Previ, the $48 billion pension fund for Banco de Brasil employees, has a tiny fraction of its portfolio invested outside Brazil. Despite repeated efforts to diversify, Brazil’s oldest pension fund, founded in 1904, currently ploughs all but 0.5 per cent of its portfolio into Brazilian assets, namely government and corporate bonds, and domestic equity.

Claudio Goncalves, who is about to press the button on new, externally run active allocations to US equity, is the latest CIO at the fund determined to invest more overseas.

“Having so much invested in the Brazilian economy is insanity in my opinion,” says Goncalves in an interview with Top1000funds.com.

The bulk of Previ’s portfolio is split between two main funds. A R$240 billion ($41 billion) defined benefit plan, closed to new entrants back in 1990, is run on an LDI strategy where most of the assets are invested in fixed income, particularly inflation-linked bonds which comfortably meet the fund’s actuarial return of inflation +4.75 per cent. This plan’s legacy allocations to real estate and equities will continue to be steadily reduced over time, says Goncalves.

The second largest portfolio, Previ Futuro, amounts to around R$35 billion of defined contribution assets. Set up in 1998, it runs eight different strategies according to beneficiaries’ risk appetite and target date options, and is where Goncalves wants to focus his overseas diversification efforts.

Not only has Previ missed out on much of the gains derived from investing in AI and the tech boom that has fuelled the US stock market and pension fund returns the world over, the fact that local companies only make up 5 per cent of the MSCI Emerging Markets index signposts the cap on domestic equity returns and investing so much in Brazil has also meant the fund hasn’t reaped other diversification benefits like volatility and exchange rate differentials.

New US President Donald Trump has also exposed the dangers of a Brazil-focused strategy and made the argument to invest more overseas even more compelling. Apart from threatening tariffs on Mexico, most of Trump’s attention on Latin America (at the time of writing) has been around immigration. If he were to slap tariffs on Brazil, Goncalves believes it could have a profound impact on fiscal policy, impacting the stock market, volatility, the exchange rate and high interest rates on which the pension fund depends.

“There is a new variable called Donald Trump, and his relationship with South America is still a big question mark,” says Goncalves.

The pull of home

The lack of progress on overseas diversification is not due to regulation. Previ is free to invest a maximum of 10 per cent of the portfolio outside Brazil.

Goncalves believes the pandemic stalled progress in meeting new targets set out by his predecessor Marcelo Otavio Wagner to allocate 2-3 per cent of assets under management to overseas markets by 2022 and 10 per cent by today.

The real reason is the opportunity cost. Every time Previ prepares to take a bold move to diversify, it is thwarted by Brazil’s high interest rates which make it much easier to tap returns at home and put profitability before diversification.

Interest rates in Brazil currently sit at 13.25 per cent and some economists predict they will spike to 15 per cent by the end of 2025. Meanwhile, sovereign inflation-linked bonds (NTN-B) pay inflation plus 7 per cent and offer compelling tenors out to 2060.

“Brazil is well known as a country with very high interest rates, and we take advantage of this. You can’t ignore an interest rate of 13.25 per cent or inflation linked bonds paying inflation plus 7 per cent,” says Goncalves. The returns derived from high interest rates also speak for themselves. In 2023, Previ Futuro easily outperformed its 8.5 per cent target, returning 16.1 per cent and all eight investment profiles exceeded the benchmark index in 2023.

Still, Goncalves is determined to green light new overseas allocations and has whittled down the number of external managers to seven, of which five or six will be approved. His primary focus is on gaining exposure to US equity. Although some of the managers have expertise in Europe and Asia, he is concerned about weak European growth prospects and unknowns in the Chinese and Indian markets.

“We are trying to measure how much we will invest abroad. We are pretty much there,” he says.

It’s also a question of timing. Market volatility triggered by DeepSeek threatening US dominance in AI and Trump’s threat of tariffs has given the team pause in recent days. Goncalves is also monitoring the impact on the exchange rate between the real and US dollar – forecasts that the US dollar would get stronger have proved wrong as the real continues to experience the longest streak of gains in 20 years.

“We are trying to understand what is going on,” he concludes.

The term lost decade, or lost decades, is generally used to describe the lengthy period of economic stagnation in Japan that began around 1990.

For three decades, this once great economy flailed, encumbered by falling asset prices, natural disasters and the country’s rapidly ageing population.

Now, other nations are facing the possibility of lost decades of their own, with a growing number of economists and investment experts seeing recession as the base case, and many doing analysis for an extended period of stagnation – an environment in which few assets do well.

It’s a scenario that’s keeping John Greaves, the director of fiduciary management at the £34 billion ($45 billion) UK pension scheme, Railpen, up at night.

“I’m increasingly really worried about a lost decade in terms of real returns and not many of us have experience managing through that, but it can absolutely happen,” he said at the Top1000funds.com roundtable on geopolitical volatility and portfolio resilience.

“What does that stress test look like, when over 10 years, you earn zero real return?”

Steven Fox, executive chair and founder of political risk consulting firm Veracity said that the possibility of a lost decade, particularly in Europe, looms large but could potentially be curbed through regulatory reform.

“The European and US economies were about the same size in 2008 but today the US economy is roughly 40 per cent larger than the Eurozone,” he said, citing over-regulation in Europe as a key reason.

As an example, Fox pointed to the rebuilding of the Notre Dame Cathedral in France, which took just five years to complete.

“If normal regulations had been followed, it’s estimated that it would have taken 20 years to accomplish but they suspended all regulations except health and safety and got it done in five,” he said.

“That is an indication of how dramatically overregulated Europe is and, until that changes, the lost decade, certainty in this part of the world, is very much going to be with us.”

Liz Fernando, chief investment officer at £50 billion UK pension fund, NEST, said there are encouraging signs of change in Europe and increasing recognition of the importance of investing for growth.

“There’s a great danger that what gets hidden behind all the noise and focus on the US is Europe – and particularly Germany, which has done some pretty incredible things post-election, [such as] the idea that the debt brake is effectively going to get thrown out,” she said.

“Europe, in some ways, has been given the boot up the backside.”

Kate Barker, chair of the trustee board at the £77.9 billion Universities Superannuation Scheme, said discussions about a potential lost decade were extremely important, particularly in the context of weak global productivity growth, which had significant implications for global economic growth.

“We’ve been through a period where we’ve had no, or very little, productivity growth in Europe, and it’s quite surprising that almost every country has experienced the same thing. You might have expected more variation,” she said.

“Much investment money has been made in the US… and it is not really clear to me where the returns will come from in the next decade.”

Regime change

According to Greaves, the market’s reaction to announcements made by the US administration in early April, provides further evidence of a regime change.

“I’m a strategist by background so I try to always think long-term, but recent events are further evidence, for me, of a change in regime and a change in how economies are going to behave and how markets are likely to react, which requires a change in my thinking,” he said.

“The thing that’s really concerning at the moment is what’s happening with the portfolio diversifiers… what’s going on with USD and US Treasuries, which emphasises the importance of geographical diversification and thinking carefully through how different parts of the portfolio might behave in different scenarios.”

Regime changes, be they political, economic or social, occur when a system goes out of balance and systemic risks are not addressed, said Luba Nikulina, chief strategy officer at IFM Investors, pointing to the election and re-election of Trump.

“We talk a lot about systems, and when we talk about energy transition, we think about the planet as a system that goes out of balance, and there are systemic risks that don’t disappear,” she said.

“There are several systemic risks we monitor, including social systemic risks that we observed here in the UK during Brexit. And now what’s happening in the US is another manifestation of this social systemic risk.

“When you’re in the midst of it, it’s hard to make significant use of it but, at the same time, it presents an opportunity for investors, provided they have the liquidity to act. This is where risk management comes to the forefront to ensure that you can actually take advantage of opportunities.”

Veracity’s Fox said the signs point to a “long-term sea-change”.

“We have a [US] president who is willing to use relatively unbridled power and an institutional system that doesn’t have the capacity to push back at the present time,” he said.

“I don’t want to paint a bleak picture but it’s a realistic picture that certainly merits a lot of thought, but we can’t get lost in the day-to-day.”

USS’ Barker said a key challenge for institutional investors, given the messy, unprecedented nature of policy changes and the market reaction, was not to react and jump to conclusions too quickly.

“We get very focused on the implications for different countries but we’re thinking about macroeconomics when actually it’s almost certainly going to be implications for different sectors that drives some of the changes to how we invest,” she said.

“Starting from the macro perspective doesn’t seem to be wholly helpful and I think this is a time when you’ve really got to start from the micro.”

For Barker, one main consideration for investors would be around currency.

“Currency views have been thrown up in the air by the events of recent weeks and questions about the US dollar are really significant,” she said.

“We may see moves by the US to suggest different deals on currencies. I’m pretty sceptical about deals on currencies because unless you have exchange control, my view is that they tend to go wherever they wish.”

Buying the dip

Pension and sovereign wealth funds, with relatively steady inflows and longer-term time horizons, appear best able out of all investors to ride out market volatility and buy the dip.

Fernando said for NEST, which receives around £500 million per month in contributions, current market conditions present unique opportunities.

“That’s a really helpful flow of liquidity, which we can use to try and rebalance the portfolio in sensible ways at times, because you’re always buying market corrections and if the fundamentals haven’t permanently been impaired you’re buying the same asset at a lower price,” she said.

“I wouldn’t say we enjoy crises but we probably view them in a different way to funds that are paying out beneficiaries.”

Like NEST, Australian pension fund (locally known as superannuation) REST is strongly positioned, given the fund’s relatively young membership.

At the A$93 billion ($59 billion) fund, around half of the members are under age 30.

Despite having a longer time horizon than most funds, Sonia Bluzmanis, REST’s London-based head of external equities research, said it is still difficult to block out the noise and chaos.

“We’re thinking about how everything that’s going on in terms of geopolitics, capital markets and economics impacts on our long-term capital market assumptions,” she said.

“In the short-term, as much as we would like to look through [the chaos] we can’t, so a key focus for us is liquidity. It’s not that we’re expecting a tonne of outflows but it’s more about having to meet regulatory requirements and ensuring that we’re trying to avoid any uncompensated or excessive risks.”

At the £19 billion Coal Pension Trustees, where nearly all members are drawing their pension and between 7 and 10 per cent of assets are paid out annually, short-term volatility and economic shocks can have a significant impact on the schemes.

Callum Logan, head of investment strategy at Coal Pension Trustees, described his job as equal parts investing and divesting, making liquidity absolutely critical.

“In these difficult times, it’s about relying on diversifying assets that often haven’t been doing as well as public equities in rising markets,” he said.

“Sometimes it has been hard holding those assets when you’ve seen a strong bull market in equities, but you can be grateful for their protection at this time.”

Railpen’s Greaves said a major challenge for pension funds is achieving appropriate geographical diversification.

“There’s often a very favourable outlook for South-east Asian growth for example, but it’s hard to get conviction that translates into corporate profitability on publicly listed markets, because it may or it may not, and you just don’t know,” he said.

“That mechanism is much more established in developed markets whereby public companies can extract growth. While that tends to go to a small percentage of public markets, as long as you’re broadly diversified, you can often feel comfortable in that assumption.”

Being a well-funded defined benefit scheme, Railpen, doesn’t have to invest in everything. It can stick to the assets that it knows and understands to earn a certain level of return, Greaves said.

“That strategic discipline I feel is more important than ever,” he said.

Chris Mansi, chief investment officer, Europe and International at WTW, said one action that investors could take in the short term was to build understanding of the risk in their portfolio by identifying areas of high concentration and considering the potential implications in the case of a “bad event”.

“Looking at things on a micro sector-by-sector basis may make sense intuitively, but it’s a very difficult thing to form strong views as to how things will pan out,” he said.

“It’s also kind of the antithesis of allocating passively, which would point to having confidence in good quality active management.”

While market volatility and signs of entering a period of high inflation and low economic growth theoretically favour active management, Logan said the standard rules and assumptions may not apply anymore.

“In volatile and uncertain times, the thinking goes, you want someone actively looking at [the portfolio] who can be on top of all the live issues and trade day-to-day, but with so much going on, how well placed is anyone to do that?” he asked.

“To me, it’s not conclusive that active management is key here and, at this stage, perhaps it’s better to be asking questions than giving answers.”

“That said, one thing I certainly stand behind is geographical diversification, which our schemes are positioned for. Global market cap benchmarks imply 65 per cent of your public equity portfolio in the US, which does not feel balanced, but whether you implement actively or passively is less clear.”

Coal Pension Trustees has had a regionally diversified approach to asset allocation for a number of years, which Logan admitted had been “painful” at times, given the exceptionally strong performance of US equities over the past 10 to 15 years and, more specifically, the phenomenal performance of US mega-cap technology stocks in recent years.

“Regional diversification is really important and it ties very closely to the currency issue because, ultimately, we’re paying liabilities in Sterling, so we want the benefit of being diversified across different regions,” he said.

“A lot of the investable universe, not just in public equities but also debt and private markets, has been in the US, and managing offshore illiquid assets and the currency around that is challenging.”

“I think it’s early days for the Trump administration and we’re trying to understand what some of these potential changes mean, including is the US dollar the flight to quality it has been and does that warrant a higher hedge ratio? I don’t think that’s a question we need to answer tomorrow, but it’s certainly one that we need to think about.”

The latest iteration of PGGM’s impact investing journey sees a core/satellite structure around 3D investing, more active management, a total portfolio approach and the hiring of fund managers that align with the mission. Amanda White spoke to chief fiduciary investments Arjen Pasma.

Central to PGGM’s impact investing approach is that risk, return and sustainability share equal airtime in the selection of investments.

The challenge comes in the implementation of the philosophy, which PGGM deploys via a core/satellite approach. The core portfolio, which is about 95 per cent of the assets, will be returns-based with different degrees of sustainability. Then it invests for real-world impact in smaller satellite portfolios around three themes: the energy transition, healthcare and biodiversity.

“These are investments where we want to claim real measurable impact. Smaller and more focused investments, still a focus on high financial returns but more degrees of freedom in those, and a specific impact,” says Arjen Pasma, the fund’s chief fiduciary investments.

As part of this multi-year journey, which ranks PGGM as one of the leading funds globally in its commitment to impact, the core portfolio has become more active with inclusion rather than exclusion at the centre.

“The core portfolio was more or less passive, and then to make it more sustainable we used screening. But we think that’s inefficient. Now we are selecting by starting with a blank piece of paper and adding companies. This makes it efficient in financial returns and a better sustainable profile than the index.”

This will be applied across all asset classes, and while PGGM would rather approach the capital allocation in a more asset class agnostic way, the Dutch law requires it to have an asset allocation in its investment plan.

“We can’t quite do TPA in the same way as some other funds. We still need to have asset-liability modelling that gives us an asset allocation,” Pasma explains.

The fund invests across equity, credit, real estate, private equity, infrastructure and alternative credit, plus there is a protection portfolio, hedging the liabilities of retirees.

“This approach won’t massively change the asset allocation, because that’s largely determined by the outcome of the ALM. I can only change how we are investing in those asset classes,” he says, adding active risk has substantially increased.

“In public equities our tracking error was below 50 basis points and now our active risk is about 300 basis points. It allows us to deviate from the benchmark so we can make some choices, but it’s not highly concentrated. We don’t allow our financial returns to suffer from the fact we want a more sustainable portfolio, it needs to be efficient in all of those three factors.”

The impact portfolios are still in their infancy, with only a “few hundred million euros” deployed so far.

The impact themes don’t have specific target allocations but Pasma says the energy transition themed investments will be a couple of billion euros, healthcare a little less and “biodiversity we are still figuring out”.

Of course, PGGM has been investing through an ESG or sustainable lens for many years and by many definitions would have more than a few hundred million euros classified as sustainable investments. But for its impact investments, which use the Theory of Change (ToC) as a framework, allocations follow the Global Impact Investing Network (GIIN) standards, which have a much higher bar, including intentionality.

For example, aligning investments with the UN’s sustainable development goals does not meet the GIIN standards, Pasma says, so those investments are in the core allocation rather than the impact satellite funds.

“The satellite mandates are very focused and asset class agnostic. Our smallest investment is €1 million – that is something we would never do in the core portfolio,” Pasma says.

The approach is allowing a fund the size of PGGM, with €261 billion, to invest in assets like new technology companies in the healthcare sector, and Pasma says there will be an increase in these types of investment over time.

“People are very enthusiastic about those investments. It’s a fun job – hard but fun,” he says.

Designing portfolios and manager alignment

Pasma says the team has taken its time to build the portfolio, because “we want to do a proper job”. This has included consulting with a lot of people, including seeking out people who think ESG investing is a terrible idea.

There has also been some criticism in the Netherlands about the potential concentration risk resulting from a focus on impact investing and this has been front and centre in designing the portfolios, given the fund’s size.

“We know we will not move into a highly concentrated portfolio. We still have a sufficient amount of companies in the portfolio – t’s north of 1000 names, but not the 7000 we used to have,” he says.

“We are designing the portfolios now and have completed the public equity and credit portfolios. We know what changes we want to make, and which managers we will hire. Those transitions are planned for this year.”

The overhaul won’t necessarily result in using fewer external managers, but there will be changes to the manager roster.

“It’s important to us that those managers we use have a vision and some experience in managing portfolios that are efficient in those 3D terms. That’s a challenge because sustainability data is something you need to invest in,” he says. “We are seeking out managers that also differ in their approach. We want to learn from external teams and internal teams about what is the best approach to managing a portfolio like that. It’s also about spreading risk and diversifying strategies.

“The managers we want are those that have said ‘we understand what you need, a 3D-efficient portfolio, and we want to build that for you.”

He said some managers have said they don’t want anything to do with ESG because of the political pressure in the US, and that’s ok. He’s also aware that with experience the portfolio and the managers will evolve.

“If we need to change managers then we will do so. But we are quite convinced the managers we have selected are in a great position to build a great 3D portfolio.”

The portfolio of the future

Pasma says a new governance structure and a focus on total portfolio management is also required for 3D investing and really knowing what you own.

From a behavioural incentive perspective, financial KPIs are not individual but judged on the overall portfolio and split 50/50 between financial and sustainability metrics.

“Twenty years ago, the only important thing was you were a financial economist and good at optimisation and calculating risk and return. Now you need to understand the sustainability profiles of the businesses and the real-world experience in your due diligence because the financial risk and return is only telling part of the story.

“With that, and the supernova of data coming into the market, there is a lot more information out there, available at a much faster pace, and if you want to use that you need to transform the raw data into information and insights and need the people to do that.”

The information required, and the way it is consumed, is a focus for PGGM as it looks to the future and invests in hiring more people with experience across AI, data platforms, and data analytics.

“Having a transition in your workforce, people who are more balanced in the teams themselves and tech they use. The entire team needs to make a transformation to AI.”

The journey to impact is a 2030 strategy but the first transitions in public markets will take place this year.

There’s been a lot to absorb and Pasma says the fund is reaching the change capacity of the organisation, which means taking it more slowly with new projects.

“Managing the story is also something we underestimated,” he says. “We need to sit together more and discuss where we are going and why it is important and fun, especially when there is a change in climate and the anti-ESG movement in the US, people are less confident.”

This article was produced by Capital Group without involvement from the Top1000funds.com editorial team.

Uncertainty surrounding the impact of the US administration’s policy plans weighed on markets, including the implementation and reversal of tariffs, job cuts across the federal workforce and tightened immigration enforcement.

US growth momentum has slowed, with significant uncertainty in the outlook and risks likely skewed to the downside. Fundamentals had been resilient, with consumer spending supported by real income growth, firm labour market demand and relatively low unemployment on a historical basis. However, tariff announcements and broader policy uncertainty have contributed to weakening consumer and business sentiment and have the potential to negatively impact real incomes, business investment and inflation. Recession risks appear to be rising.

Inflation dynamics complicate the Federal Reserve’s (Fed’s) policy decisions. Inflation implied by the Consumer Price Index and the core Personal Consumption Expenditures Index remains elevated. The Fed has indicated that it is seeking clarity on the impact of the Trump administration’s policies before it moves again, having cut the federal funds target rate by 100 bps in the last few months of 2024. Still, broader economic growth challenges and possible labour market weakness could lead to more cuts this year.

Potential policy changes from the Trump administration have raised the degree of uncertainty in the economic outlook and could weigh on global growth. The distribution of outcomes related to tariffs, taxes, regulation and international relations seems unusually wide. The initial impact of announced tariffs could meaningfully lower global growth. While the starting point for growth looks stronger in the US than in other global regions, the risks to the US seem skewed to the downside.

While economic fundamentals in many international regions currently look weaker than in the US, fiscal responses could be supportive over time. Following decades of a stable alliance, Europe is responding to a more isolationist US with increases in fiscal stimulus, which could in turn spur economic growth over the medium-to-longer term.

German stimulus and the EU’s plan to raise defense spending under ReArm EU are positive steps that should pave the way for closer European integration and faster growth in the coming years. Meanwhile, the European Central Bank appears set to lower interest rates, with the balance of risks tilted toward additional cuts given the growing chance of a trade war between the US and Europe.

In Asia, China has started to stabilise, although stimulus remains limited. That trend could change as Chinese officials look toward more fiscal measures to offset tariff risks.

Given heightened uncertainty, we are focused on building resilience and balance in portfolios. The implications of recently announced tariffs in the US could significantly alter the global growth picture, a scenario which markets are beginning to appreciate. We have looked to construct portfolios that reflect balanced risks across excess return drivers. We favour credit sectors where the income component is relatively more compelling.

We believe positioning for a steeper yield curve offers favourable risk-reward dynamics and could serve as a risk-off hedge to complement risk exposures elsewhere. In our view, the steepener position could benefit either in a worse-than-expected economic slowdown or with inflation and deficit dynamics driving long-term yields higher. We view duration more positively given that growth momentum is slowing, uncertainty is building and recession risks are rising. An underweight position in global duration could be beneficial as fiscal stimulus in non-US developed markets might cause the differential between US and non-US rates to narrow.

Within credit, we are maintaining an up-in-quality bias with a tilt toward more defensive areas of the market. This positioning reflects our concerns around increased macro and policy uncertainties. Though credit fundamentals have been sound, volatility and downside risks are likely to remain elevated. We believe select exposures across high-yield and emerging markets debt remain attractive, though credit selection is key.

We believe positioning for a steeper yield curve offers favorable risk-reward dynamics and could serve as a risk-off hedge to complement risk exposures elsewhere. In our view, the steepener position could benefit either in a worse-than-expected economic slowdown or with inflation and deficit dynamics driving long-term yields higher. We view duration more positively given that growth momentum is slowing, uncertainty is building and recession risks are rising. An underweight position in global duration could be beneficial as fiscal stimulus in non-US developed markets might cause the differential between US and non-US rates to narrow.

Within credit, we are maintaining an up-in-quality bias with a tilt toward more defensive areas of the market. This positioning reflects our concerns around increased macro and policy uncertainties. Though credit fundamentals have been sound, volatility and downside risks are likely to remain elevated. We believe select exposures across high-yield and emerging markets debt remain attractive, though credit selection is key.

 

To read more about Capital Group’s fixed income capabilities, click here. 

The private markets allocation at the United Kingdom’s Brunel Pension Partnership, one of eight Local Government Pension Fund pools set up 2017, is valued at £8 billion ($10.7 billion) spread across 162 investments, including prized sustainable investments in wind, solar green hydrogen and waste.

The allocation is split between different fund types – primaries, secondaries and co-investment – as well as direct co-investments and fund secondaries, overseen by Richard Fanshawe who joined Brunel as head of private markets seven years ago. Back then, the combined allocation to private markets (excluding property) amongst the ten client funds in the partnership was just £1.3 billion.

Fanshawe credits much of the growth in the allocation to private markets to Brunel’s “innovative model”, characterised by selecting fund investments internally alongside working with strategic partners (that are also global leaders in their asset classes) to select co-investments and funds where applicable. He says their expertise complements and acts as an extension of Brunel’s internal team of 12 private markets investment professionals – there were just five at the start.

“We are already able to achieve what the Canadian model aspires to,” he says in a reference to Canada’s model which combines robust governance with independent managers and large teams who select investments themselves to create a deep allocation to private markets and has helped create the second-largest pension system in the world, according to the OECD.

The pool’s own resources and those it can tap with its partners, plus Brunel’s combination of leadership in responsible investment and a dual investment committee process, has created a proven track record of scalable, resilient and cost-effective investment, he continues. Moreover, co-investing with a wider number of sponsors adds a critical layer of diversification that single-sponsor platforms can’t replicate. Similarly, he says access to “top-class, voluminous deal flow” is fundamental to the ability to be highly selective when choosing investments.

To date, Brunel has made 32 co-investments in global infrastructure projects and platforms, nine of which are in the UK. Co-investing is saving the pension funds in the pool around £5 million annually. In private equity, flagship investments include cornerstone Neuberger Berman Impact Private Equity (PE) Funds 1 and 2 which are 60-70 per cent co-investments.

“Co-investing is most certainly not just an extension of fund selection, but a spectrum from basic post-deal syndication to the upper end of complexity – it is an entirely new ball game requiring distinct expertise, continuous primary allocations to funds in their investment periods and compensation structures that are beyond pension funds in order to make them sustainable.”

Net returns of early realisations from Brunel’s more mature vintages already offer an early indication of success, but he says Brunel won’t increase the allocation to private markets anymore at the moment. Around 33 per cent of partner funds assets are invested in private markets, and he says there is “little more capital available to deploy until capital is recycled or strategic asset allocation weights change.”

For all the growth in Brunel’s private markets allocation over the last seven years, Fanshawe flags an enduring lack of opportunity in the UK. “There have been few exciting UK investment opportunities during the last seven years, and certainly not as many as there could have been,” he says.

He traces the lack of opportunity in UK infrastructure to the shift away from private/public partnerships in social infrastructure projects renowned for highly attractive ‘availability payments’. Now the focus is on energy, economic and utility-related assets with “fundamentally different return profiles and drivers.”

It means there are more attractive opportunities in Europe and the US with “fundamentally different business models” to those in the UK where, according to asset manager Equitix, there is now a backlog of between £50 billion and £300 billion of capital maintenance in the public sector and social infrastructure facilities.

Brunel has invested 50 per cent of all infrastructure capital in the broad energy transition, diversifying across geographies, regulatory regimes, technologies, stages, vintages and GPs. However, Fanshawe concludes that putting money to work in the transition has grown more challenging.

The consequences of the review of the UK’s electricity market arrangements are looming into view. Other challenges include “the urgent need to focus on energy efficiency measures,” the lack of proven long-duration energy storage technologies with subsidy arrangements to support higher renewable penetration and few new low-carbon baseload opportunities.

“Lack of certainty will discourage further investment,” he says.

Norges Bank Investment Management (NBIM) which oversees Norway’s sovereign wealth fund managing the country’s oil and gas revenues, is expanding its investments in hedge funds to include mandates to Asian, US and European long/short external managers. The number of managers and invested value will depend on market opportunities, said Erik Hilde, global head of external strategies at NBIM.

NBIM already invests in internally managed long/short funds. The investor also allocates approximately $90 billion to 110 external fund managers, all of whom follow bottom-up fundamental investment strategies.

“Everything will continue to be managed within our mandate and within the limits we have for deviations from the index,” said Hilde, who added that fees will be structured similarly to NBIM’s existing external mandates.

The strategies will be held in separately managed accounts. Hilde said that under the strategy, NBIM’s external managers will borrow stocks held in NBIM’s large index portfolio to position on falling prices, selling them in the market. “This way the fund avoids being net short in any company, even though some of the mandates will be long/short,” he explained.

According to NBIM’s public invitation to tender, the investor plans to award mandates across long/short and market-neutral strategies with initial funding for each mandate ranging from $150 million to $500 million. NBIM is looking to allocate mandates to single-country long/short equity strategies in Australia and Japan, regional long/short strategies focused on Europe, and long/short equity strategies in the US, where it is looking for expertise in healthcare and technology in particular.

The open invitation to external managers reflects growing investor interest in long/short equity strategies as market volatility and stock dispersion create fresh opportunities for active managers. NBIM’s move also comes as some investors grow increasingly concerned that equity market valuations look stretched, increasing the risks for long-only investors at a time when the impact of President Trump’s policies on the US economy, particularly his tariff plans, remains unknown.

Equities account for 70 per cent of the total assets under management. NBIM  has a 27.7 per cent allocation to fixed income and a 1.9 per cent allocation to unlisted real estate. Last April, Norway’s finance ministry rejected NBIM’s petition to invest in private equity citing higher fees, lower transparency of information, and the need for a broad political consensus.

Today’s new uncertainty contrasts with last year. NBIM attributes its 2024 return of 13 per cent to gains in global equity markets supported by solid corporate earnings, more optimistic growth expectations and declining inflation expectations.

Still, in 2024 the overall contribution from security selection was negative. External management made a positive contribution, but the negative contribution from internal management was larger. “The security selection strategy is not expected to contribute positively to the fund’s relative return every year, and the results for 2024 followed a period of five consecutive years of positive contributions from security selection,” states the fund.

NBIM has delivered annualised returns of 7.5 per cent over the past decade.

The fund had a 0.6 per cent loss in the first quarter of 2025 largerly weighed down by equities, which recorded a loss of 1.6 per cent or 415 billion kroner ($39 billion) driven by fluctuations in the tech sector.