Asset owners have turned more optimistic about the role of active managers as market volatility and dispersion create fresh stock-picking opportunities.
The industry has been under stress for several years due to lukewarm performance which is commonly attributed to the rise and rise of large cap technology stocks and passive investing. However, investors at the Top1000funds.com Fiduciary Investors Symposium concluded that the root cause of that stress might be more complicated.
“The trouble that active managers have faced – I’m not sure passive is to blame,” said Trevor Graham, head of equities and deputy chief investment officer at TIFF, which offers outsourced CIO services to endowment and not-for-profit clients.
Active managers tend to be underweight the Magnificent 7, which was hurting their performance, in part because they feel the need to justify their fees by finding lesser-known companies of good value, Graham said.
“There’s a little bit of a behavioural bias here – I think there’s a reluctance on the part of a lot of active managers to walk into a meeting with a client say, ‘my biggest overweight is Apple’.”
But the number of eyeballs on these companies also means there is not much room for alpha.
“Anything in the Mag 7, it doesn’t matter what stock it is, there’s probably a hundred sell side analysts following that stock. There’s probably another several hundred buy side analysts looking at it too,” he said.
“I think a lot of them [active managers] rightly say, what’s the chance I’m going to have a divergent view here that’s right, and it’s going to lead to excess return?”
As an asset owner, Graham said TIFF does not have a view about whether the Magnificent 7 will continue to dominate market performance, and it tries to not become excessively overweight or underweight. It requests individual security level positions from managers and keeps the seven stocks within a tight range of the benchmark.
“[We’d rather] take the tracking error in other places where I think the odds of success are more in our favour,” he said.
The Magnificent 7 stocks have recovered after a tough first quarter in 2025 but are still underperforming the S&P 500, and Graham said the majority of its active manager roster are ahead of their benchmarks in the year so far.
“I really think for active to do better, one of the things that that needs to happen – and it’s a simple idea – is just that these roughly seven stocks don’t continue to outperform.”
Traders vs owners
But Aziz Hamzaogullari, founder and chief investment officer of growth equity strategy at Loomis Sayles, has a different view about the way active managers approach the Magnificent 7.
“The issue isn’t that there are a lot of people following these names. The issue is these managers cannot make up their mind if they want to own it or not,” he said.
Looking at the companies Loomis Sayles owns out of the Magnificent 7 and their past ownership, Hamzaogullari estimated that only 0.5 to 2 per cent of active managers held onto their holdings over the past two decades.
“That means that 98 to 99 per cent of managers have been trading these names, and your return profile is very, very different if you owned it continuously… versus if you were trying to trade.
“They just trade it because of short term pressure; of this pressure of outperforming every day – which is not going to happen, and every year – which is not going to happen,” he said, adding that most pension managers would consider replacing a fund manager if they have underperformed in the three years trailing.
Another cause of the underperformance is because active managers have simply become less active. The Active Share – a measurement of differences between a portfolio’s holdings and those of its benchmark – has been declining every decade in the past 50 years, Hamzaogullari said.
“In large cap space, if you look at the best of the best managers, historically in the last 20 years, their information ratio is around 0.3 per cent.
“So just basic math tells you, the lower your Active Share for the same amount of information ratio, you’re going to get less returns.”
Unlike TIFF, Makena Capital – which is also an OCIO provider – has been underweight the Magnificent 7 as a collective in the past five years. But its managing director and head of public equity Anne Marie Fleurbaaij emphasised the seven stocks are not a “monolith”, and that the fund is overweight in some of the names.
When selecting active managers, the fund is looking for five things: clear process, fundamental research, long-term investment horizon, concentration and balance, and shareholder engagement.
“There’s… 160 or so names beat the S&P 500 over the last five years to [this] Monday and 90 stocks beat the Mag 7,” she said.
“If you look at year to date, it’s 350 or so names that have beat the Mag 7 and 250 names – so more than half – that has beat the S&P 500.
“This tells me that there are opportunities and you don’t have to just buy the Mag 7 to beat the market.”
Leading institutional investors said the industry could benefit from having a franker conversation about sustainable investments, both in terms of what climate goals are achievable on the path to net zero and what is behind the pushback on ESG funds.
The comments, made during the Top1000funds.com Fiduciary Investors Symposium at Harvard University, came as only 15 out of the 194 countries pledged to the Paris agreement submitted their latest plans for slashing greenhouse gas emissions within the deadline. The proposal, known as nationally determined contributions (NDCs), are renewed every five years.
“We’re big supporters of the Paris Agreement, but if you look at a lot of the work that came out immediately following that, they all called for massive, precipitous, immediate declines in fossil fuel use and emissions,” said Michael Cappucci, managing director, compliance and sustainable investing at Harvard endowment.
“Think on the order of what we experienced in 2020 during COVID. But every single year from now until 2050 those were never realistic assumptions.
“I think we would all be better served having a more realistic conversation around what a pathway to net zero might look like.”
This is not to suggest that everyone stops trying to decarbonise, but Cappucci said it is only one part of the bigger change investors can propel. Harvard endowment has committed to a net zero portfolio goal by 2050 and no longer holds positions in publicly traded fossil fuel companies.
It is using the framework developed by Breakthrough Energy – Bill Gates’ clean-tech investment firm – to find opportunities in new climate solutions around the five pillars of manufacturing, electricity, agriculture, transportation and building.
“As investors, all we can really do to impact change is invest,” Cappucci said.
“The impact we have, is the positive things we invest in, hopefully for the future to promote growth and including in decarbonisation.”
Generation Investment Management co-founder and partner Colin le Duc said another issue that warrants some candid discussions is the performance of ESG funds.
“A lot of people have tried to think about this pushback on sustainable investing, or the green retreat, or the green hushing – whatever you want to call it – as being a political thing. I actually personally think it’s because a lot of sustainable funds haven’t performed,” he said.
In it for the long haul
In public markets, the Nasdaq Clean Edge Green Energy index has “wildly” underperformed global stocks, especially since Russia’s invasion of Ukraine which saw the “fossil fuel complex come back into fashion”. While in private markets, there are promising green technology companies like Northvolt which end up failing spectacularly despite backing from corporates and sophisticated institutional investors, le Duc said.
“It’s really important to recognise that this energy transition, land transition space is just like any other investing – it’s hard, and one needs to be specialist to really execute properly and seize the opportunities in this space with a lot of volatility.
“Our best vintages in Generation’s performance history have always been when the tourists have gone home and people who leant into climate or sustainability have suddenly got distracted by something else and gone away.
“[And the entrepreneurs will ask] are you a private equity firm that I really trust to stick with me if the going gets tough on sustainability for a period of time, or not?”
For most asset owners, sustainable investing, like everything else they do, is about anticipating the long-term trend. For the Netherlands’ PGGM, this means the fund is not only investing in new technologies but also improving the sustainability of older assets.
“If you look at the current energy consumption for the next few decades, the demand for energy is going to outpace whatever we are able to build in terms of sustainable energy,” explained chief fiduciary manager Arjen Pasma.
“What can we do to make what we are doing right now more energy efficient?”
For example, PGGM has been purchasing older office buildings and improving their energy efficiency, so that they can satisfy European regulations standards and remain eligible as rentals after 2027.
The fund also holds windmills in the North Sea which are made of steel produced using fossil fuels – that manufacturing aspect could also be improved, Pasma said.
All these investments are in the core part of what the fund calls a core satellite sustainable investing approach. The core part, which accounts for about 95 per cent of the assets and is where the pensions are paid out, has a 3D investing framework emphasising risk, return and sustainability.
“In that part of the portfolio, we’re not looking for sustainability just for the sake of sustainability. We look for great investment opportunities,” he said.
But in the satellite parts, the fund conducts impact investments around three themes: energy transition, healthcare (the main industry for its fund members), and food transition.
While return still matters, this part of the portfolio is about maximising impacts, Pasma said. For example, PGGM usually has a minimum ticket size of €100 million for any investment but it is making an exception when investing in healthcare. It is primarily a venture capital investor in that sector and is trying to address the “lack of functioning capital market union” for innovative companies looking for funding in Europe.
PGGM also has a broader exclusion list, but Pasma said the goal is not to “exclude companies and then claim that the resulting portfolio is more sustainable”. It doesn’t invest in certain countries or companies because its plan participants do not want it to.
“We did calculate the numbers over the last 13 years, and the net [performance] result [after adding exclusions] is plus three basis points.
“So our data shows there is no indication that we actually made a lot of money out of those [exclusions] as of yet. On the flip side, there’s also no indication that we lost any performance.”
The healthcare sector emerges as an attractive destination for asset owner capital as new technologies reshape established and startup companies and regulatory headwinds abate, according to a panel of investors.
“[Healthcare] is very ripe for investing and has been for a long time,” Paul McCracken, managing director of growth equities at the $470 billion Canada Pension Plan Investment Board (CPPIB), told the Top1000Funds.com Fiduciary Investors Symposium at Harvard University.
“It’s huge, it’s growing fast, it has historically, both in public and private equity, been a category where specialists have reaped excess returns. In this environment, where change is accelerating, that view holds as much as ever.”
CPPIB has some venture capital exposure for “earlier stage, moonshot-type investments”, but it typically takes a more diversified exposure, with its overall program covering everything from bets on small, unproven companies to classic growth equity.
“I think for a lot of generalist investors it’s a very tricky area,” McCracken said. “The number of things you have to keep track of, the number of risks in terms of projecting outcomes, is getting harder. And it seems like a great period to continue to allocate to healthcare, and it’s a great place to deploy capital for a large asset allocator.”
Bolstering that view is the fact that healthcare is finally going to start integrating with technology in a more holistic way, following years of predictions that have – until now – not come to pass, according to Philip Broenniman, managing partner and portfolio manager at Varana Capital.
“We’re really at a nexus where there’s artificial intelligence, but also robotics; two years from now there’s going to be opportunities we never imagined. There will be things I can imagine,” Broenniman said.
“AI helping reduce the need for phase one studies by creating new combinations, new therapies and… being able to test automatically, electronically, being able to test therapies and then maybe accelerate the approval process. I don’t know that robotics, at least in the near term, will be used for something like general surgery, but for micro activities within and without the operating room? Absolutely. We are really going to see a mashup of healthcare and technology now.”
Healthcare typically lags behind tech by a decade due to the fact that it’s a highly regulated business, while technology companies can go directly to consumers without the need for lengthy trials. The industry is now at an “inflection point”, according to Daniel Matviyenko, managing director and portfolio manager for healthcare strategies at Jennison Associates, but it’s “going to take a little bit more time”.
“On opportunities, we love to be contrarian,” Matviyenko said.
“There was some commentary earlier about budgets being cut, but we’re very excited about the life science tool space… thematically we think that sector is going to do very well going forward, because you had multiple years of underperformance. A lot of those headwinds, we think will abate. The NIH funding won’t get cut 40 per cent and China, once we’re done with this nonsense trade war, will come back. And lastly, we think pharma and biotech are returning to spend.”
But investors should perhaps temper their enthusiasm for the next shiny thing. Some of the biggest value creation has come from established companies with established therapies.
“Leading into the pandemic, there was a lot of enthusiasm about AI and cell therapy and gene therapy, mRNA,” McCracken said.
“And I think we’ve seen sort of moving through various stages of the trough of disillusionment, you know, in each of these categories. Where has the most value being created? It’s been in obesity, and two publicly traded companies. It’s kind of like the Nvidia moment for healthcare.”
“This information was in plain view, and very astute public markets investors took very large positions where they saw real indications from human clinical trials. These are the things that are going to move the needle on big cardiovascular outcomes. So it’s a good object lesson for me anyway, that we ought not to be looking through one lens to see where the value creation is going to be.”
Stronger liquidity management through a total portfolio approach (TPA) can do more than manage real-time risk exposures – it can also help generate alpha, according to panellists at the Fiduciary Investors Symposium at Harvard University.
The $533 billion CalPERS is one of the largest asset owners currently planning its own TPA rollout, which will bring several benefits including a better view of the pockets of liquidity residing across its balance sheet.
“The total fund portfolio management team has been huge proponents of pushing for this total fund system that we’re implementing,” co-head of treasury management and head of liquidity, Jonathon O’Donnell, said, “and we can easily make the case that these activities – even on the margin – will pay the whole bill of implementing a gigantic system implementation.”
CalPERS currently employs multiple order management systems, which makes it challenging from a centralised funding perspective to minimise cash drag through strategies such as securities lending, O’Donnell said.
“The journey that we’re embarking upon right now is going to be a long and a hard one, I think, from a technical perspective, but one that is absolutely critical to getting us off the ground.”
United Nations Joint Staff Pension Fund chief executive, Pedro Guazo, said liquidity management “helps on the defence, but should be used on the offence”.
“In the absence of information… we end up having much more liquidity than what we need because when you don’t know exactly how much you will need, and how much you have, you tend to overstock. And of course, there’s an opportunity cost for that. So if we get better clarity on the liquidity management and better cash flows expectations, we can deploy that capital into something much more profitable.”
The United Nations Joint Staff Pension Fund is currently facing several liquidity challenges including lower contributions from UN member nations, fewer contributing staff as countries pull back, and falling distributions from private assets in a more difficult market environment.
“We’re taking liquidity as a systemic issue based on TPA, not only as a constraint in your portfolio construction under SAA, but a strategic discussion, and really understanding what is the real liquidity, and at which prices that you can drill on whenever your system starts to crank.
However, Guazo said the disparate quality and fragmentation of private asset information – which underpinned valuations – created an even bigger challenge for cash forecasting.
The necessity and limitations of models
SimCorp head of product, analytics, Ian Lumb, said the systems that underpinned a TPA had to provide multiple lenses of risk, but modelling was constrained by limited private market data.
“To build models where you can think about digging into the correlation across markets, between public and private, about the interplay of the cost of capital and liquidity, is really key,” he said.
“It’s not easy because there is no such thing as perfect data, especially in the illiquid space.”
He said that “no models are perfect, but some are useful,” and that portfolio stress tests should be aligned with scenarios that cause issues for an asset owner’s board or would attract the attention of regulators.
CalPERS’ O’Donnell said preparing to implement a TPA is about preparedness, with liquidity management the most important component. It underpins the ability to stay on strategy and to make capital calls, as well as make pension benefit payments, which are predictable and stable for CalPERS.
“It’s all the other ‘what ifs’ that we’re talking about in terms of scenario testing and what happens to your margin, what happens to your securities lending book, how do you hedge different market environments, etc that is kind of the growing piece of how you prepare to enter into that TPA world.”
Artificial intelligence and digital transformation are the hottest themes in infrastructure investing, not only among private investors but also increasingly state governments.
Just this month, Saudi Arabia unveiled one of the biggest state AI infrastructure investments, with plans to buy billions of dollars’ worth of advanced chips from US manufacturers including Nvidia and AMD.
But despite the overwhelming bullishness, some asset owners are wondering when – or if – AI can deliver a miraculous productivity gain and benefit the underlying infrastructure such as data centres.
“I am actually a little bit more – let’s call it sceptical – of AI in the longer-term than I maybe started with,” said Nick Khaw, head of research and co-head of private market at the $38 billion Khazanah Nasional, at the Top1000funds.com Fiduciary Investors Symposium at Harvard University.
“As a macro economist, I think one thing that’s pretty clear, and it’s been documented by economists from down the river at MIT, is that it [AI benefits] really hasn’t shown up in any productivity numbers.
“So either we’re measuring productivity wrongly, which is possible, or it’s not as general purpose as we think.”
With that said, AI and digital transformation is one of the four megatrends Khazanah is monitoring (alongside climate, demographics and de-globalisation). The Malaysian sovereign wealth fund’s philosophy to private markets investment is to look for “something which looks like a headwind today, but it’s a tailwind in the future, because you can buy low and then hopefully get a return later”, Khaw said.
Compared to pure AI technologies such as large language models, Khaw believes robotics is more likely to have a meaningful impact on the real economy particularly in relation to blue collar jobs. But that comes with its own set of potential problems.
“I do worry about data centre usage, but I also wonder for some of these things… if the productivity numbers don’t match up, or if they do and people lose jobs, will the politics push back on something like AI and say, look, too many people are losing jobs. We can’t afford a universal basic income. Maybe let’s stop doing this stuff.”
An interesting dilemma for pension funds in the scenario of new technologies leading to jobs losses is that the workers impacted could be their fund beneficiaries.
When asked how the fund balances its investment and fiduciary needs, Andrew Siwo, head of sustainable investments and climate solutions at New York State Common Retirement Fund, said the fund has set important parameters around workers’ rights protection in portfolio companies.
“I would say more broadly, we do have, at least in private equity, a responsible workforce management policy that addresses our expectations for sound labour management principles,” he said. The policy directs that, for example, the fund’s private equity managers should encourage industry standard wages and benefits and minimise adverse impact on workers when there are mergers and acquisitions.
While opportunities around AI are attractive, Siwo added there are risks and inaccuracies prevalent in AI that are concerning.
“New York State Comptroller, Thomas DiNapoli, the fund’s sole trustee, released an AI audit report recommending the use of governance structures to prevent AI abuse and inaccuracies. Each investment manager that has received capital from us must complete a scorecard to assess material investment risks/opportunities including environmental, social, and governance factors.”
Resilient to volatile trades
Executive director at IFM Investors Adrian Croft is more optimistic about AI and said it is “the most consequential megatrend” for infrastructure investment now. Its most prominent manifestation is data centres, but that booming demand also extends to energy infrastructure due to the substantial need for power.
“There’s certainly a case for a huge amount of potential investment in energy infrastructure, generation and grid enhancement,” he said.
“Renewable energy is going to play a huge part of that… but we think there’s still going to be a role for gas because these data centres do need 24/7 firm capacity.”
But an even longer-term play is fibre networks, which Croft admitted haven’t been the easiest area for equity investments – at least in the US and parts of Europe. This is induced by issues including rising build costs and overbuilding in some markets.
“It has been a tough spot, but the development of large data centres in secondary or emerging data centre markets are all going to need to be connected, so there could be a really good case for more fibre,” Croft said.
While global companies are rushing to establish domestic supply chains amid the uncertain trade environment, Croft believes infrastructure is an asset class resilient to the ongoing impact of localisation.
“If your infrastructure is essential to the community it serves, it’s still going to need to be there. People are still going to keep using energy, water and gas. They’re still going to need to get to work, get to school or get home in the evening. They’re still going to want to communicate and use the internet,” he said.
“But not everything is going to be unscathed… there’s a lot of focus on what’s going to happen with global ports in particular, with volume through US ports going to drop precipitously in coming months. We’ll see.”
With risks come opportunities, though, as Croft believes there could be more demand for local infrastructure like logistics and cold storage.
Granted, “it might not be the most efficient way of doing things if you have to replicate what already works pretty well in various parts of the world,” but it could add more opportunities across the spectrum from core infrastructure, infrastructure adjacencies, to value-add strategies, he said.
Specifically in relation to AI infrastructure, Khazanah’s Khaw said a driver of localisation is data sovereignty concerns, which may prompt companies to keep centres capable of processing data for advanced AI applications domestically.