The New Jersey Division of Investment generated double digit returns in fiscal year 2024 while maintaining good liquidity and dry powder on hand with an overweight to cash and cash equivalents.

Last year, cash continued to provide a real return barbelled against a slightly overweight position to US equities in a “cautiously optimistic” strategy that afforded the investor exposure to the strongest performing asset class while maintaining maximum liquidity.

In the State Investment Council’s annual meeting held in January, director Shoaib Khan told trustees that the fund had been buoyed by a “constructive market environment” through the year. In 2025, the team expects interest rates to remain higher for longer, allowing the portfolio an opportunity to continue to benefit from higher yields on its holdings in cash. But Khan said the cash position is likely to decline through 2025 given the robust pipeline in new private market opportunities and pending closings.

The Division, one of the largest US pension fund managers, oversees the assets of seven public pension systems totalling approximately $78 billion as well as other pools of state capital that include the $41 billion Cash Management Fund, CMF.

Khan highlighted the variations between the actual allocation of the pension fund portfolio and its target allocations, explaining that the policy benchmark is a measurement tool but the team doesn’t always manage the portfolio to the benchmark. Sometimes it’s preferable to retain dry powder, alternatively the team will “put their foot on the pedal” in areas of greater return like US equity.

Asset classes that struggled last year included private equity. Real estate also continued to work through the continued cap rate adjustments. The fund returned 10.7 per cent last year while five-year annualised returns are 7.7 per cent and the ten-year return is 6.94 per cent.

In a “constructive environment” for markets, Khan said that diversity is crucial to adding value because returns from different asset classes differ. Private equity, US equity and international developed market equities are the best asset classes over the past decade. In another example of the importance of diversification, commodities was a  star performing in 2021 and a laggard in 2023 and 2024.

A milestone for emerging managers

2024 was also a milestone in the division’s emerging manager program where the investor seeks to invest with smaller, off the radar managers in order to access a larger and more robust set of investment opportunities. The platform is also an opportunity to identify the next generation of managers at an earlier point in the cycle.

Last year the emerging manager roster expanded beyond private equity to include an allocation to private real estate and private credit managers. In 2025 the Division will look to expand the platform to potentially include selected public market asset classes.

Khan noted the importance of looking forward and the steady evolution of the portfolio since the division was set up in 1951. Back then the entire portfolio was invested in fixed income.

By 1975, 10 per cent of the portfolio was invested in US equity and today it is divided between global growth, real return, income and defensive assets comprising fixed income (24 per cent) US equity (28 per cent) international equity (20 per cent) risk mitigation strategies (3 per cent) private equity (13 per cent) real estate (8 per cent) real assets (3 per cent) and cash (2 per cent)

With an eye on the future, Khan discussed how AI will impact portfolio construction and risk management. Trustees heard from Sorina Zahan, founder and chief executive at Aiperion, a consulting, technology and scientific research firm focused on risk. She explained that AI will help investors deal with uncertainty and support portfolio optimisation around market, liquidity and liability risk.

Integrating AI will support investors integrate different factors simultaneously and harmonize processes to support portfolio construction. The conversation touched on the importance of adopting a new way of thinking and abandoning linear thinking to move to a systemic, total portfolio approach.

AP3, the SEK534.3 billion ($47.8 billion) Third Swedish National Pension Fund has steadily reduced its exposure to Europe over the last two decades. Only around 11 per cent of the listed equity portfolio – where just over half the fund’s assets sit – is invested in Europe (excluding Sweden) down from over a quarter back in 2006.

The dwindling allocation takes on even more resonance given CIO Jonas Thulin’s overwhelmingly bullish outlook for global equity markets where a strong macro environment that shows no signs of cooling fans AP3’s long-only approach. Yet he says Europe has become less and less important as a source of alpha at AP3,  joining a growing number of investors turning away from the continent.

Thulin quotes former Italian prime minister and ECB president Mario Draghi’s recent “bullseye” report to articulate the scale of the problem. Like the fact in 2008 the EU had the same size economy as the US, but this has now shrunk to half. Or that today there is no EU company with a market capitalisation over €100 billion built in the last 50 years unlike the US where all six US companies with a valuation above €1 trillion originated in this period.

Much of the EU’s problem is that it has fallen behind the US in the digital revolution. But it wasn’t always the case. As chief economist at Sweden’s telecoms giant Ericsson in the late 1990s, Thulin had a front row seat at one of many of the European companies in cutting edge R&D and technology at the time. Today only four of the world’s top 50 tech companies are European and the continent doesn’t have any companies competing with US dominance on AI.

“Europe is great at discussion and regulation, but rather poor at actually doing business,” he says. “The equity market is harsh, and when it votes it walks out the door. This has been happening for a long time in Europe.”

Rather than offer seeds of future growth, the green transition embodies Europe’s propensity for talk and regulation over action, he continues. “Europe is the biggest backer of the green economy, but the US invests more than us. We need a green growth agenda in Europe.”

To prove his point, he says AP3 does create alpha in sustainable investment, but only because its active strategy allows it to invest outside Europe’s regulated, dark green Article 9 funds where the bulk of ESG investment flows. “We can do things a bit differently,” he says.

Leaving solutions to European malaise to the likes of Draghi and other policy makers, AP3 is following the money and walking out of the door. It’s even more poignant given Thulin predicts equity market gains of 8 per cent in 2025 and discounts the idea that stretched valuations suggest the market is due a correction.

Valuations, he says, don’t lead equity market performance. Nor does equity risk premia predict returns. Instead, his focus is on the strong macro environment and global momentum. The broad growth metrics AP3 uses to predict equity markets (that have nothing to do with GDP) have rarely been as strong as they are today.

“We hear people discussing soft landings and hard landings. For us it is a question of ‘What landing?’”

active management

Thulin believes active management is the best way to tap today’s abundance of opportunities and runs active strategies across equity, fixed income, FX and derivatives: in corporate credit where the benchmark comprises 9,000 names AP3 owns just 125; elsewhere picking FX serves as both a hedge and as an instrument to create alpha.

One of AP3’s best 2025 investments has come from upping exposure to US banks in “a great trade” that is already “2 per cent up this year.”

He acknowledges that less than a third of active equity asset managers beat the benchmark and passive funds have created a headwind for active managers. But counters that many of these active funds are limited to only investing in one direction, say European small cap, value or growth. AP3’s unconstrained approach to buy whatever it believes in, free from the confines of a particular fund or product type, opens the door to sustained alpha.

“Being unlimited means we have the freedom to invest where we like, and this is a much easier way of doing alpha.”

AP3’s active investment involves short-term tactical adjustments that increase the efficient frontier, he continues. He likens the process to a golfer carefully adjusting their stance before hitting the ball, introducing (short term) adjustments of a centimetre here or there that will have a profound impact (long term) down the fairway.

“If we are successful in the tactical work that we do we can afford to be super long term,” he says.

“People say you can’t predict equity markets, but it is possible. Many investors are shying away from taking big active positions for alpha and focused instead on monitoring risk. I would argue these investors have confused sell side augmentation with the buy side reality.”

The wheels keep spinning

It’s not his only swipe at the asset management community. The sell side – like Europe – risks being left behind the buy side when it come to AI.

In recent weeks AP3 used AI to successfully forecast market movements in the Swedish Krona and US fixed income thanks to a forecasting methodology that accurately predicted the latest CPI figures. It’s just one example of the kind of evolution that throws into question the need for the asset management communities’ cohort of economists and strategists.

Asset managers need to evolve and push their own efficient frontier, he argues. He believes in five years AP3’s investment team will look the same, but their processes and methodology will be vastly different because it will draw on new data points and applications. The team regularly meets new service providers to discuss the latest solutions on how to predict markets.

“Large institutions on the buy side are moving in one direction, but the sell side is struggling to keep up and adjust,” he says. “We have integrated AI, but some of our sell side counterparties have not kept up with us. Investors always want to go to the next level to fine tune and build their conceptual thinking on the economy. Some of our counterparties are doing a great job of being on top of this, but a few are dropping the ball.”

In another example of AP3 forging ahead, the investment team collaborates with local universities. Sometimes as many as 20 students have come into the office to work across the fund. One recent analysis focused on developing how to better predict correlations between rates and equity, opening the door to trading correlations.

“This was impossible five to 10 years ago but it’s not impossible today,” he concludes.

After DeepSeek sent tremours across the markets a week ago, its success and impact have quickly become a point of national pride back at home. 

The Chinese AI startup grabbed global attention when it released its open-source reasoning model, R1, alongside a detailed paper which explained how the model can offer a similar level of performance while being trained for a fraction of the cost compared to competing models from OpenAI.  

On the eve of Chinese New Year, a day associated with the concept of renewal, People’s Daily – the news outlet considered the Chinese Communist Party’s official mouthpiece – published a piece referring to DeepSeek’s introduction to the international tech world as “a farewell to the old order”.  

How true that statement remains over time is yet to be seen, but it is a reminder to investors that US exceptionalism which created stellar gains in equities and unprecedented market concentration cannot always be taken as a given.  

Market concentration and the diversity dilemma 

US equities were often quoted as the biggest return driver in multi-asset portfolios in 2024, and Nvidia in particular surged 171 per cent. The chipmaker alone accounted for almost a quarter of the S&P 500 index gain during last year. 

“If you’ve been underweight Nvidia, you’ve lost this year,” said Mark Walker, chief investment officer of UK’s Coal Pension at the Oxford Fiduciary Investors Symposium in 2024. He highlighted the pressure from his trustee board in the past 12 to 18 months about investing more in US mega caps.  

According to Ryan Giannottoo, manager of equity index research at LSEG, the US stock market has never been as concentrated at the top as it is now, with the top 10 stocks accounting for 33 per cent market cap weighting.  

This raises a number of dilemmas for investors which are basically summarised as how to ride the wave on the way up (invest passively) but avoid losses on the way down (be more active). Many investors may turn to a multi-factor model in such circumstances. 

Looking back at history there have been many periods of market concentration including the Nifty Fifty, the 1990s tech bubble, the FAANGs and now the Magnificent Seven. It’s all fine when they are on the rise but what about when the market conditions change? 

According to research by Macquarie Asset Management since the end of 2005, the 10 largest companies in the Russell 3000 have outperformed the broader index, especially since early 2020. But extending that out another 10 years for a longer-term view (1995 to September 2024) returns of the top 10 companies are closely aligned with the broad index.  

Relying on a few stocks can be great on the way up, but significant underperformance could arise if market conditions change quickly. The emergence of DeepSeek and the potential undoing of Nvidia’s dominance, even momentarily, is a stark reminder of the need for diversification and the fragility of markets. 

‘This will not last forever’ 

So how are the largest institutional investors around the world tackling this? 

Norges Bank Investment Management, invests 72 per cent of its giant $1.6 trillion in equities. Within its equities allocation technology stocks make up 25.8 per cent, by far the largest sector weighting, with financials the next largest at 15 per cent. 

The Norwegian sovereign fund’s largest 10 holdings are Apple, Microsoft, Nvidia, Alphabet, Amazon (which sits outside its tech leaning as it classifies it as consumer discretionary), Meta, and Broadcom. It owns 1.3 per cent of Nvidia, making it the ninth largest investor in the company. 

Norges was a beneficiary of last year’s tech rally, just reporting its largest ever annual profit ($222 billion), with 50 per cent of its return driven by tech stocks. 

Wisely, chief executive Nicolai Tangen admitted “…this will not last forever” as reported by Reuters, but it’s unclear how it is mitigating against that eventuality. 

Meanwhile the largest asset owner in the United States, CalPERS, owned 67,259,938 shares in Nvidia at the end of the 2024 financial year, about $8.3 billion worth of stock (and the 38th largest investor in the company). Similarly public equities was a big contributor to the fund’s returns with 17 per cent for the year, the fund’s overall return was 9.3 per cent. No surprises then that the top holdings were Microsoft, Apple, Nvidia, Amazon, Meta, Alphabet Class A, Alphabet Class C, Berkshire Hathaway, Taiwan Semiconductor Manufacturing and Broadcom. Public equities make up 42 per cent of CalPERS’ portfolio. 

The story is largely the same looking at the holdings of the largest investors in different regions. The largest equities holdings for USS, the largest investor in the UK, are Microsoft, Apple, Taiwan Semi Conductor Manufacturing, Nvidia, Tencent, Visa, Alphabet, and on it goes. 

CPP Investments, the largest investor in Canada, prides itself on a very active approach to equities. It held 2,719 shares in Nvidia at the end of March 2024, and while significantly less than Norges and CalPERS this still equates to about C$3.3 billion and is the largest holding in its $172.7 billion exposure to foreign publicly traded equities. 

Vulnerable narrative 

The DeepSeek-triggered jitters perhaps demonstrated how vulnerable the idea is that the drivers and beneficiaries of the AI revolution will only be a handful of US companies. 

In an interview with Chinese press last July, DeepSeek founder and hedge fund manager Liang Wenfeng said a deeply held company belief is that China will not be a follower in the AI space forever. 

“We think as the economy develops, China needs to gradually become a contributor [in AI], instead of hitching free rides all the time. Among waves of information technology in the past 30 or so years, we never truly participated in real technical innovations [Author’s translation from Mandarin],” he said. 

While investors seem happy to ride the US tech boom for as long as they can, many are also keeping an eye on signs of a potential reset down the line, and that may come from outside the US. 

“To be honest, right now we are comfortable with it and we buy into this idea of the winner takes all in AI,” CIO of Danish pension investor PFA, Kasper Lorenzen told Top1000funds.com previously. But he believes soon the beneficiaries of AI will move from hardware providers to those building and applying the software.  

The real AI revolution may be when it transforms manufacturing and is used in industrial processes alongside consumer-facing product development, but predicting that transformation is an incredibly difficult task.  

One important takeaway from DeepSeek’s emergence is that when technology disruption occurs, it happens fast and investors should be ready to re-evaluate their own assumptions. 

In January 2020 I blogged about the 2020s decade needing a purpose and I spoke about the opportunity for corporations and asset owners – two organisational types with huge symbiosis – to develop that purpose.

The idea was that the decade heralded an opportunity for these organisations to use stronger purpose to drive greater well-being and wealth into the lives of the 8 billion consumers, 3.5 billion employees, and 4 billion of savers and investors on the planet (excuse the rounding).

The enablers to achieve this were spelt out. How people and organisations respond to the pressures and incentives within the system, and how the stars need to align, notably with governments and civil society. This must involve the alignment of the ‘outer world forces’ (the condition of the world ecosystem in all features of its landscapes) with the ‘inner world forces’ (the cognitive, emotional and behavioural state we are in as individuals reflecting the groups and organisations we owe our allegiances to as members of families and communities, and as employees and consumers).

It’s January 2025 and we are halfway through the decade, how are we getting on with this decade with a purpose? The answer is that it’s a complicated picture and a mixed story but an important one to tell.

outer view: macro factors

The outer world view looks out on eight big macro factors that condition our lives and those of the enterprises around us. The mnemonic ‘STEEPLED’ is used to represent this mosaic of factors – societal, technological, economic, environmental, political, legal, ethical and demographic. As regards progress on these outer factors it’s been a chequered five years.

These below are my opinions not definitive absolutes. There is no objective way to score these, so forgive the simplified measures used, but the conclusion is reasonably clear that better world purpose and progress has had its headwinds and is suggestive of a world in trouble.

 Three of the eight should get OK marks:

– The economic progress of the world has been bumpy but OK overall.
– The legal side is stable, and on the whole fine.
– The progress of technology has been positive, although with some stresses; while technology is firing up many innovations in various key fields, the increasing speed of change is challenging humankind’s ability to adapt.

The technology stressors have contributed to lower scores below for the other factors:

– Our societal state has turned grumpier – the world happiness score for the top 20 countries has fallen from 7.3/10 to 7.1/10 amid increasing mental health problems
– The environment has warmed faster than anticipated  – global average excess temperature (over pre-industrial levels) in 2024 up to 1.57oC from 1.23oC five years previous; that tallies with the atmospheric carbon count still rising from 399 ppm to 425 ppm.
– The political state of the world has faced a decline in the number of liberal democracies from 22 per cent of countries to 18 per cent over five years.
– Our ethical state as a society hasn’t progressed – witness the annual number of deaths from conflicts rising from 78,000 to 154,000 in the five years.
– The demographic experience has been adverse – global population growing from 7.8 billion to 8.2 billion, and fertility rates ranging from under 1 to over 7 with the growth in all the wrong countries.

Inner forces: consciousness and culture

What about the inner forces? This looks in on human consciousness, culture and experience, both at the level of the individual and in their collective states in our ecosystem. The picture seems different between the two lenses – the collective has been stronger than the individual.

This is again a mosaic of factors with a bunch of squishy things. They map into two forces – first the smarts of clear thinking and resilient coping; second the synergy of joined-up minds and collective action.

Here, the mnemonic is ‘STIRRING’: how we have been doing with sensemaking, trust, identity, relationships, resilience, irrationalities, neuropsychology and governance. These like the outer forces are hard to measure but it adds up to a mixed picture:

  • mixed forces from the smarts: resilience maybe OK (increased cautionary thinking)
  • neuropsychology OK (better education helping towards smarter cognition, but mental health less rosy)
  • sense-making and irrationalities not OK with social media increasingly implicated in feeding our innate dislike for inconvenient truths and like for convenient untruths
  • positive forces from the synergies in governance, relationships, identity and trust, particularly in their collective form.

The irrationalities, identity and relationships all need comment.

Our irrational side has always been a survival asset making us classify new experience as part of the model we expect to see, and this is fundamental to the decision-making response to too much sensory stimuli. This produces the confirmation biases, attention deficits and overconfidence that limit our receptivity to new thinking. And this state is being exploited by vested interests. But more hopefully our cognitive processes are still maturing, and new technology can contribute to that. The investment industry has way more smarts than five years back, trust me.

Identity contains values, culture, and purpose. Values have suffered with politics super-charged by emotion and bias, the rise of individualism with its fragmentation of collective identity and the extractive, consumerist and exploitative attitudes and actions that have emerged to shape our inner world and pull on the levers of our outer world. But culture and purpose of organisations have been on the rise, witness the growth in stakeholder capitalism, the resilience of society through Covid, and the resolve of large numbers of asset owners and companies to deal with that toughest of challenges – net zero (51 per cent of asset owners, 45 per cent of corporations have net zero ambitions at the end of 2025, both up from close to zero in January 2020).

Stronger relationships are needed at the heart of the toughest challenges and the investment industry has progressed on that. Illustrations in the asset owner space come from the commitment to coalition organisations, growth in stewardship engagement, and the use of co-opetition. These elements all benefit from the power of better engagement in applying collective action to address difficult problems. In a phrase this is systems leadership.

This inner world is where the principal agency lies for transformative change. An outer world ‘in trouble’ can be helped by the inner world leaning in to positive change.

Can we expect the asset owners and corporations to do the right things in the coming years? The increasing pressure from civil society on these organisations raises my expectations that they will follow the purposeful road.

But their actions have got to count. In the ‘4-3-2-1 pin code’, the 4 units of power belong to the government, 3 to corporations, 2 to asset owners and asset managers and 1 to civil society. We need the system to coalesce – for civil society to place pressure on corporations and investors to raise their game and apply their combinatorial power to government. That would be a classic systems solution from collective intervention.

In one sense I am a bigger believer in the asset owners now than five years ago.

They seem more resolute to take a view of the system in which the returns they need can only come from a system that works. And they see work to support the system as part of their fiduciary duty. They are more clear-eyed and sure-footed than other leaders in their actions. It goes with their turf. They are taking a future-back position through thinking ahead and insightful action. Their net zero ambitions fit perfectly.

A world in trouble argues for a mid-course correction. We need these organisations, appropriately motivated and inspired by purpose-driven individuals, to help steer the world and their stakeholders to a better place. This is too important a mission for them to fail.

Roger Urwin is global head of investment content at WTW.

 

Investors should expect more inequality, de-globalisation and volatility to influence their portfolios in 2025 alongside a heightened risk of unintended exposures. On the flip side, trends in the political environment that have supported sustainable investment have cooled, causing a temporary deceleration in momentum visible in the growing green and ESG investing backlash and US-China competition concerns.

That’s according to Canada’s IMCO, the $77.4 billion pension fund for Ontario’s public sector workers in its recently published World View 2025. IMCO uses its evolving framework of key world trends to distil high frequency news, developments and market movements into a guiding roadmap.

Importantly, these trends don’t evolve in a linear way but ebb and flow with more resonance in some years than others – although Nick Chamie, chief strategist and senior managing director in the total portfolio and capital markets division at the fund admits that this year the “Trump effect” has accelerated and decelerated the themes more than usual.

Accelerating trends include governments worldwide adopting interventionist policies aimed at reducing income disparities and reshaping socio-economic landscapes. Chamie says governments are acting to protect domestic jobs or bolster people on low incomes and lower the cost of living.

This means fiscal policy will increasingly be characterised by swings as governments introduce significant initiatives and stimulus into the economy. Policy will become the dominant force as opposed to the old orthodoxy of minimum government intervention. The days of governments just balancing the books and letting monetary policy do the fine tuning are in retreat, says Chamie who expects the impact will be felt in inflation, growth and stability.

If governments focus on stoking their own economies and addressing national interests inflation could become volatile and higher. At IMCO preparedness for this trend manifests in an important allocation to inflation-linked bonds to provide protection. Chopping and changing in government policy also underscores the value of diversification and spreading risk across different baskets, he says.

Chamie also observes accelerating trends around less free trade and countries prioritising domestic jobs at the expense of free trade, creating a much more fragmented world.  The impact could manifest in investment portfolios in emerging market allocations, for example.

“You can imagine tail winds for emerging markets will lessen in the new regime,” he says. “The fact that the US has outperformed global equity compared to the rest of the world by such a large margin shouldn’t be surprising.”

The need for investors to prepare for changes in government policy is particularly manifest in sustainability where IMCO carefully mitigates against ‘stroke of the pen risk’, designing an investment process that is not overly exposed to sudden changes in regulation or subsidy programs.

“We are always very careful to ensure that our sustainability program has resilience. Our underwriting process by which we evaluate risk always incorporates reducing and mitigating ‘stroke of the pen risk’.”

It’s all the more important given his prediction that global trends that have accelerated sustainable investment will decelerate in 2025. Chamie observes investor uncertainty around the level of resources to dedicate to climate change, and the policy and regulatory frameworks around sustainability. “Institutions are dropping out of and hesitating about joining alliances compared to previous years when sustainability had a strong tailwind attached to it.”

IMCO’s World View flags returning enthusiasm for private markets. When public markets dropped in 2022, many investors found themselves over allocated to private markets and a muted appetite for private investments in 2023 and 2024 followed. Today, he observes a shift, arguing that private markets will begin to regain the same tail winds as before.

In another, steady trend, index-based public market strategies will continue to underscore a shift in investor focus on long-term value creation. However, Chamie warns investors need to be cognisant of the concentration risks of passive investment.

“It’s easy in global equity to end up with a large concentration in the US of just a few names that are driving market returns. It’s very important to right-size these exposures and ensure awareness of just how volatile these markets can be. Investors that go all passive might be taking on more risk than they think.”

He said that active management helps mitigate this risk because it ensures the portfolio will look different to the benchmark.”

2025 will also require a flexible and agile approach to investment. IMCO doesn’t stay within specific asset class definitions when it looks for opportunities. The fund sees the world as one big ecosystem and recognises that many investments live in the space between public and private markets like structured transactions and private lending. Moreover new industries are evolving all the time.

Because the rate of change in the world has increased Chamie suggests investors adopt a flexible approach to ensure they tether to the strongest trends and mitigate the risks of the largest headwinds.

The latest trends also require an innovative approach and a preparedness to invest in new and different asset classes. For example, investors have built up their allocations to private credit after banks reduced lending to corporates. “The rise of private credit is an example of how investors need to incorporate new asset classes as they evolve,” he concludes.

AI is a paradigm shift of great importance, warned one of Oregon Investment Council’s (OIC) most long-standing and trusted advisors. Speaking during the investment division’s December board meeting, Lewis Sanders – CEO and co-CIO of Sanders Capital and ex-chair and CEO of AllianceBernstein whose relationship with OIC extends back three decades – espoused the importance of the investor incorporating AI into all economic models, especially the equity portfolio.

“It’s a really big deal. Take AI seriously,” he said.

The technology is the ultimate democratisation of knowledge and know-how. It will have a huge impact on computer coding, lead to productivity gains and bring software even more into business and our personal lives at speed.

Sanders said major companies are already exploring how to integrate AI and in time, and with additional development, will derive productivity gains derived from AI that bring a “measurable, substantial,” inflection that “will show up in aggregate GDP”.

Sanders also impressed on the investment committee which oversees $140 billion of investments including the $97 billion Oregon Public Employees Retirement Fund (OPERF) the “stunning” and enduring performance of the Magnificent Seven, rebuffing any suggestion that these companies’ stellar performance might be a bubble.

Collectively, the Seven accounts for nearly 50 per cent of the increase of market capitalisation of US equities over the last five years (driven by the increase in earnings) of which Nvidia’s earnings are the most stellar, rising from $3 billion in 2019 to $100 billion this year.

“Nvidia, a single company, added 200 bp to the growth of corporate earnings in the US in the last five years,” Sanders said.

He said that this is not an extreme valuation or a fantasy. “This is real.”

The capitalisation of the Seven is equal to that of all publicly traded equities added together in Japan, Hong Kong, Canada, Germany, China and France and the UK, he continued.

“These companies account for 6 per cent of the expected 10 per cent gain in earnings for the S&P,” he said.

Unique offerings

Sanders also argued that the Seven companies’ success is unique to each one. They don’t share a common factor like companies did during the internet bubble, or the oil bubble of the 1980s, for example. The only link they share is that they all inhabit the entrepreneurial tech landscape in the US that is superior to all other regions in the world.

“China is the only apparent potential challenger.”

Although these companies are subject to global and economic risk; regulation and litigation, their business fundamentals are different to each other.

“Microsoft is different to Amazon; Meta is an advertising company and Nvidia is involved in computer infrastructure. There are no monolithic factors that tie these companies together.”

Sanders said the US economy has proven resilient to monetary tightening. Meanwhile, the then-imminent Trump administration’s promise to reduce taxes and regulatory constraints to business development; stimulate investment in traditional energy and (“if you are an optimist”) use tariffs as a threat to improve the terms of trade, is likely to fan markets and stimulate more onshoring and FDI in the US.

“US equities by almost all measures are over-priced, “he said, explaining that Trump trends, and the magnificent Seven, will drive momentum further.

He explained that investors are willing to accept less extra return to expose themselves to equities. He advised the board to respond to the compression of risk premia by increasing diversity in the portfolio, creating a strategy that neutralises any change in the sovereign curve, commodity prices, or the pace of economic expansion.

He poured cold water on the idea that the US government is labouring under excessive debt.

“The debt load seems high but it’s not actually,” he said, explaining that the economy is continuing to grow and the strength of the dollar is proof that the economy can cope with debt. “I don’t see the systematic threat, no one does, it’s why risk premia is low.”

In contrast, the EU and China are experiencing high-risk premia in equities and currencies.

“The EU is now seen as your proverbial basket case, where growth aspects are impaired,” he said.

Not only is Europe embroiled in a tragic ground war, but economic growth is also impacted by regulation and protection, and innovation is scarce. He told the investment committee that the EU’s green energy imperative has generated high costs with no immediate economic benefits. The region’s leading economy, Germany, has suffered from being overly exposed to China’s local market and manufacturing in mature industries.

“There is a high-risk premia for EU centric businesses. Banks are the poster child for this,” he said.

staying private for longer

Because more companies are staying private, the ability of public market investors to benefit from the trail of innovation that typically starts in private markets has slowed.

“Innovation in private markets used to come to the public markets relatively quickly, but this is no longer true,” he said, explaining that successful companies are staying private because capital is easily available and they are choosing to avoid the significant burdens of going public.

“If you want to be exposed to wealth creation you need to be in this space. Public investors gets access after it’s too late.”

Still, he did flag the negatives for investors in private capital like illiquidity and the cost of leverage compared to the past. The amount of capital chasing private credit is also a source of particular concern.