PI 2024-10-07

Amid yet another down year, Fed cut sparks optimism

Global assets dropped 4.4% to $1.82 trillion, while U.S. institutional assets fell 7.1% to $690.3 billion

More on real estate managers

While the Federal Reserve’s 50-basispoint interest rate cut might be giving some real estate managers hope for a better tomorrow, the real estate picture over the 12 months ended June 30 was more disheartening with managers’ global assets under management down 4.4% to $1.82 trillion, Pensions & Investments’ most recent real estate manager survey results show.

Real estate AUM managed for U.S. tax-exempt institutions fell by 7.1% to $690.3 billion.

This is the third year the global AUM of the top real estate money managers responding to Pensions & Investments’ annual survey has been lackluster, starting with a 0.4% increase in the year ended June 30, 2022, and down 2.9% in the 12 months ended June 30, 2023.

“The Fed initiating the cutting cycle signals nancing costs will likely come down, which should boost buyer and seller activity,” said Jon Pliner, managing director, investments and U.S. head of delegated portfolio management at Willis Towers Watson. “It is de nitely an in ection point for property markets.”

■ P&I ranks the largest real estate managers. Page 16

■ Managers hitting potholes on the fundraising trail. Page 14

■ Credit strategies the lone bright spot in a tough year. Page 15

■ For the full report, including a full data set, go to PIonline.com/ realestate2024

But during the survey period, real estate managers were still contending with the fallout from another year of slow transactions, anemic fundraising, higher interest rates, stagnant rental growth and paltry returns, industry insiders said.

The main theme over the past 12 months was “uncertainty regarding when and to what magnitude property values would fully re ect the higher-rate environment,” Pliner said “It appears we are nearing the end of the downward repricing cycle, assuming interest rates remain stable or

North Dakota board’s goal: building up to 50% internal

y B DOUGLAS APPELL

The North Dakota State Investment Board is moving to harness the fast-paced growth of the state’s institutional investment pools to build advanced in-house asset management capabilities in Bismarck.

Scott M. Anderson, the State of Wisconsin Investment Board veteran who joined North Dakota as chief investment of cer in 2022, said that effort could see the internally managed portion of the $22 billion in assets the State Invest-

ment Board oversees on behalf of 31 state clients go to as high as 50% from zero over the coming ve years or so.

An ambitious goal, perhaps, for an organization that didn’t have a governance committee as recently as ve years ago, but not necessarily out of place for one whose tagline is “Be Legendary,” and whose executives talk about pursuing “big, hairy, audacious goals.”

Anderson paints SIB’s plan to build out internal capabilities now as a natural rite of passage in the

NUVEEN’S SAIRA MALIK: ‘I’ve loved the market since I was a teenager .’ Page 3

The Ohio State Teachers’ Retirement System cannot invest its way to a permanent COLA, Brian Grinnell, former chief actuary of the $97.3 billion pension fund, told Pensions & Investments.

Grinnell left the pension fund in May after more than 10 years as its chief actuary. In a Sept. 27 interview, he said his responsibilities were primarily to help STRS staff and the board understand the risks the pension fund has faced and help devel-

op a forward-looking plan to make decisions with long-term outcomes in mind.

In his interview, he said, “I was not comfortable with the direction the plan was headed, and I didn’t feel like my continued participation would be positive.”

The pension fund has been beset by controversy for several years after a group of retired teachers, represented by advocacy organization the Ohio Retirement for Teachers Association, launched an aggressive

Setting stakes in the Middle East

Money managers are putting boots on the ground in the region, looking to build long-term relationships. Page 3

A R LEEN JA C OBIUS

IN THIS ISSUE

Alternatives

Texas Municipal’s Yup Kim thinks investors should give serious consideration to private markets in Asia-Paci c. Page 4

Defined Contribution

A Morningstar review of the largest HSAs found that despite decreasing fees, the industry can still improve. Page 27

ESG

A Climate Week panel co-moderated by State Street’s Ronald O’Hanley stressed careful language with investors. Page 4

Exchange-Traded Funds

A former SEC of cial says the proposed SPDR SSGA Apollo IG Public & Private Credit ETF pushes boundaries. Page 6

Pension Funds

Healthcare of Ontario’s Jeff Wendling looks back on a career full of challenge and achievement. Page 23

Special Report: Real Estate Managers

Fundraising is projected to be down in 2024, but the future looks good. Page 14

In a year where total global assets fell 4.4%, credit strategies showed strong growth. Page 15

Three P&I surveys now in progress

Responses to P&I’s annual survey of the largest U.S. retirement plans are due Oct. 25. Sponsors with combined U.S. pension and de ned contribution plan assets of $1.5 billion or more are eligible to participate. Results will run Feb. 10.

Responses to P&I’s annual survey of investment management consultants are due Oct. 11. Firms providing investment advice and related services to institutional investors are eligible to participate. Results will run Nov. 18. P&I is accepting late responses to the annual survey of index mangers . Firms managing index strategies, including passive, enhanced, ETFs/ETNs and factor based for U.S. institutional, tax-exempt investors are eligible to participate. Results will run Nov. 4. To request a survey or obtain further information, please contact Anthony Scuderi at ascuderi@pionline.com or 212-210-0140, or visit www.pionline. com/section/surveys

Apollo on track to $1 trillion in AUM by 2026

als of all wealth categories; and $50 trillion for rethinking public and private assets, which includes mixing public and private assets in xed income and eventually equity portfolios.

Apollo Global Management said it is on track to increase its assets under management to $1 trillion by 2026, with plans to grow its AUM to $1.5 trillion in ve years, according to a presentation at its Investor Day on Oct. 1.

Apollo had $696 billion in assets under management as of June 30.

Apollo executives speaking at Investor Day see four routes to growth: a $75 trillion (in 10 years) global industrial renaissance including, energy transition; $45 trillion retirement sector opportunity, including pension buyouts, annuities and de ned contribution plans; $150 trillion individu-

“If we are really successful, our business will be twice the size in ve years ... and we will still not be relevant in the scale of the big asset managers,” said Marc Rowan, Apollo’s co-founder and CEO.

Over the next 10 years, Apollo executives expect a total addressable market for the energy transition to be between $30 and $50 trillion, for example.

Defined contribution plans

Through subsidiary Athene, Apollo plans to offer new de ned contribution plan strategies as well as guaranteed life income and tax-advantaged products.  Retirement is driven by xed income, particularly high-grade xed income with yield, Rowan said.

For de ned contribution plans,

Apollo and Athene expect to embed annuities and private market assets in target-date funds, according to the presentation.

There were about $15 trillion in de ned contribution plans in

the U.S. and Europe in 2023. Most of the 401(k) plans have been in daily liquid strategies mostly invested in the S&P 500 for 50 years, Rowan said.

“Why? We don’t know,” he said. “We will x this.”

Texas Teachers trims PE, but still sees

CalSTRS updated the private equity investment policy for its $53 billion portfolio on Sept. 25, delineating the use of total portfolio leverage in the asset class and requiring an independent duciary to verify price on co-investments greater than $250 million.

In January, the investment committee of the $346.5 billion California State Teachers’ Retirement System, West Sacramento, approved its ability to temporarily leverage the entire portfolio by up to 10% to smooth out cash ows and to rebalance the portfolio.

The revised policy gives pri-

vate equity staff exibility to draw on the total fund leverage to enhance investment returns and manage liquidity. Before the change, CalSTRS private equity investment policy had been silent on the use of leverage.

The board’s private equity investment consultant, Meketa Investment Group, noted in a memo to the committee that there is no explicit maximum leverage limit for private equity, but rather, the leverage limit will be measured at the total fund level.

In her presentation to CalSTRS’ investment committee, Margot Wirth, director of private equity, said that the requirement of an independent duciary

promise

Returns may improve with increased competition in ‘maturing’ asset class y B ROB KOZLOWSKI

Private equity may be maturing and competition increasing, but large institutions may bene t from increased competition by seeing better returns on existing investments, said Jase Auby, chief investment of cer of the Texas Teacher Retirement System.

The $203.7 billion Austin-based pension fund recently completed an asset allocation study — its previous study was conducted in 2019 — and the board approved a new target allocation that included lowering the target to private equity to 12% from 14%.

Auby said in a Sept. 26 interview that the new target is more in line with the private equity target at TRS’ peers.

“We’ve been quite overweight vs. peers for quite a long time, and that’s really paid off. It’s our highest-performing asset class, and we’re still big believers in private equity,” said Auby.

For the 10 years ended June 30, the pension fund’s private equity annualized net return was 12.6%, above the annualized benchmark of 12.3%.

While private equity has been the top performer during that period, Auby said staff and investment consultant Aon Investments USA recommended lowering the target slightly because there are headwinds going

opinion for all co-investments was put in place a couple of decades ago when the pension fund had done two or three co-investments, had no dedicated co-investment team and had not embarked on the collaborative model. Today, CalSTRS private equity has completed a couple of hundred co-investments and has “a world class team now,” Wirth said.

“It’s time to take off the training wheels,” she said. Co-investments, now repre-

sent approximately 22% of the private equity portfolio, according to a Meketa report to the committee. CalSTRS has slowed its pace of commitments to private equity with a $4 billion to $4.5 billion expected to be committed in 2024, said John A. Haggerty, Meketa’s managing principal and director of private market investments, at the same meeting. By comparison, CalSTRS committed $3.6 billion in 2023, $7.1 billion in 2022 and $9.4

BIG PLANS: Apollo Global Management’s Marc Rowan

Managers ock to Middle East, vying for asset bonanza

Region’s asset owners seeking relationships with a local presence

y B SOPHIE BAKER and CHRISTOPHER MARCHANT

Global money managers are ocking to the Middle East in search of fruitful collaborations, putting boots on the ground in a key region where stakeholders are keen to nd not just service providers, but long-term, symbiotic relationships.

And those that will emerge the winners will be aware of that need to give something back to the region, sources said.

moving from a model where they had a relationship manager covering (the region) — probably an expat — to opening an of ce in Abu Dhabi or Dubai. There’s also, quite reasonably, people in the kingdom saying, ‘If you want to allocate assets from ourselves, what are you going to do for our local market?’”

That includes providing training, locating a head of ce in the cities, and contributing to the economy. Sovereigns and others will want to see giving, “not just trying to take from the region. The winning (model) is not a local of ce with salespeople in it,” Gaughan said.

“There’s a real sea change in belief about being on the ground — and that doesn’t just apply to investment managers in liquid assets, but also asset servicers and others in the value chain,” said Tony Gaughan, partner, investment management and wealth sector leader for EMEA and the U.K., consulting at Deloitte. “We’re now seeing rms

European and global managers tare building relationships at the senior level with governments and stakeholders. Managers will need to know the regulators, key stakeholders in sovereigns and other asset owners in order to help shape and assist with the policy agenda in the Middle East, Gaughan said. “That’s going to be a critical element of

Nuveen’s

What started as a small law rm ling a handful of suits against 401(k) plans’ use of forfeited funds has metastasized into a broad attack on sponsors that raises questions about reducing participants’ expenses. It’s a trend of more law rms ling more lawsuits seeking to use De-

partment of Labor regulations regarding duciary duty to supersede IRS rules.

Although there are differences among the various sponsor-defendants, the general theme is the same:

What can sponsors do with company contributions to a participant’s retirement account if the employee leaves before being fully vested?

Conventional wisdom is not to turn a hobby into a job for fear of creating a chore out of something that should bring joy; but Saira Malik clearly continues to nd plenty to love and enjoy in the stock markets, turning her stock-picking hobby into a high-pro le career.

“I’ve loved the market since I was a teenager,” Malik, head of the Nuveen equities and xed income platform and CIO at the $1.2 trillion rm, said in an exclusive interview with Pensions & Investments

Right now, the U.S.’s dominance in markets, particularly driven by growth stocks and advances in technology, is “certainly nothing

(Participants’ contribution aren’t affected.)

Plaintiffs want this forfeited money to be used to reduce plan expenses, which in turn reduces participants’ expenses. However, some plans use the forfeited funds to reduce employers’ contributions to the plans.

The IRS says de ned contribution

plans can use the forfeiture money to reduce employer contributions to the plan or to reduce plan expenses.

ERISA’s duty of loyalty guidelines say sponsors must place participants’ interests ahead of corporate ones. Plaintiffs’ attorneys argue that ERISA supersedes the IRS.

The eruption of lawsuits has been accompanied in the early stages by

that I would bet against…I think you need to keep your balance in the lead that the U.S. has gained now in terms of technology, and what it can do in terms of productivity and helping companies grow revenues is going to continue,” San Francisco-based Malik said. She also agrees, though, with the

divergent federal court decisions that don’t give plan sponsors — and their ERISA attorneys — a clear picture about how to defend against the lawsuits.

“It’s regulation by litigation,” said Daniel Aronowitz, president of Encore Fiduciary, a duciary liability insurance underwriting company.

U.S. private equity funds specializing in healthcare have attracted an increasing amount of capital, and returns have generally been higher than the overall private equity asset class. However, intensifying federal and state legislative efforts could create uncertainty and hurt returns.

Growing share: During the rst six months of the year, $7.7 billion was raised for U.S. PE healthcare funds, 4.8% of total fundraising. Last year, $15.6 billion was raised, 4.1% of the total, compared with $3.5 billion (2.3%) in 2013.

U.S. private equity healthcare fundraising

Outperformance: Generally, U.S. private equity healthcare funds have outperformed private equity overall, with vintage years 2012 to 2014 and 2018 to 2020 returning 26.4% and 20.7%, respectively, vs. 18.2% and 20.1% for all funds.

U.S. PE healthcare funds’ IRR by vintage year

Public investors: Altaris Health Partners VI, a fund that closed earlier this year, has several public pension fund investors, including Connecticut Retirement Plans, New Jersey Division of Investment and New York State Common.

Political pushback: Lawmakers are seeking to prevent private equity’s involvement potentially hurting care and outcomes, introducing the Health Over Wealth Act and Corporate Crimes Against Health Care Act of 2024. Summary of proposed legislation

y B SOPHIE BAKER

BUILDING RELATIONSHIPS: Deloitte’s Tony Gaughan

Texas Municipal’s Kim optimistic on private markets in Asia-Paci c

y B NATALIE KOH

Investors will nd it worthwhile to study and consider private markets in Asia-Paci c in the long run, particularly in countries such as Australia, Japan, South Korea, and India, said Yup Kim, CIO of the $41 billion Texas Municipal Retirement System, Austin.

Speaking during a reside chat at SuperReturn Asia in Singapore on Sept. 25, he admitted that the narra-

PRIVATE MARKETS

tive around Asia has changed in recent years, speci cally around China, but limited partners globally are making a mistake if they are not visiting and studying the markets.

“The homework assignment to be successful in Asia for the next 10 years is a lot harder for LPs, right? You have to understand Australia, Japan, Korea, Southeast Asia, India. … And so I do think the bar is going to be a lot higher to be successful. But I do think it's absolutely criti-

cal,” he said.

Two years ago, he believed that the majority of equity value creation in his lifetime would emerge from Asia and that he has a “deep, deep love fundamentally for this region.”

For the rst time in a while, his thesis about Asia is being severely challenged, he said. But he believes performance will soon follow, and that Asia is too large to ignore.

“If you want to understand deeply

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Allocators value climate talk, but caution risk over fuzzy language

ESG y B CARYL ANNE FRANCIA

Climate change has polarized investors, and “a lot of it is this confusion of values vs. value,” said State Street Chair and CEO Ronald O’Hanley.

Both are important, but what investors “need to be worried about — in addition to their values, and the values of their rms — is the value that they’re generating on behalf of their participants,” so the more that the investment industry can do to bring the subject back to an investment discussion is important, O’Hanley said during a Sept. 26 panel he co-moderated as part of Climate Week NYC.

While there are challenges in data, terminology and standards, climate risks and opportunities are on the minds of the largest pension funds and other asset owners, according to panelists.

After adopting a climate strategy following the Paris Agreement, Caisse de Dépôt et Placement du Québec dropped oil companies, in part due to their intent on growing production. Additionally, the 20-year performance of the former holdings was “certainly not enough to pay for the risk of volatility that these stocks have,” said Bertrand Millot, head of sustainability at the C$452 billion ($330.39 billion) Canadian pension fund manager.

“People today would say, ‘You left lots of money on the table this year because the oil price has gone up.’ Yes, that’s only if you look at where it was yesterday and where it is now. But actually, you forget that last year it was ‘here,’ and so you’ve actually lost money over two years,” Millot told the panel. The fund has since reinvested that capital into its renewables portfolio, which is close to C$25 billion and has returned 18% over ve years.

The event was hosted by the Sustainable Markets Initiative, which launched during the 2020 annual meeting of the World Economic Forum. The panel

‘DEEP, DEEP LOVE’: Texas Municipal Retirement System’s Yup Kim

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Private credit ETF would challenge regulatory line

Former SEC of cial says proposed SSGA offering raises some concerns

y B KATHIE O'DONNELL

The proposed SPDR SSGA Apollo IG Public & Private Credit ETF pushes up against “one of the most important thematic dividing lines in the securities regulations,” a former Securities and Exchange Commission of cial said.

That dividing line “is whether or not instruments speci cally con-

structed for the private market can or should be made available to the public market,” said William Birdthistle, who served as director of the SEC’s division of investment management before joining the University of Chicago Law School as a professor from practice in April.

“It seems like a very important barricade to police thoughtfully,” Birdthistle said.

State Street Global Advisors normally will invest at least 80% of the fund’s net assets in a portfolio of investment-grade debt securities. That will include a combination of public credit-related investments and pri-

vate credit investments sourced by Apollo Global Management, a Sept. 10 ling with the SEC said. The fund can also invest up to 20% in highyield securities.

While plenty of new types of ETFs have emerged over the years, “this one strikes me as doing something particularly unusual,” Birdthistle said.

“And I do think it would be a real Rubicon if it went through,” he said.

That’s because, like the river Julius Caesar crossed, a key boundary exists in U.S. securities regulations between the types of investments sophisticated investors with long

time horizons like pension funds are allowed to invest in and investments like ETFs that are available to retail investors, Birdthistle said.

“I’m not saying it can’t be done. I’m not saying it shouldn’t be done,” he said. “I’m just saying you’re offering an instrument that puts great pressure upon the standard bargain of securities regulations and so that gives me some concern.”

That bargain is “you can be private only if you’re dealing with sophisticated investors or with very few investors,” Birdthistle said.

While private credit is the focus today, “if this works for private credit, then one could argue it would work for venture capital, it would work for hedge funds, it would work for private equity, and that just seems like a lot of … investment product designed for sophisticated investors owing dramatically into the retail market,” he said.

While private markets “are the Holy Grail for ETFs right now,” according to Bryan Armour, director of passive strategies research for North America at Morningstar Research Services, a Morningstar subsidiary, he’s not sure they should be.

“Recent lings have shown the challenges of tting a square peg in a round hole,” Armour said.

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For example, the proposed SPDR SSGA Apollo IG Public & Private Credit ETF “requires Apollo to play the role of originator, buyer, seller and valuation provider of the ETF's private credit investment,” he said.

“This single-party system creates potential con icts of interest for Apollo,” said Armour.

Asked for comment, a spokesperson for SSGA said, for regulatory reasons, it "cannot discuss fund lings pending SEC review." Apollo also declined to comment.

Limited liquidity

Operationally, there could also be issues, he said.

“Limited liquidity could create issues for the ETF structure, so it will be interesting to see how that is addressed,” Armour said.

Armour also referenced lings for two other ETFs — the BondBloxx Private Credit CLO ETF and the Virtus Seix AAA Private Credit CLO ETF — which hit shortly after the SSGA-Apollo ling. CLO is short for collateralized loan obligation.

“Similar concerns with the liquidity of the private CLOs exist here as well,” he said.

Birdthistle also pointed to the operational challenge of “trying to offer a deeply illiquid instrument in a highly liquid wrapper such as the ETF.”

The idea “that private somehow means risky” or infers company size “is going to be relegated to a distant way that we used to think,” Apollo Global Management co-founder and CEO Marc Rowan told CNBC’s David Faber in an interview.

“I will predict that a year from now, you will not be able to tell the difference between public and private,” Rowan said.

“It won’t be different issuers, it won’t be different ratings, it won’t be different sizes, and it won’t even be different liquidity,” he said. “Everything that exists in the public markets on the xed-income

‘IMPORTANT BARRICADE’: University of Chicago Law School’s William Birdthistle

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Justin Thomson was named to head up the T. Rowe Price Investment Institute, a new initiative scheduled to launch next year, T. Rowe announced in a news release Oct. 1.

The T. Rowe Price Investment Institute will focus on enhancing the rm’s investment talent development and strengthening the delivery of its proprietary investment insights to clients, T. Rowe said.

Thomson, a 26-year company veteran who currently serves as head of international equity and a chief investment of cer, is charged with creating the institute’s charter, which is expected to involve establishing a center of excellence for developing differentiated investment thought leadership and internal investment talent management.

“More than ever, investors and advisers need a place where they can nd timely and actionable insights from people who are on the ground asking the right questions of the companies that are shaping the present and future of the nancial markets and global economies,” Thomson said in the news release. “That’s why the time is right to establish this institute.”

Among other things, the institute will curate and highlight insights generated by T. Rowe Price’s investment research organization and develop educational content to help clients and T. Rowe investment professionals augment investment decision-making.

The institute, which is scheduled to launch Jan. 1, will engage experts in business and academia and with other institutions on topics such as portfolio construction, behavioral nance and geopolitics, T. Rowe said.

Thomson, who is based in London, will continue to be a member of the management committee and head of international equity until he transitions to his new role, and he will remain CIO after the transition, a spokesman said in an email.

The company veteran helped conceive the rm’s international small-cap equity strategy and managed it for many years before stepping into his current leadership role in 2020. He was also an important contributor to T. Rowe’s asset allocation committee for the past nine years, T. Rowe said in the news release.

I KNOW THAT GUY!

P&I’s Christopher Marchant nabs screenwriting award

It’s not just award-winning institutional journalism that Pensions & Investments reporters are known for: On Sept. 22, Christopher Marchant, London-based senior reporter, won an award for screenwriting at the annual Black Star International Film Festival.

The Accra, Ghana-based festival aims to promote and celebrate works by lmmakers from Africa, and to showcase African lms on an international stage.

Marchant, co-writer of “The Letter” — a short lm that he adapted from a novel by Gambian author Baaba Sillah — along with the lm’s director and others who worked on the project, was the recipient of the Africa Rising Award.

Directed by James Skinner, with whom Marchant has worked on other lms, “The Letter” is set in

1945 and tells the story of a Gambian woman who receives a letter carrying news about her ancé, who is ghting in the war. The letter is written in English and no one in her community can read it, forcing the young woman to trek across the country in search of a translation.

“It was an absolutely phenomenal feeling picking up a trophy at the festival, a re ection of all the immensely hard work the entire cast and crew put in to making this story come to life,” Marchant said.

The chance of winning an award was so far from Marchant’s mind, he was actually at the bar at the festival when his win was announced, he added.

“The Letter” was also screened in Brighton, England, and at the Tallahassee Film Festival in early September.

The Los Angeles Uni ed School District has won the annual Art Caple President’s Award for Excellence from the National Association of Government De ned Contribution Administrators.

The award to the school district and its record keeper, Voya Financial, was announced at the association’s annual conference, held Sept. 15-18, in Phoenix, according to a Sept. 24 NAGDCA news release.

The award is named for the late Mr. Caple, a former NAGDCA president who was “a visionary and voice for those who serve others through employer-sponsored retirement plans and championed retirement programs that build nancial security for state and local government employees throughout their retirement,” the news release said.

The school district was honored for its deferred compensation plan, launched in 2006, whose assets now exceed $500 million for more than 11,000 active participants.

“These results were accomplished by simplifying investment options, including automatic enrollment and a Roth 457(b) option, and reducing fees from more than 1% to just 0.18%,” the news

release said.

“Financial outreach initiatives, which include personalized messaging and educational campaigns delivered to thousands of employees, heighten nancial literacy and boost retirement readiness,” according to the news release.

The school district’s “unwavering commitment to participant outcomes, innovation, and excellence in deferred compensation administration exempli es the spirit of strategic foresight and dedication this award recognizes, and serves as an inspiration for other public sector plans,” NAGDCA Executive Director Matt Petersen said in the news release.

NAGDCA also announced its annual Members’ Choice Award for the Maryland Teachers & State Employees Supplemental Retirement Plans, Baltimore with total assets of $5.6 billion.

The award recognized the “Catch the Match” program, in which participants received a dollar-for-dollar match of up to $600 “combined with targeted outreach, including webinars, email campaigns, and in-person workshops,” the website said.

ROBERT STEYER

Only 24% of investment professionals working in European private equity and venture capital are women, according to research by Level 20, a U.K.-based gender diversity nonpro t organization.

The number is an improvement from 2020, when only 20% of investment professionals in European private equity were women.

The study surveyed over 11,500 investment professionals in more than 700 rms across 13 countries. It also found that senior investment roles held by women increased from 10% in 2022 to 14% in 2024, and the number of local all-male investment teams has decreased from 38% to 26% in the same time period.

Of the countries surveyed, France and Sweden were leaders in gender diversity within private equity, with 31% and 28%, respectively, of roles held by women. Venture capital was found to have a higher average of women in professional positions than private equity.

“What we heard is that when it comes to venture capital, there are lots of factors that have naturally created a more diverse environment," said Gurpreet Manku, chief executive of Level 20. "Firms tend to be more recently established, at a time when workforce diversity is in focus, and employees tend to skew younger with smaller teams that tend to allow for a more exible structure.”

Data was collected between March and June 2024 from open sources on individuals working at all rms in Austria, Belgium, Denmark, Finland, France, Germany, Ireland, Italy, Norway, Poland, Spain, Sweden and Switzerland.

SOPHIE BAKER MULTITALENTED: P&I’s Christopher Marchant

LEADING MAN:

T. Rowe Price’s Justin Thomson

WINNING TEAM: From left, Luis Chaves Guzman, Voya Financial; Steve Schullo, Los Angeles Unified School District; Barbara Healy, NFP Retirement; and Sandy Keaton, LAUSD.

OPINION

OTHER VIEWS JOHN D i MARCO

Worried about the election’s effect on energy infrastructure? Fear not

With the presidential and congressional elections less than two months away, energy infrastructure investors are assessing the implications of their outcomes, especially if Republicans take the presidency and/or control of Congress.

Despite concerns that energy infrastructure investment, which soared under the Biden administration, might retrench dramatically under Republican-controlled executive and legislative branches, overarching change is likely to be mitigated by the fragmented U.S. energy market and legislative, geopolitical and supply-and-demand realities.

Legislative realities

Central to the discussion of the political future of infrastructure investment is the In ation Reduction Act of 2022, which among other initiatives seeks to substantially lower carbon emissions in the U.S. by 2030 and includes nearly $370 billion of federal funding for clean energy initiatives. Former President Trump has vowed to rescind any portion of that total yet unspent for climate provisions in the Act. History, and facts on the ground in red states, may not be on his side.

No energy or climate bill has been repealed after having been signed into law and the $190 billion of the roughly $225 billion of IRA clean energy capital announced to date is for projects in Republican-controlled states. Any attempted repeal of the IRA could face resistance at the state level, even with Republican control of both the executive and legislative branches. This might include budget reconciliation efforts focused on slashing IRA incentives for electric vehicle charging and related tax credits, rooftop solar and energy ef ciency. After all, Republicans have targeted these initiatives in past legislative sessions.

Even here, Trump has been noncommittal on EVs and, during the Sept. 10 debate with Democrat candidate Kamala Harris, said he is “a big fan” of solar energy.

Offshore wind, historically hamstrung by the high construction and transmission costs, has drawn frequent criticism from Trump. Methane emissions reductions mandated in the IRA might also face legislative backlash.

The Biden Administration’s other core piece of infrastructure legislation, the Infrastructure Investment and Jobs Act, included $550 billion over an eight-year period for new investments in transportation, water, power and energy, environmental remediation, public lands, broadband and climate resilience. As it was less controversial politically than the IRA and enjoyed bipartisan support, it would be less likely to be targeted for repeal. Separately, energy transition investments in areas such as hydrogen, and carbon capture and storage, have largely avoided political controversy. All of this suggests that signi cant change to the framework for traditional renewables is unlikely.

Geopolitical realities

Because of ongoing tensions between the U.S. and China (and related bipartisan

independence, security and affordability. While historically these goals have translated into support for fossil fuels, these are not necessarily incompatible with advancing climate goals. On the other side of the political aisle, Harris has recently recanted past support for certain policies perceived to be too liberal, which, regarding energy, included a reversal of her prior support of a ban on fracking.

coalescence of concern regarding relations between the countries), import-dependent supply chains, especially solar photovoltaics, are likely to carry continued risk for U.S. energy developers, regardless of election outcomes. Government focus on U.S. content in renewable projects, including related tax credits, is challenged by scarce production (about 2% of global production of solar panels, for example). While in the long term the market equilibrium for equipment procurement will feature more U.S. production with stable prices, in the medium term the industry is likely to face continued volatility, long lead times, and competition for supply capacity.

Supply realities Republicans’ traditional focus is on energy

With energy demand rising at its fastest level in ve years, a binary “fossil fuels vs. renewables” debate is incomplete. Annual U.S. oil production and electricity generation from renewables both hit records in the Obama, Trump and Biden administrations. The Biden administration’s energy policy is, for now, an amalgam of traditional fossil fuel production (still representing more than 80% of U.S. energy production) and a span of renewables that are growing and hold promise for a clean energy future.

Energy transition is a continuum and will always be subject to policy shifts across election cycles. While the gap between a vision focusing on maximizing fossil fuels and one centered on accelerating energy transition is a genuine ideological divide, there is no outcome wherein energy transition grinds to a halt. And none where fossil fuels disappear imminently. Moreover, as

John DiMarco is a managing director at Igneo Infrastructure Partners. He is based in New York.

OTHER VIEWS RYAN CUNNINGHAM

Affordable housing has ability to weather economic stress

Given the news headlines so far this year, it’s understandable that some investors might be approaching affordable housing with caution.

Even under ordinary circumstances, marshaling the resources to create or preserve such housing can be challenging. In economically dif cult times, it becomes even more of a struggle — and we are experiencing one of those dif cult periods right now.

A growing spectrum of rising expenses has eroded property performance in recent years, despite rent increases. Operating and insurance cost increases threaten to impact investment performance and worsen housing shortages. They have already created an uncertain nancial landscape for affordable housing developers and operators. However, this is not a story of an industry in crisis.

caution, but as a unique moment of opportunity.

Payroll costs and staffing shortages

One major rising cost for affordable housing originates in the labor market. Property management companies face signi cant challenges in hiring and retaining experienced staff for both leasing and operations. These staf ng shortages often contribute to operational inef ciencies and nancial strain that manifest in property occupancy and performance issues.

On this front, novel responses abound.

The affordable housing sector has proven remarkably resilient in times of economic stress, and the current environment is no exception. Historically, multifamily properties nanced via the low-income housing tax credit (or LIHTC) have signi cantly outperformed their market-rate counterparts, as described in CohnReznick’s biannual LIHTC property performance report.

While much of this resilience comes from the unique LIHTC structure, a signi cant portion can be attributed to the industry’s ability to respond and adapt to economic headwinds. Right now, we are seeing that problemsolving mentality unfold in new ways.

For institutional asset owners and money managers, this resilience offers signi cant value — providing a buffer against broader macroeconomic uncertainty and supporting the sector’s competitive, risk-adjusted return pro le. Indeed, such investors may see affordable housing’s current headwinds not as a red ag of

DiMarco

as the divisions seem in the heat of the election, there likely will be broad agreement on issues such as streamlining permitting for energy projects, onshoring key technologies supporting clean energy development, carbon capture and storage and strengthening critical mineral supply chains.

Even with known political uncertainty, more than $110 billion of private clean energy investment has been undertaken since the passage of the IRA in 2022. Private

targets needed to convert from construction nancing to permanent nancing. Higher insurance costs also add cash ow stress to operating properties.

For large institutions considering affordable housing but concerned by recent insurance increases, the industry’s proactive approach should offer reassurance.

Sophisticated property management companies have found creative ways to reduce payroll costs — such as by utilizing contract maintenance providers instead of full-time staff, or by leveraging economies of scale and sharing staff across several properties in the same market. It is a solution that’s working on the ground: One property that IMPACT nanced in a rural market was able to limit maintenance cost increases simply by sharing staff with another property they own nearby.

Elsewhere, we have seen local governments and housing authorities step up as problem-solvers, providing valuable tenant referral services and housing subsidy vouchers. These additional resources have helped developers nd breathing room to adapt to cost increases.

Growing hurdle of property insurance expenses

As a result of increases in the frequency and severity of extreme weather, wild res, and other catastrophes, property insurers have faced a signi cantly higher volume of claims in recent years. Affordable multifamily housing is not immune to these trends, which ultimately affect the cost and availability of property insurance.   Increases in property insurance premiums have made it dif cult for properties to meet performance

sector investment will continue to propel energy transition and public policy will likely follow suit.

Investor realities

Infrastructure investors need to consider their exposure to federal policy and the implications of continued policy support at the state level when managing investments in energy transition. At a macro level, a Republican executive and legislative sweep would be unlikely to have broad disruptive implications to energy transition. In speci c areas — EVs and offshore wind, for example — the disruption could be more

On the front end, lenders and investors are now re ning underwriting standards to account for future movements in insurance markets. Some lenders are now stress-testing projected insurance cost increases and requiring extra cushion in their initial underwriting models. Stakeholders throughout the industry, including major lenders like Freddie Mac, have begun re-examining their insurance standards to nd areas where requirements can be safely relaxed. Additionally, the industry continues to incentivize long-term solutions, such as more resilient and sustainable building design through the allocation process for LIHTCs.

On the back end, developers and operators have responded by honing their risk management strategy, utilizing novel combinations of corporate blanket insurance policies and incremental policies to bring down overall costs while ensuring their portfolio remains protected.

Construction delays in a high-interest environment

Permitting delays and administrative hold-ups are longstanding issues in the construction industry, but their impact is particularly painful in the ongoing environment of elevated interest rates.

In this rate environment, delays can quickly kill a project. In response, stakeholders across the industry have focused on making their closing processes more ef cient. Here at IMPACT, we’ve streamlined our underwriting and legal review process to keep closings on track. We have also continued to offer early rate lock options to expedite the underwriting process and reduce administrative delays. Other investors are following suit.

Furthermore, project completion delays lead to strained lease-up schedules as developers rush to meet placed-in-service cutoffs or

meaningful if Republicans are in control.

Still, a multisource (sometimes known as an “all-of-the-above”) energy backdrop, combining fossil fuels and renewables, will remain in place in the near term no matter the election outcomes. Renewable energy will continue to gather momentum and, over time, share of energy generation, regardless of intermittent and inevitable political and related policy shifts.

Institutional asset owners and money managers ... may see affordable housing’s current headwinds not as a red ag of caution, but as a unique moment of opportunity.

other funding milestones. This urgency can compromise tenant screening processes, which may result in delinquent tenants and add further nancial stress. Here, again, the industry is solving problems in real time through more effective oversight.

On one transaction that IMPACT nanced in the Southeast earlier this year, the sponsor discovered during the lease-up process that their property manager had failed to process tenant applications in a timely manner, causing the property to fall behind key leasing milestones. The sponsor quickly removed the nonperforming manager and selected a new management company. Thanks to their close attention and decisive pivot, they were still able to complete their lease-up on time.

A comprehensive approach to meet urgent need

Despite the economic headwinds, affordable housing continues to be a shelter in the storm. While the sector’s creative problem-solving is minimizing the pain of the current environment, the long-term supply and demand fundamentals provide a stabilizing force for institutional investors seeking a steady stronghold in a diversi ed portfolio.

Renter demand for affordable housing remains greater than ever.

Half of all U.S. renters — a record 22.4 million households — spent more than 30% of their income on rent and utilities, according to a report published earlier this year by the Joint Center for Housing Studies at Harvard University. Meanwhile, the National Low-Income Housing Coalition’s “The Gap” report nds the U.S. has a shortage of 7.3 million affordable and available rental homes for low-income and extremely low-income renter households. With demand for such housing at an all-time high and supply persistently low, the outlook for investment in affordable multifamily housing remains positive. The present economic landscape is undeniably tough, but affordable housing is clearly up to the challenge.

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

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Ryan Cunningham is manager, investments at IMPACT Community Capital. He is based in San Francisco.

EXEC UTIVE CONVERSATION with

PLAN YOUR PATH TO A SUCCESSFUL PENSION RISK TRANSFER

For corporate pension plans pursuing a pension risk transfer (PRT) — a derisking solution that transfers some or all plan participant payments to a life insurer via a group annuity contract purchase — the operational complexities of the transaction can be daunting. But they don’t have to be, according to Londone Moulds, vice president and head of client service and operations at Legal & General Retirement America. Plan sponsors can thoughtfully traverse the several steps needed to achieve a successful PRT, both for their annuitants and for their organization. It takes proper planning, open communication among all constituents, robust data preparation and, importantly, partnering with an insurer experienced in these transactions and that prioritizes post-transaction customer service.

Pensions & Investments: What are some of the initial considerations around a PRT for plan sponsors?

Londone Moulds: It’s important for plan sponsors to prepare as much as they can for a PRT transaction because it encompasses change for both the sponsor and their plan participants. If operational issues are not top of mind, they should be right from the start.

The complexity and preparation vary depending on the type of transaction. A full plan termination can take around 12 to 18 months to complete. Some factors that have an impact on timing include the cleanliness of data, interpretation of plan provisions and any upcoming windows for lump-sum payments. A lift-out, in which only a subset of participants is transferred to an insurer, is usually less complex than a termination as it involves the transfer of a retiree population that has already selected their retirement benefit and are receiving payments, so that data is available from the start.

P&I: What are key factors — both regulatory and qualitative — that plan sponsors should assess when selecting an insurer?

Moulds: Regulatory factors are the most important. The Department of Labor (DOL) Interpretive Bulletin 95-1 provides guidelines to make sure that plan sponsors are selecting the safest available annuity provider.

There’s a great amount of due diligence by the plan sponsor to make sure that the insurer can not only meet the administrative requirements, but that they are also financially responsible. Things like credit rating, diversification of portfolio and lines of business should all be considered. The 95-1 guidelines do a good job in covering all these aspects and, as an insurer, we’re very supportive of those regulations because our goal is to ensure that we are not only compliant, but that we’re protecting the interests of the annuitants.

When it comes to the qualitative factors that plan sponsors should assess in insurer selection, one standout is clear communication. We approach the transaction as partners and aim to ensure there is collaboration between the plan sponsor and the insurer. We want to educate plan sponsors, especially those that have never transacted in the PRT space, on best practices. We also want to learn their current administrative operations. If our services don’t align with theirs, we communicate it upfront in order to

make the process as seamless as possible and mitigate any disruptions that could occur.

P&I: And what’s the one thing that plan sponsors should focus on most for the PRT preparation phase?

Moulds: Data. Data impacts the pricing, ease and efficiency of a transaction.

Data inconsistency is an issue as plan sponsors are managing decades-old information and people move or get married or divorced. We work with vendors to create the most realistic snapshot of accurate data and we’re able to identify and fill in any gaps. We can dedicate more time to reconciling the data if we don’t need to search for people and, the experience is better for the annuitants if we have current, concise information and are able to proactively communicate with them.

Londone Moulds VP, Head of Client Service & Operations Legal & General Retirement America

P&I: What differentiates an effective handover in terms of communication?

Moulds: The biggest factor is superior customer service for both the plan sponsor and the plan participants. An insurer should guide the plan sponsor via best practices on how and when to communicate the elements of the transaction that will have an impact on their participants. Having a clearly defined implementation process for communications that is established in advance creates a level of comfort and confidence. We encourage plan sponsors to start by sending out an introductory transition letter. We follow that with a welcome communication that also answers frequently asked questions and, most importantly, informs annuitants of the next steps in the process and what they can expect at each stage. We want the communication process to be as seamless as possible.

We are able to customize our project plan for communications and the data reconciliation process as both can help us further align with the needs of the sponsor. It shows our versatility as an insurer and our understanding of the diverse population of plan sponsors and their annuitants.

“It’s important for plan sponsors to prepare as much as they can for a PRT transaction because it encompasses change for both the sponsor and their plan participants. If operational issues are not top of mind, they should be right from the start.”

P&I: What are key aspects of the insurer’s operations for a PRT transaction?

Moulds: From the time that we’re selected as an insurer, we use a formal project plan that assigns a dedicated team to work on the transaction.

Our process is organized into three primary work streams: data, communication and legal. For data, we do a diligent scrub to fill in any gaps and outline our data requirements to the plan sponsor. Communication is key, not only between the plan sponsor and the insurer, but also with the participants — we describe the partnership with the sponsor and their confidence in our organization to administer and guarantee their pension benefits. On the legal aspect, we ensure that we are in agreement with the sponsor over the terms of the contract, specify our obligations and describe any potential anomalies related to data, communication and future administration.

We host weekly update meetings and take a project management approach to the transition process. It’s essential we establish a good rapport with the plan sponsor to build confidence and ensure that in the event that something unexpected occurs, we’re available and ready to take action that prevents any impact or disruption to the annuitant population.

P&I: What would you call out as differentiating Legal & General Retirement America’s approach on PRT implementation?

Moulds: What differentiates our PRT transition is that we have a dedicated, in-house customer service team. For each new deal that we win, we provide thorough, deal-specific training to all our associates, so they can provide a customized, personalized experience for each annuitant who calls in with questions.

We don’t measure our associates’ call-handling time, because we don’t want anyone to feel rushed. We acknowledge that we are dealing with an aging population, and we offer the time and dedication to ensure that their questions are answered, with clarity in all the information provided, as they transition to our organization from their prior employer. Additionally, we have developed a continuous improvement model dedicated to operational excellence. Our goal is not only to provide great service now, but for the future so we are exploring the use of advanced technology to prepare for future markets and annuitant demands. ■

Sponsored by:

REAL ESTATE MANAGERS

Managers hitting potholes on the fundraising trail

Global 2024 forecast of $140 billion a small gain from 2023, but not all sectors

estate managers are being treated alike.

Real estate managers are having a long, rough ride along the fundraising trail.

Global fundraising for the asset class is forecast to be $140.2 billion in 2024, a slight uptick (1%) from $138.4 billion in 2023 but nearly a third less  (31%) than the $202.3 billion raised in 2022 and 41% off the $235.8 billion peak in 2021, according to Preqin’s Future of Alternatives Report.

A slowdown in transactions, and subsequent distributions, affected investors’ ability “to obtain liquidity to address overall portfolio rebalancing needs and to make commitments to new offers,” said Jon Pliner, managing director, investments and U.S. head of delegated portfolio management at Willis Towers Watson.

“Thus, the major drop-off in fundraising over the past 18-plus months,” Pliner said.

North American real estate managers are expected to raise $100.3 billion in 2024, ahead of 2023 when they raised $97 billion, Preqin data shows. According to data from Pensions & Investments’ annual real estate money manager report, real estate managers had a total worldwide assets of $1.82 trillion as of June 30, down from a 2022 high of nearly $2 trillion in AUM.

Not all equal

In a world where investors have less capital to commit, not all real

But Pliner said that new managers are not necessarily faring the worst.

“Naturally, new entrants may have a more dif cult time if they don’t have the experience to draw from past cycles,” Pliner said. “However, new managers, depending on when they started deploying, could have a market timing advantage vs. estab-

‘New managers, depending on when they started deploying, could have a market timing advantage vs. established players.’ WILLIS TOWERS WATSON’S JON PLINER

lished players.”

New managers are “less likely to be strapped with troubled legacy assets in out-of-favor sectors such as traditional of ce,” he said.

Some managers are closing funds short of fundraising targets. Lone Star Funds in September closed Lone Real Estate Fund VII at $2.7 billion, barely half of its fundraising target. According to the $4.4 billion Santa Barbara County (Calif.) Employees’ Retirement System, an investor in the fund, the fundraising

target was $5 billion.

“The nal close for Lone Star Real Estate Fund VII was held on schedule, despite the dif cult fundraising environment,” a Lone Star spokesperson said in an email. “Since the fundraise period expired, Lone Star executives decided to focus on deploying the capital rather than extending the fundraise period,” the spokesperson said.

“We remain well-positioned to capitalize on the opportunities ahead to grow our business.”

Nancy I. Lashine, founder and managing partner of Park Madison Partners, a private real asset placement rm, said her team has been seeing a barbell effect: Most of the capital is going to the very large players that are generally publicly traded and have multiple product lines and “sharpshooters,” meaning niche managers, typically smaller rms, that specialize in an area or property sector such as industrial outdoor storage.

The managers that are suffering the most are the ones in the middle, Lashine said. “Folks that used to raise $500 million or $1.5 billion but don’t have enough capital to add a bunch of different products” and aren’t global.

Just like after the global nancial crisis, investors are once again trying to prune their manager lists, Lashine said.

There is consolidation in the real estate market but not always large real estate managers buying smaller rms, Lashine said. Some traditional public equity or xed-income managers would like to get into alternatives. A non-U.S. manager looking to get a foothold in the U.S. could

buy a real estate manager.

However, the biggest consolidation trend is larger managers trying to buy interest in real estate operators as a way of capturing deal ow, Lashine said.

In the past, those large real estate managers might have entered into a joint venture or invested with the operator, she said. Now, these large real estate rms want access to the operator’s deal ow and the team, buying anywhere from 20% to a controlling interest in the real estate operator — companies that manage and sometimes owns properties but don’t invest capital for third parties.

For example, in August the $20 billion Lincoln Property Co. acquired

Dallas-based Centennial, a national retail real estate owner and operator. The transaction provides Centennial capital and resources to accelerate its national expansion while giving Lincoln access to new mixed-use development opportunities, according to a joint news release.

One reason for the slower fundraising is that many investors are not getting their money back from their managers, said Tom Shapiro, president, founder and CIO of GTIS Partners.

This is particularly the case for investors heavily invested in the ofce sector, where it is very expensive to get a new tenant when one leaves, Shapiro said.

GTIS global AUM dipped less than a percentage point (0.45%) to $4.4 billion, while real estate managed for U.S. institutional tax-exempt clients rose 1.2% to $343 million as of June 30, P&I data shows.

Multifamily in favor

Avi Shemesh, a principal and co-founder of CIM Group, a real asset manager, said that more investors are increasing their investment in multifamily, infrastructure and real asset credit.

“Investors have been sitting on the sidelines waiting to see when the market will both stabilize and values adjusted to create attractive entry points,” Shemesh said.

Cityview, a real estate manager and developer focused on multifamily properties in gateway markets in the Western U.S., closed its largest fund at the end of 2023, said CEO Sean Burton.

He declined to give the total size of Cityview Real Estate Partners VII, other than to say that it raised less than $5 billion.

Burton said that 25% of Cityview’s equity is from its discretionary vehicle and 75% is from joint venture relationships.

“We marry our fund with those joint ventures on a deal-by-deal basis,” he said.

Burton said Cityview has a running game and a passing game. Part of the running game is to buy existing assets in well-located, supply constrained areas, at deep discounts.

CityView closed on its rst value-added deal in May, Burton said.

The rm’s passing game is ground-up development, he said. “That’s more of our brand ... People know us more as ground-up developers,” Burton said.

While City was able to close on the largest fund in its history in December, it wasn’t easy, Burton said.

“We had to have a lot more meetings than we used to have before,” he said.

A lot of pension systems had allocation issues and problems with open-end and core funds with debt and of ce issues in their portfolios that took up much of the investment staff and consultants’ time, Burton said.

“We’re happy we got it done,” he said. “There will be a great buying opportunity coming.”

Real estate debt

John Ockerbloom, head of Barings’ newly combined U.S. and European real estate business, debt and equity, said that his team has had more fundraising conversations in 2024 than in 2023 with more investors interested in real estate equity. But investors are still hesitant, he said.

During its July 31 second-quarter

Credit strategies the single bright spot in a tough year

Loans, hybrid debt, mortgages all increased, while outlook for opportunistic is heating up

y B ARLEEN JACOBIUS

The real estate strategies that managed to show any growth in assets under management during the 12 months ended June 30 were all debt strategies, according to the most recent Pensions & Investments real estate manager report.

While global real estate equity fell by 6.2% to $1.31 trillion, loans were up by 18.9% to $64.1 billion, hybrid debt grew by 7.5% to $10.2 billion and mortgages ticked up 0.8% to $362 billion, P&I data shows.

The same trend was true for real estate managers’ assets managed for U.S. institutional tax-exempt clients. Real estate equity was down by 10.1% to $522.1 billion, while loans were up by 25% to $14.9 billion and mortgages grew by 7.7% to $111.6 billion.

One real estate segment that showed the most growth over the past 12 months was credit, with investors increasing their target allocations to real estate credit, said Avi Shemesh, a co-founder and principal of CIM Group.

CIM’s loan AUM for U.S. institutional tax-exempt investors grew by 35% to $1.2 billion, making it the only one of the top ve loan managers to show an increase. (Second-ranked Af nius Capital did not report loan assets on last year’s survey.) CIM had $8.3 billion in total real estate AUM as of June 30, down 5.8% from the year-earlier period.

By comparison, real estate equity investors are at the early stages of evaluating deployment, Shemesh said.

DISTRESSED OPPORTUNITIES COMING: CIM Group’s Avi Shemesh

“In the case of core (NFI-Open End Diversi ed Core Equity index), investors are tending to wait for redemptions to be ful lled, but are actively considering redeployment strategies for that capital within other core funds or real estate strategies,” Shemesh said.

For the one-year period ended June 30, distributions and redemptions in ODCE funds were $13.5 billion, NCREIF reported. According to real estate consultant Townsend Group, there were ODCE fund queues of nearly $38 billion as of Sept. 30. With the exception of a short dip in 2021, queues have been growing steadily since 2018, Townsend said in the Winter 2024 edition of the PREA Quarterly.

CIM executives expect to see in-

creases in allocations to opportunistic real estate strategies when there are more forced sales or re nancings start coming in volume.

This increase in the volume of stressed and distressed properties is starting to occur, Shemesh said.

It is not just the result of higher interest rates, “but also higher operating expenses and insurance premiums, which together with moderating rental rate growth is causing property owners to seek liquidity,” he said.

Extending mortgages

At the same time, some lenders have been extending mortgages.

“Bank lenders are not extending mortgages in the hope of values increasing, but rather, they are deciding whether to extend based on a property’s current income stream and/or the current value of the asset,” Shemesh explained.

If the property doesn’t meet these criteria, “property owners are either forced to sell, inject additional equity, or hand over the keys” to the lender, he said.

“Increasingly, owners are turning to the private real estate debt market as banks continue to tighten their lending requirements,” Shemesh said.

“The last couple of years have been a bit bumpy” for the real estate industry, said Jay DeWaltoff, a managing director and head of U.S. real estate debt at DWS. DeWaltoff joined the rm from J.P. Morgan Asset Management in August.

DWS Global Real Estate’s global real estate AUM dropped by 8.3% to $68.3 billion and its U.S. institutional tax-exempt assets were down

Assets by location

The largest real estate investment managers

REAL ESTATE MANAGERS

1

REAL ESTATE MANAGERS

Fundraising

earnings call, KKR & Co. co-CEO Scott C. Nuttall echoed this sentiment, saying that investor sentiment about real estate equity “is shifting a bit right now.”

“There has been more caution, no doubt. Our perspective is that the sentiment has bottomed,” Nuttall said.

In the rst half of this year, valuations bottomed, and  “we’ve been quite active deploying into real estate equity,” Nuttall said.

“I’d say the fundraising is going to lag that reality a little bit, but we’re starting to have more conversations with investors that understand, although it may be perceived as a bit contrarian, this is a really good time to invest in real estate equity,” he said. KKR last closed a real estate fund in 2021, including the $4.3 billion KKR Real Estate Partners Americas III. The rm does not report real estate AUM separately but only as part of its $152 billion real assets business.

Last year was challenging, Burton said. This year hasn’t been easy but his team has seen more resetting of values.

People are their medicine,” Burton said. “Not everybody has been able to extend and pretend (existing mortgages that are coming due).”

That’s why there is more volume this year, he said. It’s also why Cityview chose not only to retain but hired staff to help underwrite deals. The rm looked at 183 deals and did three last year. In 2024, Ciyview closed on three deals in the rst eight months of the year.

“You can’t turn off the spigot and get rid of people,” and when the markets come back ip a switch and get them back again, Burton said.

Real estate is not the only real asset

Credit

CONTINUED FROM PAGE 15

13.8% in the year ended June 30 to $17.4 billion.

Real estate lenders did “some good old fashion kick the can down the road” last year faced with maturities on loans with few covenants, leading to an increase in loans coming due this year, DeWaltoff said.

According to the Mortgage Bankers Association, extensions or other modications led to expected debt maturities in 2024 growing to $929 billion at the end of 2023 from $659 billion expected in 2024 maturities at the end of 2022.

During the last 12 months, the loans in DWS’ portfolio were structured well and its credit portfolio bene ted from higher yields, he said.

Some 40% of DWS’ real estate credit portfolio is in multifamily, DeWaltoff said, which will continue to be a focus for the rm’s real estate credit business, along with industrial.

Banks are pulling back from making construction loans and so DWS executives are “actively deploying capital to do ground-up industrial construction lending, “ he said. With construction starts currently down, the builders will be delivering assets into a more supply constrained environment, DeWaltoff said.

Going forward, the real estate platform is pretty stable and DWS executives will be on the offensive, he said.

“Having new strategies that don’t carry any legacy issues will be in vogue and most attractive for prospective investors,” DeWaltoff said.

Investors were mainly committing capital to real estate credit rather than real estate equity, said Raimondo Amabile,

sector running into problems raising capital in a higher interest rate, low transaction volume environment. EQT on Sept. 24 held a nal close of its rst long-hold (15-25 years) active core infrastructure fund at €2.9 billion ($3.2 billion). The fund launched in March 2202 with its €5 billion target.

Since the fund’s launch, the macroeconomic environment has shifted, with many investors signi cantly impacted by the denominator effect on their portfolios and steep increases in interest rates, an EQT spokesperson said.

“The higher rate environment should allow ACI (EQT Active Core Infrastructure fund) to invest at very attractive returns,” the spokesperson said in an emailed response to questions. “EQT’s long-term ambition for the ACI strategy has not changed and it continues to scale the strategy as the core and core-plus market remains a robust opportunity set.”

EQT executives see “big potential” investing in core infrastructure, the spokesperson added.

PGIM Real Estate's co-CEO and global chief investment of cer.

PGIM was ranked second on P&I’s list of real estate rms managing mortgage assets for U.S. institutional tax-exempt investors with $25.5 billion in AUM, up 14.8% over the prior 12-month period.

“We were actually very active on the credit side,” Amabile said.

Mortgage origination, particularly in the U.S., has been fairly good depending on the state of the individual property market, he said. The vast majority of PGIM’s loans were for multifamily and logistics properties, Amabile said.

‘SENTIMENT HAS BOTTOMED’: KKR’s Scott C. Nuttall

Victor J. Blue/Bloomberg

COLAs

social media campaign criticizing the pension fund’s board for voting not to award retirees cost-of-living adjustments every year between 2017 and 2022, after previously cutting the COLA to 2% from 3% for ve years beginning in 2012.

Anger among retirees eventually led to a series of board elections. The 11-member Ohio STRS board consists of seven trustees elected by STRS participants and four trustees appointed by state of cials. Of those seven elected trustees, six — all elected since 2021 — call themselves reformers.

The reformers support restoring a permanent annual 3% COLA that was in place before a 2012 pension reform law, which would be funded by cost cutting, including a move to passive investing and signi cant cuts to the investment staff.

Since the reform trustees took over the majority, enacting their plans has proven not to be so simple, because a permanent COLA can only be approved by the pension fund’s actuarial consultant — currently Cheiron — if it does not impair the scal integrity of the pension fund, according to the 2012 Ohio pension reform law.

Mature pension plan

The pension reform law, SB342, was one of ve laws that addressed funding issues at all ve of Ohio’s state retirement systems and was drafted as a result of severe stock market declines that came from the Great Recession in 2008 and 2009. Among all the state systems, STRS was the worst off in 2012 with a funding ratio of 57.6% as of June 30 of that year. Additionally,  the amortization period for the retirement system's unfunded pension liabilities under the STRS de ned bene t plan had become in nite — meaning that it would never become fully funded.

Grinnell said STRS has had to contend with the challenge of being an extremely mature pension fund: Essentially, there is more money being sent out to retirees receiving bene ts now relative to the future contributions the pension fund can expect from current and future teachers.

“Here’s where STRS is a little bit of an unusual situation because it is a xed-rate plan,” Grinnell said, “so both the bene ts and the contributions are essentially xed by statute. So most plans, if they have a bad year in terms of investment performance, the contribution rate goes up the following year to ll that hole. That doesn’t happen at STRS.”

Grinnell said when a pension fund is both a mature plan and has that xed-rate contribution and xed bene ts, it’s very dif cult to recover from any kinds of market downturns. He noted that all ve of Ohio’s state retirement systems have that xed-rate structure.

“Most other public pensions do not have that kind of structure,” he said, “and I think that tends to work all right for an immature plan, a plan that’s growing and not paying out a lot of bene ts relative to the contributions.”

STRS, however, is not growing. As of June 30, 2023, the number of active teachers participating in STRS was 175,032, down from 179,944 as of June 30, 2003, according to actuarial valuation reports for those years.

However, the number of retirees and bene ciaries receiving bene ts rose to 156,511 as of June 30, 2023, up from 108,294 retirees and bene ciaries 20 years earlier.

“An important thing here is Ohio’s population has been pretty stagnant for the last 25 years, in particular the school age population. That’s actually been shrinking,” Grinnell said.

Beginning in the 1990s, he said, the population of school-age children in Ohio has been declining about 1% every year.

“It makes sense that if the schoolage population is declining, there's a good chance that the number of teachers are going to go down eventually as well,” he said. “That's what the plan has seen. So that's another factor that contributes to maturity and the vulnerability of the plan to downturns. It's hard to recover that resilience.”

As of June 30, 2023, STRS' funding ratio was 81.3%, according to its latest actuarial valuation report.

Effects of the law

One result of that level of maturity was the 2012 pension reform law, which increased the employee contribution rate to 14% from 10%. However, the employer contribution rate remained steady at 14%, a signi cant point of contention among teachers.

The pension reform law also amended Section 3307.67 of the state’s revised code to state it was the intent of the Ohio General Assembly to “recognize that no member has a legitimate expectation of any particular future cost-of-living adjust-

‘We have a lot of people here in the state who . . . want this benefit increased as soon as possible (and) right now if not before, but that is extremely, extremely difficult .’

FORMER OHIO TEACHERS’ ACTUARY BRIAN GRINNELL

ment, or payment of future cost-ofliving adjustments at any particular time, under Ohio law.”

As a result, the law modi ed the COLA, noting in the uncodi ed section that modifying future COLAs was “the most effective means for restoring the long-term solvency” of the de ned bene t plan.

The law also requires STRS to have a funding period of no more than 30 years or to submit a plan to the Ohio Retirement Study Council, the state’s agency overseeing all the retirement systems, to reduce its funding period to reach this target.

While the board was able to approve a 2% COLA every year until 2016, Grinnell said an experience study and asset-liability study conducted early in 2017 showed a number of assumptions needed to be changed, which would increase the calculated liabilities of the system.

New assumptions

The Segal Group, at that time the Ohio STRS actuarial consultant, conducted the studies.

“It was clear that the mortality experience of the system was different than the (earlier) assumption,”  Grinnell said. “Mortality had improved … over the last 20 years, and the assumption hadn’t really re-

ected that. So in the 2017 experience review, there was a change to the mortality assumption.”

At the same time, he said, the pension fund had an assumed rate of return of 7.75%.

“Risk-free rates had gone from 7%-plus in the early 2000s down to around 3% at that point in time,” Grinnell said.

“So that assumption was also under a lot of scrutiny, they lowered the assumed rated of return from 7.75% to 7.45%,” which increases how much is needed to be contributed to the plan.

Complicating things further, the pension fund had just emerged from an anemic year of investment returns, with a net return of 0.92% for the scal year ended June 30, 2016, according to that year’s comprehensive nancial annual report. While it beat its benchmark return of 0.45%, it was still well below STRS’ assumed rate of return.

Grinnell said the rising mortality assumptions, the lowering of the assumed rate of return and a low investment return for the prior scal year all hitting at the same time meant the “funding ratio was going to drop substantially due to the combined impact of all these things at that point in time.”

The result was that STRS’ funding period would exceed 30 years and a plan would have to be submitted to the Ohio Retirement Study Council on how to get it back under that benchmark.

According to Grinnell, the Segal Group told the board the only substantial thing that was within its authority to do was reduce the COLA.

“So at that point in time, the board made the painful decision to reduce that COLA from 2% down to 0%,”  Grinnell said.

Unfortunately, the COLA would remain at zero through scal year 2022, a period that saw signi cant market volatility in part due to the COVID-19 pandemic.

It wasn’t until scal year 2023 that retirees received a 3% COLA for that single year. However, that has not been repeated.

Turmoil at the fund

Anger over the COLA has led to what can genuinely be called a crisis at the system.

In April, an Ohio Court of Appeals restored Wade Steen, an ousted re-

letter alleging a “hostile takeover” of the pension fund by private interests. Steen and Fichtenbaum in 2021 had asked the board to consider an investment strategy promoted by a company called QED Technologies LLC, which has no assets under management, no track record and is not registered with the Securities and Exchange Commission. Retirees are angry because they retired from their positions believing they were going to get a 3% COLA every year, and they’re not getting it. But Grinnell said the economics of a COLA are just not possible in the short term.

“I understand we have a lot of people here in the state who feel that they were promised something, and I understand why they feel that way,”  Grinnell said. “They want this bene t increased as soon as possible (and) right now if not before, but that is extremely, extremely dif cult.”

form-minded trustee to its board, tilting the majority to reformers for the rst time. The court ruled Ohio Gov. Mike DeWine did not have the authority in May 2023 to remove Steen as his appointed investment expert on the pension fund’s board before his term was set to expire. While Steen’s term did expire on Sept. 27, another trustee newly elected by the reformers — Michelle Flanigan — recently took her seat and a majority remains solid.

It was then that Grinnell chose to resign from his role as chief actuary in May, not long after the reform majority took hold.

The reformers have continued to declare their wishes to gut investment staff and move the pension fund to all index funds, primarily to support the cost of future COLAs. On Sept. 25, Lynn Hoover, acting executive director and chief nancial ofcer, and Matthew Worley, deputy executive director — investments and chief investment of cer, both submitted their resignations. Hoover's resignation will be effective Dec. 1, and Worley's resignation will be effective March 31, when both have reached their 31st anniversaries that will make them eligible for bene t bene ts from Ohio Public Employees' Retirement System, Columbus, which has $101.8 billion in de ned bene t plan assets, where all STRS staff members are participants.

The resignations came days after William Neville, executive director, agreed to retire Dec. 1 by mutual agreement with a $1.65 million buyout after being on administrative leave since November pending a personnel-related investigation by an outside third party. Hoover, deputy executive director- nance, has been serving as acting executive director since that time.

On May 14, Ohio Attorney General Dave Yost led a lawsuit in the Ohio Court of Common Pleas in Columbus against Steen and fellow reform trustee Rudy Fichtenbaum, currently chairman of the board, alleging they breached their duciary duties by “seeking to steer as much as 70% of STRS's current assets (about $65 billion in teacher pension funds) to a shell company that lacks any indicia of legitimacy and has backdoor ties to Steen and Fichtenbaum themselves.” The lawsuit followed the receipt of an anonymous

“The only way that could happen is for the state or some outside entity to step in and say, ‘We’re going to fund that,’” he said. “Because if you were to commit to — for instance — a 2% additional COLA every single year, a new COLA granted every year, the amount that it roughly takes is $14 billion to fund that. Where is that $14 billion going to come from? I don’t know.”

He added that while that cost would roughly be $100 million for the rst year, each successive year would add an additional $100 million on top of that, and it would all be calculated into actuarial assumptions. By state law, the pension fund’s actuarial consultant is required to approve any COLAs and would not do so because it would impair the scal integrity of the system by taking that funding period well over 30 years.

“There’s no way to invest your way into this,” Grinnell said. “Not without taking excessive risk, and really then all you’re doing is kind of gambling and hoping it turns out OK, which is incredibly irresponsible.”

For the long term, Grinnell said, things look better, given the funding structure of a 14% contribution for both employers and employees.

“I’m sure within 10 years it’s reasonable to expect they’re going to have the ability and the resilience in order to make positive changes to the bene ts, which could well include COLAs most years,” he said.

No ‘magic wand'

Unfortunately, that provides little solace for retirees who said they were led to believe decades ago that their bene ts would increase every year for the rest of their lives. Grinnell said the reform-minded trustees cannot just restore it.

“The actuarial consultant has to say that this isn’t going to impair the scal integrity of the system. If they can’t say that, then the board cannot pay that COLA,” Grinnell said. “I think there is — I wouldn’t call it a lack of understanding — It’s just maybe a lack of acceptance that that’s the case, and the board certainly in their outward-facing statements and communications, aren’t giving a lot of indication that they understand and accept that.”

“So I think a lot of the participants who are particularly angry, they’re not hearing from the board like that, that they can’t pay a COLA now because we’re not certain we’d be able to sustain it. That’s the reason you’re not getting a COLA very year. So I think participants think the board can just wave a magic wand and they get whatever they want. It’s not so simple,” Grinnell said.

MATURE FUND: Ohio Teachers’ Columbus headquarters

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Auby

CONTINUED FROM PAGE 2

forward, a result of the maturing of the private equity asset class. The pension fund will slow down its investment pacing plan.

There is growing competition within private equity among investors, and more so going forward as private equity managers move further into the wealth and retail markets.

“The competition for transactions could translate into higher valuations that you need to pay at the outset and so that will, over time, mute returns,” said Auby. “Many others have noted that higher interest rates weigh quite heavily on private equity transactions because they are levered, and so they’re having to pay more for the debt that they used to lever.”

Auby also noted that the private equity toolkit in general has become much more widely known.

“The technology of private equity has really spread more broadly and has been embraced by corporate America,” he said, “so the things that were novel and were great tailwinds, they’re still there, it’s just that the asset class is maturing over time.”

While other institutional investors have expressed doubts about the participation of the retail markets in private equity, Auby takes a different approach.

“We are optimistic about retail participation primarily because we are large current investors in private equity,” he said, “and so to the extent that that represents additional cash ow owing to the space, that will certainly help our existing investments there.”

“That’s one way to look at retail participation that perhaps not others have noted,” said Auby.

Move to shorter duration

Also, the pension fund is making a move to shorter-duration xed income.

The board approved the creation of a new 6% target to real government bonds (which will include Treasury in ation-protected securities), funded by a reduction in the target to nominal government bonds to 10% from 16%.

The inclusion of the real bonds, which are intended to protect from in ation, is a reaction to the higher-for-longer in ation scenario.

“With Treasury bonds, we noted that we were signi cantly overweight Treasury duration, particularly vs. our peers,” said Auby. “We still are maintaining that overweight vs. peers. While we do see value in U.S. Treasuries going forward, we do think that there may be some accumulating tail risk as our government accumulate scal de cits.”

CalSTRS

CONTINUED FROM PAGE 2

billion in 2021. CalSTRS is continuing to slow its commitment pacing to re ect portfolio and market dynamics, according to a report to the committee.

Real estate

Separately, CalSTRS real estate team is focusing its $47.3 billion portfolio on property types that bene ted from changes in the markets such as industrial, said Julie Do-

The inclusion of the real bonds asset class indicates a belief by TRS in a higher-for-longer in ation scenario. However, on Sept. 18, Federal Reserve of cials approved a halfpoint rate cut as a response to a softening job market and cooling in ation, lowering the federal funds rate to a range of 4.75% to 5% from 5.25% to 5.5%.

Auby said the Fed's move indicates a higher probability of recession ahead.

“The other point the Fed chair (Jerome Powell) mentioned was they do have high con dence that in ation is getting under control, so they had a little bit more of a green light to focus on growth and employment,” said Auby. “So in the short term, I think there is less risk of in ation picking back up, but long term that question remains.”

New all-country target

TRS' other signi cant change following the asset allocation study was the creation of a new target of 39% to "all-country" equity and the elimination of the dedicated 18% target to domestic equities.

The board also approved reducing dedicated targets to internation-

‘The technology of private equity has really spread more broadly . . . so the things that were novel and were great tailwinds, they’re still there, it’s just that the asset class is maturing over time.’

TEXAS TEACHERS’ JASE AUBY

al developed markets equities and emerging markets equities to 5% and 1%, respectively, from their respective targets of 13% and 9%.

Auby said one reason for the creation of the "all-country" asset class was to align with peers and also to simplify communication to the board in terms of when each of the three regions in the portfolio are overweight or underweight to the benchmark.

The all-country portfolio also removes China and Hong Kong from the pension fund’s benchmark, the completion of a process begun in 2022 when the pension fund cut its exposure to China and Hong Kong by 50%.

“It really came down to the objectives of the economy there,” said Auby, “and whether the economy was prioritizing allowing a reasonable return on public stock investments. We’ve just noticed over time that it has become dif cult.”

negan, CalSTRS real estate investment director, at the same meeting.

CalSTRS’ real estate portfolio continues to be underweight industrial and multifamily by 12% and 10%, respectively, according to a report for the committee by its real estate consultant RCLCO Fund Advisors.

CalSTRS is also leaning into the residential segment including single family rentals and affordable housing as well as necessity-based retail, Donegan said.

There is still demand for necessity-based spaces as people are still going to shopping centers to get their haircut or go to the gym, she said.

The all-country portfolio is benchmarked to the MSCI ACWI IMI ex-China/Hong Kong index, aligning with the composition of the index with U.S. equities at 64%, nonU.S. developed markets at 35% and emerging markets at 10%.

The separate targets of 5% and 1%, respectively, to non-U.S. developed markets and emerging markets equities enable the pension fund to be overweight those regions relative to the MSCI ACWI IMI ex-China/Hong Kong index. By adding those targets, the overall public equities mix is 56% U.S. equities, 35% non-U.S. developed markets and 10% emerging markets.

TRS is overweight non-U.S. developed markets as a result of staff’s enthusiasm about Europe and Japan.

“Looking at Europe, we’re just taking note of the historically attractive valuations in that market,” said Auby, “and we see that is something that will manifest itself as higher returns over time.”

“Then in Japan, we’re taking note of the signi cant restructurings that are happening in the corporate world, namely companies not keeping as much cash on the balance sheet and then unwinding shareholder holdings, as well as governance and other changes at these rms so that they’re more focused on delivering value to shareholders,” he said.

“It's an exciting time for Japan and we see those kind of existing trends continuing over the years ahead.”

Risk parity cut

Finally, the target to risk parity was lowered to 5% from 8% due to the overall increase in public equities, as well as the shift to shorter-duration bonds.

Targets that remain unchanged are 15% real estate; 6% energy, natural resources and infrastructure; 5% stable value hedge funds; 2% cash; and -6% asset allocation leverage.

The new asset allocation has a 7.7% expected return vs. TRS’ actuarial rate of return of 7%, and Auby noted that the expected return “does not include alpha.”

The pension fund recently recorded its highest-ever alpha for a one-year period, returning a net 9% for the year ended June 30, a full 3.3 percentage points above its benchmark return of 5.7%. TRS’ scal year ends Aug. 31.

As of June 30, the pension fund’s actual allocation was 16.9% domestic equities; 16.5% private equity; 14.4% real estate; 13.6% government bonds; 11.9% international developed markets equities; 8.8% emerging markets equities; 7.2% risk parity; 6.8% energy, natural resources and infrastructure; 4.9% stable value hedge funds; 3.6% absolute return; 2.3% cash; 0.1% commodities and -7% asset allocation leverage.

Retail has taken its lumps and has gone out the other side, Donegan said.

CalSTRS real estate portfolio is also overweight of ce properties, RCLCO reported. But its of ce exposure decreased by 192 basis points over the past six months, leaving the portfolio 7% overweight to ofce. Much of the overweight is due to the portfolio’s exposure to life science buildings, said Ben Maslan, a managing director with RCLCO Fund Advisors, at the meeting. Stripping out life science, the real estate portfolio’s exposure to of ce is in line with its benchmark, he said.

Jeff Wendling’s tenure as HOOPP CEO began with a bang

The pandemic was one of many challenges he faced

came the sole CIO in 2018, before securing the top job in 2020.

during his career

y B PALASH GHOSH

When Jeff Wendling became president and chief executive of cer of the Healthcare of Ontario Pension Plan, Toronto, in April 2020, the COVID-19 pandemic had just turned the whole world upside down. He was forced to take on greater responsibilities, and nd a way to work with staff members he could not meet with in person.

“It was a very strange time,” he said. “I became CEO two weeks after our of ce had to shut down for the pandemic, so I didn’t even go into the of ce. Technology was a huge savior because we were able to work together very effectively. We didn’t miss a beat.”

The fallout from the pandemic is still extant, he noted, considering that most employees at the pension fund, including the investment staff, still work a hybrid schedule.

Wendling will retire from HOOPP in 2025 after 26 years at the pension fund. A successor has not yet been named. Starting in 1998 as a senior portfolio manager, he became vice president of public equities in 2003. In 2012, he reached the position of co-chief investment of cer, and be-

Over the span of his career –which commenced in the late 1980s – Wendling has witnessed several cataclysmic geopolitical and economic events that dramatically impacted global markets.

“The fall of the Berlin Wall in the late 80s opened up a whole new part of the world that had been really closed off, opening it up to the global capitalist economy,” he said. “The other massive thing was the rise of China and their economy, which is now the second biggest in the world.” Wendling also witnessed a lot of changes at HOOPP, which serves Ontario's hospital and healthcare-sector workers, during his tenure. For one thing, the pension fund’s asset size has mushroomed to C$112.6 billion ($84.9 billion) at the end of 2023 from approximately C$15 billion in 1998.

Asset growth, LDI

Another big change has to do with the nature of HOOPP’s assets.  “We are more international now than when I joined,” he said. About 55% of the current portfolio is invested in Canada.

Another major change: most of HOOPP's assets are managed inhouse by a team of about 80 investment professionals in Toronto. “The cost of external management can be very high, and as we got larger, we

woman con rmed.

life of a public fund.

“When you get past around $10 billion of assets under management, you start to unlock scale economies,” and SIB’s board “recognized that the plans in our care had grown to a size where we could update our governance and move the program forward,” Anderson said in an interview.

The State Investment Board, with only $4 billion in public funds as of 2010, saw its asset growth accelerate markedly that year with the launch of North Dakota’s Legacy sovereign wealth fund, set up to provide a longterm source of funding for the state from a 30% share of annual taxes on petroleum produced and extracted in North Dakota.

With transfers now of between $850 million and $900 million a year, the Legacy Fund’s $10.9 billion in assets as of June 30 are expected to grow to more than $20 billion over the coming decade, Anderson said.

“We’re kind of at an in ection point in terms of scale and complexity,” with an opportunity to increase return, reduce risk and lower costs, Anderson said in a Sept. 27 presentation to the SIB board.

Other billion-dollar pools SIB oversees include the $4.3 billion North Dakota Public Employees Retirement System, the state’s $3.3 billion Teachers’ Fund for Retirement and the $2.1 billion Workforce Safety & Insurance fund.

The two big pension funds, together with ve smaller ones, including municipal funds for Bismarck and Grand Forks, have combined retirement assets of just under $8 billion, with 80,000 active and retired members and bene ciaries, an SIB spokes-

had the resources and the scale to build internal teams. It really just is more cost-effective,” Wendling said. Wendling also witnessed the emergence of alternative assets over his tenure at HOOPP – the pension fund now has sizable allocations to

real estate, private equity and infrastructure.

“There are great opportunities in the private markets but I also think there are great opportunities in the public markets,” he said. “For us, one of the things we are very careful of

with the private market is that you have to manage your liquidity well.”

Another major development at HOOPP was the use of lability-driven investing, which Wendling and his predecessor Jim Keohane implemented in 2007.  That strategy –which involves hedging in ation and interest rate risk - led HOOPP to allocate more to bonds, a move that Wendling said played a key role in helping the pension fund to sustain itself during the global nancial crisis of 2008-2009.

Wendling's longevity at HOOPP (extending nearly three decades) is “not normal,” especially now when asset management and pension fund rms witness high turnover in the C-suite.

“But the culture and the purpose we have, everybody feels really good about working for the retirement security of healthcare workers,” he said.

As for retirement, Wendling pointed out that will not occur until sometime next year when the board nds a successor.  “The rst thing for me will be to step back and take a break, probably do quite a bit of traveling with my wife and my adult children,” he said. “Eventually, I will want to think about how I might re-engage with the industry in some way and help somehow, but that’s down the road.” HOOPP returned a net 9.38% in 2023, below the benchmark return of 10.36%.

As of June 30, the Legacy Fund had allocations of 32% to U.S. large-cap equity, 30% global xed income, 23% international equity, 5% diversi ed real assets, 4% each real estate and in-state investments and 2% U.S. small-cap equity.

The two large pension funds, meanwhile, have higher exposures to alternatives, even as SIB is poised to raise the Legacy Fund’s alternatives holdings going forward.

PERS, as of June 30, had 31% allocated to domestic equity, 24% domestic xed income, 19% international equity, 10% real estate, 9% private equity, 6% to infrastructure, and 1%

‘When

In-house capabilities

For now, Anderson said, laying the groundwork to begin bringing some asset management in-house over the coming year has included establishing committees to oversee governance, investments and compensation while hiring key investment professionals.

Anderson said the plan he presented to the board in August 2022 envisioned three phases — with the rst, focused on an initial 15% of portfolio assets in enhanced stock and bond index strategies as well as cash management strategies and the

you get past around $10 billion of assets under management, you start to unlock scale economies , (and SIB’s board) recognized that the plans in our care had grown to a size where we could update our governance and move the program forward.’

NORTH DAKOTA STATE INVESTMENT BOARD’S SCOTT M. ANDERSON

each to timber and cash.The Teachers’ Fund had 27% domestic xed income, 26% domestic equity, 16% to international equity, 14% to private equity, 9% to real estate, 6% to infrastructure, and 1% each to timber and cash.

In other news on the state’s retirement landscape, the North Dakota Legislature voted last year to close PERS to new public employees and launch a de ned contribution plan for them in its stead, effective Jan. 1, 2025.

That won’t make PERS a lesser priority for SIB, Anderson said, noting that “typically, for a plan that’s closing like that, it remains a risky plan for 10, even 15 years because you still have existing bene ciaries … making contributions.”

second, covering an additional 15% of the portfolio in rules- or factor-based portfolio strategies, seen as “low hanging fruit.”

That rst 15% is a “slam dunk because it’s doing the same things we’re already doing in the portfolio” at lower cost while giving SIB’s team added exibility in areas such as efciently rebalancing the portfolio, Anderson said.

That foothold for in-house capabilities will set SIB on a path to evolve from an organization reliant on external providers to “an advanced funds management organization,” yielding around $16 million in annual savings despite the addition of ve new investment team

members the Legislature approved for phase one, Anderson said.

The ve, who have yet to be hired, will expand the size of SIB’s investment team to 13 full-time employees.

Internal capabilities for enhanced indexing and cash management will give SIB’s investment team “the opportunity to overlay our cash with an exposure like our asset allocation,” eliminating leakage of returns, while using futures to rebalance more efciently, he said.

Relying on external managers to rebalance SIB’s equity and xed-income exposures could cost SIB 15 basis points and 25 basis points, respectively, Anderson noted. The costs of using internal overlays, by contrast, would be closer to 2.5 basis points, dramatically lowering “our costs for these plan level operations,” he said.

Phase one should be completed by 2025, Anderson said.

Likewise, the rules-based active strategies to be brought in-house next under the second phase are suf ciently commoditized to allow SIB to achieve returns similar to what it’s currently obtaining from those strategies at lower costs, he said.

That second phase — for which SIB will seek legislative approval for ve additional hires — should be completed around the rst half of 2027, Anderson said.

Phase three

The nal 15% to 20% of the portfolio with the potential to be brought in-house under phase three — which would bring SIB’s internal investment team into direct competition with external managers in certain market segments — will be “much more challenging,” Anderson conceded.

For that last 20%, which the team will likely begin to grapple with four or ve years from now, “you have to take a serious look because then you’re investing in very specialist resources,” such as a small-cap equities team, he said.

Of course, Anderson noted, it can be — and has been — done by, among others, including the $130.9 billion State of Wisconsin Investment Board, where he served as managing director of asset and risk allocation for the ve years through late 2018.

Getting there requires building a rst-rate investment team and an “analyst-driven culture that’s more focused on managing the fund from within,” prioritizing areas such as asset allocation and optimizing risk-return outcomes, Anderson said.

Anderson said he’s optimistic he’ll be able to assemble that kind of team in Bismarck, taking a “remote hybrid” approach, with younger professionals — who will ultimately be the keepers of the organization’s cultural ame — working in the capital even as more senior professionals may opt to work remotely, Anderson said.

SIB’s latest hire — Chirag Gandhi, a 24-year SWIB veteran who joined SIB in September to head North Dakota’s internal xed-income team — is a case in point, a “very skilled active investor … and standout leader,” who will remain based in Madison, Wis.Anderson said forging an advanced fund management team capable of bringing sophisticated strategies in-house will be a compelling opportunity — “something really cool to work on because we’re building something. We don’t have this 30-year-old system we have to tear down to build something new,” he said.

TAKING STOCK: Ontario Pension Plan’s Jeff Wendling

Middle East

building relationships on the ground.”

Last year, Pensions & Investments reported on a slew of hedge funds setting up shop in Dubai in particular, looking to access the talent pool and investment opportunities on offer in the emirate.

Now, a growing number of mainstream money managers have gained authorizations to operate in the local market and open of ces, with nancial centers in Abu Dhabi and Riyadh proving to be the most popular options.

Recent authorizations include for AXA Investment Managers and Morgan Stanley Investment Management, which received their “nancial services permission,” for allowing the rms to conduct operations within Abu Dhabi’s nancial center.

Meanwhile, Fiera Capital and Ninety One Gulf Capital were granted in-principle approvals, according to a statement provided by Abu Dhabi Global Market, which means a license will be granted on certain preconditions such as establishing an of ce space within the ADGM.

The latest rm to secure its license to operate in the ADGM is U.S.-headquartered PGIM, which has $1.33 trillion in assets under management. The rm marked its formal entry into the Middle East with an of ce in ADGM and itsnancial services permission license, and has worked with clients in the region for many years, it said. PGIM appointed Emira Socorro as senior executive of cer, leading the new of ce in Abu Dhabi.

And in April, the Saudi Arabia

unit of BlackRock, the world’s largest asset manager, made waves when it said it would establish a Riyadh-based multiasset-class platform to invest across public and private markets, with an initial anchor investment of up to $5 billion from the kingdom’s sovereign wealth fund, Public Investment Fund.

The new platform — which will be fully integrated with BlackRock’s investment capabilities — will support foreign institutional investment into Saudi Arabia, while also looking to broaden local capital markets and drive investor diversi cation across asset classes, BlackRock said at the time. Further, BlackRock Riyadh Investment Management aims to develop the market’s Saudi-based asset management talent, already having launched a graduate program in Riyadh and teaming up on talent development initiatives with the about $750 billion PIF.

BlackRock, which has been in Saudi Arabia for years, hopes to “bring more global investment to the kingdom and (is) excited to do so with a partner like PIF, who has a similar global perspective and is a long-term, strategic investor around the world,” a BlackRock spokesperson said.

Regarding the Middle East in general, the spokesperson added that the region is an important market for BlackRock, “both in terms of the investment opportunity for our clients, and for the continued growth of our international business. We have longstanding client relationships in Kuwait, Qatar, Saudi Arabia and the UAE and we look forward to continuing to build on these partnerships over the long term.”

Wealth appeal

The region’s appeal is clear in the numbers: There are trillions of dol-

and BAE Systems. A sixth judge ruled that the complaint against Tetra Tech should be resolved via arbitration.

lars in assets held by sovereign investors, while Boston Consulting Group’s Global Asset Management 2023 report showed that assets under management in the Middle Eastern region grew to $1.3 trillion in 2022 — up $100 billion over the year.

Assets managed in Abu Dhabi Global Market soared by 226% over the year ended June 30, according to ADGM, although a spokesperson said actual values were not disclosed.

By the end of June, the number of asset managers operating in ADGM reached 112, managing 141 funds.

The Gulf Cooperation Council also has a long and storied history of sovereign wealth funds, including Saudi Arabia’s PIF, the about $993 billion Abu Dhabi Investment Authority, and the $969 billion Kuwait Investment Authority — the oldest sovereign wealth fund in the world. Asset values are according to sovereign investor data and research rm Global SWF.

“The Middle East, and the Arabia

Gulf market in particular, has rapidly become a key component of the global nancial ecosystem,” said Mohammed Abdulmalek, head of the Middle East at PGIM. “The private wealth across the Middle East provides wealth and asset management rms with a compelling reason to establish a presence in the region. Over the last three years, while many regions faced pressures on investment allocations, the GCC has emerged as one of the few areas with surplus capital ready for global investment.”

“The region is very diverse, and investors have varied and complex mandates that extend beyond nancial rewards,” said Mike Freno, chair and CEO of money manager Barings. “In fact, sovereign wealth funds have been critically important to driving economic transformations for several Middle East countries.”

U.S.-headquartered Barings, which has $409 billion in assets under management, opened an of ce in Dubai in April as part of a long-

term strategic decision to meet growing demand and better serve its client base in the region.

Douglas Bourne, head of Middle East at Schroders, said: “The obvious appeal is the ability to work with some of the largest and most sophisticated investors in the world. They invest across asset classes and continue to explore new ways of gaining exposures whether through traditional funds and mandates or looking to develop joint ventures and other strategic relationships with international partners.”

“The challenge is that they understandably expect rst-class service, and one needs to ensure any entrant to the market has suf cient infrastructure of personnel and systems in place to provide a world-class client experience,” Bourne added. Schroders has an of ce in Dubai. Its Middle East AUM was not immediately available.

SWFs, public pensions

Although the top three sovereign wealth funds in the Middle East — ADIA, PIF and KIA — may be obvious targets for money managers, they “shouldn’t ignore that there are important sovereigns in Kuwait and Oman as well,” Deloitte’s Gaughan said. “I think what’s more interesting is that, in many of these countries, there are second-tier municipal sovereign investors that don’t really get the pro le internationally that they perhaps would if they were in other parts of EMEA,” he said.

There are at least 10 other sovereign wealth funds and public pension funds in the Middle East with between $30 billion and $250 billion in assets, according to Global SWF data, while there are “many sovereign investors (that) have more than $10 billion — small vs. the largest,

“Plaintiffs’ lawyers are the ERISA police. It’s unfair.”

In 12 months of lawsuits, the list of defendants includes a who’s who of the largest corporate retirement plans as well as smaller 401(k) plans.

Initial defendants were Clorox, Intuit, Thermo Fisher Scienti c and Qualcomm, all sued between midSeptember and mid-October 2023. Then came HP Inc. in November.  Honeywell International and Tetra Tech were sued in February; followed by John Muir Health, a hospital system, in March; Mattel in April; and Wells Fargo in June.

Recent lawsuits, all in August, included Home Depot, Bank of America, Siemens Corp., Nordstrom Inc., Smith & Nephew and LifePoint Health. In September, it was Novo Nordisk, the Danish maker of Ozempic, and Knight-Swift Transport Holdings.

“The plaintiffs’ bar has an eye out for opportunities,” said Nevin Adams, an attorney and former chief content of cer for the American Retirement Association. “We’ll have federal judges coming out with different decisions. It will be a mess for awhile.”

Court rulings

Among six federal court rulings so far, judges have rejected petitions by Qualcomm and Intuit to dismiss complaints. Judges have dismissed lawsuits against HP (plaintiffs have appealed), Thermo Fisher Scienti c

The early lawsuits and many of the new ones focused solely on the 401(k) plans’ forfeiture practices. However, some plaintiffs who initially sued sponsors over fees or investment choices amended their complaints to include challenges to forfeiture policies.

One example is Middleton vs. Amentum Government Services Parent Holding, in which a 401(k) plan participant sued in October 2023 alleging excessive investment fees and poor investment choices. In August, a federal magistrate judge for the U.S. District Court in Wichita, Kan., granted the plaintiff’s third amended complaint to include challenges to the 401(k) plan’s forfeiture policy.

DOL rules

Some new lawsuits have packaged a forfeiture complaint among other accusations of ERISA violations.

The John Muir Health lawsuit, by a 401(k) plan participant, and the Novo Nordisk lawsuit, by former employees, both combined forfeiture allegations amid claims of high record-keeping fees and poor investment choices as ERISA violations.

Unlike lawsuits in which plaintiffs’ lawyers conduct extensive research comparing a defendant’s record-keeping fees, investment management fees or investments’ performance against other retirement plans, forfeiture cases require relatively less homework.

“Forfeiture cases are very straightforward at this point because we know where the money has gone,” said Michael Schloss, of counsel to the Wagner Law Group.

“The numbers are easy to nd,” Adams added. “These are big numbers. It’s a fairly easy argument to make” about forfeited funds that plaintiffs say should be used to reduce plan expenses.

Forfeiture claims are affected by multiple factors: a sponsor’s retirement plan document, the number of participants, the vesting policy for employer contributions and the years plaintiffs allege ERISA violations took place.

In the Qualcomm case, for example, plaintiffs allege that between 2019 and 2021 the sponsor should have reduced plan expenses by $3.4 million instead of using the forfeited funds to reduce company contributions. Participants are vested 50% for employer contributions after their rst year and 100% after their second year.

In the Intuit case, plaintiffs allege that between 2018 and 2021 the sponsor should have reduced plan expenses by $15.2 million instead of reducing company contributions. For the Intuit plan, the vesting period for employer contributions takes place “over a period of years depending on when the participant was hired.”

Plan documents for Qualcomm and Intuit give sponsors a choice of using forfeited funds to reduce plan expenses or to reduce employer contributions.

Need assist from DOL

The problem for sponsors is com-

‘It’s regulation by litigation . Plaintiffs’ lawyers are the ERISA police. It’s unfair.’

ENCORE FIDUCIARY’S DANIEL ARONOWITZ

pounded by a lack of reconciliation between the IRS and the DOL, whose ERISA guidelines de ne a sponsor’s duciary duty.

“It would be nice” if the DOL and IRS would act to reduce the uncertainty, said Wagner Law Group’s Schloss. “A government announcement one way or the other would go a long way to resolving the issue.”

ERISA experts said they aren’t aware of any recent DOL efforts, such as ling an amicus brief in a forfeiture case, to articulate policy.

“We need the Department of Labor to step in and give guidance,” Aronowitz said. “The sponsors are

making a good faith effort to follow the IRS regulations.”

DOL did le a complaint in December 2017 against Sypris Solutions and its retirement plan duciaries, saying they violated the terms of the plan document, which said forfeited funds must rst be used to reduce plan expenses before reducing employer contributions.

The parties fought each other in court for six years before nally reaching a settlement of $575,000 to pay participants, plus an ERISA ne of $57,500.

One key issue in the legal debate is whether a forfeited amount is deemed a plan asset. If so, then a sponsor’s action on forfeitures is a duciary event and subject to ERISA’s rule on duty of loyalty.

If managing forfeitures is considered an administrative role under ERISA — such as creating, designing or terminating a plan — this is not a duciary one.

If courts focus on forfeitures as plan assets, “there will be teeth to these lawsuits,” said Schloss. “I expect there will be more cases.”

Another key issue is how a sponsor’s plan document is written.

One way to avoid a lawsuit is to have a plan document that only allows forfeited funds to reduce plan expenses, lawyers say.

Another recommendation is to write a plan document that says forfeited funds can only be used to reduce employer contributions. Writing a plan document that only addresses employer contributions “would certainly take the wind out of the sails of plaintiffs’ lawsuits,”

CAPITAL READY TO INVEST: PGIM’s Mohammed Abdulmalek

but still sizable and doing interesting things. So being on the ground you can build relationships with each of them, understand how the region works and priorities,” Gaughan said.

The Middle East also has a maturing retirement market, sources said, with a need for more savings and investment options in the next 30 years. That’s also leading many banks in the region to think about their savings and wealth industries — meaning competition for global managers.

“While the (domestic) segment of the investment industry is small today, it’s one that we forecast to be growing. Whilst everyone talks about global investment rms wanting to be there, the fact is there are domestic, regional rms in the industry,” Deloitte’s Gaughan said, adding that some banks have already spun out wealth or investment divisions.

“As the investment opportunities become greater, in listed and private, we’ve seen people who want to build their own rms and attract assets,” such as in real estate and private equity. So global managers will need to think about that future competition, Gaughan added.

ESG considerations

There are also differences in environmental, social and governance issues, with Islamic or Shariah-compliant nance sometimes affecting the way parts of the Middle East will invest. Exclusions from gambling, for example, will affect how managers can run investments.

“One of the diverse capabilities we bring to the region is offering Islamic nance to clients who wish to incorporate principles of religion into their investment,” PGIM’s Abdulmalek said. “Understanding local investment needs to help clients ex-

said Schloss.

“Amend the plan document to take the choice out of an administrator’s hands” by removing duciary responsibility, Caleb Barron, a partner in the law rm of Bradley Arant Boult Cummings, said in an interview. “In that way, the administrator is just following the document.”

Given the urry of lawsuits, DC plans that give plan executives discretion in using forfeited funds “may be the low-hanging fruit” for ERISA complaints, he said.

“Generally, if a plan administrator is acting with discretion, it is acting in a duciary capacity” and subject to an ERISA claim, Barron wrote in a note to clients.

“When the plan administrator has no discretion, it is generally acting in a ministerial capacity,” the note said. “The key is that the plan administrator cannot be faulted for making a choice it does not have.”

However, some plan documents may lend themselves to interpretations upon which plaintiffs’ lawyers

ecute on their strategic priorities is a crucial part of working with clients in the Middle East.”

Bourne noted that while Schroders has more than 20 years of experience with Islamic nance, the rm also deals with clients in the Gulf that do not approach business through such a lens, and a deep knowledge of its workings “is not a prerequisite” to setting up operations in the region.

There is also a raft of other considerations and projects underway in terms of ESG. The United Arab Emirates, for example, has its “UAE Net Zero by 2050” strategic initiative in place — a national push to reach net-zero emissions by 2050 and the rst Middle East and North African nation to do so, it said. Saudi Arabia aims to reach net-zero emissions by 2060 through a so-called circular carbon economy framework, focused on four R’s related to carbon and energy ow: reduce, reuse, recycle and remove.

And while the World Economic Forum’s Global Gender Gap Report, published in 2023, estimated that the wider MENA region will take 115 years to reach gender parity, efforts are underway on that front, too. Saudi Arabia’s Vision 2030 includes aims to increase women’s participation in the economy and increase female employment to 30%.

Although that period to reaching gender parity is striking, the same report estimated that it would take North America 95 years to close its own gap.

“As the Middle East undergoes a transformative shift in investment strategies to re ect the region’s economic landscape, the interest in sustainable and impact investing is rising, driven by a growing awareness of ESG factors amongst local investors,” Abdulmalek added.

seize to claim sponsors should have cut plan expenses.

One such example is Sievert et al. v. Knight-Swift Transportation Holdings Inc., led Sept. 16 in a U.S. District Court in Phoenix, by current and former employees of the company’s 401(k) plan. The sponsor ignored its plan document, plaintiffs alleged.

“The plan document, which describes the plan’s terms and conditions related to the operation and administration of the plan provides defendant must rst use forfeitures to pay plan expenses,” the lawsuit said.

“Defendant violated the terms of the plan document by using forfeitures rst for its own bene t and not for the bene t of the plan,” the lawsuit said. “There was no discretion, process, consideration of using forfeited funds for anything other than to bene t defendant.”

The sponsor should have used $4.6 million in forfeited funds from 2017 through 2022 for reducing plan expenses, the lawsuit said.

P&I Events Calendar

Climate

report from the initiative on recommendations for integrating climate issues in investment decisions, based on interviews with investment chiefs at asset owners.

But if investors want to keep the climate conversation going, they need to keep in mind that language “is absolutely critical,” said Ian Simm, founder and CEO of the $46.7 billion Impax Asset Management. Moderating the panel with O’Hanley, he noted the term ESG was not used until about 45 minutes into the onehour discussion.

“If we talk about impact investing, responsible investing, social responsibility (or) ESG — then the people who are not interested in this topic or want to undermine it think of us in a box (or) in a small compartment,” Simm added. “They can put that box on the shelf, and they can kind of forget about it as the ‘weird thing.’ We have to make this a mainstream topic … so let’s get (the) language right.”

Avoiding ‘banana skins’

At CDPQ, 12.5% of its assets are labeled green and follow European taxonomies on sustainable nance, and 33% are “aligned on climate goals de ned quite tightly,” Millot said.

It’s a shift the allocator has been working on over the past six years, made possible through leaders who set targets for the organization, emphasized the use of external taxonomies and said “we need to invest in ‘green’” as well as “we need to ‘decarbonize’ the portfolio,” Millot said.

An issue early on was education, so he would use analogies when speaking with colleagues, who he described as “hunters.”

“We need to tell them what they need to go and hunt for, and they don’t necessarily know — especially in those days — so we use taxonomies to describe what is green,” Millot added. But now, the pension fund is determining what kind of asset is “a transition enabler,” and in doing

so, he said the investment staff is being careful about the greenwashing risks.

Among the points raised by Impax’s Simm: “avoid banana skins.”

“There’s lots of temptations out there to put labels on funds that are not appropriate (and) that are not backed up by the data or the differentiation compared to the main market,” he added. “Don’t fall into that trap because that’s just a recipe for legal liabilities down the road.”

Greenwashing can be tempting and poses a risk in reputations, Simm noted, so he advised investors to keep in mind the “risk from a legal perspective down the road if you slip on those without the skins.”

Concrete numbers

For now, the terminology “is so fuzzy — and investment professionals don’t like fuzzy. They like concrete numbers that they can analyze,” said Aeisha Mastagni, senior portfolio manager at the California State Teachers’ Retirement System.

She pointed to the International Sustainability Standards Board as one organization that has been trying to develop global baselines of standards to bring some clarity.

Even for the $346.5 billion West Sacramento-based public pension fund, “it’s been a challenge,” and making allocations to low-carbon portfolios as well as measuring the emissions in its overall portfolio are only rst steps, she added.

“But there’s no guarantee that just because you’re a low-carbon asset right now that you’re going to be able to successfully transition,” Mastagni said. “It’s really trying to understand and have the data and disclosures about what are your robust transition plans. Are they robust enough? Are you allocating capital in appropriate ways that align with that strategy? That’s the type of information I think we really need as investors.”

At the $277 billion New York City Retirement Systems, “even though we’ve done a lot of smart things, we’re still missing opportunities,”

CIO Steven Meier said.

For a private equity portfolio that

has a 12% to 15% annual return expectation, Meier told the panel he worries about bringing investments that will drag performance, so he challenges his staff to “put yourself in the CIO’s seat on how you want to think about things” and take a holistic approach.

“It actually comes back to data in terms of the information we have that’s in front of us, and how do we use it intelligently? But we do have banana skins that we slip on now and then,” Meier added. “Like I said, there’s a couple of deals I think of. Yes, we missed on three really good investment opportunities because they were on the line and it wasn’t clear.”

Velliv CIO Anders Stensbøl Christiansen said to “try not to focus too much on the labeling.”

In Europe, there’s a huge focus on complying with the Sustainable Finance Disclosure Regulation. But when assessing what funds complies with rules such as Article 9 or Article 8, investors are still wrapping their heads around the de nitions, he noted.

At the 330 billion kroner ($47.4 billion) Ballerup, Denmark-based pension fund, “We’ve worked on adapting a mindset where we say, ‘OK, we can easily nd those investments that are stable today, that are green (and) have reached the goal,’” Stensbøl Christiansen said.

“But it’s much more interesting looking into the transition cases because that is the part of the portfolio that’s actually going to make a difference, and that is the part where you can make investments that doesn’t really limit your investment.”

In this process of transition cases, he said simpli cation from both allocators and managers — “instead of just offering the products that are on the shelf” — is needed in order to nd solutions.

“We don’t compromise returns — and actually can do some risk transfer as well — because we are longterm investors,” Stensbøl Christiansen said. “We should take advantage of that and create new structures.”

CLIMATE PANEL: From left: Impax Asset Management’s Ian Simm, New York City Retirement Systems’ Steven Meier, CalSTRS’ Aeisha Mastagni, CDPQ’s Bertrand Millot, Velliv’s Anders Stensbøl Christiansen and State Street’s Ronald O’Hanley

Managers

decline, and the economy holds up, so there is light at the end of the tunnel,” Pliner added.

Real estate executives expect returns to revive next year. According to the Pension Real Estate Association’s latest consensus forecast survey taken in August, real estate managers predict that the NCREIF Property index return will be -0.4% in 2024, growing to 5.3% in 2025 and 6.6% in 2026. The May survey predicted the 2024 return would be -2% with a rebound of 5% in 2025.

Both predictions would be an increase from the actual index return of -5.1% for the year ended June 30. NCREIF NPI return was -0.22% in the rst quarter and -5.3% in the second quarter.

Valuations dropping

It’s been tough for real estate, said Raimondo Amabile, co-CEO and global chief investment of cer at PGIM Real Estate.

The asset class saw valuation decreases anywhere between 20% and 25% since mid-2022, with of ce as the worst-performing asset class, Amabile said.

Valuation declines were mainly driven by the rise in interest rates, which PGIM executives call the “big market reset,” he said.

Amabile said.

“It’s still pretty depressed,” he said. “There was a 10% increase in transaction volume but there’s quite a lot to go.”

During the height of the pandemic, transaction volume fell 64% year over year in the second quarter alone, according to Real Capital Analytics.

U.S. commercial real estate transactions were up 13.9% to $40.1 billion transacted across major property types at the end of the second quarter from the prior quarter but down 9.4% from the year-earlier quarter, according to real estate data provider Altus Group.

In Europe, central banks started cutting rates before the Fed took action and the cost of capital is coming down, Amabile said. The Bank of England announced a 25-basis-point cut to U.K. interest rates on Aug. 1 and the European Central Bank trimmed interest rates by 25 basis points for the second time this year on Sept. 12.

The markets are already factoring interest rate cuts in, but market participants need a sign that things will change that will give them enough condence to begin buying and selling properties, he said.

PGIM’s worldwide real estate AUM dipped by 1.2% to $128.2 billion as of June 30, ranking third overall behind $132.9 billion MetLife Investment Management, whose AUM dropped 1.6%, and $130.1 billion Nuveen, whose AUM fell by 7.3% during the 12-month period.

PGIM’s AUM managed for U.S. institutional tax-exempt clients was also down by 5.5% to $60.7 billion as of June 30, placing it in the second spot on P&I’s rankings. Nuveen is in the top position even though its AUM managed for U.S. tax-exempt institutions dropped by 6.8% to $94.5 billion.

“We believe we are at a turning point in the market,” Amabile said. For instance, people are moving back to city centers after leaving during the height of the COVID-19 pandemic, he said.

Real estate values have dropped signi cantly and now some investors see real estate “as a growth story because the market is turning,” he said. In the past 12 months, investors were more interested in real estate credit.

But the asset class isn’t completely in the clear yet.

Even before the Fed cut interest rates, some transactions started coming back in the second quarter,

tor,” Rush said.

Even so, this real estate cycle has differed from past cycles in ways that are speci c to REITs and ways that are not, he said. Traditionally, REITs have not been as sensitive to interest rate changes as they have been this time around. The FTSE Nareit All Equity REIT index posted positive total returns in 82% of months with rising Treasury yields over the period from the rst quarter of 1992 to the fourth quarter of 2022, a Nareit analysis shows.

“My best explanation is that we saw a period of extra low interest rates over the past decade,” Rush said. “In that environment we saw real estate ... bid up to very high levels.”

Investors were searching for yield and real estate was one of the few asset classes offering yield, he said. Real estate assets increased in value and real estate securities increased in value as well, all in a low-interest-rate environment, Rush said.

“That shifted and we were no longer in low-interest-rate world ... it created a tremendous amount of fear ... and hypersensitivity to interest rates,” he said.

‘(The market is) still pretty depressed. There was a 10% increase in transaction volume but there’s quite a lot to go .’

PGIM REAL ESTATE’S RAIMONDO AMABILE

portfolio outperformed its benchmark in the one-, three-, ve- and 10-year periods ended June 30. For example, the portfolio outperformed its benchmark return of 5.2% by about 220 basis points over the 10-year period, according to a RCLCO report to the investment committee.

There still are risks remaining in real estate. There is a risk that the Fed could be wrong and in ationary pressures cause further tightening, Mammen said. The economy could also go into a recession, which would impact demand, he added. But RCLCO’s base case is that the real estate market is at an in ection point that should cause asset values to start to turn around over the next few quarters, Mammen said.

Multiyear recovery

Nancy I. Lashine, founder and managing partner of Park Madison Partners, a private real assets placement rm, said that real estate is most likely in the second year of a three-year recovery.

Private markets

Rowan said he foresees not only offering xed-income replacement but also equity replacement products. He said the entire retirement industry was built on private capital being part of institutional investors’ alternatives portfolios. That

“When the transaction market gets reactivated, capital will ow again into the system,” Amabile said. Investors will get more money back, which will free up additional capital for new investments, Amabile said.

What will get in the way of a recovery in real estate is if current trends reverse and there are signs of stickier in ation that is greater than 2.5%, said Kelly D. Rush, CEO, public real assets and chief investment of cer, real estate securities with Principal Real Estate Investors.

REITs rebounding

Even before the Fed took action at its September meeting, REIT stocks were outperforming “in a really strong fashion” as the market anticipated interest rate reduction, Rush said.

Real estate investment trusts was one of the few categories tracked by P&I that saw growth during the 12-month period ended June 30, with worldwide AUM up 6.5% to $483.1 billion.

Principal ranked fth on this year’s list of the largest managers of real estate investment trust securities with U.S. institutional tax-exempt assets  up 4.6% to $20.5 billion. The rm is seventh on this year’s list of top managers by worldwide assets with $65.8 billion, down 3.5%.

“Real estate is a very capital-intensive business and so the cost of capital is very important to the sec-

mindset, which might have been true 40 years ago, is that private assets are risky and public market assets are safe.

If an investment is risky, then  investors put it in a smaller bucket, demand higher returns and watch it closely to ensure against exposure, concentration and variability risk, Rowan said.

“What if we’re wrong. What if private is both safe and risky, and public is both safe and risky,” Rowan said.

Another difference this cycle is investors’“extraordinary con dence and optimism” that there is not going to be a signi cant drawdown in the market and that risk assets including real estate will prevail, Rush said.

“What this means is that risk assets can be bid up in value,” he said. “But if they come under pressure they won’t stand up to pressure very long.”

Over the past 12 months, concerns about the potential for signi cant distress in real estate caused investors to pause making increased investments in equity real estate and REITs, Rush said.

While investors’ worst fears have faded, the real estate sector is quite mixed today, he said. Some areas have done very well but there are areas of weakness. Some of the sectors showing weakness are Sun Belt apartments where there is demand but too much supply; self-storage where there is oversupply and less demand because people are moving less often; and biotechnology due to reduced venture capital investment in the once hot sector, resulting in less demand for the large number of new biotech buildings that were built.

Even with weakness in some areas, Principal Real Estate executives are seeing an uptick of investment in REITs over the past six months, Rush said.

More investors are sensing that real estate is at a bottom, he said. “Real estate is being taken out of the penalty box,” Rush added.

The FTSE Nareit All Equity REIT index was -2.2% for the year ended June 30.

Managers point to a few areas that have been winners during this dif cult time for the industry.

If that is true, then everything investors know about portfolio construction “makes no sense,” he said.

“Today, we are getting exposure to the bigger bucket called xed income,” which is 50% larger than alternatives and it is all investment grade, guided by rating agencies, Rowan said.

“I do not think replacement stops in the xed-income bucket. I think it will eventually go to the global equity bucket,” Rowan said. n

“We believe there are clear segments that have seen real growth over the past 12 months — especially credit and infrastructure including data centers, some of which are real estate,” said Avi Shemesh, co-founder and principal at CIM Group. “CIM Group has been investing in data centers for about a decade, recognizing that the need for additional cloud capacity, along with cloud AI, is going to become necessary and valuable to daily life in urban communities.”

During the survey period, CIM’s worldwide and  U.S. institutional tax-exempt assets fell by 5.8% to $8.3 billion.

‘Inflection point’

That’s the message CalSTRS’ investment committee heard at its Sept. 25 meeting.

While it was a rough two years for investors with valuation declines leading to negative returns and underperformance over the long term, “we’re likely at an in ection point,” Ben Maslan, a managing director with RCLCO Fund Advisors, told the investment committee of the $346.5 billion California State Teachers’ Retirement System, West Sacramento. RCLCO is CalSTRS’ real estate consultant.

That period of valuation declines with indexes down 17% or 18% in terms of values is probably at an end and could reverse as the Federal Reserve begins to cut interest rates, Maslan said.

Higher interest rates and the resulting “meaningfully lower valuations” also cooled real estate transaction volume due to valuation uncertainty, said Taylor Mammen, a senior managing director at RCLCO, at the same meeting.

CalSTRS’ $47.3 billion real estate

daily pricing — is all coming to the private market, initially focused at investment-grade, where most of the action is going to take place.”

Go-to vehicles

ETFs, which have emerged as the “go-to vehicle” for many investors, have a strong history of providing access to less-liquid instruments, said Todd Rosenbluth, head of

“It usually takes three years for distress to work its way through the system,” said Lashine, adding that this is the fourth real estate cycle of her career.

Real estate is “along the bottom and we’re starting to see prices moderate and transaction volumes pick up,” Lashine said.

What is different this time is that the downturn was an interest rate-driven crisis. What is the same is that it will take time to work out, she said.

Public assets will take the shortest amount of time to work out, while open-end funds, whose valuations are based on appraisals rather than transactions, will take longer, Lashine said.

“Appraisals are still going down because transaction volumes are so low,” she said.

Open-end funds will probably lag another quarter or so, behind closedend funds,  Lashine said.

There’s a huge spread between appraisal and transaction-based pricing used by closed-end funds, she said.

“That’s why the ODCE (NCREIF Fund Index - Open End Diversi ed Core Equity) exit queues are at the highest level yet ... 18% of net assets, which is really high,” Lashine said.

Indeed, assets in core properties, much of which reside in open-end funds, dropped 6.8% to $445.3 billion among this year’s respondents, while value-added was up 10.4% to $96.6 billion and opportunistic was up 5.7% to $59.3 billion in the 12 months ended June 30, P&I survey data shows.

Assets in open-end funds were down by 10% to $267.4 billion. Meanwhile, closed-end fund assets grew by 16.9% to $115.4 billion and separately managed account AUM dipped 2.3% to $257.5 billion, this year’s survey reveals.

research at TMX VettaFi.

While little open space exists within the ETF industry from a product perspective, alternatives like private credit are one such area, he said.

Though he’s not sure how the ETF industry will manage to get a private credit ETF done, Rosenbluth cited the CLO and cryptocurrency ETFs that have come to market as examples of areas where ETFs have broadened access for investors.

“Whether there will indeed be demand is still unknown but large asset managers focusing on the space can provide a catalyst,” he said.  n

‘INFLECTION POINT’: Willis Towers Watson’s Jon Pliner

view that the U.S. is expensive. “I agree — the U.S. is not a cheap market,” but that’s not enough of a catalyst to get out, she said. “I don’t see the catalyst for the U.S., at this point, to underperform.”

While the U.S. is not “at the cliff of a recession,” there could eventually be a mild one, maybe in 2025 since recessions on average start six months after a rate cut, she said. This month, the Fed made its rst rate cut in four years, kicking off the U.S. easing cycle with a 50-basis-point reduction in the fed funds rate to between 4.75% and 5%.

“Maybe where we differ there (from market consensus) is that, given the strength of the economy, I think the Fed (has) front-loaded rate cuts and we’ll ultimately see a 75-100-basis-points cut over the year,” Malik said.

Given her view on the U.S., she likes “to balance this with other areas of the world that I think are cheap, but also have a catalyst.”

And for Malik, that opportunity is in emerging markets. Brazil and Indonesia are bright spots, while India — “even though it’s trading at a premium — I think it has some aspects and structural aspects that make it a better position than China at this point.”

She cited emerging markets' earnings growth for next year around the mid-teens, cheap valuations, promising GDP growth in Indonesia and Brazil in particular, and in ation not being “out of hand” as reasons for her view.

She’s also bullish on Japan.

“I think portfolio managers could start to allocate more to emerging markets, also … Japan,” Malik said. The rm’s ask for Japanese companies that are more domestically oriented — such as Japanese banks and manufacturing companies without many overseas projects — is to return cash to shareholders and pay dividends.

Geopolitics, tax cuts

Politics and geopolitics remain on her radar, noting that in election years U.S. markets tend to be up about 11% — while “volatility also tends to be up by about 10%. We’ve not seen tremendous volatility this year — I think it could pick up from here,” she said.

Whether Vice President Kamala Harris or former President Donald Trump wins in November, Malik will be watching what happens when tax cuts expire next year.

“If it’s more tilted to Republican, I think … the ($)4.6 trillion that it takes to reimplement those tax cuts likely comes back into place. If it’s more of a Democratic control across the board, I think some version of them comes back into place,” she said.

That will bene t either high-income or middle-to-lower-income citizens, but the re-initiation of those tax cuts “could be somewhat in ationary for the economy.”

Fiscal debt in the U.S. “will increasingly become an issue,” and something that needs to be thought about over time. U.S. federal debt currently stands at around $35 trillion.

And then, the way the U.S. acts on climate and energy will differ by candidate.

“Those are things I’m thinking about in terms of not just the election … but what are the implications beyond the election?” Malik said.

Beyond the U.S., the war in Ukraine and con icts in the Middle East, could have “a huge impact on energy prices.” Oil prices spiking and remaining above $100 per barrel for a long period of time have in the past led to a global recession, she said. “I think that is also still hanging out there.”

Family history and mentors

Investing in the stock market was a hobby of Malik’s mother, a medical doctor who sparked Malik’s excitement in markets even more when she arranged for her to spend part of a summer in New Mexico with famed stockpicker Al Frank. And then, “when I was 19, I decided I wanted to be like Al.”

Malik started publishing her own markets newsletter in college, a free paper that she sent out, asking readers if they liked any of her stock picks, and whether they’d use her as their stock broker. She used her hobby to pay part of her way through school.

Once she’d graduated, she “knew (she) wanted to work on Wall Street,” but found upon applying to various companies — 20, she said — that she was rejected for not going to the right school.

So she “doubled down,” gaining her masters in nance and joining a program at the University of Wisconsin, Madison, “where 14 of the

fallen out of favor with investors for a reason.

students could manage part of the university’s endowment.”

A little over one year later, she had four job offers — “things quickly changed” — and she moved to New York to take up a role as an equity research analyst covering materials at J.P. Morgan Asset Management. And she “loved it."

From there, she became a smallcap analyst at the now-$3.3 trillion money manager before joining Nuveen as an equity research analyst.

She was made head of equity research and global portfolio manager in 2007, head of global equity portfolio management in 2014, CIO for equities in 2017 overseeing $500 billion in assets, and then CIO for the entire $1.2 trillion rm and head of equity in 2022.

Then, in July, she added the title of head of Nuveen equities and

‘The key thing I often talk about with sponsorship is a great sponsor is someone who talks about you when you aren’t in the room , and highlights your talents.’

NUVEEN’S SAIRA MALIK

xed income to her roster, succeeding William Huffman who was named CEO.

“I grew up doing many of the roles that I manage,” Malik said. And while her ascension to the executive committee and senior leadership team is due to her hard work, Malik is also open about the role that mentors and sponsors have played in her life over the years — and that’s something she’s also paying forward. Testament to that was her being named one of P&I's inaugural class of In uential Women in Institutional Investment last year.

Among her mentors and sponsors are Keith Banks at then-J.P. Morgan Investment Management, who hired her into her research role; Susan Ulick, her mentor at JPMAM whom she followed to Nuveen; and Huffman and previous CEO at Nuveen, Jose Minaya (now global head of investment management at BNY).

They’ve not only been great

and some European investors,” he added.

“guides for me, lighting a path for me, but I also think … their sponsorship’s been important. The key thing I often talk about with sponsorship is a great sponsor is someone who talks about you when you aren’t in the room, and highlights your talents. And all of those people, plus more, have done that for me over the years — and that’s why I’ve been very happy in this industry. I’m still … a stock picker (at) heart. But one great thing about Nuveen is learning about all these other asset classes, because to have such diversi cation and lack of correlation between asset classes for our clients is very important,” she said.

Malik oversees equities, global xed income, municipal bonds, multiasset strategies, private placements, public real assets and other strategies, while also working on weekly market and investment insights, leading the global investment committee, and providing client asset allocation views from across the rm’s investment teams.

That last responsibility is something she takes particularly seriously.

“I’m still involved in … the dayto-day ‘how are we thinking of investments?’ I think it’s important to do that, even as a manager, so that I stay engaged with … what the team is working on.”

Malik shares knowledge with clients and a wider audience, partly through a big presence on social media platform LinkedIn, as well as through of cial channels.

“Not only do they (clients) demand that … strong performance, they want to hear what everyone here is thinking. And often, when I’m sharing what I’m saying, it’s really coming from the investment teams. So if I’m talking about munis, what I’m trying to give clients is a view into what Dan Close is really thinking — not what I’m thinking,” she said, referring to Daniel J. Close, head of municipals at Nuveen.

She’s also excited about the rm's strong presence in the U.S. and its expansion to the rest of the world. “Continuing to grow our global presence is important. Meeting (clients) where they are is very important to me.” Nuveen’s AUM split is about 35% xed income AUM, 31% equities, 12% real estate, 10% multiasset, 9% private capital, and the remainder in real assets.

Despite lower fees, HSAs still have room for improvement

y B ROBERT STEYER

Although spending account and investment account fees have declined for health savings accounts over the years, the latest Morningstar review of the largest HSAs says the industry can do a better job.

“HSA transparency and ease of use could still improve,” said a Sept. 26 report covering 11 large HSAs. “Costs, particularly investing and custodial fees, could drop further. The process of investigating, signing up for and funding accounts remains complicated.”

HSAs are available to participants in high-deductible health plans offered by employers. They provide a triple tax advantage. Contributions are made with pretax dollars, investment gains within HSAs accumulate tax free and withdrawals are tax free for quali ed medical expenses.

Fidelity Investments scored the highest mark for its total investment fee of 31 basis points followed by Health Equity (38 basis points) and NueSynergy (39 basis points). The average was 47 basis points; the highest was Lively at 66 basis points.

Fidelity was the only HSA provider that didn’t charge a maintenance or investment fee — just an underlying fund fee.  Fidelity and Lively were the only providers that didn’t set an account threshold for HSA participants to invest their contributions. Most thresholds were $500 to $1,000, although Optum required $2,000.

Fidelity placed rst in Morningstar’s overall investing account analysis, whose best practices included low fees, lack of an account threshold, high-quality investments based on Morningstar ratings and menu options that cover "core areas and limit overlap and volatile or niche strategies,” the report said. Fidelity had an overall score of “high,” while the others were above average or average.

Fidelity also placed rst among peers in Morningstar’s evaluation of spending accounts, which is the money used for medical expenses, achieving the only “high” score that was based on Morningstar’s best practices of no maintenance fees, competitive interest rates on account balances, few or no additional fees and FDIC insurance on the spending accounts.

global companies based in the U.S. without understanding Asia's supply chains, understanding Asia's consumer and enterprise preferences, it's really hard to be a successful investor long term,” he added.

However, he noted that investors should not expect short-term 18- to 24-month returns from their Asian private equity investments, and that Asia is a “constellation of incredibly different cultures, demographics, maturity of capital markets, quality advantage… and so you cannot paint a monolithic brush (across the region),” he said. For instance, while he sees opportunities in select countries, he says China in the short term has

In 2020, China’s venture capital and private equity scene was driving Asia’s private equity returns, which “generated 300 to 400 basis points above the U.S. and Western European PE returns at about the equal amount of volatility. Clearly, that clearly has very much changed,” he said.

“Up until 2020 I was a very strong China bull,” he said. “I do think in the short term, it's very dif cult to say, but I do think in the next 10 to 15 years, there's going to be a lot of equity that is created across Chinese companies. I believe in the Chinese entrepreneur, the consumer, the enterprise… (But) I don't know that this return stream is available to us the same way it will be available to maybe many Asia-based investors, certainly Middle Eastern investors

He is more optimistic about Australia, however, where investors can “make very reasonable mid-market buyout returns by building some of the national champions that cater to the domestic markets,” he said.

Some domestic “champions” have found success internationally, he said, and valuations are cheaper there than in the U.S. and Western Europe. He also noted that there are 23,000 mid-market companies in Australia.

U.S. investors will have to watch out for currency risk, however, because “the Aussie dollar has been somewhat weak against a stronger dollar,” he said.

In Japan, there are opportunities as corporate management teams have not been optimizing the return on investment capital, and

founder entrepreneurs from the 70s and 80s are now looking at succession plans, which require a private equity solution to facilitate, he said.

“Across both Japan and Korea, there's a recognition by the government that, given the demographic trends, a lot of the productivity gains has to come from technology,” he added. “And so I think there's just a lot of excitement, as you think about the next generation (of) software companies being built in Japan, and also consumer companies being built in Korea.”

He is also positive on India, which he recognized as a global leader in low-cost technology. “They're digitizing all segments of society. And there's just been a very strong consumer growth story there that will lead to strong community growth in the coming years,” he said.

On a scale of 1 to 5, Fidelity scored a 5, with the next closest HSA from First American Bank posting a 4.1.

Fidelity was the only provider with a “high” rating for interest rates on the spending account thanks to its 2.69% rate, the report said. No provider was close, as three were rated “below average” and seven were rated as “low.”

Fidelity was one of seven providers that didn’t charge maintenance fees. Fidelity and Lively were the only providers that didn’t charge additional fees such as those for excess contributions or paper statements.

Health savings account assets rose to $123.3 billion in 2023, up 18.6% from 2022, according to an annual survey by Devenir Group, an HSA research rm and investment consultant. The investment component of the HSA assets rose to $46.4 billion, up 37.3% from 2022. Devenir conducted its survey in January of the 100 largest HSA providers. Survey responses are self-reported by the providers. n

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