The Thinking Ahead Institute’s climate transition working group has been exploring a thesis – that a narrowly defined transition is likely to fail.

The narrow definition relates to decarbonising economic activity: ‘mitigation’. A more positive framing of the thesis would be that a broadly defined transition (including biodiversity loss, social inequality, and circular economy) – ‘adaptation’ – is more likely to be successful.

Here we report on the group’s exploration of adaptation, which is our collective, defensive response to a warming planet and changing climate. Adaptation is defensive because it seeks to enhance our future security in response to threat – so rebuilding a flooded house on stilts or changing where and how we grow crops.

Adaptation versus mitigation

It is useful to start by comparing adaptation with mitigation, as in the table below.

Adaptation Mitigation
Characteristic ‘Defensive’ ‘Offensive’
What it is Reduction in vulnerability Reduction in emissions
What it does Address the symptom Address the cause
Geography Local Global

The dominant focus in the investment domain has arguably been on mitigation, such as net-zero commitments. This position has logic behind it – if you solve the cause, you also address the symptoms.

However, we believe that adaptation should receive more attention. This is partly because mitigation and adaptation are not mutually exclusive – there is an intersection between the two, which might yield particularly compelling investment opportunities – and partly because they are in a dynamic relationship with each other.

If we had pursued an aggressive mitigation pathway starting in the 1980s, we might have found there was little current need for adaptation. Now, however, given insufficient historic mitigation we find that the temperature is rising, which requires more adaptation, reducing the focus on mitigation and the resources available for it. This locks in further temperature rises, which will require yet more adaptation, and so on.

Adapting to what?

There are multiple levels on which adaptation is likely to be needed. Most obviously, we can start with direct physical impacts and peel back the layers from there:

  • Climate change events: There will be increased frequency of extreme weather events (such as hurricanes and droughts). Rising sea levels will salinate fertile river deltas, erode coastlines and bring flooding.
  • Degraded ecosystem and weaker related services: We are likely to see a reduction in agricultural yields and drop in food security.
    Social and cultural shifts: We are likely to see higher levels of human migration and displacement, and potential shifts in consumption and lifestyles.
  • Energy disruption: Transitioning from the dominant fossil energy to renewables (mitigation) will bring adaptation problems because of the disparity in their characteristics. For example, energy density, availability, or transportability.
  • Economic disruption: The world is committed to an income reduction of 19 per cent within the next 26 years independent of future emission choices, according to a recent paper published in Nature.

However, I would like to take the adaptation thinking a bit deeper and more abstract.

My colleague, Roger Urwin, uses an ‘iceberg model’ to describe what is going on in a complex system. In our context, above the surface, we observe adaptation behaviours but right at the bottom of the iceberg, hidden well below the surface, is the mental model from which the behaviours arise.

One version of the mental model assumes there is a mean (for example, our living standards improve over time), and sees adaptation as correcting for the shocks that come our way – we assume there is reversion to the mean. If we hold this mental model then we can run down the bullet list above and quickly work out what we need to do to correct for any shock.

An alternative mental model could assume that there is no longer any mean to return to. In this model, temperature has already risen outside the range within which humans developed agriculture and created a civilisation (true), and we are at – or have already passed – a number of irreversible tipping points (possible).

This is a world of mean aversion, where there is no average, and no normal to return to. Adaptation under this mental model looks totally different. If we run down the bullet list now, it is far from clear what we should do.

We basically have three choices… mitigation, adaptation and suffering

The title above is a quote from John Holdren, an American scientist and climate adviser to former President Barak Obama. The quote continues with, “We’re going to do some of each. The question is what the mix is going to be”. The more mitigation we do, the less adaptation we have to do, and the less suffering we will experience.

However, it is possible that we have already left it too late to mitigate. We are currently on a path to around 2.7 degrees Celsius of warming by 2100 suggesting that the mix will be dominated by adaptation and suffering.

Assuming that we wish to avoid unnecessary suffering, we will have to do a lot of adaptation. We can categorise adaptation as follows:

  • Behavioural / voluntary: This occurs at an individual or community level, such as a corporation.
  • Forced / regulatory: This is imposed from an urban, regional or national level.
  • Technical / technological: These adaptations can be adopted voluntarily (perhaps ‘heavily sold’ by profit-motivated entities) or forced through regulation.

Adaptation is necessary and will be part of our future, but there are a number of issues that make this a difficult area for the investment industry:

  • Geographical disconnect / mismatch: Where emissions are produced (‘global north’) typically doesn’t match where the impact occurs (‘global south’). It follows that there is a lack of incentive for investors to direct adaptation capital where it is most needed.
  • Short-term uncertainty: The benefits may be difficult to capture in the short term. For example, assessing avoided future losses.
  • Market absence: The regions most affected by climate change (‘global south’) often have less access to capital markets.
  • High upfront costs: Large-scale infrastructure projects (such as sea walls or flood barriers) may require significant initial investments, and may have uncertain future revenues.

While there will be micro-opportunities to invest in adaptation and earn an investment return, the above points suggest that aggregate and large-scale adaptation may not provide attractive investment returns.

If this is true, a rather bleak question suggests itself: if we are not aggressively investing in mitigation, and we are unlikely to invest at scale in adaptation, are we setting ourselves up for suffering?

Tim Hodgson is co-founder and head of research of the Thinking Ahead Institute at WTW, an innovation network of asset owners and asset managers committed to mobilising capital for a sustainable future.

CalSTRS has plenty of cash as it positions for opportunities emerging out of the current economic volatility. In the longer term, the fund’s asset allocation will continue to move away from global equities into private markets as the dust settles and makes way for more US opportunities. Amanda White spoke to CIO Scott Chan about the fund’s plans.

An acceleration of some persistent themes coming into 2025, like deglobalisation and the increasing chance of recession, has positioned CalSTRS well for the volatility in markets.

As Scott Chan, the fund’s chief investment officer carried out its annual asset allocation exercise with June Kim, senior investment director of total fund management, the senior management team, directors, and staff, one of the concerns was balancing the long-term positioning of assets alongside potential repercussions of the current economic environment.

“One of the issues is that tariffs, and the theme of deglobalisation, is causing a lot of uncertainty and chaos,” he says. “If it means that trading partners will be shifting their reliance on trading with the US, there is a growing risk that capital might shift from the US. The future holds that risk in its hands, and we are trying to understand the magnitude and speed of a risk like that.”

Chan believes it is likely the US will experience higher inflation and lower GDP growth, and the upending of complex supply chains will mean company profit margins are likely to go down, not up.

“This puts into jeopardy some very high historical profit margins. The opportunity is how we might consider diversifying our public markets exposure as a lot of that is concentrated in the US,” he says. “We are working in a world with higher inflation, higher for longer interest rates, great policy uncertainty and geopolitical uncertainty. There is a lot for allocators to think about.”

But in “reading the tea leaves”, Chan’s view is that there will be more amazing opportunities for transformative capital to come into the US once the dust settles.

“There is a lot to unpack from the US perspective,” he says. “As we look to AI and whether there will be a manufacturing renaissance in the US, the themes of infrastructure, energy, and power come in. We see private markets as transformative capital, and there is a lot of transformation that is going to be needed.

“There’s always opportunities and risks, and you can turn risks into opportunities too. These are some of the thoughts emerging and in our annual asset allocation you can see how it is in line with that.”

The fund recently completed its annual asset allocation review internally across all investment divisions and while generally speaking, Chan says the environment is one where “staying the course” is important given the volatility, there is also a need to be more dynamic.

“We have a very diversified portfolio, and I don’t think diversification has paid off in the recent past because of the dominance of the US stock market. But we are quickly moving into an environment where diversification will pay off,” he says.

The fund is moving its “diversifying portfolio” from an underweight to target position, adding to fixed income, risk-mitigating strategies (including hedge funds), long-duration bonds, and cash.

“We are hoping in a turbulent market environment that portfolio would be up, or at a minimum outperforming the growth assets. We were underweight and over time we are bringing it to target and then moving into an overweight position. We have been on a path to move to target for 18 months and we accelerated that from January this year.”

Chan says in January the view was that the chance of recession or stagflation increased significantly and wasn’t priced into markets.

“So we became defensive in Jan/Feb, positioning the portfolio defensively. While market strategists began to raise the risk of the odds of a recession, the market was pricing almost zero back in that timeframe,” Chan says. “We have more and more conviction of the uncertainty and the probability of risk increasing. We didn’t have 100 per cent direction but as an allocator we have to look at the probability and expected return.”

For nearly two years, the fund has also been on a path to increase liquidity and that accelerated in January and February.

“We are looking at all the liquidity tools we have available, raising a bit more cash, and slowing down some of our transactions. We always want to have enough liquidity to take advantage of opportunities if the market declines a lot. We are in that position now,” he says, adding that “we have a lot of liquidity when the time comes, but we don’t think the time has come yet.”

In addition to cash, the fund has access to other tools, like the futures markets, counterparties, a formal leverage policy of 10 per cent, and widening of allocation bands, all giving the fund access to liquidity.

“They all provide us with the amount of liquidity we think we need to take advantage of a market crisis. We don’t want to put a figure on it but it’s very significant and I feel good about that in preparation for volatility and an uncertain environment.”

In line with its strategic thinking, CalSTRS is diversifying out of global equities, currently around 1.5 per cent underweight, and into private markets where it sees more ability to add value.

“We are building out infrastructure, the energy transition, certain areas of private credit like asset backed, all clear areas of private markets we think can provide very good returns at decent risk levels.”

Priorities

The end of June will mark the first year of Chan’s tenure as CIO, a year in which he has laid out organisational and investment priorities and appointed new senior team members.

A shared vision for the investment division, moving to a one fund approach and revamping how the fund uses technology are the top three priorities.

“As a new CIO I wanted us to look out five to 10 years at what we need to become, and what do we need to build now to fulfill on our mission well into the future,” he says.

CalSTRS has a 30-year average return of 8.1 per cent versus its target of 7 per cent, and as the second largest fund in the United States, doubles its assets under management about every 12 years.

“Every dozen years or so, if we are successful in achieving our returns – we create a whole new CalSTRS because we double our asset base and we need to prepare for increased size and complexity”, Chan says. The move towards a total fund approach, which has taken place over the past few years, including the appointment of June Kim last year to head of total portfolio management, has been fast-tracked as the need to allocate capital dynamically becomes more important. The fund’s collaborative model is deeply embedded and the cost savings and alpha point to its success.

“We want to look at what is the better value for the risk we are taking. There are more and more evolving opportunities and they evolve quickly, things like the energy transition, data centres, asset backed private credit. Some fall within an asset class and some in between. We need to be nimble and innovate in how we allocate,” Chan says.

A centralised view of the portfolio is also essential for reporting risk at the total fund level, and can be used to scale opportunities.

“I want to unlock the advantage of position sizing,” he says.

Asset owners have identified that one of the long-term consequences of the Trump administration’s tariff policy and market fallout could manifest with investors retreating from a US-concentrated portfolio. It makes a timely moment for Norway to launch a new sovereign wealth fund specifically designed to plough investment into local companies.

The Norwegian Parliament has approved seed funding to invest NOK 15 billion ($1.4 billion) in a specialist Nordic small-cap equity fund with the potential to double the allocation over time. Three portfolio managers have started work in unlikely headquarters in the remote town of Tromso in northern Norway above the Arctic Circle, thousands of kilometres from Oslo.

The fund will be overseen by Norway’s domestic pension fund, Oslo-based NOK 381 billion ($35 billion) Government Pension Fund Norway (Folketrygdfondet) – Government Pension Fund Global’s smaller sibling – but has a delegated investment strategy.

Government Pension Fund Norway CEO Kjetil Houg has played a pivotal role in creating the new fund and believes its birth chimes with emerging themes of investors putting more capital to work at home.

“Large investors should consider their geographical location; there is no reason to send money far away in the current climate,” he told Top1000funds.com in an interview.

The new pool of domestic investment could help boost liquidity in the local market and encourage Nordic companies like Sweden’s Spotify and payments fintech Klarna, which has just delayed listing in New York because of market volatility, to list locally rather than in the US, he suggests.

Houg also believes the fund has other characteristics that suit it to the current climate. He says active management is the only way investors can ensure the depth of knowledge and true understanding of corporate risk in an increasingly protectionist world. Nordic companies with small home markets are sheltered from the impact of tariffs, but active management can drill down to how most local companies, which are exposed to global trade because of the region’s open economies, will perform.

“More than 50 per cent of Norway’s GDP derives from exports and it’s the same in other Nordic countries. Tariffs are going to impact value creation within companies and certain sectors will be harder hit. Our main concern is market access to the European Union because Norway is outside the EU. If the EU decides to put tariffs on other countries it could harm Norway, so we must ensure a good dialogue with decision makers to secure our market access.”

The portfolio will be actively managed against a reference index of 344 Nordic small-cap companies with a total market value of NOK 1,506 billion, adjusted for free float.

The three largest sectors are industry, healthcare, and finance and just under half of the reference index consists of Swedish companies, followed by Danish (22 per cent), Finnish (13 per cent), Norwegian (9 per cent), and Icelandic (6 per cent) companies. Because many Norwegian companies are already included in the index for the Government Pension Fund Norway the new fund will have a relatively low exposure to Norway.

“The tracking error for the new fund will be slightly higher than the tracking error for the State Pension Fund Norway because small caps are more volatile,” says Houg. “We already invest in Nordic equity, so we know all the large companies and also some of the companies that will be candidates for the small-cap fund. We know the industries, the brokers and the analysts, so moving into small cap isn’t a giant step.”

Active management will also come with engagement. However, the new fund’s allocation to hundreds of small companies will make engagement less hands-on compared to the Government Pension Fund Norway’s large cap investments, where the investor takes a keen interest in company management and nomination committees.

“When it comes to voting at AGMs, the new fund will use a proxy. We are also working on a new digital voting process for our whole operation that will allow us to cover more companies in a more efficient way,” he says.

Contrary to the idea that companies are pushing back on engagement, Houg believes corporates in the region continue to welcome investor input. “We are a large owner in a small market and our engagement is welcomed and expected. Companies want owners that share their ambition and want to be challenged on their strategy and development. Companies listen to what we bring to the table.”

Government Pension Fund Norway sits on 14 different nomination committees and is working on board composition and recruitment. The fund invests 85 per cent of its assets in Norwegian large-cap stocks, where it can hold up to 15 per cent in a single stock. A stake that equates to enough influence to bend corporate strategy, but does not reach “strategic” ownership.

In a new policy, the Government Pension Fund Norway now pays out a 3 per cent dividend to the government annually. It acts as a valve on the investor’s outsized exposure to the Nordics.

Engagement is also growing around nature risk, where dialogue is focused on how companies are scenario planning. The investor is launching a new expectations document and exploring how to price nature risk.

“It’s extremely difficult to price nature risk because it’s a long-term liability. You must consider what is the right discount rate and how cash will evolve in the future. Our focus is on separating direct physical risk related to sea temperature and hurricanes and more indirect risk from changes in regulation and taxes.”

Yet unlike GPFG, neither of the locally invested funds follows up engagement with divestment.

The deadline to release a detailed plan for the proposed US sovereign wealth fund (SWF) came and went, but it was crickets from the White House. The entity was expected to be unveiled at the beginning of May – 90 days after President Donald Trump signed the executive order to establish the fund on February 3.

Reportedly, the delay was because the White House was not satisfied with the approach taken by Treasury Secretary Scott Bessent and Commerce Secretary Howard Lutnick, who were tasked to jointly develop the fund and had already submitted their proposal, CBS News said, citing people with knowledge of the matter.

With minimal details released, there has been wide speculation around the ‘how’s of the SWF, including its funding source, governance structure and investment objectives, as well as the ‘why’s – does the world’s deepest capital market really need a sovereign investment vehicle? And is now a good time when the nation’s running on a dual deficit?

But for Stanford academic Ashby Monk the issue is perhaps being overcomplicated. As the executive and research director of the Stanford Research Initiative on Long-Term Investing, Monk has observed SWFs’ rise and rise with keen interest over the past two decades.

“A lot of people are focused on where the money is coming from [for the US SWF], and my point is that doesn’t matter as much as the goals,” he tells Top1000funds.com.

“I need to understand what your goals are, then we can see what a strategy could be to achieve those goals, and how does that strategy need to be governed, organised, implemented and operated.”

He recently co-authored a research paper which outlined several potential funding designs for the proposed US fund, including from government cost-cutting via initiatives such as the Department of Government Efficiency; new commodity revenues from expanded oil and gas operations; privatising federal assets like loan receivables; and ‘regulatory rent’ by monetising permits or regulatory approvals for companies like TikTok.

The US fund could also issue debt, Monk suggests – it is a practice adopted by some SWFs like Abu Dhabi’s Mubadala Investment Company and Malaysia’s Khazanah Nasional. But the paper argues that no matter how the fund is eventually launched the key is to “prioritise transparency, strategic clarity, and disciplined execution”.

“Every time you set up a new sovereign fund, you get this blank sheet of paper… on the admin, on the organisation, on the goals, all that stuff. How fun. There is this neat opportunity, especially if you get the governance right, to do something innovative,” he says.

Monk’s paper suggests that due to the inherent government oversight and ownership of SWFs, it will be prudent to adopt an arm’s-length or even double arm’s-length governance structure so that the fund can still make commercially driven and independent investment decisions.

There are some lessons from SWFs around the world. For example, the US SWF can “literally copy and paste” the arrangement in place at the Canada Pension Plan, Australia’s Future Fund or the New Zealand Superannuation Fund where funds are overseen by an independent board, Monk says.

“You let the politicians do the [board] appointments, but the selection committee weeds out everybody that is not appropriate. That’s the type of path that I think would give comfort to the market [about a fund’s independence],” he says.

President Donald Trump has loosely described the objective of the US SWF in the executive order as being for the “sole benefit of American citizens”. Monk believes this means it is likely to be a sovereign development fund – a type of SWF “that strategically pursues both commercial returns and specific domestic policy goals”, the research paper says.

In that sense, the US fund could seek inspiration from Ireland’s Strategic Investment Fund, Sweden’s AP6 or Singapore’s Temasek in terms of having clear mandates to drive industrial development, economic diversification and support growth in sectors that are of national priorities, on top of return objectives.

But it is hard to say if any single SWF has the perfect governance setup. Even the poster child of well-run sovereign funds, Norges Bank Investment Management, is subject to political influence, Monk highlights.

“People often point to NBIM as the role model, but I think that’s because they’re quite comfortable with Norway’s form of democracy,” he says.

“The [Norway] Ministry of Finance really dictates pretty interesting things about that fund – they say which companies they should divest from… and which asset classes they’re allowed to invest in.”

Monk recalls a recent conversation he had with the Ireland Strategic Investment Fund’s founding CEO, Eugene O’Callaghan, who having established a sovereign investment fund from the ground up said apart from governance, another key to success is talent. But the two are closely intertwined.

The rumoured head of the US SWF is Michael Grimes. Reuters reported that the technology investment banker left Morgan Stanley in February to take up a new role in the Department of Commerce. He has spearheaded several high-profile IPOs including Facebook, Uber and Airbnb.

“My guess is that this new fund is all about attracting foreign capital into parts of our economy that are under invested, or into new parts of the economy that don’t exist yet, and that means you need really talented investors to be at the helm of the sovereign development fund,” Monk says.

“If you have the governance right, you can recruit talented people that are credible, then you can attract co-investors. and you can start to build these capital markets in places where they have started to fail.

“Because they [other investors] are not pricing the risks correctly in these areas riddled with uncertainties, when what you want is people to see these as priceable risks that you can go in and get compensated for taking. You need really smart people to go do that.”

University of California’s chief investment officer Jagdeep Singh Bachher said its office of investment is considering increasing its allocation to equities by 3.5 per cent. The extra allocation will be drawn from winding down the absolute return portfolio.

“The absolute return category in our asset allocation is down to zero. I propose moving 100 per cent [of that allocation] into public equity,” said Bachher, speaking during the endowment’s March investment committee meeting in its first gathering of the year.

Rather than increase the allocation to bonds or private markets, Bachher called for bold and decisive strategies in public markets where opportunities include AI, life sciences, defence and an array of tech growth industries that are poised to transform the businesses operate.

“The tech decade just getting started,” he said.

Bachher said that international equity ex-US will offer some of the most compelling opportunities because of the sudden shift in government policies and dislocations caused by recent geopolitics.

“Countries around the world have woken up,” he said, citing Europe as an example because Germany has just embarked on an economic stimulus that will unleash defence spending and overhaul German infrastructure.

“[We are seeing] the kind of spending in some parts of Europe we have not seen in decades [as] Europeans come together and stimulate the economy,” he said.

Still, despite his enthusiasm for opportunities outside the US, the board heard that the rest of the world is more likely to feel the pain of US trade policy than the US economy. He also said the record-breaking returns in equity over recent years are unlikely to be repeated in the “next five years.”

The public equity team are also exploring regional diversification in emerging markets like India, hunting for opportunities in sectors including power and utilities. However, he warned against stock picking strategies. “It’s very tough picking individual stocks.”

The portfolio has around 60 per cent in stocks (11 per cent in bonds and the rest in private assets), and Bachher said public equities typically return between 6-8 per cent. At their height in the last nine months, they have returned as much as 13 per cent.

Reconsidering fossil fuels?

Baccher didn’t rule out re-entering fossil fuels either. Re-investing in oil and gas would mark a break with strategy since the university excluded fossil fuels in 2020 when it completed the sale of more than $1 billion in assets from its pension, endowment and working capital pools.

“So far, being ex-fossil fuels is ok. But there is no policy of ours that [says] we shall never invest in oil and gas. [I am] putting that on the table as it’s a consideration I entertain as I think about oil and gas.”

However, some markets remain a no-go. The University of California is still negative on China, having reduced its allocation to the country three years ago. Bachher said he has no plans to increase the allocation to China outside the investor’s MSCI ACWI exposure because of uncertainties around tripping executive orders.

“I don’t know if I am going to be investing in something or have ties to something [that] in essence violates an executive order of the US government,” he said. Citing the compliance risk of inadvertently violating a rule that “he is not aware of,” he said China has become uninvestable for American investors, despite opportunities like electric car manufacturer BYD and AI company DeepSeek. The risk means the university has ruled out the idea of picking China-based managers and investing outside the index:  he also flagged challenges that venture capital firms invested in the region are having in exiting holdings in China.

Bachher said investors now face two separate investment worlds: China and America. University of California is playing the American world but he said “a wild card policy” could change that if the US and China agreed to a trade deal.

The two powerful countries have agreed to temporarily lower tariffs imposed on each other’s products for 90 days after negotiations that took place in Geneva, as talks towards a longer-term trade arrangement continue.

“If you asked me what could be a wild card in all of these policies – [if] President 47 and the Chinese leadership decided to do a trade deal [it would provide] a huge boost to China and the US in a wild card.”

Managing liquidity is the number one concern

Bachher said managing liquidity and ensuring he has enough capital on hand in the current uncertain environment for US universities is his number one concern. Under the Trump administration, US university endowments face higher taxes and threats to cut research funding. It’s triggered a renewed focus on the simplest forms of capital endowments manage.

California Regents has a working capital pool of around $11 billion divided between a short-term investment pool (STIP) of around $2 billion and a total return investment pool (TRIP) of around $9.4 billion.

“If you feel like you want to shore up operating liquidity, take the unrealised gain in your TRIP pool and put in your STRIP pool,” he said.

Bachher also urged Wall Street firms that benefit from investing money on behalf of universities, endowments and public pension funds, to do more to support academic institutions under fire from the current administration.

Günther Schiendl, chair of the board of VBV-Pensionskasse, Austria’s €9.5 billion ($10.8 billion) multi-employer pension fund founded 35 years ago, is restructuring the fund so younger beneficiaries can have more risk exposure.

It has involved shaping a new investment strategy that allows young savers to have a larger equity allocation and exposure to more dynamic pension fund strategies. The wordy-titled ‘pension lifecycle investment optimisation process’ encapsulates a key challenge for Austria’s homogenous pension funds.

“The investment strategy for a 30-year-old person should be different to the strategy for a retired person aged-70,” Schiendl tells Top1000funds.com. “Historically, pension plans in Austria have placed young and old people in the same asset pool which means finding an optimal investment strategy is very hard because of the inherent differences between these beneficiaries’ risk capacity and time horizons, and we are tyring to sort it out.”

Earlier this year, VBV introduced an opt-out lifecycle model to target younger employees that allows these savers to invest up to 60 per cent of the pension fund in equity. VBV runs six investment strategies across specific asset pools with varying degrees of risk. On average, around 35-40 per cent of a particular asset pool will be in global equities but this now spikes much higher in the opt-out model, or as low as 5 per cent for those in retirement.

“The younger generation need more risk; they need higher risk early on that builds up capital,” he says, pointing to last year’s different returns of 6 per cent from the defensive asset pool but more than twice as much from more dynamic strategies.

Other pool assets comprise real estate (around 5 per cent, and mostly European), infrastructure equity ( 7-8 per cent) and private debt (10-20 per cent). The remainder is in fixed income, divided between government bonds (mostly European, but some emerging markets) and corporate bonds.

But introducing and nurturing interest in a new member-oriented structure focused on the individual plan member comes with challenges. Schiendl explains that it requires understanding and co-operation with human resource departments at the plan sponsors and council representatives, and engaging a younger generation that doesn’t tend to spend much time thinking about their pension pot.

But he is encouraged by a new generation coming into leadership roles at corporate sponsors which is enabling discussion around pension fund design and life cycle investment.

“It’s a development that is appreciated as it will enable us to build better investment strategies. But it takes time, and sometimes it can be more complex than anticipated.”

Pause in private equity rollout but private debt a haven of stability

Progress introducing other changes to the portfolio has recently ground to a halt. VBV had been exploring developing an allocation to private equity, motivated by the fact that private equity funds take some of the best small-cap companies away from the listed market. However, the Trump administration’s rollout of sweeping tariffs on imports and retaliatory measures from trading partners around the world has given VBV fresh reason to pause.

“The economic effect of tariffs will be felt in companies’ value chains and doing business will become more expensive for many companies. We have decided to observe how this will play out because a lot of companies will struggle to adapt,” he says.

In contrast, Schiendl enthusiastically endorses the private debt allocation. It has delivered a stable six per cent return since it was established in 2016, steadfastly weathering volatility triggered by the pandemic and more recently, Trump’s tariff and trade policies.

“So far this has really been a haven for stability,” he says.

The allocation also allows younger plan members to tap a valuable illiquidity premium. Strategy distinguishes between different degrees of liquidity provided on the one hand by the private debt fund and on the other, the liquidity that sits within the fund.

The loans that sit in a typical private debt portfolio have an economic life of between three to four years, which is shorter than the product that investors buy that has a lifetime of seven to eight years and is less liquid, he explains.

“Investors commit to a fund and then re-commit if the manager is good, so there is a turnaround.”

In this way, it’s possible to fit a less liquid structure to younger plan members who have room for less liquid instruments. The portfolio also seeks to reduce interest rate and duration risk to help earn stable returns no matter what happens to interest rates, he says.

Infrastructure equity

The infrastructure allocation is focused on infrastructure equity and Schiendl particularly likes opportunities in sustainable energy provision, as well as toll roads and digital infrastructure. Investments are made depending on the location, business case and regulatory risk. He favours working with asset managers that truly understand pension investment.

“We particularly favour asset managers that have founded their own business after spinning out of pension funds because of the alignment of interest – they have a better understanding of the needs and requirements of pension funds.”

The pension fund has between 30-40 external managers. The roster has grown most in infrastructure and private debt, where VBV works with around 8-10 managers.  An in-house investment team oversees the bond allocations which includes single security selection, asset allocation and risk management. VBV uses specialist external managers to invest in emerging market and high yield bonds.

VBV invests in equity index funds and ETFs. Sustainability is integrated via Paris-aligned indices in equities and bonds, and every infrastructure manager must integrate sustainability.

“We have had years when the Paris-aligned index has had a lower investment performance than the traditional index and years when it has had a higher performance. Over the long-term, the difference is small and should also be viewed in the beneficial effects this strategy has on society and climate,” he says.