The private markets team at the Teacher Retirement System of Texas (TRS), the $211 billion Austin-based pension fund, is increasingly concerned about the amount of retail money flowing into real estate and private equity.

Speaking during the investor’s July board meeting, Neil Randall and Grant Walker, who oversee TRS’ private equity and real estate allocations respectively, explained that the global assets under management for retail alternatives is around $4 trillion today but that figure is expected to increase in size to around $13 trillion by 2032.

It means retail investors could account for 22 per cent of the global alternative AUM by 2032 compared to 16 per cent today, eating into the slice of the pie available to institutional investors and bringing unwanted risks around liquidity, transparency and valuations to private assets.

Retail investors have become an increasingly rich source of fees and capital for GPs. Many have turned to retail investors because of capacity constraints within the institutional investor community in turn triggered by the lack of exits in private equity.

“We are above allocation to private equity so we are slowing the pace, but at same time the largest asset managers are creating products for retail and distribution to deploy products that are coming to market as we speak,” said Randall.

He added that the regulatory environment is also changing to put semi-liquid private market products into the hands of retail investors.

“Private equity firms with the largest platforms and strongest brands are expected to be the early winners.”

The TRS team is spending time “getting their arms around” the trend, conducting research internally and talking to other LPs, including industry body Institutional Limited Partners Association (ILPA).

Key concerns include transparency regarding the amount of retail capital raised alongside institutional capital in a particular fund. TRS wants to be able to work with GPs to devise a cap on the amount of retail money in the same fund they also invest in. Without this cap, retail dollars could suddenly swell the size of the fund and reduce the institutional weighting.

Other potential impacts from more retail capital flowing into private markets could be felt in LPs’ co-investment pipeline, eating into this valuable deal flow. It could also create potential conflicts between closed-end and semi-liquid funds.

It is just as big a concern in the real estate portfolio where TRS’ returns have been challenged by higher interest rates in recent years.

Substantial retail capital already flows into commercial real estate, one of the largest asset classes in the US. But Walker predicted that retail investors could sink up to $250 billion into commercial real estate annually.

“For GPs, this capital is more attractive because the fees are higher compared to what institutional investors like TRS pay. Institutional investors are also more engaged compared to individual investors who are more passive,” he said, noting that because GPs find this more attractive, some may begin to modify their business model by putting more focus on sourcing and managing capital from individuals or retail investors rather than institutions.

He said that TRS will try and mitigate the risk by leveraging its manager relationships and making much of its role as a large and long-term investor. The pension fund can act quickly and withstand market downturns without the need to withdraw money, he added

Trustees heard other key priorities in the private equity team.

These include reducing the allocation to 12 per cent in line with the new strategic asset allocation. Randall said progress is slow and steady. It will take another few years because of the risk of cutting back the allocation too quickly and suddenly being underweight.

The team are also continuing to move the portfolio from larger managers to mid-market managers with smaller fund sizes of around $3 billion. “It is going well, but we have more room to go,” he said, adding that this shift is being reinforced by retail flows into larger managers.

Another critical seam to strategy includes evaluating how AI will impact portfolio companies. “It’s important because every investment we make in private equity we will hold for 5-10 years within which time frame AI will reshape the economy. We have to think about this for every investment,” said Randall.

An external panel has recommended that Australia’s Sydney University minimise investments in defence and security-related industries within its A$770 million ($510 million) private asset portfolio rather than divest and book a A$67 million loss. 

The review was instigated by the University – which runs a A$3.4 billion portfolio comprised of donations and bequests – in mid-2024 following campus protests in response to the Middle East conflict. 

While the panel recommended the University sell its listed investments in aerospace companies, which generate revenue of about A$4.6 million, it deemed selling similar assets within its private equity pooled funds and fund-of-funds not feasible given the structure of those investments.

“It is not possible to impose exclusions on top tier private equity managers or upon private equity ‘fund of fund’ managers,” the report said.  

However, selling the entire portfolio on the secondaries market would invoke an estimated A$67 million discount on its current holding value, while the endowment would also miss out on future returns. 

“As also noted, the ‘opportunity cost’ of not investing in private funds (based on the current portfolio of A$770 million in investments) would be A$30 million per annum. This cost becomes exponentially greater, over time, given the effects of compounding returns.” 

Instead, the review recommended the University hold those private funds until maturity and identify any underlying investments that derive revenue from items listed on the Australian government’s Defence and Strategic Goods List (DSGL) Part One. It should disclose those investments annually and actively engage with private asset managers to stop any significant investment in those areas. 

The University of Sydney already excludes investments in cluster munitions, tobacco, fossil fuels and power generation companies that cannot demonstrate their transition to low carbon. 

The University is currently considering the findings of the report, which was overseen by ethics expert Simon Longstaff. 

global trend

The recommendation stands in contrast with a rising number of European pension funds which are loosening their ESG criteria to allow for greater investment in defence industries following pressure from the Trump administration. 

Denmark’s pension fund for academics, AkademikerPension – a strong proponent of applying an ESG lens across its portfolio – is the most recent fund to relax its rules for investments in the defence industry. 

“The security situation is currently worse than ever in recent times,” AkademikerPension CEO Jens Munch Holst said in a statement on the fund’s website in late June. 

“Russia continues its brutal war against Ukraine. And we see an increasingly clear picture of an imperialist Russia that clearly does not respect recognized borders and the right of other peoples to self-determination.  

“And at the same time, we can see that Europe, despite many talks with the American government, is very isolated when it comes to Ukraine, European security policy, the maintenance of democracy and relations with Russia. It is sad, and it calls for a new course in terms of investments in Europe’s defence.” 

It will now be able to invest in six European weapons manufacturers which have links to nuclear weapons: Airbus, Babcock International, Dassault Aviation, Leonardo, Saffron, and Thales. Three smaller companies have also been removed from its previous exclusion list (Serco Group, Groupe Reel and Ultra Electronics). However, the fund’s exclusion list still includes 46 weapons manufacturers. 

“We are not doing this to invest in nuclear weapons, but conversely, we do not want a small turnover from nuclear weapons-related activities to prevent us from supporting the capital construction of a European defence.” 

AkademikerPension’s statement was made on the same day that NATO leaders promised to boost annual defence spending to 5 per cent of their countries’ gross domestic product (GDP) by 2035. 

PFA Pension, the largest pension fund in Denmark, is another fund to recently allow investment in a select number of defence stocks. 

APG Asset Management which manages €552 billion ($650 billion) for Dutch pension fund Stichting Pensioenfonds ABP, is also considering increasing its existing $2.5 billion allocation to the defence sector, framing the argument in terms of security rather than buying weapons. 

Norway’s NOK 878 billion ($87 billion) Kommunal Landspensjonskasse (KLP), the fund for local government employees and healthcare workers, has just excluded US industrials group Oshkosh Corporation and Germany’s ThyssenKrupp for selling weapons including armoured personnel carriers, warships and submarines to the Israeli military.

“In June 2024, KLP learned of reports from the UN that several named companies were supplying weapons or equipment to the Israeli Defence Force (IDF) and that these weapons are being used in Gaza. On the basis of this information, KLP performed a thorough assessment of the companies and engaged in dialogue with them,” says Kiran Aziz, head of responsible investments at KLP Kapitalforvaltning, which she joined almost six years ago.

“Our conclusion is that the companies Oshkosh and ThyssenKrupp are contravening our responsible investment guidelines. We have therefore decided to exclude them from our investment universe.”

Although the combined value of the shares is minimal, KLP hopes to send a clear signal on the importance of human rights through divestment.

Last year, the investor sold its stake in Caterpillar due to the risk that the US company may be contributing to human rights abuses and violation of international law in the West Bank, and in 2022 it excluded 18 companies from its passive equity portfolio due to links with Israeli settlements in the occupied West Bank.

Still, KLP’s divestment from defence groups comes at a time when many European pension funds are examining their ESG policies to potentially invest more in listed defence companies. Geopolitical uncertainty and continued war in Europe, coupled with pledges from NATO leaders to increase defence spending to 5 per cent of their countries’ economic output by 2035, is fanning life into the sector.

KLP’s latest divestments do not reflect the investor’s preparedness to engage when it believes it can effect change. For example, although many investors have exited China, in recent years KLP has stepped up engagement with Chinese mining companies at risk of breaching its key concerns around labour rights and responsible extraction and mineral processing.

ESG is applied across the whole portfolio where strategy is focused on index portfolios offering broad market exposure and low cost, efficient asset management. KLP monitors and cajoles 7000 companies across 50 countries tracking MSCI and Barclays’ equity and bond indices, of which it currently excludes around 650.

“As an owner of 7000 companies globally you have quite a unique opportunity to set expectations and make sure companies have underlying economic activity that is responsible and sustainable,” she said. “We rely on publicly available information, and our expectations are levelled at boards and  management.”

KLP uses data providers to access information and get an indication of the level of risk. She is less focused on  ESG ratings but takes a keen interest in how a company is doing within its sector, using monitoring tools and working with other investors, stakeholders and civil society. She is in dialogue with around 300 companies annually.

The portfolio is divided between equity (35.1 per cent) short term bonds (26.5 per cent) long term bonds  (12.9 per cent) lending (11 per cent) property including Norwegian and international real estate funds (10.8 per cent)  and other financial assets (3.7 per cent)

KLP is the first company in Norway to have had its climate estimates approved according to the SBTi2 ’s new standard for financial institutions.

Aziz is a qualified lawyer who joined KLP with skills honed to argue and build a case following nine years at the International Commission for Jurists, the NGO that defends human rights and the rule of law. She is a board member of the Norwegian Refugee Council and the role takes her to refugee camps to meet people forced to flee which has informed her belief that investors have a responsibility to protect human rights.

She says the legal profession has taught her about the need to stand firm and persist and the need for courage to raise your voice when engagement is difficult.

“Many companies don’t want investors to interfere or tell them what to do, but investment is based on trust and companies should live up to certain standards.”

A group of the UK’s largest pension funds including Brunel Pension Partnership, Church of England Pension Board, People’s Pension, Brightwell and Railpen have launched a campaign to boost shareholder oversight of the companies in which they invest.

The Governance for Growth Investor Campaign (GGIC) warns that the British government’s sweeping overhaul of listing rules in its bid to try and attract more innovative and high-growth companies to UK has watered down longstanding shareholder rights that will ultimately dent investor enthusiasm.

Arguing that sustainable growth requires robust governance, the GGIC wants the government to defend important shareholder tools. For example, it argues the case for reinforcing effective reporting and high-quality audits for large private companies and clearer disclosure on voting outcomes by companies with unequal voting rights. Other issues on the GGIC agenda include clarification that companies should allow for both virtual and in-person AGM attendance.

Investor efforts to try and reverse the tilt away from their ability to influence corporate governance is also under way in the US where CalPERS’ chief executive Marcie Frost defended the role of much-criticised proxy advisory firms at a recent board meeting.

She argued their work provides valuable research and strengthens corporate governance on issues like director independence, executive compensation, and ESG.

Governance and investment go hand in hand

The UK’s latest investor group argues that shareholder power actually acts as a draw to institutional investment because governance and growth go hand-in-hand – investors will seek opportunities in the UK’s capital markets if they know they can positively shape the companies they invest in.

“We want to work with ministers to help change the mood music on the UK and tell an optimistic story that gets people excited about investing in Britain because of its governance standards,” says Caroline Escott, who leads the £34 billion Railpen’s investment stewardship work globally. “At a time when government is urging UK pension schemes to boost the economy, it’s fundamental that we have a seat at the capital markets and corporate governance policymaking table to make the case for sustainable growth.”

“Strong governance shouldn’t be viewed as a barrier to growth but a catalyst for it,” continues Wyn Francis, chief investment officer at the £37 billion Brightwell. “Well-run companies that are transparent and accountable are more likely to succeed over the long-term. That’s how we deliver sustainable returns for members and support a thriving UK economy. This initiative is about making sure our voice is heard in shaping the future of capital markets because good governance isn’t just good practice, it’s good business.”

The campaign group will shine a light on the evidence that effective corporate governance and shareholder rights help companies perform better because they are well-run, transparent, and accountable.

“Well-managed companies that make decisions in the best interests of all shareholders are more likely to grow sustainably, avoid costly mistakes, and attract long-term investment,” states the report accompanying the GGIC launch.

Policy goals and next steps include campaigning to give  UK capital allocators a seat in key capital markets and corporate governance policymaking forums.

The pension funds will also campaign to remove the “artificial divides” between private and public markets: whether a company is private or public, it needs to have effective governance and investor rights mechanisms to help it grow and scale. The pension funds want to streamline and consolidate private markets disclosure standards and measures taken to ensure UK pension schemes get the right information and appropriate governance rights they need to support companies to thrive and grow sustainably.

The investors argue that high-growth companies in particular benefit from listening to their shareholders, and to markets, to scale and thrive. For this to happen,  UK pension scheme shareholders need effective tools, including access to companies and shareholder rights, to help them work in partnership with UK companies to achieve long-term sustainable growth.

Norges Bank Investment Management (NBIM), the world’s largest sovereign wealth fund, marks the 15th anniversary of its Singapore office this year, with the unit now firmly established as its Asia-Pacific stronghold. With regional growth set to continue in the coming decade, NBIM is well-positioned to capitalise on it, says Singapore head Sumer Dewan.

NBIM closed its Shanghai office in 2023, citing a pivot to the garden city as the regional trading hub, and shut the Tokyo real estate office in May due to the small portfolio sizes it managed.

Dewan has been with the Singapore office for most of its journey and says the offshoot was set up to be a “mini-NBIM” from day one, housing departments from portfolio management to technology and operations.

“The office is very fit for purpose for that long-term strategy that we have for the region,” he tells Top1000funds.com in an interview.

The fund has a strong focus on Asia and invests 4.6 per cent of its massive equities portfolio in Japan – its second biggest market after the US – while China (2.2 per cent), India (1.7 per cent) and Taiwan (1.7 per cent) were also among the top 10 countries, according to its 2024 annual report.

It also has the most individual holdings in Asia including 4,391 companies, compared with 1,901 in North America, 1,546 in Europe and 821 for the rest of the world.

NBIM’s Asia exposure is largely driven by the index due to the fund’s substantial passive exposure, but there are some active decisions made by its internal stock-pickers, known as sector portfolio managers, and to some extent the index portfolio managers.

“Index portfolio managers may choose to go over or under[weight] certain companies based on the research that they’re doing,” Dewan said.

Sumer Dewan

“It is more opportunity based. … maybe there’s some relative value trades that didn’t exist some years ago, but now we see a difference. For example, the same stock in different regions – mining stocks in Australia versus the same mining stock in the UK. As the situation arises, we certainly are positioned to take advantage of that.”

The biggest edge of the local office is enabling NBIM to make high-level decisions in Asia-Pacific time zones without having to seek approval from global headquarters like many of its peers, Dewan says. The fund trades around the clock with coverage from its Singapore, Oslo, London, and New York offices.

“The fund has much interest to maintain that reputation as really being the preeminent call on the street when there are situations, either liquidity situations or otherwise. Being here live definitely is an edge,” he says.

“But also the setup is an edge. With one client account, it makes it transacting very streamlined. The operation’s processes are very easy compared to some of our peers who have hundreds of different kinds of accounts.”

The Asia-Pacific markets are having their moment in the sun again as investors seek to reinvest some of their US assets elsewhere to manage Trump-related risks. Japan and Australia have emerged as attractive developed markets alternatives, and the promises of a stellar growth story in India have also drawn substantial capital flow.

While NBIM does not have plans to reduce its US allocation, Dewan says it sees diverse opportunities in Asia.

“Each one of these [countries in Asia] provides its own set of opportunities that we are very much involved in.”

Trade conflicts are not a new investment risk in Asia but Dewan says the lack of decisions and clear rules of doing business right now have asset owners like itself worried.

Some 15 countries, including Japan and South Korea, are still negotiating with the US on tariffs as the July 8 deadline for completing trade talks approaches.

“I think that overhang is putting some sand in the machinery,” he says.

“If we can get clarity to the rules of the road, whatever they might be, I think then the region will be 100 per cent adjusted to that. There’s a history of that.

“We have found the Singapore ecosystem very helpful to us. In addition to the obvious reasons why people are here in terms of the governance and rule of law, we’ve been able to hire very well here,” he says.

“If we look ahead, I would imagine a lot more investors [coming to Asia]. I would hope a lot more investors do.”

In today’s volatile and challenging markets, University of Texas Investment Management Co (UTIMCO), the $81.5 billion asset manager and one of the largest public endowments in the US, will maintain its counter-cyclical approach by rebalancing every month and going overweight in equity as it sees the market drop.

Following a predetermined set of thresholds, the investor is happier to be overweight because it is easier to tell when the market is cheap and buy in, than it is to judge if the market is expensive, and be underweight.

“We will go overweight when we can, buying assets cheaply and ride that up: we rarely go underweight,” said president, CEO and chief investment officer Rich Hall in a recent board meeting at the fund’s Austin headquarters.

During the meeting, Hall also outlined his key concerns regarding the impact of policy shifts by the US administration on projected corporate earnings for 2025, describing a negative shift in earnings expectations due to lower growth, higher inflation and little added relief from the Federal Reserve.

Consensus numbers for the S&P 500 year-on-year earnings per share (EPS) growth estimates were as high as 15 per cent at the end of 2024, and it looked like the S&P would end the year at 6500 points. Key metrics signposted a constructive or neutral outlook for companies, and investors believed that the new administration would implement pro-business policies.

However, the market missed the magnitude of the impact of tariffs on trade and the economy. These numbers fell “off a cliff” in January this year, and are now as low as 9 per cent. Although Hall acknowledged that [9 per cent] is still growth, it is “not what it was,” and comes with higher levels of risk given enduring policy uncertainty.

Recessions happen when people ‘wait and see’

“There is a saying that recessions happen when people wait and see. The policy and economic uncertainty is causing consumers and companies to pull back on spending until they see what is going to happen,” he warned, adding that the probability of a recession increases as spending slows, and that a recession can become self-fulfilling until new facts emerge to break the pattern.

Moreover, he noted that despite the sharp fall in the equity market in April, the S&P 500 is still at elevated levels relative to the last ten years. This is a cause for concern for investors given the uncertainty that is still in the economy, and the fact that the higher the level, the bigger the potential fall.

During the last 12 recessions since World War 2, the median market fall in the S&P 500 has been 24 per cent and the median EPS fall has been 11 per cent. Modelling these averages to current levels if recession strikes suggests an S&P valuation of 4500, triggered by a decline in earnings and a compression in valuation multiples.

Getting stuck in the mud with stagflation

Hall also flagged his concerns regarding stagflation – one of the most difficult environments for asset values – given the fall in GDP growth and the rise in inflation.

“You can get stuck in the mud and that’s not a great place to be.” He noted that inflation expectations have spiked higher across the board and it remains to be seen to what extent tariffs will push it higher still. Meanwhile, inflation uncertainty has slowed the pace of rate cuts by the Fed, with the idea that any cuts will come later, not sooner.

Despite the high levels of volatility in the last 12 months, UTIMCO’s portfolio has earned 8.6 per cent, exceeding its benchmark by over 2 per cent, and the asset base has grown to $81.5 billion.

The endowment has 26.2 per cent in public equity, 27.8 per cent in private equity and 6.4 per cent in directional hedge funds. It has a 5 per cent allocation to long treasuries, 2.3 per cent in cash and 10.8 per cent in stable value, plus a 2.8 per cent allocation to natural resources, 4.8 per cent infrastructure, and 8.8 per cent real estate. Five per cent is allocated to strategic partnerships.