Page 18 – Top1000funds.com

SURA Mexico, the $60 billion Mexican pension fund for 8 million beneficiaries, began investing in private equity in 2019 when it launched a multi-year capital commitment programme. Today, the fund, which is forecast to double in assets under management by 2031, sits on 20 LPAC committees in coveted relationships that will stretch beyond the current cycle with the likes of KKR and CVC Capital Partners.

“From what we hear from our GPs, Mexico and the Middle East are currently the two most dynamic fundraising environments. That will change, but we are determined to take advantage of this window,” says CIO Andres Moreno in an interview from the fund’s Mexico City offices.

New private equity investors like SURA Mexico have been able to muscle in on prized GP relationships because the lack of exits has meant many long-standing LPs have been unable to reup in new vintages. But SURA Mexico has also earned its place at the top table. It boasts its own scale (growing at 20 per cent per annum) and also brings its connection with pension funds under the wider group, Afore SURA, which oversees funds in countries like Colombia and Chile together manage $180 billion in assets under management.

Unlike some new defined contribution pension funds like the UK’s NEST, SURA Mexico pays private equity performance fees.

But Moreno, CIO since 2018, has still negotiated low enough fees to offer beneficiaries – only charged 57 basis points – the chance to invest in mega cap buyout funds, venture, growth and secondaries, opening the door to strategies that would normally be out of reach for Mexican savers, some of whom only have pension pots of $5,000.

Recently, the portfolio was expanded to include private credit for those closer to retiring.

“We have negotiated cheaper fees than standard 2:20 and co-investment opportunities with no fee-bearing capital commitments. Some people in Mexico have accounts of just $5,000 and would never normally be able to invest with the KKRs of this world. We have the ability to access some of the best investment strategies for them at very competitive costs.”

The private equity strategy is only one example of SURA Mexico’s growing confidence. Something it shares with the country’s $350 billion pension industry which now accounts for around 20 per cent of Mexico’s GDP. Moreno believes it is rooted in the sector’s success in driving reforms that have reshaped the system. Like successfully lobbying the government to enable pension funds to invest in private assets, where SURA Mexico now puts around 20 per cent of its AUM. Or pushing for the ability to invest more in equity in 2018 in a reform that opened the door to active management for the first time. Policy makers also ruled out beneficiaries withdrawing money from their pension funds during the pandemic which has depleted pension funds in Peru and South Africa.

“We have changed the pension fund industry by pushing for increased contributions and proposing changes that have opened up the investment regime. Policy makers are constrained by their political mandates, but they do hear us,” he says.

pressing pause on infrastructure

Today, Moreno’s focus is on persuading the government to do more to support investment in local infrastructure. It’s an asset class he wants to invest more but has just pressed pause, blaming growing uncertainty in the contractual agreements between the government and investors.

The risk of the government reneging on tariffs linked to, say, utility or road investments which guarantee returns has spiked, changing the economics of projects. A cohort of lawyers sits in SURA Mexico’s investment team, overseeing contractual agreements between the government and the fund, but judicial reform in Mexico whereby voters now elect all judges suggests more contractual uncertainty ahead.

“The political situation and judicial reform is creating volatility and things are starting to get shaky in Mexico. We are very focused on the risks in long term investment, especially in local infrastructure, because these investments involve reaching an agreement with the government.”

It’s a source of frustration because infrastructure investment is a good way to showcase how pension fund investment can change an economy. Especially in a culture where a cohort of people still view paying into a pension as a form of tax and “don’t think the money belongs to them.”

“We are mindful of our social role in the economy. The only way we can be sustainable is if we are relevant to our 8 million clients. Every time we deploy one dollar, we have to work on the development of our markets.”

High growth asset allocation

Assets are divided between ten different strategies with different glide paths according to beneficiaries’ age and risk appetite. The public equity allocation in the different funds ranges from 15-60 per cent, averaging at around 40 per cent.

SURA Mexico invests passively in US equity, but in Europe and Asia, where he believes it’s easier to tap alpha, the fund has mandated active strategies to external managers benchmarked against a local index. “We want to do it smartly, but we are not placed to make decisions in far flung markets,” she says.

These manager relationships have also brought important knowledge transfer opportunities. Teams from Mexico travel to managers in developed markets to shadow investment teams and glean experience. “We have negotiated robust knowledge transfer agreements via secondments where we learn to do things better. It’s helping us develop our domestic market.”

The 75-person investment team run an increasingly sophisticated tech platform that spans BlackRock’s Alladin and other private market suits. “We’ve invested a lot to expand our competence,” he says. Outside private markets, the team marks to market the portfolio on a daily basis so the net asset value is reported daily. “We don’t have any off balance creative structures.”

He is confident Mexico can ride out the impact of US tariffs, as long as policymakers get it right.

“If rates are sky high and there is a fiscal contraction, then it will be hard for the peso to absorb shocks. Shocks will be absorbed by real variables instead, and we will end up with a recession. It really does depend on the policy reaction.”

And he notes that although the “Mexican factor” is deterring investment in infrastructure, that risk pays off handsomely in other areas. Listed Mexican corporates, for example, trade at a discount but derive most of their income from the US.

“You get the revenue certainty but with Mexican multiples. That is the sweet spot.”

Overseeing Mercer’s $600 billion outsourced CIO (OCIO) business, the consulting giant’s Dublin-based global chief investment officer Hooman Kaveh is used to keeping his finger on the pulse of needs and concerns from clients, which include pension plans, endowments and not-for-profit organisations. And having spent the last week visiting Hong Kong and Singapore, unsurprisingly there was only one thing everyone wanted to talk about.

“If you asked me this question [about clients’ biggest concern] three months ago, I would have had a number of answers,” Kaveh tells Top1000funds.com on the sideline of Mercer’s investment conference in Singapore.

“Today, everybody’s talking about tariffs – that’s all they want to talk about. What are the implications of tariffs on the global economy? Is there going to be a recession? And what do I do with our portfolio?”

A re-evaluation of the role of US assets in portfolios among global capital allocators is already underway, with Canadian pension funds including CPPIB reportedly halting some private markets allocation to the US due to geopolitical and tax worries.

For decades, US government bonds have been accepted as the safe haven asset and the US dollar as the reserve currency, but as these assumptions become challenged by the tariffs Kaveh says there is a “crisis of confidence” in the world’s largest capital market.

“One of the first questions [we get at client meetings now] is should we reduce our exposure to US assets or diversify more? And in general, we would say yes,” Kaveh says.

This could be diversifying the currency base of the portfolio by considering allocations to euro or yen assets and gold, but the approach has some regional caveats. For example, a Hong Kong investor may not want to significantly reduce its US dollar exposure, as it is already its lowest risk currency position because the Hong Kong dollar is pegged to the US dollar, Kaveh says.

But more importantly, he says now is the time to pivot back to active management in equities. Mercer is recommending its clients with large exposure to passive strategies, and consequently a large footprint in the US market, to consider active strategies in other developed markets like Europe or Japan or emerging markets due to attractive valuations.

“The expectations from them are much lower in terms of earnings growth,” Kaveh says. “But with the help of an active manager, they can identify which companies in Japan, Europe or in emerging markets are less vulnerable to tariffs and global trade and are more focused on delivering local services and goods, particularly in the mid cap or smaller companies.”

How private markets changed the game

Kaveh joined Mercer in 2006 as Euoprean CIO advising on asset allocation and manager structure for primarily UK and Irish pension funds. During his close to two-decade career at the company, Kaveh went from overseeing a dozen investment professionals and $20 billion assets under managements to leading a 100-person team and one of the biggest OCIO service providers in the world.

As asset owners become more mature in the way they invest, Kaveh says the biggest change he saw is allocators’ view towards alternatives, namely hedge funds and private assets. Up until 2010, most of Mercer’s institutional clients still had a typical 60/40 portfolio but now there is much more diversification both in asset classes and manager selection.

Private debt was the standout asset class in recent memory as its nominal return shifted upwards with interest rate increases, and the lack of deep recession in the last 15 years means no mass-scale defaults in the economy, he says.

A survey conducted by Top1000funds.com and Casey Quirk in February found that asset owners are enthusiastic about private assets alternatives, and 37 per cent of CIOs polled said they are planning to increase allocation in the next 12 months. Most of Mercer’s clients, particularly mid-sized assets owners, are still under allocated in private markets, Kaveh says.

In some less established alternatives asset class, he sees some potential challenge in the asset management industry’s ability to meet the increasing allocation demand.

“In the very short term, you could argue that with private credit, for example… because it’s a new asset class, there may not be as many funds and managers available as something more established like private equity or real estate,” he says.

“There may well be more money trying to get invested as soon as possible, with not as much capacity in the industry.

“[But] the capacity is coming all the time, so I’m not particularly concerned.”

Manager selection is critical to success in private markets. Whereas the spread of performance between best and worst performing managers could be 2 to 3 per cent in public markets, Kaveh estimates the difference between best and worst performing fund in private markets can be as much as 20 to 30 per cent. The dispersion is especially evident in private equity and venture capital.

Mercer has a dedicated manager research team and has a four-factor scoring system. This consists of evaluations of a manager’s abilities around ideas generation (having genuinely unique, value-add investment ideas); portfolio construction (translating the investment ideas into appropriate portfolios without adding unintended risks); implementation (making sure the ideas are properly executed); and business management (having sound management of the investment process).

But in times of extreme volatility, Kaveh says asset owners will increasingly demand one thing from their managers – transparency.

“People want to know exactly how the portfolios are positioned, so we do a lot of scenario analysis with the manager’s portfolio so that we can show the asset owners [of possible results following macro events],” he says.

DAA capability shines

Aside from strategic asset allocation, Mercer also make decisions on behalf of its clients to capitalise on short-term opportunities via its macroeconomic and dynamic asset allocation team. Kaveh says the unit works on a 12-to-18-month horizon and aims to benefit from “turning points” in the market.

One recent example of such turning points occurred just after the US election. Expectations that the Trump administration will introduce pro-business policies, cut taxes and reduce regulations fuelled a stock market rally in the fourth quarter of 2024 and into early 2025.

However, Kaveh says the DAA team was conscious of comments Trump made on the campaign trail about introducing tariffs to ensure US’ economic partners trade with it fairly and was critical of whether the perceived business benefits will come through immediately.

In the fourth quarter of 2024, the team had an underweight position in equities and overweight in bonds – especially in what Mercer calls “growth fixed income”, which are assets that are typically below investment grade, less liquid in nature and more complex than traditional fixed income.

“The markets went up a little bit more in January, February, but then they fell back down again, and that [underweighting in equities] has been value adding,” Kaveh says. “The flip side of that was to invest the money instead in Asian high yield bonds, and also in frontier markets.”

Frontier markets such as African countries may be basic commodity producers and less developed than emerging markets, but they are also not as ingrained in the global supply chain, he says.

“Those frontier markets are offering higher yield, often double-digit yield, on the investments with sort of a focus on their own positioning. So if they’re a strong economy that is not overspending in their budgets, then they can be a good investment opportunity.

“We typically tell clients that our DAA service can add about 25 basis points per annum over the over a five-year time horizon. In actual fact, it’s added about 50 basis points per annum over the last 5 to 10 years.”

Asset owners may want to review their decision-making and governance structure to ensure that they are able to seize the opportunities when they come, Kaveh adds.

“It’s very difficult to make decisions in the heat of the moment, so be ready to make your decisions in advance.”

I accept that using the above title to talk about the circular economy is groan-worthy, but hopefully I have captured at least a segment (part of a circle!) of your attention.

The Thinking Ahead Institute recently hosted a working group to discuss whether a circular economy was a possible – or even a necessary – component of the climate transition. The wider context we are exploring is whether a climate transition that only considers mitigation would be doomed to fail. Are we only likely to succeed in a climate transition if it simultaneously solves for biodiversity loss, social justice, materials use (circularity) and adaptation?

Within this context, the circular economy thesis goes as follows: the current linear economy is the source of the problems we are trying to address (for example, biodiversity loss, social inequality, climate change), and therefore needs to be reformed. The circular economy is one route to reform.

What is a circular economy?

A circular economy is one which keeps materials circulating within the economy in their highest value use. So, for example, we embrace the idea of the 100-year washing machine, where locally-3D-printed parts keep the machine working and out of landfill. Throughput through the economy is thereby reduced and, ideally, there would be zero waste heading to landfill. So after 100 years, our well-used washing machine would be carefully disassembled. Some parts, like screws or bolts, might be reused as they are (‘retain their highest value use’) while others, like the case and drum would require energy to melt them into a form that could be used again.

From this simple idea (highest-value use for as long as possible) flow a number of implications. One of these runs counter to our current prevailing culture – namely, that this would be a ‘needs-based’ economy rather than a ‘wants-based’ economy. To explain, there would be no place for the fast fashion industry. While we may want disposable clothing, what we need is durable clothing. By extension we can also eliminate the advertising industry, which exists to stimulate wants. As our needs will always be smaller than our wants this is a mechanism for reducing consumption.

As some industries disappear, others would shrink, such as mining (less need for new input). In addition, a circular economy appears to more naturally favour localisation (transportation is a form of waste), and to be accommodating of changed ownership models (smaller, employee-owned businesses; more B-corporations).

A circular economy therefore offers some highly desirable benefits. In requiring less mining and, in seeking to eliminate waste, it would be kinder to our remaining biodiversity. In lowering consumption and changing ownership models it would promote greater social justice. The lowering of economic activity would also mean we need less energy, which would – in a non-linear way – accelerate de-carbonisation.

If we grow our demand for energy, then growing renewables doesn’t really drive out fossil energy, it just tops it up. However, if we shrink our energy demand, then growing (cheaper) renewables increasingly drives out (expensive) fossil energy. In turn, this positive dynamic would reduce the ultimate cost of adaptation (relative to the amount of adaptation we will have to do if continuing to run a linear economy).
Against all these highly desirable benefits it seems a little churlish to point out one small problem with the circular economy – there probably isn’t as much money to be made.

If we imagine a spectrum with a linear economy (100 per cent) on the left and a circular economy (100 per cent) on the right, then we can make some statements about these end points. If we are 100 per cent linear then we can state that waste is either free or very cheap.

If this were not the case, then we would be at some other point on the spectrum. We can therefore say that 100 per cent linear offers the maximal opportunity to externalise cost and, therefore, is likely to offer the maximum possible investment returns.

Conversely, if we are on the right (100 per cent circular) then we can say there is minimal opportunity to externalise cost precisely because waste is eliminated at this point on the spectrum. We can’t say much about returns other than they are not maximised (100 per cent linear has taken that crown) – but there is an economy, so presumably the returns are positive.

One interesting observation voiced in the working group was that maybe required returns are lower in a 100 per cent circular economy. If externalities are minimised from the economic system, then their costs don’t fall on private individuals, as they do under the 100 per cent linear system.

What practitioners think

The working group discussion of the thesis was supplemented by polling questions. There was unanimous agreement to the following three ideas:

In the long run, high extraction rates relative to carrying capacity are likely to lead to undesirable (societal and environmental) outcomes.
A successful climate transition that also addresses biodiversity and inequality requires capitalism to be reformed.
The circular economy is a promising solution for the combined problem of biodiversity loss, inequality and climate change.

We can therefore conclude that there is strong practitioner support for the ‘theory’ of the circular economy. In terms of the ‘practice’ the working group described the current global economy as 92 per cent linear (on the spectrum discussed above), with an expectation that in 10-years’ time it would be 75 per cent linear.

Arguably this anticipated shift will be too little and/or too slow, as the group believe that sustainability will require an economy that is 11 per cent linear and 89 per cent circular. The big obstacle, for investment organisations, is the definition of fiduciary duty. Polling suggested that there would need to be a significant change to the definition to enable a shift to a circular economy – but subsequent discussion modified this somewhat.

It is possible that the definition doesn’t need to change at all, but all investment organisations would need to move together to make it happen without individual risk. There was clear agreement that a circular economy is more compatible with sustainability than a linear economy, and that it would be good for society, but likely bad for investment returns in aggregate. It will be challenging to implement due to regulatory, infrastructure, and political constraints.

For all these reasons, the group thought it unlikely to happen at scale. These conclusions were not lightly arrived at.

Rarely have I been in such a thoughtful and introspective conversation with industry peers. I suspect that we will need to go round (sorry!) this conversation a few more times.

Tim Hodgson is co-founder and head of research of the Thinking Ahead Institute at WTW, an innovation network of asset owners and asset managers committed to mobilising capital for a sustainable future.

Nordic pension giant the Swedish Fund Selection Agency (FTN) is on the hunt for active Swedish and European small cap equity managers in a SEK 46 billion ($4.6 billion) tender.

The government agency is planning to select 10 Swedish and four European small cap funds, in a move that will affect 334,000 premium pension savers.

“Investing in smaller companies generally involves higher risk but has also yielded high returns in the long term. FTN deems that these two categories are suitable for the premium pension fund platform and that they contribute to the freedom of choice for savers,” the agency’s executive director Erik Fransson said in a statement.

The premium pension, which the FTN procures funds and managers for, is part of the Swedish state pension and is a defined contribution system which receive 2.5 per cent of workers’ pensionable income every year.

Members of the system can choose the level of risk and strategies for their savings. AP7 Såfa is the default government option for those who do not make a choice.

The premium pension is in net inflow and its assets are expected to grow to €400 billion ($451 billion) by 2040. The FTN will procure funds worth SEK1.1 trillion ($112 billion) between 2024 and 2027.

Last time the agency sought out small cap strategies was in actively managed Nordic equities and it awarded four managers with a collective mandate worth SEK 8.8 billion ($902 million) this February.

More asset owners are revisiting small cap strategies as a useful diversification from US mega cap equities and active managers are essential for identifying companies with sound fundamentals.

The agency is also currently reviewing applications for two tenders in actively managed and passively managed Swedish mid/large cap equities, worth SEK 100 billion ($10 billion), and one for actively managed global mid/large cap equities worth SEK 200 billion ($20 billion).

The next fund category to be procured is IT and communication sector equity funds, which covers SEK 124 billion ($13 billion) as of 31 March 2025. Notices of procurement are expected in late August or September.

There has been a concerted effort to lift the quality of funds and reduce fees on the premium pension platform. As Fransson told Top1000funds.com in an interview last year the number of funds on offer has reduced from 900 to 450. Remaining funds are re-tendered to access the ability of best-in-class managers.

Meanwhile, managers themselves also have to pay a tender fee and if they are successful, a platform fee based on assets under management. The FTN was hopeful that it is an effective measure to deter managers without a good chance of success from going through the lengthy RFP process.

The premium pension platform does not offer access to private markets.

Applications for the Swedish and European small cap strategies need to be submitted before June 16, 2025.

Previ, the $48 billion pension fund for Banco de Brasil employees, has a tiny fraction of its portfolio invested outside Brazil. Despite repeated efforts to diversify, Brazil’s oldest pension fund, founded in 1904, currently ploughs all but 0.5 per cent of its portfolio into Brazilian assets, namely government and corporate bonds, and domestic equity.

Claudio Goncalves, who is about to press the button on new, externally run active allocations to US equity, is the latest CIO at the fund determined to invest more overseas.

“Having so much invested in the Brazilian economy is insanity in my opinion,” says Goncalves in an interview with Top1000funds.com.

The bulk of Previ’s portfolio is split between two main funds. A R$240 billion ($41 billion) defined benefit plan, closed to new entrants back in 1990, is run on an LDI strategy where most of the assets are invested in fixed income, particularly inflation-linked bonds which comfortably meet the fund’s actuarial return of inflation +4.75 per cent. This plan’s legacy allocations to real estate and equities will continue to be steadily reduced over time, says Goncalves.

The second largest portfolio, Previ Futuro, amounts to around R$35 billion of defined contribution assets. Set up in 1998, it runs eight different strategies according to beneficiaries’ risk appetite and target date options, and is where Goncalves wants to focus his overseas diversification efforts.

Not only has Previ missed out on much of the gains derived from investing in AI and the tech boom that has fuelled the US stock market and pension fund returns the world over, the fact that local companies only make up 5 per cent of the MSCI Emerging Markets index signposts the cap on domestic equity returns and investing so much in Brazil has also meant the fund hasn’t reaped other diversification benefits like volatility and exchange rate differentials.

New US President Donald Trump has also exposed the dangers of a Brazil-focused strategy and made the argument to invest more overseas even more compelling. Apart from threatening tariffs on Mexico, most of Trump’s attention on Latin America (at the time of writing) has been around immigration. If he were to slap tariffs on Brazil, Goncalves believes it could have a profound impact on fiscal policy, impacting the stock market, volatility, the exchange rate and high interest rates on which the pension fund depends.

“There is a new variable called Donald Trump, and his relationship with South America is still a big question mark,” says Goncalves.

The pull of home

The lack of progress on overseas diversification is not due to regulation. Previ is free to invest a maximum of 10 per cent of the portfolio outside Brazil.

Goncalves believes the pandemic stalled progress in meeting new targets set out by his predecessor Marcelo Otavio Wagner to allocate 2-3 per cent of assets under management to overseas markets by 2022 and 10 per cent by today.

The real reason is the opportunity cost. Every time Previ prepares to take a bold move to diversify, it is thwarted by Brazil’s high interest rates which make it much easier to tap returns at home and put profitability before diversification.

Interest rates in Brazil currently sit at 13.25 per cent and some economists predict they will spike to 15 per cent by the end of 2025. Meanwhile, sovereign inflation-linked bonds (NTN-B) pay inflation plus 7 per cent and offer compelling tenors out to 2060.

“Brazil is well known as a country with very high interest rates, and we take advantage of this. You can’t ignore an interest rate of 13.25 per cent or inflation linked bonds paying inflation plus 7 per cent,” says Goncalves. The returns derived from high interest rates also speak for themselves. In 2023, Previ Futuro easily outperformed its 8.5 per cent target, returning 16.1 per cent and all eight investment profiles exceeded the benchmark index in 2023.

Still, Goncalves is determined to green light new overseas allocations and has whittled down the number of external managers to seven, of which five or six will be approved. His primary focus is on gaining exposure to US equity. Although some of the managers have expertise in Europe and Asia, he is concerned about weak European growth prospects and unknowns in the Chinese and Indian markets.

“We are trying to measure how much we will invest abroad. We are pretty much there,” he says.

It’s also a question of timing. Market volatility triggered by DeepSeek threatening US dominance in AI and Trump’s threat of tariffs has given the team pause in recent days. Goncalves is also monitoring the impact on the exchange rate between the real and US dollar – forecasts that the US dollar would get stronger have proved wrong as the real continues to experience the longest streak of gains in 20 years.

“We are trying to understand what is going on,” he concludes.

The term lost decade, or lost decades, is generally used to describe the lengthy period of economic stagnation in Japan that began around 1990.

For three decades, this once great economy flailed, encumbered by falling asset prices, natural disasters and the country’s rapidly ageing population.

Now, other nations are facing the possibility of lost decades of their own, with a growing number of economists and investment experts seeing recession as the base case, and many doing analysis for an extended period of stagnation – an environment in which few assets do well.

It’s a scenario that’s keeping John Greaves, the director of fiduciary management at the £34 billion ($45 billion) UK pension scheme, Railpen, up at night.

“I’m increasingly really worried about a lost decade in terms of real returns and not many of us have experience managing through that, but it can absolutely happen,” he said at the Top1000funds.com roundtable on geopolitical volatility and portfolio resilience.

“What does that stress test look like, when over 10 years, you earn zero real return?”

Steven Fox, executive chair and founder of political risk consulting firm Veracity said that the possibility of a lost decade, particularly in Europe, looms large but could potentially be curbed through regulatory reform.

“The European and US economies were about the same size in 2008 but today the US economy is roughly 40 per cent larger than the Eurozone,” he said, citing over-regulation in Europe as a key reason.

As an example, Fox pointed to the rebuilding of the Notre Dame Cathedral in France, which took just five years to complete.

“If normal regulations had been followed, it’s estimated that it would have taken 20 years to accomplish but they suspended all regulations except health and safety and got it done in five,” he said.

“That is an indication of how dramatically overregulated Europe is and, until that changes, the lost decade, certainty in this part of the world, is very much going to be with us.”

Liz Fernando, chief investment officer at £50 billion UK pension fund, NEST, said there are encouraging signs of change in Europe and increasing recognition of the importance of investing for growth.

“There’s a great danger that what gets hidden behind all the noise and focus on the US is Europe – and particularly Germany, which has done some pretty incredible things post-election, [such as] the idea that the debt brake is effectively going to get thrown out,” she said.

“Europe, in some ways, has been given the boot up the backside.”

Kate Barker, chair of the trustee board at the £77.9 billion Universities Superannuation Scheme, said discussions about a potential lost decade were extremely important, particularly in the context of weak global productivity growth, which had significant implications for global economic growth.

“We’ve been through a period where we’ve had no, or very little, productivity growth in Europe, and it’s quite surprising that almost every country has experienced the same thing. You might have expected more variation,” she said.

“Much investment money has been made in the US… and it is not really clear to me where the returns will come from in the next decade.”

Regime change

According to Greaves, the market’s reaction to announcements made by the US administration in early April, provides further evidence of a regime change.

“I’m a strategist by background so I try to always think long-term, but recent events are further evidence, for me, of a change in regime and a change in how economies are going to behave and how markets are likely to react, which requires a change in my thinking,” he said.

“The thing that’s really concerning at the moment is what’s happening with the portfolio diversifiers… what’s going on with USD and US Treasuries, which emphasises the importance of geographical diversification and thinking carefully through how different parts of the portfolio might behave in different scenarios.”

Regime changes, be they political, economic or social, occur when a system goes out of balance and systemic risks are not addressed, said Luba Nikulina, chief strategy officer at IFM Investors, pointing to the election and re-election of Trump.

“We talk a lot about systems, and when we talk about energy transition, we think about the planet as a system that goes out of balance, and there are systemic risks that don’t disappear,” she said.

“There are several systemic risks we monitor, including social systemic risks that we observed here in the UK during Brexit. And now what’s happening in the US is another manifestation of this social systemic risk.

“When you’re in the midst of it, it’s hard to make significant use of it but, at the same time, it presents an opportunity for investors, provided they have the liquidity to act. This is where risk management comes to the forefront to ensure that you can actually take advantage of opportunities.”

Veracity’s Fox said the signs point to a “long-term sea-change”.

“We have a [US] president who is willing to use relatively unbridled power and an institutional system that doesn’t have the capacity to push back at the present time,” he said.

“I don’t want to paint a bleak picture but it’s a realistic picture that certainly merits a lot of thought, but we can’t get lost in the day-to-day.”

USS’ Barker said a key challenge for institutional investors, given the messy, unprecedented nature of policy changes and the market reaction, was not to react and jump to conclusions too quickly.

“We get very focused on the implications for different countries but we’re thinking about macroeconomics when actually it’s almost certainly going to be implications for different sectors that drives some of the changes to how we invest,” she said.

“Starting from the macro perspective doesn’t seem to be wholly helpful and I think this is a time when you’ve really got to start from the micro.”

For Barker, one main consideration for investors would be around currency.

“Currency views have been thrown up in the air by the events of recent weeks and questions about the US dollar are really significant,” she said.

“We may see moves by the US to suggest different deals on currencies. I’m pretty sceptical about deals on currencies because unless you have exchange control, my view is that they tend to go wherever they wish.”

Buying the dip

Pension and sovereign wealth funds, with relatively steady inflows and longer-term time horizons, appear best able out of all investors to ride out market volatility and buy the dip.

Fernando said for NEST, which receives around £500 million per month in contributions, current market conditions present unique opportunities.

“That’s a really helpful flow of liquidity, which we can use to try and rebalance the portfolio in sensible ways at times, because you’re always buying market corrections and if the fundamentals haven’t permanently been impaired you’re buying the same asset at a lower price,” she said.

“I wouldn’t say we enjoy crises but we probably view them in a different way to funds that are paying out beneficiaries.”

Like NEST, Australian pension fund (locally known as superannuation) REST is strongly positioned, given the fund’s relatively young membership.

At the A$93 billion ($59 billion) fund, around half of the members are under age 30.

Despite having a longer time horizon than most funds, Sonia Bluzmanis, REST’s London-based head of external equities research, said it is still difficult to block out the noise and chaos.

“We’re thinking about how everything that’s going on in terms of geopolitics, capital markets and economics impacts on our long-term capital market assumptions,” she said.

“In the short-term, as much as we would like to look through [the chaos] we can’t, so a key focus for us is liquidity. It’s not that we’re expecting a tonne of outflows but it’s more about having to meet regulatory requirements and ensuring that we’re trying to avoid any uncompensated or excessive risks.”

At the £19 billion Coal Pension Trustees, where nearly all members are drawing their pension and between 7 and 10 per cent of assets are paid out annually, short-term volatility and economic shocks can have a significant impact on the schemes.

Callum Logan, head of investment strategy at Coal Pension Trustees, described his job as equal parts investing and divesting, making liquidity absolutely critical.

“In these difficult times, it’s about relying on diversifying assets that often haven’t been doing as well as public equities in rising markets,” he said.

“Sometimes it has been hard holding those assets when you’ve seen a strong bull market in equities, but you can be grateful for their protection at this time.”

Railpen’s Greaves said a major challenge for pension funds is achieving appropriate geographical diversification.

“There’s often a very favourable outlook for South-east Asian growth for example, but it’s hard to get conviction that translates into corporate profitability on publicly listed markets, because it may or it may not, and you just don’t know,” he said.

“That mechanism is much more established in developed markets whereby public companies can extract growth. While that tends to go to a small percentage of public markets, as long as you’re broadly diversified, you can often feel comfortable in that assumption.”

Being a well-funded defined benefit scheme, Railpen, doesn’t have to invest in everything. It can stick to the assets that it knows and understands to earn a certain level of return, Greaves said.

“That strategic discipline I feel is more important than ever,” he said.

Chris Mansi, chief investment officer, Europe and International at WTW, said one action that investors could take in the short term was to build understanding of the risk in their portfolio by identifying areas of high concentration and considering the potential implications in the case of a “bad event”.

“Looking at things on a micro sector-by-sector basis may make sense intuitively, but it’s a very difficult thing to form strong views as to how things will pan out,” he said.

“It’s also kind of the antithesis of allocating passively, which would point to having confidence in good quality active management.”

While market volatility and signs of entering a period of high inflation and low economic growth theoretically favour active management, Logan said the standard rules and assumptions may not apply anymore.

“In volatile and uncertain times, the thinking goes, you want someone actively looking at [the portfolio] who can be on top of all the live issues and trade day-to-day, but with so much going on, how well placed is anyone to do that?” he asked.

“To me, it’s not conclusive that active management is key here and, at this stage, perhaps it’s better to be asking questions than giving answers.”

“That said, one thing I certainly stand behind is geographical diversification, which our schemes are positioned for. Global market cap benchmarks imply 65 per cent of your public equity portfolio in the US, which does not feel balanced, but whether you implement actively or passively is less clear.”

Coal Pension Trustees has had a regionally diversified approach to asset allocation for a number of years, which Logan admitted had been “painful” at times, given the exceptionally strong performance of US equities over the past 10 to 15 years and, more specifically, the phenomenal performance of US mega-cap technology stocks in recent years.

“Regional diversification is really important and it ties very closely to the currency issue because, ultimately, we’re paying liabilities in Sterling, so we want the benefit of being diversified across different regions,” he said.

“A lot of the investable universe, not just in public equities but also debt and private markets, has been in the US, and managing offshore illiquid assets and the currency around that is challenging.”

“I think it’s early days for the Trump administration and we’re trying to understand what some of these potential changes mean, including is the US dollar the flight to quality it has been and does that warrant a higher hedge ratio? I don’t think that’s a question we need to answer tomorrow, but it’s certainly one that we need to think about.”