Asset owners have identified that one of the long-term consequences of the Trump administration’s tariff policy and market fallout could manifest with investors retreating from a US-concentrated portfolio. It makes a timely moment for Norway to launch a new sovereign wealth fund specifically designed to plough investment into local companies.

The Norwegian Parliament has approved seed funding to invest NOK 15 billion ($1.4 billion) in a specialist Nordic small-cap equity fund with the potential to double the allocation over time. Three portfolio managers have started work in unlikely headquarters in the remote town of Tromso in northern Norway above the Arctic Circle, thousands of kilometres from Oslo.

The fund will be overseen by Norway’s domestic pension fund, Oslo-based NOK 381 billion ($35 billion) Government Pension Fund Norway (Folketrygdfondet) – Government Pension Fund Global’s smaller sibling – but has a delegated investment strategy.

Government Pension Fund Norway CEO Kjetil Houg has played a pivotal role in creating the new fund and believes its birth chimes with emerging themes of investors putting more capital to work at home.

“Large investors should consider their geographical location; there is no reason to send money far away in the current climate,” he told Top1000funds.com in an interview.

The new pool of domestic investment could help boost liquidity in the local market and encourage Nordic companies like Sweden’s Spotify and payments fintech Klarna, which has just delayed listing in New York because of market volatility, to list locally rather than in the US, he suggests.

Houg also believes the fund has other characteristics that suit it to the current climate. He says active management is the only way investors can ensure the depth of knowledge and true understanding of corporate risk in an increasingly protectionist world. Nordic companies with small home markets are sheltered from the impact of tariffs, but active management can drill down to how most local companies, which are exposed to global trade because of the region’s open economies, will perform.

“More than 50 per cent of Norway’s GDP derives from exports and it’s the same in other Nordic countries. Tariffs are going to impact value creation within companies and certain sectors will be harder hit. Our main concern is market access to the European Union because Norway is outside the EU. If the EU decides to put tariffs on other countries it could harm Norway, so we must ensure a good dialogue with decision makers to secure our market access.”

The portfolio will be actively managed against a reference index of 344 Nordic small-cap companies with a total market value of NOK 1,506 billion, adjusted for free float.

The three largest sectors are industry, healthcare, and finance and just under half of the reference index consists of Swedish companies, followed by Danish (22 per cent), Finnish (13 per cent), Norwegian (9 per cent), and Icelandic (6 per cent) companies. Because many Norwegian companies are already included in the index for the Government Pension Fund Norway the new fund will have a relatively low exposure to Norway.

“The tracking error for the new fund will be slightly higher than the tracking error for the State Pension Fund Norway because small caps are more volatile,” says Houg. “We already invest in Nordic equity, so we know all the large companies and also some of the companies that will be candidates for the small-cap fund. We know the industries, the brokers and the analysts, so moving into small cap isn’t a giant step.”

Active management will also come with engagement. However, the new fund’s allocation to hundreds of small companies will make engagement less hands-on compared to the Government Pension Fund Norway’s large cap investments, where the investor takes a keen interest in company management and nomination committees.

“When it comes to voting at AGMs, the new fund will use a proxy. We are also working on a new digital voting process for our whole operation that will allow us to cover more companies in a more efficient way,” he says.

Contrary to the idea that companies are pushing back on engagement, Houg believes corporates in the region continue to welcome investor input. “We are a large owner in a small market and our engagement is welcomed and expected. Companies want owners that share their ambition and want to be challenged on their strategy and development. Companies listen to what we bring to the table.”

Government Pension Fund Norway sits on 14 different nomination committees and is working on board composition and recruitment. The fund invests 85 per cent of its assets in Norwegian large-cap stocks, where it can hold up to 15 per cent in a single stock. A stake that equates to enough influence to bend corporate strategy, but does not reach “strategic” ownership.

In a new policy, the Government Pension Fund Norway now pays out a 3 per cent dividend to the government annually. It acts as a valve on the investor’s outsized exposure to the Nordics.

Engagement is also growing around nature risk, where dialogue is focused on how companies are scenario planning. The investor is launching a new expectations document and exploring how to price nature risk.

“It’s extremely difficult to price nature risk because it’s a long-term liability. You must consider what is the right discount rate and how cash will evolve in the future. Our focus is on separating direct physical risk related to sea temperature and hurricanes and more indirect risk from changes in regulation and taxes.”

Yet unlike GPFG, neither of the locally invested funds follows up engagement with divestment.

The deadline to release a detailed plan for the proposed US sovereign wealth fund (SWF) came and went, but it was crickets from the White House. The entity was expected to be unveiled at the beginning of May – 90 days after President Donald Trump signed the executive order to establish the fund on February 3.

Reportedly, the delay was because the White House was not satisfied with the approach taken by Treasury Secretary Scott Bessent and Commerce Secretary Howard Lutnick, who were tasked to jointly develop the fund and had already submitted their proposal, CBS News said, citing people with knowledge of the matter.

With minimal details released, there has been wide speculation around the ‘how’s of the SWF, including its funding source, governance structure and investment objectives, as well as the ‘why’s – does the world’s deepest capital market really need a sovereign investment vehicle? And is now a good time when the nation’s running on a dual deficit?

But for Stanford academic Ashby Monk the issue is perhaps being overcomplicated. As the executive and research director of the Stanford Research Initiative on Long-Term Investing, Monk has observed SWFs’ rise and rise with keen interest over the past two decades.

“A lot of people are focused on where the money is coming from [for the US SWF], and my point is that doesn’t matter as much as the goals,” he tells Top1000funds.com.

“I need to understand what your goals are, then we can see what a strategy could be to achieve those goals, and how does that strategy need to be governed, organised, implemented and operated.”

He recently co-authored a research paper which outlined several potential funding designs for the proposed US fund, including from government cost-cutting via initiatives such as the Department of Government Efficiency; new commodity revenues from expanded oil and gas operations; privatising federal assets like loan receivables; and ‘regulatory rent’ by monetising permits or regulatory approvals for companies like TikTok.

The US fund could also issue debt, Monk suggests – it is a practice adopted by some SWFs like Abu Dhabi’s Mubadala Investment Company and Malaysia’s Khazanah Nasional. But the paper argues that no matter how the fund is eventually launched the key is to “prioritise transparency, strategic clarity, and disciplined execution”.

“Every time you set up a new sovereign fund, you get this blank sheet of paper… on the admin, on the organisation, on the goals, all that stuff. How fun. There is this neat opportunity, especially if you get the governance right, to do something innovative,” he says.

Monk’s paper suggests that due to the inherent government oversight and ownership of SWFs, it will be prudent to adopt an arm’s-length or even double arm’s-length governance structure so that the fund can still make commercially driven and independent investment decisions.

There are some lessons from SWFs around the world. For example, the US SWF can “literally copy and paste” the arrangement in place at the Canada Pension Plan, Australia’s Future Fund or the New Zealand Superannuation Fund where funds are overseen by an independent board, Monk says.

“You let the politicians do the [board] appointments, but the selection committee weeds out everybody that is not appropriate. That’s the type of path that I think would give comfort to the market [about a fund’s independence],” he says.

President Donald Trump has loosely described the objective of the US SWF in the executive order as being for the “sole benefit of American citizens”. Monk believes this means it is likely to be a sovereign development fund – a type of SWF “that strategically pursues both commercial returns and specific domestic policy goals”, the research paper says.

In that sense, the US fund could seek inspiration from Ireland’s Strategic Investment Fund, Sweden’s AP6 or Singapore’s Temasek in terms of having clear mandates to drive industrial development, economic diversification and support growth in sectors that are of national priorities, on top of return objectives.

But it is hard to say if any single SWF has the perfect governance setup. Even the poster child of well-run sovereign funds, Norges Bank Investment Management, is subject to political influence, Monk highlights.

“People often point to NBIM as the role model, but I think that’s because they’re quite comfortable with Norway’s form of democracy,” he says.

“The [Norway] Ministry of Finance really dictates pretty interesting things about that fund – they say which companies they should divest from… and which asset classes they’re allowed to invest in.”

Monk recalls a recent conversation he had with the Ireland Strategic Investment Fund’s founding CEO, Eugene O’Callaghan, who having established a sovereign investment fund from the ground up said apart from governance, another key to success is talent. But the two are closely intertwined.

The rumoured head of the US SWF is Michael Grimes. Reuters reported that the technology investment banker left Morgan Stanley in February to take up a new role in the Department of Commerce. He has spearheaded several high-profile IPOs including Facebook, Uber and Airbnb.

“My guess is that this new fund is all about attracting foreign capital into parts of our economy that are under invested, or into new parts of the economy that don’t exist yet, and that means you need really talented investors to be at the helm of the sovereign development fund,” Monk says.

“If you have the governance right, you can recruit talented people that are credible, then you can attract co-investors. and you can start to build these capital markets in places where they have started to fail.

“Because they [other investors] are not pricing the risks correctly in these areas riddled with uncertainties, when what you want is people to see these as priceable risks that you can go in and get compensated for taking. You need really smart people to go do that.”

University of California’s chief investment officer Jagdeep Singh Bachher said its office of investment is considering increasing its allocation to equities by 3.5 per cent. The extra allocation will be drawn from winding down the absolute return portfolio.

“The absolute return category in our asset allocation is down to zero. I propose moving 100 per cent [of that allocation] into public equity,” said Bachher, speaking during the endowment’s March investment committee meeting in its first gathering of the year.

Rather than increase the allocation to bonds or private markets, Bachher called for bold and decisive strategies in public markets where opportunities include AI, life sciences, defence and an array of tech growth industries that are poised to transform the businesses operate.

“The tech decade just getting started,” he said.

Bachher said that international equity ex-US will offer some of the most compelling opportunities because of the sudden shift in government policies and dislocations caused by recent geopolitics.

“Countries around the world have woken up,” he said, citing Europe as an example because Germany has just embarked on an economic stimulus that will unleash defence spending and overhaul German infrastructure.

“[We are seeing] the kind of spending in some parts of Europe we have not seen in decades [as] Europeans come together and stimulate the economy,” he said.

Still, despite his enthusiasm for opportunities outside the US, the board heard that the rest of the world is more likely to feel the pain of US trade policy than the US economy. He also said the record-breaking returns in equity over recent years are unlikely to be repeated in the “next five years.”

The public equity team are also exploring regional diversification in emerging markets like India, hunting for opportunities in sectors including power and utilities. However, he warned against stock picking strategies. “It’s very tough picking individual stocks.”

The portfolio has around 60 per cent in stocks (11 per cent in bonds and the rest in private assets), and Bachher said public equities typically return between 6-8 per cent. At their height in the last nine months, they have returned as much as 13 per cent.

Reconsidering fossil fuels?

Baccher didn’t rule out re-entering fossil fuels either. Re-investing in oil and gas would mark a break with strategy since the university excluded fossil fuels in 2020 when it completed the sale of more than $1 billion in assets from its pension, endowment and working capital pools.

“So far, being ex-fossil fuels is ok. But there is no policy of ours that [says] we shall never invest in oil and gas. [I am] putting that on the table as it’s a consideration I entertain as I think about oil and gas.”

However, some markets remain a no-go. The University of California is still negative on China, having reduced its allocation to the country three years ago. Bachher said he has no plans to increase the allocation to China outside the investor’s MSCI ACWI exposure because of uncertainties around tripping executive orders.

“I don’t know if I am going to be investing in something or have ties to something [that] in essence violates an executive order of the US government,” he said. Citing the compliance risk of inadvertently violating a rule that “he is not aware of,” he said China has become uninvestable for American investors, despite opportunities like electric car manufacturer BYD and AI company DeepSeek. The risk means the university has ruled out the idea of picking China-based managers and investing outside the index:  he also flagged challenges that venture capital firms invested in the region are having in exiting holdings in China.

Bachher said investors now face two separate investment worlds: China and America. University of California is playing the American world but he said “a wild card policy” could change that if the US and China agreed to a trade deal.

The two powerful countries have agreed to temporarily lower tariffs imposed on each other’s products for 90 days after negotiations that took place in Geneva, as talks towards a longer-term trade arrangement continue.

“If you asked me what could be a wild card in all of these policies – [if] President 47 and the Chinese leadership decided to do a trade deal [it would provide] a huge boost to China and the US in a wild card.”

Managing liquidity is the number one concern

Bachher said managing liquidity and ensuring he has enough capital on hand in the current uncertain environment for US universities is his number one concern. Under the Trump administration, US university endowments face higher taxes and threats to cut research funding. It’s triggered a renewed focus on the simplest forms of capital endowments manage.

California Regents has a working capital pool of around $11 billion divided between a short-term investment pool (STIP) of around $2 billion and a total return investment pool (TRIP) of around $9.4 billion.

“If you feel like you want to shore up operating liquidity, take the unrealised gain in your TRIP pool and put in your STRIP pool,” he said.

Bachher also urged Wall Street firms that benefit from investing money on behalf of universities, endowments and public pension funds, to do more to support academic institutions under fire from the current administration.

Günther Schiendl, chair of the board of VBV-Pensionskasse, Austria’s €9.5 billion ($10.8 billion) multi-employer pension fund founded 35 years ago, is restructuring the fund so younger beneficiaries can have more risk exposure.

It has involved shaping a new investment strategy that allows young savers to have a larger equity allocation and exposure to more dynamic pension fund strategies. The wordy-titled ‘pension lifecycle investment optimisation process’ encapsulates a key challenge for Austria’s homogenous pension funds.

“The investment strategy for a 30-year-old person should be different to the strategy for a retired person aged-70,” Schiendl tells Top1000funds.com. “Historically, pension plans in Austria have placed young and old people in the same asset pool which means finding an optimal investment strategy is very hard because of the inherent differences between these beneficiaries’ risk capacity and time horizons, and we are tyring to sort it out.”

Earlier this year, VBV introduced an opt-out lifecycle model to target younger employees that allows these savers to invest up to 60 per cent of the pension fund in equity. VBV runs six investment strategies across specific asset pools with varying degrees of risk. On average, around 35-40 per cent of a particular asset pool will be in global equities but this now spikes much higher in the opt-out model, or as low as 5 per cent for those in retirement.

“The younger generation need more risk; they need higher risk early on that builds up capital,” he says, pointing to last year’s different returns of 6 per cent from the defensive asset pool but more than twice as much from more dynamic strategies.

Other pool assets comprise real estate (around 5 per cent, and mostly European), infrastructure equity ( 7-8 per cent) and private debt (10-20 per cent). The remainder is in fixed income, divided between government bonds (mostly European, but some emerging markets) and corporate bonds.

But introducing and nurturing interest in a new member-oriented structure focused on the individual plan member comes with challenges. Schiendl explains that it requires understanding and co-operation with human resource departments at the plan sponsors and council representatives, and engaging a younger generation that doesn’t tend to spend much time thinking about their pension pot.

But he is encouraged by a new generation coming into leadership roles at corporate sponsors which is enabling discussion around pension fund design and life cycle investment.

“It’s a development that is appreciated as it will enable us to build better investment strategies. But it takes time, and sometimes it can be more complex than anticipated.”

Pause in private equity rollout but private debt a haven of stability

Progress introducing other changes to the portfolio has recently ground to a halt. VBV had been exploring developing an allocation to private equity, motivated by the fact that private equity funds take some of the best small-cap companies away from the listed market. However, the Trump administration’s rollout of sweeping tariffs on imports and retaliatory measures from trading partners around the world has given VBV fresh reason to pause.

“The economic effect of tariffs will be felt in companies’ value chains and doing business will become more expensive for many companies. We have decided to observe how this will play out because a lot of companies will struggle to adapt,” he says.

In contrast, Schiendl enthusiastically endorses the private debt allocation. It has delivered a stable six per cent return since it was established in 2016, steadfastly weathering volatility triggered by the pandemic and more recently, Trump’s tariff and trade policies.

“So far this has really been a haven for stability,” he says.

The allocation also allows younger plan members to tap a valuable illiquidity premium. Strategy distinguishes between different degrees of liquidity provided on the one hand by the private debt fund and on the other, the liquidity that sits within the fund.

The loans that sit in a typical private debt portfolio have an economic life of between three to four years, which is shorter than the product that investors buy that has a lifetime of seven to eight years and is less liquid, he explains.

“Investors commit to a fund and then re-commit if the manager is good, so there is a turnaround.”

In this way, it’s possible to fit a less liquid structure to younger plan members who have room for less liquid instruments. The portfolio also seeks to reduce interest rate and duration risk to help earn stable returns no matter what happens to interest rates, he says.

Infrastructure equity

The infrastructure allocation is focused on infrastructure equity and Schiendl particularly likes opportunities in sustainable energy provision, as well as toll roads and digital infrastructure. Investments are made depending on the location, business case and regulatory risk. He favours working with asset managers that truly understand pension investment.

“We particularly favour asset managers that have founded their own business after spinning out of pension funds because of the alignment of interest – they have a better understanding of the needs and requirements of pension funds.”

The pension fund has between 30-40 external managers. The roster has grown most in infrastructure and private debt, where VBV works with around 8-10 managers.  An in-house investment team oversees the bond allocations which includes single security selection, asset allocation and risk management. VBV uses specialist external managers to invest in emerging market and high yield bonds.

VBV invests in equity index funds and ETFs. Sustainability is integrated via Paris-aligned indices in equities and bonds, and every infrastructure manager must integrate sustainability.

“We have had years when the Paris-aligned index has had a lower investment performance than the traditional index and years when it has had a higher performance. Over the long-term, the difference is small and should also be viewed in the beneficial effects this strategy has on society and climate,” he says.

After a decade in the top investment job at the $69 billion Maryland State Retirement Fund, Andrew Palmer will retire at the end of June. He speaks to Amanda White about his achievements and reflections on an industry where he has worked for 40 years.

As Andrew Palmer looks to his final months as the chief investment officer of the Maryland State Retirement Fund, one of his final tasks is a new asset allocation on the back of a five-year asset liability study and he’s concerned about the impact of the current market uncertainty on the portfolio.

“We have had an unusual period where the US economy, because of its natural strengths, has had some good tailwinds relative to the rest of the globe. I’ve been concerned that was going to end and lead to a crowding out of capital as US debt grew and grew,” he says.

“I’m very concerned that we were already going into a period of time where federal stimulus was going to start to wane, and I do think in the near term we were due for a slowdown.”

He says the market was expecting a resurge on growth expectations with Trump coming into office and the promise of reduced regulations. But he is now really concerned that it won’t happen, prices will go up and activity will come to a halt because of the tariffs and cuts at the federal government level.

“In Maryland we can see physically that activity level has come down. There’s a high concentration of federal jobs here and anecdotally there is evidence of people losing jobs. Even the traffic levels have come down.”

Amongst this environment, the fund is in the middle of an asset liability modelling project and a new asset allocation is with the board for approval.

For some time, Palmer has focused on building a resilient portfolio that can withstand uncertainty, managing risk, and trusting an investment policy shaped to work in every kind of environment. But he’s also considering where he can find alpha while protecting the portfolio with diversification.

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

He says diversification, through geographies, asset classes, public and private assets, is the first step in managing risk.

“What this is doing is undoing the benefits of diversification, because it is forcing investors and business to be more geographically focused, so that utility is not there and investors may have to lower return expectations or accept higher risk,” he says.

“It can be very painful when correlations go to one, and you can have that when the portfolio is concentrated.”

Portfolio changes

The fund has had a low-risk, diversified, risk-balanced portfolio with a non-home country bias since 2010.

That portfolio has a high Sharpe ratio and low volatility but relatively low returns, and the board wanted to look at an allocation that would generate more alpha.

“The board has had a bit of turnover since the last study five years ago, and while they like the diversification and how it protects us on the downside, it wasn’t earning enough. So they are willing to push out on the risk spectrum,” he says. “You can’t pay beneficiaries with a Sharpe ratio – you need cash.”

In the new asset allocation, equity risk has been pushed from 50 to 55 per cent across public and private, and the benchmark has moved back towards a global benchmark of country weights.

The fund has been underweight US and overweight emerging markets for some time. And while the emerging markets allocation has been winding back since 2022 this has been the biggest drag on the fund’s performance.

“When we made that allocation, it was difficult to get to our return target, so we looked to private equity and more emerging market equity because we thought both of those would have higher returns. Private equity did but emerging markets didn’t – it was meaningfully lower. EM stocks returned 4 per cent when US stocks returned 14 per cent, and that’s been the biggest drawdown on our performance.

“With interest rates higher now, we don’t have to be as bar belled. With lots of equity risk and some diversifiers we can move to a less bar belled portfolio. We have more developed market stocks and more credit and are moving more to the middle of the risk return path to drive a bit more return without adding too much to risk.”

The increased allocation to equities will be allocated from the absolute return portfolio, which has a strategic allocation of 6 per cent and has been a recent underperforming part of the portfolio. But while the strategic allocation will be reduced, Palmer is keen to keep on some of the absolute return managers, embedding them in the asset classes as an implementation technique.

“We wanted cash plus 5 per cent from these managers which has been a challenge. But they can be a good diversifier in markets like this. We have some really good managers and can hopefully find ways to continue to use them profitably.”

Reflections

Andrew Palmer began his investment career as a fixed income specialist with a 20-year career at ASB Capital Management. He came into the pensions industry via the director of fixed income position at the Tennessee Consolidated Retirement System where he later became deputy CIO, and then moved to his native Maryland in 2015 as CIO.

“I’ve been in the markets for a long time,” he says. “I started on the bond side and that segment of the world was where financial innovation was happening all the time. Since then, there has been an explosion in innovation. The world has become less delineated by old designs.”

But as he reflects on his career, he says what hasn’t changed is the pension board model, built on business models from the 1970s.

“There could be some work on modernising the governance structures of these plans – I don’t think that has matched the market innovation. Even conversations around asset allocation and asset classes are rooted in the past. There is opportunity there for thoughtful people to make some real innovations and improve outcomes for everyone.”

As Palmer looks to leave the fund, he is proud that he has been able to impact the fund’s future success.

“I am most proud of being able to set up the portfolio and the structure for long-term success,” he says. “When I came in 2015, the resources to manage the then $45 billion portfolio were stretched. We had a small staff and more asset classes than investment individuals. It was expensive and tough.”I didn’t see how we could grow with the structure and resources we had at the time.”

Among other things, the investment staff grew from around 23 people to more than 50, with new governance structures built to allow the fund to expand and introduce new emerging and smaller managers.

“It really has been transformative,” Palmer says. “When I think about how that has worked in practice it’s rewarding to see that over the last five years more than 90 per cent of assets outperformed their respective benchmarks through good implementation, through the staff having the authority and ability to hire managers, build portfolios and mange through time. It’s been highly fruitful for the organisation. The implementation has demonstrated putting some resources into the process was the best investment we could make.”

Palmer is grateful for his time in an industry that is collegiate and dynamic.

“The industry itself is fantastic. The job of investing changes every day and is full of wonderful eager people. You meet all kinds of people and it is so stimulative to be in this space and deal with what could happen tomorrow. But the politics has become a bigger and bigger part of this job for every CIO,” he says. “A lot of politics has crept into a job that should be focused on driving returns for beneficiaries and lowering costs for sponsors.”

The United Kingdom’s Pension Insurance Corporation (PIC) is beginning to re-evaluate how it thinks about US Treasuries and developed market government bonds as safe-haven assets. It’s not only the recent sell-off in US Treasuries, which usually offer welcome shelter for investors in times of volatility, that has CIO Rob Groves concerned.

Echoing other institutional investors, he says Western economies including France and the UK have long-term growth, productivity, and demographic challenges brewing that raise the risk of these government bond prices falling in value too.

“It will play out slowly, but major western economies face long term challenges,” he says in conversation with Top1000Funds.com after markets plummeted following President Trump’s rewriting of global trade norms in April.

He expects investors will be increasingly mindful of  governments demonstrating “real fiscal discipline” to avoid the risk of another “Liz Truss moment” when the former UK Prime Minister’s short-lived government policies triggered a run on the gilt market (and leveraged LDI strategies added fuel to the fire.)

“The Chancellor, Rachel Reeves, has a challenging fiscal position to manage,” says Groves.

Some 80 per cent of PIC’s portfolio is invested in low-risk investment-grade fixed income spanning corporate and UK government bonds, largely managed in-house – at the end of 2024, 92 per cent of the portfolio was rated investment grade. Matching assets with liabilities – so that if its assets fall, liabilities also fall at the same time – is strictly regulated for the insurer, which is restricted on where it can and can’t invest.

PIC takes on offloaded corporate DB schemes either through a buyout model whereby pension fund members become policyholders, or a buy-in model where trustees can secure the pension payments to their members through a contract with PIC.

“Think of it like an M&A process where we take on the responsibility of DB schemes which wind up and cease to exist. We manage the portfolio and pay the pensions and seek long-term stable secure cash flows that give the best returns and help us secure new business,” explains Groves.

Opportunity in corporate credit slow to emerge

Long-term PIC is focused on Western government solvency. In the short term, Groves is ready and waiting to take advantage of the current volatility in markets.

PIC has significantly de-risked its portfolio over the last 18 months on the basis that assets are expensive and investors have not been significantly rewarded for the risk. The insurer took on around £8 billion ($10.5 billion) in new liabilities through 2024 but has been slow to deploy the money because it is wary of locking in a smaller return relative to what it can earn on gilt yields. It leaves the PIC sitting on record liquidity and solvency levels – it currently has a solvency ratio of 237 per cent compared to 211 per cent in 2023.

“Going into the crisis we were about as well prepared as it was possible to be,” says Groves.

But despite market turmoil, opportunities to buy have not manifested in investment-grade corporate credit where PIC particularly hunts for opportunities. Around 40 per cent of assets are in the US, home to the largest and most liquid corporate bond market in the world, and opportunities for PIC open up when investment-grade credit spreads become more attractive.

Although prices have fallen on the screen, there is very little liquidity.

“Traders are marking their books down, but there is not much inventory to buy,” says Groves. “There is no forced selling which is a feature of a crisis. However, if tariffs aren’t rolled back there could be an extended period of market turbulence.”

Any further leg down in markets could be triggered by negative hard data in growth numbers and corporate earnings, he suggests.

Growth in private markets

If volatility returns and credit spreads increase, Groves also expects to see more opportunities to invest in higher-yielding private assets too. PIC focuses on UK infrastructure debt and housing particularly; lending is inflation-linked and comes with good terms like covenants and at attractive prices. Private assets also provide valuable support on “filling the gaps” on cash flows out, he says.

To date, PIC have invested almost £14 billion in the UK in sectors like social and affordable housing, urban regeneration projects,  renewable energy, and the UK’s universities.

On the equity side, PIC has a new stake in the build-to-rent sector where the investor works with developers to build flats that it owns and rents out over the years. New investments include a new residential community adjacent to Manchester Victoria train station.

However, Groves notes that originating private assets that work for the insurer has become more challenging in the last 18 months. He returns to the point that, unlike other asset owners, PIC is not an absolute yield or return investor but a spread investor – when PIC deploys money taken on from the schemes it manages, it sells gilts and buys credit.

“It’s not the absolute level of return we care about it’s the spread and how much extra return we can earn on the credit over gilts,” he explains. “Credit spreads are very low, and asset prices are expensive which makes a difficult investment environment for us. Take a typical borrower like a Housing Association. They care about the cost of the debt, not the credit spread. They think it’s expensive to borrow because of higher interest rates but we think it’s expensive to lend. Neither party is getting good value.”

Although annuity providers dominate long-term debt provision in the UK, he cites other challenges crimping investment opportunities too. In social housing, investors are challenged to retrofit existing property in order to meet new energy-efficiency and other regulatory requirements, for example.

“In the current market, a nice infrastructure lending opportunity will be five times oversubscribed – there is no shortage of capital to invest. However, it’s difficult to get projects off the ground because planning and regulations are impediments to these projects.”

PIC doesn’t have a strategic asset allocation but looks for opportunities on a deal-by-deal basis. “When we are pricing up a new pension scheme, we look for things we can invest in on a line-by- line basis,” he says.

The 100-person investment team (grown from 16 when he joined) is split into different teams. One manages the assets and liabilities and is responsible for pricing new business and optimising the current portfolio as well as interest rate and inflation hedging. A trading team execute all trades, and a public credit team manages the corporate bond portfolios in a strategy that is being gradually insourced, supported by a credit research team that evaluates and assigns credit ratings and interacts with borrowers. Other departments manage private debt origination and a strategic equity team hunts for interesting long-term income-generating assets.

PIC also runs a small £3 billion Alternative Fund portfolio that has allocations to hedge funds, a little private equity and healthcare royalties.

“It’s a really stable producer of returns,” he says.