Stronger liquidity management through a total portfolio approach (TPA) can do more than manage real-time risk exposures – it can also help generate alpha, according to panellists at the Fiduciary Investors Symposium at Harvard University. 

The $533 billion CalPERS is one of the largest asset owners currently planning its own TPA rollout, which will bring several benefits including a better view of the pockets of liquidity residing across its balance sheet. 

“The total fund portfolio management team has been huge proponents of pushing for this total fund system that we’re implementing,” co-head of treasury management and head of liquidity, Jonathon O’Donnell, said, “and we can easily make the case that these activities – even on the margin – will pay the whole bill of implementing a gigantic system implementation.” 

CalPERS currently employs multiple order management systems, which makes it challenging from a centralised funding perspective to minimise cash drag through strategies such as securities lending, O’Donnell said. 

“The journey that we’re embarking upon right now is going to be a long and a hard one, I think, from a technical perspective, but one that is absolutely critical to getting us off the ground.” 

United Nations Joint Staff Pension Fund chief executive, Pedro Guazo, said liquidity management “helps on the defence, but should be used on the offence”.  

“In the absence of information… we end up having much more liquidity than what we need because when you don’t know exactly how much you will need, and how much you have, you tend to overstock. And of course, there’s an opportunity cost for that. So if we get better clarity on the liquidity management and better cash flows expectations, we can deploy that capital into something much more profitable.” 

The United Nations Joint Staff Pension Fund is currently facing several liquidity challenges including lower contributions from UN member nations, fewer contributing staff as countries pull back, and falling distributions from private assets in a more difficult market environment. 

“We’re taking liquidity as a systemic issue based on TPA, not only as a constraint in your portfolio construction under SAA, but a strategic discussion, and really understanding what is the real liquidity, and at which prices that you can drill on whenever your system starts to crank. 

However, Guazo said the disparate quality and fragmentation of private asset information – which underpinned valuations – created an even bigger challenge for cash forecasting. 

The necessity and limitations of models  

SimCorp head of product, analytics, Ian Lumb, said the systems that underpinned a TPA had to provide multiple lenses of risk, but modelling was constrained by limited private market data. 

“To build models where you can think about digging into the correlation across markets, between public and private, about the interplay of the cost of capital and liquidity, is really key,” he said.

“It’s not easy because there is no such thing as perfect data, especially in the illiquid space.” 

He said that “no models are perfect, but some are useful,” and that portfolio stress tests should be aligned with scenarios that cause issues for an asset owner’s board or would attract the attention of regulators. 

CalPERS’ O’Donnell said preparing to implement a TPA is about preparedness, with liquidity management the most important component. It underpins the ability to stay on strategy and to make capital calls, as well as make pension benefit payments, which are predictable and stable for CalPERS. 

“It’s all the other ‘what ifs’ that we’re talking about in terms of scenario testing and what happens to your margin, what happens to your securities lending book, how do you hedge different market environments, etc that is kind of the growing piece of how you prepare to enter into that TPA world.” 

Artificial intelligence and digital transformation are the hottest themes in infrastructure investing, not only among private investors but also increasingly state governments.

Just this month, Saudi Arabia unveiled one of the biggest state AI infrastructure investments, with plans to buy billions of dollars’ worth of advanced chips from US manufacturers including Nvidia and AMD.

But despite the overwhelming bullishness, some asset owners are wondering when – or if – AI can deliver a miraculous productivity gain and benefit the underlying infrastructure such as data centres.

“I am actually a little bit more – let’s call it sceptical – of AI in the longer-term than I maybe started with,” said Nick Khaw, head of research and co-head of private market at the $38 billion Khazanah Nasional, at the Top1000funds.com Fiduciary Investors Symposium at Harvard University.

“As a macro economist, I think one thing that’s pretty clear, and it’s been documented by economists from down the river at MIT, is that it [AI benefits] really hasn’t shown up in any productivity numbers.

“So either we’re measuring productivity wrongly, which is possible, or it’s not as general purpose as we think.”

With that said, AI and digital transformation is one of the four megatrends Khazanah is monitoring (alongside climate, demographics and de-globalisation). The Malaysian sovereign wealth fund’s philosophy to private markets investment is to look for “something which looks like a headwind today, but it’s a tailwind in the future, because you can buy low and then hopefully get a return later”, Khaw said.

Compared to pure AI technologies such as large language models, Khaw believes robotics is more likely to have a meaningful impact on the real economy particularly in relation to blue collar jobs. But that comes with its own set of potential problems.

“I do worry about data centre usage, but I also wonder for some of these things… if the productivity numbers don’t match up, or if they do and people lose jobs, will the politics push back on something like AI and say, look, too many people are losing jobs. We can’t afford a universal basic income. Maybe let’s stop doing this stuff.”

An interesting dilemma for pension funds in the scenario of new technologies leading to jobs losses is that the workers impacted could be their fund beneficiaries.

When asked how the fund balances its investment and fiduciary needs, Andrew Siwo, head of sustainable investments and climate solutions at New York State Common Retirement Fund, said the fund has set important parameters around workers’ rights protection in portfolio companies.

“I would say more broadly, we do have, at least in private equity, a responsible workforce management policy that addresses our expectations for sound labour management principles,” he said. The policy directs that, for example, the fund’s private equity managers should encourage industry standard wages and benefits and minimise adverse impact on workers when there are mergers and acquisitions.

While opportunities around AI are attractive, Siwo added there are risks and inaccuracies prevalent in AI that are concerning.

“New York State Comptroller, Thomas DiNapoli, the fund’s sole trustee, released an AI audit report recommending the use of governance structures to prevent AI abuse and inaccuracies. Each investment manager that has received capital from us must complete a scorecard to assess material investment risks/opportunities including environmental, social, and governance factors.”

Resilient to volatile trades

Executive director at IFM Investors Adrian Croft is more optimistic about AI and said it is “the most consequential megatrend” for infrastructure investment now. Its most prominent manifestation is data centres, but that booming demand also extends to energy infrastructure due to the substantial need for power.

“There’s certainly a case for a huge amount of potential investment in energy infrastructure, generation and grid enhancement,” he said.

“Renewable energy is going to play a huge part of that… but we think there’s still going to be a role for gas because these data centres do need 24/7 firm capacity.”

But an even longer-term play is fibre networks, which Croft admitted haven’t been the easiest area for equity investments – at least in the US and parts of Europe. This is induced by issues including rising build costs and overbuilding in some markets.

“It has been a tough spot, but the development of large data centres in secondary or emerging data centre markets are all going to need to be connected, so there could be a really good case for more fibre,” Croft said.

While global companies are rushing to establish domestic supply chains amid the uncertain trade environment, Croft believes infrastructure is an asset class resilient to the ongoing impact of localisation.

“If your infrastructure is essential to the community it serves, it’s still going to need to be there. People are still going to keep using energy, water and gas. They’re still going to need to get to work, get to school or get home in the evening. They’re still going to want to communicate and use the internet,” he said.

“But not everything is going to be unscathed… there’s a lot of focus on what’s going to happen with global ports in particular, with volume through US ports going to drop precipitously in coming months. We’ll see.”

With risks come opportunities, though, as Croft believes there could be more demand for local infrastructure like logistics and cold storage.

Granted, “it might not be the most efficient way of doing things if you have to replicate what already works pretty well in various parts of the world,” but it could add more opportunities across the spectrum from core infrastructure, infrastructure adjacencies, to value-add strategies, he said.

Specifically in relation to AI infrastructure, Khazanah’s Khaw said a driver of localisation is data sovereignty concerns, which may prompt companies to keep centres capable of processing data for advanced AI applications domestically.

Reforming European capital markets could unlock a multi-trillion-dollar investment opportunity as investors seek alternatives to the US in the wake of Liberation Day, said Apollo Asset Management co-president John Zito. 

“If you look at the marketplace, you have a $24 trillion economy in the eurozone, versus a $30 trillion in the US, of which there’s $15 trillion securitised in the US and $500 billion of securitised market in Europe,” he said at the Fiduciary Investors Symposium at Harvard. 

“There’s a multi-trillion dollar opportunity to unlock the bank’s capital but that requires 35 countries to get aligned on policy, which is hard.” 

The Trump administration’s extensive Liberation Day tariffs in April shocked markets and undermined confidence in the role of the US as the natural home of capital and innovation.  

Zito said the balance of trade argument behind the tariffs neglected to consider the massive foreign direct investment coming back into US capital markets, which propelled growth and underpinned higher multiples in public markets.  

“One dollar spent on a good versus one dollar spent in equity that can be leveraged and then multiplied is worth infinitely more than the dollar on goods,” he said.  

However, the fast growth of large asset owners such as sovereign wealth funds meant they had limited options to deploy their funds outside of the US. Zito said he was positive that Europe would ultimately respond to the opportunity. 

Late last year, the European Commission appointed former European Central Bank President Mario Draghi to produce a report aimed at boosting European competitiveness. It highlighted the role of securitisation to increase the competitiveness of European financial markets, which remains heavily reliant on bank financing.  

“I think you’re going to see the German spigot turn for the first time in a decade in terms of fiscal spend. I think private credit and private capital will be a big proponent and part of that,” Zito said. 

“And just Germany turning on, particularly in conjunction with France, is going to change the whole narrative and just way the way people think about growth in the region. I’d love for them to consolidate their exchanges. I’d love for them to make it easier to do business.” 

While geopolitical forces continue to reshape the world, a technology arms race is also underway. Zito said the impact of artificial intelligence was impossible to assess, which made it a significant risk.  

“AI was not in any single investment memo for a software buyout in 2018 to 2021 and it was the single largest sector that bought out at 11 times revenue, and we still have not marked it. Meanwhile, I promise you that there will be massive amounts of disruption in software. It is the first thing that will happen. It’s the easiest thing to disrupt.” 

An economic slowdown would cause a re-rating of the sector as software retention rates declined. 

“In the LBO space, 40 per cent of private credit is software and in the equity space it’s a big percentage of total private equity outstanding, particularly stuff that has not been sold.” 

Zito said the pace of change was fast and companies needed strong leadership to pivot their strategies and a willingness to change. For example, just a couple of years ago, Microsoft was focused on workflow software but is now investing billions of dollars in AI.  

He also said it was time for large long-term asset owners to get more dynamic around their fixed income pools, given the end of zero or negative interest rates. 

“I think you’re going to see the sovereigns and the places that actually use their duration of capital to fund what is the two biggest gross spends – which is effectively infra and defence – they’ll end up having much larger pools and end up being the leader.” 

Equity markets have been the growth engine for the portfolios of many asset owners globally, fuelled by decades of low interest rates, rising economic growth and a relatively benign geopolitical backdrop.

But that seems like it’s beginning to change. Faced with increasingly fickle public markets, fewer and fewer companies are pursuing IPOs, while concentration risk has big investors questioning the size of their exposure to liquid assets.

“I think we’re seeing an evolution towards private markets because public markets are not functioning as well as they used to,” Anne-Marie Fink, chief investment officer for private markets and funds alpha at the $132 billion State of Wisconsin Investment Board (SWIB), told the Top1000funds.com Fiduciary Investors Symposium at Harvard University.

It’s getting “harder for companies to live in the public markets”, Fink said. But private market investing can remove some of the intermediary layers between companies and investors and allow both parties to properly orient their strategy towards the long term. SWIB’s portfolio is 65 per cent public assets, 20 per cent private equity and debt, eight per cent in real estate and 19 per cent in inflation-sensitive investments.

“We’re not all in privates, and we do think that publics have a place in our portfolio – in fact, a bigger place,” Fink said.

“We find that we get better returns from privates, just generally, relative to publics. We think they have advantages in terms of the way the governance works, the ability to plan things over a four- or five-year timeframe as opposed to a quarter-to-quarter timeframe, and then there’s the collaboration between your owners and your management teams of your companies. So for that reason we expect that private equity will outperform public equity.”

Gold rush

But the weight of money moving into private markets – a gold rush for established and new managers – belies the fact that many of the fund and fee structures on offer have not been particularly advantageous to their investors, while plenty of private market managers have grown up in the same benign macro environment that’s propelled public equities higher.

“There’s a lot of people that haven’t lost,” said James Clarke, global head of institutional capital at Blue Owl. “I’m 50; there’s a lot of people that are 40-odd, and they were 25 during the Global Financial Crisis, even younger, and they’ve had a tailwind of low cash, they’ve had a tailwind of people increasing private markets exposure.

“I think that the whole system has changed; I think that it’s moved from a tactical to a strategic allocation. I would say if Blue Owl, or formerly Owl Rock, had started in 2025 and not 2015 there would be zero reason for us to exist. None. I honestly mean that, and I mean that because a new entrant in this space right now would be awfully difficult. The world needs another private credit manager like it needs a hole in the head.”

To stay relevant, GPs can’t poke their heads out every three years when they want money for a fund.  LPs want partnership for the long-term value add it brings to their portfolios, and the firms that don’t get that are “going to languish”.

“Why is that beneficial? There’s scale,” Clarke said.

“There’s a fee premium through co-investment, it’s a volume discount that only a handful of managers can provide. Number two, they can access you in a way that’s more customised to their portfolio. It’s not a fund where they’re riding alongside XYZ $5 million investor. It’s SMAs, it’s funds-of-one, co-investment programs. And I encourage everybody to make sure that co-investment program is as tight as possible and replicates what the portfolio looks like, because I’ve seen co-investment programs at other firms and they can be 400 to 500 basis points off.

“There’s also fees. It’s not ‘we’re charging on committed capital’, it’s invested capital, in many cases it’s flat fees. The returns have compressed. I think it was a capital appreciation strategy in private markets and it’s now migrated to a capital preservation and income generation strategy, and that’s been the biggest change.”

Meanwhile, Kevin Kneafsey, senior investment strategist for multi-asset solutions at Allspring Global Investments, anticipates a “massive shrinking in this space” as more and more LPs realise that large chunks of the private credit, equity and real estate they’ve been buying offer them only “leveraged beta”.

“There’s a group in Chicago, Delaware Street Capital, that replicates private market assets with public market assets. The first thing they do is match the sector; the second thing they do is match the leverage. And if you do that you get a lot of what you’re getting. So if you want to pay two and 20, pay it for the alpha portion above the leveraged beta portion. I think that’s a washing out that’s coming. I think the fee pressure is coming.”

Kneafsey also thinks the market has gotten too large and that big investors “don’t need more of this” – but that many of the managers that already exist are solid, with strategies that make sense.

“When I was at BGI, back in the hedge fund heyday of the early 2000s, our CEO said there are now 5000 hedge funds. And he said there aren’t 5000 really smart people. Well, there are 17,000 private equity firms in the US. I guarantee you there are not 17,000 really smart people, and they’re all not in private equity. So this space is due for a real big shrinking and a rewriting.

“Do I think it’s going away? No, it makes a tonne of sense. There’s lots of reasons to finance companies in different ways, whether it’s venture, whether it’s private equity buyout or growth, whether it’s private credit funding these things. But the way it’s being done, the way it gets paid, the transparency – all of those things need to change.”

Carol Geremia, president of the Boston-headquartered MFS Investment Management, said “long-term washing” has become one of her biggest worries, with everyone claiming to be a long-term investor while failing to align their investment practices with that goal.  

MFS Investment Management, which Geremia joined in 1984, is a 101-year-old asset manager with $600 billion in assets under management.  

Throughout her career, Geremia said she has witnessed institutional investors’ increasing ownership of companies in the US, from 35 per cent in 1975 to 95 per cent in 2022. However, the average holding period shrank from close to 5 years in 1980 to just 5.5 months in 2022.  

“I’m constantly confused – as we talk about being long-term as an industry – [about] how we can get better aligned with the conversation around the markers to the longer-term destination,” she told the Fiduciary Investors Symposium at Harvard University.  

“We talk about ESG and the fear of greenwashing. I say the biggest fear I’ve had for the past 15 years is long-term washing. 

“If you say you’re long term, prove it. I don’t know why we don’t use the average holding horizon of a stock inside the portfolio to have a better conversation with an active manager.” 

She pointed to research conducted by WTW’s Thinking Ahead Institute which says that in the 2020s, the measurement of success of any investment should be consistent value creation for stakeholders, with a focus on overarching sustainability and achieving long-term goals. However, Geremia said it still feels like many investors are stuck in the “messy middle” when they transitioned from the ‘alpha era’ between the 2000s and 2010s, where success only means alpha generation against a benchmark with low tracking error.  

This is coupled with the fact that investors tend to turn to easy-to-use metrics to judge their organisation’s success, focusing on things like past performance and traditional benchmarks, while more difficult-to-measure qualities, like effective decision-making and empathetic communisations, are ignored. But the latter qualities are more likely to help an investor achieve their long-term goals and add value to alpha generation, Geremia said citing a State Street report.  

“It makes it easier to hold people accountable when you can measure the easier quantitative things, but it actually pulls us so far away from long term value creation, not to mention responsible allocation of capital,” she said.  

How MFS is holding itself accountable to act like a long-term investor is through its goal to perform over the full market cycle. The definition of how long a market cycle is might be contentious, but Geremia said MFS believes it is close to 11 years, despite its survey of 540 institutional investors in 2024 showing that 87 per cent of respondents believe it’s seven years or under.  

Over half of the respondents also said their organisational tolerance for underperformance against a benchmark is three years or under.  

“That definition of a full market cycle from perception is actually declining – why is that?” she said.  

“I said to our investment team [that] if we can’t define a full market cycle, we’re going to have a problem, because that in itself is the growing misalignment of the system. 

“I’ll quote Roger Urwin from Willis Towers Watson. He said the only way to generate returns in the future is in a system that works. 

“I think we talk a lot about returns, a lot about alpha, but in the way we look at our system and how we’re operating, we need to poke some really big holes in.” 

This article was produced by Capital Group without involvement from the Top1000funds.com editorial team.

Towards the end of 2024, one of our key economic themes was that the US and Europe seemed to be on divergent growth paths. Europe was becoming more fragile, both cyclically and structurally. Meanwhile, the US remained, what we called a grower economy, benefitting from both cyclical and structural resilience.

Our view was that if nothing changed, this trend was likely to continue. However, since publishing the paper, a lot has changed. Donald Trump’s return to the White House, and the announcement of reciprocal tariffs that were more draconian than anyone expected, pose a significant risk to growth and increase the potential for US recession in 2025.

At the time of writing, these reciprocal tariffs have been paused for 90 days. While the market has welcomed this development, it is worth noting tariffs are, for now, only paused, and, importantly, the political uncertainty resulting from the constantly shifting trade landscape is in itself likely to have a negative effect on investment and consumption.

On the other hand, Europe’s response of more fiscal spending helps support growth, partly offsetting the drag from tariffs.

From that perspective, we observe the dynamic between the two economies appears to have shifted from one of divergence to potential convergence, with a revitalised Europe and heightened risks that potentially lead the US to slower growth.

For investors, it is easy to get distracted by the headlines but a lot of what is happening is ultimately noise. We believe fixed income investors should continue to focus on the long-term fundamentals. Yields, which are a good proxy for long-term total returns, remain high and can therefore absorb a significant amount of near-term volatility.

 

The power of yield

 

Past results are not a guarantee of future results.

Data from 31 January 1973 to 31 December 2024 and in US dollar terms. Index used: Bloomberg US Corporate Total Return Index. Source: Bloomberg. YTM: Yield to Maturity

As simple as it sounds, yields are a proxy for future total returns. For example, looking at investment-grade corporate bond yields, history shows the correlation between starting yield and total return over the next five years has been extremely high.

Today, depending on the quality of issue, fixed income markets offer yields of between 4% and 8% across sectors and locking in these yields offers good value over the long term. Meanwhile, high-quality assets should benefit from duration in a recessionary scenario where rates are expected to fall and also provide diversification.

While credit spreads have widened sharply, they remain below long-term historical averages. Similarly, the differential between high yield and investment grade credit has widened significantly, but this has been from historically very tight levels. Consequently, the spread is now around the historical average. However, the likelihood of ongoing uncertainty could lead to further widening, with dispersion also likely to increase. For this reason, we remain defensively positioned with a bias towards higher quality.

Importantly, we have dry powder in portfolios and are ready to capitalise on any opportunities as valuations become more attractive.

The constantly changing macroeconomic backdrop underlines the importance of taking a long-term view. We believe investors should focus on idiosyncratic opportunities that can take advantage of the dispersion created and that are more resilient in this environment. A good example of such are electric utilities, which are solid defensive issuers not directly impacted by tariffs.

One area of opportunity is emerging markets (EM), specifically local currency bonds in Latin America and Asia. Fundamentals across many EM economies remain relatively healthy with a good ability to service debt thanks to continued reserves accumulation. Inflation has moderated substantially from 2022 peaks and is generally on a downward trend amid continued restrictive monetary policy stances. The impact from tariffs should weaken inflation further. Fiscal indicators are generally the weak spots, but most of the major EMs have lengthened the maturity profile of their debt and are issuing more now in local currency.

This is a pivotal time for the global economy, with many certainties of the past 40 years or more seeming to be in flux. The outcome, remains highly uncertain and to an extent binary, and the investment implications for this structural shift are not yet clear. We therefore continue to position portfolios based on the underlying fundamentals – which in our view remain strong, particularly in corporate credit and many emerging markets – while closely monitoring the structural developments.

To read more about Capital Group’s fixed income capabilities, click here.