The synergy of talented individuals working together is the key to unlocking organisational and portfolio alpha, according to an indepth new study of 26 asset owners including the Future Fund. The study’s author Roger Urwin of the Thinking Ahead Institute discusses the challenges and opportunities of this combinatorial power.

The Thinking Ahead Institute collaborated with the Future Fund and 25 other asset owners in an in-depth exploration of asset owner practices, the TAI Asset Owner Peer Study. These asset owners were carefully chosen for their robust governance, substantial size, and global perspectives. The group included nine from the Americas, eight from Europe, and nine from the Asia Pacific region—a well-balanced representation drawn from major pension funds and sovereign wealth funds. My privilege as the author was to get considerable attention from C-suite executives working through peak busy times.

The soft stuff

Among the peers, a recurring theme emerged: “the soft stuff is the hard stuff.” In conversations with CEOs and CIOs, people-related issues surfaced a remarkable 436 times. The context centred on how asset owners attract, develop, and deploy their professionals to achieve the hard-won “organisational alpha” via a combination of people, processes, and capital. This synthesis occurs through effective governance, organizational culture, talent management, leadership and technology.

The study examined alpha from two perspectives: the portfolio (how it is constructed to add value) and the organisation (how the organisation is able to add value in creating the portfolio). One success factor stood out: the synergy of talented individuals working together.

While managing complexity and workload growth remain the top challenge for 73 per cent of the group, attracting and retaining talent closely follows at 65 per cent. The quality of asset owner teams is definitely improving, but it must continue to do so given growing complexity and shifting risk landscape. An overwhelming 88 per cent of respondents believe that systemic risks – such as climate change and geopolitical tensions – will increase over the next 5-10 years, while all the peers present to discuss the results thought that systemic risks are seriously under-estimated and need urgent attention. In an investment landscape marked by heightened risk and uncertainty, critical thinking is paramount. Relationship capital, supporting innovative ideas, becomes very valuable. The group emphasized the need for risk management to broaden, deepen, and lengthen its scope.

Organisations’ successful evolution hinges on self-awareness, informed by peers and competitors. As we face an uncertain future—one that may differ significantly from the past and won’t be as kind as the past has been —this self-awareness becomes even more critical.

Our study highlighted the importance of collaboration and combinatorial benefits in a myriad ways. Teams play the central role in decision-making; insourcing and outsourcing complement each other; investment and tech specialists require a shared language; collaborative stewardship models are on the rise; collective action and systems leadership gain prominence. Being joined-up has developed a golden aura in which the whole truly exceeds the sum of its parts.

But this combinatorial power is a big ask in three respects: first, in requiring integrative thinking – adapting to inevitable trade-offs between opposing points and building creative combinations that work better than siloed answers; second, in applying systems thinking – connecting dots, spotting patterns, and socialising solutions; and, third, in using systems leadership to see problems as shared challenges and approaching them holistically to produce cooperative solutions.

To adapt, CEOs and CIOs need to work on cultivating inward savvy (authenticity, self-awareness, critical thinking, visionary insight, and emotional intelligence), and outward agility (acting as ambassadors, authoritative voices, collaborators, diplomats, and experts).

The hard stuff

These asset owners are very capable organisations. For 73 per cent of them, governance is a strength. For the remainder governance comes with constraints more to do with the organisational settings from the past than the board of the present.

These organisations, by and large, have good boards although the proportion of independent experts should surely be higher – the group average came in at around 49 per cent. If these asset owners are going to do justice to their increasing challenges, they will need boards with greater domain knowledge and cognitive diversity. One hopeful sign is that most boards have increased their female representation to 41 per cent.

Two significant challenges loomed large to all funds: portfolio construction and sustainability integration. Regarding portfolios, the trend leans toward total portfolio approaches (TPA) in which every investment competes for capital based on meeting fund goals rather than the benchmark comparisons that drive strategic asset allocation approaches (SAA). Currently, 35 per cent have adopted TPA, and a further 54 per cent are moving in that direction.

Sustainability-wise, 65 per cent of these funds embrace universal ownership and 3D investing where funds seek to balance risk, return and real-world impacts on the premise that “the returns we need can only come from a well-functioning system, and we, alongside others, can contribute to its success.” A total of 69 per cent have a commitment to net-zero.

The peers all recognise their transformation to a more complex business model pursuing multiple objectives. Achieving this transformation demands vision, process, and above all innovative thinking. Like the use of balanced scorecards to mark progress and support decisions (this had total support in the peer discussions). And like the deepening of investment beliefs to dial in systems thinking.

But here’s the rub: just when change is paramount, asset owners are grappling with peak busy conditions. Business-as-usual grows ever more complex, so the critical initiatives in business-beyond-usual struggle for attention. Asset owners need to work on a simplification response to complexity; and to streamline the investment model using total portfolio thinking and 3D investing; and address risk in both its traditional shape and its systemic form in which climate risk and geopolitical risk have escalated. This will involve assessing risk more broadly, deeply and accurately with long-term considerations ascendant. They will need to think in systems terms to build the resilience for the rocky road ahead.

These asset owners are smart and know the direction of travel required. They know they need a system to manage a system. They are prepared to adapt but they will need agility and grit to be successful with the re-set button.

Roger Urwin is global head of investment content at WTW and co-founder of the Thinking Ahead Institute.

The UK’s new Chancellor of the Exchequer Rachel Reeves didn’t waste any time approving the £7.3 billion National Wealth Fund aimed at funding the herculean costs of the energy transition and creating green jobs. Senior UK pension executives including group chief executive of the Universities Superannuation Scheme, Carol Young, and David Vickers, CIO of Brunel Pension Partnership have begun helping shape the new fund. Top1000funds.com takes a closer looks at the new sovereign wealth fund.

The fund aims to seed investments in green industries like steel, hydrogen and batteries. This will then crowd in  private sector finance by de-risking projects where investor peril ranges from technology maturity risk to revenue uncertainty and unknowns in the upstream supply chain.

“Building a green economy requires a step-change in coordination between the government and investors, so that the policy and regulatory environment is truly enabling for long-term investors,” said Vickers who has long advocated for engagement between government and investors to achieve net zero and for policy to create the best environment for the transition.

Structuring a SWF

According to a report  the new SWF will have an investment mandate rather than fixed sectoral funding allocations. Its strategic objectives and investment priorities are comparable to the Canada Growth Fund and Australia’s Clean Energy Finance Corporation.

Policy makers are weighing how to manage the fund. This could include creating an in-house operation that prioritises appointing individuals with private sector investor expertise and market credibility; relaxing pay constraints and building a culture which enables and encourages risk taking. This structure could lead to the partial outsourcing of funds.

In an alternative approach, the SWF could be managed by one or more of the existing public development finance institutions.

Another suggestion floats having it managed by a public pension fund in line with the Canadian model where the Canada Growth Fund is a subsidiary of the Canada Development Investment Corporation (CDEV) but is actively managed by PSP Investments.

GLIL Infrastructure (a joint venture founded by the Greater Manchester Pension Fund and London Pensions Fund) represents the closest equivalent to PSP in a UK context. The Pension Protection Fund, whose mandate is to protect the pensions of those on defined benefit schemes in the case that their pension becomes insolvent, is another example of an institution that could have responsibility for management of a portion of the capital.

Governance

The report has also highlighted the importance of arm’s length governance from government with independent operations and decision-making capabilities. This will include an independent investment committee to make investment decisions and an independent board – government should be represented on the board, providing an ability to influence but not veto, it suggests.

Amid industry enthusiasm for the initiative, critics flag concerns. Like the belief that slow investment in the transition and green innovation isn’t a consequence of a lack of capital, but more a lack of supply or opportunities for investors to put their capital to work.

“I’m not totally sure the problem is a lack of available capital,” says Neil Lee, Professor of Economic Geography at the London School of Economics who points to the dearth of projects coming to market, and blames a lack of capacity at a local level and difficulties bringing projects to a level whereby they become investable.

Lee also raises the risk of investments becoming pet projects that don’t attract institutional capital, like investment in green steel.

Investors always voice unease if they are told where to invest or subject to regulation that steers allocations to particular assets, arguing they need the freedom to invest where they think best captures the winners and losers of the transition.

The SWF fund is designed to jump start the market and illustrates the government taking risk, but tax payers will also question what the government is doing with their money if it fails to make a return, concludes Lee.

The UK’s new fund, which is part of a push by the new Labor government to focus on building the investment sector in the UK, shows that SWFs are no longer the preserve of resource-rich countries and is comparable to a Sovereign Development Funds (SDFs) that seek to catalyse investment and growth in their own economies. For example, Ireland’s €15 billion ($16.1 billion)  Strategic Investment Fund (ISIF) was established in 2014 with a double bottom line to both invest commercially and support economic activity and employment in Ireland.

Elsewhere, India’s government-seeded National Investment and Infrastructure Fund (NIIF) crowds in infrastructure investment in a unique model that rests on a GP/LP structure whereby anchor LP investors are also NIIF’s majority owners.

In a statement Reeves said: “We need to go further and faster if we are to fix the foundations of our economy to rebuild Britain and make every part of our country better off… Britain is open for business – and the work of change has begun.”

Florida State Board of Administration (SBA) is exploring innovative new strategies in its $18 billion private equity portfolio like Collateralised Fund Obligations (CFOs) and “NAV loans” to tap liquidity and reposition the portfolio as an alternative to selling in the secondaries market where investors continue to get clobbered with massive discounts.

The SBA doesn’t have the statutory authority to put these strategies in place because they involve issuing securities. But speaking to the Investment Advisory Council during an asset class update in June, John Bradley, senior portfolio manager in private equity, said the investment team will resume the conversation with the Legislature next year, adding that these types of strategies have become much more common in the past few years.

Bradley explained that the highly complex CFO process typically involves GPs bundling stakes in private equity-owned companies into a single ($1 billion, for example) portfolio, contributing it to an SPV and securitising the cash flows, marketing interest-bearing securities to new investors to return cash to existing investors.

He added that these types of strategy offer a better cost of capital than the secondary market where in contrast to earlier years when investors used to sell at a premium, they now risk giving up a significant return.

The challenging secondaries market reflects the markedly changed conditions in private equity where the boom of the last decade has swung into reverse.  Low interest rates and high growth led to “massive multiple expansion” but the decade ahead will be characterised by higher interest rates and slower growth, requiring portfolio companies to add value through their operations.

“The value created by GPs in the future won’t be same as in past,” predicted Bradley.

Strategies shaped around borrowing, M&A and growing the EBITDA are over. Today it is much more about being good owners of a business and driving value through operations, he said.

The SBA is preparing for more churn in its  GP relationships. But forming new partnerships and creating access with top GPs is a laborious process alongside working down the existing list of GPs coming back to market.  In the last year, SBA only closed with four new funds after  a journey that began with 326 meetings and calls.

Manager due diligence is detailed and process orientated, striving for a consistent approach in how the investor reviews fund opportunities. At each stage the team debate if the opportunity is worth taking to the next level in a process that takes 3-4 months.

At the end of last year, the SBA was invested in 243 funds managed by 71 GPs  of which 45 count as core relationships. Fifty three per cent of the private equity portfolio is concentrated in ten firms including names like Lexington Partners, Truebridge Capital and SVB Capital. These top ten names together represent 32 per cent of SBA’s committed capital today.

Contrarian strategy

SBA prides itself on a contrarian strategy.

For example, the team dug deep into traditional energy assets in 2020, snapping up secondary oil and gas assets, buying into fund and co-investments, as ESG-minded LPs bailed out of the strongly performing sector. But Bradley warned the benefits of active management and repositioning are often not felt for years.

Like overhauling the European portfolio in favour of regional, and country-focused funds. The SBA “took advantage of the 13-year bull market” to conduct six secondary sales over the past ten years, creating $5 billion in proceeds.

“We sold to realise value in the face of extreme valuations,” said Bradley. “The next evolution in European private equity is sector-focused fund investment.”

An exploration of how these assets sold in the secondary market went on to perform under new ownership revealed these funds went on to perform well. However, sharp falls in the euro produced an FX win that offset subsequent fund performance.

That contrarian approach is also visible in venture.  In 2010 the SBA increased its exposure to venture at a time many other investors were throwing in the towel. The team put together creative investments via SMAs and fund-of-one to gain access.

“It turned out that venture wasn’t dead, and we reaped huge rewards ten years later,” said Bradley.

In 2021 the SBA reduced the venture portfolio via the secondary market, selling $1.8 billion in tech and venture assets.

The SBA’s bias to early-stage venture  makes up two thirds of the portfolio. The majority of the allocation is in IT and software, largely around Silicon Valley, New York and Boston.

Bradley said that although the venture portfolio is down on the year, it has outperformed peer benchmarks and is the strongest performing sub strategy within private equity, an envelope of the portfolio that includes allocations like distressed and secondaries.

The future

The committee heard how the integration of IT into the private equity portfolio is another key focus and will include the modernization and cloud migration of legacy systems. Technology is leading to changes in how the SBA updates PE fund data, and is creating efficiencies.

Bradley concluded that the SBA will remain active in the secondary market and bring more co investment in house where two staff members now oversee co-investment.

PensionDanmark’s decision to invest in naval patrol ships flags a new source of complexity bearing down on ESG and sustainability-minded European pension funds. Many cap investment in the defence sector and exclude defence stocks because they fall foul of ESG filters, but as war drags on in Europe, the continent’s institutional investors will increasingly have to review the ethics of investing in defence.

PensionDanmark’s decision has been many years in the making and isn’t new territory for the $49 billion labour market fund. It is already an experienced investor in ships and the multifunctional patrol vessels, still in the design phase, will sit in its sizeable infrastructure allocation alongside flagship green investments like its stake in ten wind energy projects on islands around the world.

PensionDanmark is providing the finance to a newly formed consortium, Danske Patruljeskibe K/S, comprising defence group Terma and ship designers Odense Maritime Technology (OMT.) The trio’s first customer is the Danish Ministry of Defense Acquisition and Logistics Organization (DALO). Once this order has rolled off the production line, they hope to begin building military vessels for other country’s navies too.

“The risk primarily lies in the fact that it is a new type of ship that we are developing together with our experienced partners Terma and OMT,” says a spokesperson for PensionDanmark from the fund’s Copenhagen offices.

“PensionDanmark’s investment policy, including our principles for responsible investing, is discussed and approved every year by the board and has broad support. There has been a shift in the general perception of defence investments after Russia’s invasion of Ukraine.”

The fund has been first out of the gate amongst European peers to identify opportunity in geopolitical risk and the ongoing war in Europe. Most other European pension funds are only just beginning to have a complex and soul-searching conversation on the ethics of investing in defence with their stakeholders and society.

But pressure is building. Like the former Dutch Minister for Defence Kajsa Ollongren urging the country’s pension funds to invest more in the sector earlier this year. Her comments followed 2022 calls from a majority in the Netherland’s House of Representatives on pension funds to invest more in defence groups due to the war in Ukraine.

In the UK, the Investment Association, a trade body for investment managers and pension schemes, is also on the case, recently writing that “investing in good, high-quality, well run defence companies is compatible with ESG considerations.”

Meanwhile defence firms, confident that by the EU’s taxonomy won’t impose restrictions on financing their sector, are upping the ante and lobbying hard to get into pension funds’ portfolios.

“The geopolitical backdrop is changing, and different nations are in different positions,” reflects Richard Tomlinson, CIO of the United Kingdom’s £26.3 billion Local Pensions Partnership Investments, LPPI. “Understandably, there is more political support for this kind of thing in the Nordics than in the UK, given geographical proximity to Russia. That said, it’s not inconceivable to think that the UK government could do the same and actively encourage pension funds to invest more in the military in the future.”

For now, any conversation about defence at LPPI remain confined to navigating geopolitical risk in the portfolio. The investment team, alive to growing geopolitical risk for a while, have run “wargaming” workshops to plan for different scenarios and how they might respond in each. These have included an escalation in the conflict in Ukraine or rising tension between China and Taiwan.

Investing through an impact lens

One way pension funds could approach their traditional reluctance to invest in defence is by looking through an impact lens. In this context, investment in some defence assets could even sit in the social infrastructure bucket, reflects Tomlinson. “Viewed through this lens, it’s not that big a leap to go from investing in hospitals and social housing to ensuring the sustainability of liberal democracy via supporting critical defence infrastructure.”

PensionDanmark certainly has no qualms about investing in companies that contribute to “the defence of Denmark and NATO allies” so long as these companies aren’t involved in controversial weapon production and respect treaties prohibiting chemical weapons, cluster munitions and anti-personal mines.

The vessels will strengthen the capabilities of the Danish navy in domestic waters and prepare the fleet for future complexities at sea, extols the fund. “We believe our investment will make a significant contribution to society in supporting the future-proofing of Denmark’s navy and thus national security.”

But like many ESG and impact investments, investing in defence scores well in one area, preserving liberal democracy and national security, but less so in others, for example, climate. War ships and planes kick out huge amounts of emissions that will be difficult to square with net zero ambitions.

For some investors, the obvious starting point is clear government guidance. Daan Spaargaren, senior responsible investment strategist at PME says the Dutch pension fund for 1500 employers in the metal and high-tech sector that serves 630,000 beneficiaries, is willing to discuss the issues at stake. But he also wants policy guidance on which areas of the defence industry needs most investment, and where pension funds should funnel capital.

Moreover, he believes it is incumbent on the government to procure from these defence companies.  “If governments want investors to support a national defence industry, then the government should guarantee procurement so these companies can invest and expand.”

Spaargaren is aware of the potential returns in the sector where PME already invests, mostly in listed defence stocks and bonds. “The defence sector is flourishing and returns high,” he says in a nod to how the rearmament of Europe, as well as wider military spending among the US and its Asia-Pacific allies, is an increasingly important macro theme.

UK pension funds wrestling with the issue should reflect that in some respects they could already be active investors in the sector, suggests Tomlinson. At one end of the spectrum, some UK pension funds may be investors in military housing group Annington Homes via private equity group Terra Firma, for example. Further up the scale, others will hold stakes in BAE Systems which supports the UK’s strategic nuclear deterrent Trident.

Investing in more conventional, listed defence stocks to financing a country’s critical defence capabilities should be seen on a spectrum but the leap may not be that big.

Many pension funds also have existing investments in dual use technologies such as AI, facial recognition and secure communications, he continues. These technologies, with both military and civilian applications, also sit on the spectrum.

The recent spike in ransomware attacks on UK NHS hospitals has highlighted the critical role of this kind of technology in fighting cyber attacks. It offers another example that makes it possible to trace a line between UK pension fund investment in cyber security today – to financing war ships PensionDanmark-style tomorrow. “At what point does social infrastructure that enables our national institutions to combat cyber risks and broader asymmetric warfare extend to funding warships?” he asks.

As the debate grows in the Netherlands, Spaargaren notes that a few pension funds are seeking to loosen exclusion policies and invest in nuclear. He says PME has no desire to unpick its own policies, and questions if funnelling more capital into nuclear would actually support the Netherlands defence strategy anyway.

Moreover, he believes that investing in nuclear and any other controversial weapon would cross a line for PME beneficiaries, where some are already uncomfortable investing in defence.

“Investing in military capability will come down to an investor’s investment beliefs and their stakeholder group,” concludes Tomlinson. “Some investors will have clear fiduciary responsibility to principles that preclude this type of investment and will be very clear about what they can and can’t do. Others may be more able to align with government policy, if one emerged.”

In the meantime, governments’ attempt to convince Europe’s pension funds that the defence sector is green and sustainable has only just begun.

The proportion of female board members overseeing listed Swedish companies has edged downwards in the past year, back to 2022 levels. Only around 35.5 per cent of current board members on companies listed on NASDAQ Stockholm, the region’s biggest stock exchange, are female, according to SEK425bn (€37.9bn) Swiss buffer fund AP2’s Female Representation Index 2024.

“We have seen steady growth in the proportion of female board members since we introduced the Female Index in 2003,”says Eva Halvarsson, CEO of AP2.

“Unfortunately, the increase has levelled off in recent years and this year it is decreasing somewhat. The companies have some way to go to reach the goal of 40 per cent women on the boards.”

AP2 wants its listed holdings have at least 40 per cent of each gender represented on the board by 2030, and actively influences its portfolio companies to have a strategy for diversity, equity and inclusion (DEI).

“Diversity is an important issue for the fund and is one of five focus areas within sustainability. The fund’s starting point is that companies that work with diversity, equity and inclusion not only take sustainability issues very seriously but are also more competitive and thus create better value,” says Halvarsson.

Of the 356 companies examined in AP2’s Female Representation Index 2024, the number of female board chairpersons decreased from 34 to 32 – corresponding to just 9 per cent of listed companies having a female chairperson. The number of women CEOs also fell to 42 from 45, equivalent to 11.8 per cent of companies with a female CEO.

Nomination committees help

The survey revealed that companies with nomination committees have a higher proportion of women on the board than companies without a nomination committee. Companies whose nomination committees have female representation also have an average of five percentage points higher proportion of female board members compared to all-male nomination committees. At the same time, half of all nomination committees lack a female representative.

Positively, the proportion of women in listed companies working on management teams has increased, up from 26.4 per cent to 28.8 per cent. The number of women in management roles is at the highest level since the survey started in 2003 and signposts a rich base to recruit for more senior roles down the line.

“It is gratifying that our Female Index shows that the proportion of women in management continues to increase, which is an important factor for there to be a good recruitment base for female board members in the future,” says Halvarsson.

The largest proportion of female board members is found  in the finance and telecom and media industries. Materials industries and consumer discretionary sectors are at the bottom, with less than 30 per cent women.

The survey found most women in management positions in real estate, healthcare and services industries, while the lowest proportion is found in sectors including energy, where only one in five people in management roles  are women.

AP2 compiles its Female Representation Index internally. The 2024 survey included 356 primary and secondary listed companies on Nasdaq OMX Stockholm. In addition, the survey records the proportion of women who have graduated from study programmes that constitute the traditional recruitment base for management groups and boards.

Diversity, equity and inclusion are integrated into AP2’s investment strategy.  The buffer fund has developed a multi-factor index for internally managed foreign equities and corporate bonds that integrates various ESG factors including equality and the percentage of women in the company. The index is expected to generate higher returns at lower risk, while taking sustainability aspects into account.

“There are indications that the factor of the proportion of women in the company, from a global perspective, has contributed to a positive return in the Fund’s multi-factor index for foreign equities. The effect has been stronger in developed markets compared with emerging markets,” says the fund.

In the Fund’s model for analysis and evaluation of private equity companies’ sustainability practices, these practices are assessed on the basis of 25 assessment points that include diversity and inclusion.

AP2 also engages through dialogue with companies concerning selection processes for boards and management teams.

 

The United Nations Joint Staff Pension Fund (UNJSPF) recently reduced the allocation to equity in its $92.5 billion portfolio by 10 per cent in what Pedro Guazo, representative of the secretary-general (RSG) for the investment of the UNJSPF assets, describes as a conservative strategic allocation in response to the overvaluation in tech.

Behind the defensive exterior, the fund is stepping into new allocations in venture, impact, and private credit as well as developing more sophisticated strategies in an increased allocation to fixed income.

It speaks to a state of confidence after sharp losses in 2022 at the pension fund that is still in an accumulation phase; supported by a funded ratio of 111 per cent and boasts a large and growing investment team who all have skin in the game as beneficiaries.

“We are in a strong position compared to peers,” reflects Guazo who has led investment since 2020. He oversees six-seven different asset classes in a primarily dollar denominated portfolio and tells Top1000funds.com in an interview from the pension fund’s New York offices that strategy avoids any financial engineering or unnecessary complexity.

“We only invest in things we understand,” he says.

The active equity allocation now accounts for 43 per cent of AUM and is divided into four teams (North America, Europe, Asia Pacific, and Global Emerging Markets) that follows a disciplined investment process centred on equity screening, fundamental analysis, and frequent dialogue with corporate management teams.

Although the portfolio has been reduced he remains wary of key risks, particularly economic slowdown in China even though the portfolio has little direct exposure to China.

“If China doesn’t grow as expected, it will impact global demand for everything” Guazo says.

“We follow the US and Chinese economies closely because what they do has the most impact on our portfolio.”

The capital and profits – he says the fund sold at a fortuitous time – take out of the stock market has been ploughed into fixed income, favoured for its protection of capital and liquidity.

“With interest rates at this level, it makes sense to be in fixed income and our analysis shows that the risk return proposition is higher than other asset classes,” Guazo says.

“Interest rates may still be in the same ballpark for the next two-to-three years, and we are comfortable having an allocation to fixed income because it is paying off.”

New allocations to sub asset classes within fixed income include high yield corporate bonds that bring additional yield at very little risk compared to public equity. The fund has launched the allocation with passive exposure to understand how the benchmark is composed but will switch to active in time.

Similarly, implementation is with managers first, in a strategy that allows the team to learn, follow decision-making and understand the information on hand, before bringing the portfolio in house.

“We seek to manage everything internally, but there are times like in high yield when we don’t have the internal knowledge, we partner with external managers, give them a mandate consistent with the Fund’s objectives and learn while we invest,” Guazo says.

“We follow every decision and see what information they are using so that we can bring the allocation in house.”

Around 82 per cent of the portfolio is managed internally, and Guazo is convinced it is the key reason why UNJSPF has some of the lowest costs in the business. Total investment costs are 33 basis points compared to a medium amongst peers calculated by CEM Benchmarking of 45 basis points. “We always try to manage internally because it’s more cost efficient, as shown in the cost peer comparison analysis,” he says.

His conviction that active, in-house management pays is also reinforced by UNJSPF’s monthly report on every asset in the portfolio and the performance over different time frames. It offers comparisons against the benchmark and reveals the outperformance of internal management against the benchmark.

“It’s better than an x ray,” he says.

“It’s our MRI.”

Impact investment

In another new seam, UNJSPF is also exploring impact investment across all public and private asset classes. Impact themes are aligned to the SDGs and range from biodiversity and the transition to social housing or female empowerment. Investments include labelled bonds issued by development banks which Guazo likes because they include impact measuring and reporting criteria.

“We will never sacrifice return or modify our risk metrics for any investment and one day, hopefully, the whole portfolio will be invested with impact,” he says.

For now, he is particularly focused on combining impact with a venture allocation, another new foray for the fund that will sit in the private equity envelope. “We’ve been in private equity for 13 years but have always focused mainly on large buyouts,” he says.

The Fund hasn’t adopted a target to venture, preferring not to have to fill an allocation. “Of course, the ticket size in venture will be much smaller than what we are used to in private equity where we typically invest at least $120-$150 million.”

Private markets

He has no plans to build out allocations to private equity (8.3 per cent) real estate (7.5%) or beef up a smaller allocation to real assets that comprises infrastructure but also timber, agriculture, and commodities. For now the team remain chiefly occupied committing capital from distributions and diversifying risk to ensure different vintages across the fund investments which account for the whole private markets allocation.

Guazo has no ambition to do more private markets in house. Mostly because the pension fund would never be able to hire the size of the team required.

“In-house investment in private markets is very labour intensive and you need a lot of flexibility to hire the right people, particularly around compensation,” he says.

“We can’t attract this group of people to work for us internally because we are working on UN contracts. We have good compensation, but nothing comparable to the large pension funds or GPs.”

Returns in real estate have slightly trailed the benchmark for the last couple of years. One reason is that the fund uses a US-centric benchmark, and the underlying portfolio has a large exposure in Asia and Europe which has performed poorly given the strength in the US dollar. But he sees opportunity in new areas that also combine impact like affordable housing in the US.

“It provides good solid returns and protects against inflation,” he says.