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The transparency of pension fund disclosures has improved in the past year across the 15 countries and 75 pension funds measured in the Global Pension Transparency Benchmark, a collaboration between Top1000funds.com and CEM Benchmarking.

The GPTB, now in its second year, examines the transparency of disclosures across four drivers of value, namely cost, governance, performance and responsible investing.

In this second year, governance disclosures showed the biggest improvement with the average score of 65 out of 100 marking an improvement of seven from last year’s average score of 58. Governance was the best overall average score of the four factors.

The Canadian funds continue to excel in this category which CEM Benchmarking’s Michael Reid says is consistent with their reputation for excellent governance.
In last year’s review CEM noted that governance scores were most closely correlated with the overall score: good governance produces positive results and creates greater incentive (or perhaps less disincentive) to be transparent with stakeholders.

This year responsible investing disclosures showed an equal correlation with governance. Good governance allows funds to move beyond simply managing assets and towards addressing wider environmental and social issues.

The overall average performance score was 62, a slight decline from 64 last year and the second highest scoring factor after governance. The performance factor was the only factor to have a decline in the score this year. Average country scores ranged from 43 to 84.

The average country cost factor score was 48, unchanged from last year’s review, with individual scores ranging from 10 to 77.

The average country score for responsible investing was 49 out of 100 up from 42 in last year’s review, marking the biggest relative improvement among any of the four factors. These improvements mean that responsible investing is no longer the lowest scoring factor overall, having surpassed the average score for the cost factor. Improvements to disclosures were evident across all components and most countries. RI did continue to have the greatest dispersion of scores reflecting that countries are at different stages of implementing responsible investing within their investing framework. Average country scores ranged from 11 to 77, a slightly smaller range than last year.

“It was apparent from the reviews that many funds are actively taking steps to improve communications on responsible investing to stakeholders. In particular, many funds are expanding their disclosures to include quantifiable measures and progress towards climate related targets,” Reid says.

The GPTB ranks countries on their disclosures and found the following countries to be the outstanding performers in each category:
• Canada for governance
• The Netherlands for cost
• The Netherlands for responsible investing
• The United States for performance.

The Netherlands continued to lead the way in cost disclosure with the highest country score of 77. Scores were tightly banded from 71 to 89 and the top four cost factor scores were held by Dutch funds.

The Netherlands also ranked number one in the responsible investing factor, usurping last year’s winner of Sweden, with a score of 77. Both countries had improved disclosures over the past year. The Nordic countries – Sweden, Denmark, Finland, and Norway – continued to do very well on RI as a region, with all countries receiving scores well in excess of the overall average.

In the performance factor, the components with the highest scores continued to include asset mix and portfolio composition and risk policy and measures. Similarly the lowest scores were seen for asset class returns and value added and benchmark disclosures.

The US funds continued to lead the way, with an average country score of 84 for the performance factor. The US funds typically had extensive and good quality reporting across all performance components.

To examine the results for 2022 across factors, countries and the underlying funds click here.

Climate Action 100+, the $68 trillion investor-engagement initiative on climate change, is advising its 700 signatories to step up engagement with companies ahead of the US and European proxy season to pressure top emitters to do more to cut their carbon emissions.

Following on from a record number of majority votes on climate proposals last year that included a dramatic board shake up at ExxonMobil, the coming months will be a critical time for investors to support key climate shareholder resolutions at companies including Berkshire Hathaway and energy groups Phillips 66 and Valero Energy.

Recent analysis of climate progress at 166 companies revealed in the investor pressure group’s Net Zero Company Benchmark gave the lowest scores to eight companies including China’s largest vehicle maker SAIC Motor and Berkshire Hathaway, which owns companies in sectors heavily exposed to climate change risk such as insurance and rail groups.

“We will continue to use the power of collaborative engagements and proxy voting to drive action at our portfolio companies to align their climate ambitions with their long-term strategies and capital allocation decisions,” says Simiso Nzima, a member of the Climate Action 100+ global steering committee and managing investment director of CalPERS global equity allocation – around 49.3 per cent of the giant $478.1 billion portfolio.

“As a long-term investor, we want our portfolio companies to execute sustainable business models and thrive in a low carbon economy.”

CalPERS is a long-term owner of Berkshire Hathaway shares and together with a group of other investors including Brunel Pension Partnership, Caisse de Dépôt et Placement du Québec and State of New Jersey Common Pension Fund is behind shareholder proposals for change at the conglomerate flagged for this proxy season.

“We know that the current climate trajectory presents a systemic risk to investment portfolios and long-term returns to funds’ beneficiaries,” adds Andrew Gray, director, ESG and stewardship at AustralianSuper, also a member of the Climate Action 100+ the global steering committee. “This demands intensified engagement from investors, calling for near-term action from the companies they are invested in. Long-term engagement works, and accountability is key.”

High level progress

Positively, the Net Zero Company Benchmark found some corporate climate progress against key climate indicators and year-on-year improvements on cutting greenhouse gas emissions, improving climate governance, and strengthening climate-related financial disclosures. For example, 69 per cent of focus companies (the world’s largest corporate greenhouse gas emitters) have now committed to achieve net zero emissions by 2050 or sooner across all or some of their emissions footprint, a 17 per cent year-on-year increase.

Elsewhere, encouraging signs of change include 90 per cent of focus companies having some level of board oversight of climate change and 89 per cent of focus companies having aligned with TCFD recommendations either by supporting the TCFD principles or by employing climate-scenario planning.

Challenges

However, the research also reveals more action is urgently needed from companies to support global efforts to limit temperature rise to 1.5°C. One of the most alarming findings reveals the vast majority of companies have not set medium-term emissions reduction targets aligned with 1.5°C or fully aligned their future capital expenditures and the future investment meeting the goals of the Paris Agreement requires, despite the increase in net zero commitments.

According to the assessments only 17 per cent of focus companies have set medium term targets that are aligned with the IEA’s 1.5°C scenario and only 5 per cent of focus companies explicitly align their capital expenditure plans with their long-term greenhouse gas reduction targets.

Elsewhere the survey found a continued failure to integrate climate risk into accounting and audit practices. “Climate accounting and audit appears to be a topic that many companies and their auditors have yet to fully consider when preparing their reports,” state the Benchmark findings. “Climate Action 100+ investor signatories should therefore engage focus companies on this topic to better understand the financial impact that climate-related matters can have on company financial statements and audit work, and the financial implications of company climate targets and decarbonisation strategies.”

Launched in 2017, Climate Action 100+ is now in its fifth and final year of its first phase. The pressure group will move onto a second phase in 2023 set to bring more ambition, urgency and accountability for both companies and signatories.

Risk parity, the investment strategy designed to function well in almost any market environment due to its perfect balance between different asset classes, has had a hard time in recent years. So much so even long-time enthusiasts for the rules-based approach pioneered by hedge fund manager Ray Dalio have lost faith.

Credit risk has crept into fixed income, ending any notion that government bonds are risk free cash flows. Bonds and equities increasingly correlate and risk parity flounders when liquidity is being drawn out of the market and stagflation is creeping in. Elsewhere changes to the macro environment also mean the constituent assets in a risk parity portfolio often throw off the same cashflows and stack up the same exposures, lists Kasper Lorenzen, group CIO at Denmark’s $94 billion pension provider PFA who had used risk parity to simultaneously tap returns in PFA’s fixed income and equity exposures since he joined from ATP, Denmark’s statutory pension fund, where he also oversaw a successful risk parity strategy.

“I’ve lost my faith in risk parity,” he says. “We stopped using it as a strategic lever in 2021.”

Risk parity investors typically use leverage to increase their exposure to safer fixed income. This acts as a counterweight to volatile equities and ensures the different assets in the portfolio contribute an equal amount of risk. However it also means the allocation to fixed income is much higher than in most other balanced funds. During 2020, and the early part of 2021, PFA used to increase, or balance, equity risk by buying equity and bond futures. But the approach grew increasingly challenging through 2021 as interest rates remained low and inflationary pressure built. “Initially, interest rate risk diversified equity risk and worked well, but this started to change through 2021,” explains Lorenzen.

Today the backdrop has become even more challenging. The cashflows thrown off by the different assets have become similar so that the same exposures are stacking up in different asset classes. It’s leaving risk parity investors struggling to reduce risk – and running more risk than they thought they had. “Diversification had meant that if one element doesn’t perform, another does. Now the cashflows are more similar than what they used to be five years ago, and investors are just stacking up their exposures,” he says.

Looking out on the macro landscape and central bank endeavour to reverse their big money experiment without undermining economies, he doubts risk parity will come back into favour anytime soon. “Don’t fight the Fed,” he warns. “You had to be bullish interest rates in order to be a risk parity investor,” he says.

Moreover, he believes stagflation is in danger of setting in for the long-term as globalisation retreats. “We are living with higher costs, and more resilient and robust global value chains. All this is going to drag productivity and give inflation support – these ingredients are stagflationary in nature which is not good for asset markets.”

Despite his loss of faith, Lorenzen hasn’t totally abandoned the approach. PFA still runs a systematic overlay introduced in January 2020 to increase and balance out risk depending on market developments that holds many elements of a risk parity approach. “In 2020 and 2021 we used this tool to increase our allocations to shares and for certain periods to reduce our exposure to government bonds,” he says. “Back in 2021 we were always long or neutral – never short. Today’s uncertain market conditions require a more balanced risk-on, risk-off approach. The easy part is increasing risk, but you only want to do this if you are compensated.”

He is also still a strong proponent of the idea that the most compelling single assets have multiple components. For example, real estate comes with a combination of corporate exposure, fixed income characteristics and inflation protection. “We still believe stable, illiquid investments with a bit of everything are a good investment.”

Indeed, real assets (particularly those shielded from business cycle risk) including core real estate and infrastructure supporting the green economy will play a key role in the portfolio going forward and offer some of the most exciting opportunities, especially as the transition gathers pace. Rather than a comeback in fossil fuels driven by European economies scramble to avoid Russian energy exports, he believes the evidence suggests the transition is about to speed up.

Before conflict in eastern Europe broke out, he had already noted much more enthusiasm for large offshore North Sea wind investment than a year ago. Now Russia’s invasion of Ukraine has accelerated European economies move away from Russian fossil fuels at the same time as many governments have a new preparedness to spend, evident during COVID and now war in Ukraine that he believes could signal more finance flowing into the transition. “It’s no longer just about climate and climate polity; it’s about geopolitical policy and independence,” he says.

PFA sold its listed Russian equity allocation in 2018 after ESG analysis raised governance red flags. A shake up of portfolio construction led the fund to also sell its allocation to Russian government bonds last year. “We decided a diversified global emerging market portfolio doesn’t need government bonds in all parts of the world. A combination of corporate credit exposure and FX takes you a good part of the way,” he concludes.

The traditional 60/40 portfolio allocation is no longer enough. The opportunity for alpha is not gone, but the low-hanging fruit has long been harvested, and the path toward higher absolute returns has gotten far more nuanced. Today, five distinct marks define the ‘Portfolio of the Future,’ according to a new report from the Chartered Alternative Investment Analyst (CAIA) Association, the professional body for the global alternative investment industry.

Five investment experts including Commonfund’s Mark Anson, Thinking Ahead Institute’s Roger Urwin and Franklin Templeton’s Anne Simpson explain more.

Broadly Diversified

Mark Anson, CEO and CIO of Commonfund, the pioneer of outsourced CIO services for non-profits, argues that responsible portfolio management consists of collating a series of uncorrelated beta and risk premia that offers a combination of income, inflation protection, capital preservation, and principal growth to meet a required return.

During recent years the unlikely narrative has been heralded that financial assets, particularly public equities, eternally march upward. The proliferation of new, low-cost products has created complacency and “beta creep.” As such, fiduciaries must be more creative in expanding their investment opportunity set. That begins with a return of the foundational principle of diversification across asset classes, geography, sector, and purpose.

Less Liquid

The traditional 60/40 public equities and fixed income allocation has provided extraordinarily well in the last decade. But Andrea Auerbach, Cambridge Associates global head of private investments, counsels not to take solace in the recent past. Investment professionals will have to look to differentiated sources of return, notably private capital, to increase the potential of being able to fully meet their obligations with responsible control of risk.

Private capital has become increasingly attractive for earlier stage, new economy, and growth companies. And, because private capital is detached from the short-term machinations of public markets, it liberates investors to take advantage of market dislocations, information asymmetry, and out-of-favour or countercyclical opportunities. Avoiding private capital in a portfolio denies access for clients to an increasingly large portion of the global economy. Still, private markets are not a silver bullet given their opacity, high fees, need for patience, and wide risk-return dispersion. They must be carefully considered in light of client liquidity, income needs, and risk tolerance. Extensive due diligence and thoughtful, deliberate manager selection is imperative.

Fiduciary Mindset

Investment management is an agency business. Asset managers exist to deliver trust, care, and expertise to clients. Roger Urwin, global head of content at the Thinking Ahead Institute, explains how a fiduciary mindset begins with an existential understanding of purpose, alignment, and service to the client. “Systems leaders” are responsible for translating these values into behavioural norms that influence ownership structure, client communication, compensation, fees, talent recruiting, culture, and definition of success (benchmarks). The investment profession—and each client’s Portfolio for the Future —still has work to do on this journey through mitigating conflicts of interest, asymmetric payoffs, incentive dislocations between limited partners (LP) and general partners (GP), and unnecessary financial engineering

Actively Engaged

The age of the universal owner has arrived. Clients are demanding both positive financial and social outcomes from their capital allocation and underlying holdings. No one knows this better than Anne Simpson, global head of sustainability, Franklin Templeton and former managing investment director of board governance & sustainability, CalPERS. With a devastating global pandemic, climate consciousness, and the pursuit of clean energy alternatives at a fever pitch, investment professionals are integrating sustainability elements such as carbon footprint, progress on diversity, equity and inclusion (DEI), human-rights records, and labour practices into their security evaluation, risk management, and return expectations. Further, non-financial disclosures, as well as ESG ratings, are becoming more accepted as a regular, integrated part of security analysis. The Portfolio for the Future will be much more insistent and proactive in ensuring that it contributes to a more inclusive and sustainable tomorrow.

Operational Alpha

The modern investment profession is highly competitive. New sources of comparative advantage are being cultivated among enterprising professionals, argues Ashby Monk, PhD, executive director, Stanford Research Initiative on Long Term Investing. Firm culture, governance, and technology are much more predictive of sustained performance than previously thought and should be emerging priorities for any leader. The Portfolio for the Future will be driven by firms that innovate and exploit new organizational and operational models to save cost, reduce risk, and pioneer new investment ideas.

The industry needs to be reoriented back toward a north star of sophisticated portfolio construction, one that prioritizes client and beneficiary outcomes and works tirelessly to achieve those outcomes in a long-term, sustainable way. This essential definition of professionalism will usher in a new identity of enlightened self-interest that culminates in a much-improved public warranty. The Portfolio for the Future is CAIA Association’s contribution and call to action for that transformation.

Brunel Pension Partnership, the £31 billion asset manager for 10 local authority funds in the United Kingdom, is in the process of allocating to a new cohort of managers across private equity and debt, infrastructure, and secured income. Around £6 billion has already been allocated to private markets in two previous cycles in 2018 and 2020 with a further £2 billion about to be given to mostly new managers.

The latest wave of mandates offers a bonanza for private market managers. In private debt Brunel is looking for between five and six primary funds and expects to allocate to around ten new funds in private equity. Still working through how the infrastructure mandates will look, CIO David Vickers, who joined Brunel in January 2021 from Russell Investment where he was head of multi assets for EMEA, estimates 50 per cent of the allocation will go to between 6-10 primary funds and the remainder to co-investment and secondary opportunities.

He is looking for between three to four managers in secured income, although he notes it is likely the allocation will go to Brunel’s existing managers in this space – if they have capacity. “They are doing a good job and secured income funds are more evergreen,” he says.

In the first cycle in 2018, £1.2 billion was transitioned into private equity, infrastructure and secured income, comprising a mix of long-term inflation linked cashflows mostly in infrastructure and property. “Brunel asked partner funds where they wanted to invest and then built the allocation,” says Vickers. In the second wave in 2020, Brunel separated the infrastructure allocation into general infrastructure and renewables and expanded the fund choice to include private debt, attracting £2.9 billion from partner funds. All the capital from cycle one is now committed; cycle two capital is currently being committed.

Picks and shovels

Vickers describes the hunt for new private market relationships as an ongoing and permanent scouring of the market to see which funds are open, and where they are in their capital raising structure. The support of partners, like Aksia in private debt and StepStone in infrastructure, help open doors to independent projects where Brunel can co co-invest and save on fees, as well as expertise on funds and secondary products. In private equity and secured income Brunel has more informal relationships though still calls on Aksia and StepStone for introductions. “We don’t award mandates, we sign on with partners,” says Vickers.

All mandates in cycle three will have to meet Brunel’s strong ESG criteria where Vickers has a particular eye on managers mindful of the evolution in opportunities. For example, Brunel had a standalone renewables fund four years ago, indicative of the opportunities in solar and wind at the time. Today the amount of money going into wind and solar has forced prices up and returns down, while leverage and ensuing risk is also creeping in as investment opportunities move away from the typical characteristics of infrastructure. “Some projects are going onto merchant pricing which increases volatility,” he observes.

Brunel’s focus has shifted to finding the pick and shovel investments of the transition (like battery storage, efficiency gains and mitigation) rather than early- stage gold panning equivalents. He also believes that today’s high oil price will spur more investment in renewable technology to store energy and provide grid stability.

Fee considerations

Although fees are a priority – Brunel has saved £33 million in fees since inception and is targeting a £560 million fee saving by 2030 – Vickers doesn’t filter managers according to their fee. “We choose managers we like and only then do we have the fee conversation.” Moreover, he notes that managers already have a good idea of Brunel’s “rack rate” and that the pool’s buying power is significant: third-party analysis reveals that total manager fees work out at 13 basis points less expensive than the market average. “It’s different being able to negotiate with a pot of money.”

He notes that fee breaks come in as the assets grow and pooling gathers pace, hitting new tier levels without involving further negotiation. He also believes Brunel’s sustainability kite mark carries a halo effect that helps negotiate fees further. “Asset managers say when we invest it helps them open the door to others.” It leads him to reflect on the sense of pride Brunel has in an emerging trend: helping external managers shape and change their approach to ESG, particularly around disclosure. For example, he links ESG integration and change at one manager running a multi-asset credit fund specifically to Brunel’s influence. “There is a nice knock-on effect if we can shape their business.”

Progress

Private market allocations are the last batch of assets still waiting to transition from the individual member funds to Brunel which now runs around 80 per cent of total member assets. Private markets were always going to take longer to transition because legacy programs must first return capital to the partner funds before it can be invested again, explains Vickers. “Global equity and bond funds were always the low hanging fruit.”

Still, he is cognisant of the fact Brunel’s pooling process is well advanced, something he attributes to the collegiate nature of the ten funds in the pool. “We have managed to get so far down the transition path because we haven’t had to bash together organisations that didn’t want to connect.” Partner funds set their own risk and return targets and decide how and where they want to invest. Brunel is responsible for creating the funds required and monitoring them. “We don’t have a hand on the risk on or off tiller,” he says.

Perhaps ESG provides the binding thread between Brunel’s ten. The asset owners combined enthusiasm and commitment to net zero ensures new product offerings and pooling opportunities are quickly taken up like the £3 billion already allocated to a new net zero passive allocation. Brunel worked with benchmark provider FTSE to offer partner funds a passive and net zero aligned investment option via a series of Paris-aligned benchmarks designed to tilt to green revenues. The benchmarks also avoid the common ailment of many green benchmarks – high exposure to lenders financing fossil fuels. “When we looked at what’s out there, we found many indexes are underweight energy stocks but let financials float to the top. Yet these banks are financing oil and gas, and we need to engage with them as much as the energy companies,” concludes Vickers.