AP3, the 549.1 billion Swedish kronor ($51.8 billion) buffer fund, has benefited from tactical asset allocation in recent months, with CIO Jonas Thulin arguing TAA is a potentially transformative component of portfolio strategy.

Thulin believes the strong rebound in the S&P 500 following the sharp declines associated with President Trump’s tariff announcements, was justified and even predictable based on historical market patterns. The core drivers of the rebound are improvements in liquidity in the US financial markets starting around April 8-9, post ‘Liberation Day’ but before Trump’s rollback – or downgrading – of his tariff policies.

Thulin says this pattern was also visible in the market rebound seen in March 2020 when he successfully deployed similar models to benefit from market movements.

In early April, AP3 was underweight equity and even short the S&P 500, at which point modelling showed that market liquidity had suddenly improved. AP3 took profit in short positions and flipped to being overweight US stocks to take advantage of the market trends.

The buffer fund was using a model that focuses on the price of liquidity in the US bond market as a key indicator. Thulin explains that when liquidity conditions improve significantly, it tends to trigger a strong “relief rally” – any ease up in liquidity is one of the classic “buy signals” for the stock market, he says.

He added that this liquidity improvement also coincided with a strong cyclical rebound in the US economy, further boosting the stock market.

“The important thing to emphasise here is that we run thousands of models, but this is one of the ones that we use to see what tomorrow will bring,” he said in an interview on Swedish TV translated into English.

Listen to the markets, not the media

Thulin notes that although the media is still reporting concerns about the US economy the market is not showing the same level of concern.

He says that data shows China has lowered export prices to offset the impact of tariffs which in turn could reduce the impact on US CPI. For this reason, the US could scale back tariff levels. In this scenario inflation in the US is expected to continue declining, which should lead to rate cuts from the Fed, while other factors like falling housing costs could also outweigh the impact from the tariffs.

“The interesting thing here is not whether this is right or wrong, or naive. The interesting thing here is that the market is going for this – right or wrong. And now the market, just like American consumers, thinks that the US seems to be heading in the right direction.”

Thulin’s observations on the benefits of tactical asset allocation are laid out in greater detail in a paper he co-authored earlier this year in collaboration with the University of Oxford, Duke University academics, and Man Group.

It espouses the benefits of market timing to tactically shifting portfolio allocations to capture gains from anticipated market movements triggered by geopolitical volatility.

“Far from being a speculative endeavour, market timing, when executed with skill and discipline, is a powerful tool for navigating the complexities of global financial markets. We propose that market timing should be seen as one of the levers that allocators employ in seeking to deliver returns to their investors across the cycle,” the authors state.

The value of market timing lies not in the use of a particular indicator but in the ability to combine diverse signals and adapt them as conditions change. Equally important, and arguably less understood, is the role of time-varying risk. Financial markets are not static; they oscillate between periods of stability and turbulence, with changes in volatility, liquidity and correlation structures often occurring rapidly.

“If a (small) percentage of managers can add value through timing strategies, the presence of such skill challenges the narrative that passive investing is universally superior. Findings also suggest that active management is most relevant in market environments characterised by complexity and rapid change – conditions under which passive strategies may fail to respond quickly enough.

“Market timing, long looked at askance in both academic and professional circles, emerges from our analysis as a viable strategy – when it is approached with the requisite nuance. While the prevailing literature highlights the difficulty of achieving consistent outperformance through timing, it often overlooks the meaningful returns that a subset of highly skilled managers can generate. Our findings support a reframing of market timing discussions to acknowledge the role of advanced, dynamic strategies that go beyond simplistic signals.”

The paper states how analysis of market timing also underscores the need for continuous innovation in market timing methodologies. The most successful approaches are fluid, allowing for the ongoing refinement of models and the incorporation of new data sources.

While market timing is not a universally attainable skill, it isn’t the impossibility that traditional narratives suggest.

“For those willing and able to rise to the challenge, market timing – far from being a speculative gamble – is a potentially transformative component of portfolio strategy,” they conclude.

The US state of Oregon is on the cusp of passing legislation that will require the $100 billion Oregon Public Employees Retirement System to invest in clean energy wherever possible as it aims for a net-zero portfolio by 2050. The state’s treasury previously directed the fund to engage more with private markets fund managers on emission reduction goals, but identified public equities as the area where it can have the most impact on the carbon footprint.

The US state of Oregon is on the cusp of passing legislation that will require the $100 billion Oregon Public Employees Retirement System (OPERS) to invest in clean energy wherever possible and slash its carbon footprint, bucking the anti-ESG trend elsewhere in the country. 

HB 2081A, or Climate Resilience Investment Act, passed the Senate this Tuesday with an 18-10 vote, including the support from one Republican Senator Dick Anderson. The bill still needs the signature from state governor Tina Kotek to become law.  

OPERS wants to achieve a net-zero portfolio by 2050, with an interim target of a 60 per cent reduction in portfolio emissions by 2035 compared to a 2022 baseline. The fund is already changing how it works with private markets fund managers to realise these objectives.  

In a 97-page net-zero plan published in 2024, the Oregon state treasury directed OPERS to incorporate a portfolio’s emission reduction goals into fund manager due diligence in private markets and increase the share of impact fund investments.  

The report identified real assets, such as infrastructure, but not including real estate, will be one of the biggest roadblocks to a net-zero portfolio. It represents 10.1 per cent of the overall allocation at the end of June 2024, but 30 per cent of its emissions according to the 2022 baseline as reported at the end of 2023. 

OPERS’ real assets investments consist of some 70 per cent in airports and bridges, and 30 per cent in natural resources such as commodities, timber, energy, and agriculture – all hard-to-decarbonise industries, the treasury said. 

The fund also has an outsized private equity allocation which came to 26.9 per cent in 2024, compared to the 14 per cent US public pension peer average, according to figures from the American Investment Council. While it is not as emission-intensive nor as hard to decarbonise as real assets, the treasury highlighted some difficulties in controlling the sectors it invests in.   

“We are not choosing companies; we are choosing strategies and the right people to implement those strategies. The managers then go on to select companies based on those strategies, criteria, and their own best judgment,” the report said. 

Changes to public equities management 

However, public equity is where the treasury believes the fund can make the most impact because of its high “emission intensity” – calculated by dividing financed emissions by the capital invested. The asset class accounted for 23 per cent of total allocation in 2024 and 47 per cent of portfolio emissions based on the 2022 baseline, 36 per cent of which is caused by active strategies.   

Specifically, OPERS discovered that it has a higher level of fossil fuel exposure than the MSCI ACWI index due to its investment process and selection of risk factors. A low volatility strategy in public equity has led to a higher allocation to utility companies, for example. 

The treasury wants to bring OPERS’ active portfolio emission intensity in line with the MSCI ACWI benchmark, increase active “climate-positive investments” and switch passive investments to climate-aligned index, in addition to ongoing engagements and stewardship efforts. 

Progress 

OPERS is making headway in achieving its net-zero goals. In an annual update 10 months after the initial report, the treasury said OPERS has committed capital to two climate-focused real asset projects in 2024 in green hydrogen and battery storage. In private equity, it invested in a company that provides ESG data and benchmarks for real assets, as well as an outdoor living product manufacturer that uses recyclable plastics. 

Commenting on the  Climate Resilience Investment Act’s passage, state treasurer Elizabeth Steiner said it “is a clean energy investment law, not a divestment mandate”. Under the act, OPERS will need to “actively analyse and manage the risks of climate change”, including reporting on scope 1 and scope 2 emissions of fossil fuel investments, and reduce its carbon intensity through “a preference for investments that reduce net greenhouse gas emissions”.   

The treasury established an advisory group in 2024, comprised of representatives from public employee unions and OPERS retirees, which meets at least semi-annually and provides feedback on the fund’s net-zero progress.  

Another bill introduced this year, SB 681, is seeking to enact a five-year pause that bans the Oregon treasurer and Oregon Investment Council from investing OPERS and other state capital in private funds that deal heavily in fossil fuels. The bill has not been progressed from the Senate since March but received overwhelming support in its first public hearing.  

One of the most prominent and successful of the United Kingdom’s eight Local Government Pension Scheme (LGPS) pools, the £31 billion Brunel Pension Partnership, renowned for its responsible investment strategy, has been told by the Labour government to merge with another pool as it begins enacting plans for fewer, larger pools to better manage the £392 billion LGPS to “back Britain” and drive investment in productive assets.

Brunel, together with £52 billion ACCESS which manages assets for 11 LGPS pension funds in southern England, has been told their business plans don’t meet the government’s vision for the future of the LGPS. Both must now notify ministers which other pool they will merge with by the end of September.

The decision has blindsided Brunel because other LGPS pools such as the £25 billion Wales Pension Partnership and £62.7 billion Northern LGPS (a partnership between Greater Manchester Pension Fund, Merseyside Pension Fund, and West Yorkshire Pension Fund) were given the greenlight on their pooling plans but are not Financial Conduct Authority regulated – a key government requirement.

In a statement on Brunel’s website, chief executive officer Laura Chappell outlined how Brunel has met other pooling criteria it was tasked to achieve. Around 90 per cent of client funds’ assets have transitioned to the pool; cost savings amounted to £46 million per year by 2023-24, and Brunel also has a large allocation to the UK – 32 per cent of all pooled AUM was invested in the UK at the end of Q1 2024.

“In short, we did not simply meet the initial aims of pooling: we exceeded those aims and blazed a trail in Responsible Investment across the global asset owner space. For these reasons, we strongly reject any suggestion that weaknesses as a pool explain the government’s recent invitation to Brunel’s partner funds to seek an alternative pooling arrangement,” writes Chappell.

A blow to responsible investment

Brunel’s achievements in responsible investment are particularly noteworthy. Brunel staff hold positions including chair of the Institutional Investors Group on Climate Change and in the Investor Advisory Group for ISSB. Brunel also contributed to the investment industry’s most widely-used net zero framework and has pioneered Paris-aligned passive indices.

Brunel’s expertise and wide ESG offering to client funds may not be matched in investment strategies offered by other pools.

Writing in a personal capacity on LinkedIn, Adam Matthews, chief responsible investment officer (CRIO) at Church of England Pensions Board said:

“I personally view [Brunel] as one of the most credible practical examples of what it is to be a responsible investor. Be under no illusion what you have pioneered and driven has made a real world difference.”

Costs for ACCESS

ACCESS, which has already pooled £50 billion from its 11 partner funds, also criticised the government’s decision and warned that a merger with another pool would incur significant additional costs.

In a statement, the pool said a merger with either Local Pensions Partnership or Border to Coast Pension Partnership would incur estimated transition costs of between 28 and 36 basis points, based on the value of active listed assets already pooled. This equated to approximately £100 million, and double the cost of building its own vehicle – something it called  “unnecessary expenditure of tens of millions of pounds and a financial burden on our plan members which could alternatively be used to invest in U.K. productive finance initiatives.”

Last year, Chancellor of the Exchequer Rachel Reeves travelled to Toronto where she gleaned ideas from Canada’s Maple 8 bosses on how to create a “Canadian style” pension model in the UK. LGPS consolidation is expected to be a key pillar of the upcoming Pensions Bill, which is anticipated to be brought before the UK parliament in the coming months.

Australia’s Future Fund will partially internalise its direct local infrastructure and property investments to cut costs and boost flexibility in the wake of its growing concerns about investing in the US.

The shift aligns with the sovereign wealth fund’s revised government mandate to consider investments across three national areas of priority: the energy transition, the supply of residential housing, and Australian infrastructure.

Future Fund chair Greg Combet said this increased focus on domestic real asset exposures had prompted the fund to seek government approval to invest in local infrastructure and property assets – a first since the fund was established nearly two decades ago.

“This additional capability is intended to help access new opportunities in Australian infrastructure and property that we might otherwise be unable to access efficiently, or which external managers may not be focused on,” he said in a speech to a Committee for Economic Development of Australia (CEDA) event in Sydney.

It is understood that this may also include defence-related infrastructure assets where the pool of existing fund managers is small or non-existent.

While the majority of Australia’s superannuation funds have internalised much of their asset management, the Future Fund employs more than 100 external managers, which manage the bulk of its A$240 billion ($155 billion) barring some co-investment sleeves.

“We do not anticipate a significant shift away from the way in which we partner with our external managers,” he said.

The move is also viewed as a way to bring more dollars home as the fund grows increasingly cautious on the investment and geopolitical outlook for the United States. The Future Fund has more than 70 per cent of its assets offshore, well above most local super funds, which hold less than half of their portfolio offshore.

Combet said the election of Donald Trump as US president last year has “added layers of volatility and uncertainty”, adding that the Future Fund was focused on the US’ retreat from global security and economic arrangements, and on the uncertainties that have arisen as a result of that waning influence.

“We’re also mindful of the geopolitical contest between China and the US, including the race to dominate in artificial intelligence capability,” he said.

“The US tariffs and their likely macroeconomic impact are on our mind… The dollar has fallen about 10 per cent this year against major currencies, and continuing depreciation may be significant for global capital flows of asset values.”

Investors also have to contend with the “big beautiful bill” – the US’ budget reconciliation bill – which contains Section 899, which “potentially and dramatically escalate” tax rates for foreign institutional investors like the Future Fund.

“In combination, these policies and dynamics are making the US a more risky and uncertain investment destination,” Combet said.

“The factors I’ve highlighted are alerting investors that elevated risk demands a higher return on capital and that they may be overweight US assets.

“So while the US will undoubtedly continue to offer many attractive investment opportunities at the margin, I think it’s fair to say that it’s become a less attractive investment destination than it was, and maybe likely to see a smaller share of capital flows going forward.”

Those changes, if not permanent, will be long-lasting, Combet said, and the Future Fund is reviewing its short- and long-term investment scenarios.

“What will the investment environment look like under the Trump Administration and beyond? It seems unlikely that even dramatic reversals of Trump policies would engender a return to business as usual approach from long-term investors now that some doubt has been sown.

“And the trend towards deglobalisation, greater political tensions, geopolitical tensions and multi-polarity pre-date Trump and can be expected to post-date the Trump era. We certainly don’t think at the Future Fund that the dynamics I’ve spoke of will pass and return the world to the norms of yesteryear.”

Combet’s comments echoed Future Fund chief investment officer Ben Samild’s comments earlier this month at the Australian Fiduciary Investors Symposium hosted by Top1000funds.com’s sibling publication, Investment magazine.

“The global institutional order is changing,” Samild said. “The stability of the post-Bretton Woods II institutional framework may be fracturing. Portfolio construction against this backdrop is considerably more challenging and you have unsatisfactory choices.”

Samild said several forces had raised the risks for offshore asset owners investing in US dollar-denominated assets, including China’s waning appetite for US dollar assets and accumulating large foreign exchange US dollar-denominated reserves in response to the Trump administration’s hefty proposed tariffs.

“Is the global savings flywheel reversing? The US has captured 70 per cent of global savings – Europe, Japan, the most important surplus countries, Canada, Australia. I think China’s out. Many of the policies that have been announced or discussed make it more difficult for capital providers in all these countries.”

Samild said the fund viewed FX as the most important lever in its portfolio.

“It’s the least spoken about but the most important one. It changes your returns over time more than any, and it has more nasty trade-offs that you really have to think through than any of the other things that we do.”

The fund takes an active, whole-of-portfolio approach to managing currency through overlays rather than allowing FX exposures to be shaped by its underlying investments.

Samild said the Future Fund was now questioning three core beliefs about the Australian dollar that had held up over decades:

  • The Australian dollar will (on average) exhibit pro-cyclical behaviour against a basket of developed market currencies.
  • Australia will (on average) have somewhat higher real interest rates than other developed markets.
  • Developed market FX is a valuable source of diversification, particularly in stressed environments, and for liquidity risk reduction.

“We have changed our duration exposure,” Samild said. “We changed our strategic FX, we changed our tactical FX. You have to be really careful about correlation.”

“We think we might be in a world which is even harder than the one I’ve described, because our running correlation, from an Australian dollar perspective, might turn the other way, but your tail correlation in an event may still be Australian dollar down.

“It’s very hard to take on this correlation risk blind now. So maybe you buy gold, maybe you buy alternative reserve currencies, maybe you use hedge funds instead, maybe you use long vol, maybe you use options yourself. Maybe you do some version of all of this. But this is all more challenging than reliable, scalable, rewarding portfolio anchors like US duration and FX have been.”

The message for investment staff at a recent board meeting of the $211 billion Washington State Investment Board (WSIB), guardian of the state’s $172 billion pooled retirement assets, contemplating a standalone allocation to private credit was clear.

The success of the portfolio will hinge on investing with the very best GPs and the patience to wait for spaces in these funds, placing manager selection front and centre to the strategy.

Institutional investors have steadily increased their allocation to private credit since the GFC, when new restrictions limited banks’ ability to lend to companies. However, WSIB, famed for its 25 per cent allocation to private equity, still only invests in private credit via a small allocation in its innovation sleeve.

Ongoing discussions will come to a head this autumn when the board will decide on the extent of the new allocation.

Their role making the right decision was also underscored by staff. WSIB’s long-term returns are driven by allocation decisions that have allowed the investor to weather significant downturns and recover over the years. Previous important asset allocation decisions include the early adoption of private equity in 1992, integrating a global focus to equity over time, and shifting from fixed income into real estate and tangible assets.

Risk and returns

Investment officers DuWayne Belles and Julia Ferreira sketched out the shape of the new allocation in a detailed presentation.

Ferreira said losses are part of the course in credit investing, and are allowed in the underwriting. However, because credit sits at the top of the capital stack and investors have priority claims over assets, it is less risky than other types of investment.

Equity investors gain exposure to the upside and growth, but credit investors can control losses and are compensated for risk with a contractual return. In a downturn, there is a higher chance of recovery.

WSIB could expect a 6.6 per cent return over the course of 15 years.

Key risks for corporate credit investors include the borrower not repaying the loan in times of market stress or higher interest rates. Moreover, investors’ ability to derive forecasts from historical data is limited because private credit doesn’t go back as far as other assets and the sector hasn’t experienced a severe downturn.

Staff explained that it will be difficult for the investment team to know the specifics of the individual companies in which WSIB invests. They will have “a good sense” of the managers’ strategy and the sectors, but one portfolio could have hundreds of positions. Moreover, managers’ strategies are not clean cut. Some have crossovers between buckets with senior loans alongside a few subordinated deals, for example.

Mid-market firms make up a large proportion of the investable universe and are often backed by private equity firms. A key element of strategy would involve limiting the overlap with debt strategies in real estate and tangible assets to reduce aggregated risk, and the board heard how staff favour unlevered strategies.

Belles and Ferreira added that the overlap with private equity is limited because private credit is more diversified at a manager level and ticket sizes are smaller; the US and European mid-market is a large space and WSIB’s private equity allocation is more focused on large buyouts because of its size. Preventing the risk of overlap requires understanding the dynamics of the whole portfolio and its most concentrated holdings.

Shape of the strategy

Staff suggested an even split between core (direct lending) and satellite (opportunistic and distressed debt) strategies.

Direct lending allows investors to tap into recurring cash flows and is lower risk. They represent the core of today’s private credit market and loans are usually floating rate, providing an alternative to fixed-rate investment-grade bonds.

Opportunistic credit strategies in the satellite allocation would typically involve lending to a company that has gone through a period of underperformance or change of leadership but is on a path back to profit. Distressed investment involves lending to companies in need of capital where revenue streams have been impacted. In this case, investors can purchase investments at a discounted level and benefit from returns from a higher recovery value. Distressed investments are counter-cyclical, and are attractive in market dislocations.

WSIB would invest via SMA as the sole investor in customised vehicles, however satellite investments would remain in traditional drawdown vehicles.

The $23 billion Toronto-based Colleges of Applied Arts and Technology Pension Fund (CAAT), a scheme for employees in colleges across Canada, is increasing its allocation to real assets in line with a new asset liability study completed last year.

The investor is targeting a 25 per cent allocation (up from 20 per cent) to infrastructure and real estate in an iterative approach that has a global focus but has most recently comprised new assets in Canada’s transition economy.

“We are happy with the progress we are making, but we still have a lot more to do,” says chief investment officer Asif Haque in an interview with Top1000Funds.com from the fund’s Toronto office, home to the 23-person investment team.

“We are big enough to be a meaningful partner to private market GPs, but we are also still small enough to be able to allocate to newer managers with smaller fund sizes where return expectations can be more interesting.”

CAAT targets 25-30 per cent of the real assets portfolio in co-investment opportunities and nurturing the long-term relationships that open the door to co-investment opportunities is a key seam to strategy.

It’s not just real assets that are managed externally. Around three quarters of the portfolio is mandated to external managers in relationships that date back 10 and in some cases 20 years. Haque says CAAT believes in active investment and the ability to add value over what markets are providing.

The active management program contributed to the fund outperforming its policy benchmark by 1.5 per cent annually, net of fees. “Active management is a meaningful contributor to the overall health of the plan,” he says. “We take the big strategic decisions internally around asset mix and ranges, our investment policy and any tactical decision making. But day to day asset management is outsourced to a large group of external managers across public and private markets,” says Haque.

Selection and sizing are based on alignment of interest; the extent to which managers offer a differentiated and repeatable investment process, and how they respond to and are resilient to different market environments to deliver long-term value.

Characteristics that have been tested in recent months, particularly.

The sharp market moves triggered by the Trump administration’s ongoing tariff strategy is top of CAAT’s discussions with managers. The internal team have begun scenario planning and stress testing how new terms of trade might impact the global economy and investment going forward. They are trying to understand what recent market moves might mean longer term for the role of the dollar in the global financial system, and how this might impact capital market assumptions, geographical diversification and CAAT’s currency hedging strategy, for example.

“We are looking at the threats and opportunities that weren’t there but are now there,” he says. “We haven’t come to any conclusions, but we are thinking about world and talking to our external partners about issues with a long term focus.”

However, nothing will be done in the short term. Any changes to incorporate new investment expectations into CAAT’s asset mix will be integrated into the next round of asset liability modelling, which won’t happen for another two years.

Assets currently include private equity (17 per cent), credit (8 per cent), nominal bonds (12 per cent), inflation-linked bonds (5 per cent), real assets (25 per cent) and commodities (3 per cent).

Around 12 per cent of the portfolio is in interest rate-sensitive assets, 33 per cent in inflation-sensitive assets and 55 per cent in return-enhancing investments. Around a quarter of the portfolio is invested in Canada.

Passive investment is confined to part of the Canadian bond portfolio and a US S&P 500 equity exposure, with the beta from the US allocation underlying a portable alpha strategy.

In 1995, the plan spun out from the Ontario Municipal Employees Retirement System, which acted as trustee, to assume a jointly-sponsored pension plan governance structure and invest on its own. Back then, CAAT had only $3 billion in assets under management.