P&I 2024-11-18 by pensions-and-investments

CalPERS’ Gilmore to lean on strengths of the giant fund

Stephen Gilmore takes a thoughtful pause before answering how he’d describe himself as an investor.

The new CIO of the $528.8 billion California Public Employees’ Retirement System, Sacramento, has been on the job since July. Before joining CalPERS, he spent ve years as CIO of the New Zealand Superannuation Fund, valued at more than NZ$76.6 billion ($45.7 billion).

Gilmore settles on “fairly patient.’’

“As an investor at CalPERS, I really do want to focus on the strengths that we have. The market — it is hard to beat the market. But we have some areas that I would say are de nite strengths,” he said, citing the size of the nation’s largest public pension fund.

“We can probably do more things than others may be able to do, internally in some cases. We also have better negotiating power with partners. We also might have more inuence. And that could lead to lower costs,’’ said Gilmore, who hails from New Zealand.

Then there’s an investment staff of more than 300, a healthy number of external partners and a long horizon.

“We’ve been around for a long time. We will be around for a long time, and that should

U.K. government retirement reform takes cues from Australia, Canada

y B SOPHIE BAKER

The U.K. retirement system will undergo its biggest reform in decades, with Chancellor of the Exchequer Rachel Reeves announcing plans for further mergers of local government pension schemes and the consolidation of dened contribution plans into “megafunds,” in a move that aims to unlock £80 billion ($103.3 billion) in investment.

Reeves outlined the changes — affecting retirement plans that are set to have about £1.3 trillion in total assets by 2030 — in her inaugural Mansion House speech Nov. 14, with the government also publishing its interim report for its retirement system review, announced in July. The aim is also for improved governance among retirement plans. Government analysis shows that retirement plans are better placed to invest in a wider range of assets — such as startups and infrastructure — once their asset size reaches between £25 billion and £50 billion, a government brie ng note said. LGPS plans in England and Wales are set to have about £500 billion in assets by 2030, but the assets are currently split across 86 administering authorities, each with between £300 million and £30 billion. Local government of cials and councilors manage each pension fund — although efforts have already been made to consolidate these pension funds into eight pools.

The government said consolidating these assets into just a “handful of megafunds run by professional fund managers will allow

For decades, investment

ing rms have maintained their perch as the prime gatekeepers of institutional portfolios, advising asset owners on manager

asset allocation and portfolio construction. But with consultants, in their guise as outsourced CIOs, now almost universally bringing their own

Kevin Fiscus

IN THIS ISSUE

ETFs

Some managers have recently extended proxy-voting rights to their own mutual fund and ETF shareholders. Page 13

People

The appointment of Deanna Strable to the top spot at Principal Financial highlighted a passel of changes in the industry. Page 4

Regulation

The U.K.’s plans to stay relevant in nancial services include deregulation and green nance. Page 29

Special Report

Consultants

Assets under advisement and OCIO assets increased again, and execs expect the ride to continue. Page 17

The NEPC/Hightower deal won’t be the last foray into wealth management by consultants. Page 20

WorldPensionSummit

This year’s event addressed a wide range of topics, from investing to Trump to the gender pension gap. Page 6

Plan sponsor survey in progress

Pensions & Investments is still accepting late responses to the annual survey of the largest U.S. retirement funds. 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. To request a survey or obtain further information, please contact Anthony Scuderi at ascuderi@ pionline.com or 212-2100140, or visit www.pionline. com/section/surveys

‘Unprecedented’ moves at AIMCo draw criticism

mance issues and rising costs. Alberta Premier Danielle Smith’s government said a new board chair will be appointed within 30 days and that a new board will be established after a permanent chair is named.

The removal of the entire board of Alberta Investment Management Corp., Edmonton, and its CEO was “surprising” and “unprecedented,” said Keith Ambachtsheer, director emeritus of the International Centre for Pension Management, a Toronto-based global network of pension organizations.

On Nov. 7, the provincial government of Alberta terminated the entire board of the C$168.9 billion ($124.5 billion) AIMCo and its CEO, Evan Siddall, citing underperfor-

In the interim, Nate Horner, Alberta’s president of treasury board and minister of nance, was appointed the sole director and chair for AIMCo. In addition, Ray Gilmour, the province’s deputy minister and secretary to cabinet, was appointed the interim CEO at the pension fund.

AIMCo is a “crown corporation” of the province of Alberta, which means it is a government-owned organization. Ambachtsheer, who is also executive-in-residence at the University of Toronto’s Rotman School of Management, said the federal government of Canada cannot

stop a provincial government from taking such actions at a pension investment organization that the province itself created.

He also described the ongoing saga at AIMCo as unique, and that such drastic measures would be unlikely to happen at other Canadian pension funds.

“Keep in mind that AIMCO is not a pension plan,” he said. “It is an investment manager that manages the assets of public sector pension plans in Alberta; for example, teachers, municipal employees, etc.”

Examples in other provinces of similarly structured pension fund managers, he noted, are the C$452 billion Caisse de Depot et Placement du Quebec, Montreal; the C$77.4 billion Investment Management Corp. of Ontario, Toronto; and the C$229.5

billion British Columbia Investment Management Corp., Victoria.

The mass termination and upheaval at AIMCo will also “likely have a signi cant impact” on AIMCo’s culture and investment practices. He added that even after a new board and permanent CEO is installed, it’s “very unlikely” that things will return to normal at the pension fund. “The big question is: Why did the Alberta government do this?” Ambachtsheer asked.

Fees, costs, lower returns

Among other things, in explaining why it took these measures, the Alberta government cited AIMCo’s signi cant increases in operating costs, management fees and staf ng without a corresponding increase to

Fortune 500 spinoffs help power pooled employer plan gains

plan, spinoff companies tackle both challenges at once, Jones said. They gain the scale they need via the PEP to negotiate plan fees, while also offloading the administrative responsibilities and duciary risks that come with managing a stand-alone retirement plan.

Businesses spun off from Fortune 500 companies are taking a shine to pooled employer plans, choosing them over stand-alone 401(k) retirement plans for their employees.

The reasons are twofold, according to Rick Jones, a senior partner at Aon and head of the company’s pooled employer plan.

Spinoff companies are starting from scratch and often don’t have the human resources staff to manage a traditional 401(k) plan. Plus, Jones said, they lack the scale they once had with the large parent company to negotiate the fees on their workplace plans.

By joining a pooled employer

“We’ve had a lot of traction with these spinoff organizations,” Jones said, adding that they face a level of complexity that “they would rather not have to tackle by themselves.”

Of the nearly 100 employers participating in the Aon PEP, some 10 to 15 are Fortune 500 spinoffs, Jones said. Jones declined to disclose the companies that joined the Aon PEP or how much in assets they had in the plan. In total, the Aon PEP has gathered more than $3 billion in assets and commitments since its launch in 2021.

The demand for pooled employer plans among spinoff companies

College and university endowments boasting higher allocations to domestic equities and hedge funds chalked up positive returns for the second scal year in a row, even stronger than the previous year.

But that also meant that again many of the largest endowments, which eschew public equities for private investments, underperformed.

A second straight year of exceptionally strong returns by public equities, especially in the U.S., de ned endowments’ performance for the latest scal year. For the year ended June 30, the Russell 3000 index and MSCI EAFE index returned 23.1% and 11.4%, respectively, compared with the respective 19% and 18.8% for the scal year ended June 30, 2023.

Margaret Chen, global head of the endowment and foundation practice at Cambridge Associates, said in an interview that from a performance outcome perspective, there wasn’t much difference between the two recent scal years, but the market environment was indeed different.

Fiscal year 2023 was very much a rebound year, after the signi cant downturn seen in the scal year ended June 30, 2022, when the Russell 3000 index and MSCI EAFE index lost -13.9% and -17.8%, respectively. This past scal year, said Chen, was very much of an “anticipation” year, with many investors seeing good times ahead as soon as the federal funds rate was cut.

Among the 44 endowments whose returns have been tracked by Pensions & Investments as of Nov. 11, the

median return was 9.8%. The previous year’s median return was 4.4%. For the year ended June 30, 2022, the median return had been -4.1%.

After a dramatic 18-month period of rising rates, in July 2023 the Federal Open Market Committee raised the fed funds rate to a range of 5.25% to 5.5%, where it remained until the Fed cut rates by 50 basis points in September and a further 25 points on Nov. 7.

However, this year’s outcomes were similar to those seen in scal year 2023, said Chen.

“The smaller portfolios, endowments with a simpler asset mix — more public equities and less private investments — did outperform larger, more diversi ed portfolios in scal year 2024,” she said. “It’s challenging for endowments, because for the largest ones especially, this is the second year that they have been toward the bottom of the return range

What changes will a Trump presidency bring?

Tax cuts, tariffs, deregulation and ESG policy are all on Trump’s second-term docket

y B BRIAN CROCE

Tax cuts, tariffs and deregulation will be key focuses for Republican lawmakers next year after President-elect Donald Trump’s decisive victory coupled with Republicans ipping control of the Senate as well as retaining their control of the House.

In the short-term, the Dow Jones Industrial Average shot up more than 1,270 points, or 3%, in early trading Nov. 6, while the broader S&P 500 index and the Nasdaq composite were each up about 2%.

Brian Gardner, chief Washington policy strategist at Stifel Financial, said the fact that the race’s outcome was known quickly is a boon for investors. “We expect the equity markets will see a Trump win as pro-economic growth and will rally on the news,” he said in a statement.

“The sectors that could outperform on a Trump win include nancials (especially regional banks), cryptocurrency and digital assets, as well as oil and gas. The bond market could sell off on fears of increased de cits and higher interest rates.”

To that end, the 10-year Treasury yield jumped to 4.45% on Nov. 6 after closing Nov. 5 at 4.29%.

As of Nov. 6 at 12:30 p.m. EST, Trump had 277 electoral votes,

More ‘gray swans’ likely in markets, says P&I WorldPensionSummit keynote speaker

y B CHRISTOPHER MARCHANT

Donald Trump’s victory in the 2024 U.S. presidential election means international markets will likely face more “gray swans” while also confronting increased U.S. national debt and global trade fragmentation, according to Jens Larsen, director, global macroeconomics at political risk consultancy rm Eurasia Group.

At time of Larsen’s keynote speech at the Pensions & Investments WorldPensionSummit, held in The Hague, Nov. 5-7, Trump had been allocated 267 electoral college votes by the Associated Press, with 270 required to win the U.S. presidential election.

A “gray swan” event is one that is considered unlikely, but possible to occur. Larsen

noted that one such gray swan was Trump’s proposed tariffs on China, leading to a knock-on effect on U.S. rms and their

CalSTRS’ Scott

Chan sees possibility of more

in ation volatility and market uncertainty

y B ARLEEN JACOBIUS

Early on during CalSTRS’ Nov. 6 investment committee meeting, Harry M. Keiley, committee chair, addressed the elephant in the room, the presidential election.

“Half of the country is elated. Half of the country is really hurt,” Keiley said.

Having a dif cult time sleeping, Keiley said that he had “the same feelings I had as a little boy in Queens when my team lost. ... But this isn’t a baseball game.”

However, despite the noise and distractions, “We have a mission and a purpose beyond ourselves ... and that gives me great comfort,” he said.

While Keiley said he is not a religious man, he recited his favorite prayer, the Prayer of St. Francis, a prayer for peace.

China’s economy, stock market face uncertain recovery

“The sun will rise tomorrow,” said Scott Chan, chief investment of cer at the $351.5 billion California State Teachers’ Retirement System, West Sacramento, quoting CalSTRS board member Michael Gunning at a pre-brie ng. “Indeed the sun has risen today. ... We have an amazing mission to secure the retirement future of teachers ... and $350 billion to manage. Let’s get to it,” Chan said.

Chan called the Nov. 6 stock market surge a “certainty rally” as the result of the selection of the next president. He said that in the long term, investors have more questions than answers.

At the time of the meeting, one area of uncertainty was who would control the House, and who would serve in the Trump administration’s cabinet, he said.

The Chinese government recently announced stimulus measures, such as lowering the bank reserve requirements and cutting interest rates, designed to accelerate economic growth. But President-elect Donald Trump has vowed to impose steep tariffs on goods imported from China, which could hurt its economy as well as pinch stock market returns, which have lagged overall emerging markets over the long term.

Slowing growth: China’s gross domestic product grew 5.2% in 2023, and the IMF projects that will slow to 4.8% this year and continue to drop through the end of the decade. In the third quarter, GDP grew 4.6% year-over-year vs. 5.3% and 4.7% in Q1 and Q2, respectively.

China’s real GDP growth

Index heavyweight: China makes up a meaningful portion of emerging markets equities, with Chinese stocks representing nearly 28% of the MSCI Emerging Markets index.

Makeup of MSCI Emerging Markets index by country*

Equity exodus: Chinese equities have experienced out ows from separate accounts in 12 out of the last 13 quarters, with $511 million of out ows in the second quarter of this year. Overall, emerging markets have also seen out ows, including $10.1 billion in the second quarter.

Separate account flows (billions)

Can the rebound last? Chinese markets reacted positively after the stimulus announcement. Through October, the MSCI China index returned 21.7%, including a 23.9% gain in September. However, with the Trump administration promising new tariffs, economic growth may slow further than economists project.

Equity returns, China vs. EM ex-China**

POINTING THE WAY: President-elect Donald Trump

DISRUPTION: Eurasia Group’s Jens Larsen

Robert Tjalondo

Strable appointed to top spot at Principal Financial Group

Deanna Strable has been named president and CEO of Principal Financial Group, effective Jan. 7, 2025, succeeding CEO Dan Houston, who will continue to serve as executive chair of the board, according to a Nov. 12 news release.

Strable has served as president and chief operating of cer since August and previously served as the company’s chief nancial of cer from 2017 to 2024.

A spokesperson for Principal said Strable will absorb the COO respon lion in assets under management.

Eduard van Gelderen, former CIO

head of research, effective Dec. 15. He replaces Jess Gaspar who resigned in June, a spokesperson said.

vestment decisions.

Van Gelderen will shape the organization’s long-term research

Pushing What’s Possible.

nications to extend its reach and impact, a statement said.

FCLTGlobal’s head of ce is in Boston, but van Gelderen will be based in Montreal.

Van Gelderen was senior vice president and CIO at the Public Sector Pension Investment Board, Montreal, which had C$264.9 billion ($195.6 billion) in assets as of March 31.

Susan Manske, vice president and chief investment of cer of the $8.7 billion John D. and Catherine T. MacArthur Foundation, Chicago, will be retiring in June, she con rmed. Manske has been the head of the investment of ce at the foundation since 2003.

Before joining the foundation, Manske spent two years as vice president and CIO, trust investments, at Boeing Co., Chicago, overseeing the investment management of that company’s retirement plan assets.

The foundation has posted a job listing for Manske’s successor. Executive search rm Heidrick & Struggles is assisting.

Mohammed Al-Sowaidi was appointed CEO of Qatar Investment Authority, Doha, effective immediately.

The sovereign wealth fund, which has about $510 billion in assets, according to research and data rm Global SWF, said Al-Sowaidi was chosen following the appointment of former CEO Mansoor Ebrahim Al-Mahmoud as minister of public health. He had been CEO since 2018. Al-Sowaidi was chief investment of cer, Americas for QIA. QIA was established in 2005. The sovereign wealth fund invests across public and private asset classes.

Vincenzo Vedda was named global CIO at DWS Group, as the money manager brings together its portfolio management, chief investment ofce and economic research units.

Current global CIO Bjoern Jesch will leave the €963 billion ($1.04 trillion) money manager by mutual agreement, a statement said.

Vedda retains his responsibilities as global head of portfolio management-public markets, a spokesperson con rmed.

As part of the move, DWS named Johannes Mueller to the newly created role of chief economist, reporting to Vedda.

Marketa Dvorak was appointed managing director for the globalnancial institutions team in Asia-Paci c at the $2.8 trillion Capital Group, the rm said in a statement on Nov. 12.

She continues to be based in Singapore and reports to Nick Shaw, the head of client group for global nancial institutions across Asia and Europe.

Her duties include building relationships with local client groups to cultivate partnerships with global and regional distributors. The role is newly created and includes institutional client coverage, a spokesperson con rmed.

Previously, she was head of Southeast Asia for the global

management group at

Management

Deanna Strable

Susan Manske

Vincenzo Vedda

Eduard van Gelderen Mohammed Al-Sowaidi

Marketa Dvorak

shape

Art installation inspired by the Large Hadron Collider at CERN, Geneva.

P&I’s annual conference tackles investment trends — and more

At the 15th annual Pensions & Investments WorldPensionSummit, industry and thought leaders provided insights into the latest trends in investing, President-elect Donald Trump’s impact on the world order, closing the gender pension gap and myriad other themes. Read on for a selection of P&I posts from the summit, which took place Nov. 5-7 in The Hague. To read the full blog, go to:

Can the decline in the liberal order be reversed?

The liberal order that the developed world has become accustomed to has been in decline since the global nancial crisis in ’08 and ’09, but it is possible that there could be a renewal, said keynote speaker Sten Rynning, director of the Danish Institute for Advanced Study at the

of ce in 2016, there was already a sense that the West was slipping, but Trump did not come in with an anti-liberal agenda, he said.

“It was a battle between two types of liberalism ... It was the old international institutional liberalism. Trump was representative of a more nationalist, populist, sovereign liberal streak. You have to take back control at the national level, and that led to a clash, and it led to a sense of discomfort and dissolution within the West of the liberal community,” he said.

Now the old order is at a fork in the road and members have to decide whether to invest in their own base or in relations with other powers.

“They can either go center to center, power to power —Washington, Beijing, Moscow, New Delhi — talk to the centers of power to refashion global geopolitics, or they can invest in their own principle and values ... This is the question, and this is where the future of the liberal order will be decided,” he said.

Rynning is the author of “NATO: From Cold War to Ukraine, a History of the World’s Most Powerful Alliance.’’

Natalie Koh

Investment education is critical but all too scarce

Ashby Monk, executive and research director of the Stanford Research Initiative on Long-Term Investing, bemoaned the limited availability investment education opportunities as “missing a trick,” considering its critical importance.

Monk noted that his course at Stanford was one of only ve worldwide with a focus on institutional investing, a sizeable market with pension funds and asset owners managing $140 trillion.

“Asset owners are the foundation of the modern social welfare state, and they are also the base of capitalism. As banks retreat due to regulation, the asset owners in are stepping in with credit. They’re becoming the risk capital of the entire system,” Monk said.

“Yet where do we go to learn about them? We have 10,000 business schools now around the world, and I was incredibly generous by nding ve programs in the world that teach investing. There are zero professional schools of investing in the world.”

That pushes pension funds to look to models, such as the Dutch model or the Yale model because “we don’t have lots of frameworks,’’ he said.

But Monk argued that a pension fund needs to understand its own identity, based on its own unique capabilities, its governance, culture and technology.

“It is about understanding your comparative advantages, your weaknesses, and formulating a strategy to become a new model,’’ he said. “And when you have a model that generates high performance, you become a role model.’’

What is so crucial about having an identity is that it helps spur

LIBERAL RENEWAL POSSIBLE: University of Southern Denmark’s Sten Rynning

DISCOVERING THE GEMS IN GROWTH LENDING

Growth and later-stage venture loans to high-growth companies are garnering greater interest as institutional investors take a more granular approach to private credit and seek out differentiated returns. The slowly improving macro environment has created an opportune time for growth lending. There has been a material bifurcation in this market between high-flying companies on one hand, and a broader market where equity is less of a fit but additional capital is still critical. In this landscape, there are a material number of proven growth companies that are still well suited to debt. However, it takes an experienced debt manager to identify and fund the right credits across this wide field, to manage a robust growth-lending portfolio through all market cycles and to deliver consistent, attractive risk-adjusted returns, as Jeff Bede, head of growth capital at ORIX USA, explains.

Pensions & Investments: After ﬂourishing for more than a decade, the growth industry has been facing a downturn. Where is the market now?

JEFF BEDE: For more than a decade, we had a bull market in venture capital, where thousands of companies were getting funded, and valuations were high. Since 2022, the market has bifurcated, and new equity raises have been more limited to a select group of companies, but there is a part of the marketplace still deserving of growth capital. Many of these companies have seen pressures from lower spending in enterprise technology, longer sales cycles, or lower renewal pricing (down-sell) that has resulted in slower revenue growth, and the cost of equity for them has also gone way up. But we still see a robust pool of companies with proven, sustainable business models at revenue scale, but currently not growing at rates that attract or justify the cost of venture equity. It has created a lot of opportunity where debt is a good solution for solid businesses that still have need for capital. Growth lending is also an underserved market, creating a compelling opportunity for lenders. From an investment opportunity perspective, I believe there are strong reasons for institutional investors to consider the asset class at this time.

P&I: Why should institutional investors consider growth capital today?

BEDE: I see growth lending starting to go prime time with institutional investors, instead of being a niche sector funded by specialty lenders. It also happens to be a good time to enter the market for several reasons. Returns are higher than other mainstream direct lending asset classes, and secured, well-structured loans are designed to provide meaningful downside protection. The proprietary origination and the specialized nature of the underwriting relative to other debt sectors means that investors can potentially achieve strong risk-adjusted returns. We now have decades of performance data that has been tested through a range of cycles and our target companies have been especially “battle-tested” over the past few years. Loss rates are low.

Growth lending also provides a high cash coupon that provides current income from day one. Being senior in the capital structure meaningfully reduces the dispersion of outcomes compared to growth equity capital. In our opinion, it’s an attractive way to play the most dynamic and growing part of our economy, with attractive returns and debt-like protections, and in what we believe is a safer and more predictable way than venture equity.

From a diversiﬁcation point of view within private credit, I believe this sector is less correlated than other parts of the debt markets. For institutional investors considering the asset class, it is key to work with an experienced manager to navigate this market, as the origination and underwriting is more specialized, leading to less crowded market conditions.

P&I: How does ORIX USA best position itself to take advantage of opportunities?

BEDE: Access to capital as well as experience are crucial, as growth companies put a premium on sophisticated lenders that they can trust and that can grow with them over time, and we have been doing this for a long time. Being able to upsize our loans to support our borrowers’ growth trajectory is a key competitive advantage. ORIX USA uniquely uses its balance sheet to invest alongside our third-party client capital.

I see growth lending starting to go prime time with institutional investors, instead of being a niche sector funded by specialty lenders. We believe it also happens to be a good time to enter the market.

The lion’s share of our origination is proprietary, either via the venture and private equity sponsors or directly with the company. In this space, it really helps to have a proven market presence and ongoing origination channels. Having been in the market for 22 years, we have developed extensive relationships, strong references, and a long track record in growth industries.

Growth lending is a more intangible and dynamic market than more traditional lending sectors. The current tech market downturn has been a more enduring decline, with businesses needing to sustain through several years of tougher external market conditions. That puts a premium on strong underwriting ability and experienced portfolio management with teams like ours who have the knowledge and conﬁdence to lean in with both new and existing investments.

P&I: Which sectors within technology present opportunity, even with the broader market still experiencing this downturn?

BEDE: We see an opportunity set of software and technology-enabled businesses across sectors that have common attractive attributes: diﬀerentiated products, revenue scale, attractive customer retention rates, customer diversiﬁcation, continued growth, high gross margins, and manageable cash burn.

Our team also continues to focus on the traditional enterprise SaaS, or software-as-a-service, market. We feel these businesses are a good ﬁt for debt because of embedded products with high revenue visibility and contracted recurring revenues that tend to be sticky and produce high margins. Given the impact SaaS continues to have across

Jeff Bede Head of Growth Capital ORIX USA

industries, it is a key theme that hasn’t fully played out, especially on the debt side. Acquisition and buyout capital also drives demand for growth debt, and a good portion of the many venture businesses funded in the early 2020s will soon need a home.

In addition, artiﬁcial intelligence (AI) is attracting the lion’s share of new equity capital. We’re going through a systemic change, where new businesses are being created and almost every business will need to ﬁgure out how to incorporate AI into their products and services, creating a need for new capital and growth debt will play a valuable role.

P&I: How do you identify the right kind of companies in today’s macro environment, where many growth companies have struggled with slower growth, less capital availability and high rates?

BEDE: Venture/growth equity and debt can have diﬀering investment lenses, but growth continues to be critical to both. With all the macro headwinds, companies that have been able to continue to grow through the current environment can be very attractive from a credit point of view. That said, debt doesn’t necessarily need a high value exit to drive attractive risk adjusted returns, and so it does not require the same growth rates that equity does. Another important dynamic for lenders is eﬃcient growth, meaning companies that grow with manageable operating cash burn. We look for companies to be well funded with long liquidity runways so that medium-term capital markets challenges around equity and M&A are unlikely to come into play, even if the company underperforms.

We lend to what we consider premium companies, but we also see a current market opportunity in funding those attractive, growing businesses that may not be able to deliver the high exit valuations new equity investors would expect. They have important uses for the capital that outweigh the cost of the debt such as driving continued sales and marketing and strategic R&D investments.

Additionally, our senior secured loans possess strong structural protections including at least one, and typically multiple, ﬁnancial covenants. As prudent lenders, we are experienced in managing downside scenarios when needed.

The “rule of 40” has received a lot of attention in venture equity — the growth rate plus profit margin should be at or above 40% to receive equity investment. On the debt side, I’m going to coin the term “rule of 20.” With all the credit strengths of our businesses — strong product differentiation, recurring revenues, low debt to value, etc. — we believe a 20% growth that’s breakeven or a 30% growth with -10% profit margins is just fine. There is a much broader range of companies that meet this, especially in today’s market. Growth lending returns are more structured with a coupon, fees and equity kickers. ■

HITTING

A WALL

Hypatia’s gender-lens

ETF working to build assets and add a role

Patricia Lizarraga knows she needs to increase the assets of her rm’s $3.9 million Hypatia Women CEO ETF to give it any chance of hitting institutional investors’ radar screens. And she’s also sure of something else: There aren’t enough female portfolio managers.

Hypatia Capital Management, the ETF’s investment adviser, is hiring for the role of portfolio manager and head of investor relations, according to a Nov. 11 email from its parent company, Hypatia Capital Group, which Lizarraga founded in 2007. Lizarraga, managing partner of Hypatia Capital, has managed the Hypatia Women CEO ETF since it began operations in 2023.

“We are especially excited to be able to offer the title of portfolio manager of a NYSE-listed fund,” the email said. “We know this title is dif cult to obtain, and there are too few women in this role in the nancial services industry.”

The ETF, which trades under the ticker symbol WCEO, is an actively managed fund that seeks to invest at least 80% of its net assets in equity securities of U.S. companies led by a female CEO, according to its prospectus.

“We are an ETF, and we need to scale our assets,” Lizarraga said in an interview.

“We’re at sub-scale right now.”

Consequently, institutions like endowments and foundations can’t invest in WCEO “because they say we’re too small,” she said.

“So, in order to scale our ETF, we need to do personal outreach because the wealth management rms will not let us on their platforms until we’re larger,” Lizarraga said. Research has shown that women typically bear much more responsibility than men when it comes to caring for children and elderly family members, she said.

“And that affects their career and that affects the retirement gap that exists in the United States where men retire with signi cantly more assets than women, and so we’re trying to address that,” Lizarraga said.

While women tend to be the ones whose careers are interrupted by such family responsibilities, Hypatia welcomes men to apply for the role as well, she said.

“Just like I don’t like a world that’s 95% men CEOs, I wouldn’t want a world that was 95% women CEOs either,” she said.

KATHIE O’DONNELL

‘PERFECTIONISM IS PERILOUS’

Norway asking citizens for advice on shaping future of its sovereign wealth fund

Norway is looking to its own people for advice on shaping the future of its $1.8 trillion sovereign wealth fund and how the money can be used for the bene t of current and future generations.

The nation was slated to send out 40,000 text messages to its citizens on Nov. 13 in launching the Citizen Assembly for Norway’s Future. From those, 66 selected Norwegians will participate from January to April in seven meetings to hear from experts, discuss issues and eventually present recommendations for how Norway should put its wealth to work for its citizens.

“With the Citizens Assembly for Norway’s Future, we aim to spark a national conversation about how

Norway can contribute to a better future for both current and future generations in the face of shared global challenges,” said Eirik Mofoss, CEO of nonpartisan Nordic thinktank Langsikt, in a news release on the Citizens Assembly website. “We hope the panel’s recommendations will in uence political decisions across party lines.”

The 66 people will be selected based on age, gender, location, education and a question about their views.

The Citizens Assembly for Norway’s future is organized by The Secretariat, a collaboration between Nordic non-pro t organizations SoCentral and WeDo Democracy.

Further information is available on the Citizens Assembly website.

ROB KOZLOWSKI

Don’t fall into perfection trap, professor tells WPS delegates

“Perfectionism is perilous,” harms individuals and rms, and we shouldn’t let it be the enemy of good, Thomas Curran told pension fund executives.

In a keynote speech, Curran — professor of psychology at the London School of Economics and author of “The Perfection Trap” — confessed that he is “a bit of a perfectionist,” and wanted to know how many delegates attending the P&I WorldPensionSummit would agree by a show of hands.

“OK, borderline the most I’ve ever seen in terms of people in the room describing themselves as perfectionists,” he mused.

It’s a common personality characteristic, he said, referencing studies and data — but while perfectionism is often seen as a virtue, “I’m perhaps going to push you more towards the direction of

thinking perfectionism is a bit of a vice,” Curran said.

feeling of not quite being good enough, and a need to prove oneself to other people. “It’s a de cit thinking. It’s a feeling that ‘I don’t quite believe that I’m enough, so I have to set really high standards’.”

However, those high standards lead to a lot of failure, overcompensation and a cycle of perfectionism, he said — which often leads to “burnout.”

So what can perfectionists do?

Curran outlined three things: “fear setting,” putting each perfectionistic fear under a microscope, asking what’s the worst that can happen and then how it can be prevented or repaired; practicing self-compassion; and “microdosing discomfort,” avoiding shing for reassurance, using apologetic adverbs, and adding healthy assertiveness into daily routines.

SOPHIE BAKER

More retirees are facing nancial dif culties, with almost 1 in 3 spending more than they can afford, according to a survey released by the Employee Bene t Research Institute.

Exactly 31% of American retirees between the ages of 62 and 75 report spending “much higher” or “a little higher” than they can afford, up from 27% in 2022 and 17% in 2020.

Half said they saved less than what was needed for retirement, according to the survey released Nov. 7. Fewer report having three months of emergency savings. In 2024, 59% of retirees had three months of emergency savings, down from 69% in 2022.

More retirees are also reporting outstanding credit card debt. In 2024, almost 7 in 10 retirees (68%) had credit card debt, up from 40% in 2022 and 43% in 2020.

Retirees also rated two well-being measures lower than they did in 2022 and 2020. On a scale of 1 – 10, where 1 is “not at all aligned” and 10 is “very aligned,” retirees rated lifestyle alignment with pre-retirement expectations an average of 5.7, down from 6.4 in 2022 and 6.8 in 2020. Similarly, retirees rated their satisfaction with life in retirement an average of 6.9, down slightly from 7.0 in 2022 and 7.4 in 2020.

Retirees were more likely to have a “savings mindset” than a “spending mindset,” according to the survey.

When asked to rate their consumption philosophy on a scale of 1-10, where 1 is “I have a savings mindset” and 10 is “I have a spending mindset,” more than 1 in 3 (38%) said they have a savings mindset with a rating of 1, 2, or 3. A little over 1 in 10 retirees (11%) said they had a spending mindset with a self-reported rating of 8, 9, or 10.

Retirees reported that individual retirement accounts generated a median of 10% of their income, while 401(k)-like workplace retirement plans generated 15%. One in ve retirees (20%) pulled money from their IRAs, and 17% drew income from their workplace plans. The survey canvassed approximately 3,600 American retirees between the ages of 62 and 75 during the summer.

HELP WANTED: Hypatia Capital’s Patricia Lizarraga

DEFICIT THINKING: London School of Economics’ Thomas Curran

Robert Tjalondo

J614/Getty

TRENDS IN THE PRT MARKET

During a panel discussion at Pensions & Investments’ 2024 Pension Derisking Conference in October, Ian Cahill, head of pension risk transfer at Massachusetts Mutual Life Insurance Co. (MassMutual®), discussed many key trends in the PRT marketplace. We recently caught up with Cahill to follow up on his comments at the conference, and how MassMutual is well positioned to support growing PRT market needs.

KEY TRENDS

PRT transactions have gained tremendous popularity as a form of derisking, reaching $45.8 billion in new sales in 2023 as reported by LIMRA.1 Against a backdrop of favorable market conditions and improved pension funded statuses, corporate deﬁned beneﬁt plan sponsors are well positioned to evaluate and pursue pension derisking paths, and are doing so through a PRT, according to Cahill.

As the volume of PRT transactions has grown over the past decade, plan sponsors have become increasingly knowledgeable about the solution — propelling interest further. More corporate plan sponsors are familiar with and show greater intent to execute PRT transactions. Many plan sponsors have even completed multiple transactions and know how the process works, from pricing and execution to administration, Cahill said. “This has made plan sponsors more comfortable with the opportunity, and it is also driving growth in the PRT market.”

Moreover, PRT transactions are getting larger, including some that are quite complex. “We’re seeing many more requests for plan terminations, and for increasingly larger plans that are hundreds of millions of dollars and more in size,” he said. While plan sponsors are considering the full range of PRT strategies, including partial lift-outs, “more plan sponsors are focused on full-plan terminations than in the past.”

Another trend is a widening array of plan provisions. “Today we’re seeing more transactions that have greater complexity in terms of the provisions that are oﬀered to plan participants. Insurers need to be in a better position to price, underwrite and provide administration,” Cahill said. The growth in plan terminations has also led to other considerations, such as asset-in-kind funding and longer timelines, as the sponsor may have less control over timing but further foresight of the transaction.

HANDLING COMPLEX PLAN PROVISIONS

In an evolving PRT market that serves increasingly complex plan provisions, an insurer’s administrative capabilities have become even more prominent, particularly with plan terminations. “It’s important to have an insurer who has experience handling complex plan provisions and understands how to provide the information, services and resources that annuitants need through both a dynamic call center and online with a robust digital solution,” Cahill said.

Given the years of experience that plan sponsors have had with regulated traditional pension plans subject to ERISA, many may ﬁnd themselves less familiar with the capabilities and industry standards for insurance products. Cahill highlighted that insurance companies too have competitive administrative solutions and work within a regulatory framework that addresses both the ﬁnancial and operational aspects. “This is a heavily regulated industry, and we work to meet or exceed the individual state requirements where we

do business, including making sure that we provide annuitants with appropriate levels of contact, service and support,” he said.

While the regulations provide requirements and industry standards, it’s not why MassMutual strives to oﬀer robust administrative and digital capabilities, he explained. “At MassMutual, helping people secure their future and protect the ones they love is core to our mission and purpose,” Cahill said. “We monitor the annuitant experience — how are they interacting with us, what transactions interest them most, and so on. Their activity and feedback inﬂuence how we shape our capabilities over time.”

MassMutual’s administrative platform integrates existing and new technology to support all its PRT clients. “We continue to grow our call center, which is the main method used to interact with our annuitants, and we continue to invest in the technology used to support their needs and provide the best experience possible,” Cahill said. “We also continue to develop our digital service offering to annuitants currently using it as well as to be prepared for more annuitants, who we expect will use that method over the next five, 10 and 15 years. We believe we offer among the most robust annuitant administrative capabilities available in the PRT space.”

MANAGING PRIVATE ASSETS

As market demand has increased and pension liabilities are transferred to insurers, it’s become incumbent on insurers to view each potential PRT transaction holistically, as opposed to in generalities, Cahill said. “As more corporate plans come to market, we’re seeing the need for more thoughtful resource allocation by insurers when pricing and underwriting those risks.”

As an example, he added: “In situations where a plan sponsor is looking to transfer assets-in-kind as a method for paying the PRT premium, we’ve generally received traditional ﬁxed-income portfolios. But today we’re also seeing plans that have larger allocations to private assets, and there have been instances where there’s a request to use the private assets to cover a portion of the premium as well.”

With the growth of private assets in deﬁned beneﬁt plan portfolios, these types of asset-in-kind premium requests were inevitable, Cahill said, especially for plan terminations. “We’re seeing the request to settle private assets more often, and it becomes a more sophisticated conversation than it’s been in the past.”

Ultimately, an asset-in-kind transfer can be a win-win for the insurer and the plan sponsor alike, but there are complexities involved in accepting private assets to cover all or a portion of the cost of a premium, he said. Documentation that provides details on each speciﬁc asset is essential in these cases during the pricing process to ensure a sustainable and competitive bid. “It’s helpful for the plan sponsor to understand what the insurer needs and have it readily available, so the insurer can evaluate which assets they’ll accept in kind as part of the premium. The less liquid the asset, the more challenging it is to work through the process of agreeing on the asset’s value.”

Insurers want to understand the protections and covenants that are negotiated into the assets, Cahill said, and that can be a major consideration for private assets. Insurers “may be looking for structures similar to what they already have

Today we’re seeing more transactions that have greater complexity in terms of the provisions that are offered to plan participants. Insurers need to be in a better position to price, underwrite and provide administration.

— Ian Cahill Head of Pension Risk Transfer, MassMutual

on their books, and plan sponsors need to be prepared for a broader discussion around the asset and its structure, not solely on market value and yield.”

A MUTUAL, LONG-TERM VIEW

To stay ahead of the evolving PRT market, MassMutual has continued to invest in its PRT business. “We continue to invest in our people and our products to ensure we are able to support the increase in demand and complexity as well as place ourselves in a position to execute what is promised,” Cahill said.

Also, MassMutual’s focus on annuitants is deeply rooted in its culture as a mutual company. “Our participating policyholders are our owners, and their No. 1 long-term objective is our enduring viability and sustainability, as opposed to a focus on short-term outcomes,” he said. “With this objective, we take a long-term approach to managing our business. This has enabled us to deliver strong results for our participating policyowners and customers while maintaining ﬁnancial strength ratings that are among the highest in our industry. With our focus on annuitants, our mutuality, and our ﬁnancial strength, MassMutual is well poised to continue supporting market demand.”2 ■

OPINION

OTHER VIEWS JOHN BILTON

Rising rates and innovation — what investors need to know going forward

The post-global nancial crisis world of low growth, low interest rates and low capital investment is fading in the rearview mirror. In its place is a healthier economy set to deliver higher growth, higher rates and strong capital investment. “Fiscal activism” (increased government investment) has overtaken the “monetary activism” (aggressive monetary policy) of the 2010s. Investors need to manage a range of risks, not least from the geopolitical tensions that dominate the headlines. But overall, we have a constructive outlook.

Against this backdrop, we are launching our 2025 long-term capital market assumptions. Presenting our annual capital market estimates for more than 200 assets and strategies in 19 base currencies, we examine how some of the structural factors affecting economies today are likely to drive asset returns over a 10- to 15-year investment horizon.

This year’s forecast explores how four key forces — strong private capex trends; scal activism; a tendency toward economic nationalism; and widespread technology adoption — notably of arti cial intelligence — will shape the economy and markets in the decade ahead.

Higher growth, higher rates — and solid returns

Our macroeconomic outlook sets a strong foundation for long-term returns across public and private markets. We anticipate stronger growth and modestly lower in ation.

Higher growth means higher cycle-neutral cash rates which, in turn, support xed-income returns. Our forecast for the U.S. cycle-neutral cash rate increases 30 basis points to 2.8% implying average cash returns of 3.1% over our forecast horizon.

Higher growth also supports corporate earnings and projected equity returns (only modestly lower despite valuations at challenging starting points). Our long-term return forecast, of 6.4% for a USD global 60/40 stock-bond portfolio, dips 60 basis points from last year, which is in line with the long-term average.

Our U.S. large-cap forecast falls just 30 basis points to 6.7%, even as valuations act as a 1.8% drag on returns over the investment horizon. We think the U.S. market’s high-quality characteristics and sector mix (including a powerful technology sector) justi es the valuation premium that U.S. stocks have compared to their peers over the next 10 to 15 years.

In private markets, alternatives are now emerging from a period of asset repricing and offer attractive returns and diversi cation options. Real assets in particular provide a compelling bene t: diversi cation against in ation shocks. In global real estate, we see a generational opportunity for long-term investors as a direct result of valuations signi cantly re-rating. Our U.S. core real estate return forecast rises from 7.5% to 8.1%.

Turning to nancial alternatives, our private equity return forecasts increase slightly (to 9.9% for our composite). We believe a thawing of the IPO market after two very subdued years will be an important catalyst for future

returns. Hedge fund median manager forecasts move slightly higher. We note that higher cash rates have a meaningful and positive correlation with hedge fund excess returns, implying a good environment for manager alpha.

On the FX front, we continue to expect that the U.S. dollar will depreciate over our forecast horizon— but perhaps at a more muted pace.

In building our forecasts, four themes emerge that affect our assessment of productivity, corporate earnings and in ation:

Strong private capex: The pandemic, the energy crisis and opportunities from new technologies such as AI have revitalized the desire to invest. We expect this pattern to continue, and potentially to accelerate over our forecast horizon. A trend that, in the short run, supports the investment side of the economy. While in the long run, investment tends to lead improvements in productivity — which, in turn, can be a moderating force on in ation.

Fiscal activism: Austerity is off the agenda as governments begin to ramp up their scal spending. But it matters how public funds are spent. To boost real growth and not merely fuel in ation will require investments that stimulate supply rather than purely stoke demand.

Spending on supply chain resilience and national defense, for example, requires a ne line between judicious investment and excesses that embed in ation. By contrast, investments in electri cation, sustainable energy grids and incorporating AI and automation into the economy can potentially boost productive capacity in the long run.

To the extent that government spending proves wasteful, bonds may reclaim their role as the global economic police force. This may come at the price of higher volatility in government bond markets.

Economic nationalism: The pandemic highlighted the fragilities in supply chains and infrastructure, spurring a trend toward economic nationalism that so far stops well short of deglobalization. In our forecasts, the prospect of economic nationalism means our estimate of in ation volatility remains elevated. That in turn underscores the utility of

assets with positive gearing to in ation, such as real assets and commodities.

Arti cial intelligence: Adoption of AI has only just begun, and it will likely broaden out to affect all parts of the economy. We now project a 20 basis point annual boost to developed economies’ growth from AI — potentially a conservative estimate. We anticipate stronger capital growth related to AI investment spending, and improved productivity related to ef ciency gains with AI technology. The trend is expected to support higher revenue growth and margins, especially for U.S. large-cap companies.

Implications for portfolio construction

A backdrop of higher growth and higher rates provides a relatively healthy and stable environment for most categories of risk assets. However, elevated in ation volatility is a concern.

From a portfolio construction standpoint, we see:

■ Greater volatility in short-term stockbond correlations, and a wider range in correlations over the forecast horizon.

■ Higher nominal yields, allowing core bonds to effectively offset the impact of growth shocks on a broader portfolio and deliver a more meaningful level of total return and income over time.

■ A key role for active management and alternative asset classes in mitigating in ation risks while boosting potential risk-adjusted returns across portfolios.

While long-term forecasts may provide investors more clarity about the ultimate destination, uncertainty about the starting point and the journey ahead leaves little room for an autopilot strategy. Thoughtful strategies can draw on a few powerful themes: Bonds can help with growth risks, alternatives can mitigate in ation risks, and active alpha can advance the journey to an investor’s nal destination.

William Whitehurst/Getty

John Bilton is head of global multiasset strategy at J.P. Morgan Asset Management. He is based in London.

OTHER VIEWS RICHARD KAUFFMAN

Solving data centers’ appetite for energy through capital

The world is shifting to meet the growing demand for computing power. In late October, KKR and Energy Capital Partners announced a $50 billion strategic partnership to invest in data-center and power-generation projects to support advancements in arti cial intelligence. And in September, BlackRock and Microsoft announced a partnership to mobilize up to $100 billion in private equity capital and debt nancing to invest in data centers and the energy infrastructure needed to power these facilities, with Microsoft announcing a deal to reopen a nuclear power plant to power its data centers shortly after. This follows a number of other joint ventures, large fundraises and debt nancings in the data center space as institutional investors are taking notice and recent interest rate cuts are providing an additional tailwind.

These rms are right to recognize that investment in new data centers also requires investment in new energy infrastructure. As the AI era takes ight, the question remains: will AI and the growth of data centers cause us to run out of power? Some forecasts show data centers will represent 7.5% of all power demand by 2030, the amount of power used by a third of U.S. households.

This seemingly endless need for power poses several reliability challenges. Growing demand poses physical challenges to the grid infrastructure we have in place, and building more on our existing grid increases the risk of higher rates to customers. Additionally, regulatory and utility planning are often decentralized, inef cient, and built for the infrastructure we’re trying to move away from, not what we’re moving toward.

Overarching all of these challenges is a bigger one. To solve insatiable energy demands in the long term, we need to go beyond investing in simply new energy infrastructure and also invest in clean energy infrastructure to ensure this data center growth is sustainable — as we’ve seen with Microsoft’s latest power purchase deal. While some data center operators are already using renewable energy, not enough clean energy capacity exists to cover existing demand. And increasing demand can translate into a sharp increase in carbon emissions. Indeed, Microsoft announced in May that its 2023 carbon emissions increased by nearly 30% over 2020 levels. Recognizing the emissions impact of their data centers, many major tech companies including Amazon, Apple, Google, Meta, and Microsoft have entered into long-term contracts to purchase renewable energy. These ve companies have committed to having 100% renewable energy for their data centers, with contracts that represent over half of the total global corporate renewables market.

created a major opportunity to revisit our fundamental grid architecture and invest in new infrastructure that is better designed to meet the needs of the future, including solutions that can deliver clean power directly to data center sites. The current electric grid architecture is still in the mainframe world, with large power plants pushing electricity in one direction to customers often hundreds of miles away. It is

expensive and energy inef cient. Rather than build more gas power plants or wait for transmission lines to bring renewable power from long distances, new demand from data centers could help incentivize more clean power development closer to where the power is needed. Owners of

He is based in New York.

data centers have already shown that they want to develop onsite renewable energy systems that adjust power output to match the site’s electricity demand in real (or near

Canadian Pension MANAGEMENT

May 13-14, 2025 |

real) time, using a combination of fuel cells, solar, storage and geothermal.

Developing these capabilities and additional innovative renewable energy solutions will require signi cant upfront investment but will make the grid more energy and nancially ef cient, including by reducing costs associated with transporting energy. In a more distributed system, data centers

Here’s What’s on the Agenda and Why You Should Attend:

1. Funding Status of DB Plans:

2. Regulatory Updates Impacting DC Plans:

Explore New Insights & Essential Updates

We’re thrilled to share a glimpse of the powerful agenda we have lined up for this year’s conference, covering crucial updates and emerging trends for pension plan sponsors. Don’t miss this unique opportunity to deepen your knowledge, network with industry leaders, and gain insights into the latest regulatory guidelines impacting Defined Benefit (DB) and Defined Contribution (DC) plans.

Canada’s DB pension plans remain ﬁnancially strong; however, interest rate ﬂuctuations and market volatility could quickly impact their funded status. Additionally, recent mortality improvement research points to the need for long-term sustainability planning. Our sessions will provide insights into how plan sponsors can navigate these changes e ectively.

This September, the Canadian Association of Pension Supervisory Authorities (CAPSA) released two pivotal guidelines:

These ﬁrst major updates in 20 years reﬂect the evolution of DC plans and group retirement programs. Our expert panel will break down these changes to highlight what plan sponsors “need to know.”

3. New Taxonomy and Disclosure Standards for Sustainable Finance:

Canada’s sustainable ﬁnance initiative introduces a climate ﬁnance taxonomy and mandatory disclosure standards. This legislation represents a step toward helping companies meet net-zero emissions by 2050. Learn how this new measure might impact your plan and ways it supports sustainable economic activities.

SPONSORSHIP

Contact Kimba Jackson kjackson@pionline.com or Andy Jenkins andy.jenkins@pionline.com for more details and availability.

Richard Kauffman is the chair of Generate Capital.

Pension risk transfer activity

Proxy choice extended to some fund, ETF shareholders

y B ARI I. WEINBERG

In this season of elections, exchange-traded funds continue to shine as effective vehicles for the “democratization of investing,” as many market observers have said, but their utility for furthering shareholder democracy is only just being tested.

In response to a mix of demand and political pressure, many of the largest equity index fund managers have recently extended the liberty of voting the underlying proxies to their own mutual fund and ETF shareholders. Such privilege previously only belonged to large asset owners in externally managed collective investment pools and separately managed accounts. But whether this is an opportunity or a nuisance for ETF shareholders remains to be seen.

“As part of their duciary duty to clients, asset managers look to maximize nancial value creation. This is not the responsibility of their clients,” said Emma Harper, vice president and senior research analyst for responsible investing with Sage Advisory Services.

With $26.6 billion of assets under advisory, Sage recently released its stewardship report and noted “a reduction in the quality and depth of stewardship services being exercised on behalf of investors at a

growing number of ETF management rms.’’ Dual track engagement — one for sustainability-minded clients and another one for everyone else — creates “the potential for the miscommunication of business priorities’’ between companies and ETF managers.

According to S&P Dow Jones Indices, at the end of 2023, nearly 900 asset owners in the U.S. and Canada, primarily government pension funds, were utilizing ETFs. Roughly $44 billion of the $56 billion in assets was allocated to equity ETFs, 97% of which was in passive products.

Enthusiasm for environmental and social proposals at the largest passive managers has dwindled due to the speci city of some demands. For the proxy year ended June 30, BlackRock, Vanguard Group and State Street Global Advisors exhibited a “steep” decline in support for E&S proposals, which they described as “‘prescriptive,’ ‘poor quality,’ or ‘redundant,’” according to a September report from Morningstar Sustainalytics.

Wheels in motion

Nevertheless, the wheels of fund shareholder democracy are set in motion and a vehicle with this much momentum is dif cult to turn around.

Equity holders, from retail investors all the way up to the largest asset owners, utilize their votes on a

range of issues, from approving corporate directors and external auditors, to nonbinding approvals on CEO pay, as well as a variety of both management and shareholder proposals. Most are rarely contested, except in the case of activist investors looking to replace corporate directors.

At the end of 2023, half of BlackRock’s $5.2 trillion in index equity assets under management were eligible for its Voting Choice pilot, of which nearly $600 billion in assets took that opportunity.

According to BlackRock, investors in “over 650 global funds” are eligible, including the $566 billion iShares Core S&P 500 ETF. Investors were able to choose between BlackRock’s benchmark policy or guidelines from proxy advisory rms Glass Lewis and Institutional Shareholder Services. In July, BlackRock added Egan Jones to give clients up to 16 distinct voting guidelines. Vanguard recently released details on its own Investor Choice pilot across four funds and one ETF, “representing over $100 billion in assets,” according to Vanguard. The program offers clients four options — a Vanguard policy, a company boardaligned policy, a Glass Lewis ESG policy and abstention.

For the Vanguard ESG U.S. Stock ETF, 78% of pilot participants opted

for the Glass Lewis policy. For the other funds, between 18% and 22% of participants chose the ESG policy while about 45% opted for the Vanguard policy, 30% to 33% sided with the board, and few chose to abstain.

At SSGA, investors in about $1.7 trillion in index equity assets have access to voting choice, including relying on SSGA, voting in line with the board or abstaining, or choosing one of seven distinct policies published by ISS. The last of the “Big Three” passive managers to launch voting choice, SSGA’s program is now available to shareholders of all eligible U.S. index mutual funds and ETFs that invest in U.S. equities.

(ETFs structured as unit investment trusts — SPDR S&P 500 ETF (SPY), SPDR Dow Jones Industrial Average ETF (DIA), and SPDR S&P Midcap 400 ETF (MDY) — use a “mirror voting” approach whereby shares are voted “in the same proportionate relationship that all other shares of each issuer are voted to the extent permissible and, in not permitted, abstains from voting,” according to each prospectus.)

“Currently the SSGA investor voting choice program is available to over 80% of SSGA’s eligible equity index assets under management globally,” said Edward Patterson, managing director and global head of public relations for State Street

Corporation. “Unlike an SMA or unregistered commingled fund, ETFs and mutual funds have the added complexity of identifying the end shareholder,” he added.

“These programs have become a competitive differentiator for asset managers,” said Danielle Gurrieri, head of bank broker-dealer and digital center of excellence product management at Broadridge, which provides the connectivity for asset managers to assess and assign investor proxy choices.

“Signi cant asset manager due diligence goes in to selecting the policy choices,” said Gurrieri, adding that U.K. and EMEA investors have been particularly interested. “It’s also a way to capture investor preference and apply it.”

Lindsey Stewart, director of stewardship research and policy at Morningstar Sustainalytics, conrmed that European clients “have much higher sustainability ambitions,” but also noted the “bedding down period” on environmental and social proposals from the recent proxy season results.

“In the U.S., sustainability has de nitely shifted on the client side as well,” Stewart said. “To the extent of proxy choice, the complexity may overshadow the utility. For some investors, amid an array of choices, it’s just one more form to ll in.”

REAL ASSETS STRATEGY

A BALLAST IN UNCERTAIN MARKETS

Investors should closely parse segments of real assets that can deliver portfolio targets.

Institutional investors have long turned to real assets for diversification and inflation hedging — and it’s an opportune time to do so today. Broadly defined as tangible or physical assets that have intrinsic value, real assets include infrastructure, real estate and other sectors. Allocators are parsing the specific benefits each segment can bring to their overall portfolio, particularly in light of uneven macroeconomic signals and greater market volatility.

“Slowing growth combined with stubborn inflation makes certain real assets, such as infrastructure, real estate, natural resources and commodities, especially enticing,” said Vince Childers, head of real assets multi-strategy at Cohen & Steers. He sees three considerations driving increased interest in exposure to real assets: inflation sensitivity, portfolio diversification and risk/return trade-o s. “Our discussions with institutional investors center around ‘where and how’ to invest in real assets, versus ‘why.’”

Gregory Michaud, head of real estate finance at Voya Investment Management, sees real estate debt as being particularly interesting for allocators today. “We view real estate debt as an e ective way to diversify across institutional fixed-income portfolios,” particularly commercial mortgage loans. While insurance companies have long maintained hefty allocations to commercial mortgage loans, pensions have been slower to move into the asset class, due to it o ering the illiquidity of real estate equity but the yield and risk profile of fixed income. However, with the rise of liability-driven investing popularizing investment-grade private credit as a diversifier and yield enhancer, Michaud said an increasing number of pension funds are excited about commercial real estate’s ability to o er consistent returns at a premium to comparable investment grade bonds.

Proof of concept

The post-COVID inﬂation run-up has demonstrated the viability of investing in real assets.

“The post-COVID inﬂation spike did a whole lot of work in terms of proof of concept for real assets investing,” Childers said. “It convinced a number of investors who had not had that real world experience of how bonds and equities might perform when you had that kind of inﬂation shock come out of nowhere and catch everybody o guard.”

For instance, “at the end of the first and into the second quarter of 2022, inflation peaked around 9% and was generating large shocks relative to prior-year expectations, where surveys looking ahead had projected inflation numbers more like 3%,” Childers said. “By the time you looked in the rear-view mirror at the one-year returns, you had negative returns in Q2 in both stocks and bonds, and yet a diversified real assets portfolio was still delivering positive returns.”

Looking ahead, Childers’ team believes that markets are in the midst of a regime change. With its first rate cut in September, the Federal Reserve has signaled a bias toward supporting the U.S. labor market and that they’re not particularly concerned with inflation worries, he said, despite inflation staying somewhat sticky at around 3%. “What we’re really saying is that a Fed that’s very accommodative at this point may be creating upside inflation risks — but those risks look underpriced in the broader markets.”

As investors weigh that potential upside risk, “on the whole, it’s not a bad outcome for a lot of real assets, given their typical positive inﬂation sensitivity,” Childers said. “While we think about the direction of interest rates as part of our tactical views within the portfolio, history tells us there isn’t a whole lot of negative rate sensitivity across a broadly diversiﬁed real assets portfolio.”

Finding relative value

Real estate valuations across several segments have continued to struggle following the post-COVID rate-hiking cycle. For instance, the large real estate platforms

allocated to the Class A o ce buildings in markets like New York and San Francisco continue to see write-downs and impairments, said Michaud at Voya IM.

However, commercial mortgage lending tends to focus on longer-dated loans to the higher-quality borrowers with stable cash ﬂows. Institutional clients such as pension funds are seeing “good relative value pickup that they can put in the illiquid portion of their ﬁxed-income allocation and where spreads are relative to the comparablerated bonds,” he said. Also, compared with traditional equities, “if we lend around 65% for real estate exposure, we’ve still got a 35% cushion ahead of us.”

“We don’t have the high exposure to legacy big o ce loans in the primary markets that many of our peers have. We like high-growth secondary markets, and our focus has always been more on retail, industrial and select multifamily,” Michaud said, which ﬁt well in core and core-plus allocations for many institutional allocators.

With the Fed’s expected path to lower rates, Michaud cited two reasons that returns on commercial mortgage portfolios should remain robust. First, these deals tend to be fixed rate and provide 7% to 8% coupons. While residential mortgage refinancings tend to follow declining rates, it’s far less common on the commercial side due to high friction costs, he said. “It costs a lot of money to refinance a building, take out, pay for appraisals, attorneys, and so on.”

A second reason is that commercial mortgage loans are yield maintenance protected over the life of the deal, or they have exit fees. “Investors will still be clipping nice coupons for the next 18, perhaps 24, months while rates are dropping,” he said. “Eventually, these loans will get paid o . They’ll get marked to market. But rate drops don’t necessarily mean you’re going to see vast payo s,” he added, “and investors will

A CUSTOM PATH FOR REAL ESTATE

continue to beneﬁt from their commercial mortgage portfolios that were built over the recent term.”

Support in era of scarcity

For investors considering the breadth of real assets segments today, it’s important to incorporate their longer-term market outlook. “We characterize this period as representing the potential for more of an era of scarcity in the decade ahead versus what we’ve characterized as an era of abundance from the great financial crisis up until COVID,” when the positive-supply shocks and disinflationary forces were not as supportive of real assets, said Childers at Cohen & Steers. The current era represents “a lot more risk in the decade ahead. We may be looking at the possibility of more negative-supply shocks and greater risk of recurrent stagflationary bouts” that can slow global economies. “All of those risks will not manifest in 2025, but we’re keeping an eye on them, as they would likely support real assets for the long run,” he said.

A high-quality, layered approach in commercial mortgage lending can meet client objectives.

Amid blaring headlines about half-empty o ces and loan delinquencies, many investors have “the misconception that commercial real estate is the same across the board. But unlike residential real estate, which is relatively generic, commercial real estate is very specific,” said Michaud at Voya Investment Management. “It’s market specific, asset specific. Even within o ce, which makes up only $740 billion of the U.S. total $4.7 trillion in commercial mortgage debt outstanding, there is a world of di erence between the prospects for an aging landmark building in New York City versus a smaller floor plate suburban o ce. The latter is seeing leasing growth in many markets, and where it isn’t, residential conversion is a viable option. Meanwhile, the retail market is seeing its lowest vacancy rate in 20 years. But when you just go by the headlines, it’s like throwing out the baby with the bathwater.”

With regional banks having largely exited the commercial ﬁnancing market, as well as tighter Fannie Mae and Freddie Mac lending criteria, private lenders can source a wider range of increasingly attractive debt deals, he said. Voya IM’s commercial mortgage lending team is able to customize institutional portfolios based on individual client needs, such as duration, credit risk, leverage and capital. It takes a layered and customized approach, building diversiﬁed portfolios that originate mortgage loans across borrowers, tenants, locations and property types across the U.S.

Commercial mortgage loans “have structural advantages that play out over the course of market cycles, including direct access to borrowers and the ability to negotiate

Slowing growth combined with stubborn inﬂation makes certain real assets, such as infrastructure, real estate, natural resources and commodities, especially enticing.

- Vince Childers Cohen & Steers

directly with property owners during periods of volatility,” Michaud said. Both help to drive the workout and recovery process.

Opportune areas

Michaud said he sees signiﬁcant opportunities in o ce, retail and industrial — and, with some caveats, multifamily.

O ce: O ce must reinvent itself to succeed, and that’s currently happening in the smaller — under $75 million — sector in secondary markets, driven primarily through mixed-use conversions that blend residential and commercial spaces. “O ces, especially in the suburban market, are going to be more mixed-use with the ‘livework-play concept’” in order to secure much-needed funding, he said. While mixeduse conversions come with various challenges, including high costs and zoning and regulatory constraints, these properties are likely to see greater success over the longer term. Since hitting bottom in the smaller o ce space, “we’re starting to see positive upward changes in both leasing and sales,” he said.

In contrast, the larger $100-million-and-above o ce sector in primary markets is still struggling. “We’ve also hit bottom in this segment, but there’s no liquidity in sight. Many larger deals have been marked down by 70% and could face the prospect of greater cuts,” he said. Also, shorter ﬁve-year leases are in demand versus the 10- to

We view real estate debt as an e ective way to diversify across institutional ﬁxedincome portfolios.

- Gregory Michaud Voya Investment Management

15-year leasing terms that were the norm pre-COVID. “It’s a real challenge for o ce owners because they’re going to have a harder time amortizing that over a certain period of time and getting a decent net e ective rent.”

Industrial and retail: More opportunity, given greater liquidity, exists in the smaller 50,000- to 75,000-square-foot — and even the 30,000-square-foot — space versus the larger Class A deals of a million square feet and above, Michaud said. Regarding the latter, “we’re still a little worried that there might be a little overbuilding going on, making it harder to ﬁnd big tenants.” In the smaller spaces, “we’re seeing a lot of older, smaller industrial properties get a second life due to distributors trying to solve the last-mile problem.” In retail, lowerquality retail space has been washed out of the system by being redeveloped, which has improved supply-demand dynamics.

Multifamily: This sector was hit especially hard in the past few years by rate increases, inﬂation driving up costs and overbuilding. Liquidity has started to ﬂow as capitalization rates have stabilized, and owners have begun marking to market to

A HOLISTIC ALLOCATION APPROACH

adjust down rents, Michaud said. “We think the Class A multifamily sector should do quite well in the next 12 to 18 months, as the category bottoms out and rents start to increase.” Multifamily should return to more of a supply-demand equilibrium, especially as construction has stalled, which bodes well for future performance. Lower interest rates may also bring additional liquidity to the sector, he said, though “it’ll take time for lower rates to get reﬂected in the market and provide support to property values.” Michaud cautioned that major expense increases have hit multifamily the hardest with, for example, insurance premiums having risen by two to four times in popular markets.

Listed real estate

Listed real estate represents one of four core real asset categories within Cohen & Steers’ multistrategy approach, one that is currently in an underweight position, Childers said. While listed real estate has endured signiﬁcant repricing post-COVID, it is seeing a more conservative use of leverage than in previous cycles as companies do a better job of deleveraging and staggering debt maturities, he noted. As a result, many more companies are in a better position to deploy a more attractive cost of capital to acquire assets and grow.

Cohen & Steers’ multi-strategy team explores secular forces, such as technology and demographics, that underpin their strategic allocation views in listed real estate and infrastructure. Data centers and towers provide services that are “the backbone of the entire modern communications infrastructure, and increasingly, AI themes,” Childers said. On the demographic side, demand drivers that underpin real estate include the senior housing needs of baby boomers aging into retirement and the single-family rentals by millennials who can’t a ord to purchase a home.

An active multi-strategy view to delivering the diversiﬁed exposures that investors seek.

As institutional allocators turn to real assets to achieve varied objectives, it’s important to remember that each segment has distinct drivers of risk and return — and each responds di erently during market cycles. “Investors should think about the non-inﬂation-related drivers of risk and return, ultimately taking advantage of the lower correlations within, and among, real assets,” said Childers at Cohen & Steers.

To help maximize the beneﬁts of a real assets portfolio, “we do not recommend over-concentration in just one, or even two, real asset categories. Instead, we believe an actively managed, multistrategy approach across speciﬁc core asset classes — global listed infrastructure, natural resource equities, commodity futures and global real estate securities — can provide investors with a holistic approach to real assets allocation,” Childers said.

Cohen & Steers’ multistrategy is overweight global listed infrastructure because of its attractive valuations and more defensive risk attributes. “We like to focus on infrastructure companies that have strong balance sheets, with limited near-term maturities and manageable reﬁnancing schedules,” Childers said.

This segment has a number of favorable dynamics. First, lower rates have historically been favorable for infrastructure assets, especially for higher costof-capital businesses such as data towers and utilities. Second, a slowing growth environment that could be ahead, “has historically beneﬁted infrastructure that has more defensive characteristics than most of the other real assets,” he said. A third dynamic is tied to the exponential demand for power, which underpins a longterm secular opportunity. “Global data center power demand is poised to more than double by 2030, given strong demand for cloud computing and, increasingly, artiﬁcial intelligence,” Childers said.

Marine ports are another secular infrastructure theme, given that “upwards of 90% of global trade relies on ocean freight, with a large number of very busy ports in the world, especially in emerging markets,” he said. Solid fundamentals are combined with relatively positive pricing power for many marine port businesses in the listed markets.

Compelling segments

Childers sees compelling value across natural resource equities in natural gas, agribusiness and metals and mining — another overweight in Cohen & Steers’ multistrategy portfolio. These companies are kicking o enormous free-cash-ﬂow yields that are very attractive, he said, despite the markets being “skeptical over natural resource companies’ ability to generate long-term cash ﬂows, as well as the willingness to distribute them.”

While U.S. natural gas prices dropped significantly this year, Childers expects 2025 prices to rise with increased demand from liquified natural gas and power projects. Several natural gas exploration and production companies have lower costs and the ability to generate free cash flow, he noted.

Within agribusiness, bearish sentiment continues, especially as a grain oversupply has made investors wary. But the pessimism could be an overreaction, Childers said, in light of improving grain prices and policies supportive of sustainable agriculture practices helping drive future opportunities. Another depressed sector has been metals and mining, following the far-reaching impacts from China’s economic slowdown. But the major Chinese stimulus package in September could signal the start of, “a nascent global manufacturing recovery along with supply-side disruptions on the metals and mining side, which means base metals may be poised to outperform.”

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CONSULTANTS

Will the good times keep rolling? Yes, say industry execs

DOUGLAS APPELL

Investment consultants enjoyed broad gains last year for their advisory and outsourced CIO businesses and expect tailwinds to outpace headwinds for the current year as well.

That rosy view stands in contrast to the topline results for Pensions & Investments’ latest survey of the industry, which showed a 1% decline in consulting rms’ total assets under advisement to $50.55 trillion for the year through June 30. The global institutional portion of that total fared better, posting a gain of 4.2% to $49.93 trillion, while U.S. institutional, tax-exempt AUA edged up 1% to $27.24 trillion.

The year-on-year gures were skewed by the absence of survey responses this year from Bank of America and Goldman Sachs Asset Management. If those organizations’ numbers were excluded from the 2023 survey results, both total AUA and global institutional AUA would be up 6.7% for the latest year.

From the vantage point of P&I’s last ve surveys, those adjusted numbers effectively move the industry back toward the bull market gains of between 8% and 9% a year logged for the two years through June 30, 2021, after an aggressive rate hiking cycle from March 2022 saw industry AUA slip 0.7% that year, followed by a modest rebound of 1.7% for the 12 months through June 30, 2023.

Over the past ve years, total AUA, as well as global institutional and U.S. institutional, tax-exempt AUA, posted growth of roughly 20% apiece.

Investment consultants with OCIO offerings, meanwhile, reported $1.7 trillion in assets under management, an increase of 20% from

the year before for the 36 respondents.

Industry executives said a strong year for capital markets overshadowed what, on balance, was a positive story about the mix of tailwinds and headwinds facing their businesses over the latest survey period.

Market gains, including the S&P 500’s 40% run over the past 12 months, made it a great year for clients, while a “Goldilocks moment” for the global economy — marked by a soft landing, full employment and strong growth prospects — proved a favorable backdrop for consultants as well, said Rich Nuzum, executive director, investments and global chief investment strategist at Mercer Investments.

“The traditional investment consulting industry is alive, well, pro table, thriving (and) growing,” Nuzum said.

While de ned bene t plans, the traditional mainstay of consultants’ business, continue to shrink on the back of plan closures and pension risk transfers, growing demand from other segments — including de ned contribution plans, pooled employer plans and an ever-expanding universe of foundations and family of ces — should help ease the pain, executives say.

Mercer on top again

For the latest survey, Mercer’s investment consulting business — with an 8.2% gain to $17.56 trillion, and its outsourced CIO business, up 25% to $492.4 billion, padded by its acquisition in March of Vanguard’s $60 billion OCIO business — retained the top spots in their respective rankings.

Callan, in second place with a 5.7% gain in AUA to $4.98 trillion, was likewise able to take

advantage of tailwinds, including a pickup in RFP activity last year, leaving the rm “on pace for record revenue,” said Greg Allen, CEO and chief research of cer of the San Francisco-based consulting rm.

Callan reported a total of 559 institutional clients for the latest survey, an increase of 30 on the year, which included 17 de ned contribution plans, seven de ned bene t plans and ve healthcare trusts.

Other leading consulting rms likewise reported strength across a broad range of client segments, including Meketa Investment Group, which held on to sixth place in the overall rankings with a 4.6% gain in AUA to $2.94 trillion.

“Our business had a great 2024,” with growth across public funds, Taft-Hartley union funds, corporates, nonpro ts and private mar-

kets mandates, as well as both outsourced CIO and nondiscretionary mandates, said Stephen P. McCourt, San Diego-based managing principal and co-CEO of the Westwood, Mass.based rm.

Meketa aims for steady, measured growth over time, but friendly markets have seen the pace accelerate a bit over the last year or so, McCourt said.

Jeffrey MacLean, CEO of Verus Advisory, likewise highlighted the breadth of his rm’s latest gains, with a 51% surge in AUA to $1.15 trillion lifting the Seattle-based investment consultant’s ranking to 10th place from 12th.

“When you peel back the onion … and look at our growth … you would see hospitals, multiemployer plans, corporate retirement plans, health and welfare plans, educational endow-

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Consultants’ move into wealth management a case of following the $$$

NEPC/Hightower deal seen as one of many to come chasing wealth’s growth and margins

y B DOUGLAS APPELL

Willie Sutton, asked more than half a century ago why he robbed banks, memorably replied “because that’s where the money is.”

The same logic, writ large, is driving investment consulting rms — traditionally focused on serving institutional asset owners — into the wealth management space now.

The latest milestone: the Oct. 21 announcement by NEPC — a Boston-based consultant overseeing $1.66 trillion in mostly institutional assets — that it will sell a majority stake to wealth manager Hightower Holding.

Executives connected to the deal see broader trends afoot: “Retail investors want the best of institutional capabilities, and (institutional consultants) want to gain access to retail as well, just because the size of the pie is so large,” said Bob Oros, Hightower’s chairman and CEO, in an interview.

Industry veterans expect more combinations to come.

Technology is narrowing the historic gulf between the institutional and wealth channels, resulting in a “collision” now between low-end institutional and high-end retail, with consultants increasingly attracted to the wealth channel’s strong growth and relatively high margins, said Brad Jung, Russell Investments’ head of North America adviser and intermediary solutions.

Firms like Hightower, consolidating an industry where 1,300 registered investment advisers with client assets of over $1 billion account for 70% of the RIA space, will inevitably have to grapple with the need to build, buy or rent the institutional investment capabilities needed to complement their client service — an imperative that should spur a growing number of tie-ups over the coming 24 to 36 months, Jung predicted.

The current year has already seen a pickup in such combinations, including Mariner Wealth Advisors’ acquisition in February of institutional investment consulting rms AndCo Consulting and Fourth Street Performance Partners, and wealth advisory rm Cerity Partners’ April acquisition of Agility, Perella Weinberg Partners Capital Management’s OCIO business.

Oros predicted his rm’s deal with NEPC — pairing “a scaled RIA” that’s consolidated roughly 140 nancial advisory practices with $156 billion in client assets since Hightower’s founding in 2008, with a scaled institutional consultant/outsourced CIO with more than $100 billion in assets — will prove “transformational,” calling it a “one plus one equals ve situation.” Jim Scheinberg, managing partner of North Pier Search Consulting, which conducts searches on behalf

of plan sponsors for providers of OCIO and investment consulting services, agreed, saying that in the wake of such a “monumental” deal, no OCIO will be considered too big to be a merger and acquisition candidate, whether as an acquirer or the object of an acquisition.

Facing headwinds

The wealth market’s growth prospects are all the more attractive when compared to the headwinds facing client segments that have powered consulting industry growth until now, veterans say.

With corporate de ned bene t plans that still account for a big chunk of consultants’ client assets freezing or shutting down now, the wealth management segment is increasingly taking on the aura of a great white whale, promising solid growth and attractive margins.

Family of ces and the rest of individual, after-tax wealth “are the two fastest-growing institutional investment consulting segments on the planet, in terms of the number of clients,” said Rich Nuzum, executive director, investments and global chief investment strategist with Mercer.

Nimisha Srivastava, Willis Towers Watson’s head of investments, North America, cited wealth management opportunities now as an antidote for shrinking de ned bene t totals. “The size of the wealth market is now larger than the size of the U.S. de ned contribution market,” she noted.

Growth prospects for other key consulting segments, meanwhile, are likewise facing challenges, including the de ned contribution space, where the growing number of participants retiring has moved that segment to net out ows, and the outsourced CIO space, where fees have

continued to face dramatic downward pressures, said Gregory C. Allen, CEO and chief research of cer of Callan.

Srivastava and Allen both pointed to the wealth management segment as a small but growing segment now of their consulting businesses.

As of June 30, Callan oversaw just under $5 trillion in client assets, with DB clients accounting for 63% of the total and DC clients another 26%.

Different paths

But if there’s general consensus that wealth management will be an increasingly important business segment, investment consultants have beaten a variety of paths to its door.

Michael A. Rosen, chief investment of cer of Angeles Investments, a Santa Monica, Calif.-based investment consulting rm, said Angeles’ entry into the segment came from reverse inquiries from trustees of the endowments and foundations that accounted for the bulk of Angeles’ clients.

“People would come and say, ‘Hey, I’ve got a chunk of money. Can you manage it for me? Because I like what you’re doing for the foundation that we work with,’” he said.

Angeles began handling such requests as a “sort of one-off thing,” but it soon became clear that the required service model — including estate planning and communication across generations — was markedly different from that for the rm’s pure investment management focus, Rosen said.

A dozen years ago, when Jonathan Foster, a wealth management veteran serving as a trustee of one of Angeles’ clients, suggested the rm “create something for families,” Rosen said “great, you need to lead it, because I don’t know what I’m doing with that.” Foster became president and CEO of Angeles Wealth Management, which currently accounts for

about a quarter of the group’s $8.4 billion in AUM and half of its revenues, Rosen said.

WTW, meanwhile — on the hunt for opportunities to provide wealth management clients with the services and capabilities the rm honed serving institutional investors — announced at the start of October it had acquired a stake in atomos, a U.K.-based, advice-led wealth manager with more than $8 billion in client assets, backed by funds managed by Oaktree Capital Management, said Srivastava.

For wealth management platforms that might have billions in client assets but just a handful of professionals overseeing research and investments, WTW’s ability to step in and serve as an investment engine and solution provider should provide continued opportunities, she said.

In February, meanwhile, Meketa Investment Group, a Westwood, Mass.-based investment consulting rm with $2.9 trillion in client assets, announced the launch of Meketa Capital to serve RIA clients.

Stephen P. McCourt, San Diego-based managing principal and co-CEO of Meketa, said that business — bringing best practices from the institutional marketplace to the wealth management segment — was hived off to a separate corporate structure because “we didn’t want to distract ourselves from our primary focus, which is supporting our institutional clients.”

“It’s still a relatively new enterprise and endeavor for us but it’s gone quite well so far,” McCourt said.

Like Angeles, NEPC’s rst foray into wealth management, in the 1990s, was in response to trustees with the endowments, foundations and hospitals the rm advised saying, “hey, can you come and help us,” said Michael P. Manning, managing partner of NEPC, in an interview.

After decades, the rm decided to pursue a more structured business plan, bringing in needed talent, and over the past six or seven years, it has grown to be a “full- edged business line,” posting the fastest growth of any segment of NEPC’s business, Manning said. Wealth management assets account for maybe 3% of NEPC’s OCIO assets but a much higher percentage of that business’s revenues, he said.

Up until now, NEPC’s wealth management business has focused on the family of ce market, the really high end of the wealth segment, but working with Hightower should “allow us to bring our capabilities to a broader audience,” he said.

Case study

The high-pro le NEPC-Hightower combination, meanwhile, should prove a case study in the challenges of building a business serving highnet-worth clients while retaining the trust and devotion of an existing institutional client base.

“The ultimate question for any acquisition that’s shaped like this is: Does having to distribute down into that wealth management sleeve water down the institutional process?” noted North Pier’s Scheinberg.

The goal for NEPC is to ensure that the answer is “no” but “the proof is in the pudding (and) time will tell,” he said.

Competitors likewise contend that the bene ts of the deal — which include providing NEPC’s cutting-edge private markets research to Hightower’s roughly 140 nancial advisory practices — are, at rst glance, more obvious for Hightower than for NEPC clients.

The deal could help Hightower, majority owned by Boston-based private equity rm Thomas H. Lee Partners since 2018, advance its strategy of getting much bigger and eventually going public, but it’s not immediately clear how this will advantage NEPC’s institutional clients, said Rosen of Angeles Investments.

Manning said institutional business will continue “to be the lifeblood of what we do.” The process of facilitating Hightower’s ability to tap into NEPC’s capabilities — whether on manager selection, alternatives or outsourced CIO services — on behalf of its retail clients won’t nd NEPC professionals working directly with Hightower’s nancial advisory practices, he said.

Hightower’s “expertise is working with the end clients. They don’t need us to come in and help with that,” said Manning. Instead, in some cases, Hightower may just be taking NEPC’s intellectual capital and guring out how to deliver that to clients; in others, NEPC could be part of a package solution crafted by Hightower to solve a problem for the

rm’s RIAs, he said.

Up until now, Oros noted, when Hightower acquired a nancial advisory practice, it took over back-ofce functions such as human resources, nance and compliance technology, but left investment-related functions such as market research and portfolio construction to those nancial advisers. “We didn’t have the ability from the center to do that for them,” he said.

Now, with NEPC, “it gives us the ability to go to an adviser and say, ‘You know what? You have one (or two people) focused on doing this … you could redeploy them to do something else (such as estate planning or trust services) and let us do it,’” said Oros.

Having a sophisticated partner such as NEPC, meanwhile, will be an added attraction going forward for nancial advisory practices considering joining Hightower, Oros said. And opening up a new growth segment for NEPC should ultimately bene t the rm’s institutional clients, who currently account for more than 90% of NEPC’s assets under advisement or management, executives say.

If, as anticipated, NEPC’s tie-up with Hightower “allows us to accelerate growth,” that will enable the rm to reinvest back into its business, bolstering its investment team and back-end infrastructure as well, said Steven F. Charlton, NEPC partner and head of client solutions. Still, he conceded, gatekeepers could opt to put the rm “under the microscope,” at least for the rst six months, on alert for signs of change.

But Manning insisted NEPC’s heart will remain institutional. In the week following the announcement of the NEPC-Hightower combination, a few people — more managers than clients — told him this suggested a view within NEPC that “institutional investment consulting is a bad business.”

“I don’t believe that,” Manning said. “I think we undertook this thing with Hightower because it was a really good opportunity, not because we had to.”

“It’s not an indictment of the investment consulting industry,” Manning emphasized. “It’s been an awesome business for as long as I’ve been in it and I’m excited for it still to be a big part of what we’re doing.”

The largest investment consultants

By worldwide institutional assets under advisement

CONSULTANTS

Optimism

ments, Native American entities, public pension plans,” MacLean noted.

Research provides a leg up

Meanwhile, executives at top rms tied at least some of their latest gains to being among the industry vanguard at building private markets research capabilities.

Meketa’s early focus on private markets has “allowed us to punch above our weight in terms of the amount of resources and support we can provide clients” that continue to allocate more and more to those alternative strategies, McCourt said.

For most client segments, alternative investments are becoming ever more important and the huge amount of innovation occurring there now makes researching that growing market segment an ongoing challenge, said Nuzum.

And not necessarily a lucrative one, some executives suggest.

Allen noted that in contrast to public markets, researching alternatives is relatively labor intensive, with a revenue model “more like piece work — if you’re not actually underwriting (i.e. vetting an alternative strategy on behalf of a client), you’re not making any money.”

“Net, net, it’s probably not dilutive but it’s not necessarily accretive either,” Allen said.

Fee pressures

Despite the generally healthy environment for consulting rms, executives grappled with at least a few headwinds last year, among them an acceleration of downward fee pressures, particularly for OCIO mandates.

“We’ve certainly seen fee compression in the industry,” driven by more competition and the growing role played by third-party evaluators — independent, boutique rms that run OCIO- and consultant-focused searches on behalf of plan sponsor clients, noted Nimisha Srivastava, head of investments, North America, with Willis Towers Watson.

Those search intermediaries rightfully focus on getting the best outcomes for their clients, often leading to multiple rounds of fee negotiations that drive down prices, Srivastava said.

Some market participants say the falloff in OCIO fees has been dramatic.

Just under a decade ago, as demand for OCIO services really began taking off, the fees an investment consulting rm could garner on an OCIO mandate were about three times that of consulting fees, but today much of that advantage has evaporated, said Uma Kolluri, a principal with Curcio Webb, a Lawrenceville, N.J.-based bene ts consultant seen as one of the biggest competitors in the consulting/OCIO search business.

It’s not unusual for an OCIO provider, bidding after ve years to retain a client, to have to reduce the dollar cost by half, said Callan’s Allen. Michael Kozemchak, a managing director with Michigan-based OCIO search rm Institutional Investment Consulting, said ve years ago, plan sponsors with $500 million to $1 billion in portfolio assets were looking at costs of between 10 and 17 basis points to hire an OCIO provider. Today, the costs would be closer to be-

tween 6 and 10 basis points, he said.

P&I’s latest survey shows consulting rms’ average revenues attributable to investment outsourcing dropping to 10.6% of total revenues from 12.1% the year before — the biggest change for any business segment. (The next biggest revenue shift, for investment management consulting services delivered to institutional asset owners, was a gain of just under 1 percentage point to 79% of total revenues from 78.1% the year before.)

Market participants differ on how problematic that falloff in OCIO fees could be for the industry.

Callan’s Allen, noting the considerable risks OCIO providers take on in managing clients’ portfolios, said at some point the question will arise as to whether “you’re being compensated for taking that risk.”

Kozemchak, by contrast, says even if fees have come down a lot, “these guys are still making a boatload of money.”

Srivastava said while a xation on headline OCIO fees can obscure the costs and bene ts of what are highly complex, individualized programs, there are signs of progress on that front.

“What we try to showcase is … here’s the value that we bring, and very transparently showcase the fees,” with a determination that there has to be a oor to make sure “you’re still delivering high-quality solutions,” rather than engaging in a race to the bottom, she said.

“I think slowly, our consulting peers are starting to do the same thing, which … will help sort of reduce this fee compression trend that was pretty prominent last year,” Srivastava said. “I’ve seen a little bit less of it this year,” she added.

Willis Towers Watson held on to fourth place in the latest survey rankings, despite an 8.6% drop in AUA to $4.2 trillion. The consulting giant’s OCIO AUM slipped 2.1% to $167.3 billion.

Srivastava said it was “a pretty decent year for our business,” even if AUA was dinged by pension risk transfers — occurring now for the de ned bene t industry at a faster pace in the U.S. market in particular than many people had anticipated — and a decision by one big retainer client to shift to a big asset management rm’s OCIO offering.

But if DB totals remain under pressure, other growth segments — including wealth management clients and WTW’s recently launched pooled employer plan business, which has quickly garnered between $500 million and $1 billion — should increasingly act as a counterweight, she said.

Executives say they’re likewise con dent their businesses will continue to thrive.

“Consulting has always been sort of trench warfare,” McCourt said. Every year institutional clients are demanding more resources and looking to pay less and less for them, he said. Consulting rms are always challenged in envisioning how they’re going to square that circle but somehow “we always gure it out,” he said.

“It’s just a lot of blocking and tackling, it’s a lot of hard work and it’s a lot of listening to what your clients want…(but) I have a lot of condence that we’ll continue to get more ef cient, continue to provide superior resources to our clients and be fee competitive in doing it,” McCourt said.

Advisory assets by client domicile

Independent consultants

Consultants not providing services to/collecting fees from money management firms, as of June 30.

Consultants with diverse-manager search policy

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AssetASSET-BASED PRIVATE CREDIT MOVES INTO THE SPOTLIGHT

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Asset-based private credit can complement a traditional fixed income or direct lending allocation as it generates income derived directly from assets, as opposed to the cash flow of a company, which is typical in traditional lending strategies. Asset-based finance typically provides downside protection and should introduce less volatility than enterprise value cash-flow lending. Private credit specialists at Bay Point Advisors, LCM Partners and Monroe Capital unpack the underlying drivers of this asset class, the segments and regions where private capital is being deployed and the key manager attributes needed for origination and execution.

P&I: What’s drawing institutional allocators to asset-based ﬁnance?

“Private credit has principally grown as a by-product of the forceful central bank intervention that occurred both during and post the global ﬁnancial crisis. The lowering of rates, in some markets to sub-zero, forced traditional 60-40 investors and those with long-term liabilities, like pension funds and insurance companies, to look at alternatives,” said Paul Burdell, chief executive oﬃcer of London-based LCM Partners. “So, in a nutshell, institutional investors saw that the grass was actually greener in what was then considered to be an unconventional asset class, and as such, private credit became conventional by virtue of the huge support it received.”

With strong inflows into private credit, particularly direct lending, investors and their consultants have now turned their attention to differentiated segments that deliver strong risk-adjusted returns whilst also providing downside protection. “Private equity was a pathfinder to widen the aperture for investors in terms of investing in closed ended funds,” Burdell said. “Many also invested in private credit in one form or another. The only difference now, with asset-based finance, is you’re often able to directly compare your investment with public asset-backed securities. And historically, private asset-based lending has been able to deliver attractive spreads over publicly traded comparables.”

“Many investors are looking to enhance their traditional cash ﬂow direct-lending exposures and for a diﬀerent income-based strategy within private credit,” said Aaron Peck, managing director, co-head of alternative credit solutions at Chicago-based Monroe Capital. “Alternative

credit tends to be uncorrelated and generates returns in excess of other credit products.”

Peck added that the current economic environment is also drawing investor interest to the asset class. “During periods of market dislocation due to economic uncertainty, asset-based opportunities usually increase as an alternative means for borrowers to raise capital,” he said. “The opportunity set grows because borrowers look to other markets to ﬁnd ways to raise capital. Many LPs recognize that opportunity set and are finding that attractive given uncertain underlying market fundamentals.”

Historically, private asset-based lending has been able to deliver attractive spreads over publicly traded comparables.

—PAUL BURDELL, LCM PARTNERS

P&I: What are some underlying drivers that make the asset class compelling?

Since the global ﬁnancial crisis, the bank pullback from lending has persisted, and the situation was exacerbated more recently by the 2023 regional bank meltdown in the U.S. “Regional banks are basically not lending anymore. This pullback in the commercial bank market is creating significant opportunities for private asset-based lenders,” Peck said. “Companies and asset owners have had to look elsewhere for capital solutions which has provided a tailwind for asset-based private credit managers.”

“What’s really driving current origination is what we call the ‘need for speed,’” said Charles Andros, founding partner, president and chief investment officer of Bay Point Advisors, based in Atlanta. “For example, private real estate and private equity investors have experienced a dramatic decline in

distributions over the past 18 to 24 months, but they still need to fund capital calls or start new projects. They need the capital quickly, and the length of time it takes for a bank to process a traditional loan just isn’t workable.”

What’s more, lower interest rates will make more cash available in the banking system, which should translate into tighter spreads between ﬁxed income and high yield, a move that will beneﬁt private credit, Andros said. “I do think that all in all, the growth of private credit has taken the need out of public investment grade and high yield.”

P&I: What aspects of deal size, regions and sectors illustrate the range of opportunities?

The granularity of asset-based financing needs and solutions has meant that lenders can diﬀerentiate across niche or specialized areas by market or deal size, geography and economic sector — as they seek to deliver improved alpha for their institutional clients.

Monroe Capital, which focuses on the middle market across private credit, has identified major economic trends underpinning its strategies. “Three emergent themes are likely to persist,” said Peck. “First, the expansion of computing power requiring a different level of digital infrastructure and power generation for artificial intelligence is creating opportunities to finance various digital assets, including data center construction, existing data center conversions and digital equipment, such as GPU chips. Second, given the shortage of affordable housing in the U.S., lower interest rates could increase demand for ownership and rentals. That will boost financing for single-family homes for rent, multifamily apartments, and manufactured homes, areas that Monroe specializes in,” he noted. “Third, an impending wave of refinancings of commercial real estate mortgages will face a gap that banks are unlikely to fill, which asset-based lenders can address.”

ﬁt into a ﬁxed-income bucket or a more specialized alternatives sleeve.

“It’s a great complement to a fixed-income portfolio,” Burdell said. “Asset-based lending belongs within private credit, but these investments are typically short duration and highly cash generative from the outset, so they exhibit characteristics appreciated by fixed-income investors, and we have seen some interest in our strategy from those fixed-income investors who can entertain closed-ended fund structures.”

Andros said the asset-based strategies that Bay Point specializes in ﬁt under the private credit umbrella, albeit in a more specialized exposure. “While our strategy is asset based, we don’t typically rely on those assets to generate current cash flows. Instead, we focus on originating and servicing short-term, high-yield loans that are usually senior secured with low loan-to-value ratios,” he said.

“Having that true experience, knowing how to deal with different market conditions, different asset classes and types, that’s what an asset allocator should look for.”

—CHARLES ANDROS, BAY POINT ADVISORS

Bay Point Advisors has carved out its specialty niche in the middle-market space, mostly in the southeast U.S. But it has been expanding its coverage area, Andros said. “As our brand has grown, demand for capital has expanded across the U.S.,” he said. “In fact, we recently closed a transaction in Hawaii.” The ﬁrm also tends to focus on the small- to mid-size space. “On the one hand, we stay below the mega-sized asset managers, at usually around $30 million. We’ve run deals above $50 million, but we’ve seen margins compress above that,” he said. “On the other hand, we stay above the few million-dollar range. The key for us, regardless of size, is always securing a low loan-to-value ratio.”

LCM Partners provides asset finance and secured real estate-backed funding predominantly in the U.K. and Europe. Within asset finance, the focus is on business-critical hard assets, such as crew transfer vessels that take workers to offshore wind farms, agricultural equipment, and search and rescue helicopters, Burdell said. “We concentrate on partnering with finance companies or manufacturers to provide point-of-sale financing in areas of the economy that banks are not really targeting.” LCM looks for pockets of the market with favorable supply-and-demand dynamics — for instance, financing developers of smaller-scale residential housing projects in the U.K., which faces a building shortfall of about half of its home building needs over the next five years, he pointed out.

“We target high-quality customers across the width of our European footprint,” Burdell said. “We’re investors and not banks: We can favor those jurisdictions where rates are more favorable than others.”

P&I: Where does asset-based private credit best ﬁt within an institutional portfolio?

While asset-based ﬁnance typically sits under the umbrella of private credit, it can

“Because of this approach, we believe a more precise term for what we do is asset-based direct lending. Ultimately, we believe our strategy is emerging in its own distinct bucket, in asset allocation or within an investor’s credit allocation.”

To achieve the full diversification benefits of private credit, investors should consider allocating across the range of segments, Andros said. “Allocators need to have a little bit of exposure to asset-based direct lenders like us, and then all the way up the spectrum to the more cash-flow direct credit-based lenders,” he said. “That’s why we think that it fits in every portfolio.”

When Monroe Capital began raising capital 20 years ago, its strategies fell somewhere between institutional investors’ public credit allocation and their private equity allocation, “and it was hard for them to know how to look at the segment,” Peck said. Today, their assetbased strategies sit primarily within the private credit bucket. “They’re seeing asset-based ﬁnance as a diversiﬁer and a way to grow their private credit allocation without taking more of the same risk. Many investors see it as a way to generate higher return with more downside protection, which is an all-weather approach that is particularly attractive in a market like this.”

P&I: What are the key risks that investors should keep in mind, and how do you navigate them?

Similar to most investment strategies, macro risks from a shifting interest rate cycle and a potential growth slowdown are a concern for asset-based finance. In addition, the unique, and sometimes complex, nature of asset-based financing also highlights idiosyncratic risks specific to each manager or deal.

With the Federal Reserve having embarked on a policy of lowering interest rates, consumers and businesses may increase borrowing. “As banks have more money, they’re certainly going to try to make loans while they can,” said Bay Point’s Andros. “And that should loosen things up. For us, that means more competition for loans on the fringes. But all in all, we want that liquidity in the system, because it helps borrowers pay us back.”

“The ultimate risk in asset-based private lending is a decline in the price of the asset,” Andros said. Its book of business is short duration, typically between 12 and 24 months, which makes deﬂation a major risk. “That is our ultimate worry. We want a stable monetary policy with stable asset prices to loan against.”

However, short-term interest-rate fluctuations are not a big risk for the portfolio. “Changes in rates don’t affect our balance sheet like they may affect a balance sheet that holds a lot of duration,” Andros said. “That gets to the heart of what risk is and, in the end, know your collateral. That’s the definition of all lending.”

Monroe Capital’s Peck believes lower interest rates won't change banks’ calculus for lending, so asset-based finance will remain relatively unaffected. “Where you might see increased competition from banks is in larger deals. But in the middle market asset-based finance space, it’s hard to imagine the largest banks dipping down into our market to compete.”

When assessing risks specific to assetbased private credit, a critical issue is fully understanding the manager’s approach, the dynamics of its area of specialization and its origination process.

“When you’re an investor who is allocating capital to an asset-based ﬁnance manager, it starts and ends with the people,” Peck said. “Who are you investing with? What do their benches look like? What does their track record look like? It really comes down to manager selection because the asset-based ﬁnance market is so varied from manager to manager, from situation to situation. It takes a specialized skillset, as structures are more complex, and it takes the right type of experience to execute successfully.”

It’s important to know how your manager is approaching a deal and what they expect to happen for that deal to be successful or unsuccessful.

—AARON PECK, MONROE CAPITAL

For LCM Partners, building long-term relationships with its deal partners and borrowers is a central focus. “We work with origination partners, and we want these to be long-term partnerships. So when we’re establishing a partnership, we spend many months getting to know their product and customer base before we ﬁnalize an agreement,” Burdell said. “We know the market. We know the borrower. We know the underlying asset, and we understand it.”

As a lender, LCM Partners also delves into all the potential risks the borrower may face, so that it can act with a high level of confidence that the borrower will make its payments. “We provide point-of-sale financing, and so we can see and understand what the borrower is doing,” he said. “We’re not just portfolio managers, we’re also operators. It’s like being a trained mechanic when you’re driving a car. You start hearing a funny noise in the engine compartment, you stop, lift up the hood to inspect the problem and thankfully, in most cases, you can probably fix it. If you can’t, you probably know someone that can.”

P&I: As manager selection is so important in this space, what manager capabilities are most important?

If one of the bigger issues in asset-based private credit is manager selection, allocators can ameliorate that risk by getting under the hood to truly understand loan covenants, deal terms and the manager’s ability to recover if a borrower defaults.

“It’s important to know how your manager is approaching a deal and what they expect to happen for that deal to be successful or unsuccessful,” Peck said. “At Monroe, we assume the world is melting down tomorrow in every deal that we do in asset-based ﬁnance. As a result, we underwrite the deal to the worst-case scenario we believe we can predict. If that assumption materializes, how do we

get out of the deal? If we can’t answer that fundamental question, that’s a deal we can’t and won’t close.”

At LCM Partners, Burdell thinks about the ﬁrm’s ultimate clients — pensioners — and what suﬀering an investment loss could mean. “It’s as much about capital preservation as it is how much we make,” he said. “So we’ve always targeted prime, good-quality customers. You can be a big multinational or a mom-and-pop business just around the corner, but a good quality customer is a good quality customer. That’s critically important to us.”

“On top of that, if you’re investing in granular assets that are business critical and have liquid secondary markets, you’ve got additional lines of defense,” he added.

The other key is understanding how a manager will respond to a default or potential loss.

“In the event that something does go wrong, we’re pretty conﬁdent in our ability to recover the loan,” Burdell said. In a worse-case scenario, given the ﬁrm’s portfolio of hard assets with conservative loan-to-value ratios, “there’s a pretty good chance that we’ll be able to sell that asset and not incur a loss.”

For Andros at Bay Point, it comes down to the manager’s experience through several economic cycles and understanding when market conditions are changing or when a borrower may be showing signs of stress. “Nobody’s perfect. We have made mistakes, but we’ve learned from those mistakes,” he said. “Having that true experience, knowing how to deal with diﬀerent market conditions, diﬀerent asset classes and types, that’s what an asset allocator should look for.”

Consistency is key. “A unique part of Bay Point is that we are probably the only ﬁrm that originates, services and collects about 98% of our paper,” he said. “We have a lot of experience in the space.”

P&I: What’s an underappreciated fact about recent — or historical — performance of asset-based private credit?

“When looking across the private credit universe, annual loan losses of up to 90 basis points are fairly common,” said Andros. “It’s essentially baked into those strategies. However, our defaulted loans have earned our investors an average of 62 basis points annually. In other words, our gains from working out defaults have been greater than our net losses. That’s not easy to achieve.”

Investors may not know the full comparative picture of asset-based ﬁnance, said LCM Partners’ Burdell. For example, “if we look at studies from the global ﬁnancial crisis, net loss rates ranged between 0.2% and 0.5% for leasing, around one-third of the loss rate on equivalent traditional bank loans."

“So if you’re lending against business-critical assets with liquid secondary markets, as with asset-based ﬁnance strategies, you get very strong defensive attributes.”

DEFINED CONTRIBUTION EAST

MARCH 9-11, 2025

MARRIOTT RESORT | FT. LAUDERDALE

Be Better Than Your BS

Keynote speaker Risha Grant will delve into the heart of cultural transformation at DC East showing us how genuine change begins not with policies but with people willing to commit to radical acceptance, empathy, and self-betterment. Her message is clear: Better people create better cultures; it’s time to embrace our humanity and overcome the biases that divide us. By exploring the idea of “personal culture,” i.e. personal growth and the unseen impact of our BiaSphere—the collective biases and beliefs we’ve inherited. Risha challenges her audience to confront and transform their BS.

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Plan sponsors who register by December 20th win a FREE COPY of Risha’s new book: Be Better Than Your BS – How Radical Acceptance Empowers Authencity and Creates a Workplace of Culture and Inclusion

CONFERENCE CALENDAR 2025

Retirement

U.K. reform

them to invest more in assets like infrastructure, supporting economic growth and local investment,” the note said. LGPS fund governance “will also be overhauled to deliver better value from investment decisions, which independent research suggests could free up money in the long-term to support local public services.”

Each administering authority will also need to specify a target for investment in its local economy — a 5% target by each would secure £20 billion of investment in local communities, the government said. The pools will work with authorities to identify the best opportunities.

To ensure each of the 86 England and Wales administering authorities is “ t for purpose,” a new independent review process will be established.

On the DC side, where plans are set to have £800 billion in assets by 2030, the U.K.’s more than 60 multiemployer arrangements are in the government’s sights.

The government will consult on setting a minimum size requirement for these plans “to ensure they deliver on their investment potential.”

It will consult on how to facilitate such consolidation into what it also labeled as “megafunds,” which will include rules to allow money managers to easily move participants in underperforming plans to higher-returning ones.

Megafunds’ power

The government cited systems in Canada and Australia as evidence supporting the power of megafunds, noting that Canadian retirement plans invest around four times more in infrastructure than U.K. DC plans, while Australia’s superannuation funds invest about three times more in infrastructure and 10 times more in private equity. Efforts have already been made in the U.K. to open up private markets and illiquid investments to DC plans, under the Mansion House Compact, with some plans committing to invest up to 5% in private equity, for example.

The changes will be introduced via a new pension funds bill next year. While the U.K. retirement industry largely welcomed the direction of the changes and purpose — and also expressed relief at the omission of rules to mandate investment in certain asset classes — there were also warnings over disruption.

“In the LGPS area, we agree there are rational reasons to pool assets to achieve economies of scale, but any potential incremental savings from further consolidation needs to be balanced against the signi cant costs and disruption consolidation of the existing eight pools would entail,” said Tess Page, partner and head of U.K. wealth strategy at Mer-

CHANGES AFOOT: U.K. Chancellor of the Exchequer Rachel Reeves

Chancellor bets on deregulation, green nance to secure standing

Deregulation and green nance are at the heart of Chancellor of the Exchequer Rachel Reeves’ plan to secure the U.K.’s status as a global powerhouse in the nancial services sector.

The government has already unveiled a raft of changes to the U.K. retirement system, including plans to overhaul local authority pension fund governance and encourage further pooling of assets, and to bring together the country’s de ned contribution plans into “megafunds.”

A news release sent before her inaugural Mansion House speech on Nov. 14 said Reeves will say that regulatory changes made after the global nancial crisis created a system that has been “regulating for risk, but not regulating for growth.”

Those changes were necessary “to ensure that regulation kept pace with the global economy of the time,” but these rules also have “resulted in a system which sought to eliminate risk taking,” leading to unintended consequences.

Reeves’ plan is to rebalance the system and set the U.K. nancial services sector up to innovate, grow and seize opportunities for investment in businesses, infrastructure and

cer, in emailed comments. “Given the previously stated focus on fueling U.K. growth, we are surprised not to hear more at this stage on potential incentives and ideas where pension funds could play a bigger role. That said, we are pleased to see that decision-making bodies will continue to be able to make investment decisions without mandating certain allocations.”

And Gregg McClymont, executive director-public affairs Europe at IFM Investors — an infrastructure specialist manager owned by Australian super funds — said: “It looks like the government are deadly seri-

center.

So what’s stopping progress?

Conference

innovation, he said, with pension funds having the space to try new ideas.

“We have work to do to help these people do the right thing, adopt the technology that is obvious and enable an innovative ecosystem, which my hope is (that it) drives new models. … “We should create an ecosystem, a resource, a sandbox – a capability to help them do these innovative things.’’

Christopher Marchant

Africa’s potential is too important to be ignored

the $1 billion Fordham University, New York.

“Even with the alpha, it’s very hard to defend to a rst generation college student’s family why we’re paying for this, yet there are a very few managers that are so much ahead and so well regarded and resourced that they can defend that sort of arrangement,” Kapadia said.

“It’s something that I personally nd hard to reconcile. It’s very difcult when you see the amount of money that gets generated purely on fees, even vs. the alpha that’s able to be generated.”

Christopher Marchant

The gender pension gap must be closed — APG chief

will act as anchors to other customers in the area. Since the power demands of the data center vary, there may be times when the data center can provide power to other customers and times when shifting demand from other customers could help offset the power requirements of the data

Renewable energy solutions have often been viewed as a riskier bet, with substantial checks required and little opportunities for short-term returns. And although there is growing con dence in clean energy as an asset class, there are still barriers to entry — both real and perceived — for large institutional investors from a risk and check size perspective. A greater mindset shift is needed,

clean energy across the country.

The government will set new growth-focused remits for nancial service regulators and will next year publish the rst “ nancial services growth and competitiveness strategy.”

She will stress that high regulatory standards will be maintained, with the system being “rebalanced to drive economic growth and competitiveness.”

The chancellor has already written to regulators, including the Financial Conduct Authority, to ensure a greater focus on supporting economic growth, the release said.

Regarding clean energy and growth, Reeves will also set out plans to mobilize trillions of pounds of private capital to support the U.K.’s work to be a “global leader in climate change,” the release said.

The government is set to regulate ESG ratings providers in an effort to boost investor con dence in sustainable companies, will publish a consultation on the value case for a U.K. “green taxonomy,” and launch integrity principles for voluntary carbon and nature markets ahead of a consultation next year.

SOPHIE BAKER

ous about learning lessons from the success of the Australian DC system.”

Australian plans have “delivered the win-win of greater allocations to private asset classes in the service of strong long-term investment returns,” he said, adding that the key to success in the market “has been rapidly scaling systems, which make long-term investments in a range of asset classes, in line with the duciary duty of their trustees to scheme members.”

Earlier this year, the chancellor met with Canada’s Maple 8 pension funds.

but there are reasons to be hopeful.

First, there seems to be growing recognition across the industry and investors of the immediate climate emergency we are facing and the need to invest across the value chain for digital infrastructure, including renewable power infrastructure. Second, the opportunity for risk-adjusted returns are high as we have a growing class of knowledgeable investors who are able to both fund

Tapping into the potential of Africa will be critical for the world to meet its energy and climate goals, said Banji Fehintola, executive director, nancial services, Africa Finance Corp.

“Africa’s economic potential is signi cant,’’ he said. “There’s a global demand for resources and energy to meet transition goals. The continent’s reserves of critical minerals like cobalt, lithium, and rare earth are essential for the global energy transition.”

To support that growth, he said, AFC has partnered with Xcalibur Multiphysics to advance the mapping and responsible utilization of Arica’s natural mineral resources, a pact that has underscores its commitment to also diversity African economies and support the clean energy transition from a renewable energy perspective.

The global retirement sector must take action to close the gender pension gap, Annette Mosman, CEO of APG, said in a keynote address.

APG runs about €550 billion ($596 billion) in assets on behalf of Dutch pension funds.

“Here in the Netherlands, we have a perfectly good pension system” — which is in the process of shifting to

Since 2007, the AFC, an investment grade rated multilateralnance institution established to help address Africa’s infrastructure needs and challenges, has invested $15 billion in 36 African countries.

But outside investment is critical, Fehintola said. Africa needs $402 billion annually to meet the U.N.’s 2030 Sustainable Development Goals, and governance is key to mobilizing domestic as well as internal capital.

The AFC’s commitment to governance extends beyond individual projects, he said, supporting regulatory reforms and strengthening public institutions across Africa. The AFC also employs various risk management tools, including currency hedging, political risk insurance and legal frameworks to manage and mitigate risks, he said.

Julie Tatge

High management fees are dif cult to justify

It can be dif cult to justify high fees “to pay for someone’s fourth yacht” when many students are struggling nancially, said Greta Kapadia, chief investment of cer for

infrastructure companies and projects as well as provide the nuanced advice and operational support for project development initiatives.

Form follows function. The rise of data centers stem from how IT infrastructure itself has evolved from a mainframe-only world of 40 years ago to a network of distributed devices (smart phones, PCs) connected to the mainframe and server “cloud.” Let’s use the increasing demand from data

a de ned contribution-like arrangement from a de ned bene t system — and yet the average pension pot for a woman in the Netherlands is 40% less than for men, she said.

“In this country — which (is always said to have) the best system, and in which we are innovative and very well-spoken, we are entrepreneurial — we have the second-largest pension gap in Europe,” Mosman said.

One reason is the gender pay gap, another is that women are more likely to work part time. The last is that “women don’t tend to ask questions” about the issue, she said.

Globally, there is not enough thought going into the “longevity economy” — the fact that, by 2050, more than 2 billion of the 8 billion people on the planet will be over the age of 60. “It’s very good news — we get older,” but society needs to think about what that means from a labor market perspective. “And I think we need … both men and women, and I think especially people here in the room who are trained and skilled to think about future concepts, to think about pension income … (to) take up this discussion within this group and within our community,” Mosman said. Sophie Baker

centers for computing power — and growing consensus around the need to also invest in the energy sources behind them — to nally invest in and build the much discussed “Grid of the Future” today while delivering strong, long-term returns to institutional investors. n

ACTION NEEDED: APG’s Annette Mosman

Robert Tjalondo

Isabel Infantes/Bloomberg

CONTINUED FROM PAGE 2

comes as the number of companies spinning off businesses has taken off. In 2023, there were 211 spinoff deals, following 232 in 2022 and a record 234 in 2021, according to Spin-Off Research, an advisory report featuring analysis of spinoff transactions.

Unexpected demand

For Aon and other PEP providers, the demand from spinoffs was somewhat unexpected.

“It developed based on an increase in corporate restructurings,” said Preston Traverse, DC midmarket solutions leader at Mercer, adding that he hopes the trend will continue going forward.

“Companies are streamlining to increase pro tability in the current market,” Traverse said.

Of the 21 employers that are in the Mercer Wise PEP, nine came

Docket

CONTINUED FROM PAGE 3

from corporate actions such as spinouts and mergers, according to Traverse.

“We’ve done tons of meetings with larger plans doing spinouts, which is really big right now because people are spinning out different divisions to control their costs,” he said.

The Mercer Wise PEP, which launched in 2022, has $315 million in assets with an additional $150 million expected in the rst quarter, according to Traverse.

While Aon and Mercer report that employers of all sizes and across all industries have expressed interest in PEPs once they’re told about them, spinoff business is different in that the companies actively seek out the new pooled plans. Spinoff companies don’t need any marketing or education about the pooled plans because they’re already sold on the idea, Traverse said.

“I feel they come to us and our competitors,” Traverse said, adding that large spinout companies like getting “competitors in a room” to see which one offers the best deal and

according to the Associated Press, more than the 270 needed to win. Republicans ipped multiple Democratic-held seats in the Senate to win control of the chamber. Notably, Senate Banking Committee Chair Sherrod Brown, D-Ohio, lost his bid for re-election to Republican challenger Bernie Moreno.

Neither side had won a majority of House seats early on Nov. 6, but the Associated press called 198 seats for the Republicans and 180 for the Democrats.

Tariffs and rate cuts

Trump has called for establishing a universal baseline tariff on all U.S. imports of 10% to 20% and a 60% tariff on all U.S. imports from China.

If implemented, the tariffs will be bad for the xed-income market because they will lead to increased in ation, according to Andrzej Skiba, head of BlueBay U.S. xed income at RBC Global Asset Management.

“We’re talking 10% tariffs across all global partners,” Skiba said in a statement. “This is a big deal because this could add 1% to in ation. If you add 1% to next year’s in ation numbers, we should say bye to rate cuts. With higher tariffs, the Fed will not be in a position to cut rates even if the economy is slowing down — and that is a toxic mix for xed income.”

David Page, head of macro research at AXA Investment Managers, said in a statement that in ation in the U.S. could rise sharply depending on the size of the tariffs. While AXA Investment Managers expects economic growth to remain strong in 2025, it forecasts material headwinds to growth in 2026, Page said.

He added: “We believe that rising in ation will restrict the Fed’s space for policy easing. In growing anticipation of a Trump win (and in the light of rmer data), markets had scaled back expectations for Fed cuts to 4% by end2025 from 3% after the Fed’s surprise 50-basispoint-cut in September.”

It’s widely expected that the Federal Reserve will initiate a quarter-point rate cut at its Nov. 7 meeting.

Taxes

Prior to Election Day, experts had predicted that if there was a Republican sweep with the party taking control of the White House and Senate and maintaining control of the House, they would almost certainly extend key provisions from the 2017 Tax Cuts and Jobs Act. Trump, who signed the bill into law, called for extending the bill’s expiring provisions, which mostly affect individuals, such as increases in both the standard deduction and the child tax credit.

Trump in the campaign also called for fur-

“has the best underlying platform, record keeper and investments.”

Pooled employer plans such as Aon’s and Mercer’s are a relatively new type of plan that began coming to market in 2021, thanks to the SECURE Act, which greenlighted their creation. The new pooled plans were designed to entice more employers to offer 401(k) plans by allowing them to pool their plans with those of other employers, even if in unrelated businesses. This way they could potentially lower their costs through economies of scale, while also reducing their administrative workload and duciary responsibility.

Spinoff companies have the feel of small, startup companies that don’t offer workplace plans — the ones that pooled employer plans were created to help. While some spinoff companies transfer the existing 401(k) balances of workers moving to the new entity from the former parent company to the PEP, others take a different approach. Some leave the 401(k) balances at the parent organization, giving

ther reducing the corporate tax rate to 15%. In the 2017 tax bill, Republicans cut the corporate rate to 21% from 35%.

ESG

Trump has also vowed to cut regulations across the federal government.

Speci cally, Republican lawmakers have worked in recent years to prohibit environmental, social and governance investing.

In September, the Republican-led House passed a series of anti-ESG bills that were not taken up by the Democratic-controlled Senate.

If Republicans retain control of the House, anti-ESG bills are likely to pass, sources said prior to Election Day.

That includes overturning a 2022 Department of Labor rule that permits ERISA duciaries to consider ESG factors when making investment decisions.

Republican lawmakers passed a bill in September that reverts regulation back to a Trump-era Department of Labor rule that stipulated that ERISA plan duciaries cannot invest in “nonpecuniary” vehicles that sacrice investment returns or take on additional risk.

In a statement following Trump’s win, Maria Lettini, CEO of US SIF: The Sustainable Investment Forum, said the investment community’s role in creating a sustainable and resilient economy has never been more important. “Investors require transparency through clear reporting requirements, the ability to engage the companies they own on nancially material issues and certainty that policymakers will support robust climate action,” she said. “That remains true regardless of the political landscape. We commit to working with the next administration and other newly elected ofcials across the United States to advance a more just and sustainable American economy.”

Cryptocurrency

Trump was once a skeptic of cryptocurrency, but this year he promised to be more welcoming to digital assets than the Biden administration. Crypto stakeholders have criticized Securities and Exchange Commission Chair Gary Gensler’s “regulation by enforcement” approach to the industry.

Bitcoin jumped to a fresh record Nov. 6 after Trump’s win as crypto industry leaders celebrated.

Some of the sector’s largest companies and wealthiest entrepreneurs, including Coinbase Global, the Winklevoss twins and Ripple Labs, poured unprecedented amounts of money into the race. Fairshake, a pro-crypto super PAC, spent more than $180 million on ensuring candidates who supported the industry would secure their place in the Senate and House.

“We are on the brink of a new American Renaissance,” said Tyler Winklevoss, co-founder of crypto exchange Gemini Trust Co., in a post on X on Nov. 6. n

workers the option to roll over their money into the PEP or other qualied retirement savings plan, or even an individual retirement account.

“The PEP for that participating employer is starting out with zero assets and growing from there,” Jones said, referring to spinoff businesses that opt to leave existing 401(k) balances at the parent company.

Workers moving to a spinout company offering a pooled employer plan don’t feel like they’re being downgraded to a less attractive plan, according to Jones. In fact, it’s just the opposite, Jones said.

If a company is spinning off from a Fortune 500 company such as, say, Hewlett Packard, it is losing purchasing power that Hewlett Packard had in the 401(k) program that the spinoff organization might not have based on size, Jones explained.

“You may be losing purchasing power, but you’re regaining it with the PEP transition,” he said.

40% savings Jones estimates that employers

CONTINUED FROM PAGE 3

“If you think about the potential for a red sweep. It would create a lot more uncertainty as to more signi cant moves,” Chan said.

He said that the second question is that there are two differences today from the 2016 election when Trump was elected president the rst time: in ation and de cits.

“The market might be using the playbook from 2016, but the market has a lot more to consider,” Chan said.

Chan said that he believes that the economy is entering a time of higher in ation for longer with “the potential for greater in ationary surprises” that could come from tariffs, scal spending and less immigration.

There could also be greater geopolitical risk if the U.S. withdraws from the global stage. Another issue is climate policy in that there might be less movement to net zero and more support for traditional energy, Chan said.

In response to a board member’s question on whether Trump’s rhetoric could lead to a ight of capital, affecting the country’s credit standing, Chan said he questions whether the stock market rally can continue.

“With greater and greater de cits, we could lose the dollar standing,” Chan said. “It’s a difcult call now because we’ve heard the rheto-

Gray swans

CONTINUED FROM PAGE 3

associated costs. That could lead to higher ination and a reduction in U.S. growth, he said.

Larsen also noted that any mass deportations of individuals judged to be living illegally within the U.S., a policy promoted by Trump during his campaign, could have consequences such as reversing labor ows — something that also could exacerbate in ationary pressures.

“Trump’s agenda, and his takeover of the Republican Party, is profound and has long-lasting implications,” Larsen said. “I think his eccentricities are important, but they’re very hard to quantify and they’re hard to explain.”

In his previous term as president, Trump withdrew the U.S. from the Paris Agreement on climate change.

Regarding Trump’s sustainability policies during a second term, Larsen said he did not anticipate a complete shutdown of “green jobs” created through the In ation Reduction Act, which was enacted during the Biden administration.

“Trump is not much in favor of the green transition, but he is in favor of industrial policy,

that join Aon’s PEP see total plan cost savings of more than 40% vs. having their own stand-alone plans.

In addition, the spinoff company can customize the match, vesting schedule and other plan features in the PEP so that it mirrors the 401(k) they had prior to the spinoff, he said.

“It’s not a step down,” he said. “The Aon PEP investment lineup we believe is high performing at a reasonable and low cost, and we monitor it like hawks to make sure it continues to deliver value. Participants are gaining, if not maintaining, a great platform to manage their money on. They’re gaining, if not maintaining, a great investment lineup, and they’re gaining, if not maintaining, the purchasing power they had in the larger plan.”

Jones and Traverse were reluctant to say how much spinoffs will power business going forward and whether they would be a primary growth driver for their PEPs.

“I hope a lot,” said Traverse. “However, it’s very dependent on this type of corporate activity taking place.”

ric but not seen the policy.”

Chan said that there are large opportunities and risks that will be impacted by the new administration. CalSTRS’ strategic asset allocation remains close to home, with 78.5% invested in the U.S. as of Aug. 1, according to the portfolio risk report.

“We’re not willing to go outside of that because we’re uncertain what the policies are going to be,” he said. CalSTRS also has a $8 billion net cash position and a focus on diversi cation across the portfolio, he noted. n

and he is in favor of the U.S. leading technological development, and will be looking to preserve as many of those green jobs in the Republican states as he can,” he said.

Larsen also said that Eurasia had not yet fully modeled outcomes in the event of another gray swan event – that Trump could become unable to continue his presidential duties during a second term, with his vice president, JD Vance, becoming acting president. But he predicted it would be largely a continuation of Trump-style policies if this were to occur.

This year has also been observed as a record for its number of national elections, with leaders being elected around the world.

Larsen identi ed the Mexican election, won by Claudia Sheinbaum, and the Indian election, which saw Narendra Modi return to power but with a reduced majority, as being of particular note.

“(The India and Mexico) elections show that governments that haven’t shown suf cient care for the economic policy concerns of their populace have been hit really hard,” he said.

“In Mexico, the government was rewarded for showing concerns, but not in a way that a liberal economist would endorse. In India, the government succeeded in retaining its majority coalition, but only just, and punished for not showing suf cient concern in a high in ation environment.” n

MORE INFLATION AHEAD: CalSTRS’ Scott Chan

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Gilmore

CalPERS culture, risk and possible paths

CONTINUED FROM PAGE 1

mean we are able to think in a farsighted way and to look through some of the nearer-term noise.”

Gilmore succeeded Nicole Musicco, who left CalPERS in September 2023 and became the second straight CIO to leave after 18 months on the job.

In announcing his appointment in April, CalPERS lauded Gilmore’s accomplishments at NZ Super, which it described as the world’s top-performing sovereign wealth fund, with annual investment returns of more than 12% a year over the past decade.

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

Before joining NZ Super in 2019, Gilmore was chief investment strategist at Australia’s Future Fund, with assets of A$229.7 billion ($158.5 billion) as of Sept. 30. There, he oversaw efforts such as portfolio strategy, portfolio overlays and investment risk. He has also held senior international positions with AIG Financial Products and Morgan Stanley, as well as assignments with the International Monetary Fund and the Reserve Bank of New Zealand.

In this Face to Face interview, conducted on Oct. 23 at Gilmore’s Sacramento of ce, he discusses what attracted him to move across the globe, his initial priorities and the risks he’s keeping an eye on. Questions and answers have been edited for conciseness and clarity.

Q | What attracted you to this role?

A | I have to say when I was rst approached, I thought it was fairly daunting and I didn’t really think about it too deeply. But then I went away and did some research to understand more about the role and that’s when I became much more interested.

One, of course, it’s a storied institution. It’s also got the scale, it can have in uence. I also looked at things like its Sustainable Investment 2030 strategy, (which includes investing $100 billion in climate solutions over the next six years) — the ambition and the engagement. And so those things were quite interesting to me. And I got even more interested when I had a chance to speak with Marcie, who was quite inspiring.

And then things happened very quickly and all the encounters were positive — positive engagement with the board, the sorts of questions were very, very thoughtful. And I came away from that initial process really wanting to get the job.

Q | What are your initial thoughts on the role?

A | I’ve got lots of thoughts about things I would like to work on. One of the things I’ve really liked has been the work that the internal culture club has done.

Within our investment of ce, (the club) was set up after an engagement survey. And the question was, how can we improve engagement?

A group of people within the team got together and thought about things they could work on. How do we welcome new employees? How do we go out and understand what the rest of the team’s doing?

That’s been really encouraging because there’s been a buzz around the work that’s being done. So when you see that, you get quite encouraged about future cultural developments, breaking down barriers, collaborating and so on. I want to keep building on that.

I do want to think about how we develop our talent to think about succession development, looking at that training and how we get people into strong positions to be potential successors. One of the big advantages we should have as an organization is the amount of knowledge we have internally, the capability we have with our people, the number of external contact points we have. So if we can pass all that information and use it, it should be an advantage for us. I’m also thinking about how we can improve some of the processes.

Q | Such as?

A | Well, one that stands out is on the technology side.

I think it’d be fair to say historically we have followed probably more of a best of breed (approach) in terms of getting applications and systems for probably siloed areas. But to fully harness the bene ts of what we have across the institution, we need to have a better wholeof-portfolio visibility. So we’re thinking about how to do that. It’s one of the big initiatives we have at the moment. We will be spending a lot of time and energy thinking about how to improve our data and analytics and how we can use the information that comes from that capability.

I’m also spending a lot of time thinking about, of course, the portfolio, how we construct the portfolio, how we think about the portfolio. And we’re embarking on a regular exercise, which is our asset liability management exercise. At the upcoming board meeting we will talk some more about that.

Q | What’s involved with this exercise?

A | There are many steps to it. And I guess there’s a way that we did this in the past in terms of looking at capital market assumptions, looking at what we thought for asset classes return, looking at the sort of return we needed to make the fund sustainable. And we went through a fairly consistent process. We did that al-

most four years ago and we had an interim check-in.

We’re going through a somewhat similar process. What I want to do now is think about, well, what can we do to take that process a step further? I mentioned the bene ts of collaboration and all the information we get given our scale, given all the touch points.

I’m de nitely thinking a lot about how we can take a whole portfolio approach.

I’m also thinking a lot about how we think about risk in terms of the risk appetite and the trade-offs. When I speak to the board in November, we’ll go through some of those things and it’s really just a high-level framework discussion, which will set the scene for the year ahead. And ultimately that will end up with us deciding on an overall risk appetite and a portfolio.

Q | Has CalPERS been too conservative with its risk appetite?

A | That’s a hard question to answer because it depends on so many different considerations. Quite often one can sit back and say, “Oh, if we’d had more risk on, we would’ve generated higher returns.” But you don’t know that in advance, so you can’t really look backwards with hindsight. You have to think about what stakeholders feel comfortable with.

To me, that’s the true test. And when you’re thinking about risk appetite, you’re thinking about not just the amount of market risk you take. You need to think to think about how you take it, how much you invest in liquid assets, how much you invest in private market assets and so on.

Q | Is the end result to improve the funded status (now at 75%)?

A | I think in the end, yes, you want to improve the funded status, but of course there are trade-offs. If you take a lot of risk, yes, you may generate higher returns, but you may also increase the likelihood that the funded status is lower. So you need to be able to trade off those different considerations. And it depends partly on your overall risk appetite, it depends on

with CalPERS’ Stephen Gilmore

your horizon as well. And there are many other things as well that you need to think about.

Q | Of course. So if we can go back a bit: Marcie Frost has been candid about the challenges of this job, specifically that it requires resiliency and grit. How do you stay on track in difficult situations or when things aren’t going to plan?

A | You need to nd ways to step out of the space to give yourself that perspective because if you are just focused on the job, it can become more consuming. For me, I like to do things that are maybe quite different from the day-to-day. I like to experience things that are new to me. I also like to do very simple things like just walking around and listening to music or reading. I think also historically I’ve been in quite a few different settings and some of them have been potentially quite stressful and sometimes dangerous.

Q | Dangerous?

A | Well, when I worked for the International Monetary Fund, I was an IMF resident representative setting up the of ce in Tajikistan. And at the time, Tajikistan (a former Soviet republic) was in the midst of a civil war. So I mean dangerous in terms of there being armed con ict, bomb blasts and the like. When you talk about resilience, sometimes it helps to think about perspective. And I think about that.

Q | How have you gone about getting your arms around the investment team, which is a little more than 300?

A | Ideally, I would get to meet everyone individually and ideally, I would remember their names, but of course it’s not that easy. We’re spread over a couple of oors and I’ve deliberately wanted to meet a broader range of folks. I have fairly regular meetings, obviously, with my direct reports, but also people who are maybe one report removed. I will also have occasional catch-ups with others.

When I started my previous role, it was a somewhat similar challenge but at a smaller scale.

When I went into that role, I had

collaboration. So we worked quite hard to think about how we could get the right balance between that protection of information and collaboration. So I’ve made some moves in that direction as well.

For instance, some people couldn’t come up to this oor very easily or teams would nd it hard to actually physically talk with one another. So you do want obviously collaboration between let’s say your public market, xed-income people and your private debt people. And that was perhaps more dif cult with those physical barriers in place.

Q | As a global investor, what risks are you thinking most about right now?

A | I think mainly about the internal focus on the portfolio, the risk appetite, the horizon, because there are always background risks when you think about the global environment. Nowadays it’s probably more popular to think about the geopolitical risks because people often highlight those. Historically, those risks haven’t mattered so much for market outcomes or for portfolio outcomes.

AIMCo

CONTINUED FROM PAGE 2

return on investment.

From 2019 to 2023, the government noted, AIMCo’s third-party management fees increased by 96%, the number of employees increased by 29%, and salary wage and bene t costs increased by 71.4%.

Over that time, the fund delivered an average annualized return of 7.62%.

For calendar 2023, AIMCo returned a net 6.9%, below the benchmark return of 8.7%. For the threeand ve-year periods ended 2023, the fund returned a net 5.8% and 6.1%, respectively, vs. benchmarks of 3.6% and 5.9%.

However, the fund underperformed in calendars 2019 and 2020, returning a net 10.6% and 2.5%, respectively, compared with benchmarks of 11.1% and 8% for those years. In the rst half of 2024, AIMCo returned a net 5.4% (no benchmark was provided for this period).

nance Minister Horner are members of the province’s ruling United Conservative Party. Court Ellingson, Alberta’s shadow minister for nance and a member of the opposition Alberta New Democratic Party, criticized the government’s actions at AIMCo, calling it a “drastic, earth-shaking move” and described Horner as a “politician, not an investment expert.”

“Appointing a UCP politician the head of it sends entirely the wrong signal to Albertans and the investment community,” Ellingson said in a statement. “The premier (Smith) herself appointed some of these AIMCo directors. The nance minister (Horner) himself said this spring that AIMCo was doing a good job. To suggest this is about AIMCo salaries, when this government passed legislation to remove the caps on salaries for board members, is ludicrous.”

Ellingson added that AIMCo’s “poor returns” were a “clear re ection of the UCP’s incompetence.”

a team of around 50 people and one of the rst things I did was to go out and actually have coffee with all of them. So the challenge I gave each of them was, nd me a good place to go for coffee. Here it’s much more dif cult. We’re not in the center of town and also we’ve got 300 people, so I can’t really do that. But I am looking for ways to just engage with broader team members across, as I say, social activities, wandering around and having sort of formal catch-ups with people. I’m working through that, but it’ll take a long time.

Q | When you came onboard, what were your priorities?

A | Well, there were some things that I thought were a little unusual in terms of some of the structure and responsibilities.

One of the rst things I did was to move all of the operating and enabling functions under Michael Cohen, chief operating investment ofcer. So I moved investment operations, investment control and technology to him. What that also did was to free Dan Bienvenue, (formerly interim CIO before resuming his deputy CIO duties) up a bit, and Dan — obviously great acting as CIO for an extended period — but he’d also taken responsibility not just for those functions that I had mentioned that had gone across to Michael, but was also looking after the liquid market activities. It was really just too much. And I wanted Dan to be able to focus much more on the investing side of things. So for me, that was an obvious thing to do. There are other fairly simple things and you don’t see those until you arrive. Some relate to just the way we do things operationally. I was quite struck by the number of meetings we had, and so we scaled back some of those. I was also struck by how some processes have been around for a very long time and we hadn’t necessarily embraced maybe some more ef cient ways of doing things. So we’re using SharePoint and Teams much more often. And I’ve worked on information barriers. We use information barriers, but we had them operating in a way where there were physical barriers put in place, which hindered

When they have mattered is where they have had an impact on supply. If you think back to the 1970s, they did have an impact when there were changes in the oil markets. We’re in a situation now where again, those geopolitical risks can potentially have those sorts of supply impact. We need to also be thinking about the macro environment. And we’ve had this period, very long period where we’ve had very low ination and very low interest rates. And then with the COVID-19 shock and with the response to that on the monetary and scal side as well as the supply constraints, you had in ation picking up quite sharply. And, of course, central banks have acted to bring that in ation back down. The question, of course, is that a permanent downward move or are there risks of further in ationary shocks?

There are questions around where interest rates should be. Partly that’s a function of the in ation outlook. You might also think it could be a function of debt loads and so on. But that’s quite important for the pricing of assets. What we’ve seen through time, people spend quite a lot of time thinking about portfolio compositional structure.

If you go way back, people thought it was fairly simple just to set up a portfolio of equities and bonds and you would have had a reasonably diversi ed portfolio. That became less true when interest rates were very low. Interest rates are a bit higher now. There’s still that question as to how you construct a portfolio that gives you suf cient resilience to a range of possible scenarios. So think about about pricing of asset classes, think about the weight of capital, lots of things to think about.

Are we getting paid enough for locking up liquidity? Those are some of the high-level considerations.

Q | Have you got answers to all that?

A | Not de nitive. Some of these things you’re never going to get answers to. So when you’re thinking about what could happen, one of the most important things to re ect on is the possible paths and how you would feel if you went down in those paths because you can’t construct a portfolio that is going to be resilient to all those paths. n

For context, Ambachtsheer noted that AIMCo had suffered signi cant investment losses in 2020, and that this had led to reconstituting its board and senior management team over the 2021-2023 period. “This history makes last week’s wholesale dismissal of AIMCO’s new board and senior management team difcult to understand,” he said. “Realistically, it takes a decade to assess the impact of such major changes.”

“We have raised concerns about their poor returns for years, and we’ve noted AIMCo’s returns have been below that of the Canada Pension Plan,” he noted.

‘Why would (other) highquality board members and senior executives want to work for an organization owned by a government that appears to be behaving erratically ?’

Ambachtsheer pondered: “Was there something in the benchmarking processes that triggered the Alberta government’s actions? If not, was fraud or major con icts of interest detected? If not, what exactly was the trigger that led to the Alberta government’s dramatic actions so soon after the governance and management changes it made over the 2021-2023 period?”

INTERNATIONAL CENTRE FOR PENSION MANAGEMENT’S KEITH AMBACHTSHEER

Ellingson also referred to a proposal Smith made last year in which she called for the creation of a provincial pension plan (the Alberta Pension Plan) and pulling out of the national C$646.8 billion Canada Pension Plan, Toronto.

Such changes, among other things, included naming a new board chair, various new board members, new CEO, chief risk of cer, chief technology of cer, executive vice president of public equities and new senior managing director- xed income.

He also wondered “what makes the government think it can improve on the high quality of the board and executive team members it just red? And why would (other) high-quality board members and senior executives want to work for an organization owned by a government that appears to be behaving erratically?”

According to its mandate, AIMCO “operates independently and at arms’-length from the government of Alberta and it is governed by a professional board of directors that is independent of the government of Alberta and AIMCo management.” However, the mandate also states that AIMCo’s directors “shall be appointed by Orders in Council on the recommendation of the minister (of nance).”

The mandate also emphasized that there is “broad cooperation and collaboration between AIMCo and the government of Alberta.”

Politicians vs. professionals Alberta Premier Smith and Fi-

“Until now, the UCP even proposed using AIMCo to manage the proposed Alberta Pension Plan,” Ellingson stated. “Any such APP scheme should now be completely off the table.”

Ellingson called for the removal of Horner from governing AIMCo and asserted that a “non-partisan interim board and CEO” should be installed at the fund.

Union condemns the moves

The Canadian Union of Public Employees also condemned the measures, stating on Nov. 8 that the government of Alberta’s “unilateral changes to AIMCo’s board without any consultation with public sector unions” showed a “deep disregard for the fact that pension funds belong to Alberta workers and retirees, not the government.”

“Removing the ability of pension plans to move with their feet undermines pension security,” stated Rory Gill, president of CUPE Alberta. “The solution for AIMCo performance is to restore the right of pension plan members to choose who administers their retirement savings, not have a government minister continue to interfere through political appointments.”

Neither AIMCo nor the government of Alberta could be immediately reached for comment.

Kevin Fiscus

Endowments

and this is literally simply because how private investments performed relative to public investments.”

“It’s hard to outperform when you’re not at the top-performing asset class,” said Chen. Of the 13 largest endowments reporting returns as of June 30, only two exceeded the median one-year return — the University of California’s $22.6 billion endowment returned 11.7% and Columbia University’s $14.8 billion endowment gained 11.5%. Harvard University matched the median return.

MSU leads returns

The top performer was Michigan State University’s endowment. The East Lansing, Mich.-based $4.4 billion endowment returned a net 15.1% for the scal year ended June 30.

CIO Philip Zecher was unavailable for an interview, but in an Oct. 9 news release announcing the returns, he said, “Our strong performance this year came primarily from our large position in U.S. equities and the strong performance of our hedge fund portfolio. Like most, we saw private market investments signicantly lagged their public market equivalent benchmarks. However, we continue to view the private markets as attractive over the long term.”

The MSU endowment’s total allocation to global public equities is 39%, a quarter of which is invested in index funds, Zecher said in an earlier October interview with Bloomberg.

ing public equity markets at the time.” As a result, he said private asset managers did not then raise the value of their investments in line with public equity markets these past two scal years.

As of June 30, private equity had the largest allocation in the endowment at 39%. The second largest, hedge funds, had an actual allocation of 32%.

Narvekar noted that the allocation to hedge funds was increased in order to limit exposure to both public and private equities and limit portfolio risk. That portfolio, along with public equities, were the strongest performers for the most recent scal year, he said. Further details were not provided.

As of June 30, the remainder of the endowment’s actual allocation was 14% public equities, 5% each bonds/Treasury in ation-protected securities and real estate, and 3% each cash and other real assets.

Hedge funds come through Hedge funds may have made the difference for some endowments when comparing scal year 2024 to scal year 2023, said Kristin Reyn-

Harvard University, the largest endowment, returned 9.6%, well above its prior scal year return of 2.9%.

Thanks to the robust positive return, Harvard’s portfolio increased to $53.2 billion from $50.7 billion the year before, even after the $2.4 billion the endowment contributed to the university’s operating budget for the period.

N.P. “Narv” Narvekar, CEO of Harvard Management Co., which oversees the Cambridge, Mass.-based university’s investments, in his annual letter to the Harvard community said the university now relies on endowment distributions to pay for nearly 40% of its annual operations, up from just over 33% when Narvekar came aboard in December 2016 and 20% two decades ago.

“The endowment’s orientation toward strong investment returns has been tempered by the imperative for budgetary stability. We believe that has resulted in a lower tolerance for risk than many of our largest private university peers, which can cause lags in ebullient environments, but also provide protection during downturns,” he said in his letter.

Narvekar said private equity returns lagged behind public equities for the second year in a row and reminded readers in his letter that “in FY22, private managers did not reduce the value of their investments in a manner consistent with declin-

Endowment returns

olds, partner and practice group director at NEPC.

“There’s a whole group in the middle that I think are interesting, that have diversi ed strategies that are thinking about the world in a more conventional manner,” said Reynolds. “They had a high year for scal year 2024 if they had public equity, but also diversi ers helped in 2024. When I say diversi ers, I mean what other people might call hedge funds or output-oriented strategies. With the volatility in the markets and China having a rally, strategies that were more globally oriented but also less tied to public markets did well.”

Reynolds said those endowments may have struggled more in scal year 2023.

While Harvard saw its scal year 2024 numbers nearly reach double digits, other Ivy League institutions were not as fortunate.

Princeton University’s $34.1 billion endowment returned 3.9% for the scal year ended June 30, the rst positive return for the endowment in three years after two straight years of losses. The endowment returned -1.7% for the scal year ended June 30, 2023 and -1.5% the prior scal year.

It was the lowest return yet recorded in P&I’s endowment tracker, followed by Yale University’s $41.4

billion endowment, which posted a net return of 5.7% for the scal year ended June 30. Yale did not provide any information on its asset allocation, but the university is wellknown as the birthplace of the “Yale model” of endowment investing, which focuses less on traditional stocks and bonds and more on illiquid assets like private equity, hedge funds and venture capital.

The top Ivy League institution was Columbia University, New York, with its 11.5% return, followed by

Brown University. The Providence, R.I.-based university’s $7.2 billion endowment returned a net 11.3% for the scal year ended June 30. The return was in the top quartile of endowments tracked by P&I, despite having an actual allocation to private equity of 42% of total assets. University spokesman Brian Clark could not be immediately reached for further information on the composition of the private equity portfolio. Robert Appling, managing direc-

tor at Wilshire Advisors, said there was a large spread between the top-performing private equity strategies and the lowest this past scal year.

“People want to have these broad terms in saying ‘private equity,’” said Appling. “Success in private equity really is not purely beta exposure to the asset class. Success in private equity is really

by manager

and sourcing the top quartile (of performers).”

“The composition of

PRIVATE MARKETS STILL ATTRACTIVE: Michigan State University’s Philip Zecher

HJ Seeley

dowments is also important,” he said. “What exposures do you have to certain sectors (like) venture capital, buyouts, growth equity, distressed debt and special situations can also play a factor into your oneyear returns.”

Appling said that explains more of a dispersion over a one-year period among endowments with large allocations to private equity. The one-year returns, he notes, is not the endowments’ ultimate goal.

“Exposure to alternatives, specifically exposure to private equity and venture capital, have really been a tailwind to long-term success for these schools, especially for the 10year and very long-term time periods,” said Appling. “Some sectors of private equity held up better than venture capital, like buyouts and special situations, so if your portfolio was tilted more to venture capital, you may have underperformed peers with higher allocations to those other sectors. Also, If there was more exposure to secondaries or co-investments in the private equity portfolio, that may have helped peer-relative performance as well.”

Long-term success

For the ve and 10 years ended June 30, endowments with higher allocations to private investments are outperforming those with lower allocations, experts say.

Some larger endowments did not provide longer-term returns, but Princeton University — which posted the worst one-year returns among all endowments this year — disclosed it has returned an annualized 9.2% for the 10 years ended June 30, well within the top quartile of reported 10-year returns, and Yale University returned an annualized 9.5% for the period.

“Private equity has been the main driver of returns for the long-term period,” said NEPC’s Reynolds. “You can imagine that the questions are around (whether) private equity drive returns in the future, and so there are a lot of discussions about private equity valuations largely coupled with public equity valuations.”

Reynolds said that while in the last two years private equity returns have been lower, she still thinks there are strong returns ahead in the long term, especially in areas like middle-market buyout funds, the kinds of areas where operators are strongly involved.

Garrett Wilson, managing director and a member of the management committee at OCIO rm Hirtle Callaghan, said in an interview that it’s important for endowments to realize they need to stay the course on private markets.

“These are long-term, perpetual endowments that should ultimately outlive or outlast all of us that are in the room or managing those assets,” said Wilson. “That idea of intergenerational bene t really is important to remind yourself of, particularly when it comes to private markets.”

Consultants

CONTINUED FROM PAGE 1

of them looking for outside help in navigating that process, with some, perhaps, uncomfortable with the idea of possibly having their incumbent advisers select themselves as OCIO, said David Levine, a principal with Washington-based ERISA-focused Groom Law Group.

In what remains a fragmented market, even if everyone is “aiming for the same goal posts,” they’re looking at different paths to get there, said Michael Kozemchak, a managing director with Institutional Investor Consulting, a consultant/OCIO search rm. “You really need somebody ... that’s competent to help a sponsor gure out” who’s taking on what mix of investment, administrative and custodial functions, at what fees and with what liability exposures, he said.

At the end of the day, the promise of third-party evaluators is a more ef cient search process, OCIO veterans say.

The hope, said Michael P. Manning, managing partner of Boston-based investment consultant and OCIO rm NEPC, “is that they’re going to put us in front of organizations where there’s a good cultural or philosophical t, as opposed to organizations ... who just send out 20 RFPs,” without a deep understanding of how a rm such as NEPC works and its relative strengths.

For now, that market segment remains nascent, with a lingering “mom and pop” feel about the small circle of competitors that have won a modicum of name recognition.

The third-party evaluation business of bene ts advisory rm Curcio Webb, which market participants point to as one of the largest players in the space, has a team of seven, said Uma Kolluri, a principal with the Lawrenceville, N.J.-based rm.

Other rms focused on OCIO and consultant search assignments include Marina Del Rey, Calif.-based North Pier Fiduciary Management; Michigan-based Institutional Investment Consulting, with a team of six principals and support staff; and Chatham, N.J.-based Kidderbrook Group, which lists two principals on its website.

With low barriers to entry, a number of competitors with just one or two key professionals apiece has entered the fray in recent years, analysts say. Prospective clients who might have been aware of ve third-party evaluators in the past now say they may know of maybe 20 or more, Kolluri noted.

Big footprint

Compact size, meanwhile, doesn’t necessarily mean an insigni cant footprint.

By way of example, Alpha Capital Management, with only two principals and one analyst, reports having conducted over 100 OCIO and consultant

searches over the past eight years, including 23 for clients with $1 billion or more and another 12 with between $500 million and $1 billion, according to Brad Alford, a principal and founder of the Atlanta-based rm.

Traditional investment consultants, eyeing third-party evaluators’ growing role in overseeing OCIO searches, have responded by bolstering their efforts to forge and maintain relationships with the one or two handfuls of players quarterbacking the bulk of those RFPs now.

With a lot of corporates and even some public funds “starting to use third-party search rms to do consultant searches … we’re making an effort to have a good relationship with those people,” said Greg Allen, CEO of San Francisco-based Callan.

That effort evolved over time as Callan found those rms sporting an ever-higher pro le in industry searches. Three years ago, there was maybe one rm Callan made a little effort to cultivate ties with. “It wasn’t really a strategic matter for us,” said Allen, more a matter of “hey, these people keep calling.” But Callan’s team quickly concluded that the rm should be making more of an effort to work with those growing search boutiques.

Steve Charlton, a partner and head of client solutions with NEPC, said with third-party evaluators now accounting for roughly a third of the OCIO searches NEPC responds to, the investment consultant — with $1.66 trillion in advisory assets as of June 30 and over $100 billion in OCIO mandates — is making “a concentrated effort” to engage with those rms, re ecting their rising pro le as “the interface between the rm and the end client.”

To some extent, executives say, it can be challenging for traditional consultants to adjust to that evolving environment.

In an interesting way, as third-party evaluators continue to carve out solid businesses, “consultants now have to kind of put on their consultant relations hats,” said Callan’s Allen.

Historically, “we would be the trusted adviser in the room, with no other voice” weighing in, noted Rich Nuzum, executive director, investments and global chief investment strategist with Mercer Investments. Going forward, “you have to be humble and recognize that you’re actually going to get kicked out of the room when the client wants (an) opinion on you,” he said.

Mercer may be better placed than most to make that adjustment because its work in 85 countries has provided it with “85 different learning laboratories,” Nuzum said.

“We’ve had experience being intermediated,” a development seen in the Australian market as early as 20 years ago, he said.

Positive role in the industry

Despite the challenges, Allen, Charlton and Nuzum agree that

third-party evaluators are playing a positive role in the market.

Yes, “you’ve got to share that trusted adviser status that we all value so highly and aspire to with other parties” but ultimately that’s good for the industry, said Nuzum. The diversity of views and even some constructive con ict “adds value to investment decision-making,” helping plan sponsors get the most out of the consultants and OCIOs they work with, he said.

“They do a really good job, (creating) a level of consistency and transparency that helps both us and the asset owners,” agreed Allen.

Third-party evaluators ask a lot of challenging questions, Charlton noted, which in turn can result in a more robust process than searches that don’t involve those players. They are effectively helping clients do a better job ful lling their duciary duty, he said.

Kolluri said the goal of all the questions Curcio Webb asks — of

both the clients looking to hire an OCIO and the OCIOs themselves — is to make sure the right providers are brought to the table for the right clients. “It’s all about the t,” she said.

With the number of OCIO providers growing quickly, “how do you start differentiating them,” asked Kolluri. “This is what we do, day in and day out now,” she said.

P&I’s latest annual survey of the investment consulting industry found 36 respondents with OCIO services managing a combined $1.7 trillion in assets, up roughly 20% from the year before.

The third-party evaluator sector, meanwhile, remains highly concentrated, with some market players estimating that the top ve players in the space account for 90% or so of the OCIO searches those rms manage.

Jim Scheinberg, managing partner of North Pier Search Consulting, gures there’s lots of room left to grow.

Third-party evaluators oversee roughly 400 searches annually now, triple the level of just ve years ago, Scheinberg said.

That remains a tiny fraction of a universe of 200,000 institutional pools of capital in the U.S. with $50 million in assets or more, Scheinberg noted. With more and more plans accepting that it’s prudent to test their prevailing governance struc-

ture by running an evaluation or a search at least once every 10 years, he gures North Pier could double in size over the coming ve years.

Even with expectations of a growing number of searches, however, the competitive environment should remain conducive for the small, independent boutiques that currently dominate the sector, Scheinberg predicted, noting that it’s just not profitable enough for bigger consulting rms “to take it seriously right now.” If bigger consulting rms did begin offering third-party evaluation services, meanwhile, that could make it more dif cult for OCIO providers, themselves often tied to big consulting rms, to open their books to a competitor, noted Julie K. Stapel, a Chicago-based partner, focused on ERISA-related issues, with law rm Morgan Lewis & Bockius.

Growing demand

For now, the top third-party evaluators report growing demand for their services.

Eight or nine years ago, Curcio Webb’s OCIO search business was garnering maybe three assignments a year but today that number is closer to 30, said Kolluri.

“The other thing we do, and it’s been picking up a lot of steam recently … is OCIO monitoring,” she said.

Asset owners can share duciary responsibility with an OCIO but they never really of oad that responsibility entirely, Kolluri said. And that reality can lead to something more like retainer work, where the client is saying “all right, once a year please come in and review” how the OCIO is performing, she said.

Stapel uses a car analogy with plan sponsors: “You’ve given (the OCIO) the keys but there’s still some role for you here to make sure they’re …not going to run the plan off the road.” And often, the client will retain the same rm that conducted the search to do the subsequent monitoring, she said - a nod to the fact that, at the moment, “there just aren’t … all that many players in the space yet.”

However Alpha Capital’s Alford said that dual role could prove problematic, citing the challenges of remaining objective about the performance of a rm your team recommended to the client in the rst place.

In another possible sign that the third-party evaluator sector is maturing, potential clients are increasingly “running RFPs to select third-party evaluators,” with between 30% and 50% of the search mandates Curcio Webb wins now coming out of a process competing against rms “like us,” said Kolluri.

“Hiring a consultant to hire a consultant can get a little dizzying,” said North Pier’s Scheinberg. Such competitive processes probably account for roughly “two out of every three cases that we do now,” he said. Five years ago, “that number was not even 25%,” he said.

ENGAGING: NEPC’s Steve Charlton