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.

The CFA Institute mission to help the investment industry understand and fully implement net-zero investing is ramping up.

Following the launch of its groundbreaking paper: Net Zero in the Balance: A Guide to Transformative Industry Thinking, the global association of investment professionals continues to highlight the financial risks of climate change and the potential returns to investors in addressing this challenge.

(more…)

CPP Investments, the C$675.1 billion asset manager for the Canada Pension Plan, has already hit its reduced long-term strategic exposure to emerging markets of 16 per cent in a quick paring back of the allocation from 2023 levels when emerging markets accounted for 22 per cent of assets under management. 

Edwin Cass, chief investment officer at CPP Investments tells Top1000funds.com that although the investor still believes there is both an opportunity to diversify and generate alpha in emerging markets because of inefficiencies, that window of opportunity is narrowing.

“This is changing over time due to a number of factors, including geo-political risk and improving market efficiency,” he says.

On one hand, deglobalisation can be positive for emerging market investors because it adds to diversification by decoupling relationships between various trading blocs, he explains. However, geopolitical risk is the “flip side” to deglobalisation and brings real complexity.

“We need to understand the impact that deglobalisation and regional trading blocs will have on sectors and specific assets within the countries we invest in. Due diligence and appropriate investor protections become even more important.”

Successful emerging market securities selection during the past several years has been a source of alpha, and he says CPP Investments has found the strongest returns in emerging market infrastructure, notably through investments in toll roads. For example, the asset manager owns toll roads in Mexico, Chile, Indonesia and India that Cass says “are performing well.”

The energy transition also continues to present opportunities. Investments include renewable energy providers, such as Renew Power in India, and Auren Energia, one of Brazil’s largest platforms for renewable energy and energy trading.

However, more expensive active management in emerging markets is important because these markets are less efficient. And successfully navigating the risks is an intense process that relies on an in-country presence resting heavily on “boots on the ground” to stay close to political and regulatory developments and monitor any impact to existing assets.

CPP Investments has opened emerging market offices in Mumbai and São Paulo to allow it to “do its homework,” better understand the businesses it invests in; the environment in which they operate and sensitivity to local risks. Cass explains that offices in emerging markets also allows CPP Investments which manages assets both internally and with external partners to position itself to partner with the best regional and national firms.

“We also spend time building relationships with governments to understand the regulatory environment in the countries where we invest. These local and regional factors are incorporated into our organisation-wide integrated risk framework, which covers a wider variety of investment risks and includes various types of stress tests on our portfolios.”

“Our presence in the regions where we invest combined with our company-wide focus on building relationships with governments and monitoring regulatory changes also enables us to mitigate issues as they arise.”

CPP invests across 56 countries with more than 320 investment partners. Just over 50 per cent of investments are in North America.

CalPERS, America’s largest public pension fund, is more than halfway towards its goal of investing more than $100 billion in climate solutions by 2030. The investor, which manages $502.9 billion in assets, recently announced it has committed more than $53 billion to climate adaptation, transition, and mitigation efforts.

The investment goal is enshrined in CalPERS Sustainable Investments 2030 strategy where the pension fund pledges to cut portfolio emissions in half by 2030 – on route to net zero 2050 – in spite of the political pushback against ESG investment in the US.

CalPERS’ push into green assets also comes when many governments are trying to drive pension fund investment into green solutions.

“The energy transition underway represents one of the biggest investment opportunities in history,” said CalPERS chief executive officer Marcie Frost. “We are providing the capital necessary to plant the seed for the low-carbon economy of the future.”

In a reflection of the growing allocation, CalPERS is in the process of building out its sustainable investment team to 20, hiring eight more staff members in this area in the next few months.

CalPERS’ latest commitments comprise $3.6 billion in climate solution investments made over 2024 focused on private equity and infrastructure. The pension fund has partnered with asset manager Brookfield and where investments will focus on the clean energy transition, including investments to enhance power grid reliability across multiple Midwest and Mid-Atlantic states.

Last year, Mark Carney, vice chair of Brookfield Asset Management and head of transition investing at the manager, was a guest speaker at the CalPERS investment committee meeting. He said that asset emissions will be inextricably tied to financial performance in the years ahead and argued this is already visible in how low-emitting companies within a sector currently trade at a premium.

CalPERS’ climate investments also include a private equity investment partnership with TPG Rise Climate. The fund focuses on scaling climate solutions globally and the partnership seeks to invest and collaborate in opportunities across the fund’s core themes including energy transition, green mobility, sustainable fuels and molecules, and carbon solutions.

Other climate solutions funded by CalPERS over the past year include an investment in Octopus Energy, a fast-growing renewable energy company based in the United Kingdom. The company uses an advanced operating system to power six million homes in the UK and 60 million homes globally, and is expanding operations into the US.

CalPERS made this investment alongside Australian pension fund Aware Super, both partnering with Generation Investment Management, Al Gore’s investment fund. The Canada Pension Plan Investment Board also increased its stake in Octopus at the time

“We believe that making sound, long-term investments in climate solutions will generate outperformance while also providing the clean energy needed to meet the increased demands that people have for their homes, cars and technology,” said CalPERS CIO Stephen Gilmore.

Beyond the fully executed deals, CalPERS is reviewing an additional $3.2 billion in climate-related investments. The investor said some of these investments could be finalized in the coming weeks and months.

Earlier this year Peter Cashion, managing investment director for sustainable investments told Top1000Funds.com that CalPERS doesn’t target a a fixed number of climate investments for each asset class but focuses instead on a range. He said the aim is to both generate alpha and reduce the carbon intensity of the portfolio. CalPERS approved plans to increase its overall allocation to private markets from 33 per cent of plan assets to 40 per cent.

“We see investment opportunities across the spectrum with the most tangible in infrastructure, private and public equities,” he said.

If successful investment in venture capital relies on accessing top-tier managers, Prabhu Palani, CIO of the $9 billion City of San Jose Retirement System, has got an advantage over others. The pension fund sits in the heart of Silicon Valley’s venture ecosystem, uniquely placed to meet companies, entrepreneurs and fund managers, attend AGMs and glean the latest developments in AI. Not surprisingly, the pension fund also boasts tech and venture expertise on its board.

In another advantage, many VC funds actively want the pension fund in their investor cohort in a rationale that Palani also pushes hard. San Jose’s firefighters and policeman have helped contribute to the community that has allowed Silicon Valley’s technology sector to flourish and become home to some of the biggest companies in the world, and they deserve a slice of the profit too.

“Our beneficiaries have helped create the infrastructure that supports this ecosystem, so they should also benefit from the tremendous wealth in the area. Who better to invest in venture than San Jose Retirement System in the capital of Silicon Valley. We are ground zero when it comes to venture,” says Palani.

For all that, San Jose’s venture portfolio is relatively new. When Palani joined in 2018, the portfolio included buyouts and private debt but there was no exposure to venture. The fund now targets a 4 per cent allocation with long-term partners (rather than GPs “chasing flavour of the month” opportunities) diversified across vintage, stage, and industry, with a tilt toward early-stage investments where valuations have not increased exponentially.

San Jose hasn’t seen any distributions so it’s too early to see how much proximity pays. Moreover, because Palani believes venture valuations are still high, less than half the target allocation has been put to work. He is also wary of the growing trend in multi-billion dollar fund sizes because it is easier for smaller funds to produce the outsized returns of 10-15 per cent. “You are in venture because you are shooting for the stars,” he says.

But because many funds are now coming back into the market to raise more money for the first time since 2021, he believes investors are poised to see true valuations for the first time, increasing opportunities. “This needs to happen in venture,” he says.

It’s an approach that speaks to the wider interaction between the pension fund’s growth and low beta buckets that define strategy. When assets are expensive, Palani drains the growth bucket and switches more into low beta strategies, and when assets are cheap, the team takes from low beta.

Given the growth bucket has done well and US assets, where San Jose is overweight, are at an all-time high, he is eyeing low beta options. For example, ten-year bond yields have picked up, representing an opportunity to increase the allocation to fixed income. The team are currently exploring manager offerings including looking at where to position and if the fund will be paid for longer duration investments, ahead of a new asset allocation study next year.

Elsewhere, he says the gap between developed market international and emerging market equities compared to US equities offers a potential hedge.  San Jose invests in US equities passively on a low-cost basis but takes active risk in US small cap, international developed markets and emerging markets where he argues it’s possible to add value over the benchmark and inefficiencies mean high conviction managers can outperform.

Still, the portfolio remains risk-on, partly because Palani believes another wave of growth could lie around the corner. In a recent post on deregulation (written before Trump’s electoral victory) he argued that the conservative majority in the Supreme Court promises to fan deregulation that will boost stocks like airlines, banking and financial services, energy, transportation, and telecommunications. Businesses that support environmental protections such as alternative sources of energy and climate change may suffer.

“As the pendulum of regulation swings to the side of absence, we can expect a gradual unfolding of the gilded era of The Great Gatsby. Ceteris paribus, pools of capital that remain long equity beta and have the luxury of a very long horizon can ride this wave of economic prosperity.”

He acknowledges that the large exposure to growth factors means if growth does poorly, it will impact the portfolio: in standard deviation terms, the fund targets between 12-13 per cent volatility. But he is also confident that San Jose has the right risk levels and is in a better position than at any other time in the past.

“Whatever happens we have a playbook; we have the governance and confidence of the board and the ability to move quickly with our stella team. Other than that, we don’t have any control.”

Roots of a turnaround

Much of his confidence in that playbook is rooted in the fund’s dramatic turnaround. In 2020, around 35 per cent of the portfolio was in low beta because growth assets were expensive. The outsized allocation comprising short-term fixed income and market-neutral hedged strategies left San Jose falling further behind peers, languishing in the bottom 1 per cent of peer public pension plans based on 1-3-5 and 10-year numbers.

Meanwhile, 15-20 per cent of the general plan budget was being ploughed into funding the pension system every year.

The team had been looking for opportunities to increase risk ever since 2018 when Palani put new risk parameters in place to allow more investment in growth assets. Yet as assets grew steadily pricier, they did the reverse and put more capital in the low beta bucket.

“It was a tough decision. Low beta strategies in an environment that favours high beta are not going to do well but we weren’t ready to pull the trigger; it was the wrong time to increase risk,” he says.

As it was, Covid hit and the market dropped 35 per cent from peak to trough in one of the sharpest bear markets in history. San Jose leapt at the once-in-a-generation opportunity to start buying and snapped up growth assets at rock-bottom prices. “You buy things when they are cheap, but you don’t know the catalyst that will bring assets to their full valuation. Healthcare solutions and monetary behaviour are out of our control, and we didn’t expect the turnaround to happen that quickly.”

A key part of the decision-making process included a belief that challenges in the market were not structural like they were in 2008. The downturn had been driven by a healthcare event that would be solved by a vaccine; the world had come to a screeching halt, but it would restart with a solution. When the government threw trillions at the problem and the market took off, San Jose was the second-best performing public pension fund in the US.

Once again, the team had to resist the urge to do the obvious thing and pull back.

“We knew we’d had a good run but we felt that we had come to the right level of risk. So give or take a few tweaks the decision was made to keep the growth allocation high,” he concludes.