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.

Investors are weighing up the implications of a multi-regime change that is manifesting in new rules governing global trade and tariff uncertainty, shifting geopolitics and security and defence partnerships, and a steady rise in real interest rates.

“There are many balls up in the air and we have to work out what matters and if we have to change strategy as a result,” CalPERS’ chief investment officer Stephen Gilmore said during the $527 billion pension fund’s quarterly CIO report in June.

But despite warning of change ahead, Gilmore also urged the CalPERS board to view market behaviour through a long-term lens.

Despite this year’s turbulence, equity markets are now close to where they were at the beginning of the year – although the US dollar is notably weaker.  Other reassuring signs include the fact that the pension fund has returned 5.6 per cent for the fiscal year to date and is on track to meeting or exceeding its discount rate driven by listed and private equity.

Gilmore also noted that CalPERS’ allocation to private assets has gone up 3 per cent since he last reported to the board.

Putting recent events in context, he said that ever since 2000, US industrial production “has flatlined,” even though GDP has continued to grow. He noted that efforts to introduce tariffs to counter America’s longstanding and generous trade deals with other countries are nothing new, and said that the US has also run a persistent trade deficit and spent more on defence than its partners for years.

The US equity markets is still – and has been ever since the GFC – a standout performer relative to European and Japanese markets, although other global markets have finally broken out of their long-term, lethargic range. He noted US valuations are still quite high and flagged that this is in keeping with the view that returns will be lower ahead.

“We would expect forward looking returns in the US to be lower than they are for other equities.”

Gilmore also noted that although the US dollar has weakened in the last few months, over time the currency has been very strong and remains so.

He also noted that interest rates, which have driven market outcomes in recent decades, look higher ahead. Interest rates have risen ever since 2020 and 5y5y market predictions – referring to the 5-year interest rates in 5 years’ time – signpost that they will continue to rise after inflation.

“From our perspective over the longer run it’s not a bad thing because if the level of interest rates is higher then long-term returns for us should be a bit better.”

Gilmore’s message was echoed by Lauren Rosborough Watt, lead economist for the CalPERS investment office whose presentation to the board outlined how growth is expected to continue to decline over the year, but the increase in inflation may not be as high as feared because oil prices are still lower today than they were at the start of the year.

The impact of President Trump’s “big beautiful bill” on corporate growth is likely to be muted in the short run because tax breaks will have a positive impact on companies. The bill was signed into law on July 4, and the final legislation scrapped the so-called “revenge tax”, which would have imposed higher duties on foreign companies and investors from countries deemed to have “unfair” taxes on US businesses.

Rosborough Watt said that in contrast to media rhetoric, US consumers remain the driver of growth in the economy; AI is benefiting equities, and US asset markets are deep and liquid and the dollar remains the reserve currency for now.

The government may pick up extra revenue from tariffs and importers are compressing margins. The board also heard how demand for labour is slowing, but this is balanced by a reduction in the supply of labour, likely resulting in only a very modest increase in unemployment.

Warning on the deficit

However, Glimore flagged America’s fiscal challenge and said the deficit will stay at elevated levels. It remains to be seen how much additional contribution the budget adds to current debt loads, and he said it is also unclear how much will be collected in tariff revenues to offset debt.

Nevertheless, “a fiscal deficit of 6 per cent of GDP for the foreseeable future gets challenging after a while”, he said.

Running a trade deficit requires inflows of capital to finance it, yet there is a growing discussion around capital flows forcing the trade balance wider. “If you are running a trade deficit you need inflows,” he said.

Rosborough Watt highlighted that the new environment has raised the spectre of uncertainty for investors.

Risk is based on a known set of future outcomes and the probability that those outcomes will fall within a certain range.

Uncertainty introduces unknowns whereby the range of outcomes could be wider. It’s visible in how economists are now pulling back on predictions made a few months ago about recession and inflation, and the changing narrative around tariffs and rates.

Gilmore concluded that the new total portfolio approach (TPA) CalPERS is poised to adopt would allow a more dynamic approach to managing today’s challenges compared to the strategic asset allocation (SAA) the pension fund currently relies upon.

A SAA involves checking in every now and again (CalPERS adopts an SAA to determine its investment strategy every four years) and optimises at individual asset class levels, yet TPA is more continuous and optimises at the whole portfolio level for more efficiency.

“With TPA you are thinking about the portfolio on a more frequent basis.”

Ilmarinen, Finland’s €63 billion ($73 billion) pension insurer, is laying the ground to increase its equity allocation by as much as 15 per cent in a jump which could see public and private equity, as well as other assets with a higher expected return, ultimately account for up to 65 per cent of the organisation’s total assets under management.

In an interview from Ilmarinen’s Helsinki offices, chief invetment officer Mikko Mursula says the team is busy scenario testing and running simulations, working towards an anticipated two-year deadline to increase risk and with it, long-term returns.

The new strategy is the consequence of pension reform decreed by the Finnish government which is acting on the wishes of labour unions, the owners of Finland’s private sector pension system that includes investors like Varma and Elo.

“The reform improves private-sector pension providers like Ilmarinen’s opportunity to pursue better long-term returns on pension assets by carrying higher risk in investment portfolios,” explains Mursula, who will become president and chief executive of the organisation this summer.

“The unions are the ones who have negotiated the changes – we are just the executor. Our task is to invest pension assets safely and to reach high enough returns within the solvency capital framework.”

To enable Finnish investors to reach the new risk targets, the government is changing the solvency capital framework under which companies like Ilmarinen operate. That framework is specific to Finland, and differs from the EU’s stipulation on how much insurance and reinsurance firms must hold to cover potential losses.

Historically, equity is Ilmarinen’s strongest performing asset class and Mursula believes that with a long enough horizon, the increased allocation will bring the higher returns stakeholders seek.

But that is not to say the new asset allocation won’t come without side effects, like a spike in volatility which he warns will show up in choppy annual returns. Witness 2022 when Ilmarinen’s equity investments lost 10.2 per cent versus a 28 per cent gain a year earlier in 2021.

“The volatility of our annual returns will be higher, and it is very important to keep this in mind,” he says.

Another open question hangs over how to allocate the remaining 35 per cent or so of the portfolio to ensure these investments don’t have too much correlation with listed equity.

“We have to harvest correlation advantages with a much smaller portfolio than we’ve done before and we don’t know yet what it will mean,” he says.

Hedge funds hit by macro winds

As the team lays the ground for the new allocation to risk assets, one diversifying portfolio could become more important. In recent years, Ilmarinen has developed an 8-9 per cent multi-strategy, strategic allocation to hedge funds. Wholly outsourced to external managers, it specifically targets correlation advantages.

The recently volatile market has provided a good operating environment for active investors, but Mursula reflects that one of the most challenging strategies in the current climate is macro which has thrown off a disparity between managers and frequent “surprises” because of the impact of tariffs.

“Within macro there are good performers but also bad performers,” he says. “The problem is, we don’t know how tariff policy will play out from one month to the next. If you make a call and take tactical bets, you may be right or wrong. Nobody knows because the information changes all the time.”

The hedge fund allocation is not part of the tactical asset allocation. But like other investors, in today’s investment climate, Ilmarinen has been more active from a tactical perspective across equity, fixed income and FX.

The team always keep the strategic asset allocation – and the fact they are managing money with long-term liabilities – front of mind, but he says in “this kind of environment”, it makes sense to do “a bit more tactically”.

Ilmarinen’s in-house portfolio managers also sit in the asset allocation team, and it falls on them to oversee tactical asset management too. They have been allocated a risk budget within which they can make tactical calls, mostly using derivatives rather than cash.

In FX, recent strategies have included short dollar/long euro positions and long Swiss franc/short dollar, while in equities and fixed income, they are altering exposure across specific stocks, regions and at a country level.

He notes that investors have grown more sceptical of the US in light of the policy backdrop, which has put pressure on the dollar.

“This is the reason investors outside the US are short US dollars –  it wasn’t the case last year or the year before.”

However, he clarifies that any strategy to short the US dollar does not refer to how Ilmarinen is in absolute terms.

“I am referring to our position relative to our benchmark,” he explains. “In the benchmark, we are always long the US dollar. We have got over 30 per cent of our allocation to US dollar assets so ‘going short’ is always relative to benchmark.”

New opportunities in defence

Elsewhere, Mursula reflects that new opportunities in defence will open up following NATO leaders agreeing to increase defence spending to 5 per cent of their countries’ economic output by 2035.

Ilmarinen changed its ESG guidelines in 2024 to open the door to investing more in defence.

However, building up the allocation since then has been difficult because opportunities are thin on the ground. There is a limited universe of public companies in listed markets in Finland, the Nordics or Europe, and the money chasing the sector means many of these companies are valued too highly to make compelling investments. Nor do private markets offer many opportunities, given many of these companies are state-owned.

“NATO’s budget for defence is about to go higher. It means companies need to fulfil demand so we may see investment in defence really start to happen,” he says.

Ilmarinen invests around 20 per cent of its assets in Finland. Of this, around 55 per cent of the global equity allocation is in Finland, but he notes this has fallen compared to what it used to be because of changes to the asset allocation and the declining performance of listed Finnish stocks.

Moreover, he says that many listed Finnish companies derive the vast majority of their annual turnover from overseas. “The business risk is not Finnish-centric,” he concludes.