The skirmish between the New York City Comptroller and BlackRock over climate alignment of the city’s public pension funds – a fight worth a $42 billion mandate to BlackRock – highlights the complexity and impracticality of aligning climate expectations, reporting requirements and business imperatives.

BlackRock, the world’s biggest asset manager, has hit back at calls from New York City Comptroller Brad Lander that three of the city’s largest pension funds drop the asset manager.

Lander, who ends his term as NYC chief financial officer and fiduciary of the city’s $300 billion pension fund portfolio at year-end, called on the Teachers’ Retirement System of the City of New York (TRS), New York City Employees’ Retirement System (NYCERS), and NYC Board of Education Retirement System (BERS), to axe a $42 billion passive mandate with BlackRock because it doesn’t meet their climate expectations.

It is time, wrote Lander in a letter that expressed both the honour and responsibility of his tenure, for these pension funds to evaluate other managers more aligned on climate and with alternative net zero and decarbonisation strategies.

BlackRock has hit back, accusing Lander of playing politics with public pension funds.

“You accused BlackRock of abdicating its financial duty and putting New York City’s pensions at risk,” wrote Armando Senra, managing director and head of the Americas for BlackRock’s institutional business in a public statement. “These statements are another instance of the politicisation of public pension funds, which undermines the retirement security of hardworking New Yorkers.”

He continued: “Any change to one of the five pension plan portfolios would be subject to a review process involving the plan’s board, the NYC BAM investment team, and other relevant stakeholders. Should they take up your recommendation, we look forward to demonstrating the breadth and depth of our capabilities and the tremendous value we deliver to NYC BAM and 750,000 dedicated public servants.”

Comptroller Lander also called for the New York City funds to drop asset manager Fidelity (which manages $384 million for TRS) and PanAgora (which manages $358 million for both TRS and NYCERS) for the same lack of ambition on climate.

A mandate appraisal that fell short

Lander’s call to axe the three managers follows a reappraisal of its mandates across climate alignment. The evaluation process, begun in April this year, revealed 46 of the system’s 49 active and passive public markets managers submitted decarbonisation plans that met NYC pension funds’ climate expectations.

But Lander said BlackRock’s interpretation of new guidance from the US Securities and Exchange Commission under the Trump administration is conservative and restrictive, unlike other asset managers. For example, BlackRock’s policy contrasts to State Street, the pension funds’ second largest asset manager and which oversees a total of $8 billion in US equity index assets.

“State Street’s approach to climate stewardship demonstrates that it is possible for a large global equity index manager to meet the systems’ climate expectations in ways that BlackRock has not demonstrated it is willing to do,” wrote Lander.

BlackRock’s huge size means it owns more than 5 per cent of approximately 2,800 US-listed companies, far more than other investors. Last February the SEC issued new guidance on investor activism, imposing stricter regulatory requirements on fund managers wanting to influence corporate behaviour. The SEC requires firms with 5 per cent ownership to file form 13D with the SEC if they communicate with those companies on proxy voting matters.

BlackRock argues that this position is not simply a matter of filing a longer, more complicated form, but could materially affect its ability to execute index investing for its clients. Moreover, filing a 13D requires a 10-day pause in trading, which would prevent BlackRock from buying or selling the security in order to maintain the index exposure to it, potentially leading to tracking error during that period.

Lander also criticised BlackRock’s climate reporting because it is set at a “very high level” that does not provide specifics about engagement outcomes, with the exception of limited anecdotal “spotlight” columns in their annual stewardship report.

Blackrock’s history of climate integration goes back to 2021 when chief executive Larry Fink announced in his annual letter the company would put climate change centre-stage across its $7 trillion portfolio (Behind Blackrock’s climate pledge). Since then the manager has been put through its paces including in Texas where it was blacklisted by the state legislature and public funds were banned from investing with the manager due to anti-Texas policies, and then three years later it was re-instated. (Texas politicians reinstate BlackRock as manager’s ties to the state grow)

fossil fuel infrastructure on the chopping block

Lander also expressed his ongoing support for the city’s pension funds to cease future investments in midstream and downstream fossil fuel infrastructure in private markets like pipelines and LNG terminals – the strategy would have no impact on existing investments.

“Most midstream and downstream assets are capital-intensive and long-term in nature, and the long-term outlook for fossil fuels is negative as the economy transitions to low-carbon energy. There is no guarantee that future midstream/downstream investments will continue to generate excess returns. Taking this critical step will ensure that the systems’ private markets investments are not financing fossil fuel infrastructure that will make it harder for the planet to limit global warming.”

He also called for ongoing direct engagement with high emitting portfolio companies, independently from the pension funds’ asset managers, particularly targeting utilities which collectively represent about 20-30 per cent of the systems’ financed emissions.

Lander’s climate legacy

Lander has overseen ongoing progress on climate investment at the Bureau of Asset Management, home to the pension funds’ investment teams since he took the helm in 2021. The pension funds divested from thermal coal in 2016 and voted in 2021 to divest from fossil fuel reserves in public equities and corporate bonds portfolios, as well as commit to net zero emissions by 2040.

He has also ratcheted up pressure on asset managers, setting out standards by which public markets asset managers’ net zero alignment plans should be evaluated, and putting those that don’t measure up on watch.

Managers have been asked to engage portfolio companies on decarbonisation, incorporate material climate change-related risks and opportunities in investment decision-making and ensure a robust and systematic stewardship strategy.

Milestones include collectively reducing emissions by 37 per cent since 2019 and engagement with companies, particularly in the utility and financial sectors.

“These strong actions on climate have taken place while the systems have achieved a strong 10.5 per cent combined net investment returns for FY2025, which exceeded their actuarial target of 7 per cent,” wrote Lander.

Alaska Permanent Fund Corporation (APFC), the $84 billion sovereign wealth fund, currently has less than 1 per cent of its portfolio invested in cryptocurrency-related investments. But the positive returns from the small allocation and tailwinds from US policymakers are creating enthusiasm to explore what a larger allocation could bring to the portfolio.

The fund has a $9 million public market exposure to cryptocurrency investments, chief investment officer Marcus Frampton said during the annual board of trustees meeting in Anchorage.

Frampton said the return on the investments has been positive, largely driven by a handful of high performers like a stake in crypto exchange Coinbase, and various Bitcoin miners like MARA Holdings and CleanSpark. Exposure to the emerging Bitcoin treasury model, whereby companies hold Bitcoin as part of their corporate treasury reserves, via an allocation to a software company and a Bitcoin holding company MicroStrategy, also sits in the allocation.

In private markets, one of the best-performing allocations has come via venture capital, where APFC has invested around $30 million –⁠ and earned an 8.5 x multiple, including $81 million of cash distributions. High returns came from initial venture stakes in Coinbase and Circle.

“The current exposure is around $90 million, of which Circle, recently gone public, accounts for the bulk,” said Frampton.

However, he noted losers amongst the winners, like defunct crypto exchange FTX in which APFC lost “a couple of million.”

Elsewhere, exposure to digital assets comes via private infrastructure where APFC is invested in data centres and power, a sector that is benefiting from demand for electricity.

Frampton explained that the returns and volatility in Bitcoin have reduced in recent years.

Since 2010, the currency has experienced five drawdowns of over 70 per cent, with the most recent being between November 2021 and November 2022 when Bitcoin’s value declined by 77 per cent. Yet between July 2010 and December 2021, the currency has delivered a staggering 220 per cent annualised return, with an annualised volatility of 140 per cent.

Citing research from Goldman Sachs, Frampton said the last 10 years are unlikely to be repeated. Bitcoin’s market capitalisation would need to rise from less than 2 per cent of the global money supply today to 47 per cent by 2034 for that to happen. However, he said an annualised total return of 10 per cent is possible.

“If Bitcoin delivered an annualised total return of 10 per cent over the next decade, it would imply that Bitcoin’s market capitalisation would be equivalent to around 2.5 per cent of the global money supply in 10 years which seems more plausible in our view,” he said.

“Goldman says for most institutional investors, it’s [Bitcoin] not recommended. But by saying ‘most,’ they’ve left the door open; they are not saying it’s not recommended for all institutional investors.”

Risks ahead

Because it is new, it is difficult to ascertain how quickly liquidity could dry up in a drawdown. Rebalancing risk is another concern.

“I think it’s fairly liquid, but one of the issues is that it hasn’t been around that long. Although I suppose for rebalancing you’d be buying in a drawdown,” reflected Frampton.

Another unknown is just how to classify crypto investment. “Is it an asset class like a commodity or security, or is it a form of fiat currency because crypto has attributes of both?” he said.

Commodities are traded on commodity markets, and the Commodity Futures Trading Commission (CFTC) has classified Bitcoin and Ethereum as commodities, meaning they can be traded on commodity futures exchanges like the Chicago Mercantile Exchange. Yet bitcoin has fiat currency characteristics as well, and a couple of countries are adopting it as an alternative currency, so it can be viewed as a unit of account and store of value too.

“The fuzziness in its classification may be one of the biggest risks and regulatory frameworks are still evolving,” said Sebastian Vadakumcherry, chief risk and compliance officer at APFC.

Although the GENIUS Act has created more regulatory certainty, a change in administration could turn the clock back. Moreover, trustees discussed the high chance that governments will generally be uneasy about crypto taking over as money because they like to have the ability to expand or contract the money supply as they see fit.

Investors at the meeting also have other concerns. If cryptos don’t operate as fiat currencies, how is their intrinsic value discerned? The likelihood of new “crypto” being mined or developed is not low and the question of how investors would differentiate and pick “winners” remains.

Returns are also difficult to forecast.  Unlike other stores of value like gold which have years of history for investors to chart to help plot the future, the data isn’t available.

“We all think there is a lot of potential, but we have to be cautious. All asset classes have risk and we are in the business of taking risk, but we have to be mindful,” Vadakumcherry said.

Other areas of risk include unknown correlations to inflation and equities, which makes asset allocation modelling challenging. Finally, trustees heard that investors who plough in, also face reputational risk if the sector fizzles out.

Despite concerns about the US sustaining its economic growth and stock market returns, global investors continue to pour money into the world’s largest economy.  

Foreign capital now accounts for some 40 per cent of all investments into US equities, Temasek CEO Dilhan Pillay told a Bloomberg conference in Singapore last week, underscoring foreign investors’ enduring confidence in US outperformance. 

“The question I think we grapple with is, where do we rotate our capital into?” Pillay said. 

“The choice in the US is one thing, but the choice outside of the US is even worse to some extent in terms of volume and your investable space. 

“If you look at the promising markets in terms of equity performance… you look at India, you look at China, look at Europe in the last 12 months or so, the absorption capacity [for capital] is not there for rotation out [of the US] in significant levels.” 

When choices for geographical diversification are limited, Pillay said investors look at rotating into alternative asset classes, which come with currency risk considerations  

He said Temasek was looking to introduce more uncorrelated returns to equities and will increase its allocation to core-plus infrastructure as a result. Temasek does not allocate to fixed income or commodities, which might be used by other investors to achieve the same goal. These assets were likely to still be US dollar-denominated, however. 

As a result, the weakness in the US dollar becomes a huge problem for a non-US dollar-denominated investor because it eats into returns, Pillay said.  

The ICE dollar index, which measures the US dollar’s strength against a basket of six other currencies including the Euro, Japanese yen and the British pound, has dropped 8.5 per cent since the beginning of this year.  

“I’ll just give you one statistic: between 2002 and 2012, if you were Singaporean and invested US stocks, the S&P went up 30 per cent and the US dollar depreciated against the Sing[apore] dollar by 33 per cent, so you have minus 15 per cent in your returns,” he said. 

Hedging costs have also risen as that’s what the majority of foreign investors outside of the US now have to do, Pillay said. It’s come to the point where the fund has to look for a “natural hedge”.  

“It means I’ve got to be looking for things that give me, on a net basis, the return I expect for the risk associated. So some US dollar-denominated assets will not give me a net return that will justify my allocation of capital,” he said. Around 37 per cent of Temasek’s assets is US dollar-denominated according to its annual disclosures.  

But neither Pillay nor Singapore’s other sovereign giant GIC believe the US dollar’s status is being fundamentally challenged. GIC chief executive Lim Chow Kiat said at the same conference that a scenario of complete de-dollarisation whereby the US dollar ceases to be the reserve currency is unlikely to happen. 

“We don’t see that. There aren’t clear alternatives [to the US dollar],” Lim said. 

“If you have a very high exposure to a particular currency or country adjusting it down 10 per cent is not unusual. 

“I would say that there are enough levers for investors and other participants to adjust their [currency] position without causing a big problem.” 

Both funds are still deeply committed to the US market. This July, Temasek chief investment officer Rohit Sipahimalani reiterated the fund plans to invest an additional $30 billion in the US before 2030 and said it is “well ahead of that pace”.  

Similarly GIC boosted its US equities allocation in the year to March 2025 despite reservations around high valuations and the ability for companies to meet earnings expectations. The country remains the biggest recipient of its capital.  

“US exceptionalism, for the time being, doesn’t look as though it’s going to be at risk,” Temasek’s Pillay said. “But you do have things that could cause a little bit of fraying.” 

“It might be that the structural issues we face in the United States are issues that have to be thought about in your risk analysis, but the rotation [of capital out of the country] is not easy, and that’s the reality.” 

An alternative, more technical, title for this thought piece would be ‘risk has an upward-sloping term premium’. We will argue that the future is riskier not (only) because it is uncertain, but because the quantum of risk increases with time. We start by asserting that the future is unknowable [1].

Talking about the term premium of risk will therefore be tricky. Risk 1.0 gets around the problem by assuming an unchanging world so that, in each future period, we will get a new pick from the same underlying distribution. In this framing, risk does not have a term structure or, at least, not one of any interest. Once we ‘know’ (have made our assumption about) the distribution, risk through time is easy to derive mathematically. We could then push harder and talk about ‘time diversification’, which is spreading our risk budget more evenly across our investing lifetime. If there is no term structure to risk, this makes perfect sense.

Risk 2.0 assumes a complex adaptive system, and therefore we know that the underlying distribution is changing and will continue to change. Therefore, if we use a risk 1.0 model, we should introduce error bands around the output to reflect the mismatch between the assumed distribution and reality. The further into the future we wish to make projections, the wider these error bands should be, as there is more time for reality to diverge from the starting assumptions. It is also important to recognise that the increased uncertainty around the shape of the distribution as the projection horizon increases is additional to, and different from, the “widening funnel of doubt” (which is generated by “known” parameters and is part of the risk 1.0 mindset).

In addition, a complex adaptive system will exhibit ‘path dependency’. The state it goes to in the next time step is not a random and independent pick from the distribution, as per risk 1.0. Instead, the pick is from a constrained subset of the distribution, because the next possible state is dependent on the path taken through the previous states.

Now this could be interpreted as increasing the accuracy of our risk forecasting (reducing the variance of possible outcomes in the next period). However, first, we would need to be confident in our ability to determine the strength of the path dependency and to isolate the appropriate subset. And, second, we would need to be confident that the system was not about to enter a phase transition [2] and jump to another new distribution.

Finally, the transition probabilities themselves are dependent on the previous path of the system (not just the current state) and as the projection horizon increases the number of potential paths increases and therefore the degree of predictability of the system decreases. On balance, we would suggest that a further widening of the error bands is probably appropriate.

What we can know about the future

We know that systems grow in size and/or complexity unless actively constrained [3]. Bigger and more complex systems require greater amounts of energy and resources for information processing, maintenance and growth. They are also more likely to exceed carrying capacity thresholds, making them unsustainable over the longer term. In short, systemic risk rises as systems get bigger – particularly so when the system approaches resource or energy limits.

We also know that almost all politicians are committed to finding policies to promote economic growth. And we know that asset prices are underpinned by an assumption of continued growth. We further know that we face a number of problems that could affect future growth prospects:

  • Falling fertility rates
  • Toxicity
  • Deforestation
  • Biodiversity loss
  • Climate change
  • Planetary boundaries
  • Carrying capacity.

So, if growth continues into the future, we can posit that systemic risk will rise exponentially alongside it. If growth stops (or at least slows significantly), we should expect a downward repricing of risky assets. In either case, therefore, we can expect an upward-sloping term structure for risk. Risk in the future is very likely to be higher than it is today.

Investment time horizon

The extent to which a rising term structure for risk matters will depend on the investment time horizon. The longer the horizon, the more it matters. This is partly due to the upward slope, and partly due to the higher chance of occurrence (noting that these are not independent). To illustrate, consider a 20-year-old starting a defined contribution pension account. The ‘pensions deal’, historically, has been to double the real purchasing power of contributions. Early contributions are small and late contributions tend to be large, so the average contribution is invested for about 20 years, and we can double it if we earn an average annual return of 3.5% above inflation. But note that we need to earn that return for 40 years, over the whole period of contributions.

Now, a doubling through investment returns implies a close-to-doubling in the size of the economy [4]. And we need to do this twice for the 20-year-old’s investment journey [5]. So, by the year 2065, we would need a global economy 3- to 3.5-times bigger than our current economy. If our current size of economy has produced the list of issues noted above, and breached 7 of the 9 planetary boundaries, how likely is it that we can continue to grow without triggering systemic risk? We are back to the unknowability of the future (in terms of details, timings and possible surprises).

What we have sought to do here is to set the global economy within and dependent on functioning planetary systems, and to explore the need for investment returns, the dependence on growth to achieve them, and the limits to growth on a finite planet. It is our conclusion that the term structure of risk is upward sloping into the future.

Tim Hodgson is co-founder and head of research of the Thinking Ahead Institute at WTW, an innovation network of asset owners and asset managers committed to mobilising capital for a sustainable future.

[1] The technical description would be ‘radical uncertainty’, a term popularised by John Kay and Mervyn King in their 2020 book Radical Uncertainty: Decision-Making for an Unknowable Future. Radical uncertainty differs from Knightian uncertainty as it is unresolvable – no amount of new information makes the uncertainty go away

[2] An alternative term is ‘punctuated equilibria’, yet another characteristic of complex adaptive systems. A ‘Minsky moment’ is a prime example of a phase transition / punctuated equilibrium

[3] See Systemic risk | deepening our understanding, Thinking Ahead Institute, July 2023

[4] From Thomas Piketty’s Capital in the Twenty-First Century, 2013, we learn that investment returns (r) are higher than economic growth (g), so the economy does not need to double to support a doubling in investment value

[5] More likely three times, as the trend is to maintain a reasonable weighting in growth assets during the retirement phase

CalPERS made history last week after it became the first US pension fund to adopt a total portfolio approach (TPA). The change, approved by the board after months of internal deliberation, is another mark of chief investment officer Stephen Gilmore, who before joining CalPERS was the investment head at NZ Super – one of the most prominent TPA adopters alongside Canada’s CPP Investments and Australia’s Future Fund.

Yet some US public pension funds doubt if yet another acronym to label something they should already be doing is entirely necessary. Like Ben Cotton, chief investment officer of $80 billion Pennsylvania Public School Employees Retirement System, founded in 1917 and one of America’s oldest pension funds.

“It’s interesting that we need a new acronym to help us focus on what should be common sense,” Cotton tells Top1000funds.com in an interview from PSERS’ Harrisburg office. He joined the fund in 2023 from overseeing retirement benefits in the motor industry, recruited as a safe and experienced pair of hands to shore up internal controls and governance after PSERS had reported an inflated investment performance in 2021.

“A lot of allocators have made the mistake of being too siloed and segmented, whereby rather than make decisions in the context of what is best for the whole portfolio, they make decisions focusing more on each different allocation. I have tried to approach investments more holistically my whole career, and adding an acronym doesn’t make it a new strategy.”

Cotton views TPA as allocating in accordance with the opportunities in front of him, and says PSERS has allocation targets with embedded leeway that already allow a conscious decision to overweight or underweight. Moreover, the board have always delegated to the investment team on rebalancing decisions and asset allocation adjustments within the context of the strategic asset allocation.

“We [always] ask ourselves if we are making decisions that complement the whole portfolio or if we are making decisions that just maximise a silo in isolation. The former is the better way to go,” he says.

PSERS is close to its target asset allocation, apart from a slight overweight to cash and underweight to long-duration fixed income. Positioning away from the long-term strategic asset allocation requires high conviction and in today’s climate, he argues that conviction is thin on the ground. “You need a high conviction to stray off your long-term plan, so in the current environment we’ve got closer to our targets as a result.”

He points to the recent decision to axe PSERS’ remaining 5 per cent allocation to leverage as a typical example of the investment team’s ability to adjust to an ever-evolving market environment.

“When cash is close to zero and the cost of leverage is zero, over the long run the risk premium you pick up with a modest amount of leverage is additive. But once you hit the point where the cost of leverage is as high as the risk premium you pick up, it starts to introduce undue uncertainty, not only in return expectations, but also liquidity needs.”

The decision to drop the hedging strategy also shows Cotton’s holistic approach in action.

For the last 14 years, PSERS has hedged around 70 per cent of its FX exposure to developed markets in a “winning” trade that has both reduced volatility in the portfolio and enhanced returns. But the Trump administration’s reshoring policies have turned the tide on the strategy: a cheaper dollar, he explains, makes it easier to onshore assets and ensure goods made locally in the US are more competitive with those from abroad. “On balance, we decided we’d rather not have that currency hedge,” he reflects.

He adds that removing the currency hedge has not increased volatility in the equity portfolio and is a strategy other funds are now also adopting. “Most of our peers in the public space were not hedging to start with, and of the few who did, we know of one that recently went to zero just prior to us.”

The value of liquidity at the fund, which is only 64 per cent funded, has also informed his decision to axe the strategy.

Paying out on hedges and settling on derivative positions should the currency move the wrong way requires cash and creates transaction costs, he explains. “In a period when we are concerned about our liquidity profile, we want to keep surprises at bay.”

It leads him to reflect how the funded status informs other decision-making too – namely forcing a level of risk and a larger appetite and tolerance of uncertainty. A strong funded ratio gives investors more freedom in how they approach the market, but pension funds with large deficits are compelled to take a minimum level of risk.

“Our funded ratio limits our options and opportunity to de-risk in light of uncertainty because de-risking exposes us to inflation at the same time as we are paying out cash to meet our liabilities,” he explains.

Keeping private markets within target

Liquidity has also played into Cotton’s firm cap on PSERS’ 30 per cent allocation to private markets which he says would have ballooned overweight if historical pacing models had been maintained.

The allocation, comprising private equity, real estate and infrastructure, was 8 per cent overweight when he joined but moderating pacing, combined with a more selective manager approach and selling off older assets, has kept the allocation in check.

“If we had blindly followed our pacing model in private markets based on historical experience, we would be significantly overallocated,” he says, adding that the team also struck it lucky when it came to re-investing money garnered from selling private assets in the secondary market.

“We sold certain private assets into the secondary market on average close to par and at a good clearing price. It helped us beef up liquidity and freshen our private markets book. We were also able to reinvest the proceeds into the April drawdown, so when we put the money back in the market, it was a fortunate time to be deploying into equity markets.”

Although private markets account for an ever-increasing portion of the investable market, his outlook for alternatives remains cautious because of the cost of capital and stop-start distributions. “The cost of capital is much higher, so to make it work, investors want to buy private assets at a lower price. We are seeing things improve, but distributions are still challenged, and activity is a lot slower than historically.”

He is also mindful of fees – even though PSERS rarely pays 2:20. “Our fee load is closer to 1:11 across private markets. This is not just because we are strong negotiators but mostly because we take advantage of our scale and lean into relationships.”

Rebuilding the trust

Rebuilding the trust and connection between PSERS’ investment staff and the board has been a key focus since he joined.

His efforts have focused on increasing transparency and reporting, particularly around investment management fees, and improving the context in which the investment team provide information to the board. Cotton says that information in and of itself does not amount to transparency – information needs to be presented to the board in context.

“It’s about providing the information that helps answer [their] questions.”

In a benefit that now reverberates throughout the entire fund, trustees have begun to delegate decisions to the investment team, increasing efficiency.

“Up until recently, we had to bring approval for every GP commitment to the board, even when we were re-committing to long-term relationships. Now our policy provides for delegation approval for mandating certain existing relationships to the investment team, and it has started helping us be more efficient on investment decisions,” he says.

Asset owners are witnessing a sea-change in data management and analytics as artificial intelligence opens doors to more efficient processing of investment information. But despite the promise, some may be wary of experimenting with the new technology due to the potentially negative consequences of failures on budget and culture.  

This tension was recently explored at the Top1000funds.com Fiduciary Investors Symposium. Jon Webster, senior managing director and chief operating officer at the C$777 billion ($554 billion) CPP Investments encouraged his allocator peers to first shift their mindset to one of “continuous exploration” when it comes to AI.  

He challenged the view that AI experimentation is inherently expensive to implement, at least for an organisation of the size of CPP Investments. It subscribes to the enterprise version of ChatGPT and uses DealCloud as its CRM software, whose combined fee is less than C$5 million a year against a C$2 billion annual operating budget and a C$10.5 billion investment budget.  

“I don’t think you should be afraid of the cost aspect of it. In fact, I’d lean very heavily into that,” Webster told the Fiduciary Investors Symposium at Oxford University.  

“To the experimentation point, it’s not that you should experiment. You literally have no choice but to experiment, because what the models can do tomorrow is just not the same as they were able to do yesterday.” 

To understand what AI can do for a fund, one needs to first understand what constraints it will remove, Webster said. He proposes that an organisation which is formed around investing is essentially “an information-processing supply chain” – it takes structured and unstructured data and turns them into investing ideas. 

The limitations, in turn, are “scarcity of expertise”, “high degrees of specialisation”, and “limited information processing capacity”, which is an intrinsic part of being a human.  

“Lots of those constraints are about what we prize deeply, as in ourselves, our own intelligence,” he said. 

“The thing we’re looking at inside CPP Investments is, how will our organisation get changed by this [technology]? How will work legitimately get redesigned? And are the constraints around which our organisational structure was formed, as valid as they were?” 

The C$26 billion ($18.5 billion) OPTrust has also been on a journey in the past six years to more comprehensively implement AI in its investment process. It started with using AI to determine risk on/off positions but now has a regime model of four macro quadrants upon which it makes asset rotation decisions, thanks to more accuracy in risk factor predictions enabled by large language models.  

“I don’t think we think about it from a perspective of, because this is a new technology, we have to chase it,” said Jacky Chen, managing director of completion portfolio strategies, total portfolio management at OPTrust.  

“It’s a very natural progression that as we think about our investment approach, we naturally gravitate ourselves towards that kind of decision making.” 

The most important principle of AI implementation at OPTrust is that a “human is always in the loop”, Chen said, but he acknowledged that the technology becoming a more prominent part of the investment process means portfolio managers also need to change their old behaviours.  

“As an example, when AI doesn’t know what to do when you ask it to build a risk indicator, it will immediately assume that risk equals to 0.5 times the fear index plus 0.5 times maybe the gold price. And they draw this beautiful chart,” Chen said. 

“[But] would you be able to make decisions on that? I think the traditional, more fundamental managers need to start understanding how to vet that and look into that [underlying model].” 

Conversely, quant portfolio managers need to be more market-driven, instead of treating market events as “noise” and focusing purely on their data sets as they traditionally have been.  

“The cycle is moving way faster now. If you don’t do that, you’re not able to very effectively manage your model,” Chen said. 

CPP Investments’ Webster said for asset owners, using AI is not about making faster but better investment decisions, “unless fast is your competitive edge”. 

“For many of us, it isn’t,” he said. 

“You’ve got to do something different with the technology, otherwise, it’s all a bit pointless.”