New Zealand Super has revamped its multi-factor equities portfolios, working with its three external managers to integrate sustainability. Amanda White spoke to head of external investments, Del Hart, about the fine balance of meeting sustainability goals and finding factor alpha, and the next phase of the fund’s sustainability strategy: measuring investments for impact. 

New Zealand Super’s active global equities is managed by three managers in various concentrations of multi-factor portfolios across value, low volatility, momentum, and quality. 

As part of the fund’s bid to integrate sustainability across its whole portfolio, it recently engaged with Northern Trust, AQR and Robeco, which manage the portfolios, on how to best integrate its sustainability objectives without compromising the integrity of the factor exposures. 

“The multi-factor mandates make up 19 per cent of the portfolio so if we couldn’t do something with that, it was a gap in the portfolio in terms of sustainability goals,” NZ Super head of external investments and partnerships Del Hart tells Top1000funds.com in an interview. 

“If we restricted it too much we wouldn’t find the scope for factor alpha we were looking for, but we found we couldn’t simply give the factor managers the Paris-aligned benchmark we used for the passive portfolio as their universe for stock selection.” [See NZ Super culls equities, focuses on impact] 

The balancing act meant ensuring the managers had a large enough investable universe and weren’t restricted in their approach to creating the alpha expected from the portfolios, whilst still meeting certain ESG outcomes. 

The NZ Super team did a lot of research and spoke to peers as well as a range of fund managers, both incumbent and others, to canvass the financial effects of integrating ESG into multifactor equities. 

“There was a range of views, but the prevalent view was the impact was uncertain,” Hart says. “If we can incorporate ESG considerations without compromising the exposure then there is no reason to believe it will reduce returns. Our goal is not to generate alpha from the ESG integration but to have justifiable confidence it won’t detract from returns.” 

Three changes to the factor strategies ensued. The investable universe was moved away from the MSCI ACWI IMI to the MSCI World index, effectively removing small caps and reducing the number of stocks from 4,500, to 1,500. 

“That’s the level we think there won’t be a negative performance impact. It was still possible at that level to achieve a strong exposure to our desired factors,” Hart says.  

From that universe, managers were given freedom to choose their exposures to manage the portfolios but their benchmark was changed to the MSCI World Climate Paris-Aligned index, which is the same as used for the reference portfolio and passive global equities.  

“So they need to manage to the ESG characteristics of that index but can do it in a way they choose for generating the returns,” Hart says. 

Managers can design a portfolio that gives the ESG desired outcomes, as per the benchmark, but doesn’t require them to meet specific targets in terms of ESG metrics. 

“It gives them flexibility. And the important thing is we will use MSCI ESG metrics to report their performance and require them to explain any consistent underperformance, that’s our way of checking in a consistent way that our three managers are adopting an appropriate solution to achieve the goal,” Hart says. 

The fund is now working with the managers to implement the new changes which may include some amending their investment management agreements. 

With ESG considerations further integrated across equities, the fund will turn its attention to the fixed income portfolio. 

Impact measurement 

It’s all part of a move by the fund to sustainable finance which followed a two-year review of its responsible investment position, with ‘sustainable finance’ referring to the consideration of the impact of investments on society and environment, as well as thinking about the ESG risks on investments. 

There are few large asset owners globally which measure the impact of their investments, but it is attracting growing attention. New Zealand Super will do an initial portfolio assessment due by the end of September.

In developing an appropriate framework, the first part of the process was to define impact, and the framework for qualification, measurement and management. 

New Zealand Super’s definition of impact is: Investments made with intent to deliver measurable positive social and/or environmental impacts, and the fund’s required financial return. Importantly it has the four factors of intent, measurability, impact and returns. 

And questions it asks to assess investments around impact include: Does the investment meet the return hurdle; have positive social or environmental impacts been identified as a core component; can those impacts be measured; and are there any significant adverse impacts associated with the investments? 

Hart says developments in the past few years including the growing use of taxonomies has given the fund confidence they can invest in scale, measure impact and meet the financial return goal. 

“A few years ago we were interested in impact but our mandate to meet returns and with our fund growing we couldn’t get sufficient comfort in scale in a meaningful way,” she says. 

“We couldn’t invest in size and be able to measure what we were getting out of that. 

“There has been an evolution happening in the industry that has helped us get comfort that we can find managers that have that intent, and we needed those manager to report ideally on a comparable basis.” 

The fund has developed an impact investment framework with a five-step process covering qualification, measurement, reporting, analysis and management. 

The fund’s preference was to adopt, and if needed adapt, an off-the-shelf solution, given the progress and convergence of existing frameworks, and it decided on the IMP 5 dimensions of impact as the most appropriate approach.  

“In terms of measurement we wanted to have a consistent approach so we are using the five dimensions of impact for working through our existing portfolio and to invest in new sustainability solutions. We are at the stage where we are putting the new framework through any relevant new investment that we do, and taking time to go through the existing portfolio for which investments qualify for impact.” 

Importantly the fund will continue to apply its standard sustainable investment framework to all investments, including those that don’t qualify as Impact investments.

“It doesn’t mean we won’t invest in something but we are making sure we are giving thought to if an investment creates impact or not and having the lens and giving sufficient consideration to impact investing.” 

Hart says the impact measurement is a work in progress with the first step to get really clear on what the fund was trying to achieve and ensuring a consistent methodology, criteria and expectations in measuring impact. 

“The external managers’ team, the internal team and our direct team all need a consistent approach,” she says, adding the fund has engaged some of its managers, including Generation Investment Management which it appointed only this year, and are leveraging some of their expertise. 

“We have leveraged our network to help us form our solution and that has helped us,” she says. “We are on the cusp of having a lot more clarity and visibility.” 

Other tools are also being created for the investment team, including a dashboard, to provide visibility to the team internally and to help educate them. 

The predominant themes that are being measured are positive environmental impacts, with Hart acknowledging the social aspects are much harder to measure. 

“The next stage is to think more about where the opportunities are, where we can focus our effort to get impact and map that against the SDGs,” she says. “We will get more sophisticated.” 

South Africa’s EPPF wants to increase its allocation to private equity and venture capital to help ride out volatility at home in a strategy where governance and stakeholder engagement is central. CEO Shafeeq Abrahams explains.

South Africa’s R190 billion ($10 billion) Eskom Pension and Provident Fund (EPPF) the retirement plan for employees of the country’s electricity utility, is currently building resilience into the portfolio, seeking greater diversification through an increased allocation to alternatives and overseas investments. Elsewhere, EPPF is reviewing its approach to passive investment, preparing to bring more systematic strategies in-house.

The increased overseas allocation to alternatives is most focused on global private equity and venture investment. The team have just returned from meeting US managers, and EPPF hopes to issue an RFP in the next 12 months.

“We have been looking at what is out there, and the risk as well,” says Shaafeq Abrahams, promoted to chief executive and principal officer at the fund in 2021.

Although Abrahams plans to build the international allocation to private equity, venture capital and infrastructure, he won’t push the allocation much above current levels. A new regulatory ceiling allows the fund to invest up to 45 per cent of assets outside South Africa. EPPF currently invests 36 per cent of assets overseas, which he says is about right.

“Changes to regulation allowing for an increased foreign allocation will be inputs into our upcoming asset-liability modelling exercise and we will see the outcome. But in terms of our modelling, and given our liabilities are in rand and we would have to manage the currency risk, we will probably stay at current levels unless there are very compelling investment opportunities.”

The bulk of the overseas allocation is invested in international equity, with smaller portions (5.7 per cent) in emerging market equity (3 per cent) African assets and (2.8 per cent) China A Shares.

Alongside a quest for diversification, the decision to invest more in illiquid assets is also a bid to smooth volatility. Higher interest rates and inflation promise more volatility ahead, he warns. “Over the long run volatility sorts itself out, but we’ve found greater diversification helps weather the storms.”

Rand volatility particularly is a constant consideration in portfolio construction. “We take a view on currency risk, and it does influence our allocations,” he says. Although the fund never hedges long term because it is too expensive, it will hedge short term currency risk. “If market conditions indicate currency volatility, we will hedge during a specific period on a tactical basis to give us comfort.”

An appetite for South African infrastructure

A larger allocation to alternatives will also include more investment in South African infrastructure where he likes the long term, stable cash flows that provide insulation against inflation. South African infrastructure assets also chime with EPPF’s sustainability and impact targets. “If we get infrastructure right, we can drive the sustainability agenda and outcome, help grow the economy and address inequality.”

Existing exposure includes renewable energy and economic and social infrastructure assets but he’d like to expand this to opportunities in toll roads and bridges. The challenge is finding bankable projects with the right returns and partners. “The regulatory framework needs to encourage more public private projects and we are working with peers to frame the conversation to see how we can unlock this. We have room to invest on a long-term basis and a lot of appetite, but we also need a big push from public policy makers and regulators too.”

Doing more in-house

Although most assets will remain externally managed, Abrahams wants to do more in-house and expand the current 35 per cent of assets EPPF runs internally. Not only will this reduce the cost, he also wants to the team to manage systematic strategies internally and beef up their internal capabilities in private markets in anticipation of more co-investments and direct investments.

EPPF has an internal investment team of 50 (part of a large total headcount at the pension fund of 150) and he says this could grow by 55-60. The internal team is largely South African focused across a mixture of passive and active strategies, dictated by differentiated risk budgets.

Wider changes in the pension industry

Abrahams is also bracing for wider changes at the pension fund, which was founded in the 1950s. Much of his time since taking the helm has been spent building better communication with EPPF’s 80,000 members, which he says is particularly important given Eskom’s enduring corporate challenges.

“It’s critical that we inspire confidence through our behaviour, decision making and governance. All decisions must be made in line with member interest, independent of the employer. We are very mindful of the 80,000 families that depend on us. Our loyalty and allegiance to our members is paramount. One of my biggest challenges is instilling confidence in our members that the fund is well regulated and well governed at the executive level,” he continues.

Now, as South Africa inches towards a two-pot system which will allow beneficiaries to access some of their savings early, member experience, communication and stakeholder engagement are more important than ever.

Unlike executives at peer fund GEPF, Abrahams doesn’t predict the new regulation will result in significant drawdowns in the portfolio, or liquidity issues. He is more concerned about the complexity of implementation and administration, particularly for a defined benefit fund. “Numerous requests for drawdowns will carry an administrative cost and is a significant shift in the way pension funds have traditionally operated.”

He is also concerned about the long-term impact on members if they access their retirement fund early, and warns the policy change needs to run alongside an extensive education programme. “Our members need to understand the impact of the loss of compound interest over time. Accessing their pension may provide short term relief, but it could create long term retirement shortfalls.”

South Africa’s unfolding electricity industry also heralds change for EPPF. Plans to unbundle the giant utility into different segments are now back on the political agenda. If corporate divisions are separated into separate independent companies, EPPF, currently  one fund for all Eskom employees, would have to change to take on a broader set of employers. “We have just started to have discussions about how we respond to the Eskom unbundling. It’s very early days, but also quite exciting,” he concludes.

 

Canada’s TTCPP Pension Plan became a stand-alone entity only three years ago. Top1000funds.com discusses the fund’s journey to independence and the evolution of the hedge-fund heavy investment portfolio with CIO Andrew Greene.

For pension plans exploring how to step out from under their sponsor and set up an autonomous organization, Canada’s TTC Pension Plan (TTCPP), the $7.8 billion defined benefit fund for employees of Toronto’s public transport network, offers a case study in the journey to independence.

Early pivotal decisions on route to creating a separate entity included TTCPP’s board deciding not to fold the plan into OMERS, the $124 billion fund for employees of Ontario government municipalities in an endorsement of its own well-established governance and financial health. In a next step, the leadership team (TTCPP hired its first independent CEO in 2016) worked with sponsors Toronto Transit Commission and the Amalgamated Transit Union (ATU) on the structure and transition of the spin off entity. It took until January 2019 for the new fund to launch.

In the early days, a skeleton team oversaw mostly fund of fund investments with the support of consultants, recalls chief investment officer Andrew Greene, who joined in 2017 from OPTrust as the first dedicated investment person.

Today, TTCPP continues to reduce its dependency on consultants and is growing its internal expertise. The investment team guard a healthy funded status and oversee a growth-orientated strategy that includes leverage and hedge funds in a model that has all the hallmarks of  Canada’s much larger Maple Eight.

Greene, who estimates the fund will hit around $10 billion assets under management by 2030 in line with its 6 per cent discount rate, is also pushing into private assets, growing the allocation to 16 per cent of AUM from 10 per cent as per the latest asset liability study.

Elsewhere the focus is on building a new level of transparency, control, and securing better fees with managers. In charge of its own destiny, more resources are also flowing into pension management for the first-time including communication, member outreach and IT, which were a lower priority when the fund was managed by the TTC.

“At first, I relied heavily on the CEO and consultants. We were only able to hire people after two years and the team is now six. The plan is to hire another two to three people over the next 18 months,” says Greene, a Chicago native who moved to Toronto 17 years ago. “Plans that outsource everything to consultants are not as satisfying for staff.”

leaning into Hedge funds

For him one corner of the portfolio that provides particular satisfaction is hedge funds, an 8 per cent allocation that holds a mirror to TTCPP’s evolution. Until recently, the strategy consisted of two fund of funds, but when one fund merged with another, and the other went out of business, Greene changed tack.

He hired a consultant and built a direct hedge fund portfolio that was cheaper and more concentrated, and is managed on a discretionary basis as the team has evolved and grown. The allocation targets high single digit returns, but what Greene particularly likes is the diversification benefits across asset class and geography, allowing TTCPP to invest across the capital structure, take a view on different time horizons and short investments that the team doesn’t like when the rest of the portfolio is long only.

The allocation’s maturity, plus new internal resources, mean restructuring the portfolio is ongoing and Greene is reappraising certain strategies. For example, he is increasingly circumspect of long short equity.

“Long short equity is the biggest part of the hedge fund market, but I find it difficult to navigate as often one is paying alpha fees for beta returns,” he says.

Instead, he wants to lean the other way, favouring fixed income, relative value, and convertible strategies, as well as strategies that can work across the capital structure to find dislocations or take advantage of equities and bonds no longer being in sync.

Restructuring will also involve reducing the number of managers. When Greene took the helm TTCPP invested small parcels of around $5 million across 20-odd funds in an approach designed to open the door with managers, providing the opportunity to top up when a space appeared with sought after partners. It took a number of years, but now TTCPP has a full position with several top tier funds. “By the end of this year we will be down to 14 hedge funds, using fewer managers in a more concentrated portfolio.”

TTCPP typically writes cheques of $20-40 million while the consultant leans on funds to get a discount where ever possible – although Greene says the only managers that really offer a discount are smaller and starting out. Still, he notes some openings to reduce fees. For example, one of the macro managers that was underperforming has lowered its fee until they get back to the high watermark.

It’s a slightly different story away from hedge funds. Greene observes that the investment climate means more managers are open to renegotiating fees.  The denominator effect, whereby many investors (particularly endowments and foundations) are pulling back on investing more in alternatives because these portfolios have not been marked down as much as public assets, is creating opportunities to invest with sought-after GPs.

“Names that we had trouble getting in with before are now more open to discussions. It is a good opportunity, and we are buying at better prices. Prices in private markets are still going down and we have better access to GPs and terms than we would normally have.”

Leverage and higher yields

TTCPP uses leverage at a total fund level and can lever up to 10 per cent of the fund. Today the higher cost of borrowing means Greene is paring this back to around 5 per cent. “Leverage is costing me 5 per cent instead of 1 per cent and given our funded status is better because yields have gone up significantly, there is less need to take the incremental risk.”

Leverage is primarily used to invest more in market-neutral, low-beta hedge fund strategies. However, Greene says he doesn’t directly map where the leverage is applied – rather it is an extra 5 per cent to invest across the fund wherever the opportunities arise.

The funded ratio and higher yields are also driving other strategies. For example, he is trimming the public equity allocation to 20 per cent of AUM and in its place, Greene will bump up the allocation to private equity and put more assets to work in public credit, including investment grade, multi asset, high yield and bank loans, where he says it’s possible to tap equity like returns without the volatility.

Growing the allocation is timed around opportunities, he continues. “We are moving into credit, but credit spreads remain tight. When the spreads start to widen, we will increase the high yield allocation, but we will pull it back as the spreads come back in.”

Elsewhere he has lengthened the duration on some of the bond portfolio (from mid to long-term) in response to higher yields. “You can get a 4.5 per cent return sitting on nominal bonds and we like the liquidity too,” he says.

The strategy is a marked change in direction from an earlier decision to reduce the long bonds allocation to zero. As it was, the allocation never got to zero, was only reduced by 5 per cent, and is now being built back up again as interest rates climb higher.

For all his focus on building internal expertise and reducing input from consultants Greene only applies the approach when it fits and doesn’t envisage TTCPP running a large pool of direct investments. Direct allocations comprise a small portion of private equity, a quarter of the private credit portfolio (although he notes the bulk of this comprises one large deal) and some co-investment in infrastructure. In the real estate allocation, where TTCPP invests around 80 per cent of the portfolio directly in Canadian assets, he wants to turn the portfolio on its head.

He plans to transform the real estate allocation into fund of funds or SMA structures and select co-investments with GPs in an 80:20 split respectively. A complete reversal from the current approach where co-investment make up the bulk, and funds the minority. “We have two people working in private markets covering four asset classes and we simply don’t have the capacity to approve every new tenant or budget item. With a small team there are only so many line items we can keep track of.”

But it is a challenge restructuring real estate in the current environment when industrials are white hot, but office is struggling. “We are very hesitant to sell office assets right now. Nobody will buy them unless we sell for a deep discount which we do not think is prudent.”

It speaks of a pragmatic strategy and overarching priority to keep things simple. Greene refuses to chase new asset classes and strategy – he was cynical of Bitcoin from the get-go and TTCPP only has a tiny exposure to crypto though a sleeve in one of the macro managers. The fund has no plans to run other assets or amalgamate with others like the tie up between College of Family Physicians of Canada (CFPC) pension plan and the College of Applied Arts and Technology (CAAT) Pension Plan.

“We are just focused on getting our own ship in order,” Greene concludes.

 

Border to Coast, the UK’s LGPS pool for 11 partner funds, is planning to launch a new UK opportunities strategy that will invest in private markets opportunities in-country, including venture and growth. The allocation will sit in Border to Coast’s existing £12 billion private markets allocation that includes £4.3 billion in infrastructure and £3 billion in private equity.

The multi-asset UK strategy will target areas such as corporate financing, housing, property, infrastructure, renewables, and social bonds. The nature of underlying investments will also result in a range of positive impacts, including jobs created, new housing units delivered (residential, affordable, social, assisted), new commercial floor space, delivery of local infrastructure, renewable energy capacity and the provision of training including apprenticeships.

Subject to ongoing engagement with its partner funds the UK opportunities strategy will launch in April 2024.

“I am particularly pleased with the team’s work with partner funds on our innovative ‘UK opportunities’ strategy, which will facilitate investment leading to the generation of a range of positive local impacts, such as new jobs, infrastructure, and economic growth across the regions of the UK, while providing returns to fund pension obligations,” said chief executive Rachel Elwell, who has overseen the build out of the organisation to 130 employees and £47 billion of pooled assets (of the £60 billion in total funds between the underlying partners) since it was set up five years ago.

The move comes as the British government puts pressure on pension funds to invest more at home to support economic growth. Today, UK pension funds invest almost £1 trillion in the UK through a mixture of UK shares, corporate bonds, government debt, and other asset classes.

Investing more in the UK for growing LGPS and DC funds like NEST may make sense, but for many DB funds it’s not that simple. Many are still reeling from last year’s gilt crisis when the market froze over, and it was impossible to trade. The unprecedented volatility in gilts has seen these funds build new risk models into their portfolios that incorporate much bigger moves in gilts prices. This in turn has implications for how much they are prepared to invest in illiquid assets, running counter to the government push.

In a recent paper, industry body PLSA identified 10 ways to encourage UK pension funds to invest more at home. ‘Pensions & Growth: A Paper by the PLSA on Supporting Pension Investment in UK Growth’ suggests fiscal incentives, policy certainties and increased automatic enrolment contribution levels would help.

Border to Coast is midway through designing two global and two UK real estate propositions. They will lead to further increases in the level of assets under management and are expected to launch later this year. Other new strategies on the horizon include the development of a second climate opportunities portfolio. The investor currently has £1.4 billion invested in climate opportunities.

efficiency gains of Pooling

Border to Coast has pooled 83 per cent of assets owned by its 11 LGPS partner funds, with pooling on target to deliver savings of £340 million by 2030. Meanwhile, research by asset management data company ClearGlass Analytics into value for money, ranked Border to Coast number one in its efficiency scheme index of over 1,000 pension schemes.  The analysis showed its leading position is due to its scale, governance and its blend of internal and external management.

About a third of assets are managed internally, a third externally and a third in a hybrid model for private markets where Border to Coast is selecting funds but acting as a fund of funds managers.

“Five years into our journey, we are exceeding the original ambitions for pooling,” said Chris Hitchen, chair of Border to Coast. “With 83 per cent of our partner funds’ assets pooled we have been able to deliver over £65 million of savings net of set up costs with more to come.  But perhaps more importantly, we have built a sustainable centre of expertise in Leeds delivering innovative and effective investment solutions for our partner funds.”

 

 In the 60 years since the first CFA exam, the accreditation has been forced to evolve to meet the modernization of the profession. As the CFA celebrates this big milestone, chief executive Marg Franklin talks to Amanda White about the enhancements to the CFA program and how it can meet the future investment professional. 

 The CFA made the most comprehensive enhancements to its program in March this year as it seeks to maintain the essence of Benjamin Graham’s vision to focus on professional standards but also keep pace with the industry’s evolving ethical, technical and client-led demands. 

As the industry has evolved, so too has the program. The latest enhancements focus not only on more relevant content as the industry matures, but also on the way people learn, and the usefulness of the accreditation to their career paths. 

As the CFA celebrates six decades and more than 190,000 charterholders since the first exam in 1963, chief executive Marg Franklin says the changes were made following extensive research with investment professionals. 

Additions to the program incorporated digital practical skills modules that included Python, data science and AI; as well three specialised pathways: portfolio management (the traditional version of level III), private wealth and private markets. 

“The most important feature of the changes is we added the practical skills modules for each level,” Franklin tells Top1000funds.com in an interview. 

“We know candidates and employers want more job-ready candidates. We champion integrity and well-educated, ethically oriented professionals. My ambition is that we are a very effective leader for investment professionals and fill a role that they can’t get elsewhere. I’m thrilled about the enhancements to the program and how they have been received.” 

Other useful changes for candidates include the badging of level I and II so they can show their commitment as they move through their career, a reduction in the volume of materials to maintain a 300-hour preparation time for each exam, and more practice materials.

Over time the CFA has also been introducing certificates and structured learning around specialist skills to upskill and re-skill investment professionals as their careers develop. Data science and ESG certificates are already available and early next year a climate certificate focused on technical skills will be added. 

“There is a huge supply/demand gap for these skills,” Franklin says. “There also need to be more people certified in private markets, the same with private wealth and they are all in flight for next year.” 

Other areas of evolution include adapting the program to other areas of the investment food chain, by examining more closely what it means to be part of a T-shaped team where there are specialists who may not need their CFA charter but need to understand certain components of it. This includes adapting the investment foundations module for middle and back-office people. 

Similarly, as the industry embraces AI, investment professionals need to understand data scientists, and the reverse is also true.  

“We need to meet the industry composition where it is. The two parties need to understand each other,” Franklin says. “We are in an environment where society is demanding better, the world is more complicated and returns are harder to come by. The leadership we provide that has a sense of practicality and purpose for the ultimate betterment of society has never rung more true. Ultimately we are building a better system by improving investment professionals.” 

 CFA leadership starts with research 

Research is at the heart of the CFA’s leadership. It is pervasive in the changes to the program and lies is core to its forward-looking reports on important areas such as diversity equity and inclusion, the investment professional of the future and AI. 

As the world and the investment community become more complex, Franklin says the stakes are higher for investment professionals.  

“We have always provided excellent research particularly with structural longer-term aspects of the industry,” she says, pointing to research released earlier this year on a crypto currency and a portfolio perspective, the Handbook of AI and Big Data Applications in Investment, which was a culmination of five years of work; and to the Future of Work and the changing nature of culture, which is due to come out in October. 

CFA is launching a research and policy centre this year, headed by Paul Andrews, which will build out its own research capabilities and bring in luminaries from the industry. 

The research will be organised around four themes: sustainability; resilience of the capital markets, which gets to things like social media, AI and big data and the influence of that on the industry; and the investment professional. 

“Our convening power is extraordinary, part of that is because we are not for profit and have no commercial imperative for an outcome, but also we are not a trade association, that is powerful,” Franklin says. 

“We look through the lens of our mission and give people the ability to look around corners.” 

In 1963, 284 professional investors took the first CFA exam across the United States, only six of them were women. Today 18 per cent of the 190,000 charterholders are women, up from 2 per cent in the first exam. 

In 1963, 284 professional investors took the first CFA exam, only six of them were women

The CFA’s work to focus the industry on diversity equity and inclusion (DEI) is an example of the organisation’s power to effect change. (See Accelerating change: operationalising DEI) 

In 2021 it released a DEI code, rooted in six principles: pipeline, talent acquisition, promotion and retention, leadership, influence, and measurement. It was the culmination of a collaboration between CFA and a working group of industry leaders, including the experimental partners program and asset owners such as Texas Teachers, BCIMCo, and Australia’s VFMC, that began back in 2019. 

“No one expected [the code] to be as widely successful as it has been,” Franklin admits. “But 18 months past the launch and we have exceeded our expectations. We had a goal of 40 signatories and it is now at 158 signatories.” 

Franklin describes diversity as an organisation’s ability to attract talent, inclusion as the retention rate, and equity as internal promotion. 

“Anybody can get diversity, but the retention is where you really have to scrutinise what is in your culture as a barrier or blocker to a more diverse workforce,” she says.  

“The world is getting more complex, so you want more perspectives, more experiences, talents and skills, and managing that is not easy. Anything worthwhile is not easy, otherwise it would be arbitraged away.” 

The CFA itself was the first signatory to the DEI Code and Franklin says organisations will need to do a lot of internal interrogation in their approach to a diverse workforce but also to encapsulate AI and remote working. 

“We are not perfect, far from it, but we have spent a lot of time trying to improve” Franklin says. 

“I’m pleased with the multi-dimensional thinking we are doing around that. We think about how the industry will look going forward and we eat our own cooking. I’m proud of that.” 

 

Pensionskasse SBB, the CHF 17 billion ($19 billion) Bern-based pension fund for employees of Switzerland’s state-owned railway company, SBB, is increasing its allocation to equities.

Convinced higher interest rates signpost higher anticipated returns ahead, SBB will increase its equity allocation including private equity a few percentage points from current levels to 28 per cent of assets under management over the next two years in step by step increments that mark a departure from its highly conservative, low risk strategy.

“We have been thinking for a while that we could take on more risk,” says Dominik Irniger, head of asset management at the fund in an interview with Top1000funds.com.

“Although we lost money last year, the increase in interest rates has increased our return expectations and we are looking forward to higher returns as the financial situation gets more stable.”

The increased allocation will include bumping up the private equity allocation to 6 per cent of assets under management where strategy centres around investing in funds in the mid-market space focusing on diversified, controlled exposures.

He favours these investments because they typically don’t involve as much leverage as other private equity funds and target investments in industries and companies that need restructuring, or are in their growth phase.

“We don’t invest in the kind of funds that just buy a company and leverage it up, making their money like that.”

He also likes co-investment and secondary fund mandates.

“There are opportunities for investors in the secondary market. Quite a few people are reallocating their private equity allocations, so the market is quite dynamic.”

The public equity allocation is a mixture of passive and quantitative strategies with climate targets aimed at reducing the carbon footprint. The overlay changes the weight of companies in the index according to emissions reductions, he explains. “Heavy emitters will see their weight reallocated.”

SBB aims to reduce emissions across the portfolio by 50 per cent (compared to 2022 levels) by 2030. The fund has already reduced emissions by 30 per cent compared to the benchmark. “Next to emission reduction, engagement is the central ESG strategy for our fund,” says Irniger.

“The rules-based allocation is not really passive anymore, but it does have a really low tracking error,” he reflects, adding that he is particularly mindful of tracking error risk. “We don’t like managers that take to many tracking error risk. “

Most of SBB’s managers running the public equity allocations are based in Europe whilst fixed income and active strategies are run by US managers.

The expansion of the equity allocation will also include building out the global public equity portfolio.

“We do plan to add some global equity managers but our main focus is breaking out with more private equity first,” he says. SBB uses external managers across the portfolio accept in the Swiss bond and mortgage allocation.

Conservative strategy

In a conservative strategy reflective of SBB’s high number of pensioners, half the fund is invested in fixed income comprising allocations to government and provincial (Swiss) government debt, mortgage-backed securities, corporate bonds, and high yield emerging market debt. Reflecting on the implications of higher interest rates on the allocation to Swiss government debt he notes, “we don’t think interest rates will go up anymore, the curve is quite flat now. Our expectation is that interest rates have peaked.”

Asset are divided between foreign equity (10.3 per cent) Swiss equities (4.9 per cent) foreign currency bonds (19.5 per cent) CHF denominated fixed income (42.8 per cent) liquidity (3.5 per cent) alternative investments (6 per cent) and real estate (13 per cent)

Infrastructure & real estate

In another strategy seam, trustees are currently discussing whether to allocate more to infrastructure via co-investments, potentially targeting a 3 per cent allocation. “In the past we’ve just invested in closed end funds,” he says.

Building out the real estate allocation is another priority. Over the last five years, the fund has gradually built-up internal expertise in its Swiss real estate allocation where a portfolio of CHF500 million ($579 million)  is expected to grow to around CHF1billion ($1.1 billion). “We have a team of 3 people doing this,” he says.

The increased equity and infrastructure allocations follow recent decisions to drop other portfolios. SBB no longer invests in insurance -linked securities following a series of poor returns.

“We had a long history of investing in insurance-linked securities but although our outperformance relative to the market was good, the market as a whole didn’t produce the returns we expected. Investments didn’t pay off so we divested a year ago.”

Nor does SBB invest in hedge funds anymore, switching is alternatives focus to private equity where he says the fees offer better value for money.

“The ratio of what you get and what you pay out in fees in alternatives is best in private equity. In hedge funds, half your performance often goes on fees, but this is not the case in private equity. Fees in private equity are high, but you also get a better performance.”

sustainability

Alongside Swiss funds like PUBLICA and compenswiss, SBB is a member of Switzerland’s responsible investor association SVVK-ASIR partnering to work on climate engagement with corporates.  Although he cites real progress around corporates committing to long and medium-term carbon reduction goals, he’s concerned corporate investment in the transition remains slow.

“Corporate investment plan are still not aligned to targets.”

Looking to the future, he says SBB will increasingly seek to integrate human rights into the allocation.

“We think we could do something in the bond space around integrating human rights and democracy issues; it’s something we are analysing. There is also interest to understand what impact our existing private equity investments have on environmental and social issues.”

In contrast to Nordic countries and the Netherlands, the fund’s corporate sponsor and trustees are driving ESG integration rather any concerted action from SBB’s beneficiaries.

“The Swiss themselves are more pragmatic about ESG,” he concludes.