Looking out on the current investment climate, Anastasia Titarchuk, chief investment officer of the $279 billion New York State Common Retirement Fund, one of the largest public pension funds in the US, finds much that is concerning.
For an investor in search of risk premium, few diversified assets perform well in an environment of weak growth and high inflation that central banks remain unable to tame. And in a Catch-22, with US inflation last up at 9.1 per cent, the fund must also stay invested.
“Basically, you are costing yourself 9 per cent if you go into cash,” she says in a conversation with Top1000Funds.com.
Meanwhile, she is increasingly mindful of challenges in the fixed income allocation given it neither acts as a source of diversification from equity-like assets anymore nor performs well in a rising rate environment.
“A lot of our funding comes from fixed income when equities don’t perform well,” she explains. It makes allocations to real assets and real estate more appealing, but only on the margins. “The rise in mortgage rates makes mortgage assets more attractive now than in years prior,” she says.
As of the end of last year, the fund had 51.38 per cent of its assets invested in publicly traded equities and 22.37 per cent in cash, bonds and mortgages.
Still, the fact that concerns about uncontrolled inflation are so widespread also, paradoxically, give her reason to pause.
“I always question things when everyone thinks alike,” she explains, perhaps in a nod to her Russian roots which she credits with opening her mind to what can happen in the world and the importance of preparing for the unexpected.
Those early life experiences where she witnessed first-hand the impact of accelerating inflation, a wide possibility of outcomes and less stable societies still inform her cautious approach to investing, especially in emerging markets. As for Russia today, she says it’s un-investable, with no laws or ability for investors to control outcomes.
“The war in Ukraine is especially terrible for Ukrainians, but it is also terrible for the Russians.”
Scanning other asset classes, she says red flags in private equity are also growing. Although opportunities for investors exist from the spike in the number of public companies going private, where anecdotally she hears transactions are very attractive, it is one of the few bright spots. The rising cost of leverage is a primary concern.
“For highly leveraged private equity transactions, the cost of financing has gone up quite a bit. It’s a challenge for existing portfolio companies to refinance and buying companies could be difficult if you require a lot of leverage.”
Another worry in the sector is a lack of exits as GPs hold off selling because of uncertain valuations in the stock market and secondaries market.
“Nobody wants to take a loss,” she says. Still, although she predicts “there will be some losses” she maintains that private equity is mostly in good shape and investors learnt the dangers of too much leverage in 2008.
“GPs have been financing with less covenants and they are much more aware of matching maturities on their debt and the requirements of the underlying companies.” She adds that private equity also benefits from a long runway in terms of when it needs to sell or refinance. Still, the fund has no plans to increase its allocation. “We are over-allocated because of appreciation in the portfolio so we have actually had to cut private equity because of technical reasons.”
Titarchuk, who oversees one of the most diverse, large funds in the world, is also mindful of the enduring lack of diversity in the private equity industry where she says senior, diverse leaders are essential to inspire young women and racially diverse staff that they can also lead. The industry is recruiting more women in junior ranks, but diversity in senior positions has stalled on a limited talent pool, she says.
“In senior ranks, we still hear there is a lack of available talent. A lot of funds are struggling to hire senior female staff although, for the most part, the intent is there. One of the challenges is focusing on retention and providing an environment for women to succeed at all steps in their career.”
New York State Common, where senior female and racially diverse leaders are spread throughout the organisation, proves it’s possible. Key building blocks include her inclusive leadership style. For example, investment meetings (about half of total assets are managed internally) are open to the entire 50-person team and rather than micro-manage she seeks to empower staff to make their own decisions in a process that is also highly collaborative so that by the time a decision reaches her, it has been thoroughly vetted by different asset class and committee-level expertise. “What I learnt in Wall Street is that everyone makes mistakes,” she says.
“You should just try not to make obvious mistakes, or mistakes made in the past.” Does she enjoy leadership? “That’s a tough question,” she laughs. “I certainly love my job and what I do; it’s one of the best jobs out there.”
In a challenging environment, sustainable investment remains a key area of opportunity, value creation and diversification. The fund’s Sustainable Investments and Climate Solutions Program (SICS) a thematic, multi-asset class program identifies and assesses sustainable investment opportunities with the same fiduciary, risk and return requirements of all other investments in the portfolio.
The SICS allocation has grown from an initial $10 billion to now target $20 billion over the next decade. This includes a $4 billion investment in a low-carbon index that has a 75 per cent lower carbon emissions intensity than its benchmark achieved by underweighting investments in high emitters.
As of March 31, 2021, the fund had committed over $11 billion to investments to green bonds, clean and green infrastructure, green buildings, renewable energy, and climate indices.
“The sustainable space is a hedge to some of the climate transition risks,” she says.
The fund has also developed a highly selective approach to the many ESG funds that knock on its door. The main cause of greenwashing is the lack of metrics by which to measure sustainability, she says.
“The industry needs more rigour, especially in terms of what passes for ESG,” she says. “You can see regulators looking into this space; there is going to be some scrutiny. ESG labels get over-used; a company may have good ESG scores, yet investors can’t agree on what ESG scores to use and nor can the rating companies,” she says.
Against the backdrop of today’s challenges, one key metric keeps her buoyed and confident for the future, sure in the knowledge that the investment team is on the right track.
“We are a well-funded plan; almost fully-funded. This tells us we’ve done well over the years in our investment process,” she concludes.