Recruitment firm Egon Zehnder has been appointed to commence a global executive search for the next chief executive of the Australian Retirement Trust following the resignation of Bernard Reilly two years after the pension’s formation by the merger of Sunsuper and QSuper. The former State Street executive has urged Australian and international peers to consider throwing their hats in the ring for a job he says he enjoyed “almost every minute” of.

On the day mega-merger of Australian pensions Sunsuper and QSuper completed in February 2022, floods in their home state of Queensland reached their apex and Russia invaded Ukraine.

It was symbolic of the frenetic schedule and complex national and geopolitical problems Bernard Reilly would face throughout his subsequent 18 months as inaugural CEO of the new Australian Retirement Trust.

Reilly, who has announced he will step down from the role in February next year, admits the job was a challenging one.

“The last four years have been pretty big – COVID, mergers, integrations. These jobs are all-consuming and you never really switch off,” says Reilly, who lives in Sydney with his family – 733 kilometres (455 miles) from the fund’s headquarters in the Queensland capital of Brisbane.

While he concedes there were hurdles – including closing a major deal during the nation’s controversial lockdowns during the pandemic and the political and media scrutiny that comes with being a leader in its unique compulsory defined contributions system – he doesn’t want those to deter ambitious, values-based peers in the industry from stepping into his shoes at the A$260 billion ($166 billion) fund.

“This is an amazing job,” he tells Top1000funds.com. “I enjoyed almost every minute of it. I’m stepping away because it’s the right time for me. But for the right person there is an amazing platform to continue to grow Australian Retirement Trust to benefit our members.

“We are around the 20th largest pension fund in the world. And I think that’s an amazing platform to think about what we can do in the Australian context, but also when you think about the role that we play in the assets that we manage globally.”

The comments come as recruitment firm Egon Zehnder has been appointed by the ART board to conduct a global executive search for Reilly’s replacement.

Under his tenure, the fund has inked employer mandates with two of Australia’s largest listed companies, groceries giant Woolworths and the Commonwealth Bank, and says it continues to experience organic growth from members switching of their own volition.

Asked to name some of his achievements in the role, other than completion and integration of the two Queensland-based legacy funds, Reilly pointed to the fund’s work in preparing members for retirement and investment in building relationships with external investment advisers.

ART chair Andrew Fraser, a former treasurer of the state of Queensland, praised the outgoing CEO in a statement. “Bern has expertly guided Australian Retirement Trust to deliver merger benefits to our more than 2.3 million members,” he said. “But I think the thing Bern should be proudest of, and a true testament to his leadership capabilities, is the culture he has helped grow across our organisation.”

From this October $71.9 billion Pennsylvania Public School Employees’ Retirement System, PSERS, will reduce net leverage, add fixed income allocations, and continue to shave costs off its external investment management fees.

The fund is targeting an annual $130 million reduction in fees by “prudently” lowering the private markets target allocation to 30 per cent (it is currently 36 per cent) and taking the absolute return target allocation down to zero from current levels of 4 per cent of assets.

The trimming and shifting of the portfolio comes after the fund decided to adjust its strategic asset allocation in response to significant ongoing market changes.

Typically the board reassesses the SAA every three years (it last adjusted its SAA in 2021) but may consider adjustments during the interim should material changes occur to the underlying economic and capital market assumptions. In a recent board meeting, members heard how the latest decision reflects the fund’s strength and flexibility to adjust to an ever-evolving market environment.

“PSERS has successfully applied a modest amount of leverage over the years to improve diversification and enhance long-term return expectations,” CIO Ben Cotton said in the meeting. “However material changes to underlying return expectations make it practical to reassess our present targets.”

Rising interest rates have made the cost of leverage higher and by extension, the benefits of such leverage less certain, explained Cotton who oversees 65 internal investment professionals and staff.

“Reducing net leverage and making the planned reductions to private markets and absolute return allocations also allows us to simplify the overall asset allocation and reduce risk,” he said. “At the same time, we can preserve the fund’s diversification and liquidity while still maintaining sufficient long-term return expectations to hopefully meet or surpass our 7 per cent annual assumed rate of return.”

The absolute return allocation has targeted returns with a low correlation to public financial markets and strategies have included event driven, relative value, tactical trading and long short equity.

Cutting management fees

PSERS commitment to cut fees follows a concerted strategy to reduce management fees in recent years. According to its annual report, investment expenses decreased by $92.7 million from $618.1 million in FY 2021 to $525.4 million in FY 2022. As a percentage of total benefits and expenses, investment expenses have decreased from a high of 8.2 per cent in FY 2013 to 6.2 per cent in FY 2022.

PSERS is renowned among public pension fund peers for its fee transparency. It requests management fee information from each of its limited partnerships and collective trust fund investments, even if it is not specifically disclosed in the fund’s standard reports or identified in capital call requests.

This information includes base and performance fees obtained from either the fund’s administrator statement, capital account statement, or financial statements and is then used to report all relevant management fees in PSERS’ financial statements.

PSERS – one of America’s oldest pension funds, founded in 1917 although it only had assets under management of $6 billion in the early 80s –  has a 40 per cent long term target asset allocation of equity that includes a 12 per cent allocation to private equity. Public equity consists of small, mid large cap US equity (12 per cent) non US equity (16 per cent). PSERS invests around 33 per cent of the portfolio in fixed income, divided between investment grade, public and private credit and US inflation protection

Real assets comprise 29 per cent of the portfolio and includes public and private real estate and infrastructure, commodities and gold.

The United Kingdom’s £32 billion Pension Protection Fund (PPF) is marketing its credentials to act as consolidator for the country’s thousands of  DB corporate retirement funds.

The government wants the £1.5 trillion sector to invest more in economic growth at home and put money into alternative assets like infrastructure and private equity rather than invest in these schemes’ favourite asset – liability-matching fixed income that safely secures member outcomes.

The PPF’s push for an expanded role to act as a consolidator comes in response to the government’s call for evidence on how DB pension schemes, and the PPF, could support greater productive investment in the UK. Growing pressure to cajole these risk-averse pension funds to invest more in illiquid assets is an increasingly fraught debate. Many closed DB pension funds are well funded and don’t need to take this added risk to deliver on returns.

The PPF is the latest large pension scheme to burnish its ability to manage these DB funds. Under its new name Brightwell, BT Pension Scheme Management, the executive arm of the £47 billion ($59.8 billion) BT Pension Scheme (BTPS) is already offering its pension management capabilities to other defined benefit pension schemes – like the £1 billion DB arm of the EE Pension Scheme.

Perhaps Brightwell’s most compelling service comes in its promise of a coherent, single approach to pension management. Under the Brightwell umbrella schemes can replace a noisy cohort of actuarial, investment, fiduciary and covenant advisors, plus multiple asset managers, with a single operation.

A step change

The PPF explains that persuading DB funds to invest in riskier long-term assets, and accepting more volatility, is at odds with many of these funds de-risking strategies and will require a step change.

These schemes typically seek insurer buy-outs, it continues in its response to the government. They buy gilts and corporate bonds to reduce balance sheet volatility to get to this endgame as soon as possible.

Most pension funds are sufficiently well funded and do not need to generate the higher returns offered by an equity stake in productive finance assets. Improved scheme funding in recent years, driven by higher interest rates, will further accelerate the trend for closed, corporate, DB schemes to de-risk, it states. Arguments echoed by others on these pages like Railpen’s head of investment strategy and research, John Greaves.

The PPF says it has the experience and expertise to run a consolidated fund. This would create scale, and combined with professional asset management, lead to greater allocations in productive finance while providing security for members.

“The PPF is well placed to run such a Fund,” says Oliver Morley, PPF chief executive. “Consolidation must be an integral part of the solution.”

The PPF outlines how a Public Sector Consolidator solution could be designed, structured and set up. It argues that its own investment approach and asset allocation acts as a blueprint for what could be achieved.

Around 30 per cent of the portfolio is invested in alternative assets comprising private equity, private credit, infrastructure and timberland/agriculture, over two thirds of which are in the UK.  The PPF has 18-year experience consolidating over 1,000 DB schemes, it says.

“Running a Public Sector Consolidator would be a natural evolution of the PPF’s existing capabilities. Through our investment approach the PPF already provides a blueprint for how the government’s objectives can be delivered at scale. We’re a major buyer of UK gilts, invest heavily in productive assets and, by investing for growth over the long term, we’ve delivered greater security for our members,”  adds Morley.

Alongside consolidation, and an overhaul in the structure of the DB market, other step changes would also be essential. Schemes will have to embrace long term investments, diversification, interest rate/inflation risk management, scale and professional management.

The PPF also argues that unleashing this money for investment would involve “severing the link” between the sponsoring employer and its pension plan, which currently encourages most schemes to minimise risk.

The UK’s Universities Superannuation Scheme has produced new climate scenarios that are more informative for investors by focusing on shorter-term scenarios and switching the focus from temperature pathways to the complex interplay of physical and human factors.

The £75.5 billion fund aims to develop a long-term investment outlook informed by the scenarios and draw out investment implications for capital markets expectations, top-down portfolio construction, and country/sector preferences.

USS commissioned the University of Exeter earlier this year to apply a new approach to scenarios to support its investment and risk management decision making. The result of that collaboration is a report released today No Time To Lose – New Scenario Narratives for Action on Climate Change, which introduces four new climate scenarios that look at shorter-term and more realistic time horizons to inform investment decision making.

The new scenarios are more meaningful for investors because they switch the focus away from global average temperature pathways and towards the complex interplay between physical factors such as extreme weather events and human factors such as disruptions in geopolitics, economics, financial markets, and technology.

The focus is on operationalising net zero commitments and the need to have shorter term and bespoke scenarios to achieve that.

“This paradigm shift towards shorter horizons and business applications requires scenarios that focus less on the climate itself and more on the vicissitudes of politics, markets and extreme weather events. Global warming is not a major uncertainty over the next few years, but extreme weather events are rising rapidly, even if location and timing are uncertain,” the report says.

The report highlights that existing scenarios understate both the economic damage of climate change and the potential benefits of action, failing to capture key aspects of the real world, and so restrict their usefulness for investment decision-making. It also recognises that the mainstream economic models being used for climate risk scenarios are not up to this task.

Mirko Cardinale, head of investment strategy and advice at USS Investment Management, says the fund wants to lead in the development of this new approach that is focused on understanding how real-world dynamics could play out.

“The work with the University of Exeter has been extremely valuable in representing an important milestone for the development of a new approach to climate scenario analysis,” he says.

“We aim to lead in the development of this new approach that is less focused on precise estimation and more on understanding how real-world dynamics could play out in a complex world where climate risks cannot be looked at in isolation from political, economic, and technological factors. Moving forward, we intend to develop a long-term investment outlook informed by the scenarios and draw out investment implications for capital markets expectations, top-down portfolio construction, and country/sector preferences.”

USS’s Mirko Cardindale and University of Exeter Visiting Fellow Mike Clark will speak at the Sustainability in Practice event at Oxford University from November 6-8. For the program and more information click here.

Since Alison Romano joined the $33 billion San Francisco Employees Retirement System (SFERS) in the middle of last year, she has spent most of her time working with the team to ensure the fund’s celebrated long-term performance continues in the face of today’s shifting market environment.

Romano joined SFERS after a 13-year stint at Florida’s State Board of Administration and tells Top1000funds.com that she began by approaching her new dual role as both CIO and CEO by focusing on SFERS core principles. This meant outlining SFERS objectives, and how the team should design a repeatable process to meet those objectives. Alongside better-defined objectives, she’s enhanced the investment policy statement, liquidity needs and risk guardrails for each asset class, and talked a great deal on portfolio construction.

“With a refined framework in place, we can better evaluate the return/risk profile of strategy types and individual strategies and, in doing so, put capital to work in a way that is aligned with our objectives. We continue to evaluate our geographic tilts and exposures toward growth and innovation,” she says.

SFERS sophisticated and experienced investment team, who oversee an active public market allocation, top-performing private market exposure and exposure to growth themes such as technology, constantly evaluate new opportunities, debating where to trim or change the allocation.

Currently, a key focus is the fund’s exposure to China in the public equity allocation in light of what she calls “elevated risk.” In recent years, SFERS has sought to increase excess returns in public equity by investing with specialised managers with competitive advantages that has included those with expertise in China. Although exposure to China has added value over the benchmark in the last 3-5 years, concerns have grown with respect to China equities given economic conditions and COVID-19 policies.

As for equity opportunities, she’s assessing value and global mandates to complement existing strategies.

In fixed income, the team added multi-sector credit managers in 2022 and is now researching strategies in the higher yielding multi-sector credit space.

“Across every asset class, I want to make sure with each investment or tilt, we evaluate the risk/return profile in today’s environment and consider all the objectives of the strategy, from return, liquidity, diversification, downside protection, and more,” she says.

Private markets expertise

Other areas she is focused include private credit where SFERS is building out the target allocation to 10 per cent from current levels of 6.5 per cent. With a eye on relative value and risk-adjusted returns, she is looking at de-risking where possible through strategies like lower leverage, higher seniority in a capital structure, or lower jurisdictional risk while also keeping a look out for credit opportunities and distressed opportunities that may be attractive.

SFERS has been actively investing in private markets for years and has notable exposure across private equity, real assets, as well as private credit.

“We are long-term investors, and in long duration assets, maintaining discipline in pacing is important.  That said, we may lean-in or out of certain exposures or look for managers with certain expertise based on our market outlook, the risk/return dynamics, and the positioning of the overall portfolio,” she says.

For example, whereas in the recent past multiple expansion was a key driver of private equity returns, today operational improvement is increasingly important.  SFERS is particularly seeking GPs that have the expertise to facilitate operational change in both good and challenging economic environments.

Reflecting further on private equity, she notes that the prolonged period of low rates, easy monetary policy, strong economic growth and secular trends in technology that created tailwinds prior to 2022 have now changed.

Of course long-term opportunity persists, and private equity continues to have an important role in the asset allocation. But at the moment her particular focus is on growth as a theme, expressed in part through SFERS notable exposure to venture capital.

The portfolio also has an overweight to technology and an increased focus on healthcare, she says. “While our themes will drive portfolio weighting over time, we will remain opportunistic in pursuing top-tier managers across strategies and geographies.”

“We continue to evaluate exposure outside of the US, buyouts, and lower middle-market,” she continues.  As for secondaries, whether SFERS is buying or selling assets, it will apply a similar lens as any investment decision – what is the risk/return trade-off, the opportunity costs, the liquidity needs, and impact on the overall fund.”

With respect to real assets, the team hunts for areas supported by population demographic and migratory trends and assets with strong long-term market fundamentals, including areas like industrials and the digital and energy transition.

A review of absolute returns

This year she has also undertaken a thorough review of the $3.5 billion absolute return portfolio, taking into account the role of the asset class in the total plan. Once again, this process took her back to defining SFERS’ key objectives for the allocation.

In this case those goals are preserving capital relative to global equities during equity market downturns while outperforming global fixed income over a full cycle; producing returns that are independent of the performance of the equity and fixed income markets and providing a secondary source of liquidity.

After defining the objectives, the team then categorised different absolute return strategies as core/diversifiers, risk mitigators, return drivers, and high beta.

“We will continue to emphasise core strategies, such as multi-strat, market neutral, or quantitative.  These will be complemented with risk mitigators like systematic macro and opportunistic return drivers.  We are leaning away from strategies driven by equity or credit beta,” she explains.

This coming year SFERS plans to complete a full asset liability study. Part of the process will include considering current capital market assumptions, liquidity needs today and into the future, a multifaceted view of risk and the fund’s current funding status of 96 per cent.

Perhaps most pertinent is liquidity, particularly in the context of the forecast increase in liabilities – projected to grow considerably faster than the 7.2 per cent discount rate – exposure to private markets, and the slowing of fundraising and distributions.

“We continue to focus acutely on liquidity so that we can manage cash flows and retain the flexibility to be nimble when opportunities present themselves.”

SFERS targets a 7.2 per cent actuarial rate of return over a full market cycle (subject to liquidity needs and other risk considerations) and assets are divided between a target 60 per cent exposure to growth assets (public and private equity), 20 per cent to diversifying assets (real assets and absolute return), and 23 per cent to income/capital preservation that comprises fixed income and private credit. SFERS has the option to employ leverage up to 5 per cent.

Building the team

Romano’s role as both CEO and CIO take her responsibilities beyond just investment. She oversees a team of 125 “talented and hardworking individuals” that includes the 25-person investment team. Her focus is on fostering a strong culture so that SFERS can attract and retain talent across all areas of business, from investments to benefits administration and beyond.

“I aim to create an environment in which our mission, goals, and priorities are clear so that everyone knows how their responsibilities and efforts relate directly to the mission.  I strive to reinforce a culture in which individuals and teams acknowledge successes, learn from mistakes, support active problem-solving, and take ownership at every level of the organisation.”

The key to achieving this type of culture is strong communication, particularly when navigating a hybrid work structure. And this often means listening rather than speaking, she explains.

“There are many things I’ve learned over the course of my career that impact how I work, communicate, and lead.  Leaders are often expected to be the first to speak, the first to suggest the answers.  However, good leadership comes from listening, from asking good questions of the experts on the team, and from creating an environment in which good ideas can be heard and debated.”

“This is also an environment in which I, as a leader, can make well-informed decisions about risks and opportunities. Hopefully, when I lean into the Socratic elements of this management approach, I can empower the team to develop their own solutions and buy into the approach. Of course, communication is two-way, and I am responsible for engaging with the team, sharing information, and providing context for decisions. ”

Alison Romano is a speaker at the Fiduciary Investors Symposium on campus at Stanford University from September 19-21.  Click here for the program.

The differentiating characteristics of unlisted and listed real estate diminish over time according to new research by Norges Bank Investment Management, supporting the sovereign wealth funds’ unique combined strategy for real estate that sees both private and listed sit in the same team. Amanda White spoke to Norges’ CIO of real assets and global head of research.

For the past three years Norges Bank Investment Management, which manages the $1.43 trillion Government Pension Fund Global, has managed its listed and unlisted real estate teams under one umbrella. It was part of a re-organisation to bring the teams closer together following the 2019 shift to manage the real estate exposure in one combined strategy.

The combined strategy is underpinned by the belief that listed and private real estate perform more or less the same over the long term, chief investment officer of real assets Mie Caroline Holstad

told Top1000funds.com in an interview. And now the fund’s research department, led by global head Fredrik Willumsen, have research that supports that strategy.

“In the short- to mid-term there could be major differences, but that changes over the long term,” Holstad explains.

“It’s important to note we have a much longer time perspective than what other institutional investors typically have. And being as large as we are without liquidity constraints, we can sit through the cycles so long as we believe in the underlying fundamentals.”

The success of the combined strategy in real estate is underpinned by these characteristics of the fund – long-term and without liquidity constraints – which in turn means it can approach the listed markets in a fundamentally different way than most other investors.

“We are never a forced seller so we can behave differently in the listed world than others can,” Holstad says. “We are using listed the same way as many investors use private investments, which is clearly very different.”

This shows up in the length of holding and the position size of the listed investments.

“In listed real estate we don’t do small positions, we do large positions which goes with our comparative advantages,” Holstad says.

“And we sit through cycles like this because we believe in underlying economics and fundamentals of those companies. It makes our strategy quite different on the listed side, because most investors use it more tactically.”

For a combined strategy to make sense, positions need to be sizable and Norges can hold up to 30 per cent of companies on the listed side.

On the private side the fund underwrites assets for a minimum 10-year horizon, and the same is true for the listed holdings.

“When we invest in companies, we have extremely good fundamental research, more similar to private equity investment in listed entities,” Holstad says.

“We don’t use the listed part as being tactical in the market, we see them more together as one portfolio. In the long term they behave more or less the same and we are agnostic to how we invest. So, we can enter the market in the way we think makes the most sense for the fund and is efficient.”

Across all its investments Norges takes a very considered, research-driven approach and combining the listed and unlisted teams has resulted in better knowledge sharing.

“Private markets are more out there and have different sources of information, for example they speak to tenant’s ad service providers at assets. When you make that information flow from different geographies as well, and couple it all together we have a massive database of information. It’s been a very interesting journey, and I think we are in a much better place now than we were some years ago.”

Some notable examples of how this has played out in the combined approach include investments in Prologis and Alexandria.

“Investing in logistics real estate for over a decade alongside Prologis has given us a lot of insights into the logistics sector. Our push into logistics on the listed side over the past few years is very much based on our shared conviction and the research carried out by the unlisted team,” Holstad says. “We’ve been among the top shareholders in Alexandria for several years and our listed team has developed a good relationship with senior management there which was instrumental when we made our unlisted life science investment two years ago when we bought into 50-60 Binney Street in East Cambridge.”

Information and knowledge sharing between the teams has been additional to the benefits of cost efficiency. Norges can be agnostic to how it achieves real estate exposures, and the plan is this will lead to more opportunities and bundled deals for the combined team in the future.

Research to back the strategy

The recent research released under a NBIM discussion notes, Drivers of listed and unlisted real estate returns, shows the differences between listed and unlisted real estate appear to reduce over the longer term, and the correlation of their returns increases with horizon. It also showed the correlations with the broader equity market are lower at longer horizons for both real estate segments. These correlation patterns suggest that differences between listed and unlisted real estate returns are short-term and largely driven by transitory factors.

When applied to the Norges portfolio the short-term returns year on year look very different between listed and unlisted, according to Fredrik Willumsen. For example, in 2022 the listed portfolio was down 30 per cent and the unlisted was around zero. 2023 looks so far to be the opposite directionally.

“The idea of expanding the horizon makes total sense,” he says. “Listed and unlisted real estate invest in the same thing, bricks and mortar, so it stands to reason in the long term it doesn’t really matter. It speaks to the strategy we have.”

A combined strategy is also an advantage when markets are in turmoil as is the case now.

“Having this combined strategy and the toolbox to both private and listed means we can talk to companies and do more bundled deals,” Holstad says.

“Sometimes we are invested in listed and unlisted with companies and it makes the dialogue even better when it comes to information flow and opportunity set.”

Efficiency in sector allocations

Efficiency can mean a lot of things including cost, and the listed markets are often a more cost-efficient way to investigate certain sectors before committing to larger stakes.

Historically the allocations to private and public have also varied by sector. One example is that residential property was more likely to be accessed via the listed markets, and logistics is a large private allocation.

Traditionally the fund focused on four core sectors: residential, retail, office and logistics alongside a city strategy that saw eight cities as the geographical focus. But with the structural changes taking place in the real estate market the focus going forward has shifted somewhat.

“We used to say that office was the backbone of the portfolio, now we have moved away from that. We still believe in office, but we are seeing the major bifurcation in quality and location that everyone is seeing so we are more selective on office investments,” the CIO says.

In addition, as more niche sectors like self-storage, healthcare, senior housing , data centres, etc. emerged the fund could diversify even more through its listed exposures.

“As an investor with our mandate we look at how we access each sector in the best possible way, it’s more than just cost efficiency it’s also the quality of the companies and the size.”

The fund looked at how to exploit the expanded real estate sectors but also started tilting the combined portfolio to themes such as AI and climate.

“These are big themes, and we are looking at whether we can be at the forefront of these massive trends. It’s the same with logistics and retail, you only need to look at your neighbours and friends and how they do their shopping. It’s about those mega trends and how we can participate in those. We haven’t moved away from looking at the eight cities, but we are broader when it comes to geography, and more flexible when it comes to sectors. The combined strategy gives us flexibility  in a cost-efficient way.”

On the private side efficiency also extends to the choice of partner in the joint venture and their ability to have skin in the game.

“One of the most important things is for our partners to have very good local knowledge and also be a long-term investor, we don’t want people flipping assets. It’s about alignment of values and having a good reputation in the market.”

Holstad says given the specific investing environment combining local knowledge with macroeconomic themes is important.

“ We have been building up exposure in sectors like life sciences, logistics and residential where we have strong conviction about attractive long-term structural outlook and are actively monitoring and adapting to new themes emerging”