HESTA is laying the groundwork for a more systematic framework for using AI across its total portfolio, solidifying use cases in research, forecasting, risk management and private assets that all centre on the objective of allowing the A$98 billion ($64 billion) fund to “see risks earlier and clearer”.  

But with a huge number of potential AI applications in investment and only limited resources to implement them, HESTA is striking a careful balance of identifying areas where it can add the most value add while introducing the least complexity to its operations, says head of portfolio design Dianne Sandoval. 

“AI is not really going to give us a magic formula for higher returns, but it just gives us a better pair of glasses,” Sandoval says in an interview. “It has the ability to accelerate our understanding of factor exposures in absolute terms, but also across asset classes and really understand the liquidity and dynamics, which ultimately gives us just sharper insights on how to navigate uncertain markets.” 

Data ingestion and processing are two elements of research and forecasting where AI can make an outsized impact, she says. Some use cases at HESTA include scraping the internet for information that can inform early forecasts on job-growth data from its economists; and forecasting long-term S&P 500 returns using neural networks.  

The technology can also extract changes in soft languages in financial reports that may, for instance, indicate an improvement or deterioration in sentiment around issues such as responsible investments, and which HESTA uses to monitor companies on its watch list. 

“With research or risk analysis, with stress testing, with data mapping and cleanup, AI can do it much more efficiently because it’s repetitive and rules-based. But the judgment and analysis still sit with the team,” says Sandoval, who leads the research and asset allocation processes and oversees the rebalancing, currency overlays and portfolio risk management. 

In private markets, AI is handy in capital-call management which has taken an “egregious amount of groundwork and [been] very tedious”, she says. “Even things like cleaning up background checks and pulling data out of dusty PDFs that have forced us to do capital calls manually, AI does that much more efficiently.” 

The human touch 

But human-driven principles remain, especially in private markets. Sandoval says AI cannot yet replace investors conducting due diligence, in things such as measuring trust or the character of a management team and its ability to perform. 

Before moving to Australia, Sandoval held senior roles in some of the world’s biggest and most complex asset owners, such as CalPERS and Saudi Arabia’s PIF, and she says AI integration, like any change management, often takes time. 

“There’s obviously an upfront cost in doing this, and that’s why – in order to justify that – you really have to be thoughtful and cognisant of how I get the lowest hanging fruit,” she says.  

“And costs matter. Anytime I can reduce costs or reduce operational inefficiency, that’s a huge benefit for members as well. 

“Once you get through all of those, then you could start adding the higher value-add that takes more time, effort and institutional buy-in.” 

The ultimate item on Sandoval’s AI wish list is a structure that would allow HESTA to see its total portfolio all at once – including patterns across markets and asset classes – so that should another ‘Liberation Day’-style shock occur again, the fund can map its key positions, protect the portfolio and add some tactical positions.  

During the market turmoil in April, HESTA was able to make some trades with the liquidity it had on hand, adding to equity risk and trading FX as the Australian dollar collapsed. But there were too many moving pieces: its total fund management system, SimCorp, tracks the total portfolio exposures, but is separate from the risk- and liquidity-management systems.  

“We did that by coming together all in a room and using different systems. With AI, if all of these systems are more and more integrated, you would reduce some of the manual processes we had to do during those moments and make decisions even faster,” Sandoval says.  

“We’re not at that point, we’re mapping bits and pieces of processes, but when we can get an efficient risk map into our analysis and our key positions, as well as potential opportunities, that’s when we’ll see the whole field at once.” 

The US Department of Labor has publicly condemned the OECD for “pushing members to politicise their pension systems by integrating ESG factors unmoored from returns”.  

The Employee Benefits Security Administration, a DoL agency that oversees more than $14 trillion of the nation’s private retirement assets, launched a fresh attack on the OECD and its responsible investment principles for pension funds, declaring that it will withdraw support for such policies and that ESG is “nothing but a Marxist march through corporate culture”.  

Justin Danhof, senior policy adviser at EBSA, delivered the searing words as part of a speech outlining President Trump’s pension investing priorities to an OECD pension conference in Paris on Tuesday to a gasping crowd, one source attending the event told Top1000funds.com. 

Danhof, who is a staunch “anti-woke” crusader and previously called BlackRock, Vanguard and State Street “behemoth ideological cartel” over their ESG investment policies, said the US would not “support these policies, even tacitly”. 

“ESG, at its core, looks a lot like a Marxist march through corporate culture. What is the point of Marxism? The complete destruction of capitalism,” Danhof said. 

“If America and other OECD member companies hamstring our nations’ capital markets and pension systems with superfluous ESG costs, it only serves to benefit authoritarian regimes that do not engage in such frivolity,” he said. 

“America faulted with ESG. We are now on the mend. We invite you to join us.”  

Danhof also made a swipe at diversity, equity and inclusion which he said is a concept “that killed meritocracy leading to corporate mediocracy, which, in turn, sacrifices investment and pension returns”. 

The US DoL, under the Trump administration, is seeking to roll back a Biden-era regulation which explicitly allowed private pension funds to consider ESG factors when investing assets under the Employee Retirement Income Security Act (ERISA). The Democratic rule already received several state-level challenges, including a lawsuit from a coalition of red states led by Utah in a Texas court, which was ultimately dismissed.  

The DoL under Trump intends to finalise new rules by May 2026, which will require pension plans to invest “based only on financial considerations relevant to the risk-adjusted economic value of a particular investment, and not to advance social causes”, according to the latest EBSA regulatory agenda.  

The US pension system will focus on the “exclusive purpose” of providing benefits to plan participants, Danhof said, highlighting the limited adoption of ESG investing in corporate retirement plans (ERISA qualified funds) as a result of its “clear standards” against “politically motivated investments”.  

“That’s because ESG is not just some side-bar political or policy issue. It’s about sovereignty and security as well. Authoritarian leaders love when our member nations embrace ESG. Why? Because it lessens your prosperity and makes you less competitive,” Danhof said.  

Danhorf’s criticism of the politicisation of pension investing should be viewed in the context of US public pension plans which have elected officials as board members and over recent years have been criticised for restricting or directing pension investments. [See The politicisation of investments at US public funds] 

An OECD spokesperson declined to comment. 

In a separate speech at the OECD conference on Thursday, the US Securities and Exchange Commission (SEC) chair Paul Atkins also took aim at the European Union’s sustainability reporting requirements for corporates, describing them as “prescriptive” and “burdens” to US companies.  

“As Europe seeks to promote its capital markets by attracting more companies and investment, it should focus on reducing unnecessary reporting burdens on issuers rather than pursuing ends that are unrelated to the economic success of companies and to the well-being of their shareholders,” he said.  

The investment team of the Future Fund, Australia’s A$252.3 billion ($166.53 billion) sovereign wealth fund, is weighing opportunities for it to expand the active equity program it re-launched in 2023, according to chief investment officer Ben Samild.

“We’re constantly analysing where the best place for our equity portfolio is and how it is best expressed,” Samild said on a media call for the Future Fund’s results, which saw it return 12.2 per cent in the year to June 30, adding A$27.4 billion ($18.09 billion) of assets under management through investment returns.  

“There are real opportunities elsewhere in other markets where we can observe real inefficiencies; that’s a long-term framework and a long-term program. We’ve done more in emerging markets this year and would expect other parts of the world to be included over the next couple of years.” 

The Future Fund shuttered its active equity program in 2017 after deciding that central bank policy had warped fund manager returns to the extent that it would get more value from investing in listed equities through passive strategies.

Since it reactivated the program, the Future Fund has invested in a secretive Japanese activist hedge fund Effissimo Capital Management, which has stayed away from the media spotlight despite playing a decisive role in several of the biggest governance stories in Japanese corporate history, including by successfully calling for a probe into allegations that Toshiba had pressured investors into voting for resolutions recommended by its management.

That followed another investment in Japan’s equity market through Wellington Investment Management. It has also invested in active Australian small caps through Maple-Brown Abbott.

While the Future Fund has not yet updated its manager list to include any new active emerging market equity managers, it has repeatedly flagged that it would look to diversify away from the US amidst growing political uncertainty. In a speech in June, Future Fund chair Greg Combet said that the US was becoming a “more risky and uncertain investment destination” and that more time and resources needed to be devoted to investigating other markets including Japan and the EU. On Tuesday’s call, Samild said that the Future Fund had been moving to invest in opportunities across asset classes in both those jurisdictions.

“We have been investing actively across the capital stack in both [Japan and Europe]. We’ve been super interested in European credit opportunities and have been doing a lot of work in that space, and in Japan across the board: property, public equity, private equity – we’ve been very active.”

But while Samild noted that the US market has been highly concentrated in a handful of technology stocks, he also said that allocations to it have been “so well-rewarded” and are “very difficult to step away from”.

“Thematically it’s obviously super interesting, because to step away from that concentration you’re stepping away from a particular technology scenario… which is quite hard and we’re not sure that we have a differentiated view to the market on the winners and losers and outcomes of that,” Samild said.

“We try to be very thoughtful about that without being hubristic. So whilst we have taken opportunities all over the capital stack, private and public, in order to diversify across multiple potential future worlds, the actual index concentration isn’t one we’ve tried to mess around with, as it were, because we feel like, particularly in the US, you’re having to take a view that we’re not comfortable taking yet.”   

As at June 30 2024, the Future Fund had 43 per cent of its listed equities in the United States. Australian equities accounted for 27 per cent of its listed equities exposure, emerging markets the next highest exposure at 12 per cent.

Samild said that some of the Future Fund’s more active portfolio decisions over the last year “played out very pleasingly”. One of those was a move to increase its allocation to risk assets in the months prior to Liberation Day, spending a bit of the significant cash pile it had built up.

“That came as a result of pretty deep thinking about what we thought the various political and policy cycles would likely mean for risk assets and equity markets in particular,” Samild said.

“It’s definitely paid off; it’s been a really strong year for markets and it was very, very accretive to returns. We also thought there would be more significant volatility… and we did quite a bit of work in making sure that our portfolio was well-prepared from a liquidity and protection and diversification perspective.

“Liberation Day was a good example of that, and the fund and the investment team were very well prepared for those events and were able to really lean in to risk as markets bottomed and that was quite a profitable outcome.”

The Future Fund recently received permission from the Australian government to begin making direct investments in Australian property and infrastructure without using an external manager, which it has been required to do since its inception in 2006. 

But while Samild said that the Future Fund hadn’t yet made any direct investments itself, the sovereign wealth fund has been investing in the areas of “national priority” that it must consider under the controversial changes to its mandate made by Treasurer Jim Chalmers, including by increasing its stake in data centre operator CDC.

“We’ve been strong investors (in private markets) since the inception of the fund, and we were able to find some really significant domestic infrastructure opportunities this year,” Samild said.

“Candidly, it looks to us like there is an awful lot of capital needed throughout the developed world, especially in the infrastructure space, but that then floats down through credit and equities and private equity. The cost of that capital seems to be going up, which is a good situation for us, so we’re extremely alert to and interested in all manner of opportunities both domestically and across the world, but in particular Europe and Japan.” 

President Trump has fired the starting gun on encouraging America’s 401(k) plans to invest in private assets but corporate plans remain concerned about fees, structures and litigation. Meanwhile, many defined benefits funds are voicing their concerns about how it might impact access to investments, and alpha, and change the asset class.

President Trump’s latest executive order, the snappily titled “Democratizing Access to Alternative Assets for 401(k) Investors”, is widely viewed as firing the starting gun on increasing sophistication and diversification in the vast $8.9 trillion asset pool held by the country’s defined contribution corporate pension plans.

It is expected to provide a boon for private asset providers who have lobbied long and hard for regulatory support to market their wares to DC funds which overwhelmingly still invest in low-cost, passive strategies.

Moving into private markets brings a multitude of complications for DC funds in the US, not the least because 401(k) funds have seen healthy returns off the back of their existing strategies thanks to record-breaking US equity markets.

Investment executives at DB funds, which increasingly rely on private assets for alpha, are also voicing their concerns about how the private markets landscape could change with the advent of DC investors.

It leaves experts Top1000funds.com spoke to for this story questioning if America’s 715,000 corporate plans will rush to abandon index-tracking stocks and bonds and follow DC investors like Australia’s superannuation funds into global private equity, real estate and infrastructure any time soon.

Most importantly, one reason progress could stall is the executive order doesn’t allay fears among US companies of being hauled in front of the courts for how they manage their corporate pension schemes.

Over the last decade, particularly as dollars in the corporate DC system have swelled to dwarf the $3-4 trillion DB industry, companies like Walmart, Boeing and GE, to name a few, have been tied up in costly and time-consuming class action litigation, sued on matters like fiduciary duty, misusing funds or excessive fees. In part, this litigation has resulted in these funds being more risk-averse in their investment allocations.

In 2024, law firms estimate 60 new 401(k)-related lawsuits were filed (there were 100 in 2020) so that although corporate DC funds are already permitted to invest in private assets, most stick to investing in low-fee public markets and steer clear of alternatives or any kind of innovation lest they invite more litigation.

Trump’s executive order pledges to reduce the regulatory burden and litigation risks that have blocked up the system, and commentators believe new guidance will raise the pleading standards for bringing lawsuits and encourage 401(k) plans to consider the investment merits of alternatives.

But the president’s edict doesn’t explicitly resolve the litigation issue that has evolved into ever-changing lines of attack. As it stands, for most 401(k) fiduciaries, the thought of offering private investments simply creates greater liability risk and raises the spectre of more fee-focused litigation given the higher cost of alternatives.

“If I can invest in alternatives in my DB plan, why can’t I invest in the DC plan?” asks the CIO of a $35 billion corporate plan split between a $15 billion DC allocation with “zero exposure” to alternatives and a $20 billion DB asset pool with 20 per cent in alts, speaking on the condition of anonymity. “This democratizes access and that is good, and I have sympathy for this line of thinking.”

However, the risk of litigation and the absence of a track record of investing in private markets among peer DC funds, means he has no plans to change strategy yet.

“There is no upside to do this first. We will wait and watch and see what happens; let others stumble and stub their toe, and then we might do something.”

America’s largest DC plan the $1 trillion Thrift Savings Plan (TSP) doesn’t intend to alter course either. It runs five funds invested in large-cap and small-cap US stocks, government and corporate bonds, and international developed markets in an investment strategy prescribed by law.

“The TSP will not change how it invests based on recent policy changes,” confirms spokesperson James Kaplan.

“Unless the litigation question gets answered I don’t see a lot of up take from 401(k) fiduciaries,” says Dennis Simmons, executive director of CIEBA, which represents around 118 large corporates collectively managing $2.2 trillion across DB and DC plans. “The cost of alternative investments compared to a passive index fund and the litigation environment the way it is, means the pros and cons of alternative investments just won’t get talked about at investment committee meetings.”

Why state-run DC plans might be more enthusiastic

State-run plans hold much less (estimated at $1.5-2 trillion) of America’s total DC asset pool, but they are more likely to dip a toe first. States like Michigan and Alaska have fully transitioned to DC systems for new employees. Elsewhere, public retirement systems like Florida and Oregon have DC plans alongside their larger DB plans, which already have chunky allocations to private markets. These funds could use their scale and capability in alternatives to port over to their DC participants.

O’Meara

Public pension funds are also governed by different laws from corporate plans which means litigation is less of an issue, says David O’Meara, senior director at WTW, head of DC investment strategy. “There is a question of conflict of interest for corporate sponsors that government investment officers just don’t have when it comes to providing benefits for employees,” he says.

It leads him to flag another potential impediment to corporate 401 (k) flows entering private markets: sponsor enthusiasm. Corporate plans are motivated to use alternatives in their DB plans because strong returns directly impact the balance sheet in an explicit benefit. The company is also on the hook for any pension shortfall but in corporate DC plans, the employer isn’t liable for returns.

“In theory, investments in a DB scheme are solely for the purpose of members, but in reality the better the DB plan investments perform, the lower the cash cost and lower the cost of managing the plan for the sponsor,” he says.

Other factors limiting enthusiasm

Even if President Trump’s order sees off class action attorneys, corporate pension funds need to navigate other barriers to entry that will also test their enthusiasm for change. Alternative assets are harder to value and sell than traditional stocks and bonds and will introduce illiquidity, leverage and opacity, demanding a risk tolerance and ability to withstand losses.

It would be wise for 401 (k) fiduciaries to begin by investing in other assets outside stocks and bonds before jumping straight into alternatives, suggests the anonymous CIO.

“Some plan designers don’t even provide access to emerging markets as an asset class. How many understand the risk of illiquidity?” they ask, pointing to the fact that many sophisticated investors were wrong-footed by liquidity gates during the pandemic. “They were qualified investors. My question is, will people really know the risks they are signing up to?”

Investment teams at DB public sector funds that view 401(k) investors in a similar bucket to retail investors, even though 401(k) plans have an employer-based structure, also flag concerns that they will flock to private assets without fully understanding what they are investing in.

“With so many 401(k) plans in the US, there’s a risk of capital chasing the trend without fully appreciating the asset class or its liquidity constraints,” reflects Anne-Marie Fink, CIO of private markets and funds alpha at the $171 billion State of Wisconsin Investment Board which targets a 35 per cent allocation to private markets in the core trust fund over the long term.

Fees are another potential barrier. Few 401(k) plans have any experience of being charged performance fees. The sector’s hyper-focus on fees and a mentality that lower fees are always better, will make alternatives a hard sell. It requires education and endorsement of new concepts like fees also equating to a higher return or protection on the downside, and net-of-fees value for end savers.

Are fees the problem?

Commentators also flag the risk of additional layers of fees being levied on 401(k) plans, similar to retail products where more intermediaries take a cut and the net return for the final customer is degraded.

CEIBA’s Simmons counters that participants will come to understand the pay-off between returns and fees in alternatives.

“Those that have defaulted will say you ‘go ahead and do it for me’, but those that are engaged and want more diversification and the potential for higher returns understand that comes with a cost,” he reasons.

Moreover, DC funds in Australia and the UK are comfortable with the risk-return trade-off, putting in place the right governance frameworks that include professional boards and skilful investment teams.

In Australia, a 30-year old defined contribution system, funds have seen the benefits of investing in private assets. According to industry body the Association of Superannuation Funds of Australia, the average MySuper fund has a 24 per cent allocation to private assets.

Similarly in the UK, NEST, the country’s largest DC fund, has around 20 per cent allocated to private markets and hopes to increase this to 30 per cent by 2030. It has pioneered an investment approach that includes calling its own tune on the fees it is prepared to pay, including refusing to pay performance fees.

“We wouldn’t work with a manager not willing to offer products at a fee the team feels is justified,” says Rachel Farrell, NEST’s director of public and private markets.

Rachel Farrell - Asset Management Business Leader, Alternative and Traditional Investments | LinkedIn
Farrell

Although 401(k) plan participants may not be sophisticated, the idea that plan fiduciaries, skilled CFOs, directors and treasurers of sophisticated organisations, aren’t up to the job is plain wrong, surmises WTW’s O’Meara.  It’s as much of a red herring as the notion that 401(k) plans will suddenly plough into crypto assets, specifically identified as an alternative asset in Trump’s executive order.

“The 401(k) system is using fewer asset classes and has less diversification and less sophistication than any other asset pool in the world not because fiduciaries are incapable but as a consequence of how 401(k) has evolved,” he argues.

Cue another headwind.

In contrast to DB pension funds, the 401(k) system comprises asset allocation structures like target date funds and managed account solutions that are rooted in a mutual fund world. They require investments in the fund are marked to market at the end of each trading day ensuring daily liquidity to rebalance or support plan participants who might leave the company or take a distribution and for this reason are incompatible with private markets.

But proponents argue these structures can still support illiquidity. Cashflows going into 401(k)s are typically positive for the first 40 years and only turn neutral and then negative as people retire. Participants in these funds are unlikely to trade their portfolios and shouldn’t be compared to hot money that moves in and out of asset classes quickly.

Alternatives won’t be offered as separate, designated options in the plan. Instead, participants can wrap illiquid exposures within target date funds selected to match their age, or as part of another co-mingled, balanced fund in a blended and balanced approach.

“401(k) plan participants are as able as any other investors to withstand illiquidity. The idea that funds need to liquidate the entire portfolio in any given day is not a reality and puts an unnecessary constraint on the portfolio,” says O’Meara.

Once again, the UK’s NEST provides a case study in how it could be done. It boldly shaped evergreen investment structures with the UK’s asset management industry to create the type of products that allow it to invest in private markets with the transparency, liquidity and ongoing investment opportunity, it requires.

“In evergreen structures, NEST can constantly monitor deployment, see their pipeline and see money being put to work. In many cases, NEST was the first evergreen fund [a] manager had done, so the structures were really designed in consultation with us,” explains NEST’s Farrell.

Moreover, managers soon realised the cost-saving benefits of not having to raise capital all the time. A saving, she says, which is now accrued to the LP.

Why DB investors are worried

Still, the concept that target date funds resemble institutional asset pools raises eyebrows among DB investment teams, concerned that their ability to access and continue to source some of their most prized returns from private markets will be impacted by a new type of investor that doesn’t have the same long-term horizon.

Like $367 billion CalSTRS’ CIO Scott Chan who oversees a 35 per cent allocation to private markets of which private equity boasts a 10-year return of nearly 13 per cent. Chan says the pension fund will lean into its experience, partnerships and ability to create sophisticated investment vehicles to navigate the next wave of investment into private markets which he predicts will “significantly dwarf” previous flows.

“Whenever the flow of capital starts to happen, it could drive the ability to find excess returns lower,” he says.

It’s a similar story at SWIB where Fink particularly seeks more clarity on how 401 (k) plans will access private equity where SWIB targets a 20 per cent allocation (including private debt).

“We’re cautious about how retail flows might affect institutions so we’re engaging GPs early. The focus is governance, co-investment access and fair fee structures,” she says. “We will continue to advocate for structures that preserve fairness and protect long term returns.”

Texas Retirement System is also concerned about asset managers rolling out new products that will put semi-liquid private market products into the hands of retail investors.

“We are above our allocation to private equity, so we are slowing the pace, but at the same time the largest asset managers are creating products for retail and distribution to deploy products that are coming to market as we speak,” said Neil Randall who oversees TRS’ (overweight) 12 per cent private equity allocation. “Private equity firms with the largest platforms and strongest brands are expected to be the early winners.”

Randall’s main concern involves transparency regarding the amount of retail capital raised alongside institutional capital in a particular fund.

He says the investor aims to work with GPs to devise a cap on the amount of retail money in the same fund they also invest in.  Other potential impacts could also be felt in LPs’ valuable co-investment pipeline if retail investors eat into this deal flow.

“Differing time frames could reduce co-investment opportunities,” acknowledges Fink.

As long-term investors do their best to ready for what lies ahead, another concern looms large. They can’t hide their alarm that the policy shift is a result of an executive order.

“An executive order has made this available, but what happens if another executive order makes it unavailable? How do you unwind it? Nobody knows the future,” says the CIO of the corporate plan.

Whatever the future holds, the genie is out of the bottle.

Canada’s OMERS has warned that investors need to temper their expectations regarding the performance of more recent private equity vintages, as the favourable environment of high valuation multiples and low interest rates that spurred over a decade of superior returns in the asset class begins to fade.  

But the maths around another investor favourite, private credit, still “looks reasonable” despite tightening spreads, according to executive vice president and head of Asia Pacific for OMERS, Ashish Goyal.  

The comments offer a glimpse into how the C$138 billion ($100 billion) fund is thinking about the two private asset classes. OMERS has one of the highest unlisted market allocations among global pension funds at 69 per cent, with 19 per cent in private equity and 13 per cent in private credit. The remainder consists of infrastructure (22 per cent) and real estate (15 per cent) according to a 2025 mid-year disclosure.  

“I think certain [private equity] vintages, which were recently invested in the last four or five years, might really struggle to deliver the kind of returns they had promised,” Goyal said at an event in Singapore hosted by CGS International.  

Two decades ago, private equity investors focused on value creation in investee companies and reaped the rewards from it, but when interest rates plummeted post-GFC, the game changed, he said. 

“One [change] is valuations got lifted. So even if you added no value, you bought [a company] at maybe 10x [valuation multiples] at a time, sold it at 14x –  and you look very clever. But you have added no value. You turbocharge that when rates really dropped and increase your leverage levels as well,” he said. 

“Compounding that, there were certain vintages post GFC which made very high returns, not necessarily because value was added, but because multiples went up and there was a lot of leverage. That is now unwinding.” 

Private equity firms are under pressure to return investor capital amid a depressed deal-making environment, which inspired the rise of creative structures like continuation vehicles that allow managers to hold onto their assets longer and seek higher valuations. Goyal expects the challenging environment to remain a while longer.  

“I don’t think the marks are there… and the leverage is obviously unwinding because it’s not sustainable for many of the businesses to carry the books they were carrying when rates have gone up a lot,” he said.  

“[For more recent vintages] if they… buy well and are not pressurised into buying because they collected the [investors’] money, they have a chance of doing reasonably well, but you won’t see those kinds of very high returns you saw in particular vintages from 15 years ago.” 

In the six months ended June 30, private credit returned 2.7 per cent for OMERS while private equity had a 1.3 per cent loss, impacted by low valuations and, to some extent, fluctuations in the US dollar.  

In private credit, it is “certainly a riskier asset than it used to be” as covenants become diluted and leverage multiples shot up, Goyal said, but added that there are still positive features such as its floating-rate nature, which means investors are taking credit risk more than rate risk.  

“When we do it [private credit], the main thing we watch out for is… we want the covenants to be very tight. Return of capital is very important to us – return on capital we’ll worry about later, we want our money back to begin with.” 

Deep markets 

Weighing in on public markets and the question of geographical diversification, Ashish noted that there are five “deep markets” across the world where an investor of its scale can meaningfully allocate to: US, India, China, Europe and Japan (though to a lesser extent). 

Within its investments, OMERS’s largest underlying exposure is to the US (55 per cent), followed by Europe (18 per cent), Canada (16 per cent) and Asia Pacific plus the rest of the world (11 per cent). 

In China, Goyal predicted the difficult journey of rebalancing its economic drivers from capital expenditure to consumption will remain for a while longer, and the country needs to fundamentally address the issue of overcapacity.   

“You’ve seen two, three years of a deflationary environment in China. [If it] continues for some more time, it might become very much like Japan, where it’s so deep seated that you can’t shake the consumer out of that mindset,” he said. 

“I’m not seeing enough by the leadership to change that direction, which makes China a cyclical buy. 

“You can trade China. You can invest in it. It’s already done very well over the last 12 months from a very low level. But can it be a structural buy? Can it stand next to India and the US as something that you want to own for the next 10 years? I’m not so sure.” 

Japan may present interesting opportunities as a result of recent corporate governance reforms, including improvements like the reduction in cross-shareholdings. “This could be a multi-year shift – a positive shift – and that might create genuine value in Japan,” Goyal said.  

Other markets in the region, though, might not be so easy for OMERS to tap in. Taiwan and Korea have narrower markets – semiconductor manufacturer TSMC accounts for 55.1 per cent of the MSCI Taiwan Index, while the Korean market is driven by top exporters like Samsung and SK Hynix.  

The ASEAN equity market lacks scale. The collective market capitalisation of the Southeastern Asian listed companies reached $3 trillion as at December 2024, according to data from ASEAN Exchanges, which is less than Nvidia’s value by itself ($4.4 trillion).  

“Europe, in its own kind of commingled way, has something ASEAN doesn’t. ASEAN is very, very small, and for investors like us, where our minimum equity requirements are quite high, it’s very difficult to invest in,” he said. 

Because resilience may not be obvious without a whole-system view, people often sacrifice resilience for stability, or for productivity, or for some other more immediately recognisable system property.

– Donella H. Meadows

The increasing complexity of our global socioeconomic apparatus inhibits our ability to shape and change it the way we desire. Amid the slow, unfolding ecological crisis we face, this insight supports the notion of an impenetrable and uncontrollable (human-built) superstructure holding us back from a much-needed shift towards sustainability and resilience.

The concept of a superstructure may seem obscure, but it is the natural result of a prolonged period of growth, in which complexity is added onto complexity. This was sparked by the development of rational thinking and science, in the post-Enlightenment era, as a means of controlling nature.

The first industrial revolution (steam power), followed by Taylorism (scientific management of workflows) and the second industrial revolution (electric power), consolidated this process via standardisation, normative behaviours and optimisation. These technical revolutions materialised and engineered this newfound human power over nature.

Essentially, the human sphere, alongside its appendage, the technosphere, has significantly outgrown the rest of the biosphere. The extractive power exerted on the latter has been instrumental in the construction of the superstructure. Planet Earth itself became the object of our optimisation. Scholars named all this the Great Acceleration or the Anthropocene.

Among the most impactful, albeit often invisible, repercussions from this unchecked human activity is a twofold distortion of our presence on this planet:

  • “The incapacity of our imagination to grasp the enormity of what we can produce and set in motion.” (The Obsolescence of Man, Volume II, Anders, Günther)
  • Our relentless emancipation from nature to the extent of feeling and acting as separate from it.

We have come to perceive ourselves as “exempt from ecological processes” – this is what ecologists refer to as the “othering of nature”.

Is it really worth it, then?

If the narrative so far has not yet sufficiently teased out the sustainability implications, I hope the remainder of this piece will inspire more practical reflections on the matter.

Due to their inner interconnectedness and nonlinearity, complex adaptive systems (CAS) such as ours may exhibit signs of counter-intuitiveness and paradox. The system we have built and populate today is no exception. In the context of increasing efficiency and simultaneous efforts towards sustainability, the mother of all paradoxes is the Jevons paradox.

Does (energy) efficiency actually lead to (energy) saving? It should – but, paradoxically, that is not the case. Improved efficiency in resource use tends to increase overall consumption and demand for that resource (because it lowers the price), rather than a reduction (because we need less of it now).

For practical purposes, I will illustrate this paradox through a number of real-world historical examples where increases in efficiency led to unintended, opposite effects.

  • The Green Revolution of the 1940s-80s doubled the efficiency of food production per hectare in developing countries by maximising yields through intensifying production. This eventually increased the number of mouths to feed, worsening food shortage and replaced more nutrient-rich cereals eroding the quality.
  • Building more or bigger roads encouraged greater use of vehicles, worsening traffic jams.
  • Rising oil prices in the 1970s spurred the production of more fuel-efficient cars, leading American car owners to increase their leisure driving, number of miles driven, and preference for heavier vehicles.
  • LED bulbs have significantly reduced the amount of electricity needed per light, but they led to increased use of electricity because everything is now lit.
  • Refrigerators have become more efficient but also grown in size.
  • Water-efficient appliances and advancements in irrigation techniques have reduced per-unit consumption of water, but the overall usage has increased due to expanded agricultural activities.
  • The enhanced ease of creating, sharing and printing with paper-displacement technologies led to a rise in paper consumption.
  • Enhanced health prevention brought economic efficiency in the form of saved money, but increased healthcare costs in the long run due to the increased lifespan of the population.

So what?

The problem here is not efficiency per se, but a lack of restraint. Efficiency remains the most powerful driver for improving individual and local material benefits.

For instance, increasing the number of car lanes does indeed provide relief in the short-term. However, in the long-term, it reliably leads to more traffic, worsening pollution and causing spillover effects to nearby areas and communities.

I will leave it to you to iterate on this exercise with the other examples mentioned above and many others in history, especially those yet to come (think AI, electric vehicles…).

The problem is that with complex systems, things operate across multiple scales and dimensions – time, space (local vs. global), nested hierarchical levels. Efficiency usually brings material benefits in the short-term and at the micro level, but it can be harmful in the long-term and at the macro level (collective, wider system).

Sustainability is, by definition, a long-term macro target. And increased efficiency is often considered a milestone to greater sustainability. Yet, efficiency may actually be detrimental to sustainability. As seen, it has often proved to be so in the past. We are closing the circle here – the increasingly efficient supermachine we set in motion is eroding its own safe operating space.

In more abstract terms, in complex adaptive systems, efficiency triggers emergence – doing things better frees up resources for doing different things. The system learns how to optimise resources, generates surplus, and adapts by expanding socioeconomic activities.

This very expansion is responsible for increasing stress on the environment, undermining stability and increasing fragility (eg above all breaching planetary boundaries).

This is the process fuelling the superstructure.

The way out of the trap? Or the way to resilience

We need to balance the trade-offs between short and long-term and between the individual and the whole system – it’s a matter of adaptability in the present to generate sustainability and resilience in the long term.

Our current system is trapped in a trajectory that could lead to further Jevons paradox-like phenomena. Adaptation means increasing the chances of avoiding those outcomes.

Perhaps too simplistically, we have two ways forward:

  1. Correct for the Jevons paradox after the event by preventing the surplus from increased efficiency circling back into the system (eg via taxation proportional to the savings) – a form of imposed inefficiency (restraint).
  2. Prevent the Jevons paradox before the event by limiting production (eg prohibiting oil and mineral development, or the cutting of timber on certain lands).

The two points above may be interpreted as more sustainable impositions of ‘human boundaries’. However, history suggests we are not particularly good at self-imposing limits, so if that trend persists, we may need to learn to become increasingly adaptable.

Andrea Caloisi is a researcher at the Thinking Ahead Institute at WTW, a network of asset owners and asset managers committed to mobilising capital for a sustainable future.