Pensions & Investments 01-15-2024 by pensions-and-investments

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Pension Funds

CalSTRS’ Chris Ailman announces retirement CIO tells P&I he will focus on climate change and energy transition By ARLEEN JACOBIUS

Michael Austin/The iSpot

Christopher Ailman, chief investment officer of the nation’s second-largest public pension fund, is retiring on June 30 with plans to stay on as an adviser through the end of

the year to ease the transition after a successor is named, he told Pensions & Investments in an interview. An industry leader who has long pressed investors to take into account the investment risks of climate change and has defended the importance of defined benefit plans, Ailman has served as CIO of the $304.9 billion California State Teachers’ Retirement System, West Sacramento, since 2000. Starting July 1, he will transition to an advis-

er to the new CIO, who is expected to be in place by then, for the remainder of 2024. News of his retirement was officially announced Jan. 11 during CalSTRS’ investment committee meeting. CalSTRS’ board will form a committee to immediately begin a global search for a new CIO, he said. The board will not be hiring an executive search firm but instead will work with the state human resources de-

partment to find his successor. After a 38-year career working in the public pension fund arena, Ailman, 65, told P&I that he is ready to begin winding down his career. “It’s time to slow down. ... I’m starting to empty out my office,” he said. But for Ailman, slowing down is relative. While he won’t be in the building after June 30, Ailman said he will be “on call” to “smoothly pass the baton,” and in 2025 he’ll embark on his encore career with a

OUTLOOK GLOBAL ECONOMY

OUTLOOK

2024

long list of projects. The search for a successor means that CalSTRS will be competing for talent with the nation’s largest public pension plan, the $470.2 billion California Public Employees’ Retirement System, Sacramento, which last year launched its third search for a new chief investment officer in five years. CalPERS CIO Nicole Musicco left in September, returning to Toronto for family reasons only 18 SEE AILMAN ON PAGE 29

Pension Funds

2024 is expected to Board election bring same themes, could spur reform at Ohio Teachers different scenarios What’s inside

Monetary policy, political risk, geopolitics, inflation and recession top the list By SOPHIE BAKER The more things change, the more they stay the same — or so the saying goes. But while 2024 will feature the same keywords for the global economy as 2023 — monetary policy, geopolitical and political risk, inflation, and recession — the way these themes are expected to play out will be very different. Economists and senior leadership at some of the world’s largest money management firms and institutional investors are split as to whether the much-signpostSEE ECONOMY ON PAGE 30

A look at what 2024 will bring for:  Washington: Page 3  Asset owners: Page 3  Managers: Page 3  DC plans: Page 16  Asia: Page 17  ESG: Page 18  Europe: Page 19  ETFs: Page 20  What the experts foresee for the economy: Page 31  For the full report, go to PIonline.com/outlook24

OUTLOOK ALTERNATIVES

Alts managers hope for cut in rates to spawn more deals By ARLEEN JACOBIUS Most investors plan to maintain or increase their private markets allocations in 2024, banking on private equity and credit returns continuing to outstrip those of stocks and bonds despite the pain they suffered in 2023. Private equity and private credit industry executives anticipate that

the Federal Reserve’s signaled interest rate cuts could relieve some of the pain by kick-starting transactions. Without transactions, private credit managers can’t spend the capital they’ve amassed to make or invest in loans and private equity managers can’t exit portfolio companies that would be providing profits for general and limited partners to SEE ALTS ON PAGE 22

COLA, investment staff, index funds on the agenda By ROB KOZLOWSKI

Ohio State Teachers’ Retirement System, Columbus, faces a key board election in the spring that could tilt the balance to a group of self-proclaimed reform trustees. The reformers support restoring a permanent cost-of-living adjustment, funded by cost cutting, including a move to passive investing and significant cuts to the $90.1 billion plan’s investment staff. The reform trustees have been spurred on by a grassroots movement of retirees and active Ohio teachers angry about reduced or eliminated annual cost-of-living adjustments. In 2012, the state Legislature passed pension reform that gave the STRS board the authority to set the system’s COLA. The previous fixed 3% COLA was seen as unsustainable following the financial crisis of 2008, and the board cut the COLA to 2% from 2013 to 2016, and did not provide one from 2017 to 2022. The board argued that the reduction was necessary to preserve the fiscal integrity of the system. While the board has since set a 3% COLA for fiscal year 2023 and 1% for fiscal year 2024, the six SEE OHIO STRS ON PAGE 29

SOUND BITE RUSSELL INVESTMENTS’ KRIS TOMASOVIC NELSON: ‘ESG factors

are increasingly driving investment decisions.’ Page 18

Big announcements from BlackRock The new year has just started, and BlackRock has already announced a huge acquisition, but also a third round of layoffs. Page 2

January 15, 2024

Pensions & Investments

IN THIS ISSUE VOLUME 52, NUMBER 1

Defined contribution More product options and greater flexibility draw plan sponsor attention as worry about participants without guaranteed lifetime income grows. Page 6

Money Management

BlackRock starts year with big announcements Firm has huge acquisition, more layoffs despite its AUM reaching $10 trillion

Hollie Adams/Bloomberg

By CHEYENNE LIGON and SOPHIE BAKER

Exchange-traded funds In 2023, active stock and bond managers flooded the market with new ETFs and mutual fund conversions, but growing assets requires a systemwide effort. Page 13

Health savings accounts The health savings account celebrates its 20th anniversary in 2024, and researchers and consultants say there is room for improvement amid the slow, steady growth of assets being invested in these accounts. Page 6

Money management Goldman Sachs Asset Management’s senior leadership is riding high on a huge outsourced CIO contract the firm recently won from aerospace and defense company BAE Systems. Page 6

Pension funds PennPSERS CIO Benjamin Cotton reflects on his first year and looks to the future of a lower allocation to private investments. Page 4

People

Just two weeks into 2024 and BlackRock has already announced a huge acquisition, while also enacting a third round of layoffs despite its assets under management reaching $10 trillion to end 2023. BlackRock announced Jan. 12 it will acquire infrastructure firm Global Infrastructure Partners in a $12.5 billion deal that creates a more than $150 billion platform, the firm said in its quarterly update. The asset manager will pay a total $3 billion in cash and about 12 million shares of BlackRock common stock, a joint news release said. GIP, which has offices in New York, London, Sydney and other cities, was founded in 2006 and manages more than $100 billion in infrastructure equity and debt assets. The firm focuses on energy, transport, water and waste, and the digital sectors. BlackRock has more than $50 billion in infrastructure AUM across equity, debt and solutions, managing assets since 2011. Bayo Ogunlesi, founding partner, chair and CEO at GIP, will lead the combined platform along with four of the firm’s other founding partners. BlackRock also agreed to appoint Ogunlesi to its board at its next scheduled board meeting following the deal close, subject to procedures, the release said. The | SEE BLACKROCK ON PAGE 35

Courts

Industry eyes high court on Chevron deference

Blackstone, Principal Asset Management, Ontario Teachers, Voya, MFS and Natixis were among managers and asset owners naming new CIOs or CEOs in recent weeks. Page 33

Case challenges precedent that judges defer to agencies under certain circumstances

Publisher’s letter

By ROBERT STEYER

As P&I celebrates 2023 highlights, know that we have new initiatives planned for this year to inform, engage, connect and inspire our audience. Page 11

Staffing Christopher Marchant joined Pensions & Investments on Dec. 11 as a reporter, focusing on asset owners and money managers in Europe. Page 4

Departments At deadline ....................32 By the numbers ..............12 Changes ahead ..............35 Classified ......................28 ETFs ..............................13 ESG roundup .................14

Hirings...........................26 Other views ....................10 People ...........................33 Publisher’s letter ............11 Reporters notebook ..........8 RFPs .............................28

Entire contents ©2024 Crain Communications Inc. All rights reserved. Pensions & Investments (ISSN 1050-4974) is published monthly in January, February, March, July, August and December, and semimonthly in April, May, June, September, October and November by Crain Communications Inc., 130 E. Randolph St., Suite 3200, Chicago, IL 60601. Periodicals postage paid at Chicago, IL, and at additional mailing offices. POSTMASTER: Send address changes to Pensions & Investments, Circulation Dept., 1155 Gratiot Avenue, Detroit, MI 48207-2912. $16 per issue; $350 per year in the U.S.; $375 per year in Canada; all other countries $475. ‘‘Canadian Post International Publications Mail Product (Canadian Distribution) Sales Agreement No. 0293539’’ GST #136760444. Printed in U.S.A.

Keith E. Crain, Chairman Mary Kay Crain, Vice Chairman KC Crain, President & CEO Chris Crain, Senior Executive Vice President Bob Recchia, Chief Financial Officer G.D. Crain Jr., Founder (1885-1973) Mrs. G.D. Crain Jr., Chairman (1911-1996) Published by Crain Communications Inc. Chicago offices: 130 E. Randolph St., Suite 3200, 60601 London offices: 11 Ironmonger Lane, EC2V 8EY New York offices: 685 Third Ave., 10th Floor, 10017 Address all subscription correspondence to Pensions & Investments, 1155 Gratiot Ave., Detroit, MI 48207-2732 or email customerservice@pionline.com.

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SHIFTING: CEO Laurence D. Fink sees infrastructure as important in a changing economy.

The Supreme Court holds oral arguments Jan. 17 on a challenge to the legal standing of regulatory agencies that could significantly alter the balance of power between regulators and federal courts. The justices are being asked to overturn or restrict a 1984 Supreme Court ruling, known as Chevron deference, in which the court said judges should defer to regulators’ expertise in interpreting or administering laws that are ambiguous or unclear as long as the interpretation is reasonable. “Overruling Chevron could be a seismic

shift in the relationship between courts and agencies,” said an October report by the Congressional Research Service, a nonpartisan provider of analysis to federal legislators. “We’re not in the center of this battle, but I imagine we could be dragged in if we end up with a major doctrine,” said ERISA attorney Carol I. Buckmann, founding partner of Cohen & Buckmann, referring to the regulatory agencies that affect the retirement industry. The complex, highly technical ERISA “is a good argument” for letting the regulatory experts interpret the law, she said. “Congress doesn’t have the expertise. There are gaps in the law. Somebody has to fill them in.” The Chevron deference challenge is coming via two lawsuits involving the regulation of fisheries, but plaintiffs say the

justices should overrule or restrict Chevron deference across the board — a prospect that would affect every acronym from EPA to NLRB, from SEC to IRS, from DOL to PBGC. Among the approximately 90 amicus briefs filed with the justices, a large majority calls for eliminating or eviscerating Chevron deference, the product of the 6-0 Supreme Court decision Chevron U.S.A. Inc. et al.vs. Natural Resources Defense Council Inc. et al. Critics include business groups, red state politicians and advocacy groups representing such issues as gun ownership, workers’ rights to refuse union membership, conflicts between religion and secular law, and limited government and taxation. Critics say Chevron deference allows legislation via regulation, permitting reguSEE SUPREME ON PAGE 34

Exchange-Traded Funds

SEC OKs 11 spot bitcoin ETFs a day after X/Twitter hack By KATHIE O’DONNELL and CHEYENNE LIGON In a long-anticipated move, the Securities and Exchange Commission approved applications for 11 spot bitcoin ETFs on Jan. 10, one day after it was forced to knock down a false report on its hacked X/Twitter social media account claiming such products were approved. The approval was confirmed in a statement from SEC Chair Gary Gensler. The greenlight reversed years of rejections of similar products by the SEC. The agency previously rejected applications — including from asset managers that included Fidelity Investments and WisdomTree, both of which have now prevailed — citing concern about the potential for market manipulation. But in August, a federal court ruled that the SEC had been “arbitrary and capricious” in its decision to reject Grayscale’s application to convert its flagship Grayscale Bitcoin Trust into an ETF and forcing the agency to reconsider.

Andrew Harrer/Bloomberg

approve the listing and trading of these spot bitcoin ETP shares.” Yiannis Giokas, senior director at Moody’s Analytics, said the sweeping approvals were a “significant step towards the institutionalization of cryptocurrency, expanding bitcoin’s accessibility to a wider audience in a more regulated and simpler manner.” He added that the ETFs could lead to an increased demand for bitcoin and improve market liquidity but risked exposing mainstream investors to volatility.

Companies weigh in

REASON: SEC Chair Gary Gensler cited the

Grayscale ruling in the making the approvals. In a statement on the SEC’s website Jan. 10, Gensler cited the Grayscale ruling, writing that “Based on these circumstances ... I feel the most sustainable path forward is to

The 11 spot bitcoin ETFs that have been approved are ARK 21Shares Bitcoin ETF, Bitwise Bitcoin ETF, Fidelity Wise Origin Bitcoin Fund, Franklin Bitcoin ETF, Grayscale Bitcoin Trust, Hashdex Bitcoin ETF, Invesco Galaxy Bitcoin ETF, iShares Bitcoin Trust, Valkyrie Bitcoin Fund, WisdomTree Bitcoin Fund and VanEck Bitcoin Trust. Analysts months ago began predicting approval by Jan. 10, the deadline for the SEC to SEE BITCOIN ON PAGE 31

January 15, 2024 | 3

Pensions & Investments

Jennifer Bishop

OUTLOOK WASHINGTON

SEC, DOL prepare for big year of rule-making as election looms Proposed rules would significantly impact retirement industry By COURTNEY DEGEN In an election year, Congress will be less productive than usual, experts said, but there is no shortage of activity coming from key regulators in Washington. Both the Securities and Exchange Commission and Department of Labor have a number of proposals on the table that would significantly impact various aspects of the retirement and investment landscape, such as the SEC’s climate disclosure

Depending on how rule and the DOL’s fiduR E L AT E D the election fares, the ciary proposal. CONTENT Congressional Review Industry leaders and n GOP likely to Act could pose a real Republican lawmakers target oversight threat to the SEC’s fuon Capitol Hill have and campaignture rules, according to been critical of the SEC positive topics. Jillien Flores, head of for a slew of rules the Page 24 global government afagency proposed or fifairs for the Managed nalized in 2023, which range from a focus on artificial intel- Funds Association, a Washington-based trade association repreligence to short-sale-related data. “There’s been no crisis that would senting alternative asset managers. The CRA allows Congress to inprecipitate this level of rule-making,” said Christopher A. Iacovella, presi- validate a federal agency’s rule, with dent and CEO of the American Secu- a simple majority vote, if the rule has rities Association, a Washington- not been in effect for more than 60 based trade association representing legislative days. “We anticipate a lot of (SEC) regional financial services firms. And the SEC is not expected to rule-making moving into final form slow down any time soon. SEE WASHINGTON ON PAGE 24

PLANNING:

Lockheed Martin’s Paul Colonna thinks he and his staff will find opportunities in fixed income and real estate debt.

OUTLOOK ASSET OWNERS

OUTLOOK ASSET MANAGEMENT

Expect familiar worries

Consolidation pressures emphasize for 2024 as pension funds need for white-glove client service ponder economy, rates By CHEYENNE LIGON

EDGED OUT: Marc Nachmann said consolidation is more likely to occur through attrition than M&A.

Asset management firms expect to see the volatility that battered financial markets in 2023 carry into the new year, bringing with it continued consolidation pressure as the industry struggles with shrinking profit margins and rising expenses. One way firms are attempting to keep customers happy and justify their management fees is through an increased emphasis on bespoke, whiteglove client service, often using data-heavy or AI-based technology to better handle customer relationships

and create personalized investment products. But developing new technology doesn’t come cheap, industry sources said, and smaller players might struggle to keep up with an ever increasing technology spend, in particular, as firms race to develop AI applications and wrangle their data. Marc Nachmann, global head of asset and wealth management at Goldman Sachs, said it’s more likely that consolidation will happen through attrition, as smaller players get edged out by the behemoths, than via mergers

By ROB KOZLOWSKI U.S. pension fund executives are taking a cautious approach to 2024, as they await the answer to how much the economy will slow, and when and by how much the Federal Reserve may cut interest rates. While much remains unknown, they are seeking returns in places like fixed income and real estate, where they believe the greatest opportunities loom. There’s also the matter of the up-

coming U.S. presidential election. Christopher Ailman, chief investment officer of the $304.9 billion California State Teachers’ Retirement System, West Sacramento, summed up the overall uncertainty in 2024 in a Dec. 18 interview: “My Magic 8 ball is broken. It’s stuck in between tiles, so I don’t have a good prediction model for next year.” “Usually, when the U.S. market, say the S&P 500 index, is up 25%, SEE FUNDS ON PAGE 21

SEE MANAGERS ON PAGE 23

Large-cap U.S. equity gains create high 2024 expectations

While many major equity indexes fell sharply in 2022, they rebounded last year, led by the S&P 500 and powered by the Magnificent Seven technology stocks. The index has a rich valuation, creating expectations of higher growth that may prove challenging in the near term should the economy slow.

S&P 500 leads: The S&P 500 led equity markets with a 26.3% return in 2023. Over 10 years, it has produced the highest absolute return and best risk-adjusted return compared with several major indexes. Year to date, the S&P 500 is up 0.3% through Jan. 10. Equity index returns 2022 27% 24% 21% 18% 15% 12% 9% 6% 3% 0% -3% -6% -9% -12% -15% -18% -21%

2023

10 year

10-year volatility

Magnificent returns: The Magnificent Seven stocks, which make up 28% of the S&P 500, had returns ranging from 49% to 239% in 2023. This year, five out of the seven have outgained the S&P 500 Equal Weighted index. 2023 stock returns Alphabet Class C (1.8% of index)

58.8% Alphabet Class A (2.1%)

58.3% Meta Platforms (2.0%)

194.1% Amazon (3.5%)

80.9% Apple (7.0%)

49.0% Microsoft (7.0%)

58.2%

Russell MSCI World MSCI MSCI EAFE 2000 ex-U.S Emerging Markets

S&P 500 index returns and 10-year yield 50%

7.5%

40%

6.0%

30%

4.5%

20%

3.0%

10%

1.5%

Richer valuation: Last year’s big gains caused the S&P 500’s equity valuation to become richer compared with the end of 2022, with the index’s price-to-earnings multiple increasing to 23 from 18. The index currently trades at a P/E of 22 as of Jan. 10. The average year-ending P/E since 2003 was 19. S&P 500 index P/Es 40 35 30

S&P 500 S&P 500 Growth S&P 500 Value

25 0%

0.0%

-10%

-1.5%

S&P 500 index 26.3%

-20%

-30%

101.7% NVIDIA (3.1%)

Sources: Bloomberg, State Street Global Advisors, U.S. Department of the Treasury.

S&P 500 Growth index, returned 30% in 2023, outperforming the S&P 500 Value index by 780 basis points. That’s a reversal from the prior year, when growth stocks lost 29.4%, badly lagging value stocks’ 5.2% loss.

S&P 500 Equal Weighted index 13.8%

Tesla (1.7%)

S&P 500

Growth spurt: Growth stocks, measured by the

239.0%

-40%

S&P 500 Growth (left axis) S&P 500 Value (left axis) 10-year yield (right axis)

1999 2001 2003 2005 2007 2009 2011 2013 2015 2017 2019 2021 2023

-3.0%

15 10

-4.5%

-6.0%

2003 2005 2007 2009 2011 2013 2015 2017 2019 2021 2023

Compiled and designed by Larry Rothman and Gregg A. Runburg

January 15, 2024

Pensions & Investments Pension Funds

PennPSERS CIO Benjamin Cotton reflects on an eventful first year By ROB KOZLOWSKI

ADAPTING: Benjamin Cotton said one priority is adjusting to higher interest rates.

It was an eventful first year for Benjamin Cotton at the helm of the Pennsylvania Public School Employees’ Retirement System, which featured significant asset allocation changes, and he hopes in the future to drop the system’s target to private investments to lower its illiquidity allocation. Cotton joined the $72.5 billion Harrisburg-based pension fund in

January following a tumultuous period at PennPSERS in which an error in its reported investment figures led to internal and federal investigations. While the system was ultimately cleared of any wrongdoing, both CIO James Grossman Jr. and Executive Director Glen Grell retired amid the federal probe in early 2022 and the pension fund is still in the midst of an ongoing lawsuit it filed against now-terminated investment consultant Aon Invest-

ments USA related to that error. Both PennPSERS and Aon have declined to comment on the pending litigation. The arrival of Cotton, however, seems to purport a fresh start for the pension fund. A U.S. Marine veteran, he came to the pension fund after completing the doctoral program on Leadership and Learning in Organizations through Vanderbilt University’s Peabody College in December 2022 following a long stint as senior managing director at the $58.6 billion United Auto Workers Retiree Medical Benefits Trust. He had been a member of the investment team since the trust’s inception in 2009. Cotton said in a Dec. 19 phone interview that one of his priorities has been adjusting to the new interest rate environment, since institutional investors for well over a decade had pushed out on the risk spectrum in search of returns given the low-return fixed-income environment. SEE COTTON ON PAGE 34

Staffing

P&I bolsters its coverage across Europe

2024 ADVISORY BOARD Ofer Drucker Manager Pension Investments & Administration Goodyear Canada Inc.

EVP, Head of Pensions OMERS

Head of Wealth, Canada Conference Chairperson Aon

Manager, ESG Strategy Risk British Columbia Investment Management Corp

Chief Investment Officer Toronto Transit

Assistant Treasurer - Investments GE Canada

Vice President, Investments Acting EVP, Pensions & Asset Management Financial Services Regulatory The Azrieli Foundation Authority of Ontario (FSRA)

Lisa Jankov Partner Aon

Director, Externally Managed Equities Canada Post Pension Plan

QUESTIONS? Please contact Kathleen Stevens at kstevens@pionline.com | 843.666.9849 SPONSORSHIP OPPORTUNITIES ARE AVAILABLE. Contact Kimba Jackson at kjackson@pionline.com | 978.317.5032 or Henry Larson at henry.larson@pionline.com | 763.370.9522 for more details and availability.

*Only asset owners and a limited number of consultants are invited to attend. All registration requests are subject to verification. P&I reserves the right to refuse any registrations not meeting our qualifications. The agenda for Canadian Pension Risk Strategies is not created, written or produced by the editors of Pensions & Investments and does not represent the views or opinions of the publication or its parent company, Crain Communications Inc.

Christopher Marchant joined Pensions & Investments on Dec. 11 as a reporter, focusing on institutional investment across asset owners and money managers in Europe. Marchant is based in London and reports to Sophie Baker, international news editor. Before join- Christopher ing P&I, March- Marchant ant was a writer for Net Zero Investor, where he focused on how pension funds allocate money when taking the impact of climate change into account. He also covered international events in France and Denmark. He’s also written for PAM Insight and Environmental Finance. Marchant has an undergraduate degree from the University of Sussex in American Studies and a master’s in newspaper journalism. “European asset owners have always been important to global money managers, while international events are becoming increasingly important to investors across the world,” Baker said. “Chris will help to advance our European coverage and keep us at the forefront of reporting on what institutional investors and managers need to know in these challenging times.” Marchant can be reached at christopher.marchant@pionline.com. Marchant’s hire follows the appointment of Natalie Koh as senior reporter in Singapore earlier this year, covering the Asia-Pacific region. n

DEFINED CONTRIBUTION MARCH 10-12, 2024 EAST RITZ CARLTON | ORLANDO

2024 ADVISORY BOARD

Nora Alvarado

Plan Manager Employee Retirement System of Texas (ERS)

Patrick Baumann, CFA

Lan Chen, CFA, CAIA

Vice President, Treasurer Senior Investment Manager State of Michigan Signature Aviation Department of Treasury

Timothy Harrison, CFA

Mike Jerue

Deputy Chief Actuarial Senior Associate Investment Officer Federal Reserve Federal Retirement System’s Office of Employee Benefits Thrift Investment Board

Jaime Erickson

Robert Fortin

Trisha Webb

Diana Winalski

Director, Retirement Plans (US & Puerto Rico), Corporate Human Resources Abbott

Debra Roberts, Ph.D., CPA

Senior Associate Former Deputy Benefits Professional, Executive Director HR Total Rewards Chief Financial Officer Humana Maryland Supplemental Retirement Plans

Senior Manager, Benefits Wealth Amtrak

Deputy Chief Investment Officer International Paper Company

Javier Fregoso

Investment Plans Committee Member BART Police Department

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Deferred Compensation Coordinator City of Phoenix

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January 15, 2024

Pensions & Investments

Defined Contribution

Target-date funds with annuities get some attention Plan sponsors whose participants don’t have Social Security see need By MARGARIDA CORREIA After a decade of patient waiting, providers of target-date funds with built-in annuities may finally be getting a little love. Take The Kraft Heinz Co. The multinational food retailer this year will be exploring how TDFs with embedded annuities compare with its own and other traditional TDFs to see if it makes sense to add them to the investment menus of its two 401(k) plans, which jointly hold $3.7 billion in assets. “There has been a lot of exciting innovation and growth in this space over the last few years, and I believe plan sponsors are doing their participants a disservice if they aren’t at least spending the time to get to know what options are out there,” said Michael Jabs, associate director of pensions at Kraft Heinz. Jabs reflects what advisers and

consultants say is a greater openness among plan sponsors to specialty target-date funds that help participants create guaranteed lifetime income streams from their retirement savings once they leave the workforce. Emily Wrightson, a principal at CAPTRUST Financial Advisors, reports that target-date funds with embedded annuities are becoming “a bigger and bigger talking point of conversation” among plan sponsors, especially those that sponsor government and higher-education plans where employees either don’t pay into Social Security or don’t have access to a defined benefit pension plan. Concerns over participants not having any guaranteed sources of retirement income — either through Social Security or a pension plan — are driving “a lot of conversation and questions” around target-date funds with embedded annuities, she said. Joe DeBello, a managing principal in the retirement and wealth division of OneDigital Investment Advisors, also reports greater receptivity to the products. While plan sponsors

Ciara Cusseaux

ON THE HORIZON: Mercer’s Holly Verdeyen predicts guaranteed income products will

be ‘the next auto feature’ in workplace retirement plans.

are “not beating down (its) doors to add in-plan income solutions,” they show “genuine interest in exploring more” about them once brought to their attention, DeBello said. “It’s something that I think many advisers, including our own teams, are bringing to the attention of plan

sponsors, and there is some interest in learning more,” he said, referring to target-date funds with built-in annuities. “I do think that this is something that we are going to see some uptake from the plan sponsor perspective.” Holly Verdeyen, U.S. defined con-

tribution leader at Mercer, is also bullish on target-date funds with guaranteed income features, predicting that guaranteed income products will be “the next auto feature” in workplace retirement savings plan. “We do believe we’re going to get to the environment where we have automatic income,” she said. “Defined contribution plans have more options than ever to implement retirement income in their plans, and now it’s just a matter of determining what solution or solutions are most appropriate for their plan demographics and participant behaviors.” Target-date funds with embedded annuities have been around for more than a decade but haven’t taken off because the market was small and the products weren’t flexible, CAPTRUST’s Wrightson said. In 2020, when working with a client on finding a suitable target-date fund with a guaranteed income sleeve, Wrightson looked at a robust 20 different products. “There’s even more now than just those 20,” she said. SEE TARGET DATE ON PAGE 35

Money Management

GSAM looks to build on huge OCIO win from BAE Systems late last year By SOPHIE BAKER

PATIENCE: EBRI’s Jake Spiegel likens HSAs to 401(k)s in terms of it taking time

for participants to get comfortable investing using the savings vehicle.

Health Savings Accounts

As HSAs reach 20th anniversary, the focus on investing ramps up By ROBERT STEYER The health savings account celebrates its 20th anniversary in 2024, and researchers and consultants say there is room for improvement amid the slow, steady growth of assets being invested in these accounts. “HSAs may be like the 401(k) plans 40 years ago,” said Jake Spiegel, research associate, health and wealth, for the Employee Benefit Research Institute. As participants have more exposure to HSAs and gain more familiarity, “it can lead to more comfort for investing,” he said. Research by EBRI and others shows that familiarity breeds content for investing. “Most account holders who invest tend to do so within the first three years of account ownership,”

said a February 2023 EBRI report tracking HSA account balances and investing between 2011 and 2021. “The longer an account had been open, the more likely it was to have investments,” the report said. “With a few exceptions, the longer an account had been open, the larger the percentage of the account balance that was invested.” Among accounts that were opened in 2004, for example, 85% of their total assets were invested. Among accounts opened in 2021, the average was 58% in EBRI’s database of 13.1 million accounts with total assets of $39.5 billion. Spiegel said HSAs that include employer contributions tend to have higher balances, and higher balances tend to have more investments. Annual surveys by Devenir SEE HSAs ON PAGE 32

Goldman Sachs Asset Management’s senior leadership is riding high on a huge outsourced CIO contract the firm won earlier this year, from aerospace and defense company BAE Systems, London. The mandate started late last year, and is the largest OCIO contract to be awarded in the U.K. About £23 billion ($28.9 billion) in defined benefit assets across the BAE Systems Section and the Airbus Section moved to the money manager along with the inhouse team at BAE Systems Pension Funds Investment Management. Winning the mandate “is super exciting for us at Goldman because it’s the biggest one to date,” said Fadi Abuali, CEO of Goldman Sachs Asset Management International, in an exclusive interview that included GSAM and BAE pension fund executives. GSAM is not only a major player in the roughly £200 billion U.K. OCIO industry — although opportunities remain there — but it also expects to see more activity in Continental Europe, where it is benefiting from the integration of NN Investment Partners last year. “We are second” in terms of largest OCIO providers globally. “We’re going to be focused on a lot of really strategic opportunities to grow our business,” Abuali said. The latest Pensions & Investments data shows GSAM had $246.8 billion in worldwide outsourced assets under management as of March 31, which wouldn’t include the BAE Systems deal. The firm trails only Mercer, which had $337.7 billion as of that date, and is ahead of BlackRock’s $197 billion. OCIO is a business where “scale matters, and having the right invest-

ment in the right people, and of interview. The trustee board — made course talent, is super important,” up of 18 members, half of whom are Abuali said. “With BAE we get a lot member-nominated trustees, while of great talent.” others have union and industrial The deal also creates stability, backgrounds — had conversations continuity and “frankly speaks to the about how BAE Systems was a deethos of what we’re trying to do, fense and aerospace company with which is partner with like-minded “a portfolio of (about) £25 billion pensions and help our corporate cli- invested in some sophisticated asents as well to deliver solutions that sets,” Gallagher said. are bespoke, complex, but are valThe trustees had noted a June ue-added for the stake2021 deal that saw Britholders — whether ish Airways, Harmondthat’s the scheme or the sworth, England, transcorporate. With the benfer £21.5 billion in assets efit of scale we’re going and employees of the to be able to deliver a lot in-house team at British more to the schemes,” Airways Pension InvestAbuali added. ment Management to Pensions & InvestBlackRock under an ments first reported in OCIO arrangement. “We August that aerospace knew there were opporand defense company tunities to do that. We BAE Systems was con- PROUD: Fadi Abuali thought managing our sidering an OCIO ar- called the mandate ‘super portfolios would be a rangement for its U.K. exciting ... because it’s reasonably attractive pension fund, and the biggest one to date.’ opportunity for someGSAM announced in body,” Gallagher said. September it had been victorious. The trustees, along with its advisForty-nine BAPFIM staff mem- ers, tested the market and engaged bers were offered jobs, said Ed in a competitive tender process. Francis, head of U.K. fiduciary manThe trustees had a number of agement at GSAM, in the interview conversations about the process with P&I. with different views considered, Gallagher said: Was it the right thing to do? How should a competition be Competitive process That team had done a good job of run? And who should be selected? “Each one of those discussions getting the pension fund into shape — on a technical provisions basis, was full and frank and fair, and I saw the plans were fully funded at the it as my duty to make sure all of it last triennial valuation in March was put on the table,” he said. Gallagher was also sensitive to 2021. “With the U.K. schemes fully how the changes were communicatfunded, a sound investment strategy ed to the team. “Quite a few of the and a strong team in place, that was (team) liked the bespoke, in-house the time to look at the market and environment, a small team.” Briefing sessions were run for the see what was out there,” said Andrew Gallagher, chair of the BAE teams as the company and the trustpension fund trustees, in the same SEE GSAM ON PAGE 33

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REPORTERS NOTEBOOK WHERE IT ALL STARTED

First U.S. open-end mutual fund turns 100 this year The modern mutual fund industry turns 100 this year, and the fund that started it all is still in business. Back in 1924, the Massachusetts Investors Trust was a radical idea. It was an open-end fund as opposed to the closed-end funds that were popular then. Closed-end funds lacked transparency. Investors didn’t have direct ownership of their assets and the funds often contained speculative securities. Fund managers “refused to disclose their holdings, making it nearly impossible for people to know what their holdings were actually worth,” says a brief history of the Massachusetts Investors Trust, prepared by MFS Investment Management, the company that grew out of the mutual fund. The open-end mutual fund idea was developed by Edward G. Leffler, who, depending on various accounts, was a traveling salesman who sold pots, aluminum pans and shoes before selling securities. He was concerned that investors in closed-end funds couldn’t sell their shares unless they could find another buyer. And because markets were unregulated, “the buyers of their shares had little incentive to pay a fair price,” said the MFS document, posted on its website.

AHEAD OF ITS TIME: The Massachusetts Investors Trust mutual fund was a radical idea when it was founded in 1924.

Leffler said a mutual fund should have a diversified portfolio of established companies rather than the speculative investments common in closed-end funds. The fund should have professional management, it should issue additional shares and it should allow investors to sell their share back to the fund at any time. Still, it took him three years and rejections by brokerages before he could find a firm — the Boston-based Learoyd, Foster & Co. — to market his idea. Leffler, Charles H. Learoyd and Hatherly Foster Jr.

established the Massachusetts Investors Trust on March 21, 1924. “The early concept of having a diversified portfolio for a long period of time is a great match for saving for retirement,” said Carol Geremia, president of MFS and head of global distribution. The Massachusetts Investors Trust mutual fund follows the same strategy as when it was created: an actively managed large-cap domestic equity fund. “We are committed to active management,” said Geremia, noting that the fund initially invested in 45 companies, 36 of which remain in business today, with many under different names and/or ownership. The Massachusetts Investors Trust, which now invests in 69 companies, has assets of $6.2 billion. As of Dec. 31, MFS had total assets under management of $598.6 billion. Today, the mutual fund industry still dominates the 401(k) market, accounting for 62% of the $6.94 trillion in 401(k) plan assets, according to the latest data from the Investment Company Institute. Among 401(k) plans, other DC plans, and IRAs, mutual funds are an estimated $10.9 trillion, or 48%, of the $22.5 trillion in total assets, according to ICI — ROBERT STEYER

TOP OF THEIR CLASS

WorldQuant names winners of international competition WorldQuant named four university students as the top winners of its 2023 International Quant Championship, the quantitative asset management firm announced last month in a news release. The Old Greenwich, Conn.based manager named Nihar Patel and Vaibhav Gupta from the Indian Institute of Technology, Delhi, as first-place winners of the competition, according to a spokesperson. Jingli Wang from McMaster University, Toronto, came in second. Yiran Zhu from the University of Edinburgh followed in third place. “The students’ quantitative talent and ways in which they expressed their novel thinking

was commendable,” said Nitish Maini, chief strategy officer at WorldQuant, in the news release. Through the manager’s web-based simulation platform BRAIN, teams were challenged to create alphas, or mathematical models designed to predict future price movements of financial instruments such as stocks and bonds. The championship, which was the third round in the competition, was held in the Bahamas. The four students were among the 30,000 participants who competed for cash prizes from a pool worth more than $100,000. The winners may also be considered for opportunities in research consulting, internships or full-time employment at the

INSPIRING WORK: Pictured at the awards ceremony are, from left, WorldQuant’s Igor Tulchinsky and Nitish Maini; winner Vaibhav Gupta; and WorldQuant’s Richard Hu and James Macarthur.

manager, the spokesperson said. The firm judged teams based on the criteria of their alpha creation and diversification approach, the originality of their ideas, the logic of their selection and their performance, according to the news release. “The impressive turnout of competitors in the IQC exemplified the caliber of quantitative

talent across the world,” said Igor Tulchinsky, founder, chair and CEO of WorldQuant. “Their hard work and innovative ideas were inspiring, and I look forward to seeing what the future holds for WorldQuant BRAIN and quants worldwide.” WorldQuant manages more than $7 billion in assets.

Kristinn Ingvarsson

University of Iceland launches institute to study pension issues

RIGHT PATH: Jon Atli Benediktsson, rector of the University

of Iceland, said the organization has important work ahead.

PREA wants to clarify ‘S’ in ESG investing The Pension Real Estate Association is taking a stab at clarifying the “S” in ESG, which the real estate trade group executives consider the least well understood letter in the acronym standing for environmental, social and corporate governance. PREA’s report released in December is meant to be a primer for real estate investors, providing them an overview of what social factors in real estate investment are, how they can be incorporated in investment decision-making, and what existing resources can be accessed to help, said Greg MacKinnon, PREA’s Greg MacKinnon, director of research. Developed by PREA’s social impact committee, the guide points out common misconceptions about social factors in investments. Among the social factors that real estate investors may choose to target are affordable housing and community amenities and resources such as grocery stores and healthcare services. According to the report, one misconception is that social factors should only be considered by self-described impact investors. Another misconception is that impact investments must sacrifice investment performance to achieve social or environmental goals, the report said. The report pointed to the results of a 2023 Global Impact Investing Network survey showing that most impact investors, 79%, reported returns that were either in line with or exceeded expectations. Seventy-four percent of impact investors target market-rate financial performance on a risk-adjusted basis, the survey found. Twenty percent reported exceeding their financial expectations. “Importantly, it (PREA’s guide) shows how socially responsible strategies can be implemented in a programmatic way with measurable outcomes that are consistent with fiduciary responsibilities,” said Jacques Gordon, co-chair of PREA’s social impact committee, in a news release. — ARLEEN JACOBIUS

— CARYL ANNE FRANCIA

COLLABORATION AND COOPERATION

The University of Iceland, Reykjavík, has founded the Pensions Research Institute, a collaboration platform for scholars in the field of pension funds. The institute has been founded in collaboration between the university, the Central Bank of Iceland, and the Ministry of Finance and the Economy. It is also expected to work closely with PeRCent (The Pension Research Centre) at Copenhagen Business School. PeRCent researches pension issues and also offers teaching to contribute to the development of the pension system in Denmark. The aim of the institute is to promote research and increase understanding of pension matters such as the maintain-

GUIDE TO SOCIAL FACTORS

ing of gender equality, facilitate cooperation with foreign academics, gather information about the organization of pension matters abroad, and to suggest possible solutions to the challenges that pension funds in Iceland face. The institute will also maintain a website, organize workshops for academics to present research and run an annual conference. It will also annually support one doctoral student and one employee to work on research that is needed for the Icelandic pension system. "We have taken a successful step and look forward to embarking on the important tasks that await this new organization", said Jon Atli Benedikts-

son, rector of the University of Iceland. Iceland has been rated third worldwide in the Natixis Investment Managers' Global Retirement index for two years running. The index ranks each nation in the areas of retirement finances, material well-being for retirees, health, and quality of life. In Iceland, the normal pension age is 67, according to the Organization for Economic Cooperation and Development. The social security system guarantees a minimum pension to everyone, even when very little, or nothing, has been paid into a pension fund. The full basic pension value is ISK 3 081 468 ($22,400) per year, equivalent to 33% of average worker earnings. Pension funds in Iceland include the Brú Municipality Employee Pension Fund, Reykjavík, and EFIA, Reykjavík, the retirement fund of the Icelandic Air Line Pilots Association. — CHRISTOPHER MARCHANT

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OTHER VIEWS LARA BANKS

Unearthing some hidden gems — emerging managers in buyouts

absolute valuations for small deals, the professionalization and scaling of lower middle market business can result in material multiple expansion at exit, yielding even greater potential returns.

Exit optionality

Small- and midcap buyout investments also benefit from a broader set of exit options. Smaller deals retain the optionality of selling upmarket to a range of strategics and larger sponsors given the amount of dry powder in larger cap funds. These investments are attractive to larger firms either as synergistic add-ons to existing portfolio companies or as new platforms. The “private equity put” continues to actively drive liquidity throughout cycles, which enables more consistent return generation vs. those more reliant on public market exits.

been financed with fewer turns of ver the past decade, leverage. The combination of there has been a lower entry valuations and substantial increase in reduced reliance on debt provides the size of buyout small- and midcap buyouts more funds, experiencing a resilience and flexibility to 70% growth to nearly $1 billion in navigate varying macroeconomic 2022. This trend has prompted environments. Given a “highmany fund managers to pursue er-for-longer” rate environment, larger deals in order to deploy companies exhibiting higher their expanding capital bases. profitable growth and lower Consequently, the average U.S. Emerging manager advantages leverage — key characteristics of buyout deal size has more than Against this background, emerging Lara Banks is a the lower middle market — are tripled over the same period. managers are particularly well-positioned to managing director better positioned than their In response to the drift capitalize on the lower middle market buyout and co-head of larger, more indebted peers. upmarket of numerous managers, opportunity set. Typically, these newly private equity at Consequently, many adept, entrepreneurial established managers have Makena Capital. She managers adept at investors with established track previously led sector teams Emerging is based in Menlo transforming records have left to launch their at larger generalist firms, Park, Calif. managers are companies through own firms and transition into the affording them a deep strategic investment lower middle market. These understanding of the quality poised to acumen hold a distinct advantage. smaller spinouts representing the next and resources of their produce generation of elite talent offer a compelling competitors. This knowledge avenue to exploit the inefficiency of the lower them to create Accelerated value creation outsized returns equips middle market. Despite the attractiveness of effective tools that can Small- and midcap companies through the this subsegment in terms of competitive out-compete those highly are largely founder- or famidynamics, value-creation potential and exit firms. These ly-owned businesses with more implementation resourced optionality, institutional investors may exhibit emerging managers often “low hanging fruit” in their of a tailored and specialize in specific areas, reluctance to allocate capital due to perceived operations for private equity to volatility and operational complexity. However, improve over their holding period. crafting a unique proposition specialized a thoughtfully curated portfolio of emerging for partner founders or CEOs Common strategies that buyout approach to the and delivering tailored buyout managers with the appropriate managers employ to accelerate alignment, motivation and specialized skills value-added services. company transformation include lower middle can effectively mitigate these risks while Beyond purpose-built talent upgrades, infrastructure market. offering substantial upside potential. services and structures, and technology investments, emerging managers also organic growth initiatives, and enjoy the advantage of being mergers and acquisitions. Favorable competitive dynamics unencumbered by legacy portfolios to manage Although these strategies are also present in Despite there being twice as many small — a notable benefit, especially in a challenglarger companies, smaller companies can and midcap private businesses compared to ing macroeconomic environment. operationally shift and pivot faster given their their larger counterparts, the current landEmerging managers possess a distinctive set scale. Even small improvements can have scape reveals a concentration of capital in of foundational elements that align with meaningful results on businesses that have larger-cap deals. Notably, there is approxiachieving superior performance. First, these never had sophisticated investors with mately 70% less capital targeting this smaller teams exhibit high motivation and a remarkstrategic capital. segment. This dynamic in the lower middle able determination to succeed. The entrepreConsequently, the revenue and EBITDA market yields a rich and diverse investable neurial spirit and the drive for excellence are universe, wherein investors consistently secure growth of small buyout deals have surpassed often at their peak during the early stages of a those above $200 million of enterprise value by companies at discounts ranging from 10%-20% firm’s establishment. First-time fund managers nearly 1,000 basis points and 500 basis points, compared to large-cap equivalents. respectively. In conjunction with lower Notably, smaller deals have historically SEE BANKS ON NEXT PAGE

Pensions & Investments

January 15, 2024

OPINION PUBLISHER’S LETTER NIKKI PIRRELLO

50 looks good on you, Pensions & Investments; here’s what’s next

Directory in the Research s we begin a new Center, which features more year, I am always than 5,557 contacts. filled with a mix In 2024, we’ll continue to stay of gratitude, hope, focused on audience obsession enthusiasm and and you’ll see us lean into curiosity reflecting on coverage areas that resonate accomplishments from the with readers, including expandprior year and am excited ed coverage of private markets, about what lies ahead. It as well as the launch of a new seems an appropriate time to Private Markets conference in share some gratitude with April, focused coverage on you, our readers, and with the Nikki Pirrello is emerging and diverse managers amazing team at Pensions & president and and a new newsletter that Investments for the incredible publisher of Pensions debuted Jan. 10 featuring the accomplishments we & Investments. latest legal and regulatory achieved in 2023 — the year coverage — This Week in we celebrated our 50th Washington by Brian Croce, our Washinganniversary. It is our goal to inform, engage, ton bureau chief. connect and inspire our audience, so with that I’ll share some highlights as well as some of the great initiatives we have Engage: In 2023, we tested new formats to planned for 2024. engage our audience, launching Twitter Spaces interviews and LinkedIn Live interviews with leading economists and Inform: In 2023, we continued to evolve investors, reviving our Face-to-Face series our newsroom to better serve our readers that brings you deep-dive interviews with and made “audience obsession” our mantra titans in the asset management and for how we deliver our reporting, including allocator realm, and creating live blogs story selection, how we package stories, from Milken and some of our top industry when we deliver you the news and how conferences to keep you abreast of you’re receiving it: newsletters, website, up-to-the-minute news from key industry print or social. Our team produced more events as they unfolded. than 4,000 daily stories and charts in 2023, In 2024, you’ll see us continue to including nearly 1,100 stories on searches experiment with new formats and channels and hires, representing nearly $55.2 billion to bring you insights from thought leaders in searches and nearly $385.9 billion in throughout the industry. We’d love to hear if hires, and continued to build our People

OTHER VIEWS CHARLES E.F. MILLARD

Proposed fiduciary rule shows need to consider alts in target-date funds

also applies to retirement he Biden administraplan advice. This will bring tion recently proposed heightened scrutiny to all a new fiduciary rule. It kinds of recommendations is designed to lead to made by advisers, including greater protections for advice regarding the assets employers and their employees. included in target-date funds. There will be plenty of debate In exercising this fiduciary and comment before the rule is duty, consultants and other finalized, and there will surely advisers should seriously be court battles for years to consider the use of alternative come. This continues the investments. Alternative assets back-and-forth and litigation Charles E.F. Millard may not be right for the that has existed since the new is the former director do-it-yourself 401(k) menu, fiduciary rule was originally of the U.S. Pension but they are entirely appropriproposed by the Obama Benefit Guaranty ate for professionally managed administration in 2015. In the Corp., and a senior target-date funds. The meantime, however, any adviser for Ares Department of Labor made iteration of the fiduciary rule Management. He is this clear in advisory letters in — including current fiduciary based in New York. June 2020 and December 2021. standards — should lead to the And rightly so. There are increased use of alternative many arguments in favor of the use of alterassets in 401(k) plans and other defined native assets in target-date funds inside DC contribution retirement plans. Fiduciary plans. High-net-worth investors have this duty requires that retirement plan advisers access through their portfolios; why not the strongly consider using alternative assets middle class 401(k) participant? The in the DC plan. employer can use these investments in its For years, politicians and regulators defined benefit plan (assuming it still has have battled over a simple question: In what situations must an adviser put clients’ one); why not allow the DC participants the same advantage? And with the declining best interest first? Disputes about this number of public companies and the topic range from fees to the recommendaincrease in the number of companies tion of “house” products, conflicts of owned by private equity firms, shouldn’t DC interest, the nuances of five-part tests, and participants have access to this larger competing DOL and SEC regulations. The investable universe? argument is often focused on an individual These are all good points, but they do not adviser’s investment advice to individual go to the heart of the fiduciary rule. The investors. But the recently proposed rule is fiduciary duty requires a best-interest-of a reminder that this fiduciary obligation

there are other formats you’d like to see our team test in 2024. Podcast, anyone? Let us know your ideas!

Connect: In 2023, we created new opportunities for global asset owners to connect face-to-face and share insights and ideas. We launched the Nordics Pension Fund Tour, taking pension fund CIOs from across the globe to visit large and innovative funds in Denmark. This new tour supplemented existing tours in the U.K. and in the Netherlands, and these all form an important component of the P&I WorldPensionSummit. Based on your feedback, I know these visits spurred incredible conversations as well as lasting friendships and collaboration. In the U.S., we hosted our inaugural Public Funds conference along with 13 other conferences. In 2024, we’ll be evolving the conference, adding a special pension fund tour in the U.S. And as I noted earlier, we’re launching a Private Markets conference and adding some smaller roundtables for specific segments of the industry. In all, we have 15-plus events lined up to provide face-toface connection and collaboration with key investors across the investment and retirement landscape. Inspire: In 2023, we launched our inaugural Influential Women in Institutional Investing awards. With more than 220 the-participant standard for anyone who is advising a plan sponsor about what investments to make available in the DC plan. So if there is a class of investments that demonstrably increases diversification and therefore can enhance returns and /or mitigate risk, then a fiduciary that is properly carrying out its fiduciary duty must certainly include consideration of those categories of investments in its advice. Numerous studies indicate that alternative investments are likely to enhance outcomes. For example, a 2018 policy report written by Willis Towers Watson for the Georgetown Center for Retirement Initiatives concluded that a target-date fund that included a modest allocation to alternative assets would support 11-19% greater income in retirement. A 2019 academic paper sponsored by the Defined Contribution Alternatives Association modeled thousands of portfolios using actual asset returns and reached two important conclusions. First, returns are consistently higher for portfolios that incorporate private equity funds and, second, that Sharpe ratios are consistently higher for portfolios with private equity funds. And last year, the Defined Contribution Institutional Investment Association published a paper that explained that private real estate has a low correlation to traditional investments and enhances risk-adjusted return. Alternative assets sometimes have higher fees, and some advisers may feel that it is their fiduciary duty to avoid these fees at all costs. They may feel that they must select the lowest-fee option, and that will satisfy their fiduciary duty. This is wrong. The real fiduciary measure should be the likely risk-adjusted performance after fees. As a fiduciary, which would you recommend: an investment with an expected gross return of 7.5% and a net return of 7%? Or one with an expected SEE MILLARD ON PAGE 29

nominations and 65 honorees, we had an incredibly inspiring inaugural class and produced a special report on the winners that drove our biggest single day of traffic on record. On Sept. 14, nearly 300 attendees gathered to honor these deserving women. And, we rang the opening bell on the New York Stock Exchange to help mark this great occasion! In 2024, we plan to grow the program and add partnerships that will allow us to bring in more women who are early, or even pre-career, to learn from those who have achieved great success. We support continuing to build the pipeline to encourage more women to seek this industry as a career destination, and build long and rewarding careers. Nominations for the 2024 Influential Women in Institutional Investing awards will open at the end of January. Please take the time to nominate a deserving and inspiring woman. Once again, thank you to our loyal readers who helped us celebrate our 50th anniversary last year. We are looking forward to serving you for the next 50 years! And thank you to the P&I team for a year of incredible work and dedication. I am so excited to see all we’ll accomplish in 2024. Sending everyone wishes for health, happiness, prosperity and a continued curiosity to push ourselves and our industry forward. As always, please share your thoughts and ideas with me at npirrello@pionline.com. n

Banks CONTINUED FROM OPPOSITE PAGE

have typically undertaken substantial career risks, leaving behind both stability and substantial economics at their prior firms. Second, emerging managers are highly aligned with limited partners because the outcomes of their early funds will typically determine their ability to raise future capital. First-time managers often forgo cash compensation in their early years, as the management company generally operates at a deficit. Personal wealth creation and sustained viability of their firms hinge on their ability to generate outsized returns, thereby earning carried interest. This establishes a robust alignment of interests with investors in the fund. Finally, supporting a manager early in its life cycle can yield strategic advantages. The goodwill generated by early support often opens doors to greater opportunities, such as participating in a founders’ class or negotiating favorable terms, including access to fee-advantaged co-investments. As emerging managers establish themselves as proven brands, their funds frequently face capacity constraints, especially for new investors. Due to a unique combination of exceptional training, motivation and alignment, emerging managers are poised to produce outsized returns through the implementation of a tailored and specialized approach to the lower middle market. They ride a strong tailwind due to favorable competitive dynamics, as lower middle market private equity is the sole industry where the best competition leaves each year to move up market. n This content represents the views of the author. It was submitted and edited under Pensions & Investments guidelines but is not a product of P&I’s editorial team.

January 15, 2024

Pensions & Investments

BY THE NUMBERS Pension risk transfer activity

Monthly corporate funding ratio

Total completed transactions (billions)

Most recent transactions (millions)

$90

Type

Other $80 $70

Total transactions:

$60

Lump-sum acceptance

Total transactions:

■ ■ ■ ■ ■ ■ ■ ■ ■ ■ ■ ■ ■

Total transactions:

Lump-sum offer

$50 $40

Longevity swap

$30

Buyout

$20

Buy-in

$10 $0

2019

2020

2021

2022

Sponsor

110%

December 2023: 105.1%

Assets

Date

Just Group

Jan. 8

Church of England

Dec. 18

$31

Thales Group

Dec. 1

$3,400

Unisys Corp.

Nov. 27

$250

The Co-operative Group

Nov. 24

$5,000

Walgreens Boots Alliance

Nov. 24

$6,000

MMC U.K.

Nov. 16

$2,500

Deutsche Bank

Nov. 13

$619

Air France

Nov. 6

$40

Newell Brands

Oct. 30

$168

Bayer Corp.

Oct. 27

$339

Owens Corning

Oct. 25

$291

Allegheny Technologies

Oct. 18

$1,770

105% 100% 95% 90% 85% 80% 75% 70%

For details on all recent pension risk transfers, go to pionline.com/ pension-risk-transfer.

2023

65%

2013 2014 2015 2016 2017 2018 2019 2020

2021

2022

2023

Trailing 12-month returns by asset class 2022

2023

January

February

March

April

May

June

July

August

September

October

November

December

January

February

March

April

May

June

July

August

September

October

November

December

S&P 500 23.3%

S&P 500 16.4%

S&P 500 15.6%

Real Estate 0.7%

Cash 0.1%

Cash 0.2%

Cash 0.4%

Cash 0.6%

Cash 0.8%

Cash 1.1%

Cash 1.5%

Cash 1.9%

Cash 2.2%

Cash 2.6%

MSCI ACWI ex-U.S. 3.0%

Cash 3.3%

S&P 500 19.6%

MSCI ACWI ex-U.S. 13.4%

S&P 500 15.9%

S&P 500 21.6%

MSCI ACWI ex-U.S. 12.1%

S&P 500 13.8%

S&P 500 26.3%

Real Estate 18.1%

Real Estate 10.6%

Real Estate 12.2%

S&P 500 0.2%

S&P 500 -0.3%

BB U.S. Agg -10.3%

S&P 500 -4.6%

High Yield -10.6%

High Yield -14.1%

High Yield -11.8%

High Yield -9.0%

High Yield -11.2%

Russell 2000 -3.4%

High Yield -5.5%

High Yield -3.3%

Cash 2.9%

S&P 500 2.9%

MSCI ACWI ex-U.S. 12.7%

S&P 500 13.0%

MSCI ACWI MSCI ACWI ex-U.S. ex-U.S. 11.9% 20.4%

MSCI EM 10.8%

MSCI ACWI ex-U.S. 9.3%

Russell 2000 16.9%

MSCI ACWI ex-U.S. 3.6%

High Yield 0.6%

Cash 0.1%

Real Estate -5.2%

S&P 500 -10.6%

High Yield -8.0%

S&P 500 -11.2%

BB U.S. Agg -14.6%

S&P 500 -14.6%

S&P 500 -9.2%

BB U.S. Agg -13.0%

High Yield -5.2%

Russell 2000 -6.0%

BB U.S. Agg -4.8%

S&P 500 2.7%

High Yield 0.0%

Russell 2000 12.3%

MSCI EM 8.3%

High Yield 7.2%

MSCI EM 11.7%

S&P 500 10.1%

High Yield 8.7%

MSCI ACWI ex-U.S. 15.6%

High Yield 2.1%

Cash 0.0%

High Yield -0.7%

High Yield -5.2%

High Yield -5.3%

High Yield -12.8%

BB U.S. Agg -9.1%

BB U.S. Agg -11.5%

S&P 500 -15.5%

BB U.S. Agg -15.7%

MSCI ACWI MSCI ACWI MSCI ACWI MSCI ACWI MSCI ACWI ex-U.S. ex-U.S. ex-U.S. ex-U.S. ex-U.S. -11.9% -16.0% -5.7% -7.2% -5.1%

High Yield 1.2%

MSCI ACWI ex-U.S. -1.4%

High Yield 9.1%

Russell 2000 7.9%

Russell 2000 4.7%

High Yield 10.3%

High Yield 6.2%

Cash 5.1%

High Yield 13.4%

BB U.S. Agg -8.5%

BB U.S. Agg -8.2%

Real Estate -13.5%

Real Estate -9.8%

Real Estate -16.6%

Real Estate -22.4%

Russell 2000 -18.5%

BB U.S. Agg -12.8%

S&P 500 -18.1%

S&P 500 -8.2%

S&P 500 -7.7%

BB U.S. Agg -0.4%

BB U.S. Agg -2.1%

Cash 3.7%

High Yield 4.4%

Cash 4.4%

Russell 2000 8.9%

Cash 4.9%

MSCI EM 4.2%

MSCI EM 9.8%

Russell 2000 -14.3%

Cash 0.0%

MSCI ACWI MSCI ACWI ex-U.S. ex-U.S. -0.4% -1.5%

Russell 2000 -1.2%

BB U.S. Agg -2.6%

BB U.S. Agg -4.2%

MSCI ACWI MSCI ACWI ex-U.S. ex-U.S. -10.3% -12.4%

Global exU.S. fixed income -18.8%

Russell 2000 -17.9%

Russell 2000 -23.5%

Global exU.S. fixed income -24.6%

Russell 2000 -13.0%

Global exU.S. fixed income -18.7%

BB U.S. Agg -8.4%

BB U.S. Agg -9.7%

MSCI EM -10.7%

Russell 2000 -3.6%

Russell 2000 -4.7%

MSCI EM 1.7%

Cash 4.1%

MSCI EM 1.3%

Cash 4.6%

Global exU.S. fixed income 2.6%

Global exU.S. fixed income 2.5%

Real Estate 9.8%

BB U.S. Agg -3.0%

Russell 2000 -6.0%

Russell 2000 -5.8%

Global exU.S. fixed income -15.5%

Global exU.S. fixed income -16.7%

MSCI ACWI MSCI ACWI MSCI ACWI ex-U.S. ex-U.S. ex-U.S. -19.4% -15.3% -19.5%

Global exU.S. fixed income -24.8%

MSCI ACWI ex-U.S. -24.7%

Real Estate -16.9%

MSCI EM -20.1%

MSCI EM -12.1%

Real Estate -14.4%

Global exU.S. fixed income -10.7%

Global exU.S. fixed income -3.9%

Global exU.S. fixed income -6.5%

BB U.S. Agg -0.9%

Global exU.S. fixed income -2.5%

Global exU.S. fixed income 0.6%

Global exU.S. fixed income 3.4%

BB U.S. Agg 0.4%

BB U.S. Agg 1.2%

Global exU.S. fixed income 5.7%

MSCI EM -7.2%

Global exU.S. fixed income -7.1%

Global exU.S. fixed income -7.9%

Russell 2000 -16.9%

Russell 2000 -25.2%

Global exU.S. fixed income -18.5%

MSCI EM -21.8%

MSCI ACWI ex-U.S. -25.2%

Real Estate -24.7%

MSCI EM -17.4%

Russell 2000 -20.4%

Real Estate -12.6%

MSCI EM -15.3%

Russell 2000 -11.6%

MSCI EM -6.5%

MSCI EM -8.5%

Global exU.S. fixed income -1.8%

BB U.S. Agg -3.4%

BB U.S. Agg -1.2%

Real Estate 2.8%

Real Estate -4.1%

Real Estate -2.0%

BB U.S. Agg 5.5%

Global exU.S. fixed income -7.9%

MSCI EM -10.7%

MSCI EM -11.4%

MSCI EM -18.3%

MSCI EM -19.8%

MSCI EM -25.3%

MSCI EM -20.1%

Global exU.S. fixed income -22.0%

MSCI EM -28.1%

MSCI EM -31.0%

Global exU.S. fixed income -19.8%

Real Estate -23.6%

Global exU.S. fixed income -14.2%

Global exU.S. fixed income -16.7%

Real Estate -20.3%

Real Estate -14.3%

Real Estate -14.8%

Real Estate -3.9%

Real Estate -6.5%

Real Estate -4.2%

BB U.S. Agg 0.6%

Russell 2000 -8.6%

Russell 2000 -2.6%

Cash 5.2%

Expectations rise that Fed will reverse course Rate expectation for the Fed’s March meeting

Federal Reserve

62.3%

  As of As of

Dec. 5

53.5%

35.9%

Jan. 4

33.8%

9.2% 4.0%

Rate forecasts

1.5%

0.0%

4.75% to 5.00% 5.00% to 5.25% 5.25% to 5.50% 5.50% to 5.75%

6.0%

5.5%

5.0%

4.5%

4.0%

3.5%

3.0%

2.5%

2.0%

1.5%

1.0%

0.5%

0.0%

2024

Sources: P&I Research Center; NISA Investment Advisors; Bloomberg LP; CME FedWatch Tool; Federal Reserve

2025



Median estimate

Private economists

2026

0.0%

Q1 2024

Q2 2024

Q3 2024

Q4 2024

Q1 2025



Low estimate

Q2 2025



High estimate

Q3 2025

Q4 2025

Pensions & Investments

January 15, 2024

EXCHANGE-TRADED FUNDS

Record issuance in ’23, but new ETPs struggle for assets By ARI I. WEINBERG Experimentation has always been the lifeblood of the exchange-traded product ecosystem, helping to build a market that manages $8.1 trillion in assets across 3,366 products in the U.S., according to data provided by CFRA Research. But, more recently, creative destruction has taken over as the mantra. Last year, a record 544 exchange-traded products hit the market. At the same time, issuers closed 249 products, second highest to the record 277 closures in 2020. The flurry of new issuance has included well-established active managers “playing catch-up by both launching new funds and converting traditional mutual funds to exchangetraded funds,” said Aniket Ullal, senior vice president and head of ETF data and analytics at CFRA Research. Of all launches in 2023, 63%, or 343 products, were actively managed, 63% of which invested primarily in equities and 21% invested primarily in fixed income. Conversions, however, have changed the calculus of assessing a successful fund launch. Seventeen fund issuers, including Fidelity Investments, J.P. Morgan Asset Management and Bridgeway, converted a total of 34 mutual funds to ETFs in 2023. Yet only a handful of those funds, led by the $1.1 billion EA

Even established isBridgeway Omni Smallsuers routinely prune Cap Value ETF and the their offerings. Invesco, $365 million JPMorgan 550 whose ETF portfolio grew Equity Focus ETF, man500 through a handful of aged to attract any sigLaunches acquisitions, has eliminificant inflows after 450 Closures nated 105 products since conversion. 400 2017. BlackRock, the Some other active 350 market leader with over products were also a sec300 400 ETF offerings in the ond bite at the apple, of U.S., has cut 80 funds. sorts. BlackRock intro250 In a significantly highduced 10 LifePath funds 200 er interest rate environin October, bringing back 150 ment than recent years, target-date and in-re100 languishing ETFs betirement ETFs roughly come expensive, unnine years after shutter50 movable product for the ing its first attempts. Col0 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 trading firms that form lectively, the funds held Source: CFRA Research the backbone of intra$33 million at year-end. day ETF liquidity and And 15 years after collateralized loan obligations were dragged than $10 million in assets as of Dec. the creation and redemption of ETF shares in the primary market. through the mud during the financial 31, according to CFRA. “Liquidity provider balance sheets “The pace of launches has been crisis, PGIM, BlackRock and Panagram Structured Asset Management quite intense,” said Ben Slavin, glob- have shrunk,” said Slavin, “and an launched dedicated CLO ETFs, the al head of ETFs for BNY Mellon As- ETF without meaningful assets or most successful of which was the $179 set Servicing, “but the inability of trading volume is not something that million Panagram BBB-B CLO ETF, products to scale can put a strain on a market maker can profit from.” Several trading firms contacted adding $170 million in net inflows the ecosystem.” Slavin said that there is an in- for this article declined to comment. since its January 2023 launch. While many 2023 launches and creasing amount of diligence re- Market makers and authorized parclosures were calendar-based, such quired, especially for new issuers. “Do ticipants have been avoiding the as yearly target maturity bond ETFs they understand the structure? Will spotlight amid the expectations of a or options-based ETFs on a month- their investment strategies fit into an bitcoin ETP. In the crowded ETP market, ly cadence, seven new products ETF structure? What do their mardidn’t even survive the year. Of the keting and distribution plans look where every basis point of edge matrest of the 2023 launches that made like? Will they make a reasonable ters, even securities exchanges are rethinking their approach to supit to this year, 218, or 40%, held less attempt to raise assets?” he asked.

U.S. ETP launches and closures

porting products. The vast majority of U.S. ETPs are listed on the all-electronic NYSE Arca, which has an incentive and monitoring program for so-called lead market makers to facilitate liquidity. “We help the ETF issuer determine which LMM could be the best fit for their upcoming product suite,” said Douglas Yones, head of exchange-traded products at NYSE. “We also spend time educating new issuers to help them understand the role of and expectations they should have for their LMM firm,” he said. A handful of issuers have also moved some listings to the New York Stock Exchange, where floor brokers can help smooth the opening and closing trades. On Jan. 10, nine Strive equity ETFs launched in 2022 and 2023 moved to NYSE from NYSE Arca and Nasdaq listings. In a LinkedIn post,Yones wrote that ETFs switching to NYSE experienced a 43% reduction in trading spreads, to around 17 from roughly 31 basis points due to the additional oversight and judgment from a designated market maker. (Heavily traded products tend to have 1- to 2-basis-point spreads.) Whether launches and closures will continue apace into this year will largely be a function of the market. CFRA’s Ullal notes that a rising equity market, such as 2023, tends to attract more new issues. n

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January 15, 2024

Pensions & Investments

ESG ROUNDUP

Maine PERS divesting fossil fuels but report warns of costs The Maine Public Employees Retirement System, Augusta, cut its fossil-fuel investments to 6.5% of total assets in fiscal year 2023 from 7.8% in fiscal year 2022, said a MainePERS report tracking progress in the state law calling for divesting fossil fuel holdings. The report also warned that eliminating all fossil-fuel investments by the law’s Jan. 1, 2026, deadline would be cumbersome, complicated and costly. “Achieving and maintaining a fossil fuel-free portfolio by 2026 would require both disposing of significant existing investments as well as making fundamental changes to MainePERS’ investment approach,” according to the report, issued at the Dec. 14 MainePERS trustees’monthly meeting. The law, enacted in 2021, didn’t mandate zero fossil-fuel investments. For both divesting and halting purchases, the law doesn’t preclude “de minimis exposure” of fossil-fuel investments by the pension fund or by the state. The law doesn’t define “de minimis exposure,” but it says MainePERS must apply “sound investment criteria (that is) consistent with fiduciary obligations.” The pension system held approximately $1.22 billion in fossil fuel assets as of June 30 when total plan assets were $18.8 billion. A majority of the pension system’s fossil fuel exposure is in private markets — $786.8 million for FY 2023 vs. $962.3 million for FY 2022. Public market exposure was $428.4 million for FY 2023 vs. $445.5 for FY 2022. The most challenging investments are those in private markets, primarily infrastructure and private equity. “Complete removal of fossil fuel exposure would require MainePERS to sell its entire interest in any private market fund containing a fossil fuel asset,” the report said. Based on an analysis by NEPC, the pension system’s divestment consultant, MainePERS “could expect to incur discounts on the sale of its partnership interests ranging from 10% to 60% depending on the asset class and fund characteristics,” the report said. “This suggests a minimum discount of over $100 million,” the report said. “The system would also incur substantial legal and other costs associated with the transfer of partnership interests.” MainePERS made its last private markets commitments to investments with a fossil fuel focus in 2017. Exposure to fossil fuels within private markets will decrease “over time due to the runoff of historical commitments to fossil fuel-focused strategies and the growth of infrastructure investment opportunities related to the energy transition,” the report said. Other public market investments are through commingled funds. “In these cases, divestment would require exiting these commingled vehicles and redeploying capital into SMAs where the capital could be directly invested into the non-fossil fuel constituents of each benchmark index,” the report said. “In addition to the transactions costs associated with liquidating and

then redeploying capital, SMA creation involves custodial and legal costs, in particular for those accounts holding non-U.S. assets,” the report said. Excluding fossil-fuel investments from the MainePERS public markets portfolio “would result in a lower level of diversification,” thus increasing investment risk, the report said. If MainePERS chooses a more customized strategy of public markets investing to avoid fossil fuels, management fees would rise and portfolio servicing costs would increase, the report said.

Global ESG bonds hold steady in 2023 Global ESG bonds held their own in 2023, according to Barclays research released Jan. 8 that also found them outperforming ESG-labeled equity funds. Barclays’ analysis of fund flows that help gauge investor demand and allocations found that in fiscal year 2023 flows into ESG equity funds were weaker than in bond funds. While still short of peak 2021 levels of $102 billion, ESG bond flows totaled $31 billion in 2023, up from 2022’s $21 billion. Performance varied to a high degree, but most ESG bond funds saw positive net inflows and all of them surpassed the broader market, Barclays researchers found. With few exceptions, “ESGthemed funds displayed a level of resilience despite the downbeat picture painted in recent media reports,” they said, and by the end of 2023, fixed-income ESG funds represented 6.1% of the total fund universe assets under management, up from 5.1% at the end of 2022. ESG equity funds had a less successful year, with inflows of just $17 billion or 1.2% of AUM, the lowest since 2017. While the inflows were higher than the broader market’s 0.1% of AUM, U.S. ESG funds saw $7 billion in outflows, notable due to two large redemptions that were not named in the report. ESG bond issuance should reach $825 billion in 2024, “relatively consistent with FY22 and FY23E, but well below the 2021 record high,” and a key topic will be green bonds that address emissions, Barclays analysts said in the research report on ESG bonds.

NYC system puts $10.5 billion toward climate New York City Retirement Systems reported $10.5 billion in climate solutions investments for the fiscal year ended June 30, according to data provided city comptroller Brad Lander. These investments account for 4.1% of the total assets of the $241.7 billion city pension system, and they represent a near doubling of the $5.6 billion in climate solutions for the fiscal year ended June 30, 2022. “We’re thrilled to be growing our climate solutions investments at the scale necessary to safeguard the long-term future of the systems’ portfolio and our planet,” Lander said in a Dec. 19 news release. Land-

Institutional investors find ESG labels confusing According to responses to Capital Group’s ESG Global Study 2023, published in October, more than half of institutional investors said regional differences in fund labels make it challenging to pursue their ESG objectives. A majority also claimed they examine an ESG fund’s underlying strategy rather than the label assigned based on regulations. Investors’ views on ESG fund labels Neutral

Agree

Disagree

We pay more attention to ESG’s underlying strategy than its label

56%

34% 10%

Regional differences in fund labels make it more challenging for investors to pursue ESG objectives

52%

41% 7%

Our firm has created its own ESG definitions

39%

35%

27%

Our firm has created its own approach to categorizing ESG funds

35%

37%

28%

Based on institutional firms’ responses. Data may not sum to 100% due to rounding. Source: Capital Group

er is custodian and a trustee of the five independent pension funds in the city pension system. The climate solutions portfolio “includes investments in companies that derive revenue from climate mitigation, adaptation and resilience activities, such as renewable energy, energy efficiency, pollution prevention and low-carbon buildings,” the news release said. The pension funds’aggregate goal for climate solutions investments is $50 billion by 2035, the release said.

BlackRock hit by ESG suit from Tennessee AG The state of Tennessee filed a lawsuit against BlackRock for allegedly breaching consumer protection laws by failing to disclose the extent of its ESG investing activities. The civil suit, filed on Dec. 18 by Tennessee Attorney General Jonathan Skrmetti, argues that BlackRock’s continued membership in two climate “activist groups” — Climate Action 100+ and the Net Zero Asset Managers initiative — means that the firm has promised to pursue ESG investing goals across all of its $9.1 trillion in assets under management, not just in ESG-oriented funds, thus “misleading” investors who “do not want to invest in assets that are or will be used to push ESG.” In addition to its membership in the groups, Skrmetti argues in his lawsuit that BlackRock’s “extensive commitment to fulfilling ESG aims” is pursued through the firm’s shareholder voting record and in its private engagement with companies. This lawsuit is the latest in a series of shots fired against BlackRock by red state politicians, who have attacked the firm and its CEO Larry Fink for their stance on ESG investing and have collectively pulled billions of dollars from BlackRock’s

KLP’s divestments equated to about 250 million Norwegian kronor ($23 million) if the pension fund’s index strategies were to track the MSCI Emerging Markets Index precisely, a spokesperson said. Oil and gas company Saudi Aramco — which is 90% owned by Saudi Arabia — was divested from due to “dominant state ownership and weak plans for transition,” a document published by the pension fund said. The other 11 companies, based in Saudi Arabia, the United Arab Emirates, Kuwait and Qatar, were all telecommunications and real estate firms. KLP’s document said that, based on analysis and reviews of data and information obtained from sources including conversations with public officials, human rights organizations and international indexes that rank Gulf States based on civil and political rights and working conditions, “KLP has identified two sectors in the Gulf States where we consider that there is a generally unacceptable risk that KLP may contribute to human rights abuses. These sectors are telecommunications and building, construction and property.”

Independent Governance Group buys IC Select

management in retribution for what they have described as an unfair attack on the U.S. energy industry. A representative for BlackRock denied the validity of the lawsuit’s claims in a statement. “We reject the Attorney General’s claims and will vigorously contest any accusations that BlackRock violated Tennessee’s consumer protection laws. Contrary to the Attorney General’s claims, BlackRock fully and accurately discloses our investment practices and our approach to proxy voting,” the representative said.

Independent Governance Group, a retirement trustee and governance services firm, acquired Edinburgh-based IC Select, a provider of oversight and selection services to pension funds. IC Select monitors investment consultants and outsourced CIOs in the U.K. The deal adds complementary skills to IGG, which provides trustee services to corporations, such as acting as professional corporate sole trustee, chair of trustees and co-trustees. The firm has more than 170 staff and works with more than 374 pension funds with a combined £350 billion ($439 billion) in assets.

Impax buys fixed-income manager Absalon

North Carolina says no to investment in Ben & Jerry’s

Impax Asset Management agreed to acquire the assets and investment team of Absalon Corporate Credit, a European fixed-income manager owned by Danish manager Formuepleje Group. Absalon had about £351 million ($447 million) in assets under management across two fixed-income strategies — global high yield and emerging markets corporate debt — as of Dec. 31. The strategies are set up as Luxembourg-based SICAV funds and Danish-based funds. The four-person team will join Impax. Financial terms were not disclosed, a spokesperson for Impax said. Impax had about £39.1 billion in assets under management as of Dec. 31.

North Carolina Treasurer Dale R. Folwell announced Dec. 21 that his office added Ben & Jerry’s Homemade to a list of companies deemed as boycotting Israel with which state entities, including the state’s retirement system, cannot invest or contract. The state’s 2017 law, “Divestment from Companies Boycotting Israel,” prohibits the $117.9 billion North Carolina Retirement Systems, Raleigh, or the Department of State Treasurer from investing in any company engaged in a “boycott of Israel.” It also bars state agencies from contracting with such companies, which are named in a list compiled by the treasurer’s office. Folwell said in a news release that adding Ben & Jerry’s to the list also meant the law would apply to its parent company, Unilever, and Unilever’s subsidiaries. Therefore, Folwell ordered the divestment of $40 million in Unilever assets. “This is particularly important in this case as we have witnessed the atrocities perpetrated against the Israeli people,” Folwell said, referencing the Israel-Hamas war.

Norway’s KLP divests from Saudi Aramco, 11 others Kommunal Landspensjonskasse, Oslo, divested from 11 firms in the Middle East due to human rights concerns, and from Saudi Aramco for energy transition worries and the firm’s “close ties to a dominant state owner.”

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January 15, 2024

Pensions & Investments

OUTLOOK DEFINED CONTRIBUTION

Diversity challenges plan sponsors to up their game Sponsors multitasking, leaning into AI to win over their employees By MARGARIDA CORREIA Industry observers could call it the plan sponsor juggling act. As they look out on 2024, they expect plan sponsors will do more than merely help employees take advantage of their workplace retirement savings plans. Plan sponsors will also move to assist workers with things like student loans and emergency savings — all while attending to the usual business of making sure the plans offer the right investments, reflect the needs of the workforce and are competitive. The little things, experts say, will matter — especially to Generation Z, the most diverse cohort of American workers in history. Greg Ungerman, defined contribution practice leader at Callan, for instance, reminds plan sponsors that it might be time to roll out the 2070 target-date fund. “Those younger populations will start joining the workforce and you certainly want to be ready to have that target-date suite complete for those younger participants,” he said. In the end, the battle for plan sponsors boils down to making sure their plans remain competitive as the workforce grows increasingly complex, particularly with the onboarding of Gen Z, according to record keepers and other industry observers. Plan sponsors want to make sure that they offer a “competitive compensation and benefits offering” that will help them in retaining employees, said Jason Jagatic, head of global workplace thought leadership at Fidelity Investments.

Automakers pressure others

The agreement that General Motors, Ford and Stellantis reached last year with the United Auto Workers to increase their 401(k) employer contribution to an automatic 10% of worker pay will factor into many conversations about plan sponsor matching formulas, prompting some of them to increase their contributions, some experts said. “We expect that that’s going to put pressure on employers, particularly employers with union workforces, to consider how much they’re putting aside for retirement,” said Byron Beebe, global chief commercial officer for wealth solutions at Aon PLC, adding that workers may be willing to trade wages in return for higher contributions to retirement plans.

“As organizations moved from defined benefit to defined contribution plans, they really did, for the most part, reduce the amount that the employer’s spending on retirement programs, and this may be a shift back in the other direction,” Beebe said. Callan’s Ungerman added that while it’s hard to predict what sponsors will do, it will at least spur employers to ask questions about how employees value their retirement benefits relative to their compensation and whether employers “can do it better.” “I think time will tell, but it really makes for busier agendas from a retirement benefit perspective in the coming year,” he said.

Student loans and lineups

In a bid to help employees with financial wellness — and potentially boost employer recruiting and retention efforts — many employers will consider adding student loan matching and emergency savings provisions to their defined contribution plans as provided under the SECURE 2.0 Act of 2022, a massive package of legislation to improve retirement savings in the country, experts unanimously agreed. The student loan matching provision allows employers to make matching contributions for student loan repayments, meaning employees who were previously not contributing to their retirement accounts can now get a match if they’re paying back their student debt. The emergency savings provision allows employees to set aside $2,500 into an emergency savings account that is linked to their workplace retirement savings plan. “I think in 2024 plan sponsors will be spending a lot of time talking to their record keepers and talking among themselves as a committee about whether to add some of these provisions,” said David Stinnett, head of strategic retirement consulting at the Vanguard Group, referring to student loan matching and emergency savings. Aon’s Beebe sees especially strong interest among employers in student loan matching, even though not many appear to be implementing the provision for 2024. Because many employers already have programs to help employees with student loans, they’re trying to assess whether the 401(k) plan is the right place to provide student loan assistance, he said. In addition to determining whether student loan matching and emergency savings makes sense, plan sponsors will take stock of how employees are using the plan and analyzing their investment

workforce that today expects a personalized approach to retirement savings. AI could potentially come in and help make the process of personalization of benefits happen in a more meaningful way, he said. Jagatic added that almost half of Gen Z is non-white, the “largest number we’ve seen,” according to data from the Pew Research Center. Gen Z is also diverse in dimensions such as sexual orientation, gender identity and work arrangements, he said. “HR managers and leaders now have to deal with new levels of diversity that they hadn’t previously experienced,” he said, adding that AI could help in managing new workforce complexities. As such, Fidelity has invested in AI to create what Jagatic describes as “a more frictionless customer experience.” Fidelity, for example, uses AI to analyze natural language, such REMINDER: Callan’s Greg Ungerman said now is a good time for plan sponsors to roll as text and speech, to answer cusout a 2070 target-date fund in their retirement plans to be ready for younger workers. tomer questions faster. It also incorlineups to make sure they have the the investment managers in the line- porates AI into its workplace offerup,” he said, explaining that they’ll ings to personalize the participant right offerings. Industry experts do not expect scrutinize the managed account’s experience by predicting participlan sponsors to make any major methodology, ongoing performance pants’ needs or preferences. changes to their plan lineups and are and how it interacts with participants. “This could be used in places such Otherwise, he said, managed ac- as recommending educational conunlikely to replace or supplement their stable value funds with money counts could be “expensive tar- tent, planning and guidance experimarket funds following a period of get-date funds.” ences or creating international camTarget-date funds will also be paigns,” Jagatic said. high interest rates and inflation that carefully weighed given their pervamany now expect to subside. Vanguard, too, sees a strong role “Once you put something in the siveness in defined contribution for AI as it works with plan sponsors fund lineup, you need to really think plans. to improve participant outcomes. “Sponsors should continue to foabout it being a long-term option,” “We use AI and machine learning Aon’s Beebe said, referring to money cus on making sure the fund they to drive better participant outcomes, market funds in plan investment have fits the needs of their plan,” including through an AI-powered Vanguard’s Stinnett said, explaining chatbot and machine learning-drivlineups. When interest rates en personalization that fall and money market nudges participants to ‘HR managers and funds no longer have a their next best action,” leaders now have to yield advantage over said Dina Caggiula, stable value funds, plan head of participant exdeal with new levels sponsors might regret perience at Vanguard. of diversity that they having added them to Plan sponsors will the lineup, he said. look to their record hadn’t previously Holly Verdeyen, U.S. keepers to adopt artifiexperienced.’ defined contribution cial intelligence in leader at Mercer their retirement plans FIDELITY INVESTMENTS’ agreed, saying the yield and will evaluate their JASON JAGATIC advantage of money AI capabilities as part market funds is very of the vendor assessthat they should understand the tar- ment and selection process, Mershort-lived. “This is going to be a very short- get-date fund’s glidepath methodol- cer’s Verdeyen said. lived phenomenon where money ogy, fund expenses and “the rigor It’s important that record keepers market funds have a higher yield that goes into policy changes to the figure AI into their technology road target-date fund.” than stable value,” she said. maps, she said, adding that preoccuWhile plan sponsors are unlikely pations over the implementation of to change their investment options, AI on the horizon SECURE 2.0 provisions may have they will look at the engagement levSeveral observers anticipate that sidetracked some of those plans. els of target-date fund users as well plan sponsors will look to artificial “If they’re two years behind their as the do-it-yourselfers and those intelligence to gain greater insight technology road map, that would be who use managed accounts, said into their participants and give them a concern, but if they’re six months Callan’s Ungerman. behind because they had to stop to a more personalized experience. Plan sponsors will re-evaluate Fidelity’s Jagatic sees a particular- implement some of these required managed accounts “in a thoughtful ly strong need for artificial intelli- SECURE 2.0 provisions, that would manner just like they do the rest of gence in an increasingly diverse be deemed reasonable,” she said. n

Pensions & Investments

January 15, 2024

OUTLOOK ASIA

China too big to ignore but policy will dictate growth Qilai Shen/Bloomberg

Institutions stay committed to China but know various factors will determine outlook By NATALIE KOH China’s growth outlook remains murky, but global investors can’t afford to ignore the world’s second-largest economy, although factors such as domestic policies, geopolitical developments and consumer sentiment will decide its growth trajectory, investment managers said. They also argue that upcoming restrictions by the U.S. and its partners on the flow of certain technologies to China has bifurcated the world scientific community and will hurt the global economy, even as some investors outside of the West, such as the Middle East, continue to be bullish on the country. “The nominal growth outlook for China remains fairly subdued. That’s in stark contrast to, for example, India, or, for example, Japan, where you’re seeing very interesting, upbeat, supportive, nominal growth,” said Ben Powell, Singapore-based managing director and chief investment strategist for Asia-Pacific at the BlackRock Investment Institute, during a media outlook briefing. “China will continue to see relatively low real growth and relatively low inflation … as China continues to deal with different but significant challenges both overseas and domestically,” he added. A government clampdown in 2020 prevented over-leveraged property developers from borrowing further, sparking off a real estate crisis in China, and dampening consumer sentiment as households continue to hoard savings. Alarm bells also have sounded over heavily indebted local governments, and Moody’s on Dec. 5 lowered the outlook for China’s A1 debt rating to negative from stable. In August, U.S. President Joe Biden, citing national security, issued a ban on outward investment to China and the special administrative regions of Hong Kong and Macau that included advanced computing chips and microelectronics, quantum technology and artificial intelligence. Pension funds in the U.S. also have felt the pressure. The Federal Retirement Thrift Investment Board, Washington, on Nov. 14 voted unanimously to change the benchmark for its international fund to an index that excludes China and Hong Kong. Global investment managers agreed that domestic policies will have a big part to play in providing support to growth and investment potential. “At the federal level, the government has the firepower to do a little bit more support. But the government is also clearly very focused on managing financial risks. So I think quite understandably, authorities in China are being very cautious in exactly how much stimulus they want to put into the economy,” Powell said. BlackRock had $9.1 trillion in assets under management as of Sept. 30. Consumer and investor sentiment toward China has also been subdued over the past year, and it is unclear if that will change in 2024, the investment managers agreed. Many institutional investors are underallocated to China at the moment, so the question is when investors will re-enter the market, said Vivian Tang, the Hong Kong-based head of institutional clients in Asia-Pacific at abrdn, in an interview. She added that she does not have a crystal

Bhatia said. On the policy front, China has gotten smart about where it provides capital support, he observed. “I think for the first time, the government had realized that there are going to be zombie businesses that they don’t want to use good capital to support,” he said. “They have believed that for the public good, you need to keep certain things going. And they did that a little bit with the banks. I think they’ve become selective of which banks to support and which banks to let go of because if they see a structural issue in a region or the balance sheet, they are realizing there’s going to be pain,” he said. The Chinese government did the same with property developers, but in recent years decided to be selective with the developers they want to bail out. China Vanke, the second-largest developer in the country in terms of sales, received funding from a state-backed shareholder in November after concerns about its liquidity were raised in October. However, other large property companies such as Country Garden Holdings and China Evergrande Group have not been given such help even as they defaulted on some of their debt. Principal is taking a cautious approach to China’s macro outlook, but is optimistic on the micro front, as it continues to look at individual sectors to spot opportunities, said Howe Chung Wan, head of Asia fixed income. Even amid a cyclical slowdown, he is hopeful for a bounce in certain sectors such as electronics, which had a good run during the pandemic but has since reached “a very low bottom in the electronics cycle,” he said. “And then the world is starting to realize actually the U.S. economy feels relatively OK. And so this bounce that we are seeing is fairly cyclical in China. So we’re hopeful about that,” he said. He also believes that the dust is settling for the technology sector in China. For instance, even though Alibaba Group pulled the plug on the initial public offering plans for its cloud business, other parts of the business are moving ahead with funding plans, he said. In September, Alibaba’s logistics company

Superannuation funds in Australia will continue to face pressure on participant fees and investment performance, which will drive more mergers in the coming year — albeit at a slower pace, industry insiders said. They’ll also continue to move more of their investment management in-house, but sources question whether the touted benefits of in-house management outweigh the cons of being more opaque and teams lacking skills in specialized areas. “There was a steady stream of mergers before 2021 and the introduction of the Your Future, Your Super performance test fast-tracked that merger activity, with a number of funds forced to merge after they failed the test,” Mano Mohankumar, senior investment research manager at superannuation research and analytics provider Chant West, said in emailed comments. He believes there will be more mergers in the coming years, but it will likely be at a slower pace than it has been over the past two to three years. In 2021, the Australian MORE COMING: Mano government rolled Mohankumar thinks the mergers will continue out new regulabut at a slower pace. tions on superannuation performance called the Your Future, Your Super review, which made super funds’ default products subject to an annual performance test and created a comparison tool for the general public to weigh their super options, among other things. “Now that (the) performance test in its current form has been in place for three years, we expect very few other funds will fail the test as those that are close to failing are managing their investments to ensure they don’t fail the test,” said Mohankumar, who is based in Sydney. Funds have merged to tap economies of scale and moved to internalize more of their investments in a bid to improve cost efficiencies and performance. An estimated A$700 billion ($469.1 billion) to A$1 trillion of the A$3.5 trillion industry is managed internally, according to a September report by Frontier Advisors, which provides advice on over A$630 billion of assets across superannuation funds, charities, universities, insurers and the public sector. That amount has nearly doubled from five years ago, when the amount of internally managed funds was estimated at slightly less than A$400 billion, according to the report.

SEE CHINA ON PAGE 19

SEE SUPERS ON PAGE 20

IN PLAY: Consumer sentiment is just one factor institutional investors need to consider for China’s outlook.

ball that will predict when investor interest will return to China, but given China’s fundamentals and its importance in terms of global economic growth, investors cannot ignore it. “In terms of our approach, although a lot of investors are still concerned about the policies, growth prospects, domestic consumption, etc., from our perspective, our approach is really bottom-up. … From an absolute-returns perspective, we are still seeing a lot of interesting companies, (which) as an investor we are very comfortable to invest in and hold for the long term,” she said. For instance, even though near-term potential depends heavily on policies and external factors, long-term structural trends point toward domestic consumption as an area that presents opportunities from a bottom-up perspective, she said. She also added that benchmark-oriented investors such as pension funds that work on a relative return basis should also consider the fact that China is a significant part of emerging markets benchmarks, so they might miss targets if they are underallocated to China. China has the heaviest weighting in the MSCI Emerging Markets index and FTSE Emerging index at 28.39% and 31.03%, respectively. Abrdn managed and administered £496 billion ($626 billion) of assets for clients as of June 30. The firm managed £21.2 billion in APAC equities as of June 30 and the funds under management of abrdn’s largest China A fund was $2.4 billion as of Nov. 30. Abrdn does not disclose the size of its China investments, a spokesperson said.

Valuations play

China has one of the weakest structural growth stories, but valuations currently are attractive, said Kamal Bhatia, the newly named president and CEO of Principal Asset Management, during a visit to Singapore. Principal managed $517.8 billion as of June 30. “Historically, people have assumed in Asia outlook means GDP growth. … (But) from our seat, it’s probably more interesting to think about the outlook as an intersection of things like GDP growth, but also where valuation is,”

Are participants better off from Australia super fund mergers?

January 15, 2024

Pensions & Investments

OUTLOOK ESG

ESG factors, investment decisions to converge as new issues emerge in 2024

‘The idea of systemic risk has been slowly emerging over decades, but over the next year or two it will really bust into the forefront.’

More dedicated ESG personnel hiring expected, particularly for data analytics, compliance

a bit,” said Sylvain Vanston, executive director of climate investment research at MSCI, who works with investor clients on climate risk reporting and management, portfolio management and, increasingly, biodiversity. The latter “is definitely a very dynamic space. A lot of By HAZEL BRADFORD clients are asking us to help them identify how their portfolios impact nature risk. They want The line between ESG considerations and increasingly sophisticated ways to measure investment decisions will keep blurring in that,” said Vanston, who expects 2024 to see a 2024, as asset owners and managers expect to boom of geospatial technology to analyze climate data and impact, and “a lot more develcontinue bringing the two together. “ESG factors are increasingly driving in- opment of nature-based opportunities.” Biodiversity also got a boost in September, vestment decisions,” said Kris Tomasovic Nelson, senior director and head of ESG invest- with final recommendations from the Taskforce ment management for Russell Investments, on Nature-related Financial Disclosures for with $291.9 billion under management. The companies and asset managers to manage and firm’s 2023 global survey of asset managers disclose nature-related risks to portfolios. Infound only 7% of them saying that ESG factors vestors welcomed the move, but worry that the do not drive investment decisions, compared voluntary guidelines’ lack of data standardization will make it tricky to integrate nature-reto 22% one year earlier. That is expected to mean more hiring of lated considerations into investment decisions. dedicated ESG personnel, particularly for data A push for more decision-useful data has begun analytics and compliance — with the latter ex- and the first TNFD reports by companies and pected to be a bigger factor next year amid asset managers under a 14-metric framework increasing regulation in many jurisdictions, will start showing up in the spring. European pension funds have continued vigilance against grealso joined financial institutions enwashing, and political strains from 24 countries with a comin the U.S. that show no signs of bined €21.4 trillion ($22.6 trildisappearing. lion) in assets taking the Finance “The rhetoric is here to stay for Biodiversity Pledge, commitfor a while,” Nelson said. “Asset ting to five steps to protect and managers will continue to be restore biodiversity through more careful” in how they distheir finance activities and incuss ESG issues but on the asset vestments. Their reports will owner side, “we are still seeing start coming in 2024, and “it will large U.S. corporate plans wantbe interesting to see who is coming to learn more about ESG. I ing out with real” actions and do think the door is open to difwhich asset classes are adferent terminology, and outside of the U.S., I don’t see any slow- HERE TO STAY: Kris Tomasovic dressed, said Vanston, who thinks the first hard targets are ing of momentum,” she said. Nelson said investment likely to come from asset owners. The new year could also see decisions are increasingly The new year will also see asset owners spending more being driven by ESG factors. the 190-member investor initiatime and internal resources on evaluating the impacts of sustainability issues tive Nature Action 100 leveraging a collective like climate change on portfolios, with less de- $23.6 trillion in assets as they engage with 100 pendence on third-party providers of data and companies in key sectors to drive corporate analysis. Frustrated by available climate sce- action on nature and biodiversity loss. Invesnarios, for example, officials with Universities tors will also be watching COP16, the U.N.-conSuperannuation Scheme Investment Manage- vened biodiversity counterpart to COP28, ment, the main manager and adviser to the hosted by Colombia in October, to see how U.K.’s largest defined benefit pension fund, the COP15’s historic agreement and framework for £75.5 billion ($93.4 billion) Universities Super- global action to halt and reverse the loss of annuation Scheme, London, are now working nature can be advanced. with the University of Exeter on new scenario analysis methodologies for addressing climate Systemic risk risk in its portfolio. The interplay of sustainability challenges like climate and biodiversity has also made investors more cognizant of systemic risk. Climate first “It is how these issues will affect everything, With the recently concluded COP28 world climate negotiations fresh in investors’ minds, not just one issue,” said Stephen Miles, head of climate will continue to dominate sustainable sustainability for Willis Towers Watson. Someinvesting next year. An historic agreement thing like antimicrobial resistance “may not reached to transition away from fossil fuels impact one company but it poses wider risk” recognized the need to drastically reduce glob- for asset owners, and in terms of the financial al greenhouse gas emissions, while calling for relevance, “it could lead to a breakdown of the tripling renewable energy capacity and dou- entire system,” Miles said. “Asset managers are bling energy efficiency improvements by 2030. going to be called to be able to talk to these The latest COP agreement also recognized issues. They need to be doing some things to the need to reverse biodiversity loss to help show risks are being managed.” John Hoeppner, head of U.S. stewardship solve the climate crisis, boosting the importance of biodiversity risk and opportunities for and sustainable investments at Legal & General Investment Management America with investors and policymakers alike. “It was obvious to scientists, but it is new to $221 billion under management, agrees. “The policymakers. (Climate and nature loss) have idea of systemic risk has been slowly emerging led parallel lives and now they are converging over decades, but over the next year or two it

LEGAL & GENERAL INVESTMENT MANAGEMENT AMERICA’S JOHN HOEPPNER

will really bust into the forefront. There will be a shift from corporate value to portfolio value. It will be interesting because most company engagements are at corporate level, not at a system level,” Hoeppner said. With many ESG-focused investor groups starting to zero in on systemic risk, “there is going to be a huge question on passive investment,” he said. Asset owners are also showing more interest in long-term trends and how to tap into them. “We’ve come around from fear to how harness it,” said Marina Severinovsky, head of sustainability, North America for Schroders, with $923.1 billion under management. She sees 2024 as the year of “3D – decarbonizing, demographics and deglobalization.” That means more focus on human capital, addressing supply chain challenges, and investing in clean energy companies that are now more affordable. “And, because we are moving from a place of making commitments to doing the real work, it’s going to be bespoke for many folks. The personalization of (ESG) solutions is probably a trend for 2024,” Severinovsky said.

Governance

The year should also see more emphasis on active ownership, through engagement or proxy voting. “Even in clients who are wary of ESG, we are seeing more emphasis on governance. They know that voting is part of their toolkit,” said Nelson of Russell Investments. LGIM America’s Hoeppner expects to see “an evolution of proxy voting” that questions how effective it is versus engagement. “I think we are going see lot of innovations. We don’t know what that looks like yet, but there is building tension in the proxy voting process, and it’s going to be exciting,” Hoeppner said. He also sees more open discussions among asset owners and managers about the “difficult trade-offs on ESG topics and issues,” such as chemicals that are harmful to people or the environment, but are critical for energy efficiency. “These trade-off conversations that people have danced around before are starting to emerge. Forcing trade-off conversations is the next generation of where ESG is going,” Hoeppner said. One corporate governance issue expected to heat up in 2024 is dual-class shares, or unequal voting rights that protect management and boards from the views of independent

investors. Members of the Investor Coalition for Equal Votes representing $2.5 trillion in assets and chaired by Railpen, the in-house manager of the £34 billion ($42.4 billion) Railways Pension Scheme, London, and the Council of Institutional Investors, promise to speak more about phasing those out, officials there said. And they will be paying particular attention in the U.K., where an effort to attract more listings led the Financial Conduct Authority in December to propose changes that include allowing dual-class share structures. If adopted, the changes could be in place by the second half of 2024.

More scrutiny of asset managers

As asset owners increasingly tune into sustainability issues like climate and diversity, they are also getting more critical of how their asset managers respond to — or ignore — their wishes. Groups like the U.K. Asset Owner Roundtable, which brings together large U.K. local authority pension pools, the £3.2 billion ($4 billion) Church of England Pensions Board, London, and USS, studied external asset managers’ stewardship and proxy voting activities with respect to major oil and gas companies, and found significant misalignments between words and actions. Other groups, like The Interfaith Center on Corporate Responsibility, a coalition of more than 300 institutional investors with a collective $4 trillion in invested capital, have recently been raising concerns about asset managers’ declining proxy voting on ESG shareholder proposals, and some are even filing shareholder resolutions at BlackRock, State Street, Goldman Sachs and J.P. Morgan over perceived misalignments.

Artificial intelligence

One of the biggest unknowns for ESG is the role of artificial intelligence, and the potential to upend asset manager practices. “We have been approached by many really thoughtful entrepreneurs showing us cases where we are going to be using AI in our workflow,” said Hoeppner of LGIM America. He predicts that in a matter of months, traditional ESG research on investee companies “is going to be automated. That’s a big deal because that takes a lot of time.” While it will speed up managers’ ESG-related research, so far it is “unclear how it will change the market,” he said. n

Pensions & Investments

January 15, 2024

OUTLOOK EUROPE

European asset owners put inflationary woes in past Mark Kuipers

Climate concerns return to forefront; newer ideas such as AI make agenda

While climate and ESG will be more prominent concerns for money managers in 2024, there is also a more novel concern that is taking center stage: artificial intelligence. Last December, two U.S. senators introduced a bill aimed at identifying and preventing AI manipulation

of financial markets. AI “is similarly going to be front of mind,” said Caroline Escott, senior investment manager at Railpen, which acts as the in-house manager of the £34 billion Railways Pension Scheme, London. “It has the potential to generate significant opportunities but also risks, including the amplification of discrimination, proliferation of misinformation and privacy violations — particularly in relation to generative technologies.” Railpen’s recently published 2024 Global Voting Policy highlighted for the first time current expectations of companies’ governance and internal controls on AI development and deployment. Pending regulation is also on the minds of European institutional investors. In the environmental space, in 2023 the Task Force on Climate-related Financial Disclosures was disbanded having fulfilled its remit. In its place came the International Sustainability Standards Board, a potentially ground-breaking positive development for unified climate data disclosure. In 2024, the EU taxonomy on sustainable activities will incorporate the four final environmental objectives on which asset managers must report, including biodiversity, and the new EU Deforestation Regulation will also impose stringent due diligence requirements on corporations. “It will be more important than ever to ensure full traceability across the value chains in the companies we invest in,” PensionDanmark’s Rasmussen said. Escott identified a different regulatory challenge, namely the changes to governance structures within listed companies. Escott is also chair of the Investor Coalition for Equal Votes, and is a vocal opponent of proposed alterations to London listings in December 2023 which would widen access to dual-class share structures, or unequal voting rights. “Shareholder protections and high standards are fundamental to sustainable value creation and thriving capital markets. As a U.K. asset owner with an extensive history of early-stage investment in highgrowth U.K. firms, we want to ensure we can access well-run, high-performing companies, so maintaining these protections will remain high on our 2024 agenda,” Escott said. n

ward-looking basis for onshore Chinese equities is about nine times EBITDA. And if we look at the U.S. stock market, it’s in the 20s. So for $1 that a global investor puts into China, you’re getting twice the earnings yield,” he said. Geopolitical risk has had an impact on trade and foreign direct investment in China, in particular, the restrictions on flows of critical technologies to China by the U.S. and some of its partners, he said. “That’s bifurcated a scientific community and a global venture capital community that had been

one community historically. … By bifurcating the scientific community, by bifurcating the venture capital community, we’re telling the global economy to not run as fast (in the race for technological development),” he said. “And so I’ve been a China bull for 28 of the last 31 years since I first backpacked around China in 1981. And, and I’ve been right to be a China bull for 20 years. But the geopolitical tensions, the bifurcation of the scientific and venture capital communities are a problem for China,” he said. n

By CHRISTOPHER MARCHANT With interest rates looking to have peaked and now expected to plateau and fall during 2024, greater attention can be repaid to ESG and regulatory matters, institutional investors in the U.K. and Europe say. One such enduring trend that looks set to dominate conversations across European asset owners over the coming year is the ongoing climate crisis — and how to adjust portfolios accordingly. “After another climate COP it is time to deliver on the pledges and implement the initiatives needed to bring the world economy closer to a Paris-aligned pathway,” said Jan Kaeraa Rasmussen, head of ESG and sustainability at PensionDanmark, Copenhagen. “At the center of these efforts is the necessary acceleration of climate investments in the global south through a massive mobilization of private capital.” Signs of this were seen at the December COP conference, hosted in the United Arab Emirates, where more developed countries pledged to contribute a total $12.8 billion over the next four years to the Green Climate Fund, which has a mandate to support emerging markets’ shift to a low-carbon economy. Rasmussen argued that renewable energy is no longer an infant technology, and can offer an attractive return proposal in high growth markets such as India, Indonesia, Brazil and South Africa. However, he did concede that blended finance — development finance used to encourage private investment — may be necessary in some developing countries to tamper perceived investor risk and increase openness to such exposure. Thijs Knaap, chief economist of APG Asset Management, also identified climate issues as of primary concern for the new year. “We need a transition to an economy that emits much less CO2 and preserves biodiversity, and even from a cold, economic perspective we should get there sooner rather than later,” he said. Knaap believes 2024 could be a year to make signif-

China CONTINUED FROM PAGE 17

Cainiao Smart Logistics Network applied for an IPO in Hong Kong. It also pulled plans for an IPO for its grocery unit Freshippo, but said that its international digital commerce group, which comprises various e-commerce sites such as Lazada and AliExpress, was preparing for external fundraising. “Many of the monopolistic behaviors that were punished have been

TIME TO ACT: APG’s Thijs Knaap thinks 2024 could be a year to make significant progress in the transition to a low-carbon economy.

‘(AI) has the potential to generate significant opportunities but also risks, including the amplification of discrimination, proliferation of misinformation and privacy violations.’ RAILPEN’S CAROLINE ESCOTT

mate remains the single largest engagement topic and we continue to push companies to adopt ambitious, transparent and practical plans that will deliver real world CO2 emission reductions.” However, while progress has been made in particular by U.K. and European companies, “we note dilution in other companies’ ambitions at a time when efforts need to be redoubled. To increase our leverage, we continue to support several collaborative engagements. Our voting in the upcoming AGM season will be consistent with our engagement efforts,” the spokesperson said.

icant progress, barring any “distractions” such as geopolitical events or an economic downturn in China. APG Asset Management runs around €541 billion ($582 billion) in assets under management, including on behalf of Stichting Pensioenfonds ABP, Heerlen, Netherlands. The specter of global warming is an issue that is also at the forefront of concerns for U.K. pensions funds. Continuing with this dominant trend, a spokesperson for the £16.6 billion ($20.8 billion) West Yorkshire Pension Fund, Bradford, said: “Cli-

Still on the agenda

reversed as well. So you can see from a private sector point of view, (authorities) are selective in where they are allowing some of these to reopen and be supportive to the economy, (which) shows that they are rational,” Wan said.

for the long term. ... They don’t see the North American investment community in China, they don’t see the European investment community in China in the way that they did two or three years ago, but they’re still full on,” said Rich Nuzum, executive director for investments and global chief investment strategist at Mercer. “From our perspective, the case for China at this point is one about improvement from a low base in terms of expectations, and about valuation. So as we sit here today, the price-earnings ratio on a for-

Regional variation

Even though asset owners from the West remain bearish on China, Middle Eastern investors continue to invest in Chinese public and private assets. “Middle Eastern investors in general, are still very bullish on China

This is not to say that the dominant economic talking point of last year — rising interest rates to combat inflation — is going to fade into obscurity in 2024. Rates may have been held across the Federal Reserve, European Central Bank and Bank of England in December last year, but more hawkish positions on the European side means these central banks will likely reduce rates only later in 2024. Increased volatility and geopolitical uncertainty also remain on the agenda.

Magdalena Hogberg, head of strategic allocation and quantitative analysis at the 486 billion Swedish kronor ($46.4 billion) pension fund AP4, Stockholm, noted how shifts in the investment environment can provide opportunities: “Top of mind is to align the portfolio and investment structure to be able to take advantage of the increased volatility and dispersion that arise from a higher interest rate environment and continued macroeconomic and geopolitical uncertainty.” According to a Natixis report from last month, in terms of asset allocation, 56% of institutional investors said they were actively derisking their portfolios as they headed into 2024. More than two-thirds (69%) are bullish on bonds, with 62% expecting longer-duration bonds to outperform short duration.

New frontiers

January 15, 2024

Pensions & Investments

OUTLOOK ETFs

ETF share classes, active ETFs on industry’s radar By KATHIE O’DONNELL While much ink has been spilled on spot bitcoin ETFs, there are plenty of other topics that industry watchers will be keeping an eye on in 2024. Among them are applications for ETF share classes of actively managed mutual funds; how the ETF manager leaderboard might shift this year amid the rise of active ETFs; and whether, as expected, cash parked in money market funds will provide a tailwind for ETFs. “PGIA, Dimensional and Fidelity have all filed to launch an ETF share class structure of their mutual funds,” said Nate Geraci, president of The ETF Store, an investment advisory firm specializing in ETFs, and host of the weekly podcast ETF Prime. “I think that’s a potentially enormous story in the ETF space.” In February 2023, Perpetual US Services, which does business as PGIA, announced the filing of an exemptive application with the Securities and Exchange Commission seeking an order that would permit PGIA and its affiliated U.S. investment advisers to establish an ETF multishare-class structure of their respective mutual funds. The PGIA filing came just months before the May expiration of a patent held by Vanguard Group. Starting in 2000, Vanguard began operating index-based ETFs as share classes of its index-based mutual funds in accordance with an order from the SEC that was “substantially similar to the one sought by Applicant,” PGIA’s filing said. Dimensional Fund Advisors filed

Supers CONTINUED FROM PAGE 17

However, while internally managed funds can result in good outcomes, there is little independent review or direct public scrutiny of their performance compared to external managers, the report noted. In addition, funds tend to conduct a straightforward cost analysis when internalizing their investments, but the Prudential Practice Guide issued by the Australian Prudential Regulation Authority recommends that return equivalence or enhancement should instead be given higher priority, the report wrote. Rich Nuzum, New York-based executive director, investments, and global chief investment strategist at Mercer, agreed. “There continues to be a focus on cost and expense ratios, which is

its application for exemptive relief in July, while Fidelity Investments filed in October. The challenge will be getting the SEC on board, Geraci said, adding that Vanguard is only approved to use the ETF share class structure for its index-based products while PGIA, Dimensional and Fidelity are seeking to use it for actively managed products. “Active ETFs have exploded in recent years,” Ryan Jackson, a manager research analyst, passive strategies for Morningstar, said in a Nov. 13 article, which said that many mutual fund providers that entered the ETF market in recent years cite what’s known as “the ETF Rule,” which the SEC approved in 2019, as the catalyst. Rule 6c-11 allows fund providers to create and redeem ETF shares with custom baskets, Jackson said. However, the SEC said in 2019 that ETFs structured as a share class of a multiclass fund wouldn’t be able to rely on the rule, citing concerns regarding how portfolio costs would be borne. “For example, an ETF share class that transacts with authorized participants on an in-kind basis and a mutual fund share class that transacts with shareholders on a cash basis may give rise to differing costs to the portfolio,” the SEC said. “As a result, while certain of these costs may result from the features of one share class or another, all shareholders would generally bear these portfolio costs.” Geraci said that if, for instance, the mutual fund share class had substantial outflows, “that could trigger negative tax consequences and higher transaction costs for ETF shareholders.” However, the “bigger picture” when it comes to ETF share classes of mutual funds involves the retire-

good on one level, but I think it massively overshot in Australia to where the focus was on headline expense ratio, not return to fees and not the content of the portfolio,” he said. This focus is particularly prevalent in private markets, where he has observed large asset owners bringing their private equity, infrastructure, real estate and private credit investments in-house, which saves money on fees, but “puts them at risk of being the dumb money at the poker table,” he said. “The idea in the private markets is if you don’t have an information edge, you’re literally providing liquidity to people with inside information. So it’s really a bad space not to be highly skilled and highly competent,” he said. Having indirect ownership of companies will allow institutional investors to add value to the companies, which is far more difficult than investors give general

The ability to add an ETF share class to a mutual fund ‘would allow mutual fund companies to maintain that lucrative cash cow business while also pursuing the much higher growth ETF market.’ THE ETF STORE’S NATE GERACI ment plan market, and 401(k) plans in particular, he said. “That’s an extremely lucrative business for mutual fund companies and I would say it’s really the last bastion for mutual funds,” Geraci said. “Mutual funds have lost market share pretty much everywhere else except in that retirement plan space.” The ability to add an ETF share class to a mutual fund “would allow mutual fund companies to maintain

partners credit for, said Michael Aked, the Melbourne-based senior investment strategist at Scientific Beta, an index provider specializing in smart beta strategies. About $49 billion of assets tracked Scientific Beta indexes as of July 31. In addition, the skill sets of the in-house teams that superannuation funds hire is unclear. There are a limited number of asset managers that have appropriately trained and experienced portfolio managers, and the ability of superannuation funds to properly compensate these individuals is an open question, he said. “If they are implementing a simple factor-type portfolio, that would be great. You can do that at size with very small teams,” Aked said. “But you will need to have contact with thought leaders to make sure your investment strategies are continually updated and actually invested in a way that is aligned with the newest ideas. To do that you need to have partner-

that lucrative cash cow business while also pursuing the much higher growth ETF market,” he said. While there have been plenty of mutual fund-to-ETF conversions, “those are only applicable (for) products that have minimal if any retirement plan assets, otherwise they can’t convert,” Geraci said, adding that “most 401(k) plans are not set up to hold ETFs.” And, while fund firms can also offer ETF clones of their mutual funds, that’s also not as optimal as having the ability to add an ETF share class, he said. “Clone strategies don’t offer the type of operational efficiencies that a multishare-class structure would just in terms of sharing back-end operating cost and distribution cost, and then just the tax efficiency within the fund itself,” Geraci said. “And so, this ETF share structure could be a huge deal.”

Fidelity on the move

Bloomberg Intelligence Senior ETF Analyst Eric Balchunas predicted Fidelity, one of the applicants seeking an exemption, can break into the top 10 ETF issuers in the U.S. by assets by the end of 2024, he said. “Currently, they’re 13th,” said Balchunas, who expects to see “some big things from them,” this year. “It feels like they’ve got more buyin internally to do the ETF business, and they’ve got so many quick ways to get giant assets over,” he said, adding that one would be converting mutual funds to ETFs, something Fidelity has already done. Fidelity’s ETF lineup consisted of 64 funds with assets under management totaling $51.7 billion as of Dec. 31. According to VettaFi, VanEck is the 10th largest ETF manager with $66 billion in assets. The ability to offer ETF share

classes of its mutual funds would be a “huge” way for Fidelity to build its ETF assets, Balchunas said. “I kind of look at all these things as tributaries, and they all sort of flow into the ETF world and Fidelity is really starting to work these tributaries,” he said. “They have so much money that they could grow really quickly in terms of assets.” Balchunas also noted that Fidelity is among the firms seeking SEC approval for a spot bitcoin ETF. “And they have this army of advisers,” he said. “I would think those advisers would probably be great customers for the bitcoin ETF.” Greg Friedman, head of ETF management and strategy at Fidelity Investments, said ETFs are a “strategic priority” for the firm, which launched its first ETF in 2003. Active ETFs have “finally come to the forefront,” and that’s where Fidelity, with its research capabilities and 75-year-plus investing heritage can add the greatest value, Friedman said. “Fidelity has been in the game for a while, has seen where the industry is going and I think you see the increase in our presence because this is a time that we think we can add the most value and differentiate (ourselves for) our clients,” he said. Asked about plans for 2024, including whether Fidelity plans to roll out any new ETFs, Friedman declined to provide specifics. “We have a huge road map of ideas on the blackboard,” he said. “I can’t go into what we’re thinking and what we’re going to do, but we are committed to being a leader in this space.”

Money market tailwind

The global ETF industry is entering 2024 with a freshly minted record for assets under management, according to ETFGI, a Lon-

Arnold Adler

Spot bitcoin ETFs aside, plenty of other topics being watched in 2024

BE CAREFUL: Rich Nuzum said superannuation funds that bring their private markets

investing in-house risk not having the proper information or skill to do it right.

ships that are more give than take, or than just extracting (intellectual property) capital,” he said. Investing alongside a factor or smart beta manager could be beneficial since many professionals in the space are continually researching and working with professors from universities,

Aked added. “Factor investing is unique as it has the academic rigor of the asset pricing literature. As new asset pricing ideas are fomented in academic circles, having the knowledge and machinery to convert these ideas into portfolios require true partnerships where all

Pensions & Investments

parties are adequately rewarded,” he explained. He also added that the mergers in the superannuation industry have not brought down participant fees sufficiently. “The Productivity Commission report is pretty clear that fees of the smaller funds are too high, but the average fee we are still paying over 80 basis points, which is much higher than it should be.” Chant West’s Mohankumar cast a less pessimistic view, however. “Super funds are thinking about where they need to be in a few years’ time. They recognize that increased scale is an important enabler for many of their objectives,” he said. The increased scale provides greater access to assets in private markets, better access to quality staff, and allows the super to better engage with participants to grow their assets, to name a few benefits, he said. — NATALIE KOH

Funds CONTINUED FROM PAGE 3

you rarely see it repeat that return in the following year,’’ he added in a follow-up email. “You would only expect that in a raging strong economy, and we don’t have that. So, I’m expecting the typical return in a presidential election year of something like a single-digit positive result.” “It really looks to me like (Federal Reserve Chairman Jerome) Powell has pulled off the soft landing,” Ailman said in the interview. Charles Van Vleet, assistant treasurer and CIO of pension investments at Textron, concurs. He and his staff think 2024 will be another year of solid returns, the risk of recession will be low, and progress on reducing inflation will continue. He said in a written response to questions that recent breakthroughs in pharmaceuticals are the “tide that will lift all boats.” Van Vleet said in the Dec. 6 response: “Just consider that six weeks ago the FDA approved cellular meat, three months ago GLP-1 for weight loss, six months ago Nvidia introduced the H100 chip, five years ago we learned of CRISPR” gene-editing treatments. “All of these breakthroughs will power the markets with productivity and profits,” he said. Van Vleet said the greatest nearterm opportunity is in real estate, particularly in publicly listed real estate investment trusts. “The public real estate market has tossed the baby out with the bathwater by treating everything like office and shopping malls,” he said. “There are solid fundamentals in data centers, cold storage, multifamily and industrial.” Van Vleet oversees more than $13 billion in defined benefit and defined contribution plan assets for the company.

Data centers a big focus

On the real estate side, Jase Auby, CIO of the $187.2 billion Texas Teacher Retirement System, Austin, said that “data centers remain a big focus of ours.” While the rise in interest rates has been the biggest investment-related theme over the past year, Auby said on a more thematic note, the rise of artificial intelligence is just as important. “From our perspective, it’s real and it really is translating into tangible demand for data center space, so that’s something we’re focused on and allocating to,” Auby said. Paul Colonna, president and CIO of Lockheed Martin Investment Management, said fixed income and real estate debt are areas where he and his staff see some opportunity. In his role, Colonna oversees more than $30 billion in frozen defined benefit plan assets of Lockheed Martin, Bethesda, Md. At this time last year, Colonna expressed eagerness at the prospect of fixed income generating returns, given the rise in interest rates. But overall returns fell below expectations before a November boom in 2023. The Bloomberg U.S. Aggregate

Fixed Income index returned 4.5% during the month after returning -2.8% for the 10 months ended Oct. 31. “We were adding to our fixed-income portfolio in 2023, and we were glad we did that,” Colonna said. “We did that kind of thinking fixed-income returns would be compressed with equity returns, and that was more of a secular view, not just a view on ’23. We still kind of believe that.” Colonna said that he and his staff think there is more compression between the equity and fixed-income markets ahead in 2024, certainly in the first part of the year before fixed-income returns might level off if there is a soft landing. Colonna also said there is some significant opportunity in real estate debt.

dinary market performance of chipmaker Nvidia. The same question applies though. The Fed’s actions “seemed to have reduced inflationary pressure enough that people are kind of happy that this is the nice place to be,” Lakshminarayanan said. “What this means is the Fed is likely done increasing, and there is going to be a little bit of growth slowdown as it comes with higher interest rates. The bigger question for all of us is when is the Fed going to reverse that path and start reducing interest rates?” Lakshminarayanan said if the slowdown remains gradual, then the Fed can take its time reducing interest rates rather than going for the “nuclear option” of immediate, backto-back rate cuts. Noted Andrew Junkin, CIO of the Robert Tjalondo

don-based research and consultancy firm. Assets invested in the ETF industry globally are reached $11.63 trillion as of the end of 2023, besting the previous record of $10.99 trillion set at the end of November, ETFGI said. Noel Archard, global head of ETFs and portfolio solutions at AllianceBernstein, expects 2024 to be a strong year for ETFs given his expectation that some client money that’s been parked in money market funds will begin to deploy back into either fixed income or equities. “And anytime we see that redeployment, ETFs tend to get a pretty heavy piece of that flow,” Archard said. In a February 2022 news release announcing Archard’s hiring, AB said it planned to build a global ETF business under him and that he would be responsible for “bringing AB’s diverse set of investment capabilities to the active ETF marketplace.” Archard expects investor appetite for active ETFs to remain strong in 2024. “I think that the active ETFs are going to continue the trajectory they’re on, which is capturing a disproportionate share of the flow relative to our footprint from an AUM perspective,” he said. While investors for many years have had plenty of choices available to them in the “beta end of the ETF world,” many active ETFs are just starting to come up on their one-, two-or three-year track records, “which obviously is important” for an active product, Archard said. “You’re looking not only at what’s attractive about the vehicle or the structure, but what’s attractive about the investment strategy that you’re going into,” he said. “So, for some of the strategies that have been out for a couple of years and now have a track record, I think you’re going to see continued engagement there from clients.” As of Jan. 5, AB had 12 ETFs with assets under management totaling $1.5 billion. n

January 15, 2024

CONCERNS: Angela Miller-May thinks inflation and interest rates will still be dominant themes for investors in 2024, and it being an election year adds another challenge.

“(In) commercial whole loans, credit tenant leases, some of the places in the real estate debt market where you’re taking on some less leverage, there’s opportunity for pretty strong returns if you do your underwriting correctly,” he said.

Risks remain

Along with the opportunities for the coming year, pension fund executives anticipate the themes of the last two years will continue to dominate their thinking in 2024 and provide the key challenges for investors. “I think still inflation and interest rates are going to be top of mind for most investors,” said Angela Miller-May, CIO of the $50.2 billion Illinois Municipal Retirement Fund, Oak Brook. “Really, when is the Fed going to cut rates? Whether it is the first quarter or the fourth quarter of next year, how many rate cuts? Between three to five cuts? Just trying to realize what the reality will be as opposed to what the expectations will be,” she said. Sriram Lakshminarayanan, CIO of the $41.1 billion Iowa Public Employees’ Retirement System, Des Moines, said he thought the market navigated to a higher interest rate environment in 2023 surprisingly well, thanks to what he said was the might of the American consumer and the rise of artificial intelligence technology, typified by the extraor-

$105.9 billion Virginia Retirement System, Richmond: “It does feel like even if rates do come down as the Fed is projecting next year, a lot of it has already been priced in.” “Equity has really turned,” he said. “U.S. stocks are not cheap, they’re really the only place we’re seeing consistent growth around the globe, certainly driven by the Magnificent Seven.” The Magnificent Seven — Apple, Microsoft, Alphabet, Amazon.com, Nvidia, Meta Platforms and Tesla — have driven much of the growth of the S&P 500 index in 2023. “That concentration is one of the things that keeps me up at night,” he said.

Weighing recession

Texas Teachers’ Auby anticipates a recession in 2024, pointing out that the classic signals predicting recession are lining up, “flashing red as it were,” including the yield curve inversion, banks tightening lending standards, and unemployment rising, putting out projections for the coming year at 4.2%, up from the current 3.7%. Auby said it is difficult for him to see how there won’t be a recession, although it’s possible the U.S. may work its way out of it. “Valuations are stretched in the equity market, but they’re in a zone of overvaluation that can persist for a very long time,” Auby said. “There’s

no reason why tomorrow they have to revert to their long-term average, and there’s a very striking theme out there with AI and other forms of tech that are quite powerful and can feed that narrative.” Paul Matson, executive director of the $50.7 billion Arizona State Retirement System, Phoenix, said in a written response that he sees a return to a “more normal economic and political state” in 2024. That includes “interest rate levels driven more by investor and borrower demand and supply than central authorities and policy makers; mitigation of global power politic rhetoric; mild reduction of trade frictions; and modest resolution or containment of global confrontations.” He added that he and his staff do not see a recession occurring in 2024, and “a modest growth scenario is more likely than a negative growth scenario.” Farouki Majeed, CIO of the $17.5 billion Ohio School Employees Retirement System, Columbus, projects some slowdown in the economy, although he can’t say whether it will be called a recession. “It is probably not likely to be severe,” Majeed said. “At the same time we do expect some sort of rate cuts, maybe not to the extent that the market is currently discounting, perhaps to the latter part of 2024.” Meanwhile, CalSTRS’Ailman sees the slowing economy as perhaps something that will further divide the country. “If I’m right in that we don’t have a recession and it’s a really slow recovery, we are already seeing the signs (of stress) at the bottom part of the income ranges,” Ailman said. “There could be a real economic divide.”

Election angst

Few things typify the concept of a divided country like the upcoming presidential election in 2024, which by all accounts is expected to feature a rematch between President Joe Biden and Donald Trump. “It’s an election year, which brings about its own set of uncertainties,” VRS’ Junkin said. “With the two likely candidates, we kind of know the game plan, and the rhetoric and what we’re going to see. Even here in a purple state, I almost threw my TV out the window after the state elections.” “(Regarding) the election, I’m old enough in age that that stuff just stresses me out,” said CalSTRS’ Ailman. “Does it affect the market? Probably not. A president is going to want a decent economy. I think the Fed is going to go silent by August and not want to do anything in the last third of the year, but by the rhetoric? Who knows? It’s weird. It feels like it’s going to divide the country.” There’s some data showing markets tend to rise in election years. And yet, Miller-May raised similar concerns. “Really, what’s going on, it scares me. The wars and the fact that we can’t be on one accord in what should be the United States. I worry for my children. I worry for my nation. I worry for our economy because that’s my job, and because it’s what I love to do but (the election) will definitely make it more challenging.” n

January 15, 2024

Alternatives CONTINUED FROM PAGE 1

share. During the first three quarters of 2023, the transaction value of global private equity exits was a combined $232.4 billion, 55% of the value of private equity exits in all of 2022, a Preqin private equity report noted. This dearth of exits means less money through the door to LPs in the form of distributions, making investors hard pressed to commit to new funds. In the meantime, companies also have to contend with a higher cost of debt, which could cause issues not only for their private equity owners but also their private credit lenders, which might have to make concessions to prevent defaults. “Although interest rates could come down 75 basis points in the new year, there’s still pressure on companies which, when they were bought, did not forecast that senior debt” would be as high as it is, said Jim Pittman, executive vice president and global head, private equity, at British Columbia Investment Management, which had C$215 billion ($161 billion) in net assets under management as of March 31. “It will put pressure on companies that are not doing as well as the rest,” especially those that are smaller than $1 billion in enterprise value, do not have as robust management teams and were highly levered in anticipation of rapid growth that did not materialize, he said. Pittman does not share concerns that there could be a private debt bubble. “Company owners have to be good at generating value and cash flow” in a higher interest rate environment, he said. Additionally, “banks use much higher leverage than private debt,” he said. But if interest rates stay at 10% or more for two or more years, then there will be higher default rates in private credit portfolios, Pittman said. “If we believe Jay Powell (chair of the Federal Reserve), even if rates come down 1%, companies will use up less cash,” he said. BCI has had two or three companies in its $13 billion direct private equity portfolio that have had issues, but those companies have been having issues for more than two years now, Pittman said. “We’re not seeing companies get that much worse,” he said. However, BCI’s direct private equity portfolio is made up mostly of companies that have an enterprise value of at least $1 billion and so they are more stable, he said.

Pensions & Investments

Preqin forecasts that global private equity IRR’s will fall by a total of 3.4 percentage points by 2028 from 2022 due to challenging economic conditions and higher-than-expected interest rates. These return prospects combined with high interest rates and embedded inflation will make the next few years challenging for both fundraising and assets under management until a strong pickup in 2028, Preqin predicted. Fundraising for private equity funds will still be challenging in 2024 because it’s hard for investors to make new commitments when their GPs are sitting on a big pile of assets that haven’t been exited, said Chris Webber, director at placement agent Monument Group. Plus, volatile public markets is increasing private market asset classes’share of investors’portfolios, pushing them at or above their target allocations. These factors caused a major pause in LP commitments in 2023 before investments started to pick up in August. “There’s a lot of capital tied up in these embedded gains that have not been realized ... that’s what driving up (LP) overallocation to a degree,” he said. “We’re hoping (in 2024) to see more liquidity and deal volume pick up across the market and that will inherently drive the momentum in the fundraising market.” In 2023, global private equity firms raised $508.6 billion in the nine months ended Sept. 30, which is 46% of the capital raised in all of 2022, the Preqin report said. While many investors are leaning in on private credit, they are doing so with the understanding that the sector is not without risks, industry insiders say. One of private credit’s largest sectors, direct lending, is expected to return 7.3% by 2028 from a net IRR of 7.7% in 2022, Preqin projects. Distressed debt is expected to double to 14% by 2028. “Market participants are focused on interest coverage ratios,” a formula that shows whether the borrower can pay off its debt,” said Mary Bates, managing principal and private markets consultant at Meketa Investment Group. “The margin of safety for a lot of companies has declined.” While investors are of the view that there won’t be a significant uptick in defaults, she said, “We will probably see some, but not a

Valuations will get a dose of reality in private equity, credit making arriving at valuations in While true valuation private equity and private credit numbers won’t be released more difficult, Swan said. until early 2024, private equity “It’s more of an art than a and private credit managers science,” he said. “While are being more realistic with there are formulas, the art valuations, said Jeremy Swan, comes into play as to which managing principal of accountcompanies are the comparaing firm CohnReznick’s financial tive companies and which sponsors and financial company transactions are the services industry practice. comparative transactions,” On the private credit side, EXITING: Jeremy Swan Swan said. CohnReznick executives are thinks the lack of IPOs is In private equity, Scott seeing an increase in writemaking it hard to do Sperling, co-chief executive offidowns and an increase in valuations. cer of private equity firm liquidity concerns than they Thomas H. Lee Partners LP, have seen in the last few years, said “valuations have come down in terms Swan said. of the key valuation metrics but not as far Managers with riskier portfolios have as I had expected.” pushed valuations as far as they could, THL had $14.7 billion in assets under he said. management as of Sept. 30. “They’ve seen some distress and “In 2024, I think it is important to be covenants tripped (breached) where there very careful on valuations,” Sperling said. were covenants,” Swan said. “My own belief is that inflation will be There’s been some distress but not a higher for longer … more likely in the 3.5% huge percentage of their portfolios, he to 5% range. … We’re not going back to a said. 2%” rate. Even so, in 2024, their private credit Sperling said rising bankruptcies in assets will be “written down or exited in 2023 will continue to go up over the course one shape or form,” Swan added. “Our of 2024. restructuring team is starting to get more “It will present an opportunity for folks calls,” like us,” he said. he said. The lack of IPOs and transactions are — ARLEEN JACOBIUS

Jeff Diehl, managing partner and head of investments at Adams Street Partners, expects a widening of manager dispersion, with investors favoring “managers that behaved well and didn’t get over their skis on company level leverage” vs. those that did not. It will be a good time for investors to dig into their manager due diligence “and not rely on top-line IRR (internal rate of return) num-

Siren calls

Even with the risks and uncertainties in the private markets, investors are indicating that these investments are still worth it. According to secondary market manager Coller Capital’s latest LP survey released Dec. 11, 90% of surveyed investors plan to maintain or increase their private markets allocations. Forty-four percent of investors indicated they are most likely to increase their target allocations to private credit. For BCI, credit is a better bet right now among private market asset classes. In September, BCI along with sovereign wealth fund Abu Dhabi Investment Authority jointly committed almost $2 billion in initial equity commitments to be anchor investors in a direct lending fund to be formed by Centerbridge Partners and Wells Fargo & Co. “As an organization when we sit on the investment committee and can be paid 9% to 10% returns in credit where (no other lender) is ahead of you, why would you go invest on the equity side” with lower returns and added uncertainty, Pittman said. Global private equity posted a -4.5% net internal rate of return for the 12 months ended March 31, a dramatic turn from gains of 29.3% net IRR in the year-earlier period, according to a Preqin private equity report released in December.

Santa Fe, completed a review comparing private and public market performance as part of an overall review, said Bob Jacksha, the retirement plan’s chief investment officer. For the year ended March 31, private equity produced a -0.51% return compared to total public equity’s -17.89% for the year ended Dec. 31, 2022, according to a report to the New Mexico retirement plan’s board by NEPC, its general investment consultant. (Private equity performance generally lags by one quarter.) Opportunistic credit returned 0.89% for the year vs. -0.55% for fixed income. Private equity and private credit also outperformed public equity and fixed income in the 10-year time frame: private equity produced 15.31% vs. total public equity at 7.99%. Opportunistic credit returned 6.42% vs. fixed income at 4.78%. “The main point of the comparison is to evaluate whether or not the extra time and effort involved in private assets is worth it. We say, yes, given the outperformance,” Jacksha said. New Mexico Educational Retirement Board had $3.6 billion in private equity and $2.8 billion in opportunistic credit as of Sept. 30.

Deals smaller in size

LEVERAGE: Jim Pittman believes even if interest rates drop, there will still be pressure on companies that didn’t anticipate higher rates when they took on the debt.

meaningful distressed opportunity.” “We expect an uptick in capital solutions” in which managers create customized solutions for borrowers, such as offering rescue financing, Bates said. However, Bates added, “an opportunity-rich environment for special situations can be a challenging credit environment in which one would expect to see more impairments in portfolios.”

bers,” he said. “I expect return dispersions on the private equity and the private credit sides, which have been quite benign for a while.”

Banking on outperformance

Still, private market asset classes’ expected long-term outperformance against the public markets is hard for some investors to resist. For example, in November, the $15.7 billion New Mexico Educational Retirement Board,

A dip in interest rates could make it easier for private market managers to again outperform the public markets in 2024, industry insiders say. Higher rates mean private equity managers have less room to maneuver because they buy companies at a lower price when rates are high, BCI’s Pittman said. “There’s been a lot of pressure on private equity GPs because many of their investors are overweight private equity and private assets, in general,” he said. According to Pensions & Investments’ annual survey of the largest U.S. retirement plans, private credit assets among the 200 biggest plans grew 12.5% to $98 billion in the year ended Sept. 30, 2022, despite some asset owners’

Pensions & Investments

portfolios falling during the period. Private equity was up 2% to $692 billion in the year ended Sept. 30, 2022. Another stumbling block for the industry is the continued uncertainty around valuations. Private market participants use public market comparisons as well as transaction prices in recent deals as metrics in valuing their portfolios. When public markets are more liquid and transactions are more fluid, investors and managers have a better idea of valuations than when mergers and acquisitions are down about 60%, he said. Jeremy S. Schein, a partner with alternative investments firm Corsair Capital, is also optimistic that transaction volumes will increase in 2024. “Many companies seem to be ‘getting ready to get ready’ to sell,” he said. “Despite the IPO market’s slow recovery, if market levels remain steady and prospects of a soft landing with lower interest rates grow, we could see increased strategic bids, utilizing stock for transactions as early as Q1” of 2024. But uncertainties, including the 2024 presidential election in the U.S., will prompt buyers to remain cautious and Corsair executives expect more targeted sales, in which buyers reach out to potential sellers, than had been the norm a few years back, he said. Another reason transactions could be just starting to pick up is that private equity managers have a total of more than $4 trillion in dry powder, said Thomas Smale, chief executive of FE International, a midmarket tech-focused M&A advisory company. So they’re getting more creative to deploy that massive amount of money, including smaller deals, Smale said. For example, private equity managers previously aiming to acquire companies above a $100 million enterprise value may now be looking at deals with a $50 million enterprise value instead, he said. In 2024, private equity managers will remain “disciplined on the financial profile of the target company,” by avoiding companies losing money, Smale said. “Deals are happening where buyers are willing to get creative and sellers have less inflated expectations on valuations that may have happened in previous years,” Smale said. Even with a bit of a pickup in transactions, there are still fewer deals than in the past, which means that managers have to hold onto assets longer said James Reynolds, global cohead of private credit at Goldman Sachs Asset Management. GSAM has $110 billion in credit assets under management. “With the lack of IPOs and limited exits in private equity-owned assets, the effective duration of our investments is increasing,” Reynolds said. “Expect some pent-up exit activity leading to some active harvesting level in 2024 onwards.” In the last six months, Reynolds said there has been “a notable increase” in private equity-backed transactions, including some increases in deals that take public companies private, he said. Goldman Sachs’ Reynolds is optimistic that transactions will ramp up in the first half of 2024. In the meantime, GSAM was a very active lender in 2023, he said. The higher interest rates have benefited GSAM’s credit business, generating “the most attractive yields I’ve seen,” he said. To guard against risks of borrowers who cannot pay the elevated financing costs, GSAM lends to companies that generate predictable cash flow, Reynolds said. Those companies will continue to service the debt and to grow, he said. Molly LeStage, managing principal, private markets consultant at Meketa, said there’s been a narrowing of bid-ask spreads, which are the difference in the price a seller wants to sell and a buyer wants to buy. “Hopefully, we will see prices coming down and transactions going up in 2024,” she said. n

January 15, 2024

Managers CONTINUED FROM PAGE 3

and acquisitions, which he said are challenging in the asset management industry. Nachmann said that Goldman Sachs’ tech spend on things like AI and creating a new customized single-managed account (SMA) platform is “huge.” While Nachmann didn’t say how much his firm is spending, the asset management sector as a whole spent a record $24 billion on technology in 2022, according to data from McKinsey — its third-largest expense after investment management and distribution. “We struggle with how to prioritize,” Nachmann said. “I can’t imagine how you do this if you’re a tenth of our size. The table stakes are there, and if other people get to do things faster or have investment ideas faster or are more thorough … you’re going to start being at a disadvantage.” As finance firms fight to maintain profitability amid higher interest rates and continued downward pressure on fees, executives say they will do more with less as they try to cut costs. And that will likely only continue – consulting firm Casey Quirk found that over half of asset owners are seeking to lower fees, and only 19% felt that asset managers’ fees were “reasonable.” Cutting costs in the long run could require an upfront spend on things like generative AI co-pilots — essentially superpowered chatbots built on AI — to make their employees faster and more productive. For asset managers with deep pockets, like Goldman Sachs Asset Management ($2.68 trillion in assets under supervision) and BlackRock ($9.1 trillion in AUM), those projects are already in the pipeline. But for smaller, more cash-strapped firms, AI will likely continue to be out of reach in 2024.

Technology spending

Bespoke, white-glove service The rush toward AI at many asset management firms isn’t just about the latest gadget. It’s part of a broader strategy to cut costs while also providing white-glove, bespoke client services — including creating personalized portfolios or single managed accounts for smaller and smaller clients — and to justify their management fees amid the growing popularity of cheaper, passively managed products. Nachmann said that one piece of technology Goldman Sachs Asset Management expects to spend money on in the new year is the development of a new customized solutions platform to handle an increase in separately managed accounts as the firm places a greater emphasis on client customization. “Separately managed accounts are becoming a bigger and bigger thing. … It used to be

Jean Boivin, managing director and head of global research for the BlackRock Investment Institute, said investors will need to “grab the macro wheel” in order to effectively manage risk — “This is an environment where we think being active in the portfolio will be necessary,” he said. In addition to navigating choppy markets, some executives argue that active management — particularly in equities — will offer a chance to realize a profit not seen in the low interest rate era. BlackRock’s Antonio “Tony” DeSpirito, the firm’s CIO of U.S. fundamental equities, said the opportunity for active managers in 2024 makes him “the most excited I’ve been in 20 years.” “From a bottom-up perspective, I actually do think we can get equity returns whether we have a soft landing or a recession,” said Ann Miletti, head of active equity and chief diversity officer at Allspring Global Investments, which has $551 billion in assets under management. “Whether it’s mid-single digit or high-single digit returns in the equity space, I think it’s pretty reasonable if you’re picking stocks and not just buying indexes.” Alison Shimada, Allspring’s head of the total emerging markets team, said stock picking will be crucial when it comes to emerging markets equities. “An ETF does not serve you well in emerging markets,” Shimada said, citing the dispersion between the best and worst performing countries in the emerging markets division. “I’ve been waiting five or 10 years for this, but it’s time to do some stock selection — I’ve been waiting for the intelligence, and the experience and the critical thinking to matter and it really matters now.” Firms were unanimous in expectations of continued growth of private markets. BlackRock, which has $9.1 trillion in assets under management, has predicted the private debt market will balloon to $3.5 trillion by the end of 2028, from its current $1.6 trillion.

BlackRock has already launched a pilot program of its PRIORITIES: J. Christopher Donahue said Federated Hermes has budgeted $300 Rate cuts in second half first AI-powered copilot, and million for new technology and data scientists to develop new sales strategies. Though the markets have will roll out more over the priced in rate cuts for the first a thing of big institutions, big insurance com- quarter of 2024, asset management firms are, course of the year. J. Christopher Donahue, chair, president panies would be able to do customized SMA on the whole, more hawkish in their predicand CEO of Federated Hermes, said his firm accounts. We’re doing it now for thousands of tions, forecasting the first rate cut as unlikely has a $300 million budget for “new toys” over our high-net-worth clients,” Nachmann said. until the latter half of the year. the next three years, including AI develop- “That will require a whole infrastructure tech“We think policy is going to remain tight,” ment and a team of data scientists who have nology build that will be very big.” said George Bory, chief investment strategist Other asset management firms large and for fixed income at Allspring. been working with the firm’s head of distribusmall also report a growing trend toward tion on new sales strategies. “The market seems to be getting very excit“Everybody has a shopping list, and you’ve white-glove client service. ed about rate cuts for next year. We actually “The trend towards personalization has think the Fed’s going to be on hold, probably got to make priorities,” Donahue said. “If you’re not spending a whole bunch of money been going on for a while but it’s going to con- at least for the first half of the year,” he said. on technology, you’re just getting left behind.” tinue,” said George Patterson, CIO at PGIM Allspring’s prediction matches that of asset Donahue added that Federated Hermes is Quantitative Solutions. “At the end of the day, managers including Federated Hermes and working with other firms, including BNY Mel- asset managers are looking to customize be- BlackRock, both of which predict that rate cuts cause it’s kind of what we call ‘beyond alpha.’ will not happen until at least the third quarter. lon and State Street on certain projects. “Those guys ... they have billions of dollars It’s not just about performance, it’s the things Whether a recession is still on the horizon of technology budgets going,” Donahue mar- beyond just the performance — whether it’s or a soft landing has been achieved is a more veled. Federated Hermes had $715.2 billion in the client service, the reporting, (or) the cus- divisive issue among firms—– and even withassets under management as of the third tomization,” he said. in them, according to Federated Hermes’ Doquarter last year. nahue. Brian O. Casey, president and CEO of West- Active is back “Our CIO of fixed income is still thinking wood Holdings Group, said the technology Despite the pressures the industry faces in there’s a little bit of recession gas in this truck,” spend “seems like it never stops.” 2024, many asset management firms remain Donahue said. “He’s a little more reticent than “The tech spend seems to go up every year,” upbeat about their chances to weather the the equity people who think that we’ve had Casey said. “But it creates a lot of efficiencies. storm and perhaps even profit from the vola- the rocky landing and let’s get on with it. It’s You always want to try to do more with less if tility through an increased focus on higher-fee unusual for there to be, shall we call it, a creyou can.” ative friction” within the firm, he said. active management. n

January 15, 2024

Washington

Pensions & Investments

pany is convicted on criminal charges.

SEC to finalize rules

For the SEC, there are a number of high-profile rule proposals that the commisin the first half of the year for that reason,” sion is set to finalize in 2024. The controversial climate disclosure proFlores said. In March, House Republicans failed to nulli- posal is one still awaiting finalization. Origify a Labor Department rule allowing retirement nally proposed in March 2022, the proposal plan fiduciaries to select investments based on would require public companies to disclose a ESG factors. The lawmakers were unable to host of climate-related information, including overturn a presidential veto following the ap- greenhouse gas emissions, in their registration proval of a joint resolution, under the CRA, in statements and periodic reports. Iacovella said the SEC lacks the authority to both the House and Senate to invalidate the rule. But the DOL has a number of other contro- enforce such a requirement and feels it would versial items on its agenda for this year, as well. be an “unnecessary burden” on public compa“I think this is going to be a big year for re- nies. “If they go forward with this, it will be a setting the department’s relationship with the huge mistake, and it will be a massive stain on regulated community,” said Michael Kreps, a the chair’s legacy,” he added. SEC Chair Gary Gensler has publicly defendprincipal at Groom Law Group and chair of its ed the proposal and repeatedly said it’s meant retirement services group. to bring consistency and comparability to disclosures that many companies make already. Labor debates big changes Another controversial proposal that the “The department has proposed several different things that would radically change their American Securities Association, along with relationship to financial services,” Kreps said. many industry groups, have asked for the SEC The DOL’s newest proposal, which it issued to withdraw altogether is its predictive data Oct. 31, would amend the definition of the term analytics proposal. That proposal, issued in “fiduciary” and require rollover advice to be in July, would require broker-dealers and investment advisers to “eliminate or neutralize” conthe best interest of the saver. Specifically, the proposed “Retirement Se- flicts of interest arising from the use of certain curity Rule” would amend the five-part test technologies in investor interactions. Industry critics say the proposal’s definition used to determine when a financial profesof “covered technologies” is overly sional is considered an investbroad and would stifle technology ment advice fiduciary under ERuse in financial services. In its ISA. Those changes would pull most recent regulatory agenda, one-time advice, such as rollovers the SEC slated both rules for fior annuity purchases, into the nalization in April, though sources definition of a fiduciary if other noted that the timelines are arbiparts of the test are met. trary and could be pushed back. “That is a rule that is geared According to MFA’s Flores, the entirely toward pulling more inSEC’s updated agenda is “the first vestors into (the department’s) time in a while there aren’t a slew jurisdiction,” Kreps added. of new (items) that have been Though the comment period added,” which likely means the didn’t close until Jan. 2, the decommission is focused on seeing partment held a public hearing LITIGATION: Christopher things through to finalization. on the proposal Dec. 12 and 13, A. Iacovella said the ASA where opinions over the new pro- is prepared to sue over the posal varied greatly. DOL’s fiduciary rule. Litigation in the spotlight Kreps said litigation pertaining The SEC is involved in several to the rule is “inevitable,” given that “the depart- lawsuits, as industry groups sued the agency ment’s goals and views on the subject are in- over a number of rules it finalized in 2023. herently inconsistent with the views and goals On Sept. 1, six industry organizations, inof a large section of the retirement industry.” cluding MFA, asked the 5th U.S. Circuit Court “The idea that someone selling an annuity of Appeals in New Orleans to set aside the has to make a best interest determination and SEC’s private fund adviser rule, contending act as kind of a fiduciary in selling that annu- that the SEC overstepped its authority, failed ity — that’s incompatible in many ways with to prove the need for such a rule, and made how the industry operates,” he added. significant changes to the original rule proposASA’s Iacovella was adamant that if the deal without soliciting public feedback. partment “(continues) along this path,” the trade The rule requires increased disclosure from association will pursue legal action over the rule. private fund advisers, mandating they supply “(The DOL) cannot override the will of Con- investors with quarterly statements, including gress through a rule-making, and we will make information on performance, fees and expenssure that the court reminds them of that fact, es; obtain an annual audit for each fund they again, if we have to,” Iacovella said. manage; and acquire a fairness opinion in conAccording to Melissa Kahn, managing direc- nection with an adviser-led secondary transtor of retirement policy for State Street Global action. It also prohibits advisers from engaging Advisors’ defined contribution team, the DOL in several activities and practices, such as ceris “clearly pushing to get (the rule) finalized tain types of preferential treatment, unless sooner rather than later,” and she thinks the they disclose such activities, or in some cases, final version will come out by early May. receive investor consent. Other DOL proposals that both Kahn and “The fate of that rule will be pretty importKreps said are top of mind are those making ant,” according to Groom Law Group’s Kreps. modifications to the qualified professional asOn Dec. 12, MFA, National Association of set manager exemption, or QPAM exemption, Private Fund Managers and Alternative Inand prohibited transaction exemptions. vestment Management Association sued the The former proposal would expand the SEC over its rules requiring increased disclotypes of misconduct that disqualify financial sure of short-sale-related data and securities institutions from using the QPAM exemption, lending data. In another request for the 5th while the latter would require more disclo- Circuit to invalidate the rules, the lawsuit said sure from plan sponsors and other entities the SEC ignored the interconnectedness of the applying for prohibited transaction exemp- rules and took a contradictory approach to regtions. The QPAM exemption allows institu- ulating interrelated markets. tions to engage in transactions involving U.S. One rule would require certain institutional retirement assets that are otherwise prohib- investment managers to report short-sale-reited under ERISA, and is required whenever lated data to the SEC, and the regulator would a money manager’s affiliates or parent com- then publish such data, on a slightly delayed CONTINUED FROM PAGE 3

GOP likely to target oversight and campaign-positive topics An upcoming election means legislation should slow down, but Republican lawmakers may pick up the pace in things such as oversight and other party priorities that it finds politically advantageous, according to experts. “Usually election years aren’t particularly productive in terms of legislating,” said Michael Kreps, a principal at Groom Law Group and chair of its retirement services group. The first half of the year will likely be “a mad attempt to get major must-pass things done,” like keeping the government funded, authorizing defense spending and more, according to Kreps. But if bills outside the “must-pass” category don’t pass by June or July, “all bets are off,” according to Melissa Kahn, managing director of retirement policy for State Street Global Advisors’ defined contribution team. The 2024 congressional calendar shows that both the House and Senate will not be in session from Aug. 3 through the end of the month, as the chambers typically take a recess in August. However, Congress is also scheduled for a recess lasting the entire month of October, which lawmakers can use to campaign for re-election. With the time that Congress does have, sources said Republican lawmakers will likely focus their efforts on oversight and issues they find politically relevant, such as ESG and capital formation. According to Kreps, “what you see in election years is a massive uptick in oversight,” particularly from the party opposite the president. For this Congress, that would come from the House GOP, “because they use the committee process and the oversight as a way to highlight real or perceived failings of the administration,” he said. Even throughout 2023, Republican leaders of the House Financial Services Committee have staunchly criticized the SEC, Labor Department, and other actions from the Biden administration in their hearings and various committee activity. The Subcommittee on Capital Markets, led by Rep. Ann Wagner, R-Mo., specifically honed in on capital formation, holding four separate hearings on the issue in early 2023. In April, Wagner and House Financial Services Committee Chair Patrick McHenry, R-N.C., sent a letter to SEC Chair Gary Gensler criticizing the commission for what they said is a lack of attention to capital formation issues. GOP lawmakers will likely continue to focus on capital formation in 2024 as the election approaches, industry experts said.

Kreps said that focusing on environmental, social and governance investing is another topic he expects Republicans to take further action on, as “that issue ties together a lot of their narrative threads for campaigns.” “They view it as a place where they have some substantive policy objections, and where those policy objections intersect with things that they believe are campaign-positive for them,” Kreps said, noting that Florida Gov. Ron DeSantis has used anti-ESG policies as a part of his presidential campaign. At a GOP presidential debate in December, both DeSantis and fellow presidential candidate Vivek Ramaswamy criticized money manager BlackRock and its CEO Larry Fink, tying both to the ESG movement. DeSantis said Fink and BlackRock “want to use economic power to impose a left-wing agenda on this country.” Following the debate, Fink denied DeSantis’ claims, without naming the Florida governor, in a LinkedIn post. “The only agenda we have is delivering for our clients,” Fink wrote, blasting what he called “political silly season.” 2024 also marks the last year that McHenry will lead the House Financial Services Committee, as the lawmaker announced he will not run for re-election in December. McHenry is a long-time advocate of cryptocurrency regulation, and under his leadership, the committee advanced two bills aimed at digital asset and stablecoin regulation in July. The chairman himself was the sponsor of the stablecoin bill. In early December, McHenry said in a Politico interview that passing those bills is one of his top priorities for 2024. McHenry’s view that the digital asset industry needs a clearer regulatory framework greatly differs from that of SEC Chair Gary Gensler, who has repeatedly said there are already sufficient laws in place to regulate cryptocurrency. On Dec. 15, the SEC denied a petition from cryptocurrency exchange Coinbase Global that asked the agency to issue rules governing digital assets. In a post on the platform X, formerly known as Twitter, McHenry wrote on Dec. 15 that Gensler’s “continued refusal to provide clarity for the digital asset ecosystem is shameful.” McHenry also reposted a statement from Republican Commissioners Hester M. Peirce and Mark T. Uyeda, who said they disagreed with the SEC’s decision. It remains to be seen how a law passed by Congress could change the regulatory landscape for the digital asset industry.

basis, aggregating by security and keeping manager information confidential. But the other rule requires parties to securities lending transactions to disclose information on those transactions to the Financial Industry Regulatory Authority, and FINRA must make certain information it receives public by the morning of the next business day. According to the lawsuit, while the former rule maintains manager confidentiality and publishes data on a delayed basis, the latter rule discloses individual transaction informa-

tion on a daily basis “in a manner that effectively serves as a proxy for short-sale activity.” Sources also underscored the importance of the Supreme Court case Jarkesy vs. SEC, which challenges the constitutionality of the SEC’s administrative law judges that handle administrative enforcement cases in-house. Following oral arguments Nov. 29, the Supreme Court appears likely to rule against the SEC, which could mean a slower enforcement process for the agency and more difficulty obtaining settlements, according to attorneys. n

— COURTNEY DEGEN

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January 15, 2024

Pensions & Investments

HIRINGS Arkansas Teacher Retirement System , Little Rock, approved real estate and private equity commitments totaling up to $220 million. Within real assets, the $20 billion pension fund committed up to $50 million to KKR Real Estate Partners Americas IV, an opportunistic fund. Within private equity, the pension fund committed up to $40 million to Franklin Park Venture Capital Fund XV, a fund of funds: and up to $35 million each to Beekman Investment Partners V, a middle-market buyout fund, and Clearlake Capital Partners VIII, a middle-market special situations fund. The pension fund also made a follow-on commitment of $60 million to Franklin Park Co-Investment Fund VI. The pension fund originally committed $65 million in early 2023.

Also within the global public equity asset class, the pension fund terminated Baillie Gifford from its $31 million Baillie Gifford Outlier strategy. Within its absolute-return asset class, the pension fund invested $50 million in Wellington Macro Strategies Fund. Within private markets, the pension fund committed $50 million to Brookfield Infrastructure Fund V-B; €15 million ($16 million) to Gradiente III, a lower-middle-market buyout fund focused on entrepreneur- or family-owned companies in northern Italy; and $15 million to 424 Capital Fund II, a lower-middle-market buyout fund focused on healthcare information technology and renewable energy.

Dallas-Fort Worth International Airport Board approved a German pension fund Bayerische commitment of $10 million to Monroe Versorgungskammer, Munich, and Capital Private Credit Fund V for its 400 billion kronor Swedish pension $943 million pension fund. fund AP2 , Stockholm, The airport’s board committed to Sydney-based approved the commitment HAVE SOME New Forests’ Australia New to the private credit fund NEWS? Zealand Landscapes and at its Dec. 7 meeting, Please submit Forestry Fund, the firm said spokesman Brian Brooks news of changes in a statement on Dec. 20. said. to John Fuller, Clean Energy news editor, at Finance Corp., which Holyoke (Mass.) john.fuller@ Contributory Retiremanages A$30 billion pionline.com. ment System hired ($19.7 billion) in transition assets on behalf of the Australian government also committed to the fund, along with an Australian and a German insurer, the statement said. The CEFC committed A$75 million to the fund, it said in a separate statement. However, the size of commitments from the other investors was not made public. BVK, Germany’s largest public pension group, manages €106.8 billion ($114.9 billion) in assets. Cambria County Retirement Fund , Ebensburg, Pa., hired Fidelity Investments to manage about $5 million in passive international equities. The $222 million pension fund’s board approved the hiring at its Nov. 28 meeting, recently released meeting minutes showed. Funding comes from the termination of Mondrian Investment Partners. Cambridge (Mass.) Retirement System hired Mesirow Financial to manage about $80 million in active high-yield fixed income and Marathon Asset Management to run about $23 million in active emerging markets debt (hard currency). The $1.7 billion pension fund’s board approved the hirings at its Oct. 26 meeting, recently released meeting minutes show. Mesirow replaces Loomis Sayles. Chicago Public School Teachers’ Pension and Retirement Fund committed $10 million to Farol Fund III. The $11.9 billion pension fund’s board approved the commitment to the buyout fund managed by Farol Asset Management at its Dec. 14 meeting, a Dec. 15 news release said. Colorado Fire & Police Pension Association , Denver, disclosed manager hires, investments and commitments totaling $181 million. The $6.5 billion pension fund hired Mellon Investments to manage $50 million in the Mellon S&P 500 Top 50 index strategy.

AndCo Consulting as investment consultant, said Anthony Dulude, executive director. The $378 million pension fund is the first Massachusetts municipal pension fund to hire AndCo, he said. AndCo replaces Segal Marco Advisors. Howard County Retirement Plans , Ellicott City, Md., approved two new commitments totaling $35 million. The joint committee for the Howard County Retirement Plan and the Howard County Police and Fire Employees’ Retirement Plan approved commitments of $20 million to Orchard Global EleganTree Opportunities Fund III, a private credit fund managed by Orchard Global Asset Management, and $15 million to buyout fund Cortec Group Fund VIII at its Oct. 18 meeting, recently released meeting minutes showed. Idaho State Board of Education , Boise, hired Fidelity Investments as the sole record keeper of its $1.5 billion 401(a) plan. Fidelity replaces Corebridge Financial and TIAA-CREF. The services had not been put up to bid since the plan’s inception in the 1990s. Illinois Municipal Retirement Fund , Oak Brook, approved new alternative investment commitments totaling $543 million. The $48.9 billion pension fund’s board approved the actions at its Dec. 15 meeting, spokeswoman Maureen O’Brochta said. Within real assets, the board approved a commitment of up to €100 million ($108 million) to Ares European Property Enhancement Partners IV, a value-added real estate fund. Within private credit, the board approved commitments of up to $100 million each to AG Direct Lending Evergreen Fund, an open-end direct lending fund managed by Angelo Gordon; Atalaya A4, a direct lending fund managed by Atalaya Capital Management: and Comvest Credit Partners VII, a direct lending fund; and up to $50 million each to direct

lending fund CapitalSpring Senior Income Fund II and PennantPark Credit Opportunities Fund IV. Within private equity, the board approved a commitment of up to $35 million to buyout fund Coalesce Capital Fund I. Illinois Police Officers’

Pension Investment Fund , Peoria, hired Acadian Asset Management, LSV Asset Management and WCM Investment Management to run a total of about $450 million in active international small-cap equities. The $9.4 billion pension investment fund’s board approved the hirings at its Dec. 15 meeting, a spokesperson said. Acadian will run a $225 million core portfolio, and LSV and WCM will run $112.5 million each in value and growth portfolios, respectively. Funding will come from passive State Street Global Advisors portfolios. Illinois State Universities Retirement System , Champaign, committed up to $50 million to Ember Infrastructure Fund II. The $22.6 billion pension fund’s board approved the commitment to the infrastructure fund at its Dec. 8 meeting, according to a Dec. 13 news release. Ember Infrastructure invests in infrastructure projects that “reduce carbon intensity, increase resource efficiency and enhance climate resilience,” said the Illinois SURS news release. Indiana Public Retirement System , Indianapolis, disclose new manager hires and commitments totaling $375 million for its $38.3 billion defined benefit plan. The system hired Barings to manage a $200 million separately managed account to invest alongside the Barings Global Private Loan Fund series, which seeks to lend to middle-market companies in Australia/New Zealand, Europe and North America. Within real assets, the retirement system committed $100 million to Ambrose Co-Investment Fund, a real estate co-investment fund managed by Ambrose Property Group that will invest alongside Ambrose Fund IV. INPRS committed $100 million to Ambrose Fund IV, an opportunistic equity industrial fund, earlier in 2023. Within fixed income, INPRS committed $75 million to OHA Structured Products Fund III. Managed by Oak Hill Advisors, the fund aims to invest opportunistically in collateralized loan obligation debt and equity tranches in the U.S. and Europe, primarily in the secondary market. Kellogg Brown & Root , a science and technology firm, appointed Legal & General Investment Management as fiduciary manager for more than £1 billion ($1.3 billion) in U.K. pension fund assets. Assets were transferred in December, LGIM said in a news release. The deal covers more than 9,000 KBR participants. LGIM will take over management of the plan’s strategic asset allocations and will also assist in the restructuring of KBR’s private markets portfolio, with the intention of improving portfolio liquidity in preparation for buyout, the release said. Part of the mandate also focuses on investing in bonds under insurer

CONNECTICUT COMMITS $1.1B TO CREDIT, RE Connecticut Retirement Plans & Trust Funds, Hartford, disclosed more than $1.1 billion in commitments for the state’s private credit and real estate portfolios. Erick Russell, state treasurer and principal fiduciary of the $53.7 billion state pension system, announced the commitments at a Jan. 10 meeting. Within private credit, CRPTF committed $200 million to ICG Liquid Credit Strategies, comprising ICG Global Loan Fund and ICG Global Total Credit Fund; and $125 million to ICG North America Credit Partners Fund III. The pension fund also committed €150 million ($161.3 million) each to ICG Europe Mid-Market Fund II and to a customized co-investment program. In the state’s real estate portfolio, the fund committed $125 million to Penzance DC Real Estate Fund III, a value-added fund; $200 million to Stonepeak Infrastructure Fund V; and $125 million to Homestead Capital USA Farmland Fund IV. solvency requirements. Kentucky Teachers’ Retirement System , Frankfort, disclosed two new commitments totaling $100 million. The $23.2 billion pension fund committed $50 million each to Carlyle Europe Partners VI, a European-focused buyout fund, and large-cap buyout fund Hellman & Friedman Capital Partners XI, according to an investment committee report included with Dec. 18 board meeting materials. Kern County Employees’ Retirement Association , Bakersfield, Calif., approved commitments totaling up to $125 million at the Dec. 13 board meeting, said CIO Daryn Miller. The $5.3 billion pension fund approved a commitment of up to $25 million to Blue Owl Strategic Equity Fund; up to $25 million to Oak Hill Advisors Structured Products Fund III; and up to $75 million to Blue Owl Capital Real Estate Fund VI. Los Angeles Fire & Police Pensions committed a total of up to $85 million to two alternative investment funds, said a report for the $29 billion pension fund’s board. Pension fund officials committed up to $50 million to TPG Growth VI, a buyout and growth equity fund; and up to $35 million to HPS Specialty Loan Fund VI, a private credit fund managed

by HPS Investment Partners. Los Angeles Water & Power Employees’ Retirement Plan disclosed a commitment of up to $85 million to Marathon Credit Dislocation Fund II on behalf of its $16.1 billion defined benefit plan. The retirement plan disclosed the commitment to the distressed debt fund managed by Marathon Asset Management in materials for its Dec. 13 board meeting. A commitment of up to $15 million was also made on behalf of the $2.9 billion retiree health plan. Louisiana Teachers’ Retirement System , Baton Rouge, disclosed two new commitments totaling up to $150 million. The $25 billion pension fund committed up to $100 million to middle-market buyout fund Sterling Group Partners VI and up to $50 million to closed-end global infrastructure fund Stonepeak Infrastructure Fund V, spokeswoman Michelle Millhollon said. Maine Public Employees Retirement System , Augusta, authorized a pair of commitments totaling up to $75 million for alternative investments at its monthly meeting Dec. 14, confirmed James Bennett, the CIO of the $19 billion pension system. The board committed up to $40 million to buyout fund Wynnchurch Capital Partners VI, and up to $35 million to Bain Capital Real Estate Fund III, a value-added real estate fund.

University of Michigan, Ann Arbor, disclosed $90 million in alternative commitments from its $18.5 billion long-term endowment pool. The university committed $50 million to a fund managed by Investindustrial, which invests in middle-market companies based in southern Europe. Also, the university committed $40 million to a fund managed by Waterton Global Resource Management, a natural resources firm that invests in the North American metals and mining sector. A UM spokesman declined to provide further details about the Investindustrial and Waterton commitments. Montana Board of Investments , Helena, disclosed new private investments and real assets commitments totaling $299 million. The board, which manages a total of $24.4 billion including $13.7 billion in pension funds, disclosed the commitments in materials for its Dec. 12 meeting. Within its private investments asset class, the board committed $75 million to NB Strategic Co-Investment Partners V, a co-investment fund managed by Neuberger Berman; $70 million to North American lower-middle-market buyout fund McCarthy Capital Fund VIII; and £40 million ($50 million) to U.K.-focused buyout fund Kester Capital III. Within real assets, the board committed €50 million ($54 million) to EQT Active Core Infrastructure and $50 million to EQT Infrastructure VI, both infrastructure funds managed by EQT. New Orleans Sewerage & Water Board approved two new

Pensions & Investments

January 15, 2024

HIRINGS commitments to private equity funds of funds totaling $20 million for its $223 million pension fund. The board committed $15 million to Mesirow Private Equity Fund IX and $5 million to Sango Private Equity IV, managed by Sango Capital Management, at its Dec. 20 meeting, a webcast of the meeting shows. Ohio School Employees Retirement System , Columbus, approved manager hires and commitments totaling $340 million. The $17.2 billion pension fund’s investment committee at its Dec. 21 meeting approved hiring J.P. Morgan Asset Management and T. Rowe Price Group to manage $100 million each in active domestic large-cap equities, and Lazard Asset Management to run $100 million in active emerging markets equities, according to meeting highlights emailed by spokesman Tim Barbour. The committee also approved a commitment of $40 million to value-added real estate fund Blackstone Strategic Partners Real Estate Fund VIII. Oklahoma Firefighters Pension & Retirement System , Oklahoma City, selected Hood River Capital Management to replace Jackson Square Partners as its small-midcap growth domestic equity manager, according to Chase Rankin, executive director of the $3.3 billion pension fund. As of Nov. 30, the portfolio was valued at approximately $81 million, he said. Oklahoma Firefighters initiated the search because Jackson Square Partners had been on watch for performance reasons. Pennsylvania Public School Employees’ Retirement System , Harrisburg, approved two new private equity commitments totaling $200 million. The $72.8 billion pension fund’s board at its Dec. 15 meeting approved commitments of $100 million each to Clearlake Capital Partners VIII, a middle-market special situations fund, and OceanSound Partners Fund II, a middle-market, U.S. technology-focused buyout fund, a news release said. Pennsylvania State Employees’ Retirement System , Harrisburg, approved two new commitments totaling up to $220 million. The $34.4 billion pension fund’s board at its Dec. 12 meeting approved commitments of up to $100 million and up to $20 million, respectively, to private equity and special situations fund Clearlake Capital Partners VIII and a sidecar vehicle that will co-invest alongside the fund, and up to $100 million to Ares US Real Estate Opportunity Fund IV, an opportunistic real estate fund managed by Ares Management.

NEW YORK STATE COMMON PUTS $1.5 BILLION TOWARD ALTS OVER 2 MONTHS New York State Common Retirement Fund, Albany, made 11 commitments in October totaling more than $1.4 billion and a further $121 million in commitments in November, according to the website of Thomas P. DiNapoli, the state comptroller and sole trustee of the $246.3 billion pension fund. The pension fund made two real assets commitments of $250 million each to Stonepeak Opportunities Fund and to Castlelake Aviation V Stable Yield. The Stonepeak fund targets middle-market infrastructure and infrastructure-like assets. The Castlelake fund focuses on sale-leaseback and lessor trading transactions of aircraft, as well as structuring and/or acquisition of aviation debt, the website said. The pension fund also made a $375 million opportunistic absolute-return commitment to Fundamental Empire Fund, a fund of one managed by Fundamental Advisors that invests in affordable and workforce housing, renewable energy, infrastructure and municipal assets. In private equity, the pension fund committed other finalist. Plymouth County (Mass.) Retirement Association committed $10 million to Global Infrastructure Partners V. The $1.3 billion pension fund’s board on Oct. 31 also approved redeeming $10 million from its $75 million investment in an open-end infrastructure fund managed by IFM Investors. Sacramento County (Calif.) Employees’ Retirement Association committed $40 million to Wynnchurch Capital Partners VI. The $12.3 billion pension fund disclosed the commitment to the buyout fund in a December investment activity report included with materials for its Jan. 17 board meeting. San Antonio Fire & Police Pension Fund committed $20 million to Palistar Digital Infrastructure Fund III. The $3.7 billion pension fund’s board approved the commitment to the communications infrastructure fund managed by Palistar Capital at its Nov. 27 meeting, recently released meeting minutes show. San Diego County Employees Retirement Association ’s board committed $75 million to Oaktree CLO Equity Fund I, and the $16 billion pension fund’s board said it made the commitment at its Dec. 14 meeting. Oaktree expects to invest the fund, targeted at $500 million, in the equity and junior mezzanine tranches of Oaktree-managed CLOs and others. Oaktree is committing 15% of the fund’s total capital.

Pittsburgh Comprehensive

San Francisco City & County Employees’ Retirement System

hired Xponance as its S&P 500 index manager, running about $195 million. The $1 billion pension fund’s board approved the hiring at its Sept. 7 meeting, a recently released transcript shows. The pension fund had issued an RFP in June to increase its exposure to women- or minority-owned managers. RhumbLine Advisers was the

disclosed $365 million in commitments in a report from Alison Romano, CEO and CIO, included with materials for the Jan. 10 board meeting. Within real assets, the $34.6 billion pension fund committed $80 million each to Partners Solutions/S Joint Venture, a real estate joint venture among SFERS, manager Crow Holdings Capital and Sustainable Asset Fund IV, an infrastructure fund

Municipal Pension Trust Fund

$200 million to Crestview Partners V, a middle-market buyout fund managed by Crestview Advisors; and $63 million to EagleTree Excelsior Sidecar, a co-investment fund managed by EagleTree Capital that invest additional capital in co-investment opportunities alongside Eagle Tree Partners VI, to which the New York pension fund committed $125 million in June. It also committed $15 million to Tribeca Access Fund II, a growth fund managed by Tribeca Venture Partners that focuses on growth and late-stage companies across the technology sector, primarily in New York. The pension fund also made a pair of credit commitments for $100 million each to L2 Point Opportunities I, and L2 Point Excelsior Co-Invest Holdings I, both managed by L2 Point Management. In addition, the pension fund made three commitments through its emerging managers program: $51 million to Coalesce Capital Partners Fund I, which seeks to make control buyout investments in middle-market technology-enabled services companies; $26 million to KLC Fund II, which is managed by Knox Lane

managed by Vision Ridge Partners. Within private credit, the pension fund committed $75 million to Magnetar Structured Solutions Fund, an opportunistic credit fund managed by Magnetar Capital, and $25 million to private credit co-investment fund Arrow Global/SFERS Co-Invest Partnership. Within private equity, the pension fund committed $70 million to buyout fund Wynnchurch Capital Partners VI and $35 million to venture capital fund Balderton Capital IX. Santa Barbara County (Calif.) Employees’ Retirement System disclosed new real estate commitments totaling $30 million. The $4.1 billion pension fund committed $10 million each to debt fund KSL Capital Partners Credit Opportunities Fund IV; NW1 IOS REIT, a value-added fund managed by NW1 Partners; and Stockbridge Value Fund V, a diversified U.S. real estate fund managed by Stockbridge Capital Group. Stanislaus County Employees’ Retirement Association , Modesto, Calif., committed $20 million to Carlyle Renewable and Sustainable Energy Fund II. The $2.7 billion pension fund disclosed the commitment to the non-core infrastructure fund managed by Carlyle Group in a memo to the board from Stan Conwell, retirement investment officer, included with materials for its Dec. 12 meeting. Texas County & District Retirement System , Austin, committed a total of $190 million to four funds according to an investment activity report on its website. The $43.8 billion pension fund committed $90 million to two venture capital funds managed by Spark Capital: $60 million to Spark Capital Growth Fund V and $30 million to Spark Capital VIII. It also committed $70 million to buyout fund Wynnchurch Capital Partners VI, and $30 million to TCG Crossover Fund II, a venture capital fund managed by The Column Group focused on investing in breakthrough medicines.

and invests in middle-market companies in the consumer and services sectors in North America; and up to $15 million to American South Real Estate Fund II, which is managed by American South Fund Management and focuses on preferred equity and mezzanine debt investments into affordable housing in the southern U.S. In November, the plan committed $75 million to ICV Partners V, which invests in business services, healthcare, consumer, and food and beverage sectors. Also in its emerging managers program, it committed $26 million to Clearhaven Partners Fund II, which focuses on partnership-oriented control buyouts of lower-middle market software and software driven technology companies; up to $10 million to Mandrake Capital Real Estate Fund II, a real estate fund that focuses on the build-to-rent sector and special situation opportunities in the U.S.; and up to $10 million to Grandview Joint Venture III, a real estate fund that will invest in industrial and residential properties throughout the U.S.

Texas Teacher Retirement System , Austin, completed a total of $655 million in new real estate and private equity commitments in December, according to a transaction report. In real estate, the $187.1 billion pension fund committed $250 million to Bridge Development Partners’ BDP Investment Vehicles Master Commitment, which invests in industrial real estate in the U.S. and U.K.; $100 million to Alterra IOS Venture III, which invests in outdoor storage in the U.S. and is managed by Alterra Propery Group; and $100 million to PAG Investment Advisors, which invests in Asia real estate. In private equity, Texas Teachers committed to two Insight Venture Management funds: $80 million to Insight Partners XIII, which invests in early stage technology companies, and $50 million to Insight Partners XIII Growth Buyout Fund, which is a growth and expansion fund largely investing in Europe. The pension fund also committed $75 million to PSC V, a buyout fund managed by Pollen Street Capital that targets financial services companies across Europe and the U.K. Tulare County Employees’ Retirement Association , Visalia,

by Angelo Gordon & Co., and private debt fund Golub Capital Partners 15, said CIO Richard Sneider, chief investment officer. State of Wisconsin Investment Board , Madison, disclosed $808 million in private equity and real estate commitments completed in the third quarter in a report included with materials for its upcoming Dec. 15 board meeting. Within private equity, the board, which manages $147.2 billion in assets including the $115.7 billion Wisconsin Retirement System, committed $200 million to Brandon Lane Partners (Series C), a secondary private equity fund managed by Morgan Stanley Alternative Investment Partners; $125 million to The Resolute Fund VI, a middle-market buyout fund managed by The Jordan Co.; $100 million to buyout fund PSG VI; $65 million to Clairvest Equity Partners VII, a buyout fund; £50 million ($63 million) to Alchemy Special Opportunities Fund V, a distressed debt fund managed by Alchemy Partners; $28 million to venture capital fund Telescope Partners III; and €25 million ($27 million) to European buyout fund VIA Equity V. Within real estate, the board committed $100 million to Berkshire Bridge Loan Investors-MF1 III, a real estate debt fund managed by Berkshire Residential Investments; and $50 million each to opportunistic real estate fund SRP Data Center Fund I and its co-investment fund Stream Data Center Fund I Co-Invest, both managed by Stream Realty Partners.

Calif., approved commitments totaling $62 million. The $1.9 billion pension fund committed $22 million to Audax Private Equity Fund VII, a buyout fund managed by Audax Group; $20 million to buyout fund Clayton, Dubilier & Rice Fund XII; and $20 million to buyout fund Gridiron Capital Fund V. A TCERA spokesperson said the pension fund has made no commitments to prior funds of these managers.

Wyoming State Loan and Investment Board , Cheyenne,

Wisconsin Board of Commissioners of Public Lands , Madison, made two new private debt commitments totaling $56 million on behalf of its $1.4 billion Common School Fund and $30 million Normal School Fund. The board’s investment committee approved commitments totaling an aggregate $28 million each to AG Direct Lending Evergreen Fund, an open-end direct lending fund managed

approved two new commitments to private equity buyout funds A&M Capital Partners III and Arlington Capital Partners VI. The $26.3 billion board does not approve specific commitment sizes to alternative investment funds, but a presentation included with board meeting materials shows A&M Capital Partners III is reserving up to $120 million for the board, and Arlington Capital Partners VI is reserving up to $100 million.

28| January 15, 2024

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Ohio STRS CONTINUED FROM PAGE 1

years of no COLA sparked a wave of protest throughout the state, resulting in a sea change in the composition of the board of trustees in the last several years. The 11-member Ohio STRS board consists of seven trustees elected by STRS participants and four trustees appointed by state officials. Of those seven elected trustees, currently five — all elected since 2021 — are in favor of reforming the system by converting to index funds and cutting bonuses. The seat up for election in May could give the reformers a majority of the board, and is held by Dale Price, current chairman and not considered one of the reform trustees. While petitions for candidates are not due until Feb. 23, the primary opponent currently facing Price will be Michelle Flanigan. Price and Flanigan did not reply to requests for interviews. Flanigan is a government, economics and financial literacy teacher at Brunswick City School District. In its fight for the restoration of a 3% COLA, the Ohio Retirement for Teachers Association, an advocacy group for current and retired educators, has criticized costs the system has taken on that they believe should have been used toward a COLA.

Index funds and bonuses

Those costs include the system’s investment management, particularly its staff of 115 investment professionals to manage the majority of the system’s assets, bonuses paid to those staff, as well as the system’s investments in real estate, private equity and other alternative investments in asset classes that total a target of 29% of the system’s assets. The reformers say index funds could provide better investment returns and lower costs that would enable the system to readopt the permanent COLA. Another controversy that erupted recently was the awarding of $11 million in bonuses to investment staff beating custom benchmarks for the fiscal year ended June 30, 2022, a year in which STRS, along with most institutional investors lost money. Rudy Fichtenbaum, one of the current reform trustees and retired professor of economics at Wright State University, said in an interview: “Members really feel that we’re paying big bonuses to people to do investing and with really no path that we can see toward keeping those promises.” “One of the major issues that STRS faces is the problem of the cash outflows that we have but a lot of what people, I think, are very upset about is being told that everything is wonderful, everything is great, we’re the best, there’s nothing wrong and not admitting what people are feeling here,” said Fichtenbaum.

Millard CONTINUED FROM PAGE 11

gross return of 9% and a net return of 8%? Fear of trial lawyers drives some fiduciaries to focus only on fees. But what happens when the trial lawyers focus on ultimate risk-adjusted returns to participants? This is a crucial question that

January 15, 2024

Fichtenbaum said that participants’ anger over reduced benefits is the issue, and that STRS has not prioritized restoring those benefits like he believes they should. “We could do better with index investing although that alone is not likely at this point to solve our problem,” said Fichtenbaum. STRS officials, meanwhile, say the returns have been strong. STRS spokesperson Dan Minnich said in a May email the system has calculated that, without the 2012 plan design changes, the system’s funding ratio as of June 30, 2022, would have been 49.6%, down from 57.6% 10 years earlier. Instead, the spokesperson said, the funding ratio was 78.9% as of June 30, 2022. The system’s funding ratio as of June 30, 2023, is not yet published. Minnich declined to comment for this story. For the 10 years ended June 30, the system chalked up an annualized net return of 8.6%, the eighth-highest return among the 79 public pension funds whose most recent fiscal-year returns have been tracked by Pensions & Investments as of Dec. 14. The annualized benchmark return was 8.3%. The system returned 7.55% the most recent fiscal year and 10.2% over the past five years. That benchmark, however, is a bone of contention for reform trustees. Fichtenbaum laid the blame on the pension fund’s investment consultants for creating those benchmarks. The board in October voted to hire Meketa Investment Group to replace Callan as its general investment consultant following an RFP process. “I really do believe a pension plan, of course, needs investment consultants,” said Fichtenbaum, “but it needs investment consultants that really know that who they work for is the board and not the staff.” “I’m 100% for getting advice from people but I think we’re the ones who really want to set the terms, meaning if people really think that active management is better, then prove it against real benchmarks, not custom benchmarks,” he said. Fichtenbaum cited the Russell 3000 index as the one such benchmark he would prefer the system use rather than custom benchmarks. Steven Foreman, another reform-minded trustee of the Ohio STRS board elected in 2022, said he is in favor of cutting costs as much as possible in order to be able to restore the COLA. “An example that keeps getting thrown up like it’s frivolous and it’s not, is the daycare (for STRS employees). The daycare ran in the red year after year after year in a system that was making a decision to not give teachers a COLA,” said Foreman, “and it’s been said to me, ‘Well, closing that daycare isn’t going to give the teachers a COLA.’ Well, I didn’t say it was. What I said was we have to make the cuts.” “Everything needs to be looked at, and we can’t make these decisions is posed by the fiduciary rule as now drafted: If we are putting participants’ interests first, how can we not consider the use of the kinds of alternative investments that can demonstrably improve risk-adjusted retirement outcomes? The proposed fiduciary rule has a lengthy comment period and may change in many ways before it becomes a final rule, and it will surely end up in court. One focus

that aren’t benefiting the members,” said Foreman. “Everything needs to be for the benefit of members.” “We have to turn the ship around at some point, and there are a lot of investment systems that hire a whole lot less employees, and there are a lot of investment systems that do index investing,” Foreman added.

Candidate points to Nevada

One of the few systems to chalk up higher return for the 10 years ended June 30 was the $58 billion Nevada Public Employees’ Retirement System, Carson City, which returned an annualized net 8.9%, above its annualized benchmark return of 8.5%. On Nov. 15, board candidate Flanigan posted a YouTube video (which is no longer available) comparing Nevada PERS and Ohio STRS, displaying a chart proclaiming Nevada PERS as the “winner” based on having a staff of three investment professionals and higher one-year return; however the effective date of that return was not provided in the video and STRS had a higher 10year annualized return in the chart she provided. While reformers tout moving to all index funds and cite the Nevada system’s predominately passive public equity and fixed-income portfolio, the Nevada system still has a 12% target allocation to private markets, made up of equal target weights of 6% to private equity and private real estate. According to the Nevada system’s most recent investment report, the actual allocations to private equity and private real estate were 8.6% and 5.3%, respectively, as of Sept. 30. NVPERS Investment Officer Stephen Edmundson said they have kept the 12% target to private markets because it has added to returns and reduced total portfolio volatility. “We think it’s a piece of the portfolio that’s going to get us to our return objective efficiently,” Edmundson said. Part of the issue for the reform movement is the definition of “fiscal integrity,” and how the STRS board in previous years eliminated the COLA in order to preserve that integrity. Bob Buerkle and Dean Dennis, both members of the Ohio Retirement for Teachers Association, were the two lead plaintiffs in a 2019 class-action lawsuit against the Ohio State Teachers’ Retirement System, alleging the board violated the state contract law in reducing the COLA to zero in 2017. That suit was dismissed in 2021 and a new lawsuit, which is still ongoing, was shortly refiled. It alleges the board violated the contractual obligation of the COLA, and that the state of the system was not as dire as stated. The text of the suit states that STRS’ funding ratio as of July 1, 2017 — when the zero COLA took effect — was 75.1%, higher than the 72% average among U.S. public pension funds at that time. n

that will surely remain is the duty to seek the best actual outcomes for 401(k) and other DC plan participants. That should include the consideration of the alternative investments that can enhance retirement security for millions of Americans. n This content represents the views of the author. It was submitted and edited under Pensions & Investments guidelines but is not a product of P&I’s editorial team.

ENCORE: Following his departure from CalSTRS, Christopher J. Ailman said he plans

to serve on boards and advise managers and asset owners on the energy transition.

Ailman CONTINUED FROM PAGE 1

months into her tenure. Although Ailman made the formal announcement at the Jan 11 investment committee meeting, the board has been participating in a succession planning process that started two years ago around the time former CalSTRS CEO Jack Ehnes was close to retiring, Ailman said. The search process is open to all qualified executives, internal and external. “We have strong internal candidates,” said Ailman, who heads an investment team of more than 200. After the transition, Ailman, an avid cyclist and grandfather of two, said he won’t entirely stepping away from the industry. In 2025, he said he plans to embark on his encore, a part-time career serving on boards and advising money managers and asset owners on the global energy transition and the path to net zero — topics he has been passionate about for years. He also intends to continue working as a university guest lecturer. He has been a guest lecturer for a Harvard Business School course on sustainability and for Boston College’s MBA program. And he said he hopes to write more editorials on topics impacting the industry, including the energy transition.

A veteran of market cycles

Ailman is one of the longest-tenured CIOs in the world, taking over the post in October 2000 when the fund was valued at $109.6 billion. During his tenure, Ailman guided the pension fund through the internet bubble crisis, 2000-2002; the economic effects of the terrorist attacks on New York’s World Trade Center on Sept. 11, 2001; and the global financial crisis in 2008. CalSTRS posted a 6.3% gain for the fiscal year ended June 30 and 8.7% for the 10 years ended June 30. By comparison, CalPERS, in which Ailman is a beneficiary, earned a total return of 5.8% for the fiscal year and an annualized 7.1% for the 10 years ended June 30. He also formed an innovation and risk team around 2006 and was instrumental in the board’s adoption of two new asset classes: inflation sensitive and risk-mitigating strategies. “The first big idea out of the innovation team is that Steven developed risk-mitigating strategies,” Ailman said, referring to Steven Tong, CalSTRS’ director of risk-mitigating

strategies who helms the team. “At that point interest rates were diving toward zero. … We needed something that would give diversification when growth failed.” CalSTRS had 8.8% invested in risk-mitigating strategies and 6.1% in its inflation-sensitive portfolio as of June 30, with targets of 10% and 7%, respectively. Risk-mitigating strategies returned -4.19%, underperforming its -1.84% benchmark in the one year and earned 3.51%, identical to its benchmark, for the three years ended June 30. CalSTRS’ investment team developed the inflation-risk portfolio after the 2008 global financial crisis, Ailman said. However, the current allocation to inflation-sensitive strategies isn’t enough to provide the pension fund inflation protection, he said. Pension fund officials will have to devise a way to increase that allocation without cutting into returns, Ailman said.

Continued push on climate

Ailman also helped the board adopt as well as implement a sustainable investment strategy, which includes the long-term goal of CalSTRS’ portfolio achieving net-zero greenhouse gas emissions by 2050 or sooner. When he’s not working on boards such as that of the 300 Club, a group of leading investment professionals, and serving as co-chair of Milken Institute’s Global Capital Markets Advisory Council, he plans to focus on climate change and the energy transition, he said. “Climate change and the energy transition will dominate the landscape for the next 20 years. It has to,” Ailman said. His peers and the money management industry aren’t paying enough attention to it, he said. While some money managers are focused and devoted to the topic, there also is some greenwashing, he said. “We need better data from companies and better analysis of that data,” Ailman said. “It’s a key source of alpha and a key source of risk.” Even as Ailman prepares to step down from leading CalSTRS’ investment team, the pension fund is evolving. At the investment committee meeting, members are scheduled to consider for the first time adding 10% leverage to the entire fund on a temporary basis to fulfill cash flow needs in circumstances when it is disadvantageous to sell assets. CalPERS already employs 5% total fund leverage. n

January 15, 2024

Pensions & Investments

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•

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•

Where to find pockets of opportunity in the vulnerable emerging markets.

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ed global recession will come this year. There’s a 70% chance of a recession among global developed markets — excluding Japan — in RBC Global Asset Management’s cards, said Eric Lascelles, chief economist. “Generally speaking, it is a developed world recession,” although the firm is expecting emerging markets to grow at a slower pace than previously — just not with “quite the same magnitude of decline.” And while we’re in “a time of higher-than-usual uncertainty” — something Lascelles dislikes saying since one “could say that every day of your career” — it’s not the highest seen. “Nothing compares to 2020; I don’t even think it’s as high as a year ago when (we were) grappling with double-digit inflation and interest rates popping,” he said. That recession will most likely be “fairly mild — generally you need some other special sauce” to get a deep recession. He thinks it’s a “vanilla” case of interest rates up, economy down. “We think it’s fairly brief, a couple of quarters,” and RBC GAM is also assuming the labor market is less damaged than it would usually be by a recession, given companies have had to fight hard to attract workers. RBC GAM had $399 billion in assets under management as of Sept. 30. Eastspring Investments also has a mild recession concentrated in the developed markets as its base-case scenario “in the second half of 2024 as the cumulative effects of the rate hikes kick in,” CEO Bill Maldonado said. Other economists warned of a lag effect of rate hikes on the U.S. economy. “Over the past year the euro area and the U.K. have stagnated, arguably they already (are) in a recession, while Chinese growth has disappointed,” said Emiel van den Heiligenberg, head of asset allocation at Legal & General Investment Management, which had $1.47 trillion in AUM as of June 30. “Yet the U.S. economy has been remarkably resilient to the sharp rise in interest rates. We think the economic pain in the U.S. is delayed but not averted indefinitely,” he said. A recession is the most likely scenario for early this year, van den Heiligenberg said, with fiscal policy “set to turn more restrictive.” And Daniel McCormack, head of research at Macquarie Asset Management with A$892 billion ($586.3 billion) in AUM, said “the risk of a major slowdown in growth or even a recession remains high,” with the “war chest of savings consumers built up during the pandemic and surprisingly loose fiscal policy — that either won’t be present in 2024 or will be much less strong. At the same time, some key indicators with leading indicator properties — such as the yield curve, credit conditions and monetary aggregates — are all suggesting a slowdown in growth is coming.” However, others do not have a recession as the baseline forecast for this year, including State Street Global Advisors, which has $3.69 trillion in AUM. “This view is predicated on the combination of strong starting point for household finances and still robust labor markets, plus expectations of a meaningful policy pivot by key (developed market) central banks (ex-Japan) towards lower interest rates,” said Lori Heinel, global chief investment officer. “The combination extends the runway for the

elusive yet achievable soft landing.” While Lazard Asset Management’s Ronald Temple, chief market strategist, thinks the U.S. will avoid a recession, he questions “the optimism of what markets are saying,” with a consensus GDP forecast of 1.2% in 2024. He thinks market participants should be “a little more sober-minded” about how the U.S. consumer has largely depleted savings and some will be paying part of the collective $100 billion in student loan payments that restarted in October. On the corporate side, leveraged lending is “most vulnerable. It’s one thing to be able to pay the first six months, another for the next … I think there will be more default activity in 2024, more companies that try to make it through to those rate cuts but just can’t get far enough along,” Temple said. He also highlighted the U.S. fiscal deficit running at 6% or 7% of GDP — “pretty much

CAUTIOUS: Ronald Temple predicts the U.S. will avoid a recession but urged market participants to be ‘sober-minded.’

unheard of,” he added. So it’s positive in terms of probably avoiding a recession, “but we shouldn’t be putting up the celebratory bunting yet,” Temple said. Lazard has $193.6 billion in AUM. The risk of a large leveraged player such as a bank, insurance firm, hedge fund or even a leveraged corporate player, getting “in trouble due to higher interest rates, which triggers a flight to quality,” is also on Legal & General Investment Management’s so-called gray swans list — known but unlikely-to-occur events — according to LGIM’s van den Heiligenberg. While a U.S. recession is not at the forefront of all sources’ minds, one thing they all will be keeping a close eye on is central bank policy — and who blinks first in terms of cutting interest rates. And while they said they would never forecast that cen-

tral banks were “definitely” done in terms of rate hikes, they were pretty sure that the cycle has ended — in the U.S. and eurozone, at least. The Federal Open Market Committee has already indicated there will be three rate cuts this year. As for which will be the first and when, it’s not that clear-cut. “In theory, downside drift of the European economy could lead to the (European Central Bank) moving first,” potentially as early as in the first quarter of the year, said Jens Foehrenbach, CIO of Man Solutions, Man Group’s customized solutions unit. However, market pricing indicates that there’s a higher chance of the Federal Reserve moving first, he said. “So, I expect the Fed to go first, but not until Q2” unless something dramatic happens or there’s an exogenous shock, he added. “However, (that) may be pulled forward if data softens as (the) Fed likely doesn’t want to get too close” to the presidential election in November. Man Group had $161.2 billion in AUM as of Sept. 30. SSGA thinks that, with the exception of the Bank of Japan, key developed markets central banks are done hiking “and that the main 2024 debate will be around the extent of the coming cuts,” Heinel said. “Timewise, there are good enough arguments for both the Fed and the ECB to deliver the first cut if not in March, then very soon thereafter,” adding that these moves should not be seen as monetary easing per se, “but rather as a calibration of nominal policy interest rates in line with quickly retreating inflation. The policy stance remains restrictive even with these cuts,” she said. Some sources expect rate cuts to come later in the year, with Emile Gagna, economist at Candriam, looking at the “very end of the second quarter or, more likely in Q3.” Gagna expects the Fed to lead this easing cycle, unless activity weakens further in the eurozone — which is not the scenario the firm is expecting to see. Candriam has about €144 billion ($154.9 billion) in AUM. Others think another market will be the first to cut, with two sources highlighting Canada. Tessa Mann, director of macro strategy at Willis Towers Watson, said the firm thinks “current bond market expectations of a number of policy rate cuts, starting early in 2024, is optimistic, absent a material softening of economic data … this appears more likely for Europe and

P&I asked the experts: What will be top headlines in 2024? We asked executives in the money management and pension fund industry what they think will be the most and least likely headlines to top news stories by P&I in 2024. The results were decidedly mixed.

Kate El-Hillow, president and CIO, Russell Investments MOST LIKELY:

The 60/40 portfolio isn’t dead, or Rise of the machines LEAST LIKELY:

PM Starmer reapplies for EU membership Emiel van den Heiligenberg, head of asset allocation, LGIM MOST LIKELY:

Netherlands wins the Euro 2024 LEAST LIKELY:

Big technological breakthrough in nuclear fusion makes oil drop to below $20 a barrel Lori Heinel, global chief investment officer, State Street Global Advisors LEAST LIKELY:

Teens around the world drop social media, turn to books for fun!

Pensions & Investments

Canada than the U.S.” And RBC GAM’s Lascelles said while it’s not obvious who makes the first move, the timing is “pretty similar” for the eurozone, U.S. and Canada. “I wouldn’t be surprised if Canada was the first — it’s very rate-sensitive. I guess (I would) pick the eurozone over the U.S., with the clear caveat that it’s not at all clear,” he added. The wild card is the U.K., which is at the “biggest risk of (a) further rate hike, since inflation is much higher than elsewhere, labor markets softening only slowly and real rates are still relatively low,” said Shamik Dhar, chief economist at BNY Mellon Investment Management, which has $1.8 trillion in AUM. Fiscal policy is also an area to watch, said Eastspring’s Maldonado. “Governments, particularly in Asia, tend to give more fiscal handouts in an election year. This could make inflation sticky and reduce the space for rate cuts,” he said. Sources cited elections in India, Indonesia and Taiwan as ones to watch in Asia. Eastspring had $216 billion in AUM as of Sept. 30. While central bank moves and recession risk are expected to take different courses this year vs. in 2023, geopolitical risk remains high — and political risk is also back on the agenda thanks to a busy election year across the globe, with “the potential for some abrupt change,” RBC GAM’s Lascelles said. SSGA’s Heinel agreed, saying “the election calendar is crowded with several geopolitically relevant elections,” with most of them only carrying downside risks. On the elections front, more than 2 billion people across 50 counties will go to the polls around the world this year, according to the Center for American Progress — with the U.S. and the U.K. leading the pack in terms of potential global relevance and reverberations. “With populism, partisanship and pushback on climate policies and inequality, the political center is likely to be weakened,” Man’s Foehrenbach said. “This is another risk to the outlook which isn’t priced in.” In terms of presidential elections, the year kicks off in January in Taiwan — “the warm-up act for a blockbuster U.S. election at the end of the year,” said Kate El-Hillow, president and CIO at Russell Investments, which has $291.9 billion in AUM. “China/U.S. relations are thawing so a (Democratic Progressive Party) win

January 15, 2024

Bitcoin

What industry experts predict for 2024

CONTINUED FROM PAGE 2

Kate El-Hillow

Jens Foehrenbach

Lori Heinel

Thijs Knaap

Eric Lascelles

Russell Investments

Man Solutions

State Street Global Advisors

APG Asset Management

RBC Global Asset Management

2023 actual

7%*

-1%

26.3%

22.2%

2.7%

2.6%**

S&P 500 Global equities

7.1%*

Global GDP

2.5%

Global CPI

Towards 2%

2.3%

2.9% (Eurozone)

3.7%

5.9%***

3.5%

3.9%

5.2%

3.7%

$80

$71.65

$1.21

$1.10

70%

—

10-year Treasuries

3.5%

4.2%

U.S. unemployment rate

4% to 5%

4.6%

WTI per barrel

$1.13

Euro vs. dollar Risk of a recession

55%

20% (global)

25% (U.S.)

*One-year capital market assumption return. ** Estimate. ***Through November. Sources: Bloomberg, U.S. Department of the Treasury, U.S. Bureau of Labor Statistics, World Bank

in Taiwan may be less consequential than feared a few months ago.” These two elections “stand out given they both impact great power relations and the epicenter of global fragmentation,” said SSGA’s Heinel. The U.S. elections in November “will be a source of significant uncertainty, particularly if Donald Trump can pull off a red wave where Republicans solidify control of the presidency, House and Senate,” El-Hillow said. “There will be difficult questions about the outlook for monetary and fiscal policy” if Donald J. Trump were to make it for a second presidential term, she said. Will he go for growth with unfunded tax cuts and what would that mean for the Fed and its keeping inflation near 2%, she added. This is also a significant year given it’s the first time in 60 years that both the U.S. and U.K. have elections, Dambisa Moyo, author and economist, said. “And numerous other elections — Taiwan, India and Russia are bound to be telling,” she said. However, Moyo offered a “contrar-

Thijs Knaap, chief economist, APG Asset Management MOST LIKELY:

Renewable energy capacity increases more than expected in 2024 LEAST LIKELY:

Markets calm as economists’ forecasts all exactly right Eric Lascelles, chief economist, RBC Global Asset Management MOST LIKELY:

Central banks pivot to rate cuts LEAST LIKELY:

Cost-of-living crisis officially solved Bill Maldonado, CIO, Eastspring Investments MOST LIKELY:

Fed cuts rates sooner than expected Resurgence in inflation drives rates higher Daniel McCormack, head of research, Macquarie Asset Management MOST LIKELY:

U.S. consumer falters as the U.S. economy enters recession LEAST LIKELY:

China’s financial crisis (and associated capital flight) rocks global markets

ian view; stressing the need to strip out noise from the signal — in the case of the U.S. and U.K. ... there may not be a lot of daylight between the incumbent policies and the opposition,” she said. In the U.S., for example, “policy towards China has remained the same under Biden as it was under Trump.” While there could be differences in how each deals with public spending, climate priorities and immigration, “the differences will not be as great as political commentary may suggest,” she said. And Thijs Knaap, chief economist at APG Asset Management, said the firm recognizes “the political calendar will be heavy in 2024. Election years usually see plenty of government spending, but this may be offset by the private sector’s reluctance to invest when policy uncertainty is high. We reckon with somewhat higher volatility but otherwise do not let it influence our decisions much,” he said. APG is the in-house manager for the €474 billion Stichting Pensioenfonds ABP, Heerlen, Netherlands. In regards to geopolitical risks, the “best case is depressing,” Foehrenbach said. “Some truce in Gaza with some form of governance being established; ongoing but not escalating conflict in Ukraine; Iran — status quo; no provocation from (the) Taiwanese election,” he said. But the “downside risks are large.” LGIM’s list of six gray swan events includes five geopolitical risks — the escalation of the Ukraine war with the mobilization of NATO; a Chinese naval blockade of Taiwan; increased tensions on the Korean peninsula; more election wins for the “extreme right” in Europe — following a win in the Netherlands last year, “eroding the EU, trade and the confidence to do business in Europe”; and “a cyberattack (that) causes loss of life and a significant build-up of geopolitical tensions between the West and Russia or China.” But it’s not all risk and doom for 2024.In terms of region, the U.S. is the greatest potential bright spot, said Macquarie’s McCormack. “Election years are not often recession years in

the U.S. and if the economy was able to maintain its resilience” — which he said is unlikely in Macquarie’s view but is possible — “from an investment perspective it would be like a shining star on a dark night.” When it comes to asset classes, absolute yields on credit, including alternative credit, “are becoming appealing from a starting yield perspective as they provide a nice cushion against further yield increases or spread widening,” LGIM’s van den Heiligenberg said. AI was highlighted by several sources as a bright spot for investors, with Russell’s El-Hillow noting Google’s latest language model Gemini “being the latest impressive breakthrough. Tech enthusiasm could propel markets higher, and forecasts for a productivity boost from the adoption of AI tools could start to shift from hope to reality,” she said. Van den Heiligenberg said there is “hopeful progress” in many areas of technology, be it AI, machine learning, robotics or medical science. “There is an optimistic scenario possible that this significantly increases productivity, economic growth and lowers inflation, poverty and increases life expectancy. There could even be an optimistic scenario where technological breakthroughs in for instance carbon capturing making a Paris-aligned scenario or better much more likely,” he added. And the transition to a low-carbon economy was cited by APG’s Knaap as one of several themes for the coming years. “Rather than a matter of monetary economics it will be a question of real changes: investment, building physical structures to replace old (energy) infrastructure, replacing fleets, reorganizing the economy,” he said. “If there are not too many unexpected events, next year might be the year we can get down to the business of readying the economy for future, by investing in the structures we’ll need. As usual there are many ways to be distracted — financial crises, geopolitical events, the economic cycle in China — but the starting position is reasonably good,” he added. n

either approve or deny a proposed rule change filed with it by the Cboe BZX Exchange to list and trade shares of the ARK 21Shares Bitcoin ETF. “Today is a monumental day in the history of digital assets,” said Samir Kerbage, CIO at Hashdex, in a statement provided by a spokesperson. “The approval of 19b-4s marks the next phase for the industry by allowing U.S. investors to fully participate in the promise of bitcoin, and we are thrilled to play a leading role in this next wave of growth and innovation.” During a Jan. 10 appearance on Bloomberg ETF IQ, ARK Investment Management CEO Cathie Wood was asked about her expectations for the breakdown of flows into the ARK 21Shares Bitcoin ETF once it’s approved. “We’re going after all of these categories and of course our bread and butter historically has been retail, whereas 21Shares has been much more institutional,” said Wood, who is also ARK’s chief investment officer and founder. Wood was asked what she expected the initial breakdown between retail and institutional investors to be and how that might look in six months’ time. “We’re even speaking with state pension funds as well as even some treasurers. So, the interest is far and wide.” When it comes to institutions, however, “it’s not going to be overnight,” she said. “There are so many boxes to check, so much due diligence,” Wood said. “And if the approval takes place, that is for many of them, the starting point for due diligence, so I wouldn’t expect overnight success.” However, spot bitcoin ETFs won’t be available for purchase on Vanguard Group’s brokerage platform, a Vanguard spokesperson confirmed. “While we continuously evaluate our brokerage offer and evaluate new product entries to the market, spot bitcoin ETFs will not be available for purchase on the Vanguard platform,” the spokesperson said in a Jan. 11 email, adding that Vanguard has no plans to offer Vanguard bitcoin ETFs or other crypto-related products. “Our perspective is that these products do not align with our offer focused on asset classes such as equities, bonds, and cash, which Vanguard views as the building blocks of a well-balanced, long-term investment portfolio,” he said.

Fee battle

The days leading up to the SEC’s long-awaited approval of spot bitcoin ETFs saw a furious fee battle erupt among firms seeking to offer the products. Fees vary depending on the fund, ranging from 0.19% to 1.5%. “This the first time a fee war has broken out before they’ve even launched,” Bloomberg Intelligence senior ETF analyst Eric Balchunas said during the show. “This is wild.” In addition to competition over fees, firms are looking for other ways to differentiate their products. A VanEck spokesperson said the firm has committed to donating 5% of the VanEck Bitcoin Trust’s profits to Bitcoin Core developers, who maintain the code running the bitcoin blockchain. Grayscale also confirmed its ETF approval through a spokeswoman. n

January 15, 2024

Pensions & Investments

AT DEADLINE CalSTRS OKs leverage

Morgan Stanley settles

CalSTRS’ investment committee on Jan. 11 approved the ability to temporarily leverage the entire portfolio by up to 10% to smooth out cash flows and rebalance the portfolio. “At this juncture, staff needs better flexibility to exercise discretion and add value,” Scott Chan, deputy CIO, said at the investment committee meeting of the $304.9 billion California State Teachers’ Retirement System, West Sacramento. At the same meeting, the committee also expanded how far each asset class can stray from its target asset allocations before the portfolio must be rebalanced. Staff need discretion on certain decisions, such as “when to rebalance the portfolio, when to use potential leverage to smooth out negative cash flows, particularly during market disruptions and when to sell assets, if any,” Chan said. Historically, staff has been able to use up to 5% total fund leverage. Separately, CalSTRS revised its corporate governance principles that guide pension fund officials’ stewardship and also adopted a three-year plan that includes a company’s workforce and its community as an issue for engagement with portfolio companies. Among the revisions to its governance principles, the investment committee added that company boards’ role in setting human capital management standards should include incentives and compensation, retention and development, fair labor practices and pay equality. The principles also include four employee metrics companies should report: workforce headcount, cost, stability including turnover and diversity data.

The Securities and Exchange Commission and Department of Justice charged Morgan Stanley & Co. and the former head of its equity syndicate desk for perpetrating a multiyear fraud concerning block trade disclosures. The firm agreed to pay more than $249 million to settle the fraud charges and for failing to enforce information barriers. It also entered into a nonprosecution agreement with federal prosecutors in Manhattan that allowed it to avoid criminal charges. Under the settlement, Morgan Stanley will pay approximately $138 million in disgorgement, approximately $28 million in prejudgment interest and an $83 million civil penalty, according to a Jan. 12 SEC order. From at least June 2018 through August 2021, Pawan Passi, formerly the head of Morgan Stanley’s equity syndicate desk in the Americas, and a subordinate disclosed non-public, potentially market-moving information concerning impending block trades to select buy-side investors despite the sellers’ confidentiality requests and Morgan Stanley’s own policies regarding the treatment of confidential information, according to the SEC order. “We are pleased to resolve these investigations and are confident in the enhancements we have made to our controls around block trading, including strengthening our policies, procedures, training and surveillance,” a Morgan Stanley spokesperson said. “The core of this matter is the misconduct of two employees who violated the firm’s policies, procedures and our core values.”

‘Flying blind’ on climate As investors assess climate-related financial risk, they are “flying blind” to the risk of climate lawsuits that could hit companies with trillions in damages, according to a research report from Oxford Sustainable Law Programme published Jan. 11 in Science. Current practices used by investors to assess the financial risk of climate change do not adequately account for “increasingly impactful climate litigation and regulatory enforcement actions,” the report said. The report counts 2,485 climate lawsuits filed globally against large corporate carbon emitters so far. Chevron alone could be liable for up to $8.5 trillion, the report estimates, and if climate lawsuits against the energy giant succeed, “Chevron’s business may in fact be net value destroying,” Rupert Stuart-Smith, the report’s co-author and senior research associate at the Oxford Sustainable Law Programme, said in the release.

Union offered annuities While the United Auto Workers was unable to persuade Detroit’s automakers to open their defined benefit plans to resolve the 46-day strike that ended in November, it coaxed the companies into doing the next best thing: The automakers agreed to provide workers with guaranteed retirement income options. GM and Stellantis have already taken action, offering their union workers access to Hueler Companies’ annuity platform. The platform “allows individuals to compare low-cost, competitively bid lifetime income annuities from multiple insurance companies and choose the income stream best suited to their personal financial needs,” a Stellantis spokeswoman said in a statement. The platform, which became available to the company’s U.S. salaried employees and retirees in September, is now available to union workers as well, she said. GM, meanwhile, will make the platform available to union workers no later than Feb. 1, a GM spokesman said in an email.

HSAs CONTINUED FROM PAGE 6

Group show a steady, yearly growth in total HSA assets from 2007 through 2022, while the investing component grew, too, except for a slight dip in 2022 due to stock market turmoil. By year-end 2022, investing assets were $33.8 billion, making up 32.5% of the $104 billion in total assets. The first half of 2023 portends a banner year. HSA investing assets reached $40 billion, or 34.5% of the $116 billion total assets, according to Devenir, a Minneapolis researcher of — and provider of investing solutions for — HSAs, whose surveys cover the top 100 HSA providers. “It’s reasonable” to say the HSA investing component “has been a little bit underutilized,” said Jon Robb, Devenir’s senior vice president of research and technology. A “significant percentage of account holders don’t know they can invest through an HSA,” he said. However, ”the industry is getting better” at educating participants. A strong stock market in 2023 certainly helped. HSAs are available to participants in high-deductible health plans offered by employers. They provide a triple tax advantage. Contributions are made with pretax dollars, investment gains within HSAs are tax free and withdrawals are tax free for qualified medical expenses.

In the latest survey, published in November and covering 2022, PSCA reported that 32.9% imposed a minimum of more than $1,000 while 45.2% had a minimum of $1,000 and 5.5% had a minimum of less than $1,000. The survey said 16.5% of respondents had no minimum. The no-minimum result was the highest in the last five years of PSCA surveys, the latest of which had 529 employers offering HSAs.

Fees coming down

Morningstar also reported that fees can play a role in HSA investing attractiveness. “They can be discouraging,” Carlson said. “We have seen them come down” since Morningstar began reviewing accounts in 2017, especially maintenance fees. Morningstar’s October report noted that total fees ranged from 0.31% (Fidelity Investments) to 0.81% (Saturna Capital) with an average of 0.59% based on an assumption of a

and 19.3% in 2020. However, Fidelity’s investing asset percentage was well above what PSCA found: 27.8% in 2022; 27% in 2021; and 28.7% in 2020. “People come to Fidelity for investing,” Volo said. Fidelity’s HSA no-additional-fee approach started in 2019 when Fidelity introduced no-commission trading.

3 investment styles

Participants in a Fidelity HSA can choose from three investment styles: a managed account, a self-directed brokerage account, and a model portfolio of more than 35 active and passive funds chosen by and monitored by Fidelity. The no-additional-fee rule applies to the brokerage account and the model portfolio. For the managed account, there is no extra fee for accounts under $25,000 and a 0.35% fee for $25,000 and above. A Fidelity brochure says the managed account

Growth of HSA assets HSA investment assets have seen rapid growth despite 2022’s market losses. $110 $100 $90 $80

Investments Deposits

$70 $60

Minimum amounts

A prominent HSA industry debate focuses on the role of minimum amounts participants must have in their accounts before making investments. The amount is typically set by the HSA provider. “Generally the account holder can only invest the amount over the investment threshold if one exists,” Robb said. The minimum can serve as a rainy-day fund for medical emergencies. If there was no minimum, participants would have to pay out of pocket or be forced to sell their investment to cover the emergencies’ costs. “You need that threshold for liquidity,” said Will Hansen, chief government affairs officer of the American Retirement Association. “The general thinking is to keep enough cash to meet the (medical) deductible,” said Roy Ramthun, president and founder of HSA Consulting Services, Houston. “Not everybody wants to use the HSA as an investment vehicle.” Others say the minimums can be a hurdle to investing within the HSA. “The threshold can be viewed (by participants) as a deterrent,” requiring more education by providers, said Eric Remjeske, founder and president of Devenir Group. Because Morningstar research shows the average HSA balance is just under $2,500, “if you have a $1,000 minimum, it may discourage participants” from investing, said Greg Carlson, senior manager research analyst, multiasset and alternative strategies. He was referring to an annual Morningstar report in October analyzing 10 HSA providers. “HSA investors are better off selecting providers with a low or no investment threshold,” the report said. Although HSA experts say thresholds have come down somewhat over the years, annual surveys by the Plan Sponsor Council of America show a majority of plans impose minimums of $1,000 or more.

$50 $40 $30 $20 $10 $0

2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022

Source: Devenir Research 2023 Midyear HSA Market Statistics & Trends report

$14,000 investment account balance and a $2,500 spending account balance. Total fees include underlying fund fees plus additional maintenance, custodial and investment fees. The underlying fund fee is the average expense ratio of the funds each provider offers account holders. Seven providers don’t charge maintenance fees, six don’t charge investment fees and five don’t charge custodial fees. Two providers each charged six fees; another charged eight, the report said. Fidelity only charges an underlying fund fee, which is just above the group underlying fund-fee average of 0.29%. Over the last four years of annual Morningstar HSA reports, Fidelity was the only provider to earn a “high” rating for Morningstar’s assessment of investing accounts. During this period, Fidelity also was the sole winner or tied with others for the “high” rating for spending accounts. Among 3 million HSA accounts, 20% of participants have investments, which represent 49% of HSA assets, said Karen Volo, a Fidelity senior vice president and head of health and benefit accounts. Fidelity’s HSA assets have grown steadily to $19.8 billion in June 2023 from $3.56 billion in December 31, 2018. Fidelity’s investment participation rate is similar to those in the PSCA survey: 18.7% in 2022, 21.5% in 2021

is intended for participants investing three years or more. Volo said the a top goal for Fidelity is educating participants how HSAs play a role in investing for their financial future. The biggest challenge is explaining the difference between a health savings account and a flexible savings account. “Carryover is the biggest point of confusion,” said Volo, referring to the HSA accounts being held over for succeeding years while FSAs impose a yearly use-it-or-lose-it policy with no carryover. FSAs aren’t investment vehicles. Participants don’t pay taxes on their FSA accounts, which can be used to pay certain medical and dental expenses. Fidelity’ conducts education throughout the year via webinars, email campaigns and mobile app information. “It’s not just open enrollment,” Volo said. Comprehensive and extended education is endorsed by HSA consultant Ramthun, who lamented that sponsors and providers don’t provide enough information. During open enrollment, “you spend an hour talking about insurance, and with 30 seconds left you talk about HSAs,” he said. “Employers need to follow up annual discussions” about health benefits by “bringing HSAs into the discussion,” he said. “HSAs should be part of the retirement education.” 

Pensions & Investments

January 15, 2024

PEOPLE MOVES

Flurry of CIO and CEO changes at managers and asset owners Ken Caplan and Lionel Assant were appointed to the newly created roles of global co-CIOs at Blackstone. The firm’s assets under management recently surpassed the $1 trillion mark, and the promotions underscore Blackstone’s increasing breadth of investment strategies and continued expansion, a news release said. The firm expects “an extremely active deployment period, with over $200 billion of dry powder,” the release added. Caplan has been co-head of the global real estate business alongside Kathleen McCarthy since 2018. In his new role, he will work with the business unit CIOs and group heads to provide additional firm-level investment oversight, primarily for real estate and credit and insurance, the release said. Nadeem Meghji, head of real estate Americas, will succeed Caplan as global co-head of real estate. Assant has been European head of private equity since 2012, a role he retains, the release said. As co-CIO, Assant will work with business unit CIOs and group heads across private equity, including across the corporate private equity, infrastructure, tactical opportunities, growth, and life sciences businesses. Kamal Bhatia was named president and CEO of Principal Asset Management, succeeding Pat Halter, effective Feb. 10. Halter will retire on April 2, after 40 years with the firm. He will assume an interim role as division president in the interim period, a news release said. Bhatia will be responsible for strategy, investment performance and client growth for the global investment unit. The company has $651 billion in assets under management and is part of Principal Financial Group. Bhatia will also lead the continued expansion of global and local offerings, focusing on specialty public and private investment capabilities, multiasset strategies and retirement solutions. Bhatia is senior executive managing director and global head of investments at Principal Asset Management; president of Principal Funds, a platform covering U.S. mutual funds, European and Asian UCITS, and global exchange-traded funds; and is chair of the Principal Funds board. He will continue in his role as president of Principal Funds and chair of the board. Stephen McLennan has been appointed chief investment officer-as-

GSAM CONTINUED FROM PAGE 6

ee supported the team through the change. “It was fundamental to the trustee that BAPFIM as a unit remained focused on doing the job and recognized that people had their future in mind as we went through that process,” Gallagher said. Ultimately, it was GSAM’s commitment to understanding the plan and its needs that put it above its competitors.

Anderson has over three decades of experience in insurance and financial services. He spent the past 25 years with global consulting firm Mercer, where he is chief commercial officer based in London.

Kamal Bhatia

Stephen McLennan

set allocation at Ontario Teachers’ Pension Plan Board, Toronto, while Gillian Brown was named chief investment officer-public and private investments, effective immediately. Both are newly established roles that will report to Jo Taylor, president and CEO of OTPP, said a Jan. 12 news release. McLennan had been serving as acting head of investments since September 2023 following the departure of Ziad Hindo, the former CIO. In his new role, McLennan will oversee OTPP’s overall asset mix to “drive total fund performance, management of portfolio risks, and approach to strong governance and investment practices,” the release noted. In her new role, Brown will be “accountable for the execution and management of investments across public and private markets through Ontario Teachers’ equities, infrastructure and natural resources, teachers’ venture growth, capital markets and real estate investment departments,” the release stated. Brown most recently served as head of the capital markets department since 2018. OTPP had net assets of C$249.8 billion ($188.4 billion) as of June 30.

Edward M. ‘Ted’ Maloney was appointed CEO of MFS Investment Management effective Jan. 1, 2025, succeeding Michael Roberge. Roberge will assume the role of executive chair. Reporting to Roberge, Maloney will be responsible for the strategic direction and vision of MFS, leading a team of investment, distribution, finance, human resources, legal and technology functions at the firm, a Dec. 14 release said. Maloney is CIO — a position he will continue to hold at this time, the release noted. Details on whether he will remain CIO after January 2025 were not immediately available. Maloney initially joined MFS in 2005 as an equity research analyst. MFS had approximately $575.8 billion in assets under management as of Nov. 30. Philippe Setbon was appointed “We ended up in a competition with some very credible contestants, and gradually whittled it down. And without being unkind to GSAM, there would have been others who could have done it. That focus on a bespoke proposal, the work to understand the scheme and the strategy … they made it really clear they wanted to do this job. And that was attractive,” Gallagher said. He also highlighted the firm’s willingness to engage with the trustees. The GSAM team also recognized the many stakeholders in the situation, including the trustees, the sponsors and

Gillian Brown

Ted Maloney

CEO of Natixis Investment Managers, succeeding Tim Ryan in the role, effective Dec. 14. Ryan “wishes to pursue his career outside the group,” said a news release from parent company Groupe BPCE. Setbon is in charge of asset and wealth management, a member of the senior management committee of Groupe BPCE’s global businesses, and a member of the BPCE executive committee. He reports to Stephanie Paix, CEO of Group BPCE’s global businesses. Setbon had been CEO of Ostrum Asset Management, a Natixis affiliate manager, since 2019. Ostrum had €382 billion ($404.2 billion) in assets under management across insurance-related and fixed-income strategies as of Sept. 30. Olivier Houix was named CEO of Ostrum, joining from the parent group where he had been chief sustainability officer of the global businesses since September 2022. Also, Nathalie Bricker was named deputy CEO of Natixis Investment Managers, the first appointment under the $1.18 trillion manager’s new CEO, a spokesperson confirmed. The position is new, and Bricker also joins the senior management committee of parent firm Groupe BPCE’s global financial services business lines. Bricker also retains her responsibilities as global head of finance and strategy, a news release said.

Matt Toms, global CIO of Voya Investment Management, has succeeded Christine Hurtsellers as CEO. A spokesperson for Voya Investment Management said that the firm will no longer have the role of global CIO. Hurtsellers, who informed the company of her decision to retire later this year, will now serve as a strategic adviser until her retirement, said a Jan. 10 news release. Toms and Hurtsellers both report to Heather Lavallee, CEO of Voya Financial, the parent of Voya IM. In addition, Eric Stein was named head of investments and CIO-fixed income at Voya IM. Stein will report to Toms. the job of the membership. Transferring the team to GSAM also gives them “support with career opportunities,” Gallagher said. At the time the deal was announced, GSAM’s Francis told P&I that the team of 49 would all be offered roles, many initially working primarily on the BAE pension funds but, over time, being integrated fully into the team and working across other GSAM clients.

Key-person issues

Broadly, the reasons for corporations looking to offload the manage-

Philippe Setbon

Kelly Young

Stein most recently served as CIO-fixed income, at Morgan Stanley Investment Management. Voya IM had $306 billion in assets under management as of Sept. 30, according to the company website.

Brian Collett will retire as the CIO of the Missouri Local Government Employees Retirement System, Jefferson City, Mo., effective Jan. 31. Since Collett initially joined Missouri LAGERS in 2005, assets have grown to $10.1 billion from $2.9 billion, said a Dec. 20 release. Missouri LAGERS also said that it plans to retain an executive search firm to find the next CIO. Megan Loehner, deputy CIO, will oversee the day-to-day management of the portfolio in the interim. Kelly Young was named the next CEO at Acadian Asset Management, effective Dec. 20, according to a news release. Young succeeds Ross Dowd and will be responsible for overseeing the firm’s daily operations, carrying out its long-term strategic initiatives and leading the company to its next growth phase. Brendan Bradley, executive vice president and chief investment officer at Acadian, described Young as “a proven, respected and effective leader” in the news release. Young has worked at Acadian since 2009, most recently serving as the Boston-based firm’s executive vice president and chief marketing officer. Ted Noon succeeds Young as Acadian’s chief marketing officer, the news release said. He was promoted to the role after serving as senior vice president and director of the Americas client group. Acadian had $97 billion in AUM as of Sept. 30.

Christopher Hogbin was named AllianceBernstein’s first global head of investments, according to a news release from the Nashville, Tenn.based asset management firm. Hogbin was head of equities. The firm has $696 billion in AUM. As global head of investments, Hogbin will oversee AllianceBernstein’s public markets businesses, including equity, fixed income, multiasset and hedge fund solutions, investment solutions and sciences, as well as the company’s responsibility team. Nelson Yu, the firm’s CIO of investment sciences and insights, assumed Hogbin’s role as head of equities. Mohit Mittal, managing director and portfolio manager, was also named to the additional title of chief investment officer-core strategies at Pacific Investment Management Co. Scott Mather, who retired at the end of 2022, previously held the CIO-core strategies position, a PIMCO spokesperson said. In this role, Mittal will oversee fixed-income portfolios across PIMCO’s core suite of strategies, including low and moderate duration, total return and long duration, and lead the core portfolio management team, said a Dec. 12 news release. Mittal reports to Dan Ivascyn, managing director and group CIO. PIMCO had $1.74 trillion in AUM as of Sept. 30.

David Anderson was selected to be the next CEO at the Australia Retirement Trust, Brisbane, the A$260 billion ($170.9 billion) superannuation fund said in a statement. He will commence his duties in March after the current CEO Bernard Reilly leaves the fund at the end of February. The fund announced Reilly’s departure earlier in September.

Aoifinn Devitt was named CIO at London CIV, an asset pool for local authority pension funds. She replaced Jason Fletcher, who left London CIV in October, a spokesperson confirmed. Devitt has advised local authority plans since 2006, consulting on asset allocation, responsible investing and the pooling process itself. London CIV managed £14.3 billion ($17.9 billion) in active assets and £12.5 billion in passive funds as of March 31, on behalf of the local government pension funds for London’s 32 boroughs and the City of London Corp. Devitt was CIO at U.S.-based wealth management firm Moneta. She has also held investment roles at Hermes Fund Managers and the $3.8 billion Policemen’s Annuity and Benefit Fund of Chicago, where she was CIO.

ment of their pension funds — along with transferring the teams running those assets in-house — include the human resources challenge for a non-investment company running a relatively small asset management team, which is “significant,” Francis said. Key-person issues also arise over time, and “the general derisking of U.K. DB has meant that the skill sets that were created within those internal teams … have become a bit less relevant to the future of those DB schemes” — but can be highly relevant for a diversified asset manager like GSAM, Francis added.

Beyond OCIO, Abuali is eyeing private markets, where there are “interesting investing opportunities, particularly in private credit. But there will be at some point a shift in the risk back towards the equity-like markets.” But there is always room for growth. “We’ve tried to deliver a platform that delivers solutions to our clients in almost every asset class. If I was going to point to something where I think we’re a little bit behind — but we’re catching up — is the ETF market.That’s an area we’re trying to grow” on the active side, Abuali said. n

January 15, 2024

Supreme CONTINUED FROM PAGE 2

latory overreach beyond the scope of the laws that regulators administer. “Modern Chevron doctrine has distorted the separation of powers for too long,” said a July 2023 amicus brief from the U.S. Chamber of Commerce. “The result is bad for free enterprise.” Supporters say Chevron deference is necessary to prevent a single judge from overturning public policy and to avoid giving judges responsibility for highly technical issues for which they have little or no expertise. “Overturning Chevron would unsettle decades of precedent, increase the workload of the federal courts, and dramatically increase partisan division in judicial decisions, thus further eroding public confidence in the courts,” said a September amicus brief by the AFL-CIO. In the middle of the pro and con extremes is the retirement industry, which takes a more nuanced view of Chevron deference. “Personally, I would be nervous with a wholesale revocation,” said Kent Mason, a partner at Davis & Harman. “I would preserve Chevron deference where agencies are using their technical expertise, but I would not apply it regarding rules that are driven by a political or policy agenda,” he said. “It’s not an easy line to draw.” There is a degree of comfort in dealing with regulators who have expertise in technical matters. “Chevron deference produces some stability,” Mason said, ”We deal primarily with the IRS, DOL and PBGC. In many cases, we like the stability even though I don’t agree with some of it.”

Providing consistency

Mason echoed the comments of other retirement-industry lawyers who say, for the most part, keeping courts out of complex, technical regulatory issues provides consistency

Cotton CONTINUED FROM PAGE 4

The result at PennPSERS was a change in its asset allocation approved by the board in August, which included raising the target to investment-grade fixed income to 14% from 10% and lowering inflation-protected fixed income to 9% from 11%, commodities to 5% from 7.5%, and credit-related fixed income to 4.5% from 6%. Other changes included the elimination of the 4% target allocation to absolute return, raising the target to domestic equities to 18% from 15% and lowering the targets to international equities to 12% from 15% and public real estate to 2.5% from 4%. Targets that currently remain unchanged are 12% private equity, 7% private real estate, 6% private credit and 5% each private infrastructure and public infrastructure.

Net leverage target change

PennPSERS also changed its -7.5% target to net leverage to zero. “When the facts on the ground change, you have to reflect that in your asset allocation,” Cotton said. “For example, historically, PSERS

Pensions & Investments

way hundreds of thousands of financial service providers and insurance companies” in that market, the amicus brief said.

for sponsors, record keepers and other retirement industry providers. “I’m in the middle on this,” said Lynn D. Dudley, senior vice president, global retirement and compensation policy for the American Benefits Council. “You might want to do a little more tightening rather than throwing it out.” Courts’deference is important because “regulators have technical expertise,” she said. “We have to rely on agencies for that.” However, deference shouldn’t be used “as a shield for policymaking,” she added. If regulation is politically motivated or “coming out of nowhere,” then deference “might have to be reconsidered.” Attorneys say a prime example of what they call regulatory overreach in the retirement arena is efforts to create a retirement advice fiduciary rule. They point to the rules and proposals that have ricocheted from the Obama administration to the Trump administration to the Biden administration, creating uncertainty. “Modern Chevron doctrine has contributed to an unpredictable, unstable regulatory environment,” the Chamber of Commerce wrote in its amicus brief for one of Supreme Court cases, Loper Bright Enterprises et al. vs. Gina Raimondo, in her official capacity as secretary of commerce et al. (The companion case is Relentless Inc. et al vs. The Department of Commerce et al.) One example of why courts must intervene, the chamber wrote, was its March 2018 victory in a ruling by the 5th U.S. Circuit Court of Appeals, New Orleans, vacating an Obama administration fiduciary advice rule. The chamber accused the DOL of trying to “transform the trillion-dollar market for IRA investments, annuities and insurance products,” and trying to “regulate in an entirely new

abandon what they believe is ‘the best reading of an ambiguous statute’ in favor of an agency’s construction,” Justice Clarence Thomas wrote in a 2015 concurrence to the 5-4 ruling that the EPA “unreasonably” en‘Practical considerations’ Chevron deference is governed by forced a provision of the Clean Air a two-step process. If Congress del- Act. “In many ways, Chevron is nothegates authority to a regulatory agency to decide an issue and the ing more than a judicially orchescourt determines the law is clear trated shift of power from Congress with respect to this issue, then the to the executive branch,” Brett Kavacourt must implement congressional naugh, then a judge in the U.S. Court of Appeals for the District of Columintent. However, if the court determines bia Circuit, wrote in a June 2016 Hara law is silent or ambiguous on an vard Law Review book review about issue before the court, then the court federal statutes. Eliminating Chevron deference should defer to the agency if the court decides the interpretation of could lead to more lawsuits in the retirement industry and “a lot of the law is reasonable. room for creative lawyering,” said Changing Chevron deference may Stephen D. Rosenberg, an ERISA create “practical considerations,” specialist and ‘There’s a preference for partner in the Wagner Law an established status Group. Retirement inquo (among retirement dustry members industry members) even “like stability” in regulation, with though it might not be “obvious excepthe status quo they tions” like disputes over a fiduciary would pick.’ rule, he said. WAGNER LAW GROUP’S STEPHEN D. “There’s a preferROSENBERG ence for an established status quo even though it might not be the status quo they said the Congressional Research would pick.” Service report in October. Removing Chevron deference “The federal courts have cited it tens of thousands of times in the would lead to uncertainty and delays past 40 years,” the report said. “The in implementing regulations beSupreme Court alone has cited cause the industry “would have to Chevron 238 times and applied wait for all of the court cases” to Chevron in more than 100 deci- comment on what the rules mean, Rosenberg added. sions.” ERISA attorney Emily Seymour Three justices have discussed Chevron deference in language Costin doubted changes in Chevron deference would have much impact ranging from hostile to skeptical. “The whole project deserves a on her practice. “I can’t recall in a brief arguing tombstone no one can miss,” Justice Neil Gorsuch wrote in a November whether Chevron should apply or 2022 dissent of the court declining to not apply,” said Costin, partner and review a veteran’s disability pay- ERISA litigation practice leader for Alston & Bird, adding that some rement lawsuit. management issues “Chevron deference precludes tirement judges from exercising (indepen- shouldn’t be affected. “Chevron defdent) judgment, forcing them to erence does not apply to enforce-

has benefited from the use of a modest amount of leverage at the plan level, as well as a fairly strong allocation to private markets or an illiquidity premium across time.” “And that has also been accompanied with a relatively light allocation to investment-grade fixed income, although we do have an allocation to it, always have,” he said. “But with the change in the cash market right now, cash is yielding five-plus percent…If it comes down based on the market thinking it’s going to come down 150 basis points, it’s still fairly significant. You know, that’s the cost of leverage right there. And so the benefit of leverage over the long run is theoretically the risk premium that you get access to through that leverage.” The cost of leverage is now high, Cotton said, so the pension fund has moderated its view on leverage and taken it down to net zero. “That doesn’t mean we’re not using derivatives and/or leverage,” he said. “It just means that at net we’re holding it at zero. But also the higher-rate environment allows us to then put some assets in the book that traditionally have been very diversifying to our growth assets, but for a while now haven’t been paying their way, so to speak, or yielding much.”

That is why the pension fund has raised that target to investment-grade fixed income, he said. It will also help ensure it can bring the illiquidity allocation lower. “We’re at 36% (actual) private allocation right now, but our target’s 30%,” Cotton said. “We’d like to take that down another 6% (to 24%). That sounds like a lot, or maybe it doesn’t sound like a lot, but to get there takes a while because of the nature of the allocation.” Since the pension fund is overallocated, Cotton and his staff have moderated their commitment pacing accordingly until they reach the current 30% or slightly lower. “I’d like to be slightly under target because you’ve got more flexibility to manage the portfolio with public assets than you do with private assets,” Cotton said, “but there is a role for both types of assets in the portfolio longer term.” Cotton also noted that higher interest rates and the concerns about inflation have set up the situation in which the cost of capital to buy companies is higher than it’s been for quite some time, which applies across the spectrum in private markets, including private equity, real estate, infrastructure and to some extent in private credit, although he noted that private credit benefits

from the current economic environment. “What we’ve got now is a situation where people who bought assets before had expectations around the returns and had price expectations to sell, and people who are looking to buy assets today have a higher cost of capital, so their cost to buy is a little lower,” Cotton said. “So we’re trying to find this clearing point where buyers and sellers can agree and transact.” What that’s creating is what Cotton calls a numerator effect, “because the distributions that were assumed and modeled in a lot of the pacing work that was done aren’t necessarily coming through as modeled, and until that clears it’s going to create an overallocation situation.”

Primary challenge

Cotton said the primary challenge of allocating to private markets is weighing the illiquidity premium with the labor intensiveness and higher cost of those asset classes. “I’ve often been misquoted on this aspect, (but) I’m not skeptical of private markets, per se,” Cotton said. “I’m skeptical of paying higher fees without compelling evidence that the manager is going to deliver premium returns … So it’s up to us

ment matters, only statutory interpretations,” she said. ERISA lawsuits should be unaffected by changes in Chevron deference, she added. “ERISA lawsuits far more commonly involve the issue of whether a fiduciary’s decision with respect to interpretation of a plan was reasonable or not,” she said. “The court must decide whether a fiduciary’s decision was arbitrary and capricious. Chevron relates to an agency interpretation of a statute, not fiduciary decisions regarding plan interpretation.” Agencies’ guidance documents won’t be affected either. “It is very common” for courts to rely on documents, such as DOL opinion letters or website FAQs “as persuasive authority when making their own determinations of a legal issues,” she said.

Won’t stop

The DOL “will still have teeth to its enforcement efforts” even if Chevron deference is struck down, said James O. Fleckner, partner and chair of the ERISA litigation practice at Goodwin Procter. “The DOL wouldn’t stop giving guidance to the industry.” Over the years, there has been an erosion of Chevron deference because “some courts are more willing to push back” on regulators, said David Levine, principal and co-chair of Groom Law Group’s employers and sponsors group. One recent example outside the retirement field, he noted, was the April ruling by a U.S. District Court Judge in Amarillo, Texas, declaring invalid the Food and Drug Adminstration’s 2000 approval of the abortion pill mifepristone and several follow-up FDA actions relating to the pill. A federal appeals court vacated the 2000 invalidation but reaffirmed suspending FDA’s follow-up actions. The Supreme Court has agreed to hear FDA’s appeal. “There are a lot of open questions about ERISA,” said Levine, declining to speculate on what the Supreme Court might do. “There will be many implications beyond the actual ruling that will be in the eye of the beholder.” n to really do our diligence and make sure we’re allocating to our partners in this space … that can continue to deliver value for the higher fees as well as the liquidity that we take on.” One side benefit very early in his stint at PennPSERS was working through the fallout of the collapse of Silicon Valley Bank in March. “I actually got to work with the team and see how they react in a crisis situation and got to really understand the nature of our liquidity,” Cotton said. “And I think we’re positioned well from a liquidity perspective as well, and because of how our portfolio is constructed, if we were to have any surprises in 2024, I think that liquidity buys us the time that would be needed to assess the situation and make any adjustments we need to.” PennPSERS has an investment staff of 60 professionals, and Cotton said the plan is to remain at about that staff count, although there are a number of retirements coming in the near future and they will be in the market for talent. “We have a good portion of the staff that’s been here for a long time and is committed to helping us kind of transition to the next generation,” he said, “And so that’ll happen over the next several years.” n

Pensions & Investments

January 15, 2024

CHANGES AHEAD

BlackRock

Franklin Regional Retirement System, Greenfield, Mass., is searching for two active domestic small-cap equity managers to split a total of $18 million and one active domestic midcap value equity manager to run $9 million. The $185 million pension fund is seeking proposals from managers of both strategies, according to two new RFPs posted on the website of investment consultant Dahab Associates Proposals for both searches are due by noon EST on Jan. 18. HAVE SOME NEWS? Please submit news of changes to John Fuller, news editor, at john.fuller@ pionline.com

Missouri State Employees’ Retirement System, Jefferson City, issued a

request for information seeking to identify investment management organizations that could offer bundled/platform passive management services for the pension fund. According to a notice on the $8.7 billion pension fund’s website, this approach would allow MOSERS to “retain one or more passive investment managers who could implement various passive portfolios across a variety of potential mandates, including large cap public equity, small cap public equity, global equity ex-China, core fixed income, U.S. high yield,” among others. It is expected that the funding amounts will range from about $100 million to upwards of $500 million per mandate/strategy. A questionnaire for prospective candidates is due by 5 p.m. PT on Jan. 19.

Chicago Laborers’ Annuity & Benefit Fund is searching for an active emerging markets equity manager to run about $20 million. The RFP is available on the $1 billion pension fund’s website. Proposals are due at 4 p.m. CST on Jan. 26.

ACCESS Pool, Essex, England, is seeking one or more global timberland impact investment managers. The total initial mandate size is expected to be around £300 million, with ACCESS saying in a news release that there is potential for that to grow. Interested managers may contact the pension fund at access.timberland.rfp@apexgroup-fs.com. Proposals are due Feb 2. ACCESS is made up of local government pension schemes in England with assets totaling £35 billion ($43.9 billion). Santa Clara County, San Jose, Calif., is searching for a record keeper for its $3.4 billion 457 plan and $49 million 401(a) plan. The RFP is available on BidSync. Registration is required. Proposals are due at 3 p.m. PST on Feb. 9.

San Jose (Calif.) Police and Fire Department Employees’ Retirement Plan and the San Jose Federated City Employees’ Retirement System are searching for one or more investment consultants. The $7.6 billion pension funds’ boards will either hire a general investment consultant that excludes risk advisory services and alternative investments, or one that includes one or both risk advisory services and alternatives, said Ron Kumar, investment operations supervisor. The RFP is available on the city’s procurement website. Registration is required. Proposals are due at 5 p.m. PST on Feb. 15.

Seattle City Employees’ Retirement System will launch a search for an investment consultant on Jan. 17. The $3.7 billion pension fund will issue an RFP because current consultant NEPC’s contract will expire on June 30, said CIO Jason Malinowski. The RFP will be posted on the city’s procurement website. Proposals will be due sometime in February. New York State Deferred Compensation Plan, Albany, approved the issuance of four RFPs covering three existing asset allocations and one new one, confirmed Sharon Lukacs, the executive director of the $33.9 billion plan. Formal RFPs will be issued in March or April, she added. The RFPs for existing assets include passively managed investments totaling $4.8 billion and covering core fixed income, large-cap core equity and small-cap core equity; and U.S. actively managed equity totaling $10.4 billion and covering large-cap value, core and growth; smidcap core; and small-cap value and growth. There is also an RFP for a $2 billion balanced fund; and a new asset category for multisector credit fixed income.

Oklahoma Teachers’ Retirement System, Oklahoma City, approved two invitations to bid for a total of $300 million in core and non-core real estate for calendar year 2024, according to Sarah Green, executive director of the $20.1 billion retirement system. The pension fund is looking to place $200 million into non-core real estate and $100 million into core real estate. The search will remain open until the mandate size has been fulfilled. The ITBs for both real estate searches are available on the pension fund’s website.

CONTINUED FROM PAGE 2

deal is set to complete in the third quarter. “Infrastructure is one of the most exciting long-term investment opportunities, as a number of structural shifts reshape the global economy,” said Laurence D. Fink, BlackRock CEO, in the release. “We believe the expansion of both physical and digital infrastructure will continue to accelerate, as governments prioritize self-sufficiency and security through increased domestic industrial capacity, energy independence, and onshoring or near-shoring of critical sectors. Policymakers are only just beginning to implement once-in-a-generation financial i ncentives f or n ew i nfrastructure technologies and projects.” It is BlackRock’s second-biggest acquisition in its history, behind its $13.5 billion acquisition of Barclays Global Investors in 2009.

More layoffs

The GIP announcement came just days after BlackRock said it will lay off 600 employees — 3% of the firm’s approximately 20,000 employees — in a fresh wave of job cuts as the firm prepares to “reallocate resources,” according to a memo sent to staff on Jan. 9. The layoffs are BlackRock’s third

Target date CONTINUED FROM PAGE 6

Today, all the major record keepers, including TIAA, Empower Retirement, Fidelity Investments and Voya Financial, offer a target-date fund with an embedded annuity, as do asset managers like J.P. Morgan Asset Management, BlackRock and AllianceBernstein. The latest iteration of products offer more flexibility and come in a variety of different flavors as they’re tied to different kinds of annuities. Some are linked to deferred fixed annuities and deferred income annuities, while others are attached to annuities that offer guaranteed minimum withdrawal benefits. Still others are connected to qualified longevity annuity contracts or QLACS. TIAA, for example, offers a target-date fund with an embedded allocation to a guaranteed fixed annuity that can be converted into a lifetime stream of income at retirement. AllianceBernstein, in contrast, provides a target-date fund with customizable features that allows participants to buy into an annuity offering guaranteed lifetime withdrawal benefits. “Once you hit age 50, you have the opportunity to start securing retirement income over 15 years,” CAPTRUST’s Wrightson said of the AllianceBernstein product, explaining

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round in the past 12 months: last January, the firm cut 500 positions, followed by a 1% staffing haircut in June. According to the staff memo, written by Fink and President Rob Kapito, the layoffs will affect “businesses across the firm.” A source within the company said that no single team was in focus for the layoffs, contradicting earlier media reports that the layoffs would largely impact the firm’s ESG business. In their memo, Fink and Kapito attribute the need for layoffs to the rapidly changing asset management industry rather than any BlackRock-specific challenges, adding that the firm has entered the new year “with significant momentum” and its relationships with clients “have never been stronger.” The firm has ramped up its investment in AI technology, which Fink has hailed as a transformational technology that could increase employee productivity. In the memo, Fink and Kapito acknowledge that “new technologies are poised to transform our industry” including “(achieving) significant efficiencies in how we operate.” During the company’s earnings call on Jan. 12, CFO Martin Small acknowledged the layoffs. Small called the layoffs a “resourcing decision to free up investment capacity for our most important growth initiatives,” as the firm prioritizes investments that will “propel our differentiated

organic growth.” The firm’s headcount will remain “broadly flat” in 2024, Small said. In the company’s announcement of the layoffs earlier this week, Fink and Kapito said that the firm would end the year with a higher headcount than it began with. BlackRock reported having $10 trillion in assets under management at the end of 2023, up nearly 10% from Sept. 30 and 16% year over year. It is the second time BlackRock has cracked $10 trillion in assets, though the total AUM was just shy of the firm’s record-high AUM in the fourth quarter of 2021. In a statement released Jan. 12, BlackRock reported $96 billion in net inflows in the fourth quarter, bringing the full year net inflows to $289 billion. BlackRock’s clients added a net $62.7 billion to long-term products last quarter, and put nearly $33 billion in cash management. In his note to investors, Fink lauded his firm’s ability to grow despite “historically challenging market and industry conditions” over the last two years, adding when investors were “ready to put money back to work, they did it with BlackRock.” By client type, institutional saw $16 billion in outflows as clients added $7.5 billion to active strategies but pulled $23.6 billion from index funds. Retail clients withdrew nearly $9 billion. ETFs saw a whopping $87.7 billion in net inflows. n

that it gives participants the flexibility to “dial up or dial down” how much they want to annuitize. The plan sponsor might default participants to purchasing say 50% of their target-date balance, but participants can then go and “pick that up, pick that down or turn it off,” Wrightson said.

they may not be able to navigate easily. Apart from deciding whether to make the target-date fund with an embedded annuity the default investment option, they need to decide which type of annuity product is the right fit for their population and whether or not to offer just the target-date fund with an embedded annuity or both the specialty target-date fund and the traditional one. DeBello phrases the question facing employers this way: “Are we going to offer one-and-done with only income or are we going to offer both options?” “It’s going to be a really multistep process,” DeBello said. “I know a lot of the providers out there are working diligently to help create frameworks for employers to document the decision-making process to help them really narrow down the various choices based on their participant landscape and come to a decision around which of these are going to be the best fit for their population.” Like other advisers and consultants, DeBello nevertheless believes that the products will gain traction. “I know that many of the plan sponsors that we’ve talked to about this have indicated that they want to learn more,” he said. “My fear is that we may be able to get employers to a decision on whether or not to include this type of solution in their plan faster than their platforms are ready to accommodate them.” n

Remaining challenges

Despite the greater flexibility and availability of the products, challenges nevertheless remain. OneDigital’s DeBello worries that record-keeper “plumbing” for the specialty target-date funds they offer may not yet be ready to give participants the user experience they need to make decisions about whether, how much and when to annuitize. “These are all really important decision-making points that an investor would have and there’s just not a lot of technology built around this to support it,” DeBello said. DeBello added that while many record keepers are “working to build out some of that infrastructure,” they nevertheless have competing priorities, such as implementing changes required under the Secure 2.0 Act of 2022, a massive package of legislation to improve retirement savings in the country. “I don’t envy record keepers right now,” he said. The products also present employers with what DeBello describes as a complex “decision tree” that

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