Produced in partnership with T. Rowe Price.

The next six to 18 months are a critical period for asset allocators and will highlight the value of diversification, particularly geographical diversification, according to Sébastien Page, chief investment officer and head of global multi-asset at T. Rowe Price.

While geographically diverse portfolios have suffered in recent years, due to the dominant performance of US equities, diversification is starting to pay off and this will continue, at least in the short term, Page tells Top1000funds.com.

“For the past 10 to 15 years, US large cap equities have dominated the world and, at the moment, looking out six to 18 months, portfolio diversification is going to work, it has been working,” he says, citing T. Rowe Price’s tilt towards non-US stocks including Europe and emerging markets.

“We’re not calling for a large overweight to emerging markets as there are structural issues in some markets, which makes us cautious and we’re being selective but, broadly speaking, we’re in favour of diversification and believe [emerging markets] should be part of a diversified portfolio.”

“We’re comfortable continuing to add non-US stocks but not because we see an end to US exceptionalism or think investors should make a major strategic asset allocation shift. This is a tactical call because our long-term view is still that the US economy will continue to be the engine of growth for the world.”

Page rejects the suggestion that the market’s sudden and severe reaction to the US administration’s additional tariffs in early April, and the recent sell-off of the US dollar, signalled a potential regime change that challenged the position of the US as a global safe haven.

He believes the US will deliver strong capital growth for investors with a time horizon of 10 years or longer, despite a potential short-term valuation advantage for non-US stocks and bonds.

“The dynamism, risk-taking, entrepreneurship and sheer size of the US capital market, and the liquidity of that market, makes it a meaningful force,” he says, acknowledging that US equity valuations currently appear high.

T. Rowe Price has been trimming its exposure to US equities, and equities in general, but remains modestly overweight equities, supported by solid earnings growth and potential for pro-growth fiscal policies.

According to Page, the $1.61 trillion manager is taking a more cautious stance in the current economic environment, listing heightened trade policy angst, subdued US growth expectations and reaccelerating inflation as key risks to the resilience of global growth.

Cautious of ‘fat tails’

For Page, the biggest concern is not overinflated equity valuations or the risk of inflation eroding long-term real returns. Rather, he’s most concerned about “fat tails,” referring to extreme and unexpected market swings and black swan events.

Given the unpredictability of extreme events and the magnitude of fat tails, they can have a severe impact on portfolio returns.

“Geopolitical headlines are driving day-to-day market volatility and we’re seeing extreme days on the upside and the downside, and these fat tails are unpredictable,” Page says, careful not to use the word uncertain to describe the current situation.

Based on an analysis of recent media articles, Page says the word uncertain or uncertainty has been used more in the past few months than in any other period, including during the COVID-19 pandemic.

Under more normal market conditions, T. Rowe Price would see a sharp market downturn as an opportunity to buy the dip, assuming the fundamentals have not been impaired, but the firm is not doing that right now.

“We tend to be contrarian so [ordinarily] we’d be buying stocks but we’re not which is saying something,” Page says.

“We bought a lot during COVID; $3 billion of stock exposures on the way down and on the way back up, but right now we’re neutral between stocks and bonds because the tails are fat and you can get really sharp counter rallies.”

“This is not the time to be a hero. We just want to make our tactical asset allocation bets. We’re being active in our portfolio diversification, being overweight Europe, overweight value and overweight real assets.”

In times like these, Page believes institutional investors, including pension funds and asset managers, can play a leadership role in helping clients and investors navigate markets, accept a degree of stress, and stay on course.

“You don’t want to miss [market rallies] but you don’t want to panic and sell [at the bottom] either, that’s not the strategy,” he says.

Following the release of his third book in April, The psychology of leadership, Page says stress is an unavoidable part of life and essential for optimal performance.

“Stress and resilience are super important topics for me and I wrote this book because I was feeling stressed at work,” he says.

“I think we all have to stop stressing about stressing, and accept that optimal performance does not happen at a zero-stress level.”

Drawing on the field of sports psychology, Page says stress boosts performance but only up to a point, after which it can be detrimental to one’s health.

“When you’re overstressed you don’t make the right decisions but we shouldn’t go through life trying to live with zero stress because it’s impossible and that doesn’t lead to optimal performance,” he says.

After two difficult years for private equity in 2022 and 2023, investment activity and exits picked up in 2024 fanned by inflation and interest rates finally appearing to stabilise.

Fast forward to today, however, deal volume has eased back to lower than normal levels again because of the uncertain market.

Speaking during the $57 billion Arizona State Retirement System’s March investment committee meeting and before further volatility rocked markets in early April, Samer Ghaddar, deputy CIO, spelt out the challenges in private equity which accounts for around 12 per cent of total assets under management to Arizona’s nine-member board of trustees.

Ghaddar explained that although IPO activity has slightly improved, it remains sluggish compared to historical levels. Moreover,  the majority of private equity exits are concentrated in sponsor-to-sponsor deals as well as strategic sales. It means liquidity remains “a tough nut to crack” for many LPs and the percentage of net asset value realised has fallen to the lowest level in over ten years.

Although liquidity pressures mean many LPs have had to retrench from making new investments, they are committed to meeting capital calls. Ghaddar said that last year the level of capital calls and distributions at Arizona was almost level in an “extremely helpful” pattern that is reflective of the maturity of the portfolio which dates from 2006.

However, between January and March this year, the fund saw a higher number of capital calls linked to the spike in private equity deal flow. “Capital calls have been the highest in Q1 since 2006,” he said.

Ghaddar noted that the availability of private credit is spurring M&A activity and private equity deal flow. In contrast to recent years, there is now an abundance of credit in the market.

“I’ve never seen such M&A activity and there is a lot of credit in the market. Twelve months ago, if you wanted to fund a deal it was really hard to get funding, but now you get a lot of term sheets,” he said, referencing the documents that outline the key terms and conditions of a potential loan or investment. He said private debt investors had been sitting on the sidelines but have been encouraged into the market because of the stability in interest rates and favourable M&A valuations.

The importance of manager selection

Ghaddar also reflected on the importance of manager selection on Arizona’s private equity returns.

“Underwriting is extremely important,” he said. “The difference between a first and fourth quartile manager is around 20 per cent in IRR.” Arizona has prioritised choosing top-tier managers since a portfolio reboot in 2019, and the impact will start to appear in the returns.

Arizona has its largest private equity allocations with Vista Equity Partners and Veritas Capital.

Ghaddar detailed how the pension fund favours investing with sector-focused managers, particularly healthcare and industrials in strategies focused on operational improvements rather than financial engineering. The investor “stays away” from leverage because of the impact higher interest rates have on borrowing costs. “If interest rates go against you, returns will go against you,” he said.

The mature private equity portfolio is focused on the mid-market. Historically the allocation was primarily large and mega cap, but this was changed on the belief that large funds can erode returns. Moreover, more companies in the US and Europe sit in the mid-market space and the capital availability for these companies is lower and the opportunity for operational value creation is higher.

Arizona’s 12.8 per cent allocation exceeds its 10 per cent strategic asset allocation target for private equity but remains within the allowable policy range of 7-13 per cent. The allocation has outperformed its benchmark on both an absolute basis and in terms of excess return (net of fees) over 5-year, 10-year, and since-inception periods.

However, despite positive absolute returns, it has underperformed its benchmark by 26.1 per cent over the 1-year period and 0.12 per cent over the 3-year period.

The significant 1-year underperformance primarily reflects the exceptionally strong public equity returns incorporated into the investor’s private equity benchmark. When measured against the MSCI Private Equity North America & Europe benchmark, a dollar-weighted IRR peer benchmark, the portfolio’s underperformance is more moderate at 2.35 per cent below the peer group median.

Ghaddar said that the fund is strategically aligned to leverage an expected market easing phase that could reinvigorate public market IPO activity, creating enhanced exit opportunities and improved private equity performance.

Singapore’s two largest asset owners, GIC and Temasek, see attractive investment opportunities in climate adaptation solutions – an area relatively underfunded but equally important as decarbonisation which received the bulk of climate-conscious capital in recent years.  

In two separate reports released in the same week, the funds – which collectively manage an estimated $1.1 trillion in assets according to consultancy Global SWF – said climate adaptation is an investment theme understudied by private investors due to the fact that the public sector has accounted for most of its funding in recent years and it is seen as a government responsibility. But adaptation covers a broad range of commercial subsectors including weather intelligence, wind and flood-resistant building materials, indoor cooling and water storage. 

Authors of the GIC paper, senior vice president Wong De Rui and assistant vice president Kim Kee Bum in the sustainability office, told Top1000funds.com that the fund has selectively invested in adaptation solutions but is still in the “early stage” of evaluating the broader universe of opportunities.  

Across 14 climate adaptation solutions examined, the GIC report estimates that the corresponding opportunity set in public and private debt and equity could increase from $2 trillion today to $9 trillion by 2050. 

Some more bullish analysts are already saying climate adaptation strategies could deliver better returns than mitigation strategies – which focus on reducing greenhouse gas emissions – in the short term. Jefferies estimated that over a one-year horizon climate adaptation strategies could bring 13.5 per cent extra return than mitigation strategies, and 21.1 per cent over a three-year horizon, based on an analysis of 300 companies across sectors. 

But the return comparison is not so straightforward for Wong and Kim. “Our report highlights that many adaptation solutions also contribute to emissions mitigation, making it challenging to draw a clear distinction between the two,” they said. 

“We view climate adaptation as a significant and complementary investment theme alongside decarbonisation. Rather than prioritising one theme over the other, we focus on exploring investible opportunities in both.” 

Wong and Kim said GIC is conscious that climate adaptation is a rapidly evolving space and is carefully assessing the economic viability and scalability of any potential investment.  

“Understanding climate adaptation opportunities requires an interdisciplinary approach of blending scientific evidence with traditional industry knowledge; this, coupled with the variability in standards and taxonomies for adaptation solutions further complicate investment decisions,” they said.  

Tale of two in PE 

Temasek’s report focuses on breaking down private equity opportunities in climate adaptation. Investors in the asset class could help plug the significant gap in climate adaptation projects’ financing needs, which is projected to grow to between $0.5 trillion and $1.3 trillion a year by 2030, it said.  

But at the moment, PE investors often must choose between two types of strategies: investing in pureplay adaptation solution companies which tend to be early-stage targets with higher risks, or larger growth or buyout targets where adaptation only accounts for a small portion of the overall revenue. 

“These dynamics mirror the climate mitigation industry in its early days. Private investors approached that market by buying into large companies with legacy businesses that can provide cashflows as a way of investing in decarbonisation-focused companies,” the report said.  

“Similarly, many established players are (re-)aligning their strategies with Climate A&R (adaptation and resilience) as a growth vector.” 

The report also notes that many of the adaptation solutions are tailored to local climate needs but have the potential to be applied globally. For example, several wildfire management providers, which was a market almost entirely confined in North America, are experiencing growth outside of the US due to wildfire incidents in Europe.  

“The localised nature of Climate A&R markets allows investors to enter at lower valuations before market expansion can be fully priced in,” the report said.  

“Private equity firms have the opportunity to invest in areas where climate risks are still underappreciated.” 

Both asset owners are headquartered in Singapore where there is urgent need for climate adaptation solutions. Sitting on the Southern tip of the Malay Peninsula, the city-state faces challenges such as sea level change, which could have a mean rise of 1.15m by the end of the century, according to Singapore’s National Climate Change Study in 2024.  

Coupled with high tides and storm surges, some estimates suggest that one-third of Singapore will be vulnerable to coastal flooding.  

Wong and Kim from GIC noted the physical risks locally are “severe and imminent” but stressed that they will intensify across all regions, and climate response needs to be coordinated on a global scale.  

“Our research indicates that the adaptation investment opportunity remains significant regardless of the climate scenario, so investors can build conviction in this space without having to predict the specific climate pathway that will unfold,” they said. 

“This analysis reinforces our view on the growing importance and potential of adaptation investments.” 

The GIC and Temasek reports were conducted in conjunction with Bain & Co and BCG respectively.  

The investment team at the $10 billion Kentucky County Employees Retirement System (CERS) had their hopes of making an additional investment in an oil and gas fund run by investment manager Kayne Anderson dashed at a specially convened board meeting at the end of April.

Broadcast on Facebook from the fund’s Frankfort offices, the board and investment committee meeting process not only revealed trustees’ new reticence towards oil and gas assets in the current economic climate. In a show of tension between the board and investment staff, it also highlighted trustees’ concerns about their ability to conduct robust due diligence in a hurried timeframe and lacking input from the pension fund’s external consultant, Wilshire Advisors.

CERS – like its smaller, severely underfunded sister fund the Kentucky Employees Retirement System (KERS) – is managed by the Kentucky Public Pensions Authority (KPPA). However, governance at CERS and KERS was formally separated in 2021 and each pension fund now operates with its own independent board of trustees.

KERS approved the same investment at its board meeting the day before.

KPPA staff CIO Steve Willer and deputy CIO Anthony Chui laid out compelling reasons to invest in the fund which boasts commitements from a raft of other US public pension funds like the Teacher Retirement System of Texas and San Bernardino County Employees’ Retirement Association. They described its differentiated strategy, favourable risk-adjusted return and low correlation to other real return investments in the public and private portfolio.

CERS has invested with the manager before, but the previous strategy was more venture-focused and backed teams to buy acreage and explore. This time, CERS would be tapping into an asset that is already producing high levels of income. In contrast to other private market investment where capital calls can sometimes take several years, CERS capital would also be called quickly.

The strategy hedges production – currently “in the $70s” – three to five years out in a rolling approach that lowers investors’ exposure to volatile commodity markets and “makes it look like fixed income.” Oil is currently around $60 a barrel.

Willer and Chui argued that the lack of capital flowing into energy due to “investment restrictions” on many pension funds also means that those investors who do provide capital to fossil fuels can earn a significant return.

“There is underinvestment in the traditional energy space,” said Willer.

However, CERS trustees poured cold water on the strategy. They voiced concerns about the oil price, arguing it could come under pressure because of demand uncertainties prompted by tariffs as well as boosted production flowing into the market from the Middle East. Despite the hedged strategy, if oil and gas prices are subdued for any length of time it would effect the overall return. Moreover, the strategy breaks even with oil priced at $60 a barrel, yet the assets could require additional investment and costs to maintain production because they are not new wells.

“We don’t understand [the impact of the tariff issue] on industries like this,” said Merl Hackbart who serves on both the investment committee and board of trustees, adding: “There is a  history of continuing these investments [in established wells] for longer than what is intended.”

Board frustrations

Committee members also expressed their frustration with the staff because the special meeting to review the investment had been called at short notice. It meant board and investment committee members were absent, yet a full board (of six members) must be present to make investment decisions.

One member struggled to hear the conversation because he had joined the meeting whilst driving his car.

“Why have we got to make a decision so quickly? How long have you known about this opportunity?” asked Backhart.

“The other issue that stood out for me was the short timeframe we were given to look at this,” agreed George “Lisle” Cheatham, chairman of the CERS board of trustees.

Staff responded that they had been exploring the opportunity for a “long time” but had only recently taken reference calls and “done the leg work” on contract terms. Now they needed to “act quickly” because it was the final close date for capital commitments.

The investment committee also expressed concerns at the lack of input from the pension fund’s consultant Wilshire Advisors, asking why the advisors had “not [been] brought in earlier” to provide insights and expertise.

“What other opportunities are there out there compared to energy and how do they stack up,” asked Cheatham, who said the investment had “a lot of” unanswered questions. “There are probably better opportunities in different areas – what are they? Given the market uncertainty now, is real return one we should be looking at compared to others?”

Trustees also raised concerns about the allocation taking CERS over its strategic asset allocation of 7 per cent to real assets. If 100 per cent of funds were called today, the allocation would be overweight by around 8 per cent.

“Hopefully at the next opportunity to get everyone together [we will be] aware of what we are looking at,” concluded Backhart.

Whenever Yolanda Blanch is making decisions, she thinks of the Cobra Effect. Blanch is the chair of Spain’s largest corporate pension fund, the €7 billion ($7.9 billion) pension fund for Caixa Bank employees (Pensions Caixa 30).

Also known as the “law of unintended consequences”, it refers to how attempts to solve a problem can often end up making it worse. It often occurs when an incentive, meant to encourage positive behaviour, inadvertently encourages the opposite.

The story goes that to deal with an excess of cobras attacking people, the Indian government offered a bounty for every dead one. People began breeding cobras to pick up the payment, and when the government cancelled the bounty, farmed cobras were released into the wild, exacerbating the problem.

“The Cobra Effect is an example of not implementing systems thinking in a complex and interconnected world,” says Blanch, whose leadership of the 25-year old pension fund since 2023 (she worked as an FX options trader at Caixa Bank for 20 years before that) aims to follow a systems approach which seeks to understand the relationships and interconnections within a system rather than just its individual parts.

A systems approach requires systems leadership, and Blanch invests a lot of energy in ensuring employees are thriving so the investor can tap into all the knowledge and talent it has available. She says systems leadership involves creating the conditions for others to think and express themselves clearly, ensuring psychological safety in an atmosphere of collaboration, communication and trust.

“In a complex world, no one can know about everything. I think the days of a leader who knows everything and decides everything is over. Now leadership is much more about being of service to others,” she reflects.

Systems Leadership in practice

Caixa’s 15-member supervisory board administers the fund, decides the investment policy and approves performance and return expectations in a wide-ranging and active remit.

Blanch views the rest of her board as a source of unique individual talent and ideas. “I try to approach everyone with humility and curiosity, and encourage debate,” she says.

Elsewhere, the parameters of board meetings have been laid out after guidelines were established to shape the kind of meetings the organisation wanted and protect against the risk of unruly meetings muddying decision-making.

“We’ve agreed that creating space for everyone to contribute without interruptions, and keeping our interventions concise, ideally under three minutes, helps us reach better outcomes,” she says. “In a complex world, we need to make room for diverse perspectives. We value what each person brings to the table, and believe that thoughtful listening and inclusive dialogue are essential to finding the most balanced and effective solutions.”

Blanch also bases her leadership on an acceptance of the reality we live in and approaches every day from a place of trust, not fear.

“Most human beings want to create a better world. What’s challenging is that we don’t always agree on how to get there,” she says, adding that she is encouraged by the strong example of soft skills in pension fund leadership.

Over the years, the pension fund has honed a reputation for excellence in investment governance. In 2016, trustees drew up seven investment beliefs to improve decision-making and achieve better outcomes, and in 2018 it approved eight SRI-related investment beliefs.

More recently, trustees carried out a deep dive into the asset allocation, centred around analysis of the distribution of accumulated assets across the current and forecast membership, and the risks implied by the various drawdown methods that the scheme offers its members.

Board discussions currently focus on shifting geopolitics, the beginning of a new era away from globalisation, and the potential for more collaboration in European capital markets. Elsewhere, she wants to begin exploring plan members’ appetite for lower returns vis-à-vis sustainable investment, a conversation she believes needs to be had because maximising returns at all costs increasingly conflicts with sustainability.

“One of the important challenges we face is the tension between the demand for continued economic growth and the environmental limits of a finite planet. As fiduciaries, our responsibility remains to deliver strong, long-term returns for plan members.”

Should circumstances ever evolve in a way that requires reflecting on how sustainability and financial performance interact, we would of course take careful account of members’ views and sensitivities. So far, sustainability and profitability have often aligned well, but we are aware that future scenarios could be more complex and will require thoughtful, balanced consideration.”

 Other longer-term projects include exploring impact investment in the illiquid allocation that will complement sustainable investments in thematic equities and fixed income via a social bonds portfolio.

The board re-evaluate the pension fund’s strategic asset allocation every year (it isn’t modified every year) and also closely follows tactical decision making. All investment is managed by Caixa’s fiduciary manager VidaCaixa, Spain’s largest asset manager, also owned by Caixa Bank

“We are really close to the investment process,” she says.

The portfolio is divided between equities (30 per cent), illiquid assets (20 per cent) and fixed income (50 per cent) “Global equity has proven resilience in the long run,” she says.

The investment objective of the Pension Fund is to achieve an annual return (measured on an annualised basis over 5 years) in line with the 3-month Euribor + 2.75 per cent. At the end of 2023, the 15-year return was 5.46 per cent and the 5-year return was 5.81 per cent. The level of risk associated with this objective should be in the region of 10% (measured through annual volatility).

“When we reach a certain age in life, usually professional ambition and ego no longer primary focus, I think institutional investors understand the challenges and contradictions on the table. ”

APG Asset Management which manages €552 billion ($624 billion) for Dutch pension fund Stichting Pensioenfonds ABP is pondering increasing its existing $2.5 billion allocation to the defence sector.

“Defence has always been on our radar; we haven’t excluded it,” says Ronald Wuijster, chief executive of APG Asset Management. “We are already in this sector and could do a bit more over the next five years.”

Many European pension funds cap investment in the defence sector and exclude defence stocks because they fall foul of ESG filters. Yet geopolitical uncertainty and continued war in Europe is leading the continent’s pension funds to review the ethics of investing in the industry.

Wuijster prefers to frame the argument to invest more in defence around security rather than buying weapons.

“Defence is a means of security. Everyone appreciates security, including members of pension funds.”

In this way, investments could include assets like dual usage technology comprising quantum computing, cyber security or radar and drone technology. Other potential investments could include owning and investing in military buildings whereby pension fund investment frees up government budget to invest more in weapons, indirectly playing a role.

He said any increased allocation must fall within the boundaries of a good return and benefit the world from a security perspective. He also warned that any additional investment must begin with government leadership. “It’s not the role of a pension fund to defend a country or a region, it’s the role of government. It starts with the government and then pension fund investment could play a role.”

Investing in security for impact chimes with wider investment themes around impact and infrastructure where ABP plans to allocate more following its announcement to invest $34 billion in global investments with real world impact.

The impact allocation will have a strong focus on infrastructure where ABP targets around $12 billion in climate and biodiversity investments; assets like affordable housing and the energy transition will account for the remaining €10 billion.

“We are interested in expanding infrastructure because there is a big demand and it’s a way to have an impact,” says Wuijster.

Although most of the investment will be focused on private markets, Wuijster says APG will also invest for impact in the capital markets.

APG Asset Management’s latest one-year investment return of 8.9 per cent reveals that private markets lagged public markets. Although the allocation to private markets has performed well and beaten peers and benchmarks, the stellar performance of tech stocks in the Magnificent Seven outshone private markets. Wuijster cautions it’s far too short a period to compare public and private markets due to the different principles used to determine valuations.

“To do that, you need to take a longer period, perhaps even 10 years,” he says.

He remains confident that the private equity portfolio is well positioned and says the team are comfortable entering new investments. “We don’t think we have exaggerated valuations in our portfolio analysis. Actually, the portfolio is conservatively valued.”

Still, he notices that broad private equity market valuations have moved up higher and investors are struggling to realise investments in an environment where listings are difficult. The latest challenges also serve as a reminder that private equity is not better than other asset classes “every year” and is not “a guaranteed bet.”

Wuijster is also spending time fine tuning total portfolio management. Balance sheet and asset liability management has always been a key policy at APG, but has become more important in recent years driven partly by the country’s migration to a new pension system guided by new laws that places more emphasis on asset liability.

He says total portfolio management strategies include homing in on hedging interest rate risk and how best to deliberately manage currency risk given it’s also a diversifying factor. Liquidity, and optimal diversification of the portfolio across strategies and names, also falls under total portfolio management. He adds that it is distinct from LDI which is more insurance-orientated does not include allocations to risk.

“Pension funds should take a certain amount of risk,” he says.

The challenge of long term investing

Wuijster also reflects that it is getting more difficult to be long-term.

The attention the investor attracted when it sold a $585 million stake in Tesla on behalf of its main client late last year as part of an “optimisation strategy” in the index portfolio was a case in point. Wuijster reflects how “many people found” the decision “strange” because Tesla’s share price increased in December 2024, yet the strategy attracted praise when shares declined in the first quarter of 2025. Yet neither was merited because both analysis is based on short-term analysis.

“We invest based on inclusion, in which criteria such as climate, biodiversity, human rights, and good governance play a role. This policy results in a very diversified portfolio that historically yields a return comparable to the broad market; is very well diversified, liquid, and expected to be more resistant to risk. If you change the strategy and move from one approach to another, that implementation costs money. That cannot be avoided. That result should, therefore, not be judged in the short term.”

“It’s not that we are not analysing and can’t act on a particular day, but we are in for decent return at responsible risk level and pension fund asset management is about balance or risks and return for a long-term horizon.”

APG invests based on analysis of four elements comprising return, risk, cost and sustainability, and that hasn’t changed,” he concludes, adding that sustainability has never dominated every other element and can’t go at cost of return but its valuable information for risk management purposes.