Texas Teacher Retirement System, the $211.6 billion Austin-based pension fund, has an asset allocation that is built to withstand the “extraordinary times” and adverse climate investors face today, reassured CIO Jase Auby, speaking during the latest update at the fund.

A 21 per cent allocation to stable value wholly tasked with maintaining value even during “pre-recessionary times, if you believe we are on a path to recession” has proved most robust.

All four asset classes comprising real and nominal government bonds and hedge funds have remained positive proving a “ballast” that the fund depends on as it navigates the impact of negative GDP and corporate earnings news, weak demand and a flight to quality.

“The markets are highly volatile. It’s worthwhile emphasising how our asset allocation is built to  last and weather storms like this,” said Auby.

The pension fund’s  57 per cent allocation to global equity comprising public equity (45 per cent) and private equity (12 per cent) was down about 7 per cent reflecting the sharp fall in the S&P 500 which has experienced its third largest fall in post WW2 history.  “The two other times were during the GFC,” said Auby.

The impact of recent volatility on TRS’ real return allocation that includes real estate (15 per cent) and energy, natural resources and infrastructure (ENRI) is more difficult to gauge because the portfolio is private and not mark to market, he said. However, the energy allocation that includes oil and natural gas has suffered falls in oil, but positive returns in gas.

The risk parity allocation was down but still “holding its own.” This portfolio seeks to deliver the same level of return  but do so with less emphasis on the equity market.

Poised for the offensive

Auby told trustees the fund has maintained its standard rebalancing processes through the market turmoil.

“At this point in time, we have no insight or special information on how [Trump’s tariff polices] will role out,  so the best alternative is to rebalance and be as close to the benchmark as we can possibly be. But we also recognise there will be a time for offence, and to go back into the public equity market if there is a draw down to a substantial degree.”

Typically a drawdown of around 32 per cent signposts recession, and he said only at this point would TRS consider “going on the offence” and pause rebalancing so rigorously.

“When it’s time to play offense we’ll do so.”

He added that TRS’ overweight to private markets has been offset by depressing the All Country equity allocation. Last year, TRS has rolled out a new SAA that includes an increased long-term target allocation to public equity from 40 per cent to 45 per cent. It combined regional portfolios into a $70 billion all country allocation; a $9.6 billion portfolio of non-US developed market equities and a $1.9 billion emerging market allocation that fully excludes China and Hong Kong in line with new Texas laws.

TRS recently experienced the high level departure of Mohan Balachandran after 17 years at TRS where he came to lead multi asset strategies. Auby said attrition, which had been low, has recently spiked with 12 members of the investment team leaving so far this year.

Staff resignations have led to a restructuring of the teams that implement public market quantitative strategies. A new quantitative equity group will continue current stock selection strategies, but TRS has reduced assets in internal quantitative equity strategies by approximately 60 per cent with the intent to grow them back as appropriate.

In another note, TRS has ended its working from home policies with staff now in the office five days a week.

“The parking lots are full,” said Auby.

I believe biodiversity loss is one of the top global risks in terms of its impact and likelihood, yet it is completely overshadowed by climate change and is not well understood.

Six out of the nine planetary boundaries that define a “safe operating space for humanity” have now been exceeded and there is increasing pressure on all nine boundaries, or processes, that regulate the stability and resilience of the Earth system. There is now undeniable evidence that economic growth at the expense of the environment and the biosphere is unsustainable in the long term.

Climate transition encompasses and affects several different areas, which are all interdependent and together form a complex network or system. Targeting and thinking about one area in isolation, therefore, may produce negative impacts on other parts, potentially resulting in more harm than good.

Achieving net zero emissions is a critical goal for combatting climate change, however reversing the decline of biodiversity is equally vital for human survival and flourishing. Without a wide range of animals, plants and microorganisms, ecosystems will not survive. We rely on ecosystems to provide us with food and air, materials we wear and use to build our homes with. Hence biodiversity is essential for all life on Earth, including humans.

Among the main threats to biodiversity are climate change, pollution, habitat loss, overexploitation of species, and invasive species.

The relationship between biodiversity and climate change is complex. Biodiversity plays a key role in regulating the climate through carbon sequestration, maintaining healthy ecosystems, and supporting resilience to climate change impacts.

Effective climate action can enhance biodiversity by promoting the preservation of habitats and ecosystems. However, there is a potential scenario where the race to achieve net-zero emissions could inadvertently harm biodiversity.

For instance, the rapid expansion of renewable energy infrastructure or large-scale monoculture for bioenergy could disrupt natural habitats and threaten native species. Aggressive reforestation efforts without considering local ecological needs may lead to the introduction of non-native species that can harm existing biodiversity. The energy transition relies heavily on critical minerals, and extraction tends to have serious environmental and social consequences.

It is essential therefore that while pursuing the goal of carbon neutrality, we consider its effects on other dimensions and make sure we don’t compromise biodiversity in the process. Considering climate change in isolation is potentially dangerous because it overlooks the intricate relationship between climate and biodiversity, both of which are crucial for sustaining life on Earth.

The ‘do no harm’ principle plays a vital role in ensuring that climate action does not inadvertently damage natural habitats or the species that depend on them. We need sustainable approaches that simultaneously address both issues to ensure a holistic and effective response to environmental challenges. Our efforts to address climate change and biodiversity must ultimately be net positive to ensure their long-term sustainability.

Achieving positive, viable outcomes will depend on our ability to embrace the fact that we are part of a system where all components are interconnected, and their interaction creates the life as we know it. In practice, this also means that climate change efforts require collaboration among all stakeholders, where every perspective is significant and additive.

As the climate and natural environments continue to change, the interactions between them evolve, presenting challenges and opportunities that are difficult to anticipate. This is a dynamic relationship with potential tipping points, further shifts in climate and irreversible damage to the planet. Our lack of understanding or ability to predict these events with any degree of accuracy underscores the need and urgency for action and careful consideration of our approaches.

The biosphere is the foundation of economies and societies and the basis for all of the United Nations’ Sustainable Development Goals (SDGs). Nature loss threatens financial stability and poses a systemic risk which is likely to impact increase volatility and financial returns in the future.

Addressing biodiversity is a challenge for the investment industry. Investment organisations already have limited governance budgets, there is a lack of reliable data and it’s difficult to measure the impact of investments on biodiversity. The Taskforce on Nature-related Financial Disclosures (TNFD) incoming biodiversity regulation aims to enable financial institutions to integrate nature into decision-making, but still a lot needs to be done to ensure investor actions have a positive real-world impact.

In practice, investment organisations have different levels of ambition when it comes to biodiversity. At one end, there is compliance with regulatory requirements and TNFD reporting.

Moving beyond compliance, there is risk management and mitigating potential threats to portfolios. At the other end of the spectrum, some organisations take on a more proactive role by financing transformative projects aimed at restoring biodiversity and rehabilitating ecosystems. A systems-based approach is at the heart of these projects, with stakeholders collaborating to solve the challenge to generate positive outcomes in the long term.

Climate change and biodiversity loss are both critical global risks, in terms of impact and likelihood of occurrence. The interplay between them forms a complex and interdependent system that cannot be effectively addressed in isolation.

Recognising this interconnectedness is crucial, as failing to consider the mutual influences between climate and biodiversity could lead to incomplete and potentially harmful strategies. Addressing biodiversity loss requires integrated efforts across all sectors, acknowledging the profound and multifaceted relationships that sustain our natural environment. Only through such a holistic perspective can we hope to mitigate the risks and secure a sustainable future for our planet.

Anastassia Johnson is a researcher at the Thinking Ahead Institute at WTW, an innovation network of asset owners and asset managers committed to mobilising capital for a sustainable future.

Produced in partnership with Capital Group.

Almost half of asset owners plan to make material asset allocation changes due in part to concerns about overheated equity markets, according to the 2025 CIO Sentiment Survey, a global collaboration between Top1000funds.com and Casey Quirk, part of Deloitte Consulting.

With the global economy in flux, as the US retreats from the rest of the world, asset owners are grappling with unprecedented events and challenges.

For the past few years, listed equities, particularly US equities, have been one of the biggest return drivers of multi-asset portfolios, however, CIOs are increasingly wary of high valuations, causing a growing number to decrease both active and passive equity allocations in favour of core fixed income and alternatives, the report found.

And now, with market volatility continuing, investors need to look at the geographical diversity of their portfolios.

According to Jeremy Cunningham, investment director at Capital Group, heightened geopolitical concerns, inflation and the new US administration are among the factors that have the potential to challenge many of the certainties that have underpinned investment positioning in recent years.

“Investors need to be prepared for several potential outcomes in 2025 and should think through probabilities to build resilient portfolios that should do well in the most likely outcome but that, importantly, have the ability to pivot if outcomes change,” he says.

For institutional investors, a truly global approach to fixed income can beef up the resilience and robustness of their broader portfolio by providing exposure to a diverse, multifaceted and often varied investment universe, Cunningham says.

Derek Walker, head of portfolio design and construction, total funds management, CPP Investments, lists US debt sustainability and uncertainty around US economic policy as one of the group’s top concerns.

Speaking at Top1000funds.com’s Fiduciary Investors Symposium in Singapore in March, Walker said CPP Investments spent considerable time thinking about its portfolio and the key risks.

“The real challenge for our portfolio is around US debt sustainability and policy makers testing the limits in terms of what’s possible, and that’s for a couple of reasons including the diversification benefits you get from fixed income in a world where there are debt sustainability issues and increased risk premia as you go out the curve,” he says.

“These are the things that are going to start shifting around correlations that would otherwise be helpful in hedging a portfolio but may be much less so in this world.”

Walker said, until recently, investors hadn’t really had to project the impact of a US debt sustainability crisis.

“As they say, if the US sneezes, the world catches a cold, so if the US gets the flu, it’s even worse given US fixed income underpins the global economic system,” he said.

“A world where tariffs are going up, prices are rising, and supply chains are getting reorientated leads to higher inflation and greater volatility, potentially more volatile growth. One possible silver lining is the potential for greater diversification across geographies.”

Leigh Gavin, deputy chief investment officer and head of portfolio strategies at Australian superannuation fund, Cbus Super, agrees that what happens in the US drives global fixed income markets.

“For a small economy like Australia, our 10-year yield tends to be heavily swayed by what’s going on in the US as well as domestic factors so we started the year thinking that the majority of Trump’s policies would likely be, on the margin, inflationary so tariffs, tax cuts and the like,” he says.

“All things being equal, you may have thought that by year-end, 10-year bond yields would be closer to 5 per cent than 4 per cent, and the thing that has changed is that Trump and [Scott] Bessent [US treasury secretary] have said they are targeting the long end of the yield curve and trying to get that down, and a key strategy to achieve that is reprivatising debt in the US.”

Cbus does not allocate to credit in its fixed income portfolio. It has a “relatively pure” exposure to fixed income that is focused on G-7 government bonds.

According to Gavin, the role of Cbus’ fixed income portfolio is to provide good protection in a crisis, particularly a deflationary crisis, which may occur if fears of a recession in the US become more pronounced.

“Our focus is on portfolio protection, particularly in a recessionary environment. We don’t make a lot of active tilts within the portfolio,” he says.

More than geography

While geographic diversification is important, building a robust, diversified global strategy relies not only on identifying where the opportunities lie but understanding the counter-factual opportunities or, put another way, the strategies that provide diversification to the broader portfolio, Cunningham says.

“Having identified these strategies, it is then important to size the positions appropriately to ensure the desired level of risk is captured,” he says.

Although the main risk sources in the global universe are still rates, curve, credit spread and currency risk, today there are also much deeper and varied sub-sets of these primary risk groups.

One example of this variation, according to Capital Group, can be observed through the rapid evolution of the emerging market debt asset class, which has experienced strong growth in the EM local currency sovereign sector, the EM corporate sector, and index-linked bonds.

“Most EM countries have moved away from pegging their currency to the US dollar and instead have free-floating exchange rate regimes, which afford active global investors multiple routes to capture added value and provide diversification to the broader portfolio,” Cummingham says.

Another meaningful evolution has been the inclusion of China and India in the emerging market debt universe.

Since China’s inclusion in the index in 2019, it has grown to represent nearly 10 per cent. India was added in 2024.

“Investors need to consider the influence of both countries on the global economy and not just the US,” Cummingham says.

“This is particularly important given that US and China’s economic cycles have often exhibited low or negative correlation. They can therefore provide divergent influences on a portfolio, depending on the opportunity being considered. Similarly, Indian government bonds have historically had a low correlation to other global assets and so can provide further diversification benefits.”

Next best place

According to Anthony Skriba, senior consultant at Casey Quirk, 2025 will likely be an “inflection point” for institutional investors, as markets start to peak, and the impact of trade policy start to manifest in economic systems.

The 2025 CIO Sentiment Survey found the trend of institutional money flowing into alternative assets like private infrastructure, private equity and private credit continued, despite ongoing exit challenges.

“There is a very strong possibility that alternatives globally are somewhat over invested,” Skriba said, citing fixed income as “the next best place” to be, despite concerns that there is “a lot of capital chasing limited returns, or what might become limited returns over the next few years”.

Cummingham said the changing economic and geopolitical environment called for investors to rethink their core fixed income allocation and take a more global view to beef up the resilience and robustness of their broader portfolio.

The second Trump administration has so far brought a lot of things: market shocks, volatile trade policies, and turbulent foreign relationships. But beyond the chaos, renowned geopolitics expert Stephen Kotkin said Trump has an unwitting role to help the world rebalance and reach a “new equilibrium” in the global order.

Professor Kotkin, who is a senior fellow at the Hoover Institution at Stanford University, said the initiatives Trump set in motion signals that the US is retreating from the world, but it is not about the world’s largest economy giving up its position as the world leader.

“This is about a rebalancing of the costs and benefits, and it’s happening, and it’s a mess, and Trump’s version of it is going to maybe even fail to produce a new equilibrium, but it’s going to break the current equilibrium that needed to be broken.”

In this live recording from the Fiduciary Investors Symposium, hosted by Top1000funds.com in Singapore in March 2025, Professor Kotkin unpacks what’s next for the US and the world in conversation with Conexus Financial founder and managing director, Colin Tate.

In the week since ‘Liberation Day’, and the mounting of prolific and many large tariffs, markets have witnessed volatility not seen for five years. 

The VIX, a popular measure of the stock market’s expectation of volatility, closed on Monday up 209 per cent on a year ago, a five-year high. In the past 20 years it has only been higher two other times, October 31, 2008 and March 20, 2020.  

While some of the success of American capitalism in the past has been due to the process of creative destruction, it hasn’t typically been at this scale, or inside government, observes Andrew Palmer, CIO of Maryland’s state retirement fund. 

“It definitely reduces confidence,” he says in relation to the volatility in markets. “It is going to impact the behaviour of consumers, businesses and investors, just because of the uncertainty.” 

In Palmer’s state, where there is a high concentration of federal government jobs, he says there is already anecdotal evidence of waning retail and traffic activity on the streets.  

A bigger concern according to Palmer is a potential seismic shift among long-term investors to retreat from a US-concentrated portfolio. 

“The bigger picture is that we have gone through a decade or more where the US has been the destination of choice for capital – that might be unwinding. There is a lot of money that is still here that might decide to go home,” he says. 

“This is undoing the benefits of diversification because it’s forcing investors and business to be more geographically focused so that [diversification] utility is not there. So we may have to lower return expectations or accept higher risk.”  

The dollar question

Others reflect that although the impact of tariffs is very distracting in the short term, a much longer-term issue is also in play around the future role of the dollar in global commerce.

“Tariffs feel like a short-term issue we can likely look through; longer-term I am focused on whether this signals a possible rewiring of the financial system and global economy. Is this part of a bigger shift to de-dollarisation and a change in the role of the dollar in the global financial system?” asks Richard Tomlinson, chief investment officer of the UK’s LPPI.

If trends that are already visible continue, such as the US becoming more isolationist, or uptake in the digital RMB in cross-border settlements, or the use of other digital currencies, it could lead to a devaluation of the dollar and threaten its role as the world’s reserve currency. The long-term implications for investors could include more appetite for hard assets or even a reappraisal of the extent to which US government bonds are a haven asset, he suggests.

At Railpen, the £34 billion fund for the members of the UK railways pension schemes, ensuring liquidity on hand and looking for opportunities are key priorities, explains Mads Gosvig, chief officer, fiduciary and investment management.

“We are trying to make sense of what is going on and figure out if there is a bigger plan around, say, depression of the dollar. It’s also conceivable there isn’t a plan. In the short term, we are focusing on how our portfolio is running and ensuring we have enough liquidity so that we can meet payments. In a second step we are watching for any exposure that is particularly struggling in this context, and finally identifying any opportunities which may arise. If we have the liquidity and the risk levels are right, we will consider deploying money into this.”

The Malaysian sovereign wealth fund Khazanah Nasional has traditionally had an Asian emerging market focus, with offices on the ground in China and India among others. However, in the past few years it has been upping its developed market exposure to look more like western allocators and now has around 40 per cent allocated to the US. 

“But I think this whole discussion…makes us take a pause,” says Wei-Seng Wong, head of strategy at Khazanah. “Is that the right way to think about it? Probably not anymore. So we really have to relook, not necessarily from a China exposure or US exposure, but really understand, what are the trends? What are the return streams that we want to look at vis-à-vis this bifurcated world.” 

While the volatility in stock markets continues to confuse traders, it’s also an opportunity for prudent investors, many of which have abundant liquidity.  

CIO of Canada’s OPTrust James Davis says managing risk is critical and has to be the centrepiece of the fund’s investment philosophy. This comes with close portfolio monitoring and the ability to move quickly, which is enabled by the fund’s total portfolio approach and a huge benefit in volatile environments. This flexibility allows it to allocate in an absolute sense and not relative to a benchmark. 

“Right now we have an abundance of liquidity,” he says. “That is important given the uncertainty in this current environment.  

“This kind of environment in the public markets can create opportunities. Volatility and uncertainty allows for bargain hunting, and more differentiation.” 

OPTrust was an early mover into gold, and last year had more than 6 per cent allocated. Davis says it also dialled down credit exposure quite significantly at the end of last year due to tight credit spreads and made geographical weight decisions in the equities market. 

“They [the TPA group] have been concerned with the US, especially the concentration risk and exploring opportunities outside of the US,” he says. 

Portfolio dynamism 

Bernard Wee, group head of markets and investments at the Monetary Authority of Singapore (MAS), says history shows that asset owners have to be mindful of different regimes. 

“If you look back at the decades that were horrible, 1970s and the 1940s, they were characterised by a lot of political uncertainty, a lot of conflict, and those are exactly the same forces, the same things that are happening right now,” he told delegates at the Top1000funds.com Fiduciary Investors Symposium in March. 

“So if we think that our strategic asset allocations are something that we can just set and forget, that’s something that I would not presume to be true for the coming few years.” 

The key, he says, is to be more granular in asset allocation and look for more differentiated characteristics in countries and sectors within asset classes. 

Multiple investors, including Canada’s BCI and Singapore’s MAS indicated in conversations with Top1000funds.com that uncertainties from trade wars and deglobalisation are impacting their scenario analysis.  

BCI’s base case is a recession, and MAS is doing scenario analysis for stagflation, an environment in which few assets do well. 

Meanwhile, Mubadala Investment Company said uncertainties caused by trade wars and political populism mean investors need to change their mindset to recognise that “volatility is the new norm”.  

The Abu Dhabi sovereign wealth fund is weatherproofing its portfolio for multiple macroeconomic scenarios.  

“Whereas in the past we would look at two scenarios, a base case, [and] a downside case just to have a plan B,” deputy chief strategy and risk officer Marc Antaki said at a Hong Kong conference last month. “We cannot afford that binary view [anymore]. The scenarios are not that obvious, so we look at five, 10 scenarios.”  

“We need the portfolio to be able to be resilient under all types of scenarios and be dynamic.”  

In this regard, dynamic asset allocation is becoming more important both for portfolio adjustments on the up and downside, and also for the information short-term movements might give about the long-term direction. 

Antaki said it also highlighted the rising importance of investor partnerships as a way to share risks and create common value, adding investors need appropriate and perhaps different resources to navigate more complex underwriting, due diligence and regulatory requirements in the investment process.  

The most important thing for Mubadala as a long-term investor is “staying risk-on” despite this period of turbulence, Antaki said.   

“At the end of the day, you cannot make money, shape the world or participate in transformation by sitting on the sideline. But at the same time, you don’t put all your bets on in one year,” he said.    

“So stay consistent, deploy to the cycle, and be dynamic.” 

APG Asset Management is bullish on Asia’s growth prospects, with local CEO Thijs Aaten saying he would like to eventually see half of the Dutch pension fund’s real assets invested in the region. 

The fund’s Asia operations are mainly conducted out of its Hong Kong office, and investors can reach countries representing almost half of the world’s GDP and around 80 per cent of the global GDP growth within six hours of flight from the city. Aaten referred to the zone as “the Hong Kong circle”.  

“There’s a lot of growth in the region. Another statistic is that [among] the 100 largest cities globally, 69 are in that Asian circle,” he told the Fiduciary Investors Symposium in Singapore.  

 “Also in that circle there’s probably a billion people moving towards the middle-income level. That’s very different in Europe. 

“Given that so much is in this in this Asia circle… That’s why I struggled to understand why you would follow a market index and invest 70 per cent of your money – if you look at the MSCI World – in the US.” 

The benefit of being geographically diversified will only be more pronounced during uncertain times, Aaten said.  

“It’s very difficult to predict what’s going to happen. The only thing that I know is if I spread my eggs over a bit more baskets, then I’m less exposed to idiosyncratic risks,” he said.  

But while the overarching trends in Asia are interesting, Aaten said APG has a granular view towards investing in specific countries. For example, the demographics of Japan and Indonesia are vastly different and so are the investment opportunities that come with them.  

The fund has a culturally and linguistically diverse workforce who can tap into these nuances within Asia, Aaten said.

“That’s also important when you do private investments – building that network where the opportunities come from. [Because] you’re not going to an exchange and clicking on your order to get it executed.” 

Several global pension funds have retreated from Asia this year, including Canada’s AIMCo, which shut down its Singapore office for cost reasons, and Ontario Teachers’ Pension, which is winding down its Hong Kong operations in the next 18 months. The latter still has offices in Singapore and Mumbai.  

APG’s Hong Kong office has operated for close to two decades, and Aaten said being in the region shows APG’s portfolio companies of its commitment.  

“[It shows] that we’re more than an institutional investor that steps in and out, that we’re there for the long term, and that we’re very much thinking as an owner of the company or the project that we invest in],” he said.  

APG Asia is not immune to cost scrutiny from its clients, as Aaten acknowledged that “you constantly need to justify why you are in the region and what is the added value that you bring to your client back home”. 

 The regional office needs to be conscious of the types of activities it is undertaking and recognise that its existence is expensive and its function is not index investing or back-office administration, Aaten said. He added that the fact that not all the value it generates is measurable in the form of financial returns only adds to the challenge.  

“We do have examples of investment opportunities that would have been impossible to do out of an Amsterdam office, but it’s very difficult to come up with metrics and say, ‘the office here has delivered us 60 million euros extra this this year’,” he said. 

“So it [the regional office’s value-add] is partly a belief, as well.”