This week's issue P&I 2024-08-12

Amid geopolitical turmoil, institutional investors are seeing the appeal of the traditional in ation hedge

y B CHRISTOPHER MARCHANT

Institutional investors are looking for a Midas touch when it comes to their portfolios, with greater recent interest in gold among pension funds.

However, it’s not simply mythological levels of wealth they are seeking. It’s more a matter of valuing the commodity’s well-known role as an in ation hedge

and its role in protecting portfolios against geopolitical turmoil, such as the potential for upcoming volatility associated with the U.S. presidential election in November.

In June, the A$223 billion ($143.2 billion) Future Fund, Melbourne,  con rmed plans to add exposure to gold within its portfolio.

The glittering asset was trading at

How large hedge funds are navigating the AI revolution

The boom in generative arti cial intelligence is both new and old for some of the world’s largest hedge funds. Many have had teams focused on machine learning for years, but are now trying new use cases. Pensions & Investments spoke with AQR Capital Management, Balyasyny Asset Management and Man Group about how they are thinking about AI, where AI staff t in their rms, the skill sets they are looking for and how AI is being applied.

Over the past several years, AI has broadly transitioned from the back-of ce technology domain at asset managers, to a focus on “actionable insights that impact the

$2,326 an ounce on July 1 — up 12.5% vs. Jan. 1, when one ounce was priced at $2,068. A June report by the World Gold Council showed that institutional investors are at least interested in getting in on gold’s rally, with at least 85% of North American institutional investors andnancial advisers now having some holding in the product.

Another big investor, the ¥254.7 trillion ($1.58 trillion) Government Pension Investment Fund, Tokyo, in March called for information on asset classes that it does

Defined Contribution

Large-cap funds led changes to 401(k) lineups in a busy year

U.S. corporate plans nearly double the lineup changes in 2023 compared to 2022

y B ROB KOZLOWSKI

Well over 100 U.S. corporate 401(k) plans made changes to their investment option lineups in 2023. That's nearly double the number that disclosed changes the previous year, with 401(k) plans in 2023 saying changes to active domestic large-cap growth equity options dominated.

DISPERSION: Callan’s Greg Ungerman

The number of plans that made changes in 2023 was up signi cantly from the prior year.  Pensions & Investments compared 819 corporate 11-Ks led with the Securities and Exchange Commission between May 14 and June 28 with similar lings in 2022.  For 2023, slightly less than 15% of 11-K lings showed retirement plans that made at least one investment option change during the year, with the majority affecting individual active equity options, P&I's analysis of recently released 11-K lings showed.

Last year's 847 corporate 11-K lings found that 65 U.S. corporate 401(k) plans, or just under 8%, added or

Amy McGarrity, chief investment of cer of the Colorado Public Employees’ Retirement Association, considers the pension fund’s emphasis on internal money management a signi cant competitive advantage over its peers.McGarrity has a staff of about 60 people across all asset classes, administration and operations who have the responsibility of managing most of its global equities asset class, and the entirety of its xed-income portfolio in active management.

“We believe that is a competitive advantage for Colorado relative to our peers and relative to other state pension plans,” said McGarrity. “Every year we run an estimate of what those cost savings are, and last year was $65 million.”

McGarrity said what has also helped considerably is the strong support of PERA’s board and a compelling compensation package, and what also helps is the attractiveness of the Denver metropolitan area as an appealing place to live.

“I think we have a combination of

Wayne E Wilson/Getty

IN THIS ISSUE

ESG

The EU’s ambitious effort to help investors gain more clarity about their ESG investments is sowing confusion. Page 4

Washington Crypto is emerging as an electoral issue. Some say it’s typical ‘pay-to-play’ Washington politics. Page 6

Money Management

BNP Paribas is in talks to acquire AXA Investment Managers, a deal that would create a $1.64 trillion money manager. Page 6

Special Report:

Artificial Intelligence

Fixed income and equity managers are already reaping the bene ts of generative arti cial intelligence and machine learning.

Page 18

The AI boom is fueling investments in data centers and infrastructure, but raising questions about how much power is needed. Page 19 AI is becoming an important resource in sustainable investing — but its application is also growing as a governance issue. Page 20

RE manager survey in progress

Responses to Pensions & Investments' annual survey of real estate investment managers are due by Aug. 30. Firms managing private real estate assets or REIT securities for U.S. institutional, tax-exempt clients are eligible to participate. Results will run Oct. 7. To request a survey or obtain further information, please contact Anthony Scuderi at ascuderi@ pionline.com or 212-2100140, or visit www.pionline. com/section/surveys

William Blair’s Braming exploring ‘the unobvious’

If active managers are judged on their ability to outperform the crowd and nd alpha while the rest of the herd looks elsewhere, unobvious parts of the market would be a good place to explore.

That's proving to be a good tactic for William Blair Investment Management, the $72.4 billion manager where Global Head Stephanie Braming and her team are nding opportunities — and client interest — in those “unobvious spaces that are adding value” right now, she told Pensions & Investments in an exclusive interview.

Take developed vs. emerging markets in terms of treading the untrodden path for regional allocations. All eyes right now are on developed markets' central bank moves and whether in ation’s new normal will remain above the traditional 2% target. Frontier markets — countries that are too small or not liquid enough to be deemed an emerging market, such as Kazakhstan and Vietnam — are proving to be of interest with consultants, and one of the rm’s “top ideas,” she said.

“In some ways, it’s the unobvious space relative to, like, private credit. And it’s really personally intellectually interesting to me because it’s just so

far out of my own investment experience,” Braming said.  The rm’s rst emerging markets debt strategy

Pensions & Investments is accepting entries for the 2025 Eddy Awards, an annual program recognizing plan sponsors and service providers that exhibit best practices in offering investment and nancial education to de ned contribution plan participants.

The deadline for completing the entry in the online system is Sept. 13.

All materials — including participant communications distributed as part of a de ned contribution education campaign — must be included as part of the online entry, via PDFs of printed materials, high-resolution JPEGs or website links. Regardless of whether they were dis-

Netherlands-based rm NN Investment Partners.

Percentage-based formulas disproportionately bene t higher earners, Vanguard says

Even in their generosity, employers can unwittingly be unfair.

That's one of the biggest takeaways from a new Vanguard report that looks at the 401(k) matching contributions that employers typically put into employees' retirement accounts.

Employers labor over the right matching formula, with many choosing to match 50 cents for every dollar employees put into their accounts, up to 6% of their pay.

The popular “50% on 6%” match, however, has some shortcomings in that it rewards higher-paid workers more. Employees making $100,000 who contribute 6% of their pay, or $6,000, to their accounts get an employer match of $3,000. Those making $50,000 can

tributed to participants in print or online, entry materials must be submitted online.

Complete rules and entry forms are available at pionline.com/EddyEnter . Campaigns must have been launched no earlier than Jan. 1, 2023.

Sponsors of plans of all sizes are encouraged to enter, with materials judged against those from their peers based on the number of participants. Record keepers and retirement plan advisers can submit their own generic entries or in conjunction with plan sponsor clients. In the latter instance, both will receive trophies for a winning entry.

Winners of the Eddy Awards will be announced at P&I's annual East Coast De ned Contribution Conference

only get $1,500.

One way to make the employer matching contribution more equitable is to cap the dollar amount. Employers could, for example, cap the match at $2,500, so that all workers — regardless of income — would have a chance at receiving the same maximum employer contribution.

Traditional percentage-based matches, such as 50% on 6%, are “disproportionately owing to top earners,” said Fiona Greig, global head of investor research and policy at the Vanguard Group, summing up the topline nding of Vanguard's report released in May.

If employers want to promote retirement security among their workers as their “North Star,” employers need to start thinking about who needs the match dollars most and how they can channel the money “to move the needle on retirement security to the greatest effect,” she said.

Of the estimated $200 billion that employers contribute to workers’ retirement

March 9-11 in Fort Lauderdale, Fla.

The award categories, in alphabetical order, are:

Conversions: This category recognizes campaigns devoted to explaining the move to a new record keeper. This category also includes consolidation of record keepers by 403(b) plans. All ongoing investment education materials do not have to be included.

Financial wellness: Workplace experts increasingly warn that employees' nancial stress can damage their productivity, health and ability to retire. This category aims to recognize efforts that take a holistic view of employees' nancial wellbeing outside of traditional retirement programs. Those efforts should

include, but are not limited to, education or tools regarding student loans, health savings accounts, emergency savings and debt reduction, and household budgeting. Ongoing investment education: Entries should educate existing employees on the investment options of the plan and how it helps them save and reach their retirement goals, or new employees about investment options of an existing plan. Entries must focus heavily on the investment process. Note: Campaigns aimed at educating participants on the importance of saving in their dened contribution plan for retirement, via their 401(k) plan, for example, can be included in this

came as a result of a team liftout from The Hague,

‘INTELLECTUALLY INTERESTING’: William Blair Investment Management’s Stephanie Braming.

Blue Owl: ‘Golden age’ falls short in describing the private credit boom

$1.7 trillion segment is a sustainable, ‘go-to’ asset class, co-CEO maintains

y B LYDIA TOMKIW

Blue Owl Capital co-CEO Marc Lipschultz doesn’t think it's a golden age for private credit, saying that’s the wrong frame of reference for the booming investment space.

“This paradigm of the golden age is too much about some golden moment … but the de nition of golden moments is there’s something unique and probably not sustainable about why it worked. And then the golden age passes,” Lipschultz said in an interview at Blue Owl’s New York of ce.

“I actually don’t see that analog because we weren’t trying to be the gold miners. I mean to switch metaphors, but probably appropriately, we always talk about being the picks and shovels to the gold miners.” Blue Owl, which was born out of Owl Rock Capital Group and Dyal Capital Partners agreeing to merge

in 2020, manages over $174 billion in assets as of March 31, investing across credit, GP strategic capital and real estate.

Lipschultz sees the purpose of private credit as a “go-to reliable, long-dated solution” for a multitrillion-dollar leverage lending marketplace, with Blue Owl following the three “Ps” of direct lending: predictability, privacy and partnership.

“What we’re trying to do is a steady production of attractive, risk-adjusted returns. And others can mine for gold, and they will have golden eras and dark periods,” he said. “We’re trying to stay in a much steadier band, and that’s been working, and I think will continue to work.”

The rapid growth in the private credit segment in recent years, now estimated by Preqin at $1.7 trillion, has brought questions about potential cracks. Lipschultz said from his seat, “we’re still in a very healthy place” and he doesn’t see cracks, but added, “it doesn’t mean there won’t be someday.” Blue Owl manages $91.3 billion in credit strategies,

‘SUBSTANTIAL

HUBRIS’: Arizona Public Safety’s Mark Steed said a pullback could be coming for managers.

Ohio State Teachers compensation ght spotlights public pension plan pay scales

A ght over compensation at one of Ohio's largest public pension funds has turned a spotlight on other retirement plans' pay packages, and intensi ed scrutiny of how much pensions funds' investment staff are paid.

Some public pension funds are

under increasing criticism from members regarding what they perceive as excessive investment staff compensation. The average annual salary of a CIO at a public pension plan was $277,000, according to the 2022 NCPERS Public Pension Compensation Survey. Including bonuses, the average CIO earned $517,000.

In many cases, however, public pension staff members are paid less compensation than staff at university endowments and private-sector money managers. By far the most visible pension fund that has faced criticism in recent years is the $94.5 billion Ohio State Teachers’ Retirement System,

Arizona Public Safety CIO sees ‘existential crisis’ in private equity

Arizona Public Safety Personnel Retirement System, Phoenix, has bene ted from outsized contributions in recent years that have allowed it to become a liquidity provider in private equity deals. But an existential crisis is afoot in the asset class, which means the pension fund and institutions like it are practicing greater caution in pulling the trigger on deals, said Mark Steed, chief investment of cer.

Steed and the multiemployer retirement

system have been aided in recent years from a massive ongoing project to shore up its funding, working with more than 300 municipal, county and state public safety-related employers whose assets feed the system to increase their contributions.

Arizona PSPRS had hit a low point with a funding ratio of 46.9% as of June 30, 2020, but improved three years later to 66.3%. The funding ratio for this latest scal year is pending the actuarial valuation.

While there is still plenty of work to do,

Lower interest rates may boost fixed income, hurt private credit

PSPRS has experienced a signi cant spike in system assets that made it the fastest-growing U.S. retirement plan in the three years ended Sept. 30, according to Pensions & Investments data.

During a period of signi cant market volatility, the system’s assets grew 81.7% to $19.8 billion as of Sept. 30 from $10.9 billion three years earlier thanks to those outsized contributions. PSPRS now has about $21.3 billion in assets.

A cut in interest rates in September seems to be a foregone conclusion, and chatter has turned to how aggressive an approach the Fed will take. Should longer-term yields continue declining, pension funds’ U.S. xed-income assets will likely bene t. However, private credit funds could see their outsized returns under pressure, since they typically

Fixed allocation: Large pension funds have a signi cant allocation to U.S. xed-income assets. The class made up about 20% of the largest pension plans’ assets, although that’s down from the nearly 25% held in 2019.

Largest U.S. pension funds’ fixed-income allocation

D r opping yields: 2- and 5-year

Tr e a sury yields peaked in October at 5.1 % and 4.9%, respectivel y. They’ve dro p ped si nce due t o economic data, including slowing in ation. The 2-year yi el d s tood at 4%, and the 10-year yield was 3.96%, as of Aug. 7.

U.S. Treasury yields

Locking in yields: U.S. corporate high-yield bonds currently have a 7.71% yield to worst. Although down from nearly 10% at the end of the third quarter of 2022, it’s high compared against the past 10 years. Investment-grade securities, represented by the Bloomberg U.S. Aggregate Bond index, have a 4.51% YTW. The YTW averaged 2.7% from 2014 through 2023.

Yields to worst

Private credit reversal?

North American private credit funds have bene ted from higher short-term interest rates, returning a cumulative 65.9% over the ve years ended March 31. With the Federal Reserve poised to cut rates, though, returns could slow.

North American private credit vs. U.S. corporate high yield

bold climate transparency push hitting snags

say the legal requirements aren’t clear and too many data gaps exist. And key de nitions within the EU Sustainable Finance Taxonomy, which underpins understanding of what can be classi ed as “green,” haven’t been fully decided yet.

Three years in, the European Union’s most ambitious effort to help investors gain more clarity about environmental, social and sustainability characteristics of their investments continues to sow division and confusion.

Investors say they’re inundated with details. Investment managers

There is broad consensus that the launch of the EU’s Sustainable Finance Disclosure Regulation, which aimed to create a common, transparent framework that allowed investors to more easily compare investments — and reduce greenwashing — has been less than optimal.

“SFDR still has to address several de ciencies such as unclear legal

concepts (e.g. de ning exactly what sustainable investment is), low quality data reported by the investable companies or the misuse of SFDR for marketing purposes,” according to Joanna Frontczak, senior impact equity analyst at Swiss investment management rm Vontobel, which had AUM of 206.8 billion Swiss francs ($230 billion) as of Feb. 29.

However, recent joint recommendations by the European Supervisory Authorities have proposed a way forward.

Introduced across the European Union in March 2021, SFDR aimed to let investors know the green and

ESG-related credentials of investment strategies through the introduction of a reporting framework for funds.

As it stands, the technical and detailed approach of SFDR can make it challenging for pension fund clients to understand the signi cance of certain data points, such as the emissions of inorganic pollutants or even a rm’s anti-bribery policies. So much granular information “can lead to more confusion than clarity,” according to Elisabeth Ottawa, head of public policy for Europe at Schroders, a U.K asset management rm with £751 billion ($949 billion) in

AUM as of Dec. 31.

SFDR currently categorizes funds as Article 6 — which do not integrate any kind of sustainability into the investment process; Article 8 — promoting ESG compliance; and Article 9, which are strategies with investments that speci cally target sustainable outcomes.

An investor shorthand for these three classi cations has been “brown” for Article 6, “light green” for Article 8, and “green” for those most ESG leaning and classi ed as Article 9.

Following SFDR’s introduction, sustainable fund ows do appear to have reacted positively. The proportion of Article 8 and 9 funds as part of the universe of EU funds in scope for SFDR reached 60% in the rst quarter of 2024, up from 33% in the second quarter of 2021, according to data from Morningstar Manager Research.

Soon after its introduction, there became a belief that SFDR, which was created as a disclosure and reporting framework, had become a “de facto labeling regime,” said Stuart Burnside, head of product governance and ESG product at M&G Investments, a U.K. rm with £343.5 billion AUM as of Dec. 31.

“I think SFDR was actually a reasonable and effective instrument, which people have then used to play the wrong tune,” Burnside said.

Perceived problems within SFDR deepened as 2022 drew to a close, when large asset managers such as BlackRock and HSBC Asset Management downgraded Article 9 funds to Article 8, and Article 8 funds to Article 6 as criteria was tightened.

The investment community has been anticipating the key signals to

anticipating it, but there might be more to

Don’t miss our opening keynote, where we’ll cut through the noise and attendees will learn how to stay flexible and navigate the ever-changing markets from a seasoned investment professional. Register now to gain these invaluable insights and position yourself ahead of the (inverted) curve!

The ‘Level 2’ of the regulation’s Regulatory Technical Standards, effective in January 2023, added elements such as requiring investment rms to align their ESG disclosure with the principal adverse indicators reporting framework, which identied ESG risks within an investment strategy, and share detailed information on how to avoid such adverse ESG effects of a fund.

Arthur Carabia, director of ESG policy research at Morningstar Sustainalytics, notes that “as with most EU regulation, enforcement is primarily executed by national regulators, with European Securities and Markets Authority oversight.”

Recent developments

A recent feedback report, published in May and authored by the European Commission and taking views from 324 organizations and individuals with insight into the market, showed ongoing division on how to x SFDR. For example, 56% of respondents believed that the EU should impose standardized disclosure requirements for all nancial products. According to the report, a large majority of respondents also called for these disclosure requirements to be simpli ed and streamlined across the sustainable nance framework.

Following this report, joint recommendations by the European Supervisory Authorities to the European Commission, published in June this year, proposed a way forward.  The reported stated that SFDR categories should be simple with clear objective criteria or thresholds to identify which category the product falls into. The ESA encouraged

You are invited to register with 500 euro discount

We are honoured to present our CIO opening panel: POWERING-UP FOR THE NEXT INVESTMENT ENVIRONMENT

Sneak-preview of our speaker faculty:

ANNETTE MOSMAN CEO APG

MICHELLE OSTERMANN CEO PENSION PROTECTION FUND (PPF)

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

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

THOMAS CURRAN Professor of Psychology, Author of the Perfection Trap LONDON SCHOOL OF ECONOMICS

YOU ARE INVITED TO REGISTER SUMMER500WPS Asset owners/Plan Sponsors can apply for a complimentary delegatepass

PEDRO ANTONIO GUAZO ALONSO Representative of the Secretary-General for the investment of the UNJSPF assets UNJSPF

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

LAURA CHAPPELL CEO BRUNEL PENSION PARTNERSHIP

AEISHA MASTAGNI Portfolio Manager CALSTRS

CHRISTOPH JUNGE Head of Alternatives VELLIV

Crypto emerges as election issue but opinions vary on why

y B COURTNEY DEGEN

There’s no question that crypto is talked about in the political arena, but opinions vary on why the topic rose to prominence and how it would impact electoral outcomes.

The fact that cryptocurrency made it into the 2024 Republican platform is “a pretty big deal,” according to Sheila Warren, CEO of the Crypto Council for Innovation, a trade group advocating for cryptocurrency.

However, “the reality is this election is just not about crypto or digital assets,” Warren said. "There’s no

question it is an issue … but it is not the issue of this election,” she added.

Warren’s view differs from crypto rms and advocates who insist that voters will base their decision on whether or not a presidential candidate is “pro-crypto,” and the Republican Party seems to be listening.

In its 2024 platform, the GOP pledges that “Republicans will end Democrats’ unlawful and unAmerican crypto crackdown and oppose the creation of a Central Bank Digital Currency. We will defend the right to mine bitcoin, and ensure every American has the right to self-custody of their digital assets, and trans-

act free from government surveillance and control.”

Ripple representatives attended the Republican National Convention, and the company plans to attend the Democratic National Convention as well, with the goal of “education,” and to “spread the messaging of where our smart policies are intersecting with greater kind of American policies,” said Lauren Belive, head of U.S. policy at Ripple, a cryptocurrency rm. Coinbase, another crypto rm, also sent representatives to the RNC, according to reporting from Politico.

Belive contended that this year's

election cycle is a "pivotal" one for the cryptocurrency industry at large.

However, some contend that the crypto industry merely bought its way into the conversation.

“The only reason people are talking about crypto, currently, so much is because of the amount of money they are spending to buy politicians to push their special interest above every other priority of the American people,” said Dennis M. Kelleher, co-founder, president and CEO of Better Markets, a nonpro t that describes itself as a Wall Street and government watchdog.

According to OpenSecrets, both

Coinbase and Ripple are ranked in the top 10 of organizations making the most contributions — including those to candidates, party committees, PACs, 527 organizations and outside groups — in the 2024 election cycle. OpenSecrets tracks contributions “from the organization's employees and members, its PAC and the organization itself, only when it gives to outside groups,” according to its website.

“Despite the industry's rhetoric around this, the shift in position from policymakers in Congress and other parts of Washington is not based on the substance of the industry's policy arguments,” said Mark Hays, senior policy analyst at Americans for Financial Reform, a nonpro t advocating for nancial reform, and Demand Progress, a nonpro t progressive advocacy group.

BNP Paribas Group is in exclusive talks to acquire AXA Investment Managers in a €5.1 billion ($5.6 billion) deal that would create a €1.5 trillion money manager.

Under the deal, which is subject to regulatory approvals, BNP Paribas would also enter into a long-term strategic partnership to provide investment management services to parent company AXA, separate news releases said.

The proposed deal is expected to complete in mid-2025.

BNP Paribas’s money management unit, BNP Paribas Asset Management, had €576 billion in assets under management as of June 30, with €338 billion in institutional AUM. Of its total AUM, €382.8 billion is classi ed as ESG AUM, according to its website. The rm runs strategies across listed and private assets.

AXA IM has about €850 billion in assets under management across equities, xed income and alternatives strategies. The alternatives unit had €184 billion of AUM as of March 31.

AXA’s news release said its intention to exit the money management business emphasizes the group’s strategy to focus on core insurance activities, with CEO Thomas Buberl adding that the group had considered different options to support the future development of AXA IM “in the context of a rapidly consolidating and highly competitive asset management industry.”

“By joining forces with BNP Paribas, AXA IM would become a global asset manager with a wider product offering and a mutual objective to further their leading position in responsible investing,” he said.

BNP Paribas spokesperson could not immediately be reached for comment on the impact on staff.

PE exec’s gift to fuel study on high court

Private equity executive

James A. Kohlberg has donated $30 million to the Brennan Center for Justice at the New York University School of Law to help the center conduct research on Supreme Court reform.

Kohlberg is chairman of  Kohlberg & Co., a rm he cofounded in 1987 with this father, the late Jerome Kohlberg Jr. The elder Kohlberg is the “K” in Kohlberg Kravis & Roberts Co., where his son James was a former executive.

James Kohlberg has been chairman of Kohlberg & Co. since 2007.

“We are at a tipping point,” James Kohlberg said in July 23 news release announcing his donation. “Without signi cant reform, the U.S. Supreme Court will remain unchecked, jeopardizing constitutional values and our democracy for generations. I can think of no better institution than the Brennan Center to lead the critical work ahead to hold the Supreme Court accountable.”

The Brennan Center, an independent nonpartisan and policy organization at the law school, was founded in 1995 by former law clerks to Supreme Court Justice William J. Brennan Jr., who served from October 1956 to July 1990.

The donation will create the Kohlberg Center on the U.S. Supreme Court that will, among other things, publish policy reports and research, convene scholars and “advance proposals for Supreme Court reform,” the news release said.

“We will use Jim Kohlberg’s generous gift to deepen the public’s understanding and broaden support for reforming the court,” Michael Waldman, president and CEO of the Brennan Center, said in the news release.

President Joe Biden recently unveiled a series of Supreme Court reform recommendations: setting term limits, suggesting Congress pass a binding ethics code for the justices and advocating a constitutional amendment that eliminates presidential immunity for crimes committed while in of ce.

ROBERT STEYER

TRAINING NEXT GENERATION

Greenwood Project expanding college student program

Nonpro t organization Greenwood Project is expanding its college program for Black and Latino students.

Based in Chicago, the organization was founded in 2016 to train scholars of color in career-tracked skills they will need to succeed in nancial services. Kwesi Smith, formerly a research analyst at corporate partner William Blair & Co., became CEO of Greenwood in July 2023 and has spearheaded an expansion of its training and recruiting efforts.

The organization received an in ux of funding following the murder of George Floyd in the summer of 2020.”Our goal is to grow and scale the organization to train a thousand individuals and transition them into nancial services every year,” Smith told Pensions & Investments. Previously, the program provided high-school juniors and seniors with six weeks of training during the summer, but Smith said they have eliminated

GREEN TRANSITION

that because too few of the students remained in their declared major after entering college.

Instead, the Greenwood Project is expanding its college program. Previously, the project’s college program began with four weeks of training at the beginning of the summer and then a six-week internship with a corporate partner, and now is transforming into an 18-month learning journey, Smith said, beginning with recruiting students in their freshman and sophomore years of college.

“Then they will go through roughly three large learning modules and really get them ready for that speci c internship,” said Smith. Both scholars and corporate partners have requested more on-site time in their internships, and the ability to provide training before the summer will allow scholars to participate in a traditional 10-to-12-week summer internship with corporate part-

Included among over 30 corporate partners are money managers AllianceBernstein, Janus Henderson, Wellington Management and William Blair.

Over 70% of Greenwood Project alumni are currently working in

Investors commit $400 million toward energy transition in emerging markets

Investors including the Caisse de dépôt et placement du Québec and the C$128.6 billion ($97 billion) Ontario Municipal Employees Retirement System, Toronto, have committed to invest an initial $400 million to the emerging markets energy transition under the Emerging Markets Transition Debt initiative.

The debt strategy is managed by investment manager Ninety One, which had £128.6 billion ($164.2 billion) in assets under management as of June.

According to a July 29 news release, the strategy “looks to provide companies in emerging

BANG FOR THEIR BUCK

markets with commercial financing to make critical investments, including in

IEN develops benchmark for measuring investment impact

With various standards around environmental, social and governance factors, endowments and foundations may have dif culty assessing how much impact their investment are having and how that compares with their peers.

To address that, the Intentional Endowments Network has been developing a benchmark to help endowments and foundations with mission-based, sustainable and impact investing mandates see how they stack up.

The Endowment Impact Benchmark is focused on “celebrating progress” being made by institutions, said Georges Dyer, executive director of IEN. The organization designed it to be exible around how endowments “normally operate and do busi-

ness,” regardless of their size, their strategy for deploying capital and ESG metrics they may use, he added.

As a rst step, endowments answer a 32-question assessment focused on process and policy, with 21 of the questions based on data provided by the institutions.

IEN designed the assessment to align around frameworks that endowments may follow, such as the United Nations Principles for Responsible Investment and the Impact Management Project.

The impact veri cation provider BlueMark then scores the responses with a rating and provides feedback to the endowments on areas they can improve in. Institutions can score as high as “platinum” and as low as “bronze.”

low-emission infrastructure and in heavy emitting companies with a credible transition plan — helping

Institutions can score higher based on how “strong commitment to transparency” and how they are “following through on that,” Dyer noted.

IEN is seeking 15 endowments to participate in a second pilot program, and is accepting applications through the end of September.

Results will be published in early 2025.

The rst pilot program for the benchmark was held in 2023, and surveyed ve member institutions of IEN that Dyer said have been “active” around sustainable investing, including the University of California. The Oakland-headquartered, land-grant university system’s $20.7 billion endowment received a “gold” rating according to a report on the pilot’s results, which highlighted the institution’s Sustainable Investing Framework and DEI considerations in investments.

Endowments and foundations “have often wrestled with transparency to their stakeholders around

nancial services, said Smith. There are 200 project alumni before the summer of 2024, of whom about 75 have graduated, he said.

More information can be found on the organization’s website.

reduce carbon emissions and supporting the global energy transition.”

United States Secretary of the Treasury Janet Yellen and South African Finance Minister Enoch Godongwana recently praised efforts to pull institutional capital into emerging markets through the Emerging Markets Transition Debt initiative.

“For many of the investors involved, this initiative represents a significant step forward in expanding their investments in emerging markets. It shows that we are making tangible progress on our ambition to increase private capital mobilization for emerging markets, with hopefully much more progress ahead,” Yellen said at a G20 event in Brazil last month.

their investments,” Dyer said, so IEN sought to design a system that moves them toward “more transparency in a way that ts their constraints — in terms of how they’re governed and what information they can and can’t share.”

He added this benchmarking program can help endowments engage “in more meaningful ways” with their stakeholders, including students who may not “necessarily understand how endowments are managed (and) what their constraints are.” This comes as university students hold protests pertaining to how their institution invests amid the ongoing con ict between Israel and the Palestinian militant group Hamas.

From here, the organization intends on growing engagement with the system, which is also considering a re-evaluation process about every three years for previous participants to assess institutions that may have changed their practices.

CARYL ANNE FRANCIA

ners.

ROB KOZLOWSKI

A LEG UP: Through internships and study, students learn skills to succeed.

CARYL ANNE FRANCIA

‘TIPPING POINT’: James A. Kohlberg ACCOUNTABILITY

OTHER VIEWS HANS STOTER

Why the backlash? Sustainable investing

is simply a better approach to

investing

Responsible investment is under attack. As a responsible investor supporting the transition to sustainable economies, we strive to identify and back environmental, social and governance leaders that can protect and grow client portfolios. We have already seen signs that the global economy is starting to move to a more sustainable and equitable model over the next decade.

Still, some critics simply believe that anything ESG-related is so much greenwashing. Others argue that it is a distraction from the goal of delivering the best possible investment performance. Put differently, that investing in a responsible way limits the opportunity set and thus the potential for nancial returns.

This, in our view, goes to the heart of the backlash. The evidence to support this argument is, however, inconclusive at best.

So why does the backlash, in its various forms, persist?

Souring sentiment toward ESG can be traced back to 2022, when sustainable indexes were negatively impacted by a sectoral bias amid temporarily high energy prices. Oil companies and other energy stocks performed extremely well in the wake of Russia’s invasion of Ukraine, and handed skeptics the ammunition to argue that ESG was a fad whose time had passed.

The subsequent underperformance of the energy sector in 2023 should have blunted that argument, but markets have selective memories. ESG funds have consequently yet to shrug off the stigma of 2022, despite that year’s exceptional nature and the ensuing outperformance of ESG indexes.

We do not believe this situation will last. It makes little nancial sense to eschew an approach whose aim is to deliver superior investment returns alongside non- nancial outcomes, like mitigating climate change. But it may take several years and a deeper level of appreciation about the direction of travel at a corporate, governmental and regulatory level — ultimately the drivers of the economic case — for ESG to become as accepted as it should be.

If short-term relative performance challenges have proved a headwind for ESG, we should also acknowledge that confusion around the topic has, to some extent, helped fuel the backlash.

What ESG is not about is overzealous responsible investors seeking to achieve their sustainability goals using client money. What it is about in the rst place is having a framework to assess a business and its operating environment across a range of key risk factors. And the evidence shows that, in the medium to long term, businesses that are low on carbon, socially aware and display the best governance practices are likely to outperform their peers and help improve the risk pro le of portfolios.

Seen through this lens, we are convinced that there can’t be any robust active investment process without a solid ESG framework.

After all, when an investor is taking long-term views on companies, they must take into consideration all the risks; not just the business and market risks, but also those around potential litigation, changing consumer trends, and evolving societal attitudes and regulation toward sustainability. These are real risks, and they present real investment opportunities.

A key point here is that corporates are changing their business models themselves. Not only are they becoming more sustainable, but they are also expending signi cant time and resource on improving transparency across a range of issues. Most companies now produce a sustainability report because the way they do business is changing. We are not, as investors, selecting them because they are an “ESG” company, but because they are attractive nancial investments.

Equally, it is important to remember that corporates are not operating in a vacuum. We are in the midst of two epoch-de ning transitions: the technology transition and the energy transition. These will fuel seismic shifts in the way the world economy works, and they are increasingly core to how businesses operate. If an investor is not evaluating all the risks associated with these transitions, how can they be accurately assessing a company’s ability to deliver sustainable shareholder returns?

Arguably, this point has been lost in the commotion around ESG, yet there is no doubt that the different and evolving corporate strategies adopted by asset managers has done little to impart clarity. Approaches to RI vary from highly active and committed to hands-off, with the onus on the client to decide what to do or how to vote. Some groups are increasingly attempting to straddle both camps, depending on the client type or continent where they pitch.

This shifting spectrum has not, in some eyes, helped ESG maintain credibility when consistency is prized in a complicated area. The range of sustainable nance policies that have come into force in several geographies over recent years has further added to the complexity and confusion. It is evident that

more simplicity and comparability are needed in a landscape littered with different metrics, targets and de nitions.

But asset managers could be more transparent, too. Of course, they are free to choose how to engage with different policy frameworks as well as the various investor initiatives that seek to drive change through collective action. They can be more or less of a responsible investor. But they should be clearer about their choices and what approach to RI they offer and why, to allow asset owners and other investors to make informed decisions.

As an active asset manager committed to responsible investing, we would make several observations about the future.  First, investment strategies that align with industry efforts to reduce fossil fuel usage in society are simply economically rational. Companies making aggressive cuts to their greenhouse gas emissions have been shown to at least match or outperform their wider benchmarks . Corporate efforts to effect change do not have to come at the expense of shareholder returns.

Second, a huge amount of progress has already been made. Regulation, data, guidelines and benchmarks have evolved to help companies and asset managers make accurate disclosures and well-informed investment decisions. Asset managers can choose to ignore changing market frameworks. But disregarding the transition to net zero is equivalent to forfeiting the impact of the billions that governments are already spending to transform economies, support (or enforce) the decarbonization of high emitters and assist those companies providing solutions necessary to the transition.

Third, we should not pretend that the transition is going to be painless. There is a physical and social cost to it, and that creates problems for governments. The use of renewable energy is rising in many regions as the costs rapidly decline, but the transition will have implications that have not always been acknowledged. More honesty is required.

OTHER VIEWS CHRIS WALVOORD

The typical NAV loan looks something like this: A private equity sponsor looks at their portfolio of equity stakes in highly leveraged companies and says, “I want to spend some more money. None of our companies can afford to borrow any more capital and we have already called all of our LP commitments. How about if we post all the equity in the portfolio against a fund-level loan and then we can do all sorts of things with the money.”

This may be a slightly cynical description of net asset value loans, but this rapidly growing corner of the private credit market certainly warrants some in-depth analysis.   First, what motivates a sponsor to take out an NAV loan? They are typically employed by funds that are past their investment period and the GP is likely waiting for their cost cutting, levering up, and other “synergistic improvements” at the portfolio companies to start showing up in the nancial results.

The sponsors need to start working on an exit plan so that they can return capital to their LPs and pay themselves. Private equity is, after all, longer-term capital but, unlike public markets, it is not permanent capital. GPs need to sell their companies and move on in order to collect that carried interest.

But what happens when exits are dif cult? Perhaps a company is struggling to grow into their now much higher cost of debt. Or they need just one more bolt-on acquisition to achieve scale and turn a pro t. Or maybe the LPs are anxious for a return of capital so they can stick to their pacing plan, reinvest in the next vintage fund and not risk getting shut out of the private equity market forever.

These factors create demand for NAV loans when portfolio compa-

Stoter

CONTINUED FROM OPPOSITE PAGE

Finally, progress will take time. While many corporates are making climate commitments and devising and implementing credible plans to meet them, it is unrealistic to expect large investors to move at the same pace. Institutional asset owners cannot transform their overall investment portfolios to meet decarbonization commitments overnight. The practical realities of integration at that scale across asset classes should warrant patience given the challenges involved.

Will ESG still be facing the same backlash in ve years’ time?

We believe the answer is no. As policy prompts greater action and thus ever more investment in reducing carbon emissions, the economics of renewable energy will become increasingly compelling. It is these shifts that ESG is designed to capture to generate better investment performance over the long term. There will be

nies can’t be sold anywhere near where they are marked. While at a very high level these all seem like reasonable justi cations for adding leverage with a NAV loan, adding leverage increases risk, so investors need to dig into the details and think through the scenarios and possible downsides. If the bolt-on acquisition does not quite get that company to scale or they continue to struggle with their debt service coverage ratio after the capital infusion, what then?

Chris

Walvoord is an alternatives investor who was most recently the global head of liquid alternatives research and portfolio management at Aon. He is based in Chicago.

The sponsor will have to source capital from other companies in the portfolio to pay back the loan. This puts more pressure on the rest of the portfolio, the companies that did not get any of the initial loan proceeds. It could result in a debt spiral that sinks the whole fund.

Sponsors do work hard to add value to their portfolio companies, but they are also quite good at extracting value from those companies. The returns that private equity LPs have earned over the past decade bear this out, as well as the fortunes that the GPs have made.

Sponsors will extract value from every corner of the portfolio, one way or another, sometimes engaging in asset transfers, charging the companies for “services,” and other sorts of what is known as “investor on investor violence.”

If things go bad for a NAV loan, who is rst in line to get the value? When the sponsor says to the NAV lender “I can’t pay back that loan,

blips along the way. But many of the doubts expressed about ESG miss the point. It is not about advancing agendas or foregoing returns. In today’s world, sustainable investing is simply a better way of investing.

In a few years’ time ESG will be a redundant acronym. Assessing risk to a business, and therefore an investment, will automatically consider risks from climate change, environmental liabilities, social protection and the ongoing governance of how companies are managed. All of these factors, governed by regulation and market preferences, will constitute mainstream investment decision making. Sustainable investment returns depend on sustainable business models and that is just not about selling product but about positioning companies to prosper as the world becomes more able to quantify non- nancial risks.

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.

you can have the portfolio of equity stakes,” what do you imagine that portfolio will be worth? My guess is close to zero.

The Modigliani and Miller theorem tells us that leverage does not create value, it simply changes how the value is divided across stakeholders. We see this clearly when the proceeds of the NAV loan are used to make distributions to the LPs. The end result is that while the LPs do get some capital back, their remaining equity is much riskier due to the increased leverage. The payouts also increase several of the metrics that are commonly used to judge private equity performance such as multiple on invested capital (or MOIC) and IRR. Finally, the distributions can help get over any hurdle rate required to trigger carried interest payments to the GP.

One additional concern for the LPs is the cost of this NAV loan.

Private credit funds have a much higher cost of capital than the banks. If the private equity fund can’t generate a rate of return higher than the cost of the NAV loan with this incremental additional capital, then the loan

will be dilutive to the LPs' returns. The cost of the loan is certain, the return on the incremental capital is uncertain. If the LPs are satis ed with the existing risk-return proposition, then the NAV loan may not be desirable.

We need to ask questions about the lenders’ side of the equation as well. One common argument given by NAV lenders for the attractiveness of the strategy is that the loan-to-value ratios are very low — on the order of 15% to 25%.

But remember that the NAV loan is subordinate to any debt at the company level, so the ratio of this debt to the underlying assets is signi cantly worse. We also have some fairly strong evidence that current PE valuation numbers are at a minimum stale and likely well off the market. Remember that one of the factors driving the demand for these loans is the fact that exits are generally not available at current marks. So the V in our LTV calculation is much smaller than it would rst appear.

The other question worth thinking through is how are the loans repaid? The primary mechanism for generating cash to pay back principal is selling the equity stakes. In this sense the NAV lenders are really just taking on the same risk as the LPs — they get their money back when companies are sold. But the NAV lender has a capped upside with similar downside risk to the LPs.

All of this feels a bit like the

nancial engineering exercises we saw leading up to the great nancial crisis. There was a large increase in leverage on leverage and, as we learned later, the underlying credits were shaky and many collapsed. Both the subprime mortgage market and the CLOsquared transactions are prime examples. Investors failed to appreciate the common risk factors that could, and did impact all of the underlying loans in these “diversied” pools at the same time. The result was an ugly mess that took years to work out.

To be clear, I am not predicting that private markets are going to crash and bring down the nancial system.   And within a diversi ed portfolio, there is a place for well-researched private equity and private credit exposure that can earn a liquidity and complexity premium. But borrowing adds risk, especially at the fund level. Investors need to be aware of this added leverage and understand the risks they are taking. They need to convince themselves that the risk-return proposition is still attractive vs. what is available in public markets. And if something does not smell quite right, they need to either keep digging or walk away.

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.

Pension risk transfer activity

Total

Bond ETF innovation mostly steers clear of derivatives

Amid a surge in issuance of equity exchange-traded funds employing derivative-based opportunities and hedges, the xed-income ETF market has been relatively devoid of such offerings around rates and credit.

The paucity is not for lack of liquidity, particularly in listed and over-the-counter derivatives linked to U.S. Treasuries or the federal funds fate, but more likely in the collateral and leverage required to eke out noteworthy gains from markets that tend to move slowly — and then all at once.

Moreover, the fate of past exchange-traded products trying to exploit spread differentials and the yield curve may be the limiting factor to experimentation among the nearly 700 products and $1.7 trillion in assets under management in U.S.-listed xed-income products, said Elisabeth Kashner, vice president and director of global fund analytics at FactSet Research Systems.

Outside of broad-based bond index exposures — from Treasuries, governments, agencies and munis, to investment-grade corporates and high yield, as well as mortgage-backed securities, the rst novel xed-income offerings to take

hold among investors were target-maturity products. From BlackRock and Invesco, these ETFs are built with bonds all maturing at the same time, allowing investors to ladder diversi ed ETFs as they would individual securities.

These products paved the way for a variety of funds that hedge interest rate risk, target duration, or even invest in on-the-run Treasuries — the most recently issued Treasuries. But as the market lls once again with speculation on the depth and timing of changes to the federal funds rate — and, indeed, central bank action around the world — ETF investors have limited opportunities to speculate on rates in the ETF market.

“This may not be such a bad thing,” Kashner said.

Based on her analysis of recent ows and returns, “ETF investors have been quite terrible at using relatively simple tactical tools in the xed-income market,” Kashner said. For example, the iShares 20+ Year Treasury Bond ETF (TLT) “raked in billions in the past three years, despite losing about 11.4% per year during that time.”

Effective duration for TLT was 16.7 years on Aug. 2, according to BlackRock.

“None of this will stop asset managers from innovating and introduc-

ing new products into the market,” Kashner said. “Their mandate is to nd a winning business strategy. Investors' mandate is to grow their capital. It's great when the mandates overlap, and not so great when things don't go to plan.”

Making it work

Among those that have recently found that overlap, F/m Investments offers exposure to on-the-run Treasury bills, notes, and bonds, while making monthly dividend payments. Its US Treasury 3 Month Bill ETF has nearly $4 billion in assets two years after listing. And, over the same period, BondBloxx Investment Management has accumulated $2.3 billion across its eight target-duration Treasury ETFs.

“Having precise duration is a tool to manage risk in the current interest rate environment,” said Joanna Gallegos, co-founder of BondBloxx.

The Municipal Employees’ Retirement System of Michigan, for example, has utilized a handful of BondBloxx products to ne-tune positions in Treasuries, corporates and emerging-market debt, according to its most recent 13F ownership ling with the Securities and Exchange Commission.

“To make an ETF product targeting the yield-curve worthwhile, it would really have to be levered up

beyond a level that’s prudent for a listed open-end fund,” said Harley Bassman, managing partner at Simplify Asset Management. “An ETF using solely feds funds futures might need leverage as high as 40 to 1 to be interesting.”

Simplify, which manages $5.5 billion in ETF assets, has products that include “better beta” exposure to changes in credit and rate levels, as well as equity volatility, among other strategies. “ETF products should be reasonable and perform as advertised … without a trap door,” Bassman said.

Exchange-traded products designed speci cally for scenarios such as a steepening or attening of

the yield curve or the magnitude of in ation or de ation have not employed enough leverage to attract investors, according to Bassman, and have often been challenged by the timing of investor interest or market calls.

Speci cally, FactSet’s Kashner points to the rise and fall of the Quadratic Interest Rate Volatility & Ination Hedge ETF (IVOL), which was designed to target rising rates and in ation. “The ETF attracted billions in investment, only to dramatically underperform TIPS when in ation hit,” Kashner said.

The reality for xed-income ETFs may be that creative thinking trumps overthought products.

PIMCO'S cyclical outlook, published in April, for example, called on investors to be more mindful of diverging markets, particularly on duration and regional rate moves, precisely the scenario that trapped global investors in early August.

And should xed-income investors still want to be whipsawed by speculating on rates and the yield curve, PIMCO’s 25+ Year Zero Coupon U.S. Treasury Index ETF (ZROZ) goes far beyond BlackRock’s TLT by targeting U.S. Treasury principal STRIPS.

Its effective duration as of Aug. 2 was 27.1 years, according to PIMCO.

DELIVERING MULTI-FACETED BENEFITS

The defined contribution plan has gained prominence as a key benefit for attracting and retaining employees, which has led plan sponsors to reassess how they can optimize e ciently to provide strong retirement benefits for their workforce. Powered by the SECURE Act of 2019 that sought to boost retirement security for working Americans, the pooled employer plan — or PEP, a new type of multiple employer plan that has several unrelated employers and is managed by one pooled plan provider — has emerged to meet that objective.

“PEPs represent an extension of the existing DC outsourcing spectrum, enabling employers to outsource the plan sponsor role. This allows companies to focus on their core business while ensuring their employees receive high-quality retirement benefits managed by experts,” said Chris West, managing director, DC strategy leader and head of the U.S. LifeSight® PEP Pooled Employer Plan at WTW. “With DC plans on the rise globally and $3 trillion in pooled DC plans worldwide,1 the availability of PEPs is a significant step forward in the retirement landscape,” she added.

Because it’s a pooled employer plan, the first question that we get is, ‘Can I still design the plan features the way I want?’ The answer is, ‘Yes.’

- David Eisenreich

“The benefits of pooled retirement plan models appeal to many employers. However, access to these models has historically been limited,” said Deborah Rubin, vice president and managing director for pooled plan sales at Transamerica. “As Congress explored solutions to the growing retirement savings gap, broadening access to pooled models became an attractive way to expand coverage for participants while providing employers with many benefits that they seek.”

Valued benefit

HOW IT WORKS

PEPs can effectively address several challenges that employers are facing as they aim to strengthen their DC plans.

Plans also face regulatory uncertainty and complexity, all of which create added burdens. “Employers struggle to provide customized and comprehensive benefits because it takes a lot of work and comes with legal and compliance risks. This makes it harder for them to ensure better retirement outcomes for their employees,” Eisenreich said. He also noted that there are various cost management challenges, including plan administration, record keeping, compliance, fiduciary oversight, and fees for plan investments.

Engaging participants with plan communication and education is critical to retirement preparedness, but this too can be expensive, Eisenreich said. “Participants often don’t have time and feel ill-equipped to make informed decisions around retirement savings. Providing the required educational support to help and engage them can be costly and resource intensive for employers.”

Comparative advantages

“Employers are looking for a retirement solution that is simple, reduces their dayto-day fiduciary and administrative burden, and is cost e ective,” said Stanley Kim, director and pooled plan practice leader at Transamerica, which is a record keeper for single employer DC plans as well as multiple employer plans like PEPs, including the PEP o ered by WTW. For many plans, both small and large, that solution is to join a PEP as a participating employer, he said.

WHAT ARE THE BENEFITS OF PEPS ?

In the 2024 WTW Global Benefits Attitudes Survey, two-thirds of employees said their employer’s retirement plan is more important to them now than ever before. In fact, 55% said it is an important reason for choosing to remain with their employer.2 Even as DC plan sponsors recognize this heightened need for retirement security, they continue to face numerous challenges in delivering a robust retirement plan, said David Eisenreich, managing director and head of retirement, North America, at WTW. The good news is that they can consider an expanding range of DC solutions that now includes PEPs to solve many of these challenges.

Source: Transamerica

In addition to its collective buying power, which typically reduces overall plan costs for each participating employer, the PEP model provides several advantages over stand-alone plans. “A PEP allows DC plans to reduce their liability by outsourcing much of the fiduciary responsibility as well as audit responsibility, with a PEP itself subject to a single audit, which often saves the participating employers money,” Kim said.

The PEP model eases plans’ administrative burdens, said Rubin. “The PEP is structured specifically to do that. The service providers do a lot of the heavy lifting for the plan sponsor.”

• The PEP sponsor is known as the Pooled Plan Provider (PPP) and generally serves as the plan administrator and fiduciary

• “Adopting employers” elect to join the PEP

• These plans are defined contribution (DC) plans

• At any time, adopting employers are easily integrated into the plan hosted by the sponsor and tracked on the Transamerica platform

PEPs expand access to retirement plans for all workers by allowing employers from unrelated industries to join a pooled plan arrangement. Benefits to the adopting employers include increased administrative e ciencies, reduced fiduciary risk, and potential cost savings. ADOPTING

Employee communications is another specialized area that is managed by the pooled plan provider, or PPP, along with the record keeper. “As it pertains to employee engagement, participation and data, each participating employer in the PEP gets the data and services they need, as they would in a single employer plan. Plans don’t lose anything,” Rubin said. In fact, the PEP could provide enhanced communications, education and engagement tools that plan sponsors may not have the resources to provide in a single plan.

• Large plan filers benefit from reduced audit costs, which are distributed among the plan’s adopting employers

A more robust investment menu is another key reason that employers are turning to PEPs, said West. “They may not have access to a sophisticated fund lineup with the lowest fees. In a PEP, participating employers are able to take advantage of scale and can provide better risk-adjusted return potential to their employees, while also transferring their fiduciary risk and lowering fees.”

By joining the PEP, adopting employers can focus on running their business and meeting the needs of their employees. Benefits include:

Employers are looking for a retirement solution that is simple, reduces their dayto-day fi duciary and administrative burden, and is cost e ective.”

- Stanley Kim Transamerica

Dispelling myths

Several myths and misunderstandings about PEPs persist among plan sponsors. Many think PEPs are too new, appropriate only for small plans, or have a one-sizefits-all approach.

Eisenreich said of LifeSight, “Because it’s a pooled employer plan, the first question that we get is, ‘Can I still design the plan features the way I want?’ The answer is, ‘Yes.’ That question jumps out due to a misconception or lack of understanding” of PEPs.

As the PEP provider industry has grown, some plan sponsors may have evaluated some options that don’t, in fact, provide any flexibility in design, Kim said. It has led to the misconception that for all pooled plans, “the employer is restricted in plan design options.” The restrictions are not inherent to the structure, but rather they stem from the constraints of service providers, he said.

Employers should evaluate the specifics of each PEP, along with the track record and capabilities of all organizations involved in managing the PEP, including the record keeper, Kim advised. Transamerica, which has 20 years of experience in the pooled plan market, has technology specifically designed to support these types of plans.

What’s flexible

Plan sponsors who consider joining a PEP need to understand which aspects of the model are pooled and the features that are not, which in turn allow for some flexibility.

Largely the administrative or back-o ce functions are pooled. Eisenreich said, “If you have 10 single employer plans, that means 10 audits need to be done. If you put those same 10 employers into a PEP, things are no longer replicated 10 times — they’re done once.”

But the PEP model can also provide flexibility in some of the design and investment features that are unique and important to each specific employer. At WTW, “we’re not pooling design elements and our investment lineup uses an open architecture approach,” Eisenreich noted, which allows the participating employers to customize these features.

WTW’s LifeSight PEP combines flexibility with e ciency in its approach to overall 401(k) administration, West said. “It has flexibility in areas that materially impact the employer’s value proposition, such as eligibility, types of employer contributions, allocation formulas, automated features and investing.” In addition, the transition process from a single plan to WTW’s pooled plan is relatively seamless as well, she noted. “The flexibility of the LifeSight PEP allows employers to adopt it with little or no change from their current core plan design. We’re keeping what matters most to them and to their employees.”

UNDERSTANDING THE PEP STRUCTURE

An explanation of eligibility, features and plan sponsor responsibilities.

The SECURE Act in 2019 created pooled employer plans for 401(k) plans, and SECURE 2.0 in 2022 expanded the eligibility of PEPs to 403(b) plans o ered by non-profits and educational institutions. Smaller plans that are more resource constrained were the early adopters. Today, interest has widened to include DC plans of all sizes pursuing the PEP solution.

PEPs versus MEPs

For plan sponsors considering this model, it’s important to clarify how PEPs are di erent from traditional multiple employer plans, or MEPs, which require the participating employers to have some commonality in the same industry or business. “PEPs, unlike MEPs, don’t have a common nexus rule, making it a clear path forward for unrelated entities that can join and obtain the benefits that traditional MEPs provided,” said Rubin at Transamerica.

PEPs also avoid the burden of MEPs under the “one bad apple” rule, which penalizes all participating employers for the compliance failures of one. Instead, under a PEP, the participating employers are protected from the failures of any single employer in the plan. “Eliminating the bad apple rule opened up pooled plan options to unrelated employers without that added level of concern,” Rubin said.

PEPs are structurally distinct from MEPs too. They designate a pooled plan provider, or PPP, as the sponsor of the PEP with the individual plans referred to as participating employers. The PPP is the plan’s fiduciary and has oversight of investments, administrative duties and monitoring the other third-party providers. With MEPs, the plan sponsor is typically the industry association or professional organization of the participating employers.

“The PPP is the sponsor, the plan administrator, the named fiduciary, and it is the entity responsible for performing all the administrative duties. The PPP is also required to register with the Treasury and Department of Labor, said Transamerica’s Kim. Further, the PPP is responsible for hiring and monitoring all the PEP’s service providers.

Distinct from group plans

Five common PEP misconceptions

Kim pointed out that the administrative approach for PEPs is di erent from other aggregation programs, including group plan solutions, or GPS. These are unrelated

As

it pertains to employee engagement, participation and data, employers in a PEP get access to their analytics and annual reviews at the specific participating employer level.

- Deborah Rubin Transamerica

1.

PEPs are new and unproven

Pooled delivery of DC plans has been around in the U.S. for decades – recent legislation simply expands access to unrelated employers.

2. PEPs are only for small plans

While small plans may benefit the most from increased scale, PEPs can provide less effort, risk mitigation, improved participant outcomes and lower costs regardless of plan size.

3. 4.

PEPs don’t benefit employees

Lower fees can directly increase retirement balances for employees. In addition, employees may gain access to design features, innovative investments, an enhanced user experience, and more.

PEPs are one size fits all

Flexibility varies significantly from one PEP to another. LifeSight allows each employer to set the plan design that is right for them.

5.

PEPs are difficult to monitor

LifeSight offers a simple, transparent service model and fees. In addition, we provide periodic information to assist employers in their fiduciary monitoring role.

Source: WTW

CASE STUDY: THE LIFESIGHT PEP

How can a PEP deliver e ective operation and administration of the pooled model while also providing employers with a solution that improves retirement outcomes for their plan population? WTW’s LifeSight PEP leverages the firm’s deep experience and capabilities in administering global DC pooled plan solutions totaling over $30 billion in assets and covering more than 500,000 participants and 1,000 clients.3

Institutional focus

As Eisenreich said, “With LifeSight, we focused on maintaining flexibility in the areas that materially impact employers, namely the cost and the alignment to their total rewards approach. Where employers want control, we’re giving them control, and in others, we’re relieving them of burdensome tasks.” The LifeSight PEP provides plans of all sizes access to the institutional scale, features, oversight policies, and governance model used by the most sophisticated DC plans.

“The LifeSight PEP brings e ciency to 401(k) plan administration without requiring a one-size-fits-all approach,” added WTW’s West. Participating employers can determine their preferences for eligibility, types of employer contributions, allocation formulas, automated features and investing. But, if they so choose, they can access WTW’s recommended plan design that includes suggested employee deferral rates.

Transamerica’s Kim underscored the LifeSight PEPs unique approach to delivering flexibility. “This PEP is for an employer looking for all the same benefits of a single employer plan with the maximum allowance of fiduciary and administrative outsourcing. It is designed for the sophisticated plan sponsor that has complexity to their plan and doesn’t want to be put into a particular box.”

Governance is also critical in a pooled plan structure, given that employers are outsourcing so many fiduciary responsibilities. “A strong governance and compliance model is the foundation of the LifeSight PEP,” West said. “Our in-house structure ensures coordination and accountability, which reduces the risk of oversight gaps, and ensures consistent compliance across all of the required plan activities.” The LifeSight PEP has a dedicated compliance leader who closely tracks regulatory changes in coordination with WTW’s Research and Innovation Center.

Ease of transition is another key aspect when selecting a pooled plan. Eisenreich said, “Guiding employers through change is in our DNA. We routinely lead clients through transitions of DC plan, pension plan and health and benefit plan strategy, delivery and employee experience with ease and confidence.” West added, “Our approach makes moving to the LifeSight PEP straightforward. We coordinate directly with a plan sponsor’s existing vendors and payroll to lessen the burden on the plan sponsor.”

PEPs represent an extension of the existing DC outsourcing spectrum, enabling employers to outsource the plan sponsor role.

- Chris West WTW

entities that, for pricing reasons, share common service providers, including an administrator, record keeper or investment manager. However, each large plan filer in a GPS is required to have an audit performed, and each employer is responsible for filling out the DOL’s annual Form 5500. In a PEP, the PPP files a single Form 5500 and coordinates the PEP’s audit.

DC plan sponsors should evaluate all the di erent types of aggregation programs to understand their subtle di erences and comparative advantages — a service that Transamerica provides, he added. The PEP provides the highest level of fiduciary outsourcing among these programs.5

How to evaluate a PPP

When selecting a PEP, sponsors need to assess the PPP and the service providers involved, including their track records, reputations and capabilities.

WTW’s deep expertise across the DC

Employee experience and outcomes

The LifeSight PEP is designed to meet the needs of plan participants on several fronts, starting with WTW’s proprietary employee experience platform that delivers a modern, digital user experience. It is also designed to support employees when it comes to retirement readiness. “It is important that employees are engaged in a way that inspires them to use the tools and resources o ered to them to take appropriate actions,” Eisenreich said.

In addition, employers can use WTW’s analytics to evaluate employee behaviors and help improve participant outcomes. “The LifeSight PEP o ers quarterly interactive insights to identify areas of financial vulnerability. When you identify vulnerability, you can manage it,” he said. This continuous view of data and insights, likely exceeding what many sponsors get from their individual plans, is crucial. “Our ability to segment this data allows us to help plan sponsors identify areas of improvement and curate actions for the most e ective use of their time and budget.”

Investment structure

The LifeSight PEP’s investment structure utilizes custom (“white label”) core funds and custom target date funds, which allow WTW to integrate the top investment research insights where it can be most impactful to participant outcomes. The investment menu also has a range of investment options tailored to di ering risk appetites and retirement goals. “Individuals should have access to funds that really meet their individual risk tolerance and preference,” West said.

The investment menu is designed to meet the needs of the three main types of participant profiles: “do it for me,” “help me do it” and “do it myself.” The investment choices correspond to the di erent profiles: a target-date fund, which is the default option; a core lineup, including a managed account option (WTW’s solution is LifeSight Advice); and a brokerage window. The menu can also accommodate a company stock fund, if o ered by the employer.

Fees are kept low, in part because WTW is able to leverage its outsourced chief investment o cer, or OCIO, platform with $162 billion in global AUM.⁴ In fact, as West noted, WTW played a significant role in originating the DC industry’s first target-date fund.

With LifeSight, Eisenreich said WTW has continued its tradition of DC plan innovation, building on its own expertise and that of its partners. “Our solution includes investment advisory, fiduciary expertise, employee communications and engagement, defined contribution plan design, strategy and compliance. We’re operating the plan e ciently, e ectively and accurately.”

landscape has drawn sponsors to its LifeSight PEP, West said. “We’ve provided retirement consulting services for more than 140 years. The U.S. LifeSight PEP expands on our capabilities, supporting clients through administration, co-fiduciary services, plan design, data and analytics, investment advisory and delegated solution and vendor management.” WTW manages over $30 billion in assets of pooled DC plans globally, which includes pooled plans in the U.K. and Europe.6

For the LifeSight PEP, WTW turned to partners who had similar expertise in DC group plan solutions. It is “important to hold our providers and partners to high standards of quality. This is a major reason why we selected Transamerica” as record keeper, she said. In addition, Deloitte is the PEP’s auditor, State Street Bank and Trust serves as the trustee, and the investment menu leverages high-conviction third-party managers including BlackRock, PGIM and State Street Global Advisors, among others.

Plan sponsor duties

Though PEPs may be the most comprehensive DC outsourcing solution available today, the participating plan sponsors still maintain some responsibilities after joining a PEP, Kim said. This includes monitoring the PPP and assessing the appropriateness of fees. Each participating employer “has to monitor the 3(38) investment manager but not necessarily the individual investment lineup. Each plan also has a fiduciary responsibility to make sure the submission of payroll is timely and accurate.”

Nonetheless, compared with single employer plans, PEPs may o er a meaningful reduction in costs and managing fiduciary and administrative responsibilities, with

the potential for improved participant engagement and decision making. “For employers interested in o ering a retirement program that hands o responsibilities to professionals, that is where PEPs are incredibly attractive,” Kim said.

DELVING INTO THE SERVICE MODEL

Record keepers are key to meeting the needs of participating employers via a robust technology platform.

How are record keepers for a pooled employer plan able to replicate what a DC plan sponsor — and its plan participants — experience under a single employer plan? And further, how are record keepers pushing the needle to help drive positive retirement outcomes for participants?

Understanding the PEP structure

Source: WTW https://www.wtwco.com/en-us/solutions/services/pooled-employer-plan

These are key questions for plan sponsors when assessing the suitability of the PEP service model. “Record keepers provide similar functions in the PEP to what a participating employer would expect from them in a single employer plan,” said Transamerica’s Kim. But there can be significant di erences among record keepers on what they can deliver to participating employers in a PEP when it comes to the planning, design and flexibility. These are largely the result of di erences in technology.

“Our systems were developed and designed for pooled plan structures. It allows each participating employer to have the individual experience they would have expected in a single employer plan” when joining a pool, Transamerica’s Rubin said. For example, an individual plan participant sees only their own employer information when logging in to their account. Transamerica can also provide automatic rolled up reporting on all plan participants for each participating employer. Some record keeping platforms that were built for single employer plans would not necessarily have these requisite capabilities when it comes to pooled plans, she said.

At Transamerica, “our record keeping system provides expansive reporting and tracking of participant behavior on both an individual participating employer level, but also from an entire PEP level. That enables us to deploy targeted and customized communications to employees to encourage them to save and invest,” Kim said.

Employee education and communication are also a key consideration for participating sponsors. “How to engage with employees is top of mind for every record keeper and plan sponsor,” Rubin noted. “As it pertains to employee engagement, participation and data, employers in a PEP get access to their analytics and annual reviews at the specific participating employer level.”

Rubin emphasized that record keepers need to have distinct expertise and capabilities to support pooled plans. “You need individuals who have an understanding of the unique nature of pooled plans and the clients joining them. At Transamerica, we have specific communications managers that are assigned to pooled structures in order to engage with those clients and understand their specific needs.” The record keeper also leverages several technologies and tools to engage plan participants in the PEP via a range of channels and even custom targeted campaigns.

One focus of Transamerica’s engagement programs is to create “journeys” for employees to identify the next financial step or goal on their path to retirement. “We engage with people in ways that matter the most to them,” Rubin said.

WHAT’S NEXT?

PEPs could continue to evolve and grow, but employers need to learn more about them.

With under five years in existence, PEPs have already established themselves as a robust retirement plan solution. Although their original appeal was believed to be limited to small employers, both mid-sized and large plans are evaluating and adopting them as well. What does the future hold for this structure?

The DC industry is at the front end of an evolution toward even greater adoption of PEPs. “We are going to see technological advancements, smart use of data and insights, and economies of scale that will continue to expand the comparative advantage of PEPs over most single-employer plans,” WTW’s Eisenreich said.

Another area providers are currently evaluating is the introduction of retirement income solutions within PEPs, including annuities, managed payout funds or other options.

Despite the growth in PEPs, Eisenreich argued that support and advocacy for the merits of pooled platforms from industry and other professional associations is warranted. Several misconceptions around PEPs concerning complexity, loss of control and ability to customize are still widespread. “There is an information gap and lack of understanding. Better knowledge among employers about PEPs’ benefits and features is needed,” he said.

Lack of knowledge about PEPs is also first on her list of barriers yet to be tackled, said Rubin at Transamerica. “Sponsors don’t know how they work, nor their benefits.” This holds true of some consultants and advisers as well. Another barrier is the fear of loss of control in a PEP, which is a mistaken perception. “It comes back to learning and education.”

Also, many plan sponsors assume that all PEPs are the same. They are not, Rubin said. “Like any retirement program, there are nuances, and sponsors need to find the right pooled plan for them.” It involves conducting thorough due diligence on the available PEPs, the PPP and the partnering service providers.

“There is momentum in this space, with a tremendous number of drivers” behind it, Rubin said. “When PEPs are positioned correctly, and when employers understand the value and benefits of these programs for their company and their employees, they will often choose these plans.”

Sponsored by

ARTIFICIAL INTELLIGENCE

Generative arti cial intelligence and advances in machine learning are making an impact across equities and xed-income investing.

Fixed-income investors are dealing with an enormous universe of millions of securities globally, said Bernd Wuebben, director for systematic investing and quantitative research at AllianceBernstein, where he oversees the quantitative research group for xed income.

“One ought to be able to somehow come up with a quantitative approach that tells you, ‘OK, given the characteristics of this bond, such as its maturity or its age, how long has it been outstanding, or the credit rating of the underlying issuer, what is the fair spread that I ought to be able to ask for, or the bond should be trading at?’” he said. “And when you dive into the analytical details of this, this becomes very quickly a complex analytical problem that can really very effectively be solved using machine learning methods.”

“When it comes to xed income, it's just so many more securities,” he said, using the comparison to equities where an investor may only be focused on 1,000 names if they are focused on the Russell 1000 index, for example.

Data going back decades is also needed and investors are focused globally on emerging markets, corporate sovereigns and investment-grade bonds, he added.

“And then it took a while for us all (as an industry) to build up the necessary infrastructure to collect … even mundane information, such as analytics for all the constituents of all these different benchmarks and have that readily available,” Wuebben said.

Many xed-income investors focus efforts on trying to determine macro factors including yields, spreads and Federal Reserve policy. Machine learning can help create better factors, Wuebben said.

Many datasets that investors, like hedge funds, use have been geared toward stock selection, said Andrew Chin, the recently named rst-ever chief arti cial intelligence of cer at AllianceBernstein. Chin sees an opportunity for xed income “to look at datasets that may not be as easy accessible, stitching together a variety of scrapped data to put together information about xed-income securities; munis (municipal bonds), I think, is a perfect example,” he said.

Quantitative methods coming to the fore in xed income is an ongoing process and machine learning and AI will play “ever-increasing” roles, Wuebben predicted. AB managed $294 billion in xed income as of June 30.

Chin noted that using AI to summarize documents and calls and extract key metrics from corporate lings allows AB's analysts to be a lot more ef cient and effective.

And machine learning factors that work in the equity domain can also carry over to xed income, Wuebben said, pointing to building factors from sentiment analysis.

“Factors that allow us to make statements about … the relative attractiveness of issuers. So that's a factor you nd in equities, but you would also nd that in, say, corporate

AI is changing the game for bond and equity managers

Machine learning can help whittle down the overwhelming number of fixedincome options and parse low signal-to-noise ratios

bond investing,” he said.

Chin said jokingly that many AI tools, such as classifying humans vs. cats, are dealing with easier, high probability problems. Asset managers must gure out how tools can work for them.

“Our industry is very different … so these tools have to be adapted to see how they work with low signalto-noise ratio problems, and I think we're just at the start of that, and so I think that will take time,” he said.

Direct impact on equities

“Quants have been using forms of AI for decades,” said Stacie L. Mintz, managing director and head of quantitative equity for PGIM Quantitative Solutions, pointing to de nitions that encompass regression models.

Natural language processing — machine learning technology that gives computers the ability to interpret, manipulate and comprehend human language — is an area of AI that PGIM has “strongly” embraced and used for many years now, she said. Mintz said it’s a “very valuable tool and directly has impacted and improved our models and the ability to get beyond just basic nancial data of companies.”

Over the last decade, tools and computing power advanced, closing the information gap. Mintz pointed

to information that was previously restricted to fundamental analysts talking directly to companies or physically reading items that quantitative models could not read. And non-quants have realized the value of these tools.

“I feel like everybody is a little bit of a quant now because it’s kind of hard not to be with all the information out there you need to digest. So, I think that the equity market has come a long way,” she said.

PGIM recently hired a natural

By Lydia To mki w

language machine learning expert allowing the team to go even deeper, Mintz added.

“I think quants …are a little bit ahead of the game with a lot of this, mainly because we have the staff, we have the talent who can evaluate new techniques, new sources of data. This is what we’ve done always,” she said.

Stock selection is a “really complicated” question with so much information out there and a huge signalto-noise ratio, Mintz said, adding

‘I feel like everybody is a little bit of a quant now because it’s kind of hard not to be with all the information out there you need to digest.’

that it’s important that “we have signals in our stock selection model that are based in fundamentals and that we understand.”

“If AI nds some interesting signal and it worked in the past, if you don't understand what it is or what the foundation of it is, we wouldn't be comfortable using that in the future because, you know, past performance does not guarantee future results,” she said. “So, I think there is a limit there. I think humans are going to really be the ones that need to determine whether whatever has worked in the past can really be relied on to work in the future.”

Human assessments are still critical, Mintz said, offering the example of the COVID-19 pandemic as a moment in time where investors realized it was unlike something they had ever seen before.

And Mintz sees applications that will support the investment business. She pointed to exploring using AI for automating to some degree responses to requests for proposals, portfolio compliance monitoring, client communications and summarizing information.

“It’s about improving ef ciency and increasing productivity of the team we have by really automating some of these more mundane tasks — important but mundane,” she said.

Securing power sources vital to fueling data center, AI infrastructure investing

Electrical demand by hungry data centers could double by 2026

The boom in generative arti cial intelligence is fueling investments around data centers and infrastructure but also raising questions about how much power will be needed.

The investment amount needed to sustain the growth in AI will be enormous. Blackstone Chairman and CEO Stephen A. Schwarzman recently estimated that in the U.S. alone, over $1 trillion in capital expenditures will be needed to build and facilitate new data centers over the next ve years.

Through the end of July, $33.7 billion was invested globally in data centers, according to an analysis from law rm Linklaters.

Large deals are helping drive AI growth. In May, CoreWeave, a specialized provider of critical cloud infrastructure, or AI hyperscaler, secured $7.5 billion in debt nancing led by Blackstone and Magnetar Capital along with Coatue Management, Carlyle Group, C$434 billion ($318 billion) pension fund manager Caisse de Dépôt et Placement du Québec, DigitalBridge Credit and others.

In June, Apollo Global Management and af liates agreed to acquire a 49% equity interest for $11 billion in a joint venture related to U.S. chipmaker Intel’s Fab 34 high-volume manufacturing facility in Ireland.

The power challenge

The amount of power needed to fuel the AI boom is immense. The International Energy Agency estimated in a 2024 report that electricity consumption from data centers, AI and cryptocurrency could double by 2026. Data centers globally consumed approximately 460 terawatt-hours in 2022 and that could hit 1,000 TWh in 2026, with the report noting “demand is roughly equivalent to the electricity consumption of Japan.”

DigitalBridge, the $80 billion global digital infrastructure rm, has been investing in data centers since 2016, said Kevin Smithen, chief commercial and strategy of cer. A few years ago, a hyperscale technology campus would be around 50 megawatts with an initial customer deploying 20 to 30 megawatts. Today, standard AI data center campuses are using at least 250 megawatts, he said.

“You're going to need a number of these campuses across North America for each large AI customer. So, the power density that is required for these new facilities is quite extensive,” he said, adding that DigitalBridge has prioritized securing power to sustain sector growth, often through renewables. He added, “Those that are coming

into the space that have not secured that power today are going to have to either build it (the energy infrastructure) or wait.”

DigitalBridge sees a natural adjacency to providing power to data centers and is considering as a strategy partnerships to provide power to data centers, with an eye to renewables, Smithen said.

The No. 1 challenge with data centers is accessing power, said Stephen Dowd, CIO for private infrastructure strategies at CBRE Investment Management. He’s seen a similar power growth in recent years with data centers going from the range of 30 to 50 megawatts to now being built for 100 to 200 megawatts.

“Then a subsidiary challenge to that is, what kind of power are you accessing?” he said, adding, “there’s still a lot of pressure” around investors asking, “can you make that power clean power?”

Dowd said that is “a tough nut to crack,” giving the example that big solar farms may not be located near data centers, which tend to be closer to population centers.

A recent CBRE report on data centers found they currently account for 2.5% of U.S. electricity consumption, and in northern Virginia, where almost half of the country’s data center inventory is found, they account for almost 20% of electricity consumption. The low cost of energy on a relative basis and state tax incentives for data centers make the area attractive.

One of those northern Virginia facilities is Corscale’s Gainesville Crossing, a 130-acre hyperscale data center campus. Development began in 2022 and construction has already begun on the second building on the campus. When fully developed, the campus will be over 2.3 million square feet with 326 megawatts of available power. Corscale is a data

Data driving power needs

center development company.

Nic Bustamante, the chief technology of cer for Af nius Capital af liate Corscale, said the facility was built so that it won’t become obsolete anytime soon.

“We make it modular,” he said, describing how the building’s shell is meant to be there for the long term but the power and cooling systems can be unbolted and removed as new technology is developed.

Carrington Brown, senior managing director for development at Afnius who oversees data center investments, thinks the projected forecasts for the AI marketplace are wrong. Af nius manages $8 billion in a data center portfolio.

“I think the growth we will see in the next four to ve years will exceed, frankly, every report that I’ve read,” he said. “The only thing that will stop that is the supply of energy.”

Brown said there will be need for new forms of power generation, including nuclear as a possibility.

Bustamante, who has worked in the data center sector since the late 1990s, said what is happening now with AI is “mind boggling. The growth rate in the data center sector is insane,” he said.

Mohammed Al-Sowaidi, CIO for the Americas region at the Qatar Investment Authority, said at the Bloomberg Invest conference in New York in June that the QIA decided AI was a long-term theme they needed to spend time on, and several years ago they started “investing heavily in things like data centers” and investing around infrastructure that will fuel AI.

Al-Sowaidi also gave the example of investing in a medical service business, Radiology Partners, that is using AI to make radiology assessments.

“In addition to nding new hardcore AI, we’re looking into other applications that could be empowered by opportunities or businesses that can be transformed with an element of AI,” he said.

Overall, it’s still early days for institutional investors and the next several years will be an evolution, said Jamshid Ehsani, a partner and head of global principal structured nance at Apollo Global Management and chairman of the ACRA group of insurance companies. But with trillions of dollars in investments coming over the next decade, it’s an area allocators “can’t ignore,” he added.

“In my opinion, as people start to better understand the whole ecosystem, what AI does, and how we are evolving the technology, be it on the compute semiconductor or memory semiconductor, or the way we are bringing the whole ecosystem together, I think people's interest is going to increase, and you will have an allocation to this,” Ehsani said. Understanding regional differences is also key. “You need to look at it from the perspective of the U.S. and the perspective of Europe. You need to have two separate strategies,” he said, pointing to data privacy regulations.

Investors are increasingly seeing AI and the digital ecosystem “as its own asset class, and some of the delineations between private equity, real estate and infrastructure are breaking down, and people are looking for ways to play these themes,” said DigitalBridge’s Smithen.

'Long-term

play'

The AI boom has been compared to the internet boom of the late 1990s, and it remains unclear which companies will come out on top.

“I think one of the advantages of infrastructure is we don’t know what uses will succeed and where,” CBRE’s Dowd said.

Dowd, who has invested in infrastructure for over 30 years, said data centers didn’t register at the beginning of his career and didn’t become viewed as part of infrastructure until it become more established with use cases.

Amid all the hype around AI, Ehsani cautioned investors need to be wary of overbuilding.

“It's extremely dif cult to know ve years from now where we are going to be in AI. There's one thing that is certain, whoever resolves the issue of power … power capacity will be dominating this sector,” Ehsani said.

He added, “This is not just a shortterm play, this is a long-term play, and you have to be measured. It's not a sprint, it's a marathon.”

DigitalBridge’s Smithen thinks over the next ve to 10 years, the AI boom will be revolutionary.

“The analogy is that there are always ts and starts with any technology cycle. But we do think this one is revolutionary, but it may play out after this early, early adoption phase … it may not always be just up and to the right, just persistent growth. There could be ebbs and ows temporarily, and then a reacceleration,” he said.

Consumers will also play a big role, Af nius’ Brown argued.

“The supply and demand fundamentals that we're seeing in the sector is unlike anything that I've ever seen, the demand that we're seeing from the users is really insatiable,” Brown said.

ESG investors seeking a responsible solution to the conundrum AI raises

y B CARYL ANNE FRANCIA

For institutional investors that consider ESG issues in their portfolios, arti cial intelligence is becoming a resource to advance the sustainable landscape. But the application of AI is also growing as a governance issue.

Institutions are betting on investment projects that can advance energy transition and companies that can enhance the development of AI. Some — including the National Community Investment Fund — are even developing AI tools to advance ESG research. Receiving support from banks, nancial regulators plus endowments and foundations — including the Ford Foundation and the W.K. Kellogg Foundation — the $229 million nonpro t private equity fund invests in minority-owned banks, credit unions and tax credits with the mission to bring capital to low-income communities.

NCIF has been building an AI tool starting this year to measure the impact of its work and other community development nancial institutions like itself.

“The idea there is ‘how can we use AI to facilitate (or) to democratize data and analytics?’” said Saurabh Narain, CEO and president of NCIF. “There’s a lot of data out there that is not connected in the form of relational databases, and hence not used most effectively. AI and natural language programming can actually help in using the data to catalyze capital into underserved communities.”

But some institutions say they want to assess so-called responsible AI — how they use AI themselves or how the companies in their portfolio holdings use the technology. After all, generative AI is still in its early days, investment professionals said. For those institutional shareholders who own companies that are using AI — or even playing a role in AI’s development — to boost profits, they want more transparency.

“It’s important that responsible investors like us get ahead of the issue to say, ‘Hey look, we want to make sure you’re doing this the right way from the beginning instead of managing litigation or regulatory uncertainty further down the line after products are more developed,’” said Marian Macindoe.

At Parnassus Investments, Macindoe serves as managing director of sustainable investment strategy. As do other investors, the $49.8 billion investment manager doesn’t see AI — or the excitement around it — leaving anytime soon.

“We’re not interested in putting the brakes on the development of AI or trying to stymie its production, but rather to make sure that companies are thinking about the long-term impacts on stakeholders (and) start thinking about this stuff,” Macindoe added. “We know this is going to drive innovation. We know it’s going to deliver returns for investors, and we know that it’s highly likely going

to make work better as well.”

Assessing responsible AI use

Views on AI have evolved over Pensions & Investments’ coverage of institutional use of technology. Back in 2021, adoption of AI among institutional investors was low, said Thomas Kim, then-CEO of thenancial technology software provider Enfusion.

Now, the California State Teachers’ Retirement System, West Sacramento, plans on exploring AI in its 2025 scal year. While it’s still doing research, the $337.9 billion public pension fund will consider what role AI will play in its innovation and sustainability goals, according to a presentation for its July 24 offsite meeting.

Other investment professionals have also been wrestling with how generative AI is being used responsibly, not only in their investment practices but in their holdings.

During the 2024 proxy season, AI-related proposals were led by the trade union center AFL-CIO and activist investor Arjuna Capital at names like Apple and Meta Platforms.

But shareholders have also been examining AI use beyond the technology sector, especially at companies using AI to innovate in their practices, said Beth Williamson, vice president, director of sustainable equities research and associate portfolio manager at Calamos Investments, which had $38.2 billion in assets under management as of June 30.

For instance, Deere & Co. has been investing in and integrating AI into its farm equipment to help farmers increase their yield, reduce insecticide use and become more ef cient.

“That’s an application that is huge, especially if we’re going to go into the sustainable investing space,” she noted. “Here’s a name that you never really think of in the AI discussion, but as investors, we’re looking beyond the Magni cent Seven (and) the IT names to nd these opportunities.”

On that end, AI-related proposals were led by the $270.5 billion New York City Retirement Systems as well as AFL-CIO at media companies including as Net ix and Warner Bros. Discovery.

These proposals sought the establishment of board committees to oversee AI and reports on the use of the technology, or more speci cally, how corporations spread misinformation and disinformation created by generative AI.

Parnassus led a proxy proposal at Verisk Analytics that asked the insurance data analytics provider for governance information in regard to decision making, particularly around discriminatory impacts on rural populations.

“It’s really important that the algorithms aren’t making decisions that worsen, create disparity or introduce discrimination when you’re

looking at data — sometimes nontraditional data — to make sure insurance decision making around claims processing, underwriting or pricing,” Macindoe said.

Parnassus withdrew the proposal after the company agreed to release that information by the end of the year, she noted.

Overall, proposals on AI received low shareholder support, with one submitted by AFL-CIO asking Amazon.com to form an additional board committee to oversee the technology receiving 83.3% votes against it, including from CalSTRS. But the proposal at Net ix, which asked for AI ethical guidelines, did receive a strong 43.2% support, making it one of the top 10 investor-supported proposals during the season.

Still, with this ESG proxy trend expected to continue, Calamos’ Williamson said that “it’s important that we go back to board and executive oversight for their leadership because you can have a policy … but if the company is not living that truth,

then it’s just word salad.”

“That’s where investors are going,” she added. “What are companies doing to evaluate, or what are companies doing to improve their corporate governance structure with a focus on AI safety and ethics … How many of the independent directors are there that have this AI expertise?”

Investors also worry about deepfakes, which are “deliberately used to deceive, distract (or) defame,” Macindoe said.

States such as California and New York have introduced laws on the use of AI, particularly in regard to their in uence on political elections. Laws may imply penalties, but whether jail time or nancial fees will discourage unlawful behavior is in question, said Macindoe.

Another concern is around “hallucinations,” or when AI gives inaccurate answers or misinformation.

“We as investors cannot afford to have two plus two equal ve ever,” NCIF’s Narain said. “Portfolio ana-

lytics and asset allocation have to be accurate.”NCIF’s AI tool doesn’t provide investing advice, but it can inform decisions, Narain noted.

Through machine learning, access to data and analytics can be democratized for nontechnical “people to scrutinize,” he noted. “I don’t think the human mind is going away, not for a long time. The human mind has to be able to get that information and make an analysis out of that.”

Institutional use cases

Industry professionals told P&I that AI can parse through large volumes of nancial data, including a company’s regulatory lings, corporate calls and nancial news. The technology also has room to innovate in the ESG space, said Gabe Rissman.

As an undergraduate student studying data science at Yale University, he led and engaged in shareholder activism through the Dwight Hall Socially Responsible Investment Fund. The student-run fund currently manages $200,000 in assets on behalf of the university’s investment of ce.

Today, Rissman is the co-founder and president of YourStake, a wealth management data platform with an emphasis on values-based investing. His team integrated generative AI into their service after realizing in 2023 the technology’s capabilities corresponded with increasing client demand.

For sustainable data speci cally, AI can sift through sustainability reports to pull information on water consumption or management diversity, he said. YourStake’s AI tool allows users to upload a portfolio and share what values they care about, such as water protection or human traf cking. The AI tool can tell the investor where its portfolio is matching values or lacking.

Among use cases at asset management rms, Rothko Investment Strategies offers bespoke ESG investment solutions for its emerging and international equities funds.

The independent unit of the $49 billion Mondrian Investment Partners uses large language models to extract data from “vast amounts of text information to drive a deeper understanding about controversies in the ESG space,” said Daniel

LONG-TERM IMPACTS: Parnassus Investments’ Marian Macindoe

Philps, head of Rothko.

Additionally, Man Numeric has been using ChatGPT-based technology in climate modeling for physical risks in its portfolios.

AI has helped with reading company reports and thinking of actions it can take to mitigate climate change-related damages in its portfolio with less staff involved, said Matt Goldklang, climate scientist at the quantitative equity subsidiary of $178.2 billion Man Group. The technology is “really just becoming a very helpful assistant,” he told an April 17 panel at the BloombergNEF Summit in New York.

NCIF’s Narain said the nonpro t’s AI tool was created out of the need for data and measurement in the context of the Greenhouse Gas Reduction Fund, a $27 billion program launched by the U.S. Environmental Protection Agency to mobilize capital to projects meant to curtail the effects of climate change.

Responding to questions in plain English, the platform has the ability to run trend analyses of demographics in a speci c county or the pollution in a neighborhood.

From there, an investment professional can do asset allocation and scenario analysis. Using the example of a $50 million portfolio that invests in low-income neighborhoods focused on whole energy-ef cient technologies, NCIF’s tool can solve for the impact of the technologies, the number of jobs that could be created, the amount of carbon dioxide emitted — or the market implications if more capital was allocated to the portfolio.

The nal part of the process — which the nonpro t is still developing — measures the overall impact of the decision, or veri es it. Narain has showcased the tool to community development nancial institutions, nancial advisers, asset owners and managers — and even the EPA.

AI is going to be here for the long term, and embracing the technology will move the needle further, he added.

“Might as well,” Narain said. “I would love to convene a group of people who will talk about it and say which pain points can be useful. More than anything else, you might think about this as a call to action.”

Hedge AI

CONTINUED FROM PAGE 1

investments and ultimately the returns of the fund,” said Alyse Egol, a principal at Korn Ferry and member of the recruiter’s global technology of cers practice.

AI roles vary across the industry from rms looking to upgrade technology and create platforms that AI tools can be built off to hiring chief technology of cers, chief information of cers and heads of AI.

“There’s a whole amalgamation of different titles that are out there,” she said.

‘Not just the quants’

Gary Collier, chief technology ofcer at $178.2 billion Man Group, likes to think about technology through concentric circles with AI as the broadest circle representing anything that can mimic human intelligence, then on to machine learning, deep learning and other subcategories including large language models.

While Man Group has been working on AI for over a decade, Collier said the last two years have brought changes.

“What has made the last year or two noticeably different is it’s not just the quant business with deep interest in generative AI … there is an enormous amount of interest from discretionary businesses,” he said, adding that other areas including operations and legal are also interested in the tools. “It’s not just the quants at the leading edge of technology this time.”

Man Group employs approximately 500 people in technology roles, and technology teams focused on AI and machine learning sat in the quant space.

When Robyn Grew took the helm as the rm’s CEO last year, a dedicated machine learning technology team that cuts across divisions was created and Collier stepped into the new CTO role while Tim Mace serves as the head of data and machine learning.

They’ve worked to build out Man GPT, the rm’s version of ChatGPT, an interface anyone at the rm can use. And an enablement team of engineers works to look at use cases and experiments with teams across the business, he added.

“there’s a large focus on these general purpose, large language models and what they can actually do for us.”

Balyasny had a natural language understanding team for six years. As ChatGPT came on to the scene, the rm got a privately hosted version of the model and immediately ran a hackathon last year to see different use capabilities, Flanagan said. Since then, the rm has built its own ChatGPT-like system.

Flanagan and others saw an opportunity to form a centralized team to work across investment and business functions and the applied AI team was created about nine months ago. The team has 14 members, with an even split between researchers and engineers, and is focused on building tools and platforms and educating people, including running more hackathons and trainings.

“We’re really focused on helping empower everybody in the rm to leverage AI in their everyday work,” he said. “That’s the mission of our team.”

FOCUS ON FIRMWIDE EMPOWERMENT:

Balyasny’s Charlie Flanagan

Collier points to use cases including using chatbots to talk with a wide array of data and documents, foreign language translations for documents such as Japanese to English and coding co-pilots that suggest lines of code. Collier said they’ve seen approximately 20% of suggested co-pilot lines of code get used.

“We are talking about co-pilots, augmentation, not sure anyone is using the term autopilot … it’s very much human augmentation, that’s where I see the edge,” he said.

From 2 days to 30 minutes

Charlie Flanagan, Balyasny’s head of applied AI, said there’s been an evolution over the last 15 months, showing both the opportunities and limitations with new generative AI tools.

“AI ML (machine learning) as a term has evolved,” he said, adding

And Flanagan argued now is the moment for everyone, experts included, to explore new methodologies and use cases. Balyasny has over 1,000 people on an internal chat sharing use cases, papers and tools, he added.

Flanagan pointed to several use cases, including one that is saving Chris Pulman, head of macro research and chief economist for the macro team at Balyasny, days of work. Previously, Pulman would spend two days a month putting together a central bank preview report to send to investment teams.

With help from the applied AI team, Pulman wrote code and has generative AI tools go through a range of sources from speeches of bank ofcials to the rm’s own proprietary views and extract relevant information and then put together a report that now only takes 30 minutes.

AI is also helping investing teams ask better questions, with the applied AI team working with investment teams to create AI-generated reports. Flanagan said in one case, the system suggested an analyst ask about GLP-1 drugs, gym memberships and related spending and this helped shape an investment strategy.

‘Custom problems’

When AQR’s head of machine learning, Bryan Kelly, thinks about AI, he is focused on portfolio research and views it as “very heavily parameterized prediction models.”

“Organizationally, the way we think about AI is these are tools that are general purpose tools. They can be valuable for a lot of our portfolio research processes,” he said.

But asset management faces a lot of “custom problems that we have to solve, and that these are not problems that can be solved with off-theshelf methods, typically. So we need to have capabilities to solve these problems ourselves, and that’s what the machine learning team focuses on,” he said.

AQR formed its machine learning team in early 2019 and a big area of focus has been using machine learning to extract information from textual data sources, Kelly said. That along with pre-trained language models have become “table stakes.”

But Kelly added that training custom language models for asset management is key.

“That last mile of the portfolio construction problem using large language models or other preexisting AI, is where all the nance expertise needs to come in. That’s where the differentiation is going to happen,” he said.

Kelly has also been spending time exploring the theoretical behaviors of AI models, which he said can save an enormous amount of resources and guide how to structure models.

Needed skills

Korn Ferry’s Egol expects that in a few years, AI skill sets will be part of an individual’s experiences vs. a stand-alone function. “It’s going to be so intrinsic in what a quant does, or what the head of data or technology does, you don’t really want to kind of keep it as a stand-alone,” she predicted.

Salaries for heads of AI run the gamut from $550,000 to $750,000 to packages that hit $1 million and up, Egol said. With the expenses involved, rms are having to decide whether to bring talent in-house — and if so, where to place them and how to support them — or outsource aspects of AI.

Man Group’s Collier said hiring bright people who are passionate about technology is still key. And he advises people who want to go into nance to learn the programming

language Python.

He scoffs at predictions that software engineers will not be necessary because of generative AI.

AQR’s Kelly advises that students should “develop a balanced expertise between technical machine learning, statistical skills and economic expertise, grounding in theoretical economics, theoreticalnance. These two together are the ideal combination for success as a quantitative researcher in the asset management industry,” he said.

Kelly added that “there are surprisingly few people” who have both technical and economic skills at “a high degree of sophistication” and that the combination is “the homerun recipe for being a successful quantitative researcher.”

Kelly expects there will be “a ramp up” in the industry in expertise on the machine learning side, but “it’s going to atten out in the nottoo-distant future.”

Balyasny’s Flanagan said people who can adapt are critical and everyone needs to be learning some elements of AI, and he encourages everyone to take an engineering and coding class, especially Python. “I don’t think that engineering goes away. I just think that the most tedious parts probably get a little bit easier,” he said.

Flanagan said he sees AI tools as replacing tasks, especially “the most monotonous or the most frustrating in a lot of cases,” but not replacing jobs.

A revolutionary moment?

Man’s Collier said a view may be emerging that the peak of initial hype cycle around generative AI has passed and that some people may be disappointed that there is no “killer application.”

He argues that is the wrong way to look at it since generative AI will be broad and incrementally additive to many parts of an organization.

“The technology is very additive in a lot of different places as opposed to a single wow, killer knockout app,” he said, adding he expects it to become “table stakes.”

Balyasny’s Flanagan thinks the current moment in time is a “platform shift” akin to the internet in the late 1990s and the introduction of the Apple iPhone.

“I do think this moment in time, we’ll look back on and say that that was the moment that things changed,” he said.

AIDING PORTFOLIO RESEARCH: AQR’s Bryan Kelly said the rm formed its machine learning team in 2019.

FROM PAGE 1

not have exposure to, including gold. However, a spokesperson for GPIF con rmed to P&I in August that the fund was not looking to incorporate gold at this time.

“Pension funds are looking more seriously at gold than they have done in recent years, and this relates to ongoing concerns about in ation,” said John Reade, chief market strategist and head of research at the gold council, an international trade association. “The WGC has been diligently reaching out to pension funds to make the case for gold, and we’ve had some success, but we stay busy at what we’re doing on that front.”

In Reade’s experience, some of the continental European pension funds, particularly Swiss institutional investors, have had a longer-standing association with gold ownership than in the U.K. and in the U.S. He sees “a certain irony” to Swiss pension funds being the most amenable to investing in gold because in ation in Switzerland has been low compared with other Western nations since the COVID-19 pandemic.

For example, the 40.5 billion Swiss francs ($44.7 billion) Swiss Federal Pension Fund PUBLICA, Bern, has an allocation to precious metals, including gold and silver, as a diversier for its portfolio, according to a news release accompanying its 2023 annual report. That part of the portfolio, which is managed internally, amounts to 1.1 billion Swiss francs of assets, and, according to the annual report itself, returned almost 5% in 2023. Of the total, about 80% is invested in physical gold, the report added.

However, Reade said data shows that gold’s role and performance amid rising in ation is not entirely clear cut — it’s a hedge only against the right type of in ation. “It’s not a panacea, it’s not a silver bullet. For example, gold and its performance is not a fantastic hedge for consumer

401(k) match CONTINUED FROM PAGE 2

accounts annually, the bulk goes to high earners, according to the report that Greig co-wrote with researchers from Yale University and the Massachusetts Institute of Technology.

The report found that the top 20% of earners receive 44% of total employer contributions. The bottom 20% of earners, in contrast, receive just 6%. The ndings occurred despite statutory limits in place to cap the level and share of employer contributions available to high earners.

Dollar caps and equity

Putting a dollar cap on how much workers receive results in more equitable allocations of employer match dollars across income groups, Greig said.

“In some instances, it can put a ceiling on the match dollars going to the top earners, but in other cases it can raise the oor considerably on just how much match dollars may be available to low-income workers,” she said.

Greig explained that of the 10 most popular matching formulas, dollar-cap matches were the most equitable.

Nevertheless, dollar-cap matches are rare, with only 6% of workplace

price in ation.”

For example, during the COVID-19 pandemic, gold performed well in 2020, peaking at $1,987 an ounce on Aug. 1 of that year. In 2021 and 2022, when CPI was starting to rise worldwide, gold would not reach that price again — in fact dropping as low as $1,637 an ounce in November 2022, a month in the center of consecutive interest-rate hikes from both the Federal Reserve and the Bank of England in response to in ation standing at 8.2% and 11.1% in the U.S. and U.K., respectively.

“We got a lot of questions (across 2021 and 2022), because gold’s got a reputation as in ation hedge. It is an in ation hedge, but not against CPI. It’s a hedge against money supply growth. When, in 2020 as a response to COVID, central banks massively increased money supply, that’s when gold performed. It goes up in anticipation of the in ation that comes,” he said.

Pension funds

Investing in the asset as a straight commodity is far from the only inroad for gold either, with the share price of gold mining rms Newmont Corp., Barrack Gold, and Kinross Gold Corp. all up on July 25, compared with the same date last year. However, equity prices have lagged the price of gold itself, showing an unevenness in the upward jump.

Gold as an exchange-traded commodity is another option that saves having the physical asset itself on the books, which the investment criteria of many pension funds rules out. The iShares Physical Gold ETC is up 21.95% between June 30,  2023 and June 30, 2024, and the Invesco Physical Gold ETC is up 21.7% for the same time period. This ETC rise largely tracks with the gold price itself, which rose 22% in this time.

Another pension fund with an allocation to gold is the $202 billion Teacher Retirement System of Texas, Austin, where Shayne McGuire is the portfolio manager for the Emerging Markets Fund and the Gold Fund. Founded in 2009, the

retirement plan employing them, a trend that some experts believe may shift as employers increasingly think about diversity, equity and inclusion in their plans.

“I would think maybe we would start to see an upswing now that employers are so focused on equity in retirement plans, more so than they have been in the past,” said Melissa Elbert, partner and head of de ned contribution solutions at Aon.

“You can help push more of your bene t dollars to lower-paid workers,” Elbert said, explaining that doing so can help equalize an employer’s “bene t spend across populations.”

Jana Steele, a senior vice president and de ned contribution consultant at Callan, echoed similar views, saying that as plan sponsors look at equity as a factor in their decision-making, dollar caps “may be something to consider.”

The plan sponsors currently using dollar caps, however, are not citing equity as the reason for their use. Some employers put dollar caps in place because it sometimes “sounds like a bigger amount” than if expressed as a percentage of pay, said Rob Austin, head of thought leadership at Alight Solutions.

A dollar cap amount like $5,000 may seem a lot bigger than 4% of pay to some employees, especially those with smaller salaries, he said.

TRS Gold Fund was the rst of its kind among U.S. pension funds, although less than 1% of the pension fund’s assets are invested in the precious metal.

“Our holdings in gold are mainly held via exchange-traded funds, as with the pension fund’s rules we are not allowed to hold the physical asset. We will also hold gold via futures,” McGuire said.

Geopolitical shocks

But it’s not just the perceived ination protection that gold offers that has investors interested.

Chartres contrasts gold’s position to equities, which he believes “typically struggle” in the scenario he lays out, with their valuation multiples likely to fall in the wake of such shocks.

Such a shock may come from geopolitical turmoil such as tensions in the Middle East and the ongoing war in Ukraine, factors which have pushed the price of gold past even its 2020 peak to record levels.

Another recent phenomenon has been de-dollarization, in which central banks reduce their reliance on the dollar as a reserve currency and

McGuire said gold can act as a diversifying asset. He points to the fact that for every year since 1971 in which the S&P 500 has been down more than 10%, gold has been up without exception.

Added Ruffer’s Alexander Chartres: “The bottom line is gold can be a powerful portfolio diversi er, acting as protection against both rising in ation and also geopolitical shocks.’’

“As the world becomes more ination-prone and more shock-prone, both of those things will increase gold’s value,’’ said Chartres, a fund manager at U.K. investment manager, which had approximately £22 billion ($27.8 billion) AUM as of July 1.

“If employers are really trying to sweeten the pot in areas that are typically more lower paid and perhaps a little bit higher turnover, this is something that can resonate with and attract people to their jobs through that larger amount,” Austin said.

Other employers use dollar-cap matches to assist with their non-discrimination testing. “By capping the match, it means that your highly compensated employees are receiving a lower matching contribution than they might receive otherwise,” said Callan’s Steele.

Steele explained that the lower contribution amounts for high earners makes it easier for employers to pass their non-discrimination testing.

Still, other employers use dollar caps because they make their contribution cost more predictable.

“By knowing the number of participants and the maximum matching allocation that they can receive each year, the plan sponsor knows what the maximum matching cost is going to be,” Steele said. “It can be a way to control costs.”

Dollar caps also cost less. Of the 10 most common matching formulas, dollar caps are the least expensive for employers.

A dollar-cap match costs employers 2.7% of their total bene t compensation, beating the popular “50% on 6%,” which costs 3.6%, according

veloping countries further toward gold. Cunningham said: “In recent years, the U.S. has chosen a more protectionist path, coupled with a very loose scal stance—all of which will likely be ampli ed in the coming years if a Trump administration returns.”

“Nations are diversifying reserves away from U.S. dollars, over fears that they can be weaponized against them. Some estimates point to gold holdings in international reserves having close to doubled over the past decade as a result.”

The UBS Annual Reserve Manager Survey, published in June and surveying 40 central banks managing a signi cant proportion of the world’s $12 trillion FX reserves, noted a trend toward more diversi cation of reserves resumed after a pause between 2021 and 2023. Government bonds and green bonds were asset classes that central bank managers wanted to own more in the future, followed by equities, and then gold.

“If you look at who is buying gold at the moment, the top countries are those such as China, Poland, Singapore, India, Libya, Turkey, Iraq, Qatar, Oman,” said Massimiliano Castelli, head of strategy for global sovereign markets at UBS Asset Management, which had $1.1 trillion in AUM globally as of Dec. 31.

push toward an asset such as gold instead. Developing countries across the globe express this view by gathering gold resources.

According to Iain Cunningham, head of multiasset growth at Ninety One, an investment manager overseeing £128.6 billion in assets as of June 30, in recent years, the U.S. government has chosen a more protectionist path, coupled with a “very loose scal stance,” positions that will likely be ampli ed in the coming years if a Trump administration returns.

With this trend in mind, a Trump victory would likely drive the U.S. debt crisis and subsequently, the de-dollarization trend, pushing de-

to Vanguard’s report.

The cost savings could be used to pay for other plan enhancements, such as auto-enrollment and immediate eligibility, which experts say also play a huge role in making plans more equitable.

“You can use the cost savings to implement other plan design changes or provide other bene ts that are going to support your workforce,”

Aon’s Elbert said.

Not ideal for all firms

Dollar caps, however, are not ideal for all organizations, particularly those looking to attract high earners because the matching contribution will be lower than with a traditional percentage-based match.

“If they're in a very competitive eld, it might not be a great t for them,” Callan’s Steele said. “Although it is more equitable from a numbers perspective, it does end up being a little bit of a negative for their higher earners.”

Vanguard’s Greig agreed, saying that if the goal is to “win the war for talent and particularly of top earners,” then dollar caps are likely not going to help.

“Depending on how they’re designed, they can reduce the incentive or the contribution for top earners,” Greig said.

To get around this issue, employ-

“There is this emerging split between the central banks in emerging markets which have become net buyers of gold, and the central banks in advanced economies which have not been jumping on this wagon,” he said, mentioning Germany as one nation that is even selling small amounts of its reserves.

According to Castelli, a reason for the disparity between the gold-related behaviors of emerging markets central banks and developed markets is that emerging markets are more susceptible to the “weaponization” of foreign exchanges, as was seen with the freezing of certain assets in the Central Bank of Russia following that nation’s invasion of Ukraine in 2022. Gold is seen as an asset that might avoid such sanctions.

ers often offer high earners a non-quali ed deferred compensation plan, an ancillary retirement savings plan that allows high earners to sock away money beyond what they’re allowed to do with their 401(k) plans.

Dollar caps have other disadvantages. They’re dif cult to program and add administrative complexity to retirement plans, according to industry experts.

Because dollar caps are uncommon, they’re more dif cult to program from a payroll or record-keeping perspective, Callan’s Steele said.

Aon’s Elbert added that they’re also hard to keep up to date because they need to be indexed with in ation and are tricky to set for employers with workers spread out across the country.

“It’s potentially hard to come up with a dollar cap that’s going to work for your entire population because of geographical differences in the cost of living,” Elbert said.

As Alight’s Austin sees it, the decision to implement a dollar cap isn’t easy, as it will be seen as a “takeaway” for some but a “win” for others.

“It’s going to have winners and losers,” he said. “The question is, are there enough winners that outnumber the losers and if the winners are where an employer might want to focus their attention.”

‘NOT A SILVER BULLET’: World Gold Council’s John Reade

Robert Tjalondo

A Primer on PEPs: Separating Myth from Reality

Wednesday, August 14 | 2:00 pm ET

Defined contribution plans are a key component of benefits programs that support talent hiring and retention today, as recent surveys have revealed that plan participants place even greater importance on their financial security. Yet many employers continue to grapple with optimizing their DC plan – both in terms of the plan design and its administration as well as maximizing participant engagement. This expert panel explains how pooled employer plans, or PEPs, have emerged as an innovative solution that addresses participant needs across the savings and decumulation phases of their working lives.

You will hear from a pooled plan provider and a record keeper on how PEPs deliver both resource and cost benefits to plan sponsors via appropriate products, services, administration and education –often with some flexibility. The panel will delve into the service model and technology infrastructure that can meet the specific needs of each participating employer’s requirements – and provide the underlying context on PEPs as a growing solution for the retirement industry of the future.

REGISTER | pionline.com/pooled-employer-plans-webinar24

Sponsored by

Corporate DB Plan Management in 2024: What path are you on?

Available on demand

Key topics include:

Interest Rate Management: Discover the latest strategies for managing interest rates e ectively within both closed and open defined benefit plans.

Liability Hedging Diversification: Explore ways to enhance your liability hedging portfolio by introducing diversifying assets to potentially increase expected return for a given level of risk.

Return-Seeking Bucket Strategies: Learn about tools to potentially improve the composition and management of the return-seeking portion of your defined benefit plan investments, regardless of whether your plan is open and on-going or closed/frozen.

REPLAY | pionline.com/AON-corporatedb-webinar24

Sponsored by

Mastering Retirement Income: In-Plan Solutions

Built for Security and Growth

Available on demand

For years, retirement plans focused entirely on accumulating savings— until now. As more than 11,000 Americans per day reach age 65, plans need to take it a step further and consider how participants will spend that savings and make it last for potentially 30 years or more.

Join Tim Pitney, Head of Lifetime Income Default Solutions at TIAA, Lisa Schwartzenburg, Assistant Vice President, Human Resource Operations at Gonzaga University and Tim Irvin, Senior Financial Advisor at CAPTRUST to learn how to create, structure and deliver e ective income solutions for giving workers the best chance at secure retirements. They’ll cover:

•Various in-plan default investments with post-retirement withdrawal strategies

•Fiduciary considerations surrounding o ering in-plan annuity options

•Tools and best practices for guiding participants through the complexities of spending decisions

REPLAY | pionline.com/TIAA-retirementincome-webinar24

Sponsored by

Crypto

CONTINUED FROM PAGE 6

“The industry likes to say that this is true proof that there’s a so-called crypto voter, that crypto is a major election outcome or a major election issue. But I just feel like it’s sort of the same old pay-to-play Washington politics,” Hays added.

Congress’ crypto moves

In May, the House passed a comprehensive crypto bill known as the Financial Innovation and Technology for the 21st Century Act, or FIT 21, with bipartisan support. Though the bill is unlikely to pass the Senate this year, sources said its passage marks an important milestone.

The bill would give new oversight of the digital commodities market to the Commodity Futures Trading Commission, while also designating the Securities and Exchange Commission as the regulator for the digital securities market. It also directs both agencies to propose joint rule-makings on digital assets and allows digital asset intermediaries to dually register with the SEC and CFTC.

Many in the crypto industry have said legislation is needed to achieve regulatory clarity, which has historically kept institutional investors away from the asset class.

However, there have been unexpected changes in the crypto world recently, as the SEC in May approved eight applications to list and trade shares of spot ether exchange-traded products, following a January approval of 11 applications for spot bitcoin ETFs.

Also in May, both the House and Senate passed a congressional resolution with bipartisan support to overturn SEC guidance on the custody of digital assets. The guidance will survive, however, as the House failed to override the president’s veto of the resolution.

The SEC guidance requires any custodian of digital assets to report those assets on their balance sheets,

Climate

CONTINUED FROM PAGE 4

categories of “sustainability” and “transition,” replacing Articles 8 and 9.

The feedback report also showed that 72% of respondents supported the creation of a speci c category for products with an ESG transition (companies with imperfect ESG credentials looking to improve) focus within SFDR.

However, Laura Kaliszewski, global head of client sustainable investing at Natixis Investment Managers, part of French banking group BPCE, with $1.32 trillion in AUM as of March 31, is in the opposite camp on this point: “We believe that ‘transition’ should not be a separate category but has its place within each different levels of ambition: it will depend on the strategy deployed by the asset manager.”

The ESA recommendations are currently being reviewed by the commission, which will then consider what amendments to propose regarding SFDR going forward. Any changes put forward will then form part of a legislative proposal to be voted on by the European Parliament.

Another ongoing issue is that the European taxonomy on sustainable activities, which act as key de nitions underpinning SFDR, is yet to be completed.

thereby raising capital requirements, which some GOP lawmakers said hinders banks from acting as custodians for digital assets.

Both Hays and Kelleher chalked up Congress’ recent crypto moves to the in uence that money has on the legislative agenda.

In May, Ripple made a $25 million donation to the crypto super PAC Fairshake, which focuses on House and Senate races, according to Ripple’s Belive. This followed a $20 million donation in December, putting the company right behind Coinbase as the top donor for the super PAC, according to data from OpenSecrets.

Belive said the company is committed to supporting candidates that are “pro-innovation, pro-crypto regardless of their party positions.”

According to Hays, crypto rms’ donations are “the same old sort of special interest money distorting policy outcomes.”

“We’re concerned that’s going to harm investors because it will likely lead to the passage of legislation that creates more permissive regulatory oversight for an industry that really hasn’t demonstrated a good body of practice and could actually amplify risk for investors,” Hays added.

Trump campaign and crypto

In addition to including crypto in the 2024 Republican platform, the campaign for former President Donald Trump has acknowledged the industry in several ways.

In May, the Trump campaign established a fundraising page accepting donations in the form of cryptocurrency. On July 27, Trump spoke at Bitcoin 2024, a Nashville-based conference that also featured independent presidential candidate Robert F. Kennedy Jr.

J.D. Vance, the Ohio senator recently announced as Trump’s running mate, has been working on his own legislation to revamp digital asset regulation, according to reporting from Politico.

According to Belive, these are all signals that Trump is a consumer of crypto, wants to regulate it and wants

The ongoing wait for the specication around areas such as pollution prevention or water protection “limits the SFDR potential and investors’ appetite as some cannot invest in parts of the value chain,” according to Vontobel’s Frontczak.

SDR vs. SFDR: Culture clash?

One downside to SFDR was its position as a rst mover, which meant it had no other models to learn from, sources said.

Eugenia Unanyants-Jackson, global head of ESG at PGIM, a U.S.based asset manager with $1.29 trillion AUM as of Dec. 31, goes so far as to say regulators should’ve taken more time over SFDR. “Now that we know what can go not quite to plan, perhaps it would have been better to spend longer in the making of the regulations, and to test them with investors beforehand,” she said.

Following on the heels of SFDR was the Sustainability Disclosure Requirements, administered by the U.K.’s Financial Conduct Authority and with its own rules nalized in November 2023. Explicitly constructed as a labeling regime, SDR looks to regulate funds through the labels of sustainability focus, improvers, impact and mixed goals.

In the U.S., a climate disclosure rule proposed by the Securities and Exchange Commission is also facing pushback.

to put forth smart policy on it if he wins.

When asked why Trump’s campaign has embraced the issue, CCI’s Warren responded, “I think there are a couple of people who put a ton of effort into getting into his ear on the topic,” which she said is “of crucial importance to the American economy.”

“I also think that there’s something about the ethos and culture of crypto that is appealing to someone like Donald Trump,” Warren added. “There’s kind of an upstart rebellious culture to it, and I think that is familiar to someone who I think sees himself … as somebody who’s a bit of a rebellious upstart in the political arena.”

Opportunity for Democrats?

“The Republicans are gaining support by saying they’re pro-crypto,” and the Democrats could gain support if they follow suit, according to Belive, who contended “there is an opening” for the new Democratic nominee to appeal to the industry.

Vice President Kamala Harris received President Joe Biden’s endorsement after he dropped out of the race and is expected to be the Democratic nominee.

“Kamala Harris, I do not believe, has a strong position on crypto and has not been seen as kind of like the architect of the anti-crypto agenda,” Warren said.

Harris is a native Californian, and the industry is thriving in the state, so there’s a sense that “she understands California, she understands the Valley, she understands tech,” Warren added.

To Warren, “crypto should not be a partisan issue. The extent to which it’s been politicized is a problem; it is not good.”

Belive seemed to have a similar view, noting that “the worst case scenario is that this industry is seen as a political football.”

“This should not be a wedge issue,” Warren added. “It should be something that any candidate of any party in any race, however down ballot, however top of the ticket, should understand.”

The nature of SDR makes it “more principles-based and less rulesbased,” said Ashley Hamilton Claxon, head of responsible investment at Royal London Asset Management, which has £170 billion AUM as of March 2024.

Christopher Fidler, head of industry codes and standards at the CFA Institute, thinks SFDR could learn a lot from SDR: “What is and isn’t sustainable is what SFDR was trying to distinguish; I think they just it just did a very poor job of it.

“They tried to make this gradation. When SFDR rst came on the scene there was talk about brown, light green and dark green. That’s nowhere in the legislation but that’s how people talked about it,” he said.

Sources also said cooperation between regulatory bodies could be helpful. For example, if a fund were to be labeled in a certain way by SFDR, the manager could expect it to be assessed in a similar way by SDR. “It would certainly help reduce the cost burden to asset managers and to underlying customers, if that passporting can happen,’’ Claxton said.

“I suspect, however, that jurisdictions will be quite nationalistic in the sense that they want to have their own stamp on sustainable nance. So I’m not necessarily expecting, certainly not in year one, a straight equivalence regime,” Claxon said.

Changes

removed at least one investment option in 2022.P&I's analysis found that 120 U.S. corporate 401(k) plans added or removed at least one investment option last year. Of that 120 corporate plans, 37 plans made changes speci cally with their active domestic large-cap growth equity investment options. According to the comparison of 11-K lings, J.P. Morgan Asset Management was the most-added manager during 2023, with 36 401(k) plans adding one of its funds. Twenty-seven of those plans added the JPMorgan Large Cap Growth Fund during the year.

The most removed manager was T. Rowe Price Group, with 33 plans removing one of its funds during the year.

Wide dispersion

Greg Ungerman, senior vice president and leader of the de ned contribution practice at Callan, said that the wide dispersion of large-cap growth fund performance in 2022 led to search activity in 2023.

While there has been a huge dispersion of active management returns in the large-cap growth area for some time, due to the “Magnicent Seven” stocks and similar iterations of big names (such as FAANG), that dispersion was very pronounced on the downside in 2022.

“The long and the short of it is, the Russell 1000 Growth was a very difcult benchmark to beat because of the market leadership,” said Ungerman. “A lot of active managers really don’t have room to overweight those

Lipschultz

CONTINUED FROM PAGE 3

including private credit.

If more regulation comes down on the private credit space, Lipschultz said rms would adapt.

“We’re perfectly happy to operate in any regulatory framework that someone de nes for us,” he said. “Importantly, what all we ask is that people who are crafting those regulations fully understand what it is that we do, how we do it, and what purpose it serves.”

While questions abound on what would happen if something went wrong in private credit, Lipschultz said private credit has been the “steady provider of capital” to corporate America through volatile times over the last several years.

“We’re not part of the bank system,” he said. “If we do a poor job, and I’m committed to not doing a poor job; in fact, I’m committed to doing an excellent job. But if we, or someone else, does a poor job in private credit, you know what the result is? They’re going have a set of investors who get a less attractive result than they wanted. I mean, that happens every day in the world of the marketplace. So, I just think it’s a little bit of a solution looking for the problem.”

Across Blue Owl’s 400 portfolio companies, Lipschultz said overall nancial performance is strong. “It’s a good time to be a direct lender,” he said.

And Lipschultz said those 400 portfolio companies, which are almost all U.S.-based across different sectors, provide an interesting onthe-ground look at the U.S. economy. “Business is good,” he said, adding

strategies, so many of them are underweighting them just from a concentration (and) risk control perspective.”

Active managers just don’t have a lot of room to move in the large-cap growth space, he added. Ordinarily, if a manager likes a stock, they overweight it.

“But in fact many of their risk parameters limit their abilities (to do so), so therefore they’re underweight,” said Ungerman. “And so even if they like the company, they can’t even maintain an index exposure, so that creates a lot of dispersion.”

While Ungerman said 401(k) retirement plan sponsors certainly think long term beyond those poor results in 2022, the magnitude of underperformance could have been so far outside their tolerance level that those results seriously impacted three- and ve-year return numbers.

“It puts a lot of pressure on plan sponsors relative to their investment policies or their particular standards,” said Ungerman. “It’s hard to cut or categorize a very big universe, but I could see how that could put a lot of pressure on certain managers that had a dif cult time.”

Manager turnover

There has also been turnover among portfolio managers of active large-cap growth funds, with a number of them choosing to retire following the COVID pandemic, said Bill Ryan, partner and head of de ned contribution solutions at investment consultant NEPC. Those departures just happened to occur while there was this large dispersion in returns.

“(This) creates triggers in investment policy statements,” said Ryan, “so if you have key staff changes and

performance challenges, you hit two things that people look at. So while the performance in isolation might not have triggered a change, the portfolio manager changed and the performance is down.”

Ryan and other consultants would not comment on speci c funds, but one fund that was potentially affected in that manner was the T. Rowe Price Blue Chip Growth Fund. Larry Puglia, the portfolio manager of that fund since its inception in 1993, retired at the end of 2021.

For the year ended Dec. 31, 2022, a period in which the Russell 1000 Growth lost -29.1%, the Blue Chip Growth Fund lost -38.6%. According to the P&I analysis, at least ten 401(k) plans removed that fund from their lineups during 2023.

member,” said Verdeyen. Especially when there's more like a C-suite representation on the committee, sometimes they can have an outsized voice.”

“It is interesting with the ‘great resignation’ and a lot of movement in the job market we’re experiencing that a lot of our committees do have new membership, that the committees have turned over, and they tend to pull the trigger a little bit more quickly,” said Verdeyen.

Notably, the Blue Chip Growth Fund would experience a dramatic turnaround in 2023, returning 49.4% for the year ended Dec. 31, well outperforming the Russell 1000 Growth index, which returned 42.1%.

Turnover at money managers isn’t the only potential trigger for largecap growth fund changes, said Holly Verdeyen, partner and U.S. de ned contribution plan leader, at Mercer.

One of the things her consultants shared regarding those changes is they were indeed performance-driven, but also turnover at plans’ investment committees may have prompted changes.

“We observed that sometimes committees are quicker to pull the trigger when there is committee turnover or there's a new committee

that Blue Owl’s high conviction view for the last 18 months has been that in ation is “sticky.”

“We’re still in an upward price environment, again, nothing near as extreme as it was a year and 18 months ago, but still very real. And that, to us, has led and continues to inform a view that’s generally higher for longer,” he said.

Asset-backed lending

Corporate direct lending is a “developed” market with established capital providers and users, Lipschultz said. For investors that already allocated to direct lending and are looking to other segments of private credit, the next area is asset-backed lending.

“It’s a very, very large addressable market that is itself shifting,” he said, pointing to banks “retreating … as they did from corporate lending for their own reasons or exogenous reasons.”

And for investors who want downside protection backed by assets, it’s “mathematically or intuitively appealing to people,” Lipschultz said.

Earlier this month, Blue Owl announced it is acquiring Atalaya Capital Management for $450 million, signi cantly boosting its credit and asset-based nance capabilities.

Lipschultz said there’s good reason to believe asset-backed lending is “likely the next version of direct lending,” adding that it is an “ecosystem that probably develops over the next ve and 10 years, in the way the direct lending ecosystem developed over the last 10. Remember this ecosystem is only 10 years old. It’s young by the standards of markets and by the standards of private equity and all these other adjacencies.”

Many pension plans have made direct lending allocations, something that Lipschultz said was “just about

David O’Meara, senior director and head of de ned contribution investment at Willis Towers Watson, said he has also seen turnover at investment committees, but for the most part those new committee members have deferred more to their consultants in making manager change recommendations.

“When turnover happens at super-senior levels, they can have more openness to change,” said O’Meara, “but we’ve seen most of our clients actually be the opposite, and they’ve been more patient and less reactionary.”

O’Meara does believe many retirement plan sponsors in recent years have not exercised that level of prudence.

“I do have a fear that many plan sponsors may have let historical performance dictate their investment manager selections,” he said, “and they’re potentially getting whipsawed in a market like we’re having in this last week (week of July 29) and even today (Aug. 5), where underweighting those (tech) compa-

nonexistent” 10 years ago in the “world of pensions.””You have to be able to deliver good results, good risk-adjusted results and pensions are, and I believe will continue, to earn very attractive risk-adjusted returns in direct lending,” he said. And for pension funds looking to expand, Lipschultz thinks asset-backed lending will get more play.

Room to grow

Blue Owl has been active on the mergers and acquisitions front so far this year. Lipschultz said the rm likes “selective M&A” adding both vertical and horizontal business extensions, but stresses that “cultural compatibility is beyond integral to success.”

That’s why he said he spends a lot of time thinking about culture and how to sustain an environment where people can say, “Hey, I disagree.”

“We need everyone to speak their minds and share their views so we can make the best possible decisions for our investors,” he said.

In addition to the recent Atalaya acquisition, Blue Owl recently completed its acquisition of real estate lender Prima Capital Advisors. Lipschultz said that acquisition “ ts us strategically because it brings us, in a successful format, into real estate credit” a market he describes as “highly disruptive.”

In real estate, Lipschultz sees triple net lease as a “durable” strategy for Blue Owl. On the wider real estate universe, Lipschultz said his views are “bearish” on the next few years. The rm manages just over $27 billion in real estate assets, as of the rst quarter this year.

“I think the future of certain parts of real estate is it’s going to get a lot worse before it gets better,” he said. “We haven’t really seen the prob-

nies would have led to underperformance until this past week.”

Trending down

Overall, O’Meara said the number of new manager selections among WTW’s de ned contribution plan sponsors has trended down in 2024.

“That’s across the board for us (including) international, whether it’s growth or value, equities or xed income,” said O’Meara. He said really what drove markets beginning in 2020 when the tech sector really took off are driving the markets now.

“So many of our clients have gotten comfortable with the volatility in market rates,” said O’Meara, "with the relative calm followed by rapid volatility, and they’ve been fortunately more patient than what we had seen going back ve or 10 years.”

Jessica Ludwig, managing partner and senior consultant at Fiducient Advisors, said that while not pronounced, they have seen their clients increase their activity in target-date fund searches during 2024, likely for due diligence purposes.

“I don’t think there’s some emerging trend that necessarily has triggered that,” said Ludwig, “but there’s a lot of plan sponsors who have perhaps had very long histories with their target-date fund strategies." Ludwig doesn’t necessarily think many of these clients are going to make a change, but she has had more due diligence conversations with clients during the second quarter than recent quarters. "To the extent there is an active management component, there has maybe been some choppy performance more recently, and it just feels like there is greater target-date due diligence going on right now.”

lems come to fruition in real estate. Everyone’s aware they’re coming, and they are coming, but they haven’t really been crystallized to a large degree.”

At the same time, he sees opportunities, “it’s a particularly attractive time for us to do we do because we’re able to originate.”

At the start of July, Blue Owl completed its acquisition of Kuvare Insurance Services, something Lipschultz described as adding a horizontal capability for Blue Owl and tapping into a third channel that delivers tailored solutions for the insurance market where ratings and structures are critical.

More could be ahead. Lipschultz points to other “logical” areas including infrastructure and European direct lending, which “would be an easy extension if we had the right platform.”

“I think there’s some apparent areas for us that would make sense, and that’s where we should look,” he said. And one area Blue Owl is doing more than looking is in the Middle East.

Blue Owl has an of ce in Dubai and is opening one in Abu Dhabi. The rm has a strategic partnership with Abu Dhabi-based sovereign wealth fund Mubadala Investment Co. focused on technology lending and a joint venture focused on minority stakes in midsize private markets rms with Abu Dhabi-based Lunate. Lipschultz sees a “signicant” opportunity in the region.

“We think it’s critical to be on the ground,” he said, adding that allocations in the region have been largely aimed at private equity and real estate, “credit’s pretty new” and GP stakes and triple net lease are “assuredly new.”

‘GOOD TIME TO BE A DIRECT LENDER’: Blue Owl Capital’s Marc Lipschultz

Jeenah Moon/Bloomberg

‘QUICK TRIGGER’: Mercer’s Holly Verdeyen

The 11-member team, led by Marcelo Assalin, joined William Blair in January 2020.

William Blair managed $17.9 billion in emerging markets securities across all strategies as of June 30, with $13.4 billion run in dedicated emerging markets funds. Its Emerging Markets Debt Fund - Class I, for example, gained 13.41% in calendar-year 2023, according to the rm’s website, vs. 11.09% for the J.P. Morgan EMBI Global Diversi ed index on a net-return basis.

And then there’s U.S. large-cap growth — another “unobvious” place to look, but one that’s proving to be particularly successful in terms of catching the attention of the rm’s non-U.S. clients right now. The William Blair Large Cap Growth Fund has grown to $16.3 billion as of June 30 — up from $1.3 billion in just ve years. That includes two large wins in Europe of about $2 billion, although Braming declined to identify the asset owners involved.

Of course, some of that growth has come from markets providing “a nice tailwind,” Braming acknowledged, but the international allocations in particular are testament to the work done to add investment talent and expand business outside the U.S. For example, the rm recently appointed Ian Smith and Paul Birchenough, formerly of Newton Investment Management, as co-portfolio managers on the William Blair emerging markets leaders strategy, based in London. Along with expansion across the globe has been a focus on “growing our investment acumen,” Braming

Steed

Steed, who was hired as CIO in October 2018 following the retirement of Ryan Parham, has been with the system since 2007 when he joined as a portfolio analyst and moved up the ranks to lead portfolio manager, then chief of staff and then deputy CIO.

Liquidity provider for PE

The additional cash has given the pension fund the opportunity to be a liquidity provider in private equity deals.

“So that means secondary funds and secondary buyout transactions,” he said. “That means GP (general partner) continuation vehicles where they have one or two or three assets left and they need to extend the life to do a re sale. You’ve got now what’s called NAV lending, lending against the portfolio to release some cash into the pockets of other LPs, precommitting dollars to certain partners of ours. That can provide liquidity to a counterparty.”

As of March 31, the pension fund has an actual allocation of 6.7% — or or just over $1.4 billion — in cash. Meanwhile, there has been signicant less deal volumes in private equity, and exits have been slow.

“So the fact that we have a lot of cash, that meant really for the last two years and really this year, we’ve leaned heavily into that liquidity provider role. That will be rewarded in the markets, and I think it always will continue to be rewarded in the markets,” Steed said.

said, which comes in the shape of launching new strategies among existing teams, and also in team liftouts.

When considering adding a team, it has to be one “that would complement the platform — active fundamental investment teams we already have — but also improve something with our clients,” she added.

“We continually have teams come talk to us — we’re always looking for talented colleagues to add over time, but we’re really excited and happy with the two teams that we’ve brought on so far,” she said.

The rm has launched 13 new strategies in the last seven years across existing teams and those brought into the rm through various deals, such as NN IP and the 2021 deal to acquire U.S. value equities manager Investment Counselors of Maryland from BrightSphere Investment Group. That deal added an eight-person investment team and $3.2 billion in assets.

Adding the emerging markets debt team was a “great addition to our investment acumen,” not only from a results point of view but also for balance — the deal “tied in nicely with our global growth aspirations,” Braming said. And adding the emerging markets view to the developed markets strategies “improves our peripheral vision.”

Learning from one another

A huge focus for Braming since becoming global head in 2017 is culture, which she attributes in part to the manager’s private partnership structure. That culture allows for freedom of thought, autonomy among executives and the motivation to nd new ideas and opportunities, she said.

One aspect of the rm’s culture

“All these extra contributions allowed us to set up those agreements,” said Steed. As of March 31, the pension fund’s actual allocation to global private equity was 22.1%; the target is 27%.

Those deals have occurred during what Steed calls an existential crisis for private equity, as managers are no longer experiencing the level of growth and ease of gaining investors that they’ve seen since the global nancial crisis.

“I think private equity is going through an existential crisis because of that sensitivity to interest rates,” said Steed, “and going forward, investors have made a note in their heads that it might only work when rates are on the way down and not on the way up.”

Steed also said a “substantial hubris” in the private equity market has led to this existential crisis because institutions like public pension

that she’s worked to cultivate is a willingness and emphasis on learning from one another.

Shared learning extends to clients, with different teams presenting to unrelated clients — that is, those not necessarily invested in their own strategies — on current affairs and topics of the day.

“From a strategic perspective, our goals are to continue to grow, be better partners to our clients, both by delivering strong results … then also by providing differentiated intellectual capital to them to help them make better decisions on things that

weather short-term performance hiccups — but it’s always used to broaden relationships,” she said.

It’s also evident that Braming walks the walk, in particular when highlighting conversations she hears among staffers and Yvette Babb, an emerging markets debt portfolio manager. Braming said listening to Babb talking about emerging markets debt, particularly when she’s sharing insights on sovereign debt, is “intellectual candy.”

Braming also made sure she was at the center of the investment teams when she became global head of the

‘Our goals are to continue to grow, be better partners to our clients, both by delivering strong results … then also by providing differentiated intellectual capital to them to help them make better decisions on things that we have nothing to do with .’

WILLIAM BLAIR INVESTMENT MANAGEMENT’S STEPHANIE BRAMING

we have nothing to do with,” Braming said.

Around the Brexit vote, Simon Fennell, a portfolio manager on several international strategies, took the time to educate clients on the implications of the U.K.’s exit from the European Union, while Vivian Lin Thurston, a portfolio manager on several emerging markets growth and China growth strategies, has spent time speaking to clients about the history of China to give additional context and help clients understand the bigger picture of the market’s impact in the world.

“It is just a way for us to be a better partner with our clients and have a signi cant impact. (It) allows us to have long-term relationships,

funds have so aggressively increased their allocations to the asset class in the past 15 years. Arizona Public Safety had a 12% target to private equity as of June 30, 2018, shortly before Steed became CIO.

A lot of public pension funds saw university endowments employing the “Yale endowment” model with large allocations to alternatives posting higher returns even in the middle of the global nancial crisis as one big reason they’ve increased their allocations.

“Everybody thought that’s a better way to do it,” said Steed. “More and more alternatives, and everybody piled into alternatives, and now I’d say if you look back in ’08 and ’09 the only alternatives anybody had was maybe private equity and maybe real estate, depending on how you de ne it.”

Now he said there’s private credit, hedge funds and other alternatives, and when you aggregate all those

rm, moving desks and also spending time walking the three oors of the Chicago of ce.

Client-centric

She takes pride in William Blair IM’s client-centric approach. Taking lessons learned from her time as a portfolio manager on the rm’s growth teams when she “met with the clients,” WBIM now humanizes investing by putting “spotlights” on the clients. Representatives will come into the of ce and present to the rm, giving the investment team and others the chance to link what they’re investing in with who they’re investing for. They talk about where the William Blair strategies t into their portfolios and then have a

asset classes together, that translates to institutional portfolios allocating between 30% to 50% to alternatives.

“This chain kind of sustained itself for about 15 years,” said Steed, “(but) I think investors got a little bit scared in the recent market and the current market with the lack of distribution coming from private equity.”

“I think there will be a pullback in the organic growth that private equity has enjoyed, along with a lot of the other alternative managers. I think they’ll nd it harder to raise money, and that it’s going to get harder to drive deals.”

Chasing retail money

Finally, Steed said private equity managers going public has led to their trying to get money from the retail channel.

“I think that will be good for investors who already have money in the ground in private equity because

“ reside chat,” she said.

“It’s a way to align people from a purpose perspective. The joy of investing is great, but it’s always bringing it back to the people you serve. And then when you win … you celebrate,” Braming said.

She’s also proud of what she terms “boomerang clients” — those that may have terminated mandates with the rm but have then returned for new allocations —  that the average client tenure is over a decade, and that 36% of clients invest in more than one strategy with the rm.

And while interest and performance from certain investment strategies may wax and wane, retaining the culture within a rm is key to keeping teams motivated. “Part of it just this motivation of delivering excellence for clients in nding new ideas — just the actual act of investing,” Braming said.

“I do know from personal experience that when you hit air pockets, you need that philosophy, that bedrock, that process, but then also the exibility to understand, ‘OK, I’ve made a mistake here and I need to move on.”

“Because we attract individuals that just love investing, that provides a lot of motivation. Secondly, we have a very strong, collaborative-type of approach — and so our distribution teams and our investment teams work really closely together to say, how are we going to grow? How are we going to broaden our client footprint?” Braming said.

For those client wins, “it takes a village,” Braming mused. “Sometimes it’s a game of millimeters. (Sometimes) it’s actually how you responded to this one question in the RFP that was the deciding factor,” she added.

that’s maybe the way to drive demand,” said Steed, “but I think if you’re an investor like us, you’re going to be looking at Blackstone or Carlyle or KKR, those large asset manager buyout funds, and you’re also going to be looking at public stock prices.”

“And you’re going to say why is their public stock outperforming their buyout funds? And if it has, why would I go into the buyout one? So that push into the liquid retail markets has made us certainly take a pause and say ‘Wait a minute!’”

Steed said the efforts to go into the retail market could mean opportunities are going to retail investors and not his pension fund.

“So I think we’re trying to gure out what exactly is private equity about? Are they just about asset gathering or are they about creating value? I think there will be a lot of disparities there,” Steed said.

CONTINUED FROM PAGE 2

category. If retirement-preparation campaigns are speci cally aimed at workers 55 and up, those materials should be submitted in the pre-retirement preparation category.

Plan transitions: Entries in this category should re ect the investment education and communication necessary when employees are eligible to participate in a new DC plan. Such eligibility most often occurs because of mergers, acquisitions and spinoffs or when a de ned bene t plan is frozen and participants are

moved to a new or existing DC plan. The depth of the education typically ranges from what is found in investment education materials for new employees to what is found in conversion materials.

Pre-retirement preparation: Awards in this category will recognize organizations that have done the best job of educating participants nearing retirement — specically, those age 55 and older — on how much they should save, how to make their savings last and other steps they need to take for a nancially secure retirement. Information about non-retirement plan considerations also should be included in the effort, such as retiree medical,

housing and other expenses, and Social Security. Note: Campaigns that are not focused on those 55 and up do not qualify for this category, but could be submitted in the ongoing investment education category.

Special projects: Showcase special education and communication programs with entries as simple as a single postcard or an email rather than a full campaign. Special campaigns related to the coronavirus crisis, such as helping plan participants save or understand market volatility, should be included in this category.

All entries must include evidence of the effectiveness, such as an increase in participation or a change in the average participant asset mix.

In order to evaluate online components, the complete website address and a temporary user ID and password, valid through March 18, 2025, must be provided.

Entrants must return an online entry form for each entry with one set of educational materials attached to the entry form.

Please note that PowerPoint presentations and training materials for human resources teams or nancial advisers will not be judged. Joint entries must include documentation that the sponsor approved the submission. An acknowledgment form is available online. For a look at last year's winners, visit pionline.com/eddyawards2024

Compensation

Columbus. A 2012 state law designed to shore up funding eliminated a 3% cost-of-living adjustment and gave its board the authority to vote on an annual COLA provided its actuary agreed it would not endanger the scal integrity of the pension fund. Since then, retirees have received little to no COLA most years, and a number of them were galvanized into a movement that has led to the election of reform trustees that now hold a majority of the board. Those reform trustees have criticized the compensation of investment staff and have vocally supported culling the staff and moving to low-cost index funds in order to save on costs. While the reform trustees have been limited by duciary counsel to meet that objective, on July 19 they capped performance incentives for senior investment staff, tying it into the level of bene t enhancements the pension fund can provide for retirees. Michael Oak, a compensation consultant with McLagan, said the challenges for public pension funds are unique, given they operate in a shbowl. He declined to comment on Ohio’s pay scuf e.

More scrutiny

“Everything is open to a lot more public scrutiny, right or wrong, than private-sector organizations,” said Oak, “and part of that is making sure

McGarrity

CONTINUED FROM PAGE 1

opportunities that have created this pretty unique internal management capability,” said McGarrity. “We are somewhat traditional, although we are maybe a little bit overweighted in global equities relative to our peers and at the expense of maybe some of the private market assets.”

PERA’s target allocation is 54% global equities, 23% xed income, 8.5% each private equity and real estate, and 6% (other) alternatives.

As of March 31, the actual allocation was 56.2% global equities, 18.6% xed income, 9.8% real estate, 8.4% private equity, 6.8% alternatives and the rest in cash.

Of the pension fund’s total allocation to global equities, just over 74% is internally managed. The growth of that internal management capability has been organic relative to the team that’s been in place and its expertise, said McGarrity.

McGarrity has been CIO of the $63.7 billion Denver-based pension fund since March 2017 when she replaced the retiring Jennifer Paquette.

Aside from a brief, six-month sojourn at William Blair & Co. as a global equity product specialist, she was a six-year veteran at PERA,

that you consistently operate with being transparent, communicate what you’re doing throughout the compensation decision-making process.”

“I think this probably goes for all of our clients, but especially public funds where everything is open is that trust is the foundation of a successful compensation program,” he said. “You need mutual trust between board members, between board members and senior management and between management and employees.”

Peter Landers is senior partner at compensation consultant Global Governance Advisors, which has worked with the $337.9 billion California State Teachers’ Retirement System, West Sacramento, since 2011 and the $515 billion California Public Employees’ Retirement System, Sacramento, since 2020.

He said in an interview that Ohio STRS is just one public pension fund that has seen participants compare the compensation of investment staff to the level of their own bene ts and have called for cuts.

“In the last couple of decades, there are these low-cost index funds, and people start to question what is the value of having active investments and all this investment staff,” Landers said. “That makes it even more critical for public pension funds to be able to tell the story of the bene t that having this internal staff is having for members.”

Landers said one of the biggest advantages of having investment staff is the ability to diversify investments.

serving as deputy CIO from 2013 to 2016 and a senior investment of cer from 2010 to 2013. Before then, McGarrity had spent nearly four years as the CIO of the Denver Public Schools Retirement System, which was folded into Colorado PERA at the end of 2009.

“A lot of us have been in PERA for a long time, and we have really built that expertise internally,” said McGarrity. Colorado PERA started managing public domestic equities internally in 1985.

“Then over the years we have added some internally managed portfolios,” she said. PERA started managing global equities internally in 2008.

“It was essentially recognizing that we had a demonstrated expertise on the U.S. side and a process that worked and with the internal infrastructure, we could leverage that on the global side,” said McGarrity.

“So we think where it makes sense, we want to manage assets internally,” she said. “In areas of the market that may be perceived as less ef cient — for example, emerging markets and small cap — for us, it doesn’t make sense to really do that internally. We would have to put a lot of resources into running that actively, and even passively to be honest, because those markets are constrained and restricted.”

P&I Events Calendar

“And yet in an upswing in the stock market, you’re going to look a little bit lower than the stock market,” said Landers, “but you’re also not going to witness the drop you’ll see in the stock market as well. So it’s about providing that more risk-adjusted, more consistent level of returns over the long run.”

More internal staff

Landers said pension funds need to communicate the savings of having an internal staff, and he said that bringing in more internal staff is always recommended, even though compensation can look expensive.

If a pension fund can employ internal staff especially in areas like real estate, private equity and real estate, their cost savings vs. external fees are “exponential,” he said.

Landers also noted that public pension funds are complex organizations that are not comparable to any other state agency.

“I think that’s a mindset that comes with pension funds that slowly but sure is starting (to develop),” said Landers. “I think we’re right to say we’re not a traditional public-sector organization or public agency. We are a unique piece, and so we need to make sure that we have a relatively competitive (pay) structure.”

Hank Kim, executive director of trade association National Conference of Public Employee Retirement Systems, said the challenge has been to make the public understand why investment staff get paid what they get paid.

‘We think where it makes sense , we want to manage assets internally.’

COLORADO PERA’S AMY M c GARRITY

For the scal year ended Dec. 31, PERA’s global equity portfolio returned a gross 23.8%, above its custom benchmark return of 21.9% for the period, while xed income — which is all actively managed internally — returned 6.2%, above its benchmark return of 5.5%. The global equity portfolio has outperformed its benchmark over the ve- and 10year periods, while xed income has outperformed over the past three, ve and 10 years.

“There is virtually little criticism of football coaches and basketball coaches at state universities literally making millions of dollars,” Kim said.

“The challenge for us is how do we get the public to equate (the performance of) public pension funds like they view the performance of their state football head coaches or state basketball coaches?” he said.

Inaugural survey data

Recent criticism over investment staff compensation galvanized Kim to inaugurate a survey, in order to have the data to support that argument, he said. Data is currently not easy to come by, he added.

“We want to gather more data and then ultimately, once we have the data, we want to be able to have a dialogue with the media, with the public, and ultimately the policymakers,” said Kim. He said he hopes the data will beg those groups to ask the question if they think football coaches deserve millions, then why do public pension plan of cials get criticized for being paid so far less?

The rst survey in 2022 covered the most senior executives, including CIOs, while the second survey conducted in 2023 focused more closely on senior - and midlevel staff, which included asset class heads and portfolio managers.

The 2022 survey had a total of 153 responses, representing 11,617 staff positions, of which 1,074 represented investment staff. Of the 18.1% of responding plans that had internal

Asset-liability study

Colorado PERA is undergoing an asset-liability study this year for the rst time since 2019, and while the study is not expected to conclude until September, McGarrity said it appears the board is leaning toward some moves.

“The way that we’re headed in the last meeting was essentially taking some weight out of global equities and putting it into real estate and private equity, which is a more incremental move,” she said.

“We’re talking about a percent and a half in each of those,” she said, “And then maybe a little bit of a restructure of the alternatives portfolio.”

PERA’s alternatives portfolio (outside of private equity and real estate) consists of private credit, real assets, and global macro and multistrategy hedge funds, as well as “tactical opportunities stemming from market dislocations or regulatory change,” according to its website.

Any increase in the targets to private equity, real estate and alternatives will be limited, McGarrity said.

“We are slightly underweight relative to peers,” she said, “and that is a result of not only our internal management capability and demonstrated added value there, but also our liquidity pro le may be a little more than some of our peers. We are a very mature fund with a net out ow

investment staff, the average salary of chief investment of cers was just over $277,000 annually and an average bonus of $238,000.

That is compared to an average compensation of $800,000 for endowment CIOs, according to executive search rm Charles Skorina & Co. Kim said that as NCPERS was beginning to think about the third survey for 2024, they thought they would do the survey on compensation for entry-level and frontline employees and then switch back to the most senior executives for 2025 to begin the cycle again.

However, when a human resources director at a public pension fund informed Kim that they ll out up to ve similar compensation surveys every year, he decided NCPERS would partner with one of the other rms conducting survey.

Kim also declined to comment on the compensation ght at Ohio STRS.

So this year, NCPERS is teaming up with CBIZ’s talent and compensation solutions division to provide a much more robust data set, said Kim. It includes comprehensive salary and bonus data for more than 80 common positions found at public pension funds and was distributed in May to the 500 pension funds, sponsors and other stakeholders in its organization.

In September, NCPERS will host an inaugural Public Pension HR Summit, which will include a preview of the ndings of the new survey.

in excess of 2% per year.”

In addition, PERA has had funding challenges and reported a funding ratio of 66.2% as of Dec. 31 in its latest actuarial valuation.

“As people think about rebalancing portfolios and asset allocation and liquidity events, most people think of black sky scenarios and modeling our ability to continue to pay bene ts,” said McGarrity. “I think there’s more to it than that. It’s our ability to rebalance the portfolio and get back into those risky assets according to the strategic asset allocation, which we’ve put in place for the long term to deliver the long-term rate of return assumption.”

PERA’s long-term rate of return assumption is currently 7.25%.

“So in the event of a signi cant market event where you’re liquidating both equities and xed income — because you can’t liquidate your illiquid investments or you have to take a signi cant haircut to liquidate them — your ability to get back to your strategic asset allocation can be challenged. I think we saw some of that in March of 2020,” she said.

“So we are trying to walk that line of having exposure to those benecial asset classes while still maintaining exposure to liquid bene cial asset classes and delivering our long-term rate of return,” said McGarrity.

DEFINED CONTRIBUTION

Get ready to be captivated by our exclusive opening keynote at DC West that inspires you to motivate and help your employees engage and reach financial security through their working years and in retirement. At the iconic entertainment Walt Disney Company, employee education and communication take a front-and-center role, integrating the values of the company into its retirement plan and well-being initiatives.

You will hear firsthand success stories and challenges within Disney’s robust retirement savings plans and understand their innovative strategies and unique approaches to cater to a diverse employee cast. You’ll get an enthusiastic, behind-the-scenes look at how one of the world’s most beloved companies ensures the future financial security of its team—and the motivation to elevate your financial wellness programs.