cer, the rm announced July 1.

AB said the new position is intended to show the rm’s progress with AI as well as “its future potential,” according to a news release.

Smits added that there is a need to be “resilient,” and that “you also have to be innovative” in the industry.

Other BNY leaders present at the London bell ringing included Abdallah Nauphal and Euan Munro, CEOs at BNY IM af liates Insight Investment and Newton Investment Management, respectively.

SOPHIE BAKER

Pope Francis grants CEO delegation an audience to discuss sustainability

CEOs from major companies — including money manager Ninety One — were granted an audience with Pope Francis to discuss their priorities as part of the Sustainable Markets Initiative.

The Holy Father addressed 25 CEOs who are members of the Sustainable Markets Initiative on June 15 at the Vatican, according to a news release posted on the Holy See press of ce website and information posted on the of cial news platform for the Vatican, Vatican News.

“It was the privilege of a lifetime to experience an audience with the pope as

part of a delegation from the Sustainable Markets Initiative (SMI) at the Vatican over the weekend,” Hendrik du Toit, CEO at Ninety One, said in a LinkedIn post. “The Holy Father’s message could be summarized in two concepts — the need for inclusive capitalism and a more sustainable world. No one should be left behind.”

Du Toit added that the conversation between Vatican staff, companies, solutions-oriented startup rms, academics and the initiative’s leadership “was stimulating and motivational. This was totally in line with the Ninety One purpose of ‘investing

Iceland has issued a gender bond of €50 million ($54 million) designed to improve the welfare and nancial health of women.

“By being the rst sovereign to issue a gender bond, Iceland is using its international leading position when it comes to gender equality to set an important example for other nations with a new approach to mobilizing nancial markets and public nance to promote gender equality,” said Sigurdur Ingi Johannsson, minister of nance and economic affairs, in a June 24 news release.

The news release said proceeds would be used to increase affordable housing for women with low incomes, “the majority of whom are single parents and/ or have reduced work capacity.”

Other uses of the proceeds “may go towards projects that contribute to reducing and redistributing the burden of unpaid care and domestic work.’’

“Eligible expenditures include increased maximum payments during parental leave, intended to allow and create incentives for both parents to make use of their equal right to paid parental leave following the birth of a child,” the news release said.

The gender bond transaction was a private placement issued to Franklin Templeton, which was arranged by BNP Paribas.

“The progressive use of proceeds also positively supports economic resilience and the social advancement of women, paving the way forward for sovereigns to innovate across public and private nance,” said Frederic Zorzi, global head of primary markets at BNP Paribas, in the news release.

ROBERT STEYER

for a better tomorrow,’” he wrote. “Yes, we can!” Ninety One had $159.2 billion in assets under management as of March 31.

The pope told the CEOs that “the functions you are called upon to perform are

“As AI continues to play a critical and transformative role in enhancing AB’s investment-research, operational and business procedures, and improving ef ciencies across our corporate functions, we look forward to having an industry veteran like Andrew lead our rm into the future in this newly created role,” said Karl Sprules, AB’s senior vice president and chief operating of cer, in the news release. Chin, who will remain based in New York and report to Sprules, said in the news release that the new position shows “the broadening role that data science and AI are playing across the nancial services industry.”

Chin has spent 27 years at AB, most recently as head of investment solutions and sciences. He also served as AB’s head of quantitative research and chief data scientist, and was the rm’s chief risk of cer for more than a decade.

Chin’s previous responsibilities will be shared by Nelson Yu, senior vice president and head of equities, and Daniel Loewy, CIO and head of multiasset and hedge fund solutions, a spokesperson con rmed to Pensions & Investments AB had $757 billion in assets under management as of May 31. Financial services rms and regulators have been adding new roles to tackle AI. Many of the largest hedge funds have heads of AI, and recently, the Commodity Futures Trading Commission appointed Ted Kaouk as the agency’s rst chief AI of cer.

LYDIA TOMKIW

increasingly decisive in not only economic but also social and political life. Large companies are players in the dynamics of international relations. You therefore nd yourselves making decisions that have an impact on thousands and thousands of workers and investors, and increasingly on a global scale. Economic power is intertwined with political power.”

A spokesperson for the Sustainable Markets Initiative was not available to comment. The initiative was launched in 2020 at the World Economic Forum’s annual meeting in Davos, Switzerland by King Charles III — then the Prince of Wales. The global organization focuses on sustainable transition. Its mission is to build a coordinated global effort to enable the private sector to accelerate progress toward achieving global climate, biodiversity and sustainable development goal targets.

SOPHIE BAKER

CELEBRATION: BNY Investment Management’s Hanneke Smits opens trading at the London Stock Exchange to commemorate the firm’s 240th anniversary.

‘PRIVILEGE OF A LIFETIME’: Ninety One CEO Hendrik du Toit

AI LEADER: AB’s Andrew Chin

PENSION RISK

TRA NSF ER

Corporate pension plans are continuing to pursue pension risk transfer (PRT) transactions for a host of reasons, with more insurers stepping up to help meet the demand and deliver on providing retirement security to plan participants. This updated resource explains what’s behind the current developments and offers practical advice to plan sponsors on preparation for a PRT, evaluation of an insurance partner and implementation steps. It also profiles the sponsor’s investment capabilities, capital sourcing strategies and solutions.

OPINION

OTHER VIEWS ROY SWAN

Everything funds want to know about investing in diverse managers (but are afraid to ask)

Afraid to ask publicly, that is. Over the years I’ve spoken with many asset allocators, including decision-makers from the public, private, government, and philanthropic sectors from all over the world. Many leaders of those organizations — whether heads of family offices or elected pension fund decision-makers, like state and city controllers, comptrollers and treasurers — are chosen for their extraordinary leadership capabilities and vision and not necessarily for their investment acumen.

Yet they are thrust into the public eye, entrusted with the stewardship of trillions of dollars in family wealth or retirement funds, despite sometimes lacking formal expertise in the intricacies of investment management. Even if they are investment experts, their primary function is to serve as leaders who inspire, not to delve into the minutiae of investment strategy and execution.

In the realm of public pension fund management, where fiduciary responsibilities intersect with political accountability, transparency and accountability are paramount.

However, acknowledging gaps in understanding of a CIO’s investment strategies and allocation decisions can be an unrealistic expectation for these elected officials, because we want them to project confidence to build public trust.

While ensuring the well-being of current and future retirees is a major part of their job description, they have many other responsibilities and appropriately rely on their teams of experts to decide and execute retiree savings investment allocation.

Despite the significant impact of investment decisions on voters’ retirement capital, a wide disconnect exists between public pension officials’ efforts on behalf of the people they serve and the investment decisions made by public pension fund investment staff.

It is estimated that women- and minority-owned firms oversee just 1.4% of the total assets under management in the U.S. — despite women and people of color making up 70% of the U.S. working-age population.

Public pension fund staff allocate only slightly more than that paltry 1.4%. Elected officials know that transparency, representation, and accountability in the space are long overdue, and many public pension fund leaders wisely seek outside advice on how to serve their current and future retiree constituencies.

Below, I address questions that many officials may hesitate to ask publicly, drawing from experiences and conversations throughout my career. The questions seek to surface insights that can empower pension fund leaders to navigate their roles and direct the chief investment officers who report to them with greater confidence and effectiveness, ensuring a more accessible and equitable future for all stakeholders.

Q : My CIO tells me he can’t get his staff to bring forward diverse fund managers. What should I do?

A

A: There are options: 1. Find a new CIO. 2. Hire an executive coach to help your CIO learn how to manage employees in line with institutional objectives. 3. Tell your CIO to hire professionals who embrace institutional objectives.

Q : Diversity is important, but won’t my returns suffer if we allocate capital to

women and people of color investors?

A: Attractive financial returns and underrepresented investors are not mutually exclusive. In fact, volumes of research exist indicating the opposite, with diverse teams often outperforming homogeneous ones. A simple fact remains: If you select skilled investment managers, you increase the likelihood of achieving attractive financial returns.

Q : We tried investing with diverse fund managers and it didn’t work. Why should I try again?

A: Just as there are underperforming managers across all demographics, there are also highly successful ones. It’s essential not to generalize based on individual experiences. Instead, apply the same standards of evaluation consistently across all managers, regardless of gender or race. Consider diversifying your approach further by allocating more capital to a broader range of managers who are women or people of color. By spreading your investments across a diverse portfolio of skilled managers, you increase the potential for success and

Roy Swan is the Ford Foundation’s head of mission investments.

OTHER VIEWS JOEL PAULA

Navigating the global power struggle over long-term investment

In a 2022 address on the way forward for the global economy, U.S. Treasury Secretary Janet Yellen said, “Going forward, it will be increasingly difficult to separate economic issues from broader considerations of national interest, including national security.”

Two years on, this concept is rearing its head as geopolitical rivalries heat up, and institutional investors find themselves at the center of a tug of war. What is at stake is billions of dollars in long-term investment capital that institutional investors deploy in global equities, fixed income and private markets.

Just as the U.S. dollar has long been wielded as an instrument of economic and foreign policy, governments are eyeing this institutional pot of wealth as a tool to fulfill national security or geopolitical policy objectives.

Another former Treasury secretary, John Connally, once summed it up dryly, “The dollar is our currency, but your problem.” Now, national interest is governments’ policy and investors’ problem. Governments are shaping a new investment environment, replacing the old where capital flowed freely with one where constraints are limiting the opportunity set for investors. A rewiring of global alliances and economic policy is manifested through trade controls, repatriation bans, sanctions, and sometimes outright bans on investment in certain markets or industries.

There may be good reasons for governments to craft policies that prioritize energy transition and independence, access to critical resources, healthcare, and strategic industries. Success could lead to more resilient societies that are

the impact of any individual underperformance.

Q : Our investment consultants discourage us from considering diverse fund managers.

A: Research indicates that there’s a systemic bias against selecting women and people of color, particularly within traditional investment circles led by white men, while Black investors make the most racially diverse investment decisions. It might be worth reassessing your relationship and seeking out a new consultant with women and people of color in decision-making roles. Beware of superficial diversity efforts and window dressing, as simply having women or people of color in advisory roles doesn’t guarantee alignment with

better able to withstand disruptions. At the same time, investment capital is necessary to achieve these policy objectives.

The problem is that policies intended to push or pull investment capital create clear trade-offs for investors.

The U.S. government has moved to restrict investment in certain Chinese companies or industries. Recent proposed legislation even targets equity index funds specifically. In Canada, the House of Commons special committee studying Canada-China relations is urging the federal government to introduce new measures to prevent Canadian pension funds from investing in Chinese companies that pose a threat to national security. In the United Kingdom, the Treasury will require pension funds to publicly disclose how much they invest in U.K. businesses as part of government efforts to boost their investments in U.K. assets.

Trade-offs emerge when national interest overlays do not map to where capital seeking financial opportunities would otherwise flow. Investors become compelled to balance opportunities for growth and attractive returns with potential reputational or investment risks stemming from geopolitical concerns.

Destinations, diversifiers, diversions

Imagine the options as a matrix, featuring national interest juxtaposed against fiduciary risk-adjusted return.

“Destinations” offer good return and align with national interest. Friendshoring markets, for example, benefit from trade tensions and fragmentation. Countries like Mexico, Vietnam and

your institutional objectives.

Q : Won’t I get attacked for DEI if I talk about increasing capital allocations to women and people of color?

A: Maybe. However, it’s essential to understand that “DEI” really means “fairness.” While the term itself may have been politicized or misrepresented, the core principles it represents are critical for fostering a more equitable society, generating attractive financial returns and improving overall retiree well-being. Rather than focusing solely on the label, prioritize fairness and inclusivity, and the value of broadening your capital allocations for the purposes of diversification as a risk management tool and pathway to untapped financial returns.

The latter are substantive matters of fiduciary responsibility that not only bolster the prudence of your investment practices but

Poland function as economic swing states that offer investment opportunities and political palatability. These are the win-win opportunities for investors and policymakers.

“Diversifiers” can still offer good returns, but they may be misaligned with national interest. Investors end up leaving money on the table to satisfy a national interest mandate. Investments in China could fall into this category.

“Diversions” satisfy national interest, but return opportunities are low. Investors pressured to invest in their home markets may well be forced to divert capital from better opportunities abroad. Industrial policy cannot simultaneously foster competition in “favored” industries everywhere all at once. Multiple countries promoting national champions in semiconductors and batteries, for instance, would be a high-cost proposition for all.

How can investors parse out

will also allow you to navigate potential criticism more effectively while still advancing meaningful change.

Q : Should I commission a report to study whether women and people of color can outperform vs. the median?

A: Volumes of research and documentation already exist on this topic, demonstrating that diverse investment teams can deliver competitive performance. Instead of reinventing the wheel, leverage existing research resources available through academic institutions, foundations, and investment firms. Engage with experts who specialize in this area to gain valuable insights into the performance potential of diverse fund managers.

these options? Start by diagnosing the intent behind government communications. Is a given policy a directive or an aspiration? If policymakers know full well that there are trade-offs with fiduciary duty, what behaviors are they trying to influence? For investors, it is first about following the rules and legal requirements, then determining where their responsibilities lie, how implicit or explicit the rhetoric is intended to be, and

how policy could change given the direction of that rhetoric.

What I’ve heard in recent conversations with a number of global investors is that engaging directly with policymakers has become a common means to understand government intentions, and whether a specific pronouncement is truly a directive or just an aspiration. Policy engagement remains an often-overlooked tool for investors to stay ahead of surprises. Institutional investors have a responsibility to help governments make sound investment policy decisions for their own interest and, in many cases, for the national interest. Investors are best off clearly communicating their preferences and rationale to governments, helping them to gain insight into the long-term perspective, which they may not fully grasp otherwise.

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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Joel Paula is a research director at FCLTGlobal.

SEISMIC SHIFTS POWER INFRASTRUCTURE ASSETS

Nearly three years after the Infrastructure Investment and Jobs Act was signed into law, infrastructure remains top of mind for institutional investors. And for good reason. The asset class is powered by at least three global mega-trends: the need for upgraded transportation infrastructure and power grids; technological advancements, such as artificial intelligence; and the transition to renewable energy sources. In addition, infrastructure not only delivers risk-adjusted returns comparable to traditional assets, but also diversification and resiliency in the face of inflation and higher interest rates.

Yet as investors explore the vast opportunity set, some questions have arisen amid last year’s slowdown in deal activity and shifting macro conditions. Is it time to pause on allocating to infrastructure? Are the recent valuation concerns expected to persist? Leading managers in infrastructure investing — abrdn, I Squared Capital and Igneo Infrastructure Partners — cut through the complexities, share their investment approach and highlight the macro and market tailwinds that underpin the asset class.

P&I: Is this an opportune time to invest in infrastructure?

“We believe that increased rates have presented a long overdue repricing of risk, increasing the appetite and attraction of infrastructure as an asset class,” said Ivan Wong, partner of concession infrastructure at abrdn. Over the last several years, from the start of the pandemic to the supply shocks and the sharp rise in inflation that led central banks to combat it with higher rates, the relatively consistent performance of infrastructure assets has reassured investors that the sector is resilient and thus a good place to be invested in for the long term, he said.

“The appetite for this asset class remains very high,” Wong said. “Even with fundraising markets tight as they are, investors do intend to increase their allocations across the board to infrastructure.” Additional reasons that investors like the asset class today are its long-dated, predictable cash flows and liability matching with very low volatility, even during periods of high interest rates.

What’s more, the sector has suffered from massive underinvestment, according to Michael Ryder, partner and co-head of North America at Igneo Infrastructure Partners, a specialist in middle-market infrastructure investing. It “has been systematically under-invested in for decades, and so there is significant opportunity for new capital to invest in infrastructure development and infrastructure build-out,” he said.

“This is a much better time to invest than when rates were zero,” said Gautam Bhandari, co-founder, managing partner and global chief investment officer at I Squared Capital. “Current mid- and long-term rates are reflective of a somewhat more normalized environment and higher inflation. So now is a great time to come in and lock those rates in for a long period of time. Infrastructure assets offer the unique ability to lock in higher rates in the next 10 to 20 years."

In fact, Bhandari sees the beginning of what he calls an infrastructure super-cycle that he expects will keep dollars flowing and investor interest high for decades. This super-cycle is characterized by “a few trends that have converged: climate change, the use of artificial intelligence, society’s desire to have modern infrastructure immediately, and governments’ desire to create jobs and have a productive economy.”

Sameer Amin, global head of concession infrastructure at abrdn, said infrastructure is well

positioned relative to other private market investment options. “One has to look at the challenges that both real estate and private equity are currently experiencing to understand why infrastructure is standing head and shoulders above some of our peers,” he said. “Allocations are awarded to private markets because they can genuinely deliver the diversification that people are seeking from a private markets allocation.”

P&I: Which thematic trends will drive infrastructure assets over the next few years?

Amin highlighted three trends: decarbonization, urbanization and digitization. All told, up to $94 trillion over the next 15 years would be needed to meet the infrastructure requirements borne out of the three trends, he estimated. “When you take the three mega-trends together, you start to get a sense of what, ultimately, we’re facing as an industry,” said Amin. “And that translates into very explicit opportunities.”

When you take the three mega-trends — decarbonization, urbanization, digitization — together, you start to get a sense of what, ultimately, we’re facing as an industry. And that translates into very explicit opportunities.

— SAMEER AMIN, ABRDN

“We believe private capital has a pivotal role in funding all this,” Wong added. “It’s a broad opportunity set to work in partnership with government to meet these challenges.” Abrdn has identified a number of subsectors that are ripe for investment in each of the three global trends. They range from healthcare, education facilities, housing, water and waste treatment to transportation areas, such as mass transit systems, roads and ports, as well as renewable energy generation.

The move to electrification and renewable energy is a “massive societal trend” that will help drive long-term interest and investment into infrastructure, Ryder said. It dovetails nicely with two other trends favorable to the asset class: digitization and reshoring. “That includes the move away from hydrocarbon-emitting fuels toward greater electrification and renewable energy,” he said. “That is a significant area of investment on a global scale.”

Beyond energy generation, Igneo Infrastructure Partners also sees opportunities in transmission and storage. In addition, digitization, highlighted recently by the rapid development of AI, has driven investment into cell towers, fiber networks and data centers, Ryder said. “We’ve seen a massive increase in investment and velocity around artificial intelligence, but that is just a continuation of a significant trend of considerable investment that has gone into macro cell towers, fiber and data centers to provide the computing power, the storage and

low-latency access to information and data that is necessary for our society to run,” he said.

“If you look at societal needs globally, they all imply a monumental buildup of infrastructure,” said Bhandari of I Squared Capital. “You can see it globally in how rapidly people want to make the grid green and how quickly we are adopting technology and data centers — all of which has massive implications for the consumption of power.”

P&I: For investors considering an infrastructure allocation, what key attributes and risks should be top of mind?

“Leverage. When you’re operating an infrastructure asset, what’s the level of leverage you’ve taken on?” Bhandari said. “If you take a very safe asset but put a lot of leverage on it, then it’s no longer safe.” Other key attributes to watch for in an infrastructure investment include recurring revenues, how an asset performs through the stages of a business cycle and how a company performs through inflation different scenarios as well as how efficiently the company manages its day-to-day operations, he said.

“It’s important to buy infrastructure businesses with a strategic approach,” Ryder said. “It involves building and maintaining broad networks to identify opportunities for investment and then doing the hard work to understand those businesses and to carefully negotiate structures of acquisitions or partnerships in order to make investments. Once you own the business, it’s all about actively managing that business, putting the right leadership team in place that is appropriate for the asset.”

At abrdn, which operates in the public-private partnership, or P3, space, Amin and Wong pay particular attention to government policy. Amin pointed out that upwards of 70 countries around the world are going to the polls this year. “Understanding whether a change in government will lead to a change in strategy or policy on how public procurement programs are enacted and mobilized is incredibly important because that really determines the speed at which we can respond to that requirement,” he said.

As far as regulations are concerned, Bhandari noted, investors need to monitor “how consistent the regulator has been, regardless of the country.” Besides regulations, investors also need to keep an eye on liquidity and changing market conditions, he said. Depending on the size of their investment, exiting a position could be difficult. “If you’re a $300 million to $1 billion investor in an infrastructure asset, it’s easy to get in and out. But if you have written a $2-to-$3 billion equity check, then $4-to-$6 billion exits are harder,” he said. “So liquidity is one of these risk factors” that you need to closely watch.

Successful infrastructure investing requires active management, Ryder emphasized. It involves “identifying and watching out for any future changes in the market environment in which you operate — the customer environment, the supplier environment, the value chain, the technology — any changes that would manifest themselves as risks that could impact upon the long-term value of the business that you’re running,” he said. “Active management is key to what we do.”

in some segments enjoying high investor demand, high valuations don’t necessarily mean investors should stay away.

“Companies that have strong positions with existing generation capacity in operation and a clear pipeline of opportunities in development are demanding strong valuations because that sector is in such high demand, and there are significant growth opportunities,” Ryder said. “These are in areas where there’s more demand for growth and investment than we necessarily have opportunities today. That situation drives valuations to be at strong levels.”

“So rather than asking whether valuations are high or low, you need to look at the specifics around individual sectors and ask whether the forces in play are driving valuations to fair levels, even with numbers that may look elevated. I think the answer is yes,” he said.

Abrdn, which is seeing public sector projects utilizing private sector skills to deliver infrastructure, also sees valuations readjusting to higher interest rates, Wong said. “Given the increased underlying cost of government debt, there’s diminishing dry powder in the market with respect to liquidity,” he explained. “Those two features have implied a repricing of risk. And as such, valuations are adjusting accordingly and setting more value for buyers.”

Bhandari said it’s actually been a good year for infrastructure. “Investors are still allocating to the sector and private infrastructure continues to consistently outperform any of its listed peers with lower volatility. If you look at, for instance, private investments in wind farms, renewable energy or data centers, those are all up 20+ % as an asset class because there is fundamentally good value creation and these assets meet a real societal need.”

Companies that have strong positions with existing generation capacity in operation and a clear pipeline of opportunities in development are demanding strong valuations... and there are significant growth opportunities.

— MICHAEL RYDER, IGNEO INFRASTRUCTURE PARTNERS

Institutional investors should also consider infrastructure in a global context. “We’re keen to explore and continue to take advantage of the opportunity set in South America and targeted geographies, such as the Andean regions of Colombia, Chile, Peru and Uruguay, where there are established legal frameworks and a good track record in utilizing P3,” Amin said, adding that rapid population growth is fueling the need for additional infrastructure. “That presents a very compelling opportunity.”

P&I: With subdued performance in the past couple of years, are valuations more compelling today?

“Broadly, asset values are more specific to the situations and the opportunities around certain companies,” Ryder said, referring to private infrastructure assets versus publicly traded ones. For example, with so much demand for AI, companies developing data centers and other industries that cater to AI are richly valued, he said. But even

I Squared’s ability to allocate capital globally and across sub-sectors, combined with a prudent underwriting approach, is essential to identifying the most compelling opportunities, Bhandari said. Datacenters are one example “with potential for more attractive valuations outside the OECD markets. Our local insights combined with an ability to build platforms has meant we’ve been able to pick up businesses cheaply and build them. And, with buyers placing a premium on late-stage development capacity, a subdued market can create better entry points for those looking to capitalize on future growth.”

P&I: Will 2024 see a turnaround in fundraising and deal volumes in private infrastructure?

“While it’s difficult to predict near-term allocation trends, investors broadly recognize the need the grow their allocation to the asset class. We think 2024 and 2025 are promising investment years for fundraising and deal activity,” Bhandari said. “These are very good vintages because if you believe that rates will come down — whether six months from now or three years from now — you would have captured elevated rates for a very long term.”

“Deal volume has slowly been picking up,” Ryder said. “Fundraising will improve as monetization accelerates. As funds sell assets, exits occur and capital flows back to institutional investors, they will then need to reallocate that capital. That’s when we will really see fundraising start to improve.”

Amin said he doesn’t expect a “material” improvement in fundraising this year “because the effects of what’s taken place macroeconomically over the last 18 months has left a number of allocators with disproportionate allocations, and with disproportionate return requirements to their clients,” he said. “Do we see it improving thereafter? Absolutely.”

P&I: How will infrastructure exposure continue to benefit institutional portfolios?

“Infrastructure is a great diversifier for your portfolio because, generally, infrastructure assets are low-beta assets,” Bhandari said. “Also, it has explicit, often contractual inflation protection; so infrastructure companies do very well when inflation is high. And it adds a defensive element to your portfolio.” Investors are attracted to all its pos -

itive characteristics for an institutional portfolio: low correlation, liability-matching and linkage to inflation, he said.

“Over the past few years, infrastructure investing has demonstrated inflation resiliency,” Ryder said. “And as interest rates have gone up, we’ve seen that many owners of infrastructure assets have been able to pass on some of that inflation and maintain strong cash flows and margins.”

“Infrastructure is an alternative asset class that gives institutional investors the opportunity to add diversification in their portfolios,” he added. “It has different correlation levels with other alternative asset classes, such as private equity, real estate and private credit, and often is a meaningful addition to an institutional portfolio to reduce risk and provide uncorrelated returns.”

Infrastructure is a great diversifier for your portfolio because, generally, infrastructure assets are low-beta assets. Also, it has explicit, often contractual inflation protection [and] it adds a defensive element to your portfolio.

Diversification within a private market allocation is increasingly important in a tight market, Amin said. “Infrastructure forms one of many private market options for investors,” he said. “One has to look at the challenges that both real estate and private equity are currently experiencing to understand why infrastructure is really standing head and shoulders above some of our peers. With infrastructure, we can genuinely deliver the diversification that people are seeking from a private market allocation.” His colleague Wong added that three benefits of infrastructure continue to stand out today for institutional portfolios: current income in the form of yield, capital appreciation and capital gains.

— GAUTAM BHANDARI, I SQUARED CAPITAL

P&I: What specific attributes of an infrastructure asset manager are important to navigating today’s market?

“It’s important to identify a private manager who has demonstrated over a long track record an ability to identify opportunities to invest in true infrastructure businesses,” Ryder said. “If you’re looking at and comparing managers, and then looking at the deals that those managers have done and their track records, make sure that they’re sticking to what they have said they will do.”

I Squared Capital sees the middle-market, which Bhandari defined as deals between $300 million and $1 billion, as presenting the best opportunity for infrastructure asset managers to generate returns. “The segment where there is real alpha, real value, tends to be in that middle-market segment,” he said.

From there, investors need to understand a manager’s risk process. “A lot of managers use a bucket approach to classify risk in terms of core, core plus, etc. But at I Squared, we use a ground-up, numerical, methodical and consistent 10-factor risk model,” Bhandari said. “One key to creating value is selecting the right assets. And key to selecting assets is measuring risk consistently, not just in broad buckets but focusing on granular risk and measuring it,” he said. Using its 10-factor risk model, the firm monitors those risks and attempts to lower them over the course of its ownership, he noted. “And as you lower the risk, you create value.”

For abrdn, it is key to be able to articulate the infrastructure investment strategy and then implement it with a well-seasoned team of professionals. In addition, differentiation is critical. “Being differentiated and niche, we believe, plays well” with institutional

investors, Amin said, pointing to its approach with public-private partnerships globally.

P&I: How does the uncertainty over the Federal Reserve’s next moves, given the expected rate-easing cycle, impact infrastructure?

For infrastructure investors, a long-term view is critical to success, but how critical interest rate policy is to an infrastructure strategy depends on the strategy itself.

Wong said that as a P3 manager, abrdn keeps a close eye on Fed policy. “Often, we enter into long-dated contracts funded by our public activity bonds, usually with a 10-year call option to effectively refinance those bonds, delivering a cheaper capital solution,” he explained. “However, with the slight delay or continued uncertainty around the Fed’s easing of interest rates, that’s just been pushed out a bit longer.”

But that also means that in some cases the current market environment is beneficial, Amin added. “The cost at which private-sector capital can be procured is intrinsically linked to where the Fed chooses to move its interest rates,” he said. “So it’s an incredibly timely moment.”

While uncertainty around the Fed’s next move is not hampering deal activity, its next move will fuel it, said Ryder at Igneo Infrastructure Partners. “Once we see actual tangible easing, and the Fed moving to a more accommodative monetary policy, we’ll probably see transaction activity accelerate further,” he said.

Investors need to think about the impact of interest rates on different aspects of infrastructure assets, said Bhandari at I Squared Capital. “If rates do come down, the assets that you would have bought during this period will be worth more,” he said. “But because these assets are not like real estate, you need to finance them on the longer end of the spectrum, so investors also need to think about long-term interest rate equilibrium. Fortunately, now, long-term interest rates have also moved up and are therefore more normalized today.”

P&I: Will the U.S. election impact infrastructure?

“We believe that in some ways, it transcends either party that may come into government and their priorities; infrastructure will be a priority regardless,” Amin said.

Bhandari agreed. “The common theme for any presidential campaign globally has been infrastructure. It’s generally jobs and infrastructure are the top two items in any election,” he said. “It’s very hard to argue that one side wants good infrastructure and the opposing party doesn’t.”

“If you look at the support for infrastructure investing, significant capital has flowed into the infrastructure sector in the U.S. through Republican administrations and through Democratic administrations,” Ryder said. “We are carefully monitoring the election outlook, but we remain confident that regardless of who is in the White House and who is on Capitol Hill, there remains a significant need for infrastructure investment. The federal government and, importantly, state, regional and municipal city leaders will work to encourage and support further infrastructure investment,” he said, “because it goes to the core of supporting and growing U.S. competitiveness on a global scale.”

Pension risk transfer activity

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Corporate funding & buyout indexes

INVESTMENT OUTSOURCING

Providers disagree on bene t of scale

management bene ts their businesses.

Amid an expected pickup in consolidation for outsourced CIOs, top providers — overseeing a mix of corporate, nonpro t and healthcare plan assets — insist that scale is a friend, capable of accelerating their own growth while delivering better value for clients.

Competitors focused on narrower market segments such as endowments and foundations, by contrast, say they’re careful to maintain a more modest pace of growth that won’t inhibit their search for alpha.

Analysts say the industry is broad enough to allow providers on both sides of that divide to build successful businesses.

In the outsourcing business, scale generally does help from a provider pro tability perspective because costs go down and revenues go up, said Ravi Venkataraman, managing partner and co-owner of Chestnut Advisory Group, a Westport, Conn.-based boutique management consulting rm focused on asset managers and investment solutions providers.

Ever more complex solutions, meanwhile, call for “increasing technology spend, which in turn will favor rms that can build scale — even if there’ll always be room for specialist competitors that know their market segment better than anybody else,” Venkataraman said.

The largest managers in Pensions & Investments’ latest OCIO rankings say increasing heft in terms of outsourced assets under

“Scale is increasingly important and we’re going to continue to see scale be a differentiating feature and factor as people make decisions,” said Timothy Braude, global head of multiasset solutions with Goldman Sachs Asset Management.

GSAM — which retained second place in P&I’s latest ranking with $328.9 billion in worldwide outsourced institutional AUM as of March 31, up 33% on year — reported in May that UPS hired it to manage the Atlanta-based package delivery giant’s $43.4 billion in North American de ned bene t assets.

“Every time we bring in another $50 billion, we’re able to leverage that scale, (providing) better savings not only for our existing clients but for new clients” as well, Braude said.

Mercer embraces scale

Mercer, which held on to the top spot in the latest rankings with a 39% surge in outsourced AUM to $469.2 billion, helped by two sizable acquisitions, likewise made scale work for its clients last year, noted Rich Nuzum, Mercer’s executive director, investments and global chief investment strategist.

By way of example, when Mercer “closed the liftout” of Australia’s A$63 billion ($42.7 billion) BT Westpac retirement business on April 3, 2023, “we passed back that bene t of increased size” with a more than 30% drop in expense ratios for a representative account of

A$50,000 — a concrete example of how scale can drive better outcomes for clients, said Nuzum.

Some competitors contend there’s a self-reinforcing element to such scale increases, allowing OCIOs to offer compelling

value propositions to ever-larger plan sponsors.

Several years ago, when BlackRock’s OCIO business was considerably smaller, a number of corporate retirement programs in the U.S. boasted suf cient scale to make them competitive with BlackRock’s team in terms of hammering out attractive terms with external managers, noted Ryan Marshall, managing director and co-head of BlackRock’s multiasset strategies and solutions investment group.

But with the continued healthy growth of BlackRock’s OCIO business, “we can now bring economies of scale to more and more clients,” delivering bene ts for very large organizations in a way BlackRock wasn’t able to do when it was smaller, he said. At present, Marshall noted, BlackRock’s book of business with external managers has grown to $150 billion.

That value proposition is coming under consideration in an ever-expanding number of C-suites.”If you’re a (chief operating ofcer) sitting at almost any institution, you’re being asked about core and noncore activities. And increasingly with these large mandates being public, you’re being asked … is that something that might make sense for us as well,” said Marshall.

Michael Cagnina, senior vice president and managing director of SEI’s institutional business, agreed that scale has its advantages but that, he suggested, doesn’t necessarily mean that bigger is always better. Once an OCIO manager achieves a certain critical mass, the bene ts of further scale may diminish, he said.

For providers approaching the top 10 in OCIO industry rankings, even if a competitor brings an addition $50 billion in AUM to the

LunahZon Photography

table, the pricing they get from external managers should be “pretty similar,” Cagnina said.

Scale becomes the enemy OCIO managers focused on endowments and foundations, meanwhile, say they see scale as more problem than solution and their AUM growth for the year through March 31, even accounting for the 4% to 5% disbursements those nonprofits distribute annually by law, remains relatively modest. For example, Hirtle, Callaghan & Co. stood 33rd in the latest rankings, with a 5% gain in worldwide institutional outsourced assets to $12.7 billion, while Global Endowment Management, in 37th place, reported a 0.9% increase to $10.2 billion. Global Endowment Management doesn’t aspire to manage $50 billion or $60 billion in client assets, said Matt Bank, a partner, deputy CIO and head of the client portfolio management group at the Charlotte, N.C.-based OCIO boutique. That kind of scale would impinge on the ability of GEM’s team to deliver investment excellence in less traveled corners of the market such as small private equity buyouts or elite venture capital.

For those market segments, scale is the enemy of returns and at a certain point “we would have to take more risk … to deliver the same kinds of returns that clients expect,” Bank said. Bank said such considerations could take on greater importance with the end of a 15-year run of favorable market conditions marked by rock-bottom interest rates and steady gains in equity market beta that effectively helped buoy all boats.

That change of fortunes will make it more difficult to deliver strong results going forward, setting the stage for a

pickup in consolidation that will pose the central question: What are clients getting out of it, Bank said.

“Every firm in our space can be plotted somewhere on the spectrum of treating (OCIO) like a business or treating it like a profession,” with more and more treating it like a business, Bank said.

Consolidation by those like-minded firms could benefit them but “I’m not sure what the benefits are to the clients at the end of the day: Are you getting a better portfolio? Are you getting more engagement? Are you getting a willingness to do things that don’t scale and help these institutions through difficult times?”

It’s an open question, Bank said.

Consolidation, meanwhile, could prove more complicated than many are anticipating, analysts say.

“If you can successfully scale it’s very profitable,” but achieving that in the OCIO business is not always a straightforward exercise, noted Amanda Tepper, managing partner and co-owner of Chestnut Advisory Group. “Not all the transactions are going to work out for everyone involved,” she warned.

By way of example, Tepper pointed to Mercer’s policy of not taking on public fund clients, which resulted in the firm not taking on all of the clients that came with Mercer’s March 2024 acquisition of Vanguard’s OCIO business. Mercer no longer works with public pension plans after a 2010 lawsuit settlement.

In light of the enormous “breakage fees” incurred when a client changes OCIO provider, that has been a “wakeup call for every client who has an OCIO,” Tepper said. “That’s a risk that generally had not been thought about or considered as a key risk going into hiring an OCIO,” she said.

Could OCIO reporting standards bring light to opaque universe?

The ability to do applesto-apples comparisons would help grow market

y B DOUGLAS APPELL

Efforts underway now to come up with outsourced CIO reporting standards could be one means of making what remains a crowded, opaque market segment easier for institutional clients to navigate.

Or not, depending on whom you ask.

Scott Perry, a partner with Boston-based NEPC, counts himself among the optimists, holding out hope that an ongoing CFA Institute exercise charged with creating rules of the road for OCIO reporting could lay the groundwork for more consistent reporting of OCIO track records and performance over the coming six to 12 months.

He said those coming guidelines — “an important next step for the rapidly expanding OCIO solutions market” — should help stakeholders make more informed decisions about the options available to them.

“Historically, it has been hard for stakeholders to do an apples-to-apples comparison of OCIO track records,” Perry noted. These guidelines, while not perfect, will move in the direction of making such comparisons possible.

“We’re making really good progress” in a market segment that retains “a little bit of the Wild West” about it, Perry said.

In P&I’s latest annual survey of OCIO providers, NEPC reported $106.6 billion in worldwide institutional outsourced assets under management as of March 31, up 73% from the year before.

At present, “there’s no industry standard” to dictate whether a manager responsible for a $50 bil-

INVESTMENT OUTSOURCING

Outsource managers’ diversity

INVESTMENT OUTSOURCING

IBM’s about-face sparks hope for DB bounce back

Outsourced CIOs reporting a growing number of pension risk transfers by de ned bene t clients they’ve guided to full funding could be forgiven for looking at the DB portion of their businesses as a wasting asset.

Instead, a number of executives see a chance that the ripple effects of IBM’s decision last November to put its multibillion-dollar pension plan surplus to work — reopening its DB plan while ending the company’s 401(k) match — could breathe new life into a corporate DB segment long seen as a dinosaur on the road to extinction.

For now, while that prospect remains mostly a matter of conjecture, at a minimum the repositioning of IBM’s retirement program has succeeded in shattering the singular focus corporate DB plan sponsors had maintained in recent years on pension risk transfers.

“For many years, everyone’s goal was just to get to fully funded and sort of get this thing off our balance sheet,” said Ryan Marshall, co-head of multiasset strategies and solutions with BlackRock.

But now, what IBM has been able to accomplish could — on the margin — be shifting views of de ned bene t plans “from what I would call a strategic liability to a strategic asset,” opening up a range of options beyond pension risk transfer,

Standards

CONTINUED FROM PAGE 17

lion client’s $5 billion target-date fund would report $5 billion or $50 billion in OCIO assets, noted Ravi Venkataraman, managing partner and co-owner of Chestnut Advisory Group, a Westport, Conn.-based boutique management consulting rm focused on asset managers and investment solutions providers.

Other OCIO veterans agree that uniform standards will be a signicant step forward for the industry.

The move toward global investment performance standards, or GIPS-compliant composites, for OCIO providers would amount to a “pretty big shift,” said Mark Andersen, San Francisco-based senior vice president and manager of Callan’s trust adviser group.

“We’re all kind of waiting to see what the outcome is and what the guidance will be prospectively,” he said.

The CFA Institute introduced global investment performance standards to replace country-speci c standards in 1999, with 85 of the top 100 asset management rms worldwide claiming compliance with GIPS standards for all or part of their businesses today.

OCIO clients haven’t historically demanded GIPS-compliant returns but over the next ve years — and probably much sooner — such reporting is likely to become “table stakes” for OCIO rms, Andersen said, adding that competitors without the capabilities and methodologies to present those returns to prospects could face headwinds.

For Callan’s part, “we’re at the

Marshall said.

“We’re certainly working with clients on that very question,” Marshall said.

IBM’s example has “caught the eye of other pension plan decision-makers,” agreed Scott Perry, a partner and head of portfolio strategy with Boston-based consultant and investment house NEPC, leaving some considering a different way forward now that could shift the balance between DC and DB “a bit.”

Timothy Braude, global head of multiasset solutions with Goldman Sachs Asset Management, said “you’ve got the IBMs of the world (saying) wait a minute! A DB plan is actually less expensive for me than a de ned contribution plan,” feeding into an “inverse correlation” between people’s ability to do something from a risk transfer perspective and their desire to actually do it.

When funding levels were low and nobody could imagine a day when they could put their plan on autopilot, “everybody wants to get rid of everything,” Braude noted. Now, by contrast, sponsors of fully funded retirement plans are eager to consider their options. All DB pensions may look the same but “every single one of them is different,” he said.

Whether those stirrings on the margin swell into something bigger remains an open question. For now, at least, pension risk transfers re-

doorstep,” he said. “There’s a very long process to put together all of the historical returns and all of the procedures necessary to say you’re satisfying all the requirements that have been laid out. We expect to take that step in the second half of 2024, so the overwhelming majority of the work is done now. We’re in the veri cation process,” he said.

Callan reported $33.7 billion in worldwide institutional outsourced AUM as of March 31, up 45% from the year before.

Opposed to standardization

Other OCIO veterans say they are either philosophically opposed to standardization efforts or not ready to commit to new standards until nal recommendations under the CFA’s auspices can be reviewed.

The CFA initiative, like similar attempts to forge collective reporting standards, are “trying to turn a service into a product,” said Jonathan Hirtle, the OCIO pioneer who helped launch Hirtle, Callaghan in 1987.

“We come from an industry that’s all about products,” something OCIO was designed to replace, Hirtle said.

The efforts being made now suggest the industry doesn’t really have a good feel for what a CIO does, he said. “The money manager is like a role player … a character actor. The CIO is a writer, director” and how can the “terri c, broad solution set” for that more expansive role be captured by a composite index, Hirtle asked.

In P&I’s latest ranking, Hirtle, Callaghan reported worldwide institutional outsourced AUM of $12.7 billion as of March 31, up 5% from the year before.

IBM could be shifting views of DB plans ‘from what I would call a strategic liability to a strategic asset .’

BLACKROCK’S RYAN MARSHALL

main at record levels, according to the latest LIMRA survey, and most observers see little chance of considerable change anytime soon.

“I’m not convinced it’ll be a fullon trend over the next ve years,” said Michael Cagnina, senior vice president and managing director of SEI’s institutional business. Still, there’s always a “running with the herd” element at play and if three or four more IBM-class organiza-

Timothy Braude, global head of multiasset solutions with Goldman Sachs Asset Management, likewise expressed concern about how a market segment with so many working parts can be successfully standardized.

“I recognize there’s constant chatter around the best way to display performance relative to indices for OCIO mandates (but that’s) a pretty challenging thing to do when every single mandate is different,” Braude noted.

For example, one proposal under consideration calls for bucketing mandates based on high level allocations to liability-hedging or risk-mitigating assets, potentially a move of questionable value when there can be so many nuanced differences under the hood, he said.

“We obviously think there’s a lot of bene t to ensuring that we have GIPS-compliant performance compositions but ultimately if we don’t think that the proposed solution is appropriate then we’ll have to assess what the next steps are at that point,” Braude said.

Goldman Sachs Group reported $328.9 billion in worldwide institutional outsourced AUM as of March 31, up 33% from the year before.

Crowded field

If deep-seated differences remain when it comes to the value of OCIO-speci c GIPS composites, there’s broad agreement that the universe of OCIO providers remains crowded — even with a recent pickup in high-pro le M&A activity — and dif cult for prospective clients to vet.

An ever-broader embrace of the OCIO model makes it easier for institutional investors to decide to

tions follow suit, it could start trickling down to funds in the billion-dollar range or lower, he said.

There’s been “a lot of interest, a lot of conversations,” said Rich Nuzum, Mercer’s executive director, investments and global chief investment strategist. Meanwhile, other elements at play now — such as demographic challenges facing many countries as their populations age — could ultimately provide some tailwinds for DB plans as well, he said.

Labor force trends

More than half of European GDP growth over the past ve years can be tied to increased participation in the labor force by workers 55 and older — people who appreciate and understand the value of a pension because they previously enjoyed them, Nuzum noted.

By contrast, the labor situation in the U.S. isn’t so acute but if more restrictions on immigration are imposed — something not out of the realm of political possibility now — “we’ll have a bigger problem in terms of driving GDP growth,” he said.

That desire to attract and retain employees — effectively the “original intent” of offering pension plans in the rst place — is once again boosting corporate plan sponsor interest in retaining their pension plans, agreed NEPC’s Perry.

“I’m waiting for clients to actually create new DB at the large end of

outsource their plan assets but selecting a provider has arguably become harder because there are so many OCIO rms out there and “so many nuanced differences and ways you can engage an OCIO,” said Timothy Yates, president and CEO of Commonfund OCIO.

“If you walk into an ice cream store (and) you’ve got vanilla, chocolate and strawberry, it’s an easy decision. If there are 47 different avors, all of a sudden it’s a much harder decision,” he said.

Commonfund reported $14.6 billion in worldwide institutional outsourced AUM as of March 31, up 20% on the year.

“The biggest challenge for our industry has been the mass proliferation of organizations that call themselves OCIOs but pursue different models, different value propositions, different discretionary engagement and styles,” agreed Matt Bank, a partner, deputy CIO and head of the client portfolio management group with Global Endowment Management, the Charlotte, N.C.-based OCIO that broke away from Duke University’s endowment team in 2007.

“There’s been a general muddying of what the term means, which makes it much harder for institutions to sort out what they ought to do (and) what’s in the best interest of their organizations,” given the fact that typically the committees making those decisions are staffed by volunteers relying on their own experiences and opinions to manage the pools of capital they oversee, Bank said.

“It’s highly competitive, with a lot of players and still limited consolidation,” noted NEPC’s Perry. Meanwhile, there are three major catego-

the market, or reopen DB,” perhaps to lure older employees who had built up considerable job skills over their careers off the sidelines — as occurred in Western Canada during the oil sands boom, the “last time that we saw new DB plans created,” Nuzum said.

A comeback for DB plans would not be a bad thing, opined SEI’s Cagnina, because “at the end of the day, we’ve shifted the responsibility to employees to make their investment choices in DC plans” and the promised bene t of a DB plan would be a signi cant diversi er to ensure retirement security.

Meanwhile, the drastic challenges facing clients now as the economic backdrop shifted dramatically over the past two or three years plays into another factor boosting demand for OCIO services more broadly, BlackRock’s Marshall said.

“The ability to deliver for clients as an OCIO not just at a point in time but through time (as) clients’ objectives evolve,” is a big reason why more and more are turning to OCIOs, and the questions surrounding the ripple effects of IBM’s example are a case in point, he said.

The signi cant increase in interest rates over the past few years has helped most pension funds from a funding standpoint, shifting — sometimes quite suddenly — the challenges facing their portfolios, favoring liability management over growth, Marshall said.

ries of OCIOs — those linked to asset managers, investment consulting rms and endowment boutiques, he said.

According to research by the Chestnut Solutions Institute this year, at the close of 2023, 51% of worldwide outsourced AUM was managed by OCIOs with consulting rm roots, 41% by asset manager-linked OCIOs and the remaining 8% by boutique OCIOs.

Chestnut’s Venkataraman said the preference of some clients for OCIOs that use third-party managers as opposed to in-house products can favor providers connected with investment consultant shops.

According to P&I’s latest OCIO survey, internally managed worldwide institutional outsourced AUM rose 12% over the 12 months ended March 31 to $489.4 billion even as U.S. institutional outsourced AUM was dropping 5.3% to $225.5 billion.

Some industry veterans predict consolidation is poised to pick up over the next few years.

Over a long period where markets were going straight up and interest rates were very at, it was relatively easy to hang out a shingle as an OCIO and the number of providers went up and up, but that moment in time is over, said Michael Cagnina, senior vice president and managing director of SEI’s institutional business.

Some of those rms are nding themselves hard-pressed to deal with the current, more complicated market environment, which will lead to more transactions to come in the OCIO space, Cagnina predicted. SEI reported $90.6 billion in worldwide institutional outsourced AUM as of March 31, up 3.9% from the year before.

y B DOUGLAS APPELL

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expected to be largely on par with the 2023 proxy season, which saw an all-time high of 643 proposals, according to Institutional Shareholder Services. Support dropped this year for a blended category of proposals that cross environmental and social impacts as only few proposals garnered winning support, continuing a downward trend.

While environmental and social proposals peaked in 2021 with 33 winning majority support within the first half of the year, only three proposals have won majority support this year, said Marc Goldstein, head of U.S. research at ISS.

With more proposals on the ballot, this “unfortunately” meant that some of the “proposals weren’t very good in terms of investors feeling they need to or wanted to support them,” he added.

Proposal support over 20% is considered as a “significant signal” to companies to act on materiality, said Kirsten Spalding, vice president of the Ceres Investor Network. The average support for all proposals in the environmental and social category is 16% this year, down from 29% in 2021, Goldstein noted.

Environmental and social proposals relating to political spending and climate “continue to get significant levels of investor support,” he added. But other proposals — such as those auditing racial equity or civil rights at a company — are getting less support than they did in 2020 or 2021 following the killing of George Floyd.

The ‘G’ in ESG

Although support for environmental and social proposals has declined since 2021, the “arterial bleeding has stopped” with numbers now “just slightly down” as opposed to being in a “steep drop,” said Heidi Welsh, executive director of the Sustainable Investments Institute, or Si2.

In contrast, support for governance issues such as declassification — or when all board of directors are up for re-election — and shareholder rights “seems to be up this year” as “investors still care about that stuff,” Goldstein noted.

A reason for the increase is that these proposals “overwhelmingly come (from) a small group of shareholders” that include names of activists such as James McRitchie, Kenneth Steiner and Myra Young, he added. McRitchie is also the publisher of the online corporate governance portal CorpGov.net.

it, an increase from the 73% votes against another proposal in 2022.

The two groups withdrew their proposal on Feb. 1, with Exxon Mobil proceeding with the lawsuit. Shareholders, including major pension funds, called for others to vote against the re-election of all 12 incumbent directors on Exxon Mobil’s board.

The $504.6 billion California Public Employees’ Retirement System — the largest public pension fund in the U.S. — voted against all of the directors. In a May 20 open letter, CalPERS CEO Marcie Frost and Board President Theresa Taylor cited the directors’ actions allowing Exxon Mobil CEO Darren Woods “to pursue a reckless and destructive effort” against Arjuna and Follow This for the pension fund’s decision.

All of the directors were ultimately re-elected and received an average support of 95%, said Jim Chapman, treasurer of the company, during the 2024 meeting. Notably, Woods received 91.6% votes in support, while Joseph Hooley, chair of the board, received 87.1% votes in support — the lowest among the members of the board, according to an 8-K filing.

U.S. District Court Judge Mark Pittman dropped Follow This from the lawsuit on May 22. He then dismissed the case against Arjuna in a June 17 order, writing that the withdrawal of the shareholder proposal rendered the case moot.

The number of “particularly well-supported” resolutions — those with 40% or more shareholder support — are expected “to be about the same level as last year” based on nine-month figures starting from July 2023, said Lindsey Stewart, director of stewardship research and policy at Morningstar Sustainalytics.

After a complete analysis of the trailing 12-month period, the figures might change because there are more resolutions during May and June, he noted.

Top 10 proposals

Among the top 10 investor-supported proposals so far this season,

Additionally, “we’re seeing governance proposals in companies that previously haven’t had them, and these are proposals seeking to eliminate supermajority vote requirements or declassify board issues,” Goldstein said.

Among the most notable executive board votes this season was at the annual meeting of Exxon Mobil on May 29.

The gasoline company filed a lawsuit in federal court on Jan. 21 against activist investors Arjuna Capital and Follow This after they submitted a proposal that called for the acceleration of its emission reduction plans. A similar proposal during the 2023 proxy season received close to 90% of votes against

“Other perils include sudden mass layoffs due to job automation, the misuse of customer and employee private data and the creation of ‘deepfake’ media content that may be used to disseminate false information.”

In addition to AI’s threat to employment opportunities for creatives, shareholders are concerned about its threat to intellectual properties, ISS’ Goldstein said. The generative technology’s large language models are trained using huge data sets, including copyrighted work.

“The third major concern with AI is what is going to be the impact on human rights (and) democracy,” Goldstein added. “Are we going to see great use of deepfakes? People making videos of Biden or Trump saying things that they never said, trying to influence the election? … The particular issues raised depend on the company, but we’re going to see more of these proposals.”

The AFL-CIO Equity Index Fund — a collective investment trust for union members’ pension plans that have assets of over $12 billion — filed shareholder proposals on AI to technology and media companies.

Among the companies that received AI-related shareholder proposals, Amazon.com was asked by AFL-CIO, with representation from the $500 billion consulting firm Segal Marco Advisors, to form an additional board committee to oversee AI.

On executive pay, shareholders are ‘starting to see the alignment that they’ve been asking for after last year’s votes.’

SUSTAINALYTICS’ LINDSEY STEWART

the key issues among shareholders were related to political spending, greenhouse gas emission targets and artificial intelligence.

“Political spending and climate have been the leading issues for 20 years,” said Michael Passoff, founder and CEO of the consulting firm Proxy Impact.

But AI is new as an issue this year following the launch of OpenAI’s ChatGPT in November 2022. As AI plays an increasing role in the workflow of all industries, the technology presents a risk to investors such as Brandon Rees, deputy director of the office of investments at AFL-CIO.

The technology “threatens the very framework of the nation’s economy and endangers the existence of the already dwindling middle class while introducing the potential for discrimination in employment decisions,” Rees wrote in an Oct. 19 blog post.

The proposal was voted against by some public pension funds including CalPERS, Sacramento; the C$632.3 billion ($466.5 billion) Canadian Pension Plan Investment Board, Toronto; and the $337.9 billion California State Teachers’ Retirement System, West Sacramento. The resolution was ultimately not approved with 90.3% votes against it, according to an 8-K filing. Additionally, shareholder groups led by Arjuna asked Alphabet and Meta Platforms to each produce a report on the companies’ role facilitating the spread of misinformation and disinformation created by generative AI. Both votes failed, with 81.6% of votes against at Alphabet and 83.3% of votes against at Meta, according to 8-K filings.

Biodiversity

Biodiversity emerged as a trend, said Ceres’ Spalding, whose nonprofit advocacy organization tracks all climate-related shareholder proposals. The topic is gaining “a lot more investor interest” this year not only in ballots but in dialogues, she added. United Church Funds filed a proposal to Exxon Mobil asking for a

Comptroller Brad Lander filed a proposal to Morgan Stanley asking for a clean energy supply financing ratio. Lander serves as the custodian and a trustee for the New York City Retirement Systems, which consists of five pension funds with $264.3 billion in total assets. The Morgan Stanley proposal failed with 77.1% votes against, according to an 8-K filing. Overall, proposals following this sector-specific theme didn’t win a majority, but they received “meaningful levels of minority support” above 20%, said ISS’ Goldstein. However, Spalding said Ceres “saw a number of banks make commitments” before the proposals came to the annual general meetings.

report on plastic production under a system change scenario. The $1 billion faith-based endowment in New York was concerned that plastic leakage could threaten oceans, wildlife and public health, according to the energy provider’s April 11 proxy statement. The resolution failed with close to 80% voting against it, according to an 8-K filing.

“Investors are seeking to know how companies are addressing climate change, and they want to know what the commitments are — but also whether or not they’re implementing them,” Spalding said.

Shareholders have filed 279 climate-related proposals in 2024, with 69 of them withdrawn in return for commitment from companies, according to Rob Berridge, senior director of shareholder engagement at Ceres. The number of proposals is up from 259 in 2023 and 242 in 2022.

Information on greenhouse gas emission targets — which alongside lobbying was one of the two most common issues within climate-related proposals — were sought by institutional investors. Ceres saw 41 proposals combining both these targets plus just transition plans.

The $267.7 billion New York State Common Retirement Fund, Albany, filed a proposal asking Capital One Financial to set greenhouse gas emission reduction targets, according to the bank’s March 20 proxy statement. The proposal failed with 89.9% of votes against it, according to an 8-K filing.

Illinois Treasurer Michael Frerichs filed a proposal asking Berkshire Hathaway to disclose data on greenhouse gas emissions and information on its progress to its net-zero emission reduction target, according to the conglomerate’s proxy statement. With 82.3% of votes against it, the proposal failed, according to an 8-K filing.

Previously at Berkshire’s 2023 shareholder meeting, a proposal submitted by the shareholder advocacy organization As You Sow asked the company to issue a report on how it plans to measure, disclose and reduce such greenhouse gas emissions. The proposal failed with 77.2% of votes going against it, according to an 8-K filing.

Adding to the 2024 trend from abroad was Norges Bank Investment Management, the manager of the Oslo-based Government Pension Fund Global, with 17.7 trillion Norwegian kroner ($1.65 trillion) in assets. NBIM filed a proposal to Kinder Morgan, asking the energy infrastructure company to establish a greenhouse gas emission reduction target.

A number of shareholder proposals asked banks for their financing ratio of fossil fuel energy vs. renewables and clean energy, Spalding noted.

For instance, New York City

Lander withdrew similar proposals at J.P. Morgan Chase, Citigroup and the Royal Bank of Canada after all three banks agreed to disclose their financing ratios.

Pay, performance link

“Institutional shareholders have long been concerned about maintaining a link between pay and performance, and so we’ve seen a lot of activity in that area — certainly in the 2023 proxy year,” said Sustainalytics’ Stewart.

While executive pay hit a voting record in 2023, ISS’ Goldstein said the number of failed say-on-pay votes went down.

So far in 2024, Stewart has “seen a bit more comfort around those notquite-so-many votes against executive pay,” though this doesn’t mean investors are less concerned. Instead, “they’re starting to see the alignment that they’ve been asking for after last year’s votes,” he added. Through its general fund, the International Brotherhood of Teamsters filed a proposal to Tenet Healthcare, asking about plans to integrate ESG metric into executive pay. The resolution failed with about 94.7% votes against it, according to an 8-K filing.

One of the most notable executive pay-related issues on the ballot was the $55.8 billion compensation package for Tesla’s Musk. The CEO won the award with 76.9% of votes for it. Support came from the $254 billion Florida State Board of Administration, Tallahassee, and Vanguard Group, which holds a 7.2% stake in the electric automaker.

But opposition against the package came from other pension funds based internationally like NBIM and the U.S., such as CalPERS and CalSTRS.

ESG pushback

Some state investment officials in politically conservative states have acted to push back against companies considering ESG in their investments.

As ESG becomes politicized, anti-ESG proposals are making it to the ballot. Under the broad range of anti-ESG, some proposals may ask for something with a geopolitical angle, such as a report on a company’s operations in China.

But these proposals “tend to address issues that are not seen as material to the performance of the business or to the share price, and then cover areas that are often reported on by management already,” Sustainalytics’Stewart said. “They tend to get very low support, often well below 5%.”

This year, anti-ESG proposals received an average support of 2%, so “pretty much shrugged off by the market,” Si2’s Welsh said.

Anti-ESG proposals appear to have reached their peak, said Proxy Institute’s Passoff. “But that remains to be seen this coming election,” he added.

SUPPORTING VARIETY: Ceres’ Kirsten Spalding said biodiversity is gaining more attention this year, not only on ballots but also in dialogues.

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Gamba

CONTINUED FROM PAGE 2

passive totaled $781 billion, while the institutional to retail split was 76% to 24% as of March 31.

Gamba has spent his rst 14 months at NTAM checking the foundations of the rm so he can build on them. In London, for example, the xed-income desk is growing into areas including high yield, while there will be “news … on stewardship and sustainability soon as well,” Gamba teased.

To achieve further growth, Gamba is open to all opportunities — organic, plug-ins or acquisitions, but also partnerships.

“I think the industry is also understanding that you need scale … So having to build everything from scratch yourself, that model is the model of the past. Very few people can do that,” he said.

Regarding partnering, “I think you need to know what you do well, and then the areas where you are maybe late to the game: Maybe it’s better to just keep doing what you do well and nd ways where you can actually collaborate. So pretty pragmatic.”

The good news, he said, is that “a lot of the capabilities that I would call sub-scale — my private (markets) capability, my ETFs capability — I think the opportunity’s humongous. It’s fast rivers,” he said.

Fast rivers in a deep ocean

“The industry is a deep ocean, but there are also fast rivers around the industry — these are the areas that are actually growing,” Gamba said. NTAM has an alternatives platform — 50 South Capital — that manages $10 billion in assets and has $3 billion in assets under advisement. The unit dates back to 2000, when Northern Trust began providing hedge fund and private equity solutions. Its clients invest in private equity, private credit and secondaries funds — but those clients all represent U.S. relationships.

The plan is to expand that platform into new vehicles and markets — including international, Gamba said — requiring the hiring of local executives to expand the coverage of private securities and a new client base. “We can grow at much, much more scale,” he said. “But that’s future,” he added.

Signposting growth

On the ETFs and retail side, as well as on the OCIO and solutions side, Gamba namechecks some high-pro le, industry veterans he’s brought into the NTAM fold as evidence of growth to come.

A big signpost of Gamba’s expansion plans was the hiring of David

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Berry added.

Daniel Winik, a Department of Justice attorney who argued on behalf of the Labor Department, dis-

Abner as head of global ETFs and funds, announced this month. Abner oversees the rm’s mutual fund and ETF product strategy, research and development, product management, and capital markets, and also fund services oversight and treasury functions. The manager had $230 billion in U.S. mutual funds and global ETFs assets under management as of March 31.

“His rst area of focus is going to be on what areas are we going to be putting our energy behind?” Gamba said. He’ll look, for example, at making sure the rm is investing in the future in terms of thematic ETFs — “the sectors that are moving faster.” NTAM already has a thematics ETFs franchise, but Abner will “dene what other things (we) should be part of.”

He’ll take a look at xed income — although “we have a great offering … he’s going to look at areas where we don’t have product.”

And Abner’s background as CEO

‘A lot of the capabilities that I would call sub-scale — my private (markets) capability, my ETFs capability — I think the opportunity’s humongous. It’s fast rivers .’

NORTHERN TRUST ASSET MANAGEMENT’S DANIEL

GAMBA

for Europe at ETFs specialist WisdomTree Asset Management gives another clue to a future area of development for Gamba: “If you look at his background … he understands retail assets, and he understands the use of technology in investing. So I think you’re going to look at his background and see that we’re going to be looking at retail assets as well.”

A people business

Gamba also highlighted the September appointment of Anwiti Bahuguna as the rm’s rst CIO of global asset allocation, overseeing the asset allocation and multimanager teams, with $125 billion in AUM as of June 30, 2023. She joined from Columbia Threadneedle Investments, where she was head of U.S. multiasset strategy. She’s tasked with strengthening the outsourced CIO offering. NTAM had $95.1 billion in worldwide institutional outsourced assets under investment management as of March 31, according to Pensions & Investments data.

agreed and said the tiebreaker provision is consistent with ERISA and does not allow duciaries to sacri ce returns or add risk.

“Neither ERISA, nor the common law backdrop to ERISA says you have to make that choice by ipping a coin,” Winik said. “It leaves duciaries free to employ other collateral considerations, including but not limited to ESG factors to break that tie.”

He added, “If you can choose on the basis of pecuniary factors, there is no tie.”

The oral arguments came less than two weeks after the U.S. Supreme Court overturned the Chevron deference, a standard set by the Supreme Court 40 years ago that said judges

“Especially I would say on the investment side, I have hired veterans,” but there’s also “up and coming talent” that he’s brought into the senior leadership team, including Paula Kar, who was promoted to global head of product.

“So I’ve combined up and coming with veterans. Some clients want experience, but we also want to build new capabilities,” Gamba said. He’s also “a big believer of elevating talent, but in some cases — especially an industry that requires a relationship with clients and also regulators — you need also people who have done it before.”

Gamba’s resume shows Abner and other additions are complementary to his own — he’s a BlackRock veteran with years of experience across asset classes, active and passive investing, types of roles including distribution, and geographies. He came to BlackRock with the legacy Barclays Global Investors business, which was added to the fold in 2009.

Other previous leadership roles include as global head of active equities product strategy, co-head of iShares U.S. and head of Americas institutional, and CEO of the Latin America and Caribbean business — a role he held at BGI.

A lot of opportunities came his way, but it took an approach by Northern Trust, led by CEO Michael O’Grady, to tempt him.

“They were looking to transform … its asset management” business, he said. The rm and Gamba started talking in summer 2022 about a role that would succeed the high-pro le former president Shundrawn A. Thomas, who left in June that year and launched private equity rm Copia Group.

“By the end of the year, I was convinced that (it) was a good t from a cultural perspective,” Gamba said. It also helped that Gamba’s daughter is at college in the Midwest, with Gamba adding that “my wife actually was a key component of the decision to move to Chicago” from New York-based BlackRock.

“And I was ready to actually take on a full platform. I was convinced (that) if you want to be successful, you have to have a big, scalable platform,” he said.

His experience told him that “indexing was core…and the other building blocks need to be there — or the willingness to build those building blocks,” Gamba said. “We have some fundamental…and we have a very nice multimanager platform. And we also have ETFs. And we have private. So, we have everything — maybe not everything is at the scale of what I’m used to seeing, but… we have all the vehicles and ways of managing money to be relevant for clients. So that’s why I joined,” he said.

should defer to regulators when laws are ambiguous and unclear.

Though the District Court judge cited Chevron throughout his decision in September, neither side on July 9 said the Supreme Court’s decision would have much of an impact of the case because the department didn’t invoke Chevron during its defense.

“This case has been fully adversarially presented and ventilated without any reliance on Chevron,” plaintiffs’ attorney Berry said. “I don’t see anything in the District Court opinion … that would incline the District Court to revisit much of its opinion in light of its reliance on Chevron.”

Pension Funds

Fresno County’s chief worries about spiraling debt

Donald Kendig says a defensive asset allocation isn’t immune to hard times

y B PALASH GHOSH

Donald C. Kendig, the retirement administrator at the $6.6 billion Fresno County (Calif.) Employees’ Retirement Association, is most concerned about consumer and federal government spending and debt hitting a tipping point “that we cannot recover from” and a hard landing that the Federal Reserve likely “won’t be able to offset.”

Kendig is also worried about “significant environmental collapses that are closer than they seem affecting food and other resources,” as well as artificial intelligence, “where it is easier to do more harm than good if we are not careful.”

“Our asset allocation is set up to mitigate interest rate and inflation risks; however, no matter how an asset allocation is set up, a hard landing or a debt collapse would hurt us and everyone else,” Kendig said.

A CPA by training, Kendig has served as the retirement administrator of FCERA for the past decade, after working just under two years in the same role at Ventura County (Calif.) Employees’ Retirement Association (VCERA). Prior to that, he served as a trustee for Santa Barbara County (Calif.) Employees’ Retirement System for nine years.

VCERA now has $8 billion in as-

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— an assertion that ERISA attorney Stephen Rosenberg said is misguided.

“The implicit and explicit suggestion that doing away with it will improve the ability of regulated actors to understand their responsibilities and project out what their legal obligations are, seems to me to be wildly inaccurate in the context of entities operating under ERISA,” said Rosenberg, a partner in the Wagner Law Group.

“Predictability, uniformity and

BNY

CONTINUED FROM PAGE 3

portfolio manager after more than 10 years at firms including Merrill Lynch and J.P. Morgan.

Minaya is also a member of the board of trustees of Manhattan College and the board of advisers of the Amos Tuck School of Business at Dartmouth. He’s on the board of Moody’s, the National Forest Foundation, the Investment Company Institute and the investment committee of the Board of Regents of the Smithsonian Institution. Minaya is also chair of the governing board of directors of the Robert Toigo Foundation, which promotes inclusive leadership in finance and beyond. He was executive sponsor of TIAA’s inclusion and diversity initiative. Vince also thanked Smits for her leadership of BNY’s money manage-

sets, while SBCERA has about $4.2 billion.

“I learned the fundamentals for public pension plan administration and investment theories and practices while I was a trustee,” he said. “Public pension organizations generally have wonderful training programs.” Santa Barbara’s retirement administrator, Oscar Peters, was also a “very good mentor,” Kendig noted.

Staff a key to success

In his prior posts, Kendig realized that staffing is key to the success of pension funds — but having a lot of employees is not necessarily a good thing.

“Too few staff and we all suffer,” he said. “Too many staff and we waste valuable pension assets and I endeavor to keep us right-sized.”

As retirement administrator, Kendig serves effectively as the chief investment officer — and he noted that the three pension funds he has worked at did not have a CIO during his tenures (although VCERA added one after he departed and SBCERS added one by a different title).

“I am very accustomed to having to perform both roles (retirement administrator and CIO),” he noted.

“(Pension) plans have been very consultant-dependent, starting a few decades ago. They (consultants) report to the board on a monthly or quarterly basis, but they do not perform the CIO function, unless you pay them a lot of money for an OCIO relationship.”

Now FCERA has an investment

consistency are a tremendous boon to the regulated entities that make up the ERISA marketplace,” Rosenberg said.

“That is going to be a lot harder to do if, as is now going to be the case, the meaning or enforceability of a given regulatory initiative is always in doubt and its long-term viability can never be assumed,” he said. “I don’t personally see the unpredictability that will be ushered in by the court’s decision as any type of a boon to any of the players in the ERISA universe.

Chevron deference was established by a 1984 Supreme Court ruling that said courts should defer to regulators’ expertise in interpreting

ment unit. She was promoted to oversee BNY’s seven money management affiliates in 2020, having spent four years as CEO of Newton Investment Management. She was previously CIO at private markets firm Adams Street Partners.

Alongside her role overseeing BNY’s money management business, Smits served as executive sponsor of PRISM — BNY’s LGBTQ+ employee group — and is also chair of the 30% Club, a global campaign for gender equality on company boards and at the C-suite level.

Over her time at BNY Investments, the firm has launched a number of offerings to align client investments with their philanthropic goals and values, including the BNY Mellon Women’s Opportunities ETF.

The fund principally invests in U.S. companies with attractive financial attributes and that promote “women’s opportunities” — opportunities that can enhance the profes-

KEY TO SUCCESS: Fresno County Employees’ Retirement Association’s Donald C. Kendig said staffing is key — but only if it’s right-sized.

officer, Conor Hinds (hired in December), as well as an investment analyst, Jason Chin (hired in August) — and along with Kendig, they make up the entire investment staff.

“Conor is now at the forefront and will be my main staff member to develop an investment strategic plan, for the board’s review and approval, which will outline how we see our newly formed investment unit evolving to provide more investment oversight and underwriting for the board,” Kendig explained.

“Conor is working on a due diligence plan now for the monitoring of all our investment managers and partners. Conor and Jason are (also) meeting with our liquid managers quarterly and our private GPs at least annually. Jason is doing the legwork for Conor, and Conor and Jason

laws that are ambiguous or unclear.

On June 28, the Supreme Court voted 6-2 to overturn Chevron deference in the case of Loper Bright Enterprises et al. vs. Gina Raimondo, in her official capacity as secretary of commerce et al. and 6-3 in Relentless Inc. et al vs. The Department of Commerce et al. (Justice Ketanji Brown Jackson recused herself from the Loper Bright case.)

are doing the legwork for me. I get the pleasure of focusing on the big picture. While Conor is charged with the drafting of many of the plans, I get to translate the board’s policy direction and guide his efforts.”

In April, FCERA hired NEPC as its non-discretionary general consultant, replacing Verus, and the pension fund will be starting an asset-liability study on Aug. 7, Kendig noted.

“What I have told managers is that it is the riskiest time for them because even if they are performing well, they can be asset-allocated away or reduced due to no fault of their own,” he said. “It can also work the other way with larger allocations, but when there is an increase, usually another manager is added for a net reduction to the existing manager.”

Asset allocation shifts

As of March 31, FCERA’s largest allocations were to domestic equity 28.1% (29% target), global fixed income 20.5% (22%), international equity 19.9% (21%), private equity 8.5% (8%), real estate 7.9% (8%), infrastructure 5% (4%) and private credit 7.1% (8%).

“Private equity is overallocated because we are not getting the return of capital that was forecasted by our discretionary consultant, Hamilton Lane,” Kendig said. “Market forces are outside of everyone’s control, but now that distribution trends might lag for more than a year, we will likely see reductions in future allocations for a short period of time

Each plaintiff lost at the district court and appeals court levels. The ruling sent the cases back to their

sional development and advancement of women, and/or the ability for women to meet their work or other personal life responsibilities. She also led first-of-its-kind research — The Pathway to Inclusive Investment — which identified a $2 trillion gap in global GDP that could narrow if women invested at the same rate as men.

Also joining BNY in September is Leigh-Ann Russell as chief information officer and global head of engineering. Russell will join on Sept. 15 and report to Vince.

Russell was executive vice president of innovation and engineering at BP.

BNY — recently rebranded from BNY Mellon — celebrated its 240th anniversary in June with the ringing of stock exchange market opening bells across the globe. The custodian bank oversees $48.8 trillion in assets under custody and/or administration.

as a new equilibrium is established.”

The infrastructure overallocation is intentional, he noted. “Our single infrastructure manager, IFM Investors, offers a flat fee based on commitment levels, which is tiered, but not blended,” Kendig said. “We overcommitted to reach the next tier and reduce our overall fee as a percentage of assets. We intend to grow out of the overallocation and possibly add satellites to the core at some point down the road.”

Kendig said the pension fund is currently underallocated to private credit “due to delays in establishing future funding tranches and we have rectified this with forward-looking commitment periods and amounts that should get us to target in the next year, if not two.”

Real estate would be overallocated due to our “core real estate assets not being as liquid as we thought,” however, “the closed end vehicles have been winding down and offsetting.”

The lesson here, Kendig observed, is “even if an open-ended fund promises quarterly liquidity, it usually isn’t there when you need it.”

He added that, “even though we are overallocated by about $30 million in our core real estate potion of the allocation, I have let NEPC know that I want to keep allocating and obtaining vintage year diversity. The composition of the real estate allocation should balance out within the next 12 to 24 months as the redemption request is honored and new closed-end allocations are made.”

MISSING THE MARK: Wagner Law Group’s Stephen Rosenberg said the rationale behind the Chevron decision is ‘wildly inaccurate.’

respective courts “for further proceedings consistent with this opinion.”

More uncertainty

The Chevron deference ruling will increase uncertainty, said Carol I. Buckmann, founding partner of Cohen & Buckmann PC.

“In the employee benefits field, new regulations often require expensive changes to plan record-keeping systems, plan documents, employee communications and compliance procedures,” she said. “If there is less certainty about which rules are in effect at any given time, that can only burden service providers and disincentivize employers to adopt new plans.”

Buckmann acknowledged that overturning Chevron deference could reduce the regulatory flip-flopping that accompanies changes in political administrations.

“The question is whether that outweighs the negative factors,” she said. “Removing Chevron restrictions on a court’s ability to substitute its judgment for those of the experts will only encourage” more ERISA lawsuits.

“Will the lack of deference be enough to cause a court ultimately to disagree with the DOL and invalidate its rules in any particular case? That remains to be seen,” said Andrew Oringer, a partner and general counsel for Wagner Law Group.

However, “there can be little question” that erasing Chevron deference “increases the likelihood that any particular challenge to administrative regulations will succeed,” he said.

Even with the Supreme Court’s opinion about when courts must respect when Congress specifically authorizes regulators to interpret laws, there’s room for uncertainty, said Jaime Santos of Goodwin Procter’s appellate and supreme court litigation practice.

“Where a statute expressly authorizes an agency to fill statutory gaps,” the Chevron deference ruling won’t apply, she said. One example is the ERISA section that authorizes DOL to promulgate regulatory exemptions to ERISA’s prohibited-transaction provisions.

“But where a statute expressly gives an agency authority to give meaning to a statutory term or implicitly delegates authority to an agency by using vague terms like ‘reasonable’ or ‘appropriate,’ then it’s not at all clear what it will look like for a court to both recognize that delegation while independently interpreting the statute,” she added.

The long-term impact of the court’s decision remains unclear to Kent A. Mason, a partner at Davis & Harman, who supported overturning the Chevron deference and whose firm primarily deals with regulations from the DOL, Pension Benefit Guaranty Corp. and IRS.

“The retirement savings area benefits from a stable regulatory environment,” Mason said. “If rules are susceptible to challenges in every district (court), then there is a concern about the potential for uncertainty about how to comply.”

embedded investment materiality,” said Steve Falci, who was chief investment officer of equities at the Calvert Group when he was in the working group.

Falci participated in U.N. initiatives before being invited to collaborate on the report, which he was “excited” to be a part of. Calling the establishment of ESG “an excellent first step,” he is now the head of systemic and multiasset strategies at Impax Asset Management, which managed $50 billion in assets as of March 31.

And while some may oppose the three-letter acronym, “nevertheless, I continue to passionately believe that using an ESG lens to evaluate investment opportunities and risks helps investment managers to make better investment decisions,” Falci added.

ESG’s predecessor

Before ESG, there was SRI.

Socially responsible investment was the “designated term at the time,” said Eric Borremans, head of ESG at Pictet Asset Management, which had 248 billion Swiss francs ($274.8 billion) assets under management as of March 31.

SRI sparked debates at the time where “people were saying, ‘Well hang on, it’s not just about social issues. It’s also about the environment,’” he said.

Borremans was head of sustainability research at BNP Paribas Asset Management when he participated in the U.N. report’s working group.

At BNP Paribas, “we tried to coin it ‘sustainable and responsible investment,’” but there was “some pushback” as well as “some confusion,” Borremans added. But there was a need to have a term like SRI by its “nascent market” in France, where demand was driven by unions in what he calls “a unique phenomenon.”

The unions “had coupled together to create a label for SRI funds that would be investable for employee savings schemes … because the hidden agenda for them was to get an influence over the voting rights of those employee saving schemes invested into shares of the companies in France, among others,” he said.

The U.N. report’s working group was led by Ivo Knoepfel, founder and managing partner of onValues Investment Services and Research. Under Knoepfel’s leadership, group participants sought a new term that built on the idea of SRI.

“There were a number of U.S. participants at the time, and ‘socially’ in the U.S. was translated as ‘socialist,’ so that didn’t get much traction,” so “we were thinking of another term more neutral (and) more materiality oriented,” Borremans said.

The group arrived at the term ESG, but it could have been something else.

“Initially, we were thinking of calling this ESC — the ‘C’ standing for corporate governance,” Borremans added. “Then someone in the group said, ‘Well, hang on, ESC sounds like what we all have on our keyboards, “escape.”’ We thought, ‘Oh my God, we cannot call it ESC,’ and we said, ‘OK, let’s call it ESG.’”

The report also led to the 2006 creation of the U.N.’s Principles for Responsible Investment, a network composed of financial institutions

that promotes sustainable investing through the lens of ESG factors. The establishment of the network was a key turning point as it is now the basis of many ESG strategies and signatories. Borremans said he remembers “the initial meetings that led to the crafting of the six core principles that are still used by the UN PRI, so that (report) was the genesis.”

Other names that were involved in the 2004 report were involved with UN PRI, including Henderson Global Investors. It merged with Janus Capital Group in 2017 to form Janus Henderson Investors.

The $352.6 billion investment manager calls itself “a proud founding member” of the network, a spokesperson for the firm said. Janus Henderson still embraces the principle of responsibility behind ESG, which is integrated in most of its actively managed strategies.

Debate over standards

Like SRI back then, ESG is sparking debates about what the standards are, how to measure it and how to compile it.

Even in 2004, the endorsing institutions acknowledged in the report that there are problems with the definition of ESG issues, citing a survey of CEOs and chief financial officers conducted in 2003 by the World Economic Forum.

While 70% of the survey’s respondents expected ESG issues to receive increased interest from “mainstream investors” in the future, they also highlighted obstacles that include problems with the quality and quantity of information.

Impax does not define itself as an “ESG investor,” Falci said. Instead, “we integrate environmental, social and governance factors, to the extent

a lesser extent, the just transition and social issues beyond that,” said Steve Waygood, chief sustainable finance officer at Aviva Investors. “Corporate governance has, in many ways, taken a relative back seat more recently, which has been unfortunate.”

Aviva Group, which had a total AUM of £376 billion ($478.7 billion) as of Dec. 31, was one of the endorsing institutions in the 2004 report.

“But the core concept that environmental and social issues are routinely material considerations to investors is now accepted wisdom by most active managers,” Waygood added. “It’s just the relative extent of financial relevance and — often — disagreement on directionality of impact that investors disagree about. But that very difference of opinion is of course what generates the market.”

A

slow march to progress

When the U.N. report was released 20 years ago, Borremans thought the integration of ESG investing would “go much faster” than it is today, “naively thinking that within the next five years, ESG would become part and parcel of every fundamental research (and) every investment strategy.”

sustainable investments in the U.S. reached a total $8.4 trillion in assets under management, according to a report by US SIF: The Sustainable Investment Forum.

Regulators in Europe would step in to mobilize private financing and “help accelerate the transition to a low-carbon economy, and — more generally speaking — to accelerate the transition to a greener and more sustainable economy,” but they also sought to prevent greenwashing attempts, Borremans added.

Paris Agreement

The Paris Agreement to address climate change was signed at the 2015 U.N. Climate Change Conference, aiming to make the flow of financial capital consistent with a path toward lowering greenhouse gas emissions and advancing sustainable development. The following year saw the adoption of the U.N.-supported Sustainable Development Goals, a 17-point plan for 2030 that was built around ESG issues.

amount of capital just in the energy transition itself.”

He retired as CIO on June 30 but will stay at CalSTRS through the end of the year as an adviser.

Borremans said that “there’s more to come (and) more to do, but I think it’s taken longer than one would have expected. But yes, it is happening.”

Risk assessment

As part of their fiduciary duty, investment professionals — “whether they label themselves ‘ESG’ or not” — will have to assess all risk factors to deliver strong returns, Impax’s Falci said.

Seeing “politicians prohibit investment managers from analyzing ESG factors — for example, deliberating ignoring flood risk in a maritime state — strikes me as shortsighted,” he added.

For ESG to be part of the conversation for two decades, “there has been tremendous testament to the success of the field,” IEN’s Dyer said.

“While attempts to make this work political may confuse the conversation for a short time, the basic structures that make considering ESG factors so important … will remain,” he added.

Conversations around the three-letter acronym have “been fueled by those corporate interests that will have to dramatically adapt to the new sustainable economy,” Dyer noted.

And shareholders continue to assess ESG factors — particularly governance — and voice their opinions through votes at the companies they hold in their portfolios during the 2024 proxy season.

we consider them material, into our investment process, which we articulate as identifying companies that are well-positioned to benefit from the transition to a more sustainable economy,” he noted.

The controversy around ESG investing today isn’t a surprise to Falci, who said the connotation of the term has broadened, and “is a confusing and ambiguous term, used by different people in different ways,” he added.

It was “never intended as a comprehensive, alternative framework for guiding the deployment of capital,” Falci said, but “when ESG is clearly articulated, ESG analysis is a useful investment tool to help investment managers to do a better job at evaluating the opportunities and risks arising from global sustainability challenges.”

Since 2004, conversations around the term have “grown to become dominated by climate change and, to

At the time, there was also “surprisingly little research on corporate governance,” he added. Independent ratings agencies such as Innovest Strategic Value Advisors — which was a participant in the report’s creation and is now part of the private markets research firm CB Insights — filled in that gap of knowledge.

“How can you possibly invest in a company without taking a long hard look at the governance of that company (and) at the board of directors?” Borremans said. “Because, ultimately, it’s the board of directors that defines the company strategy and is supposed to ensure that it is properly executed by senior management and the board is reporting back to shareholders. It’s an essential ingredient.”

Between the report’s release through 2019, institutional investors drove the market for ESG seeking “so-called ‘best-in-class’ strategies” with low-tracking error conventional benchmarks, he said. Borremans also noted that thematic and green funds — focusing on areas such as water, clean energy and the environment — gained traction from investors and banks. By the start of 2022,

Having “extensive intellectual capital and resources of the financial services sector has resulted in better data, measurement and disclosure,” said Georges Dyer, executive director of the Intentional Endowments Network. The organization seeks to advance sustainable investing at higher educational institutions, foundations, businesses and nonprofit groups.

Dyer pointed at the availability of sophisticated software and artificial intelligence as tools to help “better understand these complex challenges” within ESG.

Working for some of the largest pension funds are ESG proponents, including former CalSTRS CIO Christopher Ailman. He has called for “as much data as possible” on what companies are doing for their climate plans as well as uniform metrics for data at the BloombergNEF Summit in New York.

“2030 is barely six years from now. It is here and going to be upon us, so people are going to want that information and need it at an increasing rate,” he told a panel on April 16.

“I see this, and I’m loud and vocal,” Ailman added. “This is a mega trend, just like demographics. Like anything else, you’ve got to be focused on educating yourself, and focusing it into your strategy … But huge opportunities (and) a massive

Google employees’ actions this past season echoed the efforts of French union members 20 years ago. Backed by over 1,000 employees through an internal petition, a proposal filed by the shareholder advocacy group As You Sow asked parent company Alphabet to publish a report disclosing how it is “protecting plan beneficiaries — especially those with longer investment time horizon — from increased future portfolio risk created by present-day investments in high-carbon companies,” according to an April 29 proxy statement.

Plan participants at Alphabet are automatically enrolled in target-date funds managed by Vanguard Group, which accounts for 65% of the defined contribution plan’s assets, according to the proposal. It added that “these funds invest heavily in high-carbon companies and companies contributing to deforestation.”

A report produced by As You Sow and the University of Waterloo, Ontario, found participants could have earned about $1.15 billion in additional returns if it had divested from fossil fuels, which account for $2 billion of the plan’s holdings.

Although the proposal failed 96.2% votes against it in an 8-K filing, employees as well as shareholders still had their voice represented during the company meeting.

“Shareholder advocacy is still alive, well and thriving, even though the anti-ESG crusade — which is a well-funded, well-orchestrated right-wing political action — has been trying to take away shareholder rights,” As You Sow CEO Andrew Behar said.

“We’re not going anywhere. We own these companies,” Behar said. “Boards report to us. We have a responsibility to make sure they really address systematic risk and longterm sustainable growth.”

OOPS: Pictet Asset Management’s Eric Borremans said an early idea for the nomenclature was ESC — until someone pointed out the key on a keyboard.

‘CONFUSING AND AMBIGUOUS’: Impax Asset Management’s Steve Falci isn’t surprised by the controversy surrounding ESG investing.

Magnus Arrevad

BlackRock

emerging from stocks to bonds,” he said.

“They’ve made investment performance and drivers of return much more transparent … They’ve grown durable, high-growth revenue pools that are adjacent to asset management and they have generated enormous value for clients and shareholders. Our aim is to do all of that in the far less mature data, analytics and index business for all the private markets.”

The acquisition of Preqin is only a starting point and will drive further data collection and benchmarks to be used by clients for asset allocation and performance analysis, said Clémence Droin, a partner at Indefi, a Paris-based investment manager strategy consultant. “Developing a private markets index seems challenging, yet could be achieved with greater scale and coverage,” she noted.

“Market consolidation will also play a crucial role — the private markets landscape is today still very fragmented and home to a wide number of small-scaled local and niche boutiques. As consolidation happens, access to data will be faster and easier and the ambition of creating an index more palatable.”

“BlackRock’s acquisition of Preqin makes sense from a strategic business perspective, as they continue to build out their portfolio analytics database and tech platform,” said

Alan Kosan, senior vice president and the head of alpha research at Segal Marco Advisors. “The addition of Preqin bolts on a complementary private markets data source to their existing portfolio management tool kit.”

BlackRock, Kosan noted, can offer a broader range of analytics to their investors across public and private markets, while potentially enhancing Preqin’s content, benchmarking utility and industry footprint through their financial sponsorship.

However, Kosan cautioned that this acquisition also raises a few questions, including “how BlackRock will decide to price Preqin to current and prospective customers, and how some general partners may react to serving as source to a database that is no longer independently owned?”

Avoiding conflicts

An analyst on the July 1 call also posed that “a large portion of Preqin’s customer base is probably a competitor of BlackRock’s in some form or fashion within the private markets,” and added that he wondered how some of Preqin’s existing clients would be comfortable with their platform being brought into the “broader BlackRock ecosystem.”

In response, Rob Goldstein, BlackRock’s chief operating officer, noted that the fastest-growing part of the Aladdin business is actually other asset managers. “So this is something that we’re quite accustomed to in terms of being a platform as a service and our broader technology business,” Goldstein said. “With regard to Preqin, in particular,

equivalents and 0.5% other investments, according to the university’s most recent financial report.

Avoiding ‘historical baskets’

we’re very confident that clients will be the biggest beneficiary from the transaction. It increases our Aladdin client reach fivefold and if clients choose to, they’ll have the opportunity to seamlessly manage public and private portfolios together across both workflow and data on a single unified platform.”

Noting that Preqin will still be offered as a standalone service, Goldstein explained in the call that Preqin’s current clients “do not need to access the software through Aladdin.”

Goldstein also cited that BlackRock’s acquisition of eFront — Aladdin’s private markets platform —

five years ago was somewhat similar to the proposed acquisition of Preqin.

“What we did (with eFront) was mobilize outreach to the GPs, make sure to introduce our goals, make sure they understood the information protection barriers that we have in place and we have been doing this really since the beginning of being a technology provider. And we will continue to safeguard Preqin’s GP and LP data from use by any other parts within BlackRock on the investment side.” The addition of Preqin, Goldstein added in the call, “does not change our data commitments or how we use eFront client data.”

While access to data is key, it is also mainstreaming for alts, Droin of Indefi added.

“As private markets used to be opaquer than the listed space, there is now greater access to information as client education is crucial to the democratization of alts,” she stated. “Tech and (artificial intelligence) will certainly support this trend and in this case, BlackRock is well positioned to be a frontrunner.”

The proposed acquisition of Preqin comes six months after BlackRock said it would acquire Global Infrastructure Partners for some $12.5 billion in cash and stock.

Meghan Neenan, managing director and the North American head of non-bank financial institutions at Fitch Ratings, commented that “given Preqin’s leading private market/ alternatives data presence, BlackRock’s acquisition is another pivotal step for their overall growth in private assets.”

Droin said that Preqin will be a complement to Aladdin and eFront and aims to turn BlackRock into the end-to-end private market tech provider both for asset owners and asset managers.

“BlackRock places private markets at the core of its investment and technology business development strategy with the objective to capture the global demand for alts,” she said.

The deal also provides several opportunities for growth synergies — namely, cross selling and the ability to leverage and further develop private market data, Droin added.

BlackRock has about $10.47 trillion in assets under management.

moving away from a distinction between public and private equity investing.

“There are differences in the cadence of investing, the kinds of data that’s available and the types of due diligence,” said Falls, “but honestly, at the end of the day, if you’re going to own equities, public or private, these are companies that generate earnings, that have a multiple and a growth rate and a balance sheet and governance and management.”

Falls said it is important to be able to look through that public-private divide to see how opportunities vary between region and market capitalization, and not base them simply on whether the ownership structure is public or private.

“You don’t have people just doing one thing, and that can sometimes create blind spots in the portfolio,” said Falls.

As of Aug. 31, 2023, the endowment’s actual allocation was 29.2% public equities, 20.5% venture capital, 15.5% absolute return, 14.9% real assets, 11.9% private equity, 5.8% fixed income, 1.7% cash and cash

What Falls would call “historical baskets” has gotten anachronistic, she said.

“Let’s take emerging markets,” she said. “When I started in the business and I started in emerging markets, emerging markets were a clear thing and you knew which countries were in that category, and then Goldman Sachs came up with a very unhelpful marketing acronym of BRICs: Brazil, Russia, India, China.”

“I think that just proves the point,” said Falls. “You know Russia and China are not the same, right? And India is different, and Brazil is different.”

She criticized the artificial bundling of a group of countries as emerging markets as an “exercise in ridiculousness” because inevitably investors seek out substitutions for that bundling, such as “emerging markets ex-India” or “emerging markets ex-China.”

“I’m blowing up all those baskets,” said Falls. “We’re going to think about regions potentially that may have commonality. We might consider a country’s funds when they’re

P&I Events Calendar

‘It’s very hard to get ahead of trends when everybody’s responsible for everything. It undermines accountability.’

NORTHWESTERN UNIVERSITY’S AMY FALLS

large enough.”

Falls said the longer she’s been in the business, the more she feels the asset classes that were created to allow for a helpful benchmark have become unhelpful over time.

Adopting teams and zones

Falls said while there are risks to becoming too siloed as an investment staff, there are distinctive risks about going too far in the generalist direction, chief of which is what she calls “jump ball risk.”

“It’s very hard to get ahead of trends when everybody’s responsible for everything,” she said. “It undermines accountability. It’s way more difficult to allocate resources and time, and as a result it can undermine your ability to see around

the corner because you’re not so deep in any one area.”

Falls said as a result, while she has moved her team more toward a generalist model, she has attempted to strike enough of a balance so they don’t fall into that “jump ball risk.”

“What we’ve tried to do is create some teams and zones,” said Falls, “and that is basically three zones right now. I like to say we’ve gone from man-to-man to zone defense.”

One zone: growth and innovation, which concentrates on areas like venture capital and growth strategies in areas like biotech, on which Falls said her team has significant focus.

It’s all about capturing the full ecosystem of opportunities in growth and innovation, she said. An example, she said, is energy and the energy transition.

“How do we think about that?

That’s everything from super cool venture technology to carbon capture coming out of the old guys down in Texas, right? I mean, it’s like it’s everywhere,” she said. She added that investments in growth and innovation can both be in public and private investments, primarily in larger- and midcap investments.

The second zone focuses on more traditional equity investments, while the third zone is diversifying strate-

gies, which tend to concentrate more on interest rate-sensitive investments and inflation protection, she said.

She has deployed her modest investment team to concentrate on these three zones. Falls said the entire team consists of 23 staff members.

While the approach could be seen as innovative, Falls said more than once she has been humbled by that thought.

“I’ve learned that, you think you’re doing something super-innovative and different, and then you get to a conference, or you go visit managers and guess what? There’s more than you,” said Falls.

“The challenges for CIOs is often it’s a pretty distributed business. We’re in Evanston. I get around,” she said, “but it’s very different than sitting on a trading floor at Morgan Stanley with 400 people and a lot of pipes coming in. We’re little shops, us running around, and we run into each other and we talk to each other.”

“But it’s a bit fragmented as an industry,” said Falls. “You think you’re doing something super innovative and then you’re like, ‘Oh no. Everybody’s doing that.’ So that’s quite humbling.”

LESSONS LEARNED: BlackRock’s Rob Goldstein says that the firm’s purchase of eFront gave it a roadmap to avoid problems with competitors.

David Paul Morris/Bloomberg

work as hard to produce your actuarial rate of return,” Murphy said.

The pension fund also is following a less-traveled path than the ones trod by other funds its size, adding the ability to use up to 5% leverage, steering its 10-year-old private credit portfolio into asset-backed investments without neglecting traditional public fixed income and boosting its private equity exposure but not as much as it could, given its slightly cash flow negative posture.

In April 2023, OCERS adopted a new asset allocation that increased its private equity target to 15% from 13%. It also slightly increased the target allocations to real assets by 1 percentage point to 13%, and private credit by 1 percentage point to 4%, while decreasing the allocations to public equity and public income strategies by 2 percentage points each to 45% and 13%, respectively.

OCERS’ cash flow position distinguishes it from a lot of other pension plans, she said. The fund was cash flow positive until a couple of years ago, she said, a reflection of a combination of factors: Orange County is a growing county resulting in a favorable active to retired employee ratio and robust employee and employer contributions.

“We’re a lot healthier than most U.S pension plans in that respect. In a long-term sense, that means that we should have a healthy allocation to equities,” Murphy said.

Most other plans are 2% negative cash flow, some are approaching 5%, she said.

“That cohort will really explore the income market at today’s rates, whether it is traditional fixed income

or some sort of alternative income strategy,” Murphy said.

Orange County currently has a 45% global equity target allocation, which she said is “the perfect spot for us.”

The pension fund has a target allocation of 17% to income strategies, which has an actual allocation of 13.9% as of March 31.

“We’re not wedded to the oldschool thinking that income comes just from bond-type instruments,” Murphy said. “We can get income from all kinds of constructs: royalties, preferred equity, and any other strategy, as long as the majority of its performance comes from contractual, or persistent, income.”

But what she calls “a broader view of the world” in credit doesn’t abandon traditional fixed income in favor of private credit.

“I’ll take easy all day long over hard,” she said. “If we can get to 7% rate of return in public investment-grade then I should be doing that.”

OCERS has leaned more into public investment-grade credit than it had done in the prior decade, Murphy said.

OCERS divides its income strategies, formerly referred to as fixed income, into 75% public and 25% private credit. It’s a more dynamic portfolio, she said.

Real assets

As part of its last asset allocation changes in 2023, Orange County increased real assets to 13% from a 12% target allocation, increasing infrastructure but cutting real estate.

“Over the last four or five years, we’ve been taking down our real estate portfolio allocation and moving into infrastructure,” Murphy said. “It benefited us when inflation spiked because inflation-linked pricing is contractual in the infrastructure

sponsors' growing appetite for pension risk transfers, will remain a “shrinking asset class,” Tepper said.

adjusted to account for State Street Global Advisors not breaking out its DB client AUM after reporting $62.5 billion the year before — slipped roughly 1.9% to $563.9 billion.

That decline came during a year that saw the Bloomberg Global EQ:FI 60-40 index jumping 15.2%, suggesting weak net flows for outsourced DB assets.

By contrast, OCIO managers reported AUM growth of more than 20% for both defined contribution plans, to $327.4 billion, and mission-based endowments and foundations, to a combined $383.8 billion.

The defined contribution segment likewise led the way in the number of clients outsourcing plan assets, up 39% to 29,814. Over the same period, the number of DB clients slipped 0.6% to 2,209.

A reflection of success

Some analysts expect that pattern of new leadership to persist going forward.

Endowments, foundations and defined contribution should remain the fastest-growing institutional investor segments in terms of both the number of clients and outsourced AUM, predicted Amanda Tepper, managing partner of Westport, Conn.-based Chestnut Advisory Group, a management consultant to asset managers and investment solutions providers.

DB, by contrast, on the back of

space, where there is a mechanism that resets the revenues based on the CPI or something similar.”

In 2023, OCERS’ infrastructure portfolio earned 11.2% compared to a loss of -10.5% for real estate.

“Four percent of real assets is in infrastructure, which will probably grow over time as we need more income,” Murphy said.

OCERS has 7% in real estate, “half in drawdown funds and half in open-end funds, which are current-

‘We’re not wedded to the old-school thinking that income comes just from bond-type instruments. We can get income from all kinds of constructs .’

ORANGE COUNTY EMPLOYEES

MOLLY

RETIREMENT SYSTEM’S

MURPHY

ly as illiquid as drawdown funds,” she said.

At the same time, OCERS is moderating its increasing allocations to private equity and private credit.

“I also believe that just because you can doesn’t mean that you should,” Murphy said. “We are at 15% private equity.”

When Murphy arrived in 2017 to serve at the helm of Orange County’s investment office, the fund had a 6% private equity allocation, she said.

“We have almost tripled our allocation to private equity in the last seven years” and the pension fund has the ability to allocate more than 15% to private equity, but isn’t, Murphy said.

Like other asset owners, OCERS’

15, Mercer acquired Vanguard’s $60 billion, endowment and foundation-heavy OCIO business.

OCIO managers said that challenge to DB’s pride of place in the OCIO universe is an ironic outcome of the success managers have had in helping clients achieve fully funded pension plans, leaving clients in a position to move those liabilities off their balance sheets, should they choose to do so.

The past year “was really good in terms of outcomes for our clients (and) that meant we had a record year for risk transfer activity,” said Rich Nuzum, Mercer’s executive director, investments and global chief investment strategist.

While all of the big OCIO client segments are attractive, each has its own rhythm, and DB’s rhythm is particularly interesting now, Nuzum said.

“With a lot of our clients, we’re going to drive them to the destination and we’re going to help them park the car, and then it’s not our car anymore,” he said.

Mercer retained the top spot in the latest rankings with a 39% jump in worldwide institutional outsourced AUM to $469.2 billion and a 58% surge in U.S. outsourced assets to $198.4 billion, helped in part by two sizable acquisitions.

On April 3, 2023, Mercer closed the liftout of Australia’s BT Westpac business, “which brought us A$63 billion, more than 15,000 underlying employer clients, more than 850,000 (plan participants) and more than 300 new colleagues,” Nuzum said.

Less than a year later, on March

asset allocation has target ranges for each asset class. Private equity has a target range of 10% to 20%, according to OCERS investment policy statement.

“We are leaving some room should the need arise, but we also won’t get so deep into the denominator effect at this level that it hurts our ability to pay benefits because we are too illiquid,” Murphy explained.

Of OCERS’ 15% private equity allocation, about a third is in venture capital and growth, with the rest in buyout, she said. At the same time, OCERS officials are looking for ways to invest other than making commitments to funds, she said.

“I’m more of an investor at heart than an allocator. I like to get into the details,” Murphy said. “We have a culture of innovation, and it leads us to always want to get closer to the deal.”

If OCERS wants to make a specific investment but can’t execute the deal on its own, the team may find a partner or take a revenue share or do a joint venture “or something that’s going to get us into the economics of what we are doing in a different way,” Murphy said.

Collaboration is key

And OCERS is seeking ways to collaborate with other asset owners, she said.

“One of things my team and I have been doing over the last couple of years is collaborating with any institutional investor that will take our call,” Murphy said.

This year, Murphy’s team has had dozens of peer-sharing meetings, she said.

That collaborative spirit led OCERS to seed a new venture capital firm, Collective Global, committing $100 million in the fall of last year, she said. Fellow investors include

That DB client “rhythm” is something top OCIO managers say they should embrace.

“It’s a lost client for the correct reason,” said Michael Cagnina, senior vice president and managing director of SEI’s institutional business.

SEI has helped 76 different insti-

of serving pension clients ... and I assured my team that's something that we should celebrate, if that's our clients' objective."

"And if we are very good at helping clients achieve that objective, I’m highly confident that we’re going to replace that AUM … with additional AUM, and we’ve been able to do that,” Marshall said.

BlackRock, which remained in third place in the latest rankings with a 7.6% rise in worldwide outsourced AUM to $240 billion, reported 29 U.S. DB clients as of March 31, down two from the year before. Outsourced DB assets fell 11% to $57.9 billion.

Other sources of growth

Industry leaders that have focused on DB insist that that market segment will remain a central pillar of their OCIO businesses going forward, even if DB-related flows have become more of a two-way street of late.

San Jose (Calif.) Federated City Employees Retirement System as well as Railpen, the in-house manager for the Railways Pension Scheme, London.

The decision was an outgrowth of the work she said she was doing in the GP stakes world. OCERS was already an investor in Capital Constellation, a consortium of global asset owners formed by alternative investment manager Wafra in 2018.

“I really like that model and thought it would be great to do in venture capital,” Murphy said. The conversation started in 2020. Murphy said she felt that the venture capital market was having an excess run, peaking in 2022 not long before Silicon Valley Bank failed, financing began falling, inflation was spiking, and the technology investment play was having a valuation reset.

“All of those things were aligning for a good group of dedicated venture capital investors with largescale money to be able to enter the market,” Murphy said.

What OCERS is doing with Collective Global investment is a combination of taking a stake in the venture capital firm, going into its fund as part of the GP commitment and supporting portfolio company rounds, Murphy explained.

“It has several plays within the one platform,” she said. “We have high expectations for that.”

Private credit evolves

OCERS has 4% allocated to private credit, down from its 6% peak in 2017, she said.

“Again, just because we can doesn’t mean we should,” Murphy added.

Over the years, OCERS has modified what it is seeking in private credit, she said. Ten years ago, OCERS was focused on unsecured

Five to 10 years ago, “if you had a $2 billion to $3 billion mandate” every 18 months, that would have really stood out, but today “we’re seeing $10 billion mandates trade every quarter,” Braude noted. So, it’s a chunky business and the chunks are getting larger and they’re coming more and more frequently, he said.

GSAM remained in second place in P&I’s latest ranking, with worldwide institutional outsourced AUM of $328.9 billion, up 33% from the year before and U.S. AUM of $211 billion, up 14.5%.

Meanwhile, even if DC outsourcing is accelerating now, there are reasons to remain focused on DB plans, Braude said.

Defined contribution investment outsourcing is “gaining popularity but it’s a different type of investment problem,” with a focus on curating lists of managers that DC plan participants can access.

“But

tutional clients reach that goal over the past decade or so, Cagnina noted. SEI ranked 13th in the latest survey with a 3.9% gain in worldwide OCIO assets to $90.6 billion, down from ninth place the year before.

Ryan Marshall, managing director and co-head of BlackRock's multiasset strategies and solutions investment group, likewise took a philosophical view: "It is part of the nature

The types of organizations and the size of organizations interested in pursing outsourcing opportunities continue to expand significantly, said Timothy Braude, global head of multiasset solutions with Goldman Sachs Asset Management.

GSAM, in May, proved it was doing more than talking the talk in that regard, announcing that Atlanta-based UPS had tapped GSAM to manage its $43.4 billion in North American defined benefit assets, with UPS’s internal investment team forming the nucleus of a new Atlanta-based hub for GSAM’s OCIO business.

“A DB portfolio is far more intellectually stimulating from an investment problem and investment solution standpoint, and that’s how you attract and retain really talented investors — you give them challenging problems to solve,” Braude said.

Still, with the growth of net DB exposures under pressure for much of the industry, OCIO executives say other market segments, including defined contribution, endowments, foundations, healthcare organizations and, more recently, public pension funds as well, are taking up the slack.

SEI’s Cagnina said nonprofits, in all their variety, are the fastest-growing segment of SEI’s business now.

NO REBOUND: Chestnut Advisory Group’s Amanda Tepper said DB funds will remain a ‘shrinking asset class’ for OCIO managers.

direct lending.

“That was a great trade. Now, half is more nuanced corporate direct lending in sectors and geographies that we want to underwrite.” Murphy said. “The other half is in asset-based lending, specialty finance and other niche markets. We prefer strategies that have a (economic) moat rather than strategies that are (cash) flow based.”

OCERS’ investment team has also done a lot of the groundwork to be a more active player in the private markets secondary market, both buying and selling, Murphy said. This year, OCERS’ board preapproved Campbell Lutyens, Evercore, Jefferies and Raymond James to assist the fund with its secondary market activities going forward, she said.

“We plan to put a portfolio out for a secondary sale at the end this quarter,” Murphy said. “We will be modest, possibly a transaction between $100 million and $200 million.”

OCERS officials are putting the proposed sale portfolio together, which could be shown to potential buyers as early as the later part of July, she said.

Not only will OCERS officials be selling tail pieces, which are funds at the end of their lives, but Murphy said that the fund is “also looking to sell positions that aren’t strategic as well.”

OCERS would start with private credit assets, “only because they have the best bids under them right now,” she said.

“But secondary sales are always going to be bid dependent. We’re not doing it because we’re strapped for cash” Murphy said. “We are only going to sell when it will make monetary sense.”

Another innovative move was the board approval earlier in 2024 of leverage of up to 5% of the total fund.

At present, the firm’s 181 nonprofit clients are just behind its 188 DB clients, but over the coming five to 10 years, the share of that client segment should rise to 65% to 70% of the firm’s client base, he predicted.

DC a bright spot

Nimisha Srivastava, head of investments, North America, with Willis Towers Watson, said while pension risk transfers weighed on her firm’s DB totals last year, DC assets posted strong growth.

The firm, which remained in fifth place with $163 billion in worldwide institutional outsourced assets, down 1.2% from the year before, reported a 25% drop in U.S. institutional DB assets to $39.9 billion, partly offset by a 22% gain in DC assets to $25.4 billion.

“As DB plans decline, assets in DC are growing and one of the solutions we’re really excited about is we launched our Lifesight pooled employer plan last year, which the firm anticipates will be capable of delivering strong growth over the coming year,” Srivastava said.

Other OCIO managers likewise attributed their strong growth last year mainly to DC-related flows.

Defined contribution clients powered CAPTRUST Financial’s 61% surge in U.S. institutional outsourced AUM to $138.1 billion for the year through March 31, accounting for roughly $47 billion of its $52 billion gain in assets, said Matthew Patrick, senior manager, defined contribution with the Raleigh, N.C.-based OCIO provider.

The number of CAPTRUST DC

Murphy said leverage would not be used to enhance returns.

“We don’t think it is necessary,” she said. “We are going to use leverage to be more capital efficient, focused on synthetic rebalancing and cash management.”

Exploring AI

Pension fund officials are also exploring AI applications to improve the operational efficiency of the fund, Murphy said.

“We’re exploring AI apps to run a lean team of humans doing the strategic thinking with technology and computers doing repetitive tasks or low value-add tasks,” Murphy said.

For instance, OCERS officials are currently testing a bot for internal use that will sit in on manager due diligence calls. It’s a transcription bot that can do smart summaries, composes or suggests a list of for the people on the call to follow up with and then loads them into OCERS’ customer relationship management system and project management software so investment staff can document and track activity, she said.

“We have six-to-eight AI-related projects and automation projects that we are doing jointly with our custody bank, State Street,” Murphy said. “That’s a big initiative for us. AI is the tool of this generation.”

One of the team’s ideas is predictive rebalancing, she said. OCERS officials would like to be able to load such information as its liquidity constraints, notice period dates, targets and ranges together with macro trends and a factor model. Then they would like to have the generative AI process show the investment team how to maximize rebalancing, she said.

“It doesn’t sound exciting, but it can reduce staff time and brain drain” Murphy said.

Indonesia fund sees assets increase, doubles deployed assets in 2023

y B NATALIE KOH

The Indonesia Investment Authority, Jakarta, deployed 29.6 trillion rupiah ($1.9 billion) in investments in 2023, of which 19.6 trillion rupiah, or $1.3 billion, came from its own portfolio, according to its annual report published on May 31.

The investments were made across six deals that comprised nine assets in sectors such as healthcare, infrastructure, digital infrastructure, geothermal and logistics.

In comparison, the fund deployed $503 million in 2022 across three projects, including a $400 million acquisition of two toll road assets. The remaining two projects were in the pharmaceuticals and digital industry sectors.

Total assets of INA rose to 116.9 trillion rupiah ($7.6 billion) as of Dec. 31, a 17% increase from 99.8 trillion rupiah a year ago, the report said.

As of Dec. 31, most of its assets (76.6 trillion rupiah) were invested in the shares of Bank Rakyat Indonesia and Bank Mandiri, and 21.4 trillion rupiah was in government bonds, cash and time deposits.

INA was launched in 2021 with capital injections from the government in the form of 45 trillion rupiah worth of shares in the two banks, and 30 trillion rupiah in cash, with the aim of working with domestic and global investment partners to invest in Indonesia’s development.

The fund has received 6.2 trillion

clients jumped by 240 to 1,330, dwarfing more modest increases in endowment, foundation and defined benefit clients.

The growth in DC assets, while up from between 20% and 35% in prior years, marks a continuation of a trend, with sponsors of ever-larger DC plans looking to clear their decks as much as possible to better focus on big-picture goals, such as getting more of their employees enrolled and giving them the education they need to get the most out of their company retirement offerings, Patrick said.

For sponsors that continue to own all of their plans' investment deci-

rupiah in dividend income from the banks since 2021, and the cash and bonds return 4.4% annually, the report said.

INA has deployed 31.3 trillion rupiah or $2.1 billion of its assets since inception, of which 91.2% is in infrastructure, 4.4% in private equity, 2.4% in hybrid capital solutions and 1.9% in public equity.

By Dec. 31, its total assets under management, including those contributed by its co-investors, was 147.6 trillion rupiah. The co-investment deals INA signed in 2023 included an agreement with Manulife Investment Management to invest in Indonesian real assets, and a strategic partnership with British International Investment that focuses on green projects in Indonesia such as renewable energy and climate resilience.

The sovereign wealth fund did not publish the portfolio’s returns by asset class but wrote that the fund’s profit for the year was 4.3 trillion rupiah, and revenue was 5.4 trillion rupiah. The revenue was derived from interest income from investment portfolios and treasury assets, dividend income from in-kind shares, and income from unrealized gains based on mark-to-market investment valuations, the report wrote.

“As INA is only three years old, it is too early to say whether our performance meets stakeholder expectations,” Chief Financial Officer Eddy Porwanto said on June 25 in an

ing his firm's "robust" processes leave it well positioned to address any legal challenges.

CAPTRUST ranked eighth for P&I's latest survey, up from 10th the year before.

Mark Andersen, senior vice president and manager of Callan’s trust advisory group, said a handful of big DC client wins boosted his firm’s OCIO business last year to $33.7 billion, up 45% from the year before. Callan reported 31 clients as of March 31, up two from the year before, with its DC client total climbing to 20 from 18.

DC plans “are large and growing, and DB plans are large and maybe shrinking,” so even though DB plans will be around for a very long time, an argument can be made for focusing on DC, as Callan does, Andersen said.

emailed response to questions about the fund’s portfolio targets. Porwanto was a senior employee with private equity house Northstar Group, where he served on the board of commissioners and directors in portfolio companies.

The fund’s targets are not only commercially related, but also focus on developmental impact, he said.

“From (the) commercial perspective, our target return might vary on a project-by-project basis, depending on structure, sector, asset class, etc. — but it is important that all investments align with our mandate to contribute to Indonesia’s sustainable development and build wealth for future generations,” he said.

“We have (an) internal hurdle rate but our overall performance (is) not benchmarked to certain indexes,” he added. He did not disclose targets. Most of the portfolio is made up of direct or platform investments and is internally managed by the fund’s team of 30 investment professionals, he said, adding that the fund might allocate some of the portfolio to be externally managed in the future, depending on its strategic needs and asset allocation target.

For 2024, the fund will pursue portfolio rebalancing to asset classes with higher yield characteristics and more immediate returns such as real estate and hybrid capital solutions, and continue focusing on priority sectors as opportunities arise, Porwanto said.

they consider what opportunities to pursue in building their businesses.

Still others said they see no reason to choose one over the other.

NEPC’s 73% gain in worldwide institutional outsourced AUM to $106.6 billion for the year through March 31 was powered by a combination of new DB and DC clients, said Scott Perry, a partner and head of portfolio strategy with the Boston-based consult and investment house.

“We had a number of large defined contribution programs that engaged us for OCIO mandates … and then there were a lot of advisory clients that we had relationships with that asked us to play a bigger role in their investment programs,” he noted.

sions, by contrast, the thorough oversight that entails can often find them spending an inordinate amount of time making a single change to their mutual fund lineups, Patrick said.

One of the biggest recent changes, meanwhile, has been a rising awareness of the legal risks sponsors face over investment-related decisions, which has left sponsors looking for ways to minimize those risks, he said.

Chestnut's Tepper said that charged legal environment has kept some OCIOs away from the DC market segment but Patrick said CAPTRUST isn't one of them, contend-

Comparing the relative charms of DB and DC, market participants say DB OCIO mandates, with their greater complexity, offer higher fees but when all is said and done the attractiveness of the two segments may well be comparable.

Andersen said thinner basis point fees have to be weighed against the relatively large size of DC-related mandates.

No need to choose

One industry veteran, who declined to be named, said while OCIOs typically garner higher fees for managing outsourced DB pools, the time horizon for a DC plan is theoretically perpetual while that of a DB plan might be much shorter — a trade-off OCIOs have to ponder as

Meanwhile, more broadly, all signs point to a growing appetite for OCIO services, analysts said.

“Solutions are winning. Solutions is where it’s going in the long term,” noted Chestnut’s Tepper.

“We just saw a large increase in RFPs” last year, most in the back half, which helped Russell start the year with $20 billion in yet-to-be-funded OCIO mandates, said Lindy Freeman, global head of institutional with Russell Investments.

And that momentum has continued into 2024, with the strongest quarter Russell has ever seen in terms of new searches in the Americas, Freeman said.

Russell edged up to sixth place in the latest rankings from seventh the year before on the strength of a 6% rise to $161.6 billion in worldwide institutional outsourced AUM.

STRONG GROWTH: Willis Towers Watson’s Nimisha Srivastava said the firm’s outsourced business is getting a boost from DC funds.

Rick Hovis