Institutional Allocator - October 2018 | Volume 1 | Issue 2 by Markets Group

AUTUMN 2018

VOLUME 1 | ISSUE 2

MEASURE THIS!

Private credit investors square up to a conundrum: How to benchmark the stuff?

INTRODUCING MARKETS GROUP’S NEW ADVISORY BOARD

FOOLS’ GOLD?

BACK TO BASICS

AM TECHNOLOGY IS TRANSFORMING THE INDUSTRY

SPECIAL REPORT: INFRASTRUCTURE

It’s an impressive group…we think you’ll agree

Minnesota State Board of Investment’s CIO Mansco Perry shares a sip of his secret sauce

Renewable energy, yes. But what are else investors doing in the infrastructure sector?

Outsourced CIO providers want more public pension plan accounts. Have they finally found a way in?

But do asset owners know what they need?

TABLE OF CONTENTS MEET THE BOARD

ASSET ALLOCATION

4 Meet the Board

18 Infrastructure Special Report

Markets Group introduces its new Advisory Board

COVER STORY 7 Benchmarking Private Credit Investments A relatively new asset class, private credit has left many institutional investors and consultants grappling with an important question, or conundrum: how does one benchmark private debt, especially when trying to measure performance for an opportunity set that is so diverse, both by collateral type and geographically?

8 Consultants Grapple with Private Debt Benchmarking 11 New Mexico Funds Fashion Private Debt Benchmarks that Fit 13 Researchers offer alternatives to inapt private credit benchmark strategies

ASSET OWNER SPOTLIGHT 15 Minnesota State Board of Investment’s CIO Mansco Perry Reporter Kaitlyn Mitchell speaks wth Perry, who explains how he brings investments back to basics.

Institutional investors are looking for opportunities to invest in infrastructure in general, and renewable energy in particular, and the markets have taken note. In fact, more than half of the infrastructure deals completed in Q2 2018 were for renewable energy assets, while energy assets and utilities assets each accounted for 11% of all infrastructure deals, according to a recent report by research provider Preqin.

20 Renewable Energy Investments Taking Hold in Institutional Portfolios 22 Investors are Missing Out on EM Infrastructure 24 Braving the New World: CIOs Pass on Pricey European Infrastructure

ENDOWMENTS & FOUNDATIONS 34 E&Fs are Fulfilling Impact Investment Mandates; Pensions Lagging Behind ESG investing is in vogue with institutional investors. But impact investing, or investing with the objective of making a measurable impact as well as a competitive return, appears to be at a point of divergence in the investment community.

TECHNOLOGY 38 As AMs Race to Ramp-up Tech, Institutions Must Clarify Their Needs The investment data and transparency demands of institutional investors, and their drive to reduce asset management costs, have had a “transformative” effect on technology development in the investment industry, since the financial crisis. However, to optimize how they adopt these new tools, institutions need to be clear and realistic on what applications and amount of data is appropriate for them.

26 Paltry Rates Perplex Life Insurers as 43 Guest Article: Front Office Pre-Crisis Debt Matures Solutions: Easing the Pain of the U.S. Life Insurers losing sleep of re-investment options Chief Investment Officer

INVESTMENT GOVERNANCE 28 Are OCIOs Chasing the Elusive Pension Pot of Gold? Moves by public pension funds this year to entrust outsourced chief investment officers (OCIOs) with discretionary oversight of substantial portions of their portfolios have industry insiders asking: Have OCIOs finally cracked the code to access public pension plan accounts?

INVESTMENT PRACTICE 31 Epoch’s COO Values Left & Right Brain in Seeking Alpha Philipp Hensler, COO of New York City–based equity manager Epoch Investment Partners has alpha on his mind—on the left and right side of his brain, to be clinical.

CIOs face a number of challenges in today’s investing environment. This is especially true for investment officers at endowments and foundations, with an ever-growing set of requirements around transparency and reporting to external stakeholders, on top of their already difficult job of delivering superior risk-adjusted returns to their institution.

PLAN SPONSOR PEOPLE MOVES 45 Plan Sponsor People Moves IA lists senior executive personnel moves at institutional asset-owner organizations in the calendar quarter preceding the magazine’s press deadline.

FUND FLOWS 47 Fin Searches’ Completed Institutional Mandates Chart Q2 & Q3 manager search data on all completed mandates from U.S. public pension funds and E & Fs.

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EDITORIAL TEAM Mark Fortune Editor Leslie Kramer Managing Editor Kaitlyn Mitchell Reporter CREATIVE DIRECTOR Tony Patryn Senior Graphic Designer & IT Projects Manager EXECUTIVE STAFF Adam Raleigh Chief Executive Officer

Kim Griffiths Head of US Institutional Sales

Tim Raleigh Chief Financial Officer

Andres Ortiz Head of Production‚ EMEA

Shalini Sinha Head of People Operations

Veronica M. Rodriguez Co-Head of US and RE Investor Relations

Giseli Akaboci Head of Operations & Logistics Group

Jason Peet Co-Head of US and RE Investor Relations

Joyce Riley Operations Associate

Cassia Di Roberto Co-Head of Private Wealth Investor Relations

Paul Hamann Head of Private Wealth & Alternatives Group

Michelle Quilio Co-Head of Private Wealth Investor Relations

Paloma Lima-Mayland Head of Private Equity & Real Estate Group

John Zajas Marketing Manager & Data Protection Officer William Kazlauskas Office Manager

PROGRAM MANAGERS/INVESTOR RELATIONS Jacobo Gaspardone Adena Baichan Amanda Jiang

James Silverman

Ann Lee

Kari Walkley

Audrey Kadenge

Kevin O’Connor

Ben Ettlinger

Kyle Becker

Brian Intemann

Logan Brodsky

Carolina Gomez-lacazette

Maxime Laurent

Chantal Barralis

Nicole Morisette

Christopher Hoarty

Olga Gorlatova

Christopher Nelson

Patrick Murray

Cory Stavis

Peter Kempf

Domenick Pugliese

Rebecca Birch

Georgia Quinones

Roberta Dalla

Gerlim De La Cruz

Stephen Deiner

Harry Garland

Trevor Schrier

Jane Popova RELATIONSHIP MANAGERS Alex Olson

Patrick Egan

Brendan Davey

Tom Hind

Daniel Para Mata

Tom Mallon

Eric Lubus

Tony McLean

Max Tattersall

Will Hamilton-Hill

Nawshad Noorkhan

William McArdle

Paola Segura DELEGATE SALES Brett Windisch Javier Grullon Sean Walsh MARKETS GROUP ADVISORY BOARD MEMBERS Vicki Fuller, former CIO, New York State Ian Toner, CIO, Verus Investments Common Retirement Fund Bob Jacksha, CIO, New Mexico Educational Carolyn Weiss, CFO & Treasurer, The New Retirement Board York Community Trust Joe Cullen, CIO, Montana State Board of Mansco Perry, Executive Director and Chief Investments Investment Officer, Minnesota State Board Tim Barron, CIO, Segal Marco Advisors of Investment Cameron Black, CIO, Treasurer, Blue Cross Chuck Burbridge, Executive Director, Blue Shield of Arizona Chicago Teachers Pension Fund Anand Philip, Vice Chairman of the Investment Committee and Trustee, Ohio Wesleyan University

PRODUCTION Institutional Allocator (Volume 1, Issue 2) is published 4 times a year by Markets Group. No part of this publication may be reproduced or transmitted in any form without the publisher’s permission. Authorization to photocopy items for internal or personal use, or the internal or persnal use of specific clients, is granted by Markets Group. © 2018 Markets Group. Entire contents copyrighted.

LETTER FROM THE EDITOR

Mark Fortune, Editor, Markets Group

Welcome to the second edition of Institutional Allocator’s quarterly magazine. First, I must admit that after having basked perhaps a little too long in the glorious afterglow of producing IA’s inaugural magazine edition in the summer (IA Volume 1, Issue 1)—replete with high-fives and nods of acknowledgement from colleagues and friends—I was aghast when I learned a second edition was expected, and then a third, a fourth and so on. Surely, I believed, there had been a horrible misunderstanding! But once I understood and accepted that the plan for IA is long-term in nature, it occurred to me that securing a little more buy-in (or perhaps backup) from the industry, in the form of an editorial advisory board, could pay dividends regarding the publication’s content quality and, by extension, its longevity. So, it is my pleasure to introduce with this edition Market Group’s new 10-member Advisory Board, which boasts some very experienced institutional investment practitioners from varied corners of the industry. The members include: Timothy Barron, Cameron Black, Charles Burbridge, Joseph Cullen, Vicki Fuller, Robert Jacksha, Mansco Perry, Anand Philip, Ian Toner and Carolyn Weiss. (See next page for details.) Regarding this edition’s cover story, well, Managing Editor Leslie Kramer simply rolled up her sleeves and got down and detailed with private-debt fixed-income benchmarking, or the lack thereof. Her efforts culminated in a three-part treatment of a challenging—some say insuperable—problem in the market. What started out as a quick news report on a research paper on private credit investing from the Institute for Private Capital, that observed that “on an adjusted basis, we find that there is no single benchmark that is clearly preferred for calculating relative performance,” for private credit, grew to an effort by Leslie to secure institutional investment consultants’ outlook and insight on the matter, which then begot similar discussions with institutional asset owners on the topic. And voila! Leslie delivers a 360-degree take on the nature of the issue (some call it a conundrum) and possible remedies. Read it yourself. Starts page 6. Last, having been an institutional investment industry reporter and editor for in excess of 25 years, if there is one thing to which I can attest regarding readers’ interest level in various types of stories, it is that stories of any stripe about people are almost invariably the most read. I put it down to something primal—we’re social mammals, the human condition, that kind of thing. So, as a concession to that “need”, in this issue we deliver our first Asset Owner Spotlight, a Q&A feature with senior decision makers at investing institutions that takes a slightly more personal tact that is usual. In this edition, we spotlight Minnesota State Board of Investment’s CIO Mansco Perry. We’ve also included a new section, called Plan Sponsor People Moves, in which IA aggregates all the news and announcements of which it becomes aware regarding senior executive moves, placement and promotions at institutional investment organizations in the calendar quarter prior to publication of each issue. The addition of these features, along with the introduction of a technology section, is simply part of our efforts to improve the comprehensiveness and quality of IA’s content on an ongoing basis, as I indicated we would in my last note. Onward! Mark.fortune@marketsgroup.org VOLUME 1, ISSUE 2

MEET THE BOARD BY MARK FORTUNE

t is my pleasure to introduce Market Group’s and Institutional Allocator’s editorial advisory board. We are very pleased to have convened what we think you’ll agree is an impressive panel that brings wealth of diverse institutional investment experience to the table, so to speak. The board’s role will be to provide, on an ad hoc and informal basis, expert advice on content themes and topics for Market Group’s publications and meeting agendas. We believe input from these industry professionals can only serve to improve the caliber of Market Group’s content.

Timothy R. Barron Timothy Barron is a senior vice president and chief investment officer with New York City-based Segal Marco Advisors, where he manages the firm’s research department and oversees all investment activities. Barron has more than 40 years in the investment industry, including experience as a plan sponsor, in asset management, and consulting. Barron also chairs Segal Marco Advisors’ Investment Committee and is on the Governing Committee of the Global Investment Research Alliance. He has a BA from Emory University, an MBA from Georgia State, and is a holder of the Chartered Alternative Investment Analyst designation. 4

Cameron Black

Cameron Black is treasurer and chief investment officer for Blue Cross Blue Shield of Arizona (BCBSAZ). He is responsible for the company’s shortand long-term investment strategies. He also oversees risk management. Prior to joining BCBSAZ in 2006, Black held positions as an independent investment adviser and with the Translational Genomics Research Institute. He currently serves on the investment committees of the Arizona Community Foundation and the ASU Operating Fund. He also sits on the Finance Advisory Board at the W. P. Carey School of Business.

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Joseph M. Cullen

Joe Cullen is chief investment officer of the Montana Board of Investments (MBOI), leading a team of 15 investment professionals managing the state’s $17 billion in assets. Prior to joining MBOI, Cullen held positions at Fidelity Investments, Amherst College and Lucent Technologies, accumulating more than 25 years of experience in the investment industry. Cullen holds CFA, CAIA, and FRM designations, and earned his BA at Ripon College and his MBA at Tepper School of Business at Carnegie Mellon University.

Anand T. Philip

Anand Philip has served on the Board of Trustees of Ohio Wesleyan University since 2011, and currently serves as vice chairman of its investment committee. He has more than 18 years of principal investing experience currently as senior managing director of New Yorkbased York Capital Management and previously as a partner at New York-based Castle Harlan Inc. He previously worked in the private equity department of The Blackstone Group. Philip began his career in merchant banking at Wasserstein Perella & Co. He holds an MBA from Harvard Business School and a Bachelor’s degree from Ohio Wesleyan University.

and CAIA charters, an MBA from the University of St. Thomas in St. Paul MN and a BS degree from Bemidji State University.

Vicki Fuller

Fuller recently retired from the New York State Common Retirement Fund where she had served as chief investment officer since 2012. She is now a member of the board of directors for the Tulsa, Oklahoma– based Williams Companies. The New York State Common Retirement Fund is the third largest public pension fund in the U.S. with approximately $207 billion in assets under management. Prior to her tenure at the fund, she served for 27 years in several leadership positions at Alliance Bernstein, including as managing director from 2006 to 2012. She earned her MBA from the University of Chicago and her BSBA from Roosevelt University of Chicago. Fuller is a Certified Public Accountant.

Ian Toner is chief investment officer for Verus, responsible for the overall investment output at the Seattlebased institutional investment consultancy for discretionary and non-discretionary clients. Toner is responsible for the portfolio management team, strategic research team, and both the public and private markets teams. He is also a member of Verus’ management committee. He joined the firm in 2013 from Russell Investments, where he was most recently director, capital markets research. Before Russell Investments, he was an executive director at UBS Investment Bank in London, and a vice president at both Schroder Salomon Smith Barney and InterSec Research Corp. Toner has a degree in Law from the University of Oxford and is a CFA charter holder.

Mansco Perry

Mansco Perry is the Executive Director and Chief Investment Officer for the Minnesota State Board of Investment, a state attorney responsible for the investment management of various retirement funds, with approximately $96 billion in assets under management.

Ian Toner

Robert Jacksha

Bob Jacksha assumed the role of chief investment officer for the New Mexico Educational Retirement Board (ERB) in January 2007. In this role, Jacksha supervises an investment team of 14 individuals who are responsible for the management of ERB’s $13 billion investment portfolio. Prior to this role, he served as deputy state investment officer with the New Mexico State Investment Council and has had various positions in the investment field with other organizations over the past 35 years. Jacksha holds CFA

region. Weiss joined The Trust from Helmsley Charitable Trust and FJC, a foundation of philanthropic funds, where she was chief financial and investment officer. Her earlier experience included leadership roles with Deutsche Bank and KPMG. She served as a professor at Kean University in New Jersey and in China. Weiss holds a BA from Pennsylvania State University, an MBA from Baruch College, and a New York CPA license.

Charles A. Burbridge

Charles Burbridge is executive director of the Chicago Teachers’ Pension Fund (CTPF). Burbridge joined CTPF as ED in March 2015, where he oversees the operations and investments of the Fund’s $11 billion in assets. Burbridge began his public service career at the Illinois Economic and Fiscal Commission where he rose to chief economist before joining Cook County as deputy chief financial officer. He later worked for the Chicago Public Schools as deputy chief fiscal officer, and then directed local government management assurance services for KPMG. Burbridge returned to public service as the chief financial officer at the Los Angeles Unified School District and then moved to the Atlanta Public Schools before joining CTPF. Burbridge earned his bachelor’s and master’s degrees in economics from the University of Illinois.

Carolyn M. Weiss

Carolyn Weiss is CFO & Treasurer at New York Community Trust, which she joined in 2014. With an endowment approaching $3 billion, The Trust is one of the largest community foundations in the U.S. and one of the most significant funders of nonprofit organizations throughout the New York Metro

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PRIVATE DEBT BENCHMARKING For the cover of this edition of Institutional Allocator, Managing Editor Leslie Kramer tackles the challenge the investment community is facing in formulating an applicable benchmark for private-debt investments. For clarityâ&#x20AC;&#x2122;s sake, she has written the story in three partsâ&#x20AC;&#x201D;examining the topic from the point of view of consultants, institutional investors and academics. She found they were aligned in their outlook: there is no effective benchmark for this diverse and relatively new asset class. As a consequence of this, some in the investment community have come up with their own customized versions of private-debt benchmarks, which are an amalgamation of several existing benchmarks with varied expected rates of return.

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P CONSULTANTS GRAPPLE WITH PRIVATE DEBT BENCHMARKING BY LESLIE KRAMER

rivate credit, a relatively new asset class, offers investors a large, multiasset class that encompasses a variety of niche strategies. Because the term “private debt” is not well defined by the industry— “We estimate the size of the U.S. middle market at around $400 billion, and adding distressed would bring that number much higher,” said Stephen Nesbitt, chief investment officer at the investment consultant firm Cliffwater—the lack of definition has left many institutional investors and consultants grappling with an important question: how does one benchmark private debt, especially when trying to measure performance for an opportunity set that is so diverse, both by collateral type and geographically? The answer to that question is just as diverse as the asset class, according to investment consultants and advisors. IA spoke with several of them to get their take on the benchmarking question and to find out how they are resolving it. “From our perspective and the clients we work with, benchmarking the private credit asset class is difficult for multiple reasons: one of the biggest is the valuations, and how to think about the role the asset class serves in the portfolio,” said Rose Dean, a managing director at Wilshire Consulting, an investment consulting firm. “While private credit shares some common characteristics with private equity or fixed income, investors are starting to recognize that it deserves specialized attention, due to its unique set of risks and implementation considerations, said Sylvia Owens, senior portfolio advisor, Aksia, an investment consulting firm. “There are a couple of reasons why there is no generally accepted benchmark: it’s a relatively new asset class, most private credit funds were launched post-financial crisis, and so many are only resolving themselves now, explained Chris Acito, a partner at Gapstow Capital Partners, an asset advisor specializing in credit investing. “It’s challenging, because the asset class is not all that developed, but it’s really exploded since the crisis and more so over last five years,” he said. The other problem is that investors’ definition of “private debt can lump together several fairly disparate strategies, including esoteric forms of private debt, distressed debt, CLOs (collateralized loan obligations) and middle-market direct lending, which all are very different return

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profiles. So, to say there is a singular benchmark Different benchmarks for is somewhat of a flawed concept,” Acito said. different debt At consultancy Aon, “we look at benchmarks in a Still, the sheer diversity of the asset class continues couple different ways. We try not to benchmark to present a problem for investors. “Senior individual funds within our client report, when secured direct lending is different in terms of looking at the public market equivalent or returns from mezzanine debt or distressed debt benchmark,” said Eric Denneny, senior consultant, or opportunistic credit. Because the components global private equity research at Aon. “We tend to that make up private credit are so different, it’s benchmark it at the asset-class level for our client difficult for clients to get their hands around an reports or at the vintage-year level, so every deal all-encompassing benchmark,” Denneny said. “So done on a specific vintage year on an IRR (internal what we have seen from working with our clients rate of return) basis,” he said. “We tend to show on direct lending is that clients will use a bank loan benchmarking to a peer universe quartile ranking, public-market proxy for their senior secured direct so we use Burgiss, a database of private capital lending strategies, whether that is the S&P / LSTA funds, including private equity, private debt and Leveraged Loans Index or Credit Suisse Leveraged real assets,” he said. Loan Index plus some premium, which could be 150 to 300 basis points,” he said.

Different schools of thought

Owens contends that while there are no easy answers, there seem to be two main schools of thought for how to benchmark the asset class. “One is to use an ‘opportunity cost’ benchmark, taking into account where the capital may have been deployed otherwise. So, if the money is coming from fixed income, they might use a benchmark of leveraged loans plus a modest premium for illiquidity. The “alpha” will often come from taking on structural and/or strategy complexity,” she said. Another approach “is to match current or intended strategies by using a blended benchmark composed of public market equivalents and/or available private credit benchmarks. However, public benchmarks are often a mismatch and private credit benchmarks tend to be limited to distressed, mezzanine and direct lending, which may or may not reflect the actual portfolio or its risk/return objectives,” Owens said.“The other drawback with this approach can be that private credit is meant to be opportunistic, so predetermining a strategy mix could end up influencing future investments,” she added.

expect,’ but would you choose a manager who says 7 percent? Probably not,” Acito surmised.

Mezzanine debt

“For mezzanine, what we have seen used there is reference to a high-yield benchmark,” Acito continued. “Really the idea there is that high-yield benchmarks tend to have a higher correlation to equities from time to time. Mezzanine debt has an equities portion to it as well, so that tends to be where clients go.”

In times when equity markets are booming, high-yield debt will return pretty strongly, noted Denneny. “So there is a little bit of simpler correlation with mezzanine debt, because there is a decent equity component to mezzanine debt from 20 to 30 percent of return, which tends to be tied to the equity that they are holding alongside that debt. So, it can boost returns in up-market Direct lending Many of Aon’s clients ask about how to benchmark time periods,” he said. debt that is tied to direct lending strategies. “We direct people to use, from a public perspective, Opportunistic credit a bank-loan-like benchmark,” Denneny said. The most difficult type of private debt to Investment consultant Cliffwater also has a benchmark is opportunistic credit, consultants series on direct lending that collects data on the agree. “We see things across the board in underlying data and creates an index of direct opportunistic credit,” Denneny noted. “Some loans, based on data held by BDCs ( business people, if they have a shorter life strategy or more liquid component to it, will use the HFRI hedge development companies), he said. fund benchmarks, but usually some kind of splice Cliffwater looks through the BDCs to the yield of a return series is used,” he said. “A lot of times on underlying holdings, and it reports on it on a you will hear a manager say that they don’t track quarterly basis. “But ILPA (Institutional Limited to a specific benchmark, or that they track to Partners Association) and those groups have not the S&P 500 Index, if they think of it as asset officially sanctioned or signed off on a benchmark class level-opportunity cost. A lot of times, it’s an that they think should be considered for these alternative bucket, and the money being allocated type of things, so what makes the most sense to to those investments is coming out of equities. So, investors is all over the place right now,” Denneny we’ll just say, we have to beat our public market said. “From our perspective, we try to be as broad equity benchmark, otherwise it doesn’t make sense as possible and try not to benchmark at each to do the investment.” individual investment, but more think about the asset class when benchmarking to public indices,” The allocation from which it comes he said. A lot of Wilshire’s clients use private debt as a Acito agreed that for direct lending products, the fixed-income diversifier in their portfolio. “If the industry still hasn’t yet settled on what the go-to money comes from their core fixed-income or benchmark should be. “If you go to consultant bank loan allocation, they can be benchmarked studies, they will give you a very sober view, which to the leveraged loan index plus whatever they is that direct lending should provide a premia over think the liquidity premium should be. That has public markets, and their benchmarks might be 50- ranged from 2 to 3 percent or so,” Dean said. “If 50 high-yield loans, plus 300 basis points, or a flat 7 the allocation is from private assets, where it’s part percent to 7.5 percent,” Acito explained. “But there of the private equity and private credit portfolio, is dissonance in the marketplace, because managers then you have to decide where you want to be in are usually setting expectations in the low double terms of the credit and equity risk that you are digits. So what is right? On one hand, when pushed taking,” she added.

Acito has found that: “In general, for private credit benchmarks, many investors borrow a ‘public markets plus’ approach often used in benchmarking private equity. Over the long term, private equity investments are usually expected to produce 300 to 400 basis points more than a relevant public equity index, such as the Russell 2000 Index. For private credit, a relevant metric might be 200 to 300 basis points above a 50-50 blend of high yield bonds and leveraged loans,” he said. to it, a consultant will say ‘7 percent is what can I “When it is benchmarked to an absolute-return

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target, then you have to think about where the private credit investments are in the capital structure, it’s more like an absolute-return target, looking at it versus similar credit or equity-risk returns and setting the expectations as to whether these should earn similar levels of return,” Dean said.

The Bottom Line As the private credit market matures, investors and consultants are, clearly, still working out their best solutions and strategies for the asset class. But investors are beginning to differentiate between private credit funds. “For example, within middle-market corporate lending, investors are asking how much leverage is being provided, what industries are being targeted, how large are average

loans, what should be the assumed loss rate, will the fund get all of your capital to work, what are the expenses going to be, and what is the netof-everything return we should expect,” Acito delineated. For now, investors may have to be satisfied with leaving some of these questions unanswered. “The bottom line is that benchmarking continues to be a topic that is very much in discussion, and we have observed investors over time recalibrate their benchmarks as programs become more mature,” said Owens. In addition, we have seen that as people start to recognize private credit as its own asset class, with its own risks, there is more of a push to making sure there are specialized resources to support the asset class, including risk management,” she said.

“We tend to benchmark it at the assetclass level for our client reports or at the vintage-year level, so every deal done on a specific vintage year on an IRR basis”

(Left to right) Rose Dean, managing director, Wilshire Consulting Sylvia Owens, senior portfolio advisor, Aksia Chris Acito, partner, Gapstow Capital Partners Eric Denneny, senior consultant, global private equity research, Aon

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NEW MEXICO FUNDS FASHION PRIVATE DEBT BENCHMARKS THAT FIT BY LESLIE KRAMER

(Left to right) Pete Werner, fixed-income portfolio manager and Bob Jacksha, chief investment officer, New Mexico Educational Retirement Board

inding effective benchmark measures for private debt has proven challenging to even the most nimble-minded institutional investment practitioners. Nevertheless, some chief investment officers and portfolio managers at pension funds and endowments are coming up with their own ways to solve, at least in-part, this diverse asset class’s benchmarking issues. IA’s Managing Editor Leslie Kramer spoke with several New Mexico-based institutional investors who attended Markets Group’s Southwest Institutional Forum in Santa Fe, N.M., on Sept. 20, to gain insight into how they are approaching the problem.

The fund typically builds custom indexes to fit its institutional portfolios by blending existing indices, Werner explained. “Around the private credit space, we blended a 50/50 split between the Credit Suisse Leveraged Loan Index and the ICE BofA ML US High Yield BB/B-Rated Constrained Index. That index is used to benchmark the private credit portfolio as a whole,” he said.

Private debt has appealed to New Mexico ERB since 2008 because at that time credit, even investment grade credit, was trading at attractive prices. “We thought, at that time, that you could get equity-like returns for credit-like risk and that did play out—the fund achieved double-digit returns. But we have less of an appetite these days because it re-priced some time ago,” Jacksha said.

Opportunistic Credit

Today, the fund is still looking to achieve a fairly high single-digit return on private debt. However, “We think because of repricing and more capital flowing in, it’s unlikely to happen going forward.” That said, Jacksha said he still views private equity as a reasonably priced, attractive asset class.

New Mexico EBR has had an allocation to what it calls opportunistic credit since 2008, according to Bob Jacksha, the fund’s chief investment officer. Most of the private credit the fund holds is in that allocation bucket. “That category covers loans, high-yield bonds, high-yield asset-backed, and some distressed emerging market debt and New Mexico Educational CLOS,” he said. “In the lending category, it’s Retirement Board The New Mexico Educational Retirement Board mostly smaller direct-lending deals, as opposed to big syndicated deals.” The fund’s private debt (ERB) has been active in private credit for some allocation target has been as high as 20%, but it’s years. The fund manages roughly $3.5 billion been down over the last couple years and is now in fixed income, with some $2.4 billion of that an 18% target. “It’s quite big relative to others,” dedicated to the private side. “My past experience he noted. around benchmarking difficult-to-define asset For this type of portfolio “there is no good specific classes is to just design your own custom index, benchmark,” Jacksha declared. “It is not like the rather than try and pick a generic one,” said Peter S&P 500, it’s difficult, especially when you have Werner, fixed-income portfolio manager at New a portfolio as diverse as ours. But we decided to Mexico ERB. “It’s fairly easy to do these days with use one benchmark across the whole opportunistic all the tools that are available,” he said. credit allocation,” he explained. photograph by Daniel Quat

New Mexico Public Employees Retirement Association Dominic Garcia, chief investment officer at New Mexico Public Employees Retirement Association (PERA), which has $15.6 billion in AUM, said the fund looks at the private-debt asset class, first, from a portfolio allocation standpoint. “At a very high level, we use a risk budget to determine what active risk we want to take beyond our reference portfolio. We believe any risk we take beyond that should be compensated and used efficiently. Private credit is given an active-risk allocation with the opportunity cost being global high-yield bonds,” he said. VOLUME 1, ISSUE 2

Joaquin Lujan, director of rates and credit at the New Mexico PERA, narrowed it down. The fund’s credit portfolio, both liquid and illiquid, is all benchmarked against the Barclays High Yield Index, he said. “Again, we use high-yield as a reference portfolio for risk. From there, we break it down further. First, we separate out the alpha and beta. Is the beta implicit in private debt keeping up with the beta in global high-yield bonds? If it is not, then can we buy beta in other parts of the portfolio to match our reference benchmark? If private debt hovers around 0.6 to 0.8 beta to high yield, then we have a whole other roster of credit strategies where we can add 1.2 or 1.4 beta to get us closer to our reference portfolio,” he said. “After we achieve beta 1 versus our reference benchmark, then we add alpha. We think that credit selection and staying away from private credit sponsorowned flow deals can add alpha in the private debt space, particularly convex alpha or that excess idiosyncratic alpha you can earn when there is lack of equilibrium or price discovery in the market,” he elaborated. (Left to right) Bob Jacksha, chief investment officer, New Mexico Educational Retirement Board Dominic Garcia, chief investment officer at New Mexico Public Employees Retirement Association Joaquin Lujan, director of rates and credit at the New Mexico PERA Pete Werner, fixed-income portfolio manager at New Mexico ERB

H. Bart Stucky, acting director, fixed income at the $24.2 billion New Mexico State Investment

INSTITUTIONAL ALLOCATOR

At the council, private debt is now 10% of its overall portfolio, but it is moving toward a target of 15% for the asset class. Stucky noted that the fund is not pushing to reach that goal in the short term, “given where we are in the cycle,” but is looking to do so in the longer term, over the next two to three years. “Benchmarking is a discussion we have had with our consultants. We use Aksia for non-core fixed income, and our general consultant is RVK,” Stucky said.The NMSIC originally hired Aksia for assistance in its hedge fund portfolio and then had some crossover assets that ultimately ended up in the non-core fixed income portfolio as well. For non-core, the permanent endowment has a custom benchmark, which is the product of 20% BofA High-Yield Benchmark, 30% HFRX Asset-backed Index, 30% Credit Suisse Leveraged Loan Index, and 20% HFRX Distressed Series Index. “It matches our target for the structure of our non-core fixed-income portfolio,” Stucky said. The fund has four buckets within private debt: unconstrained; structured credit; lending strategies; and distressed and other.

Looking at the risk budget, in terms of return, the portfolio managers look at “how much of the tracking error the strategy generates beyond the benchmark, and what do we expect for that?” Garcia explained. “For private credit, we think it should generate an extra 2.9 percent excess return,” he said. “That active risk to generate that though is quite high, around 10%, so we think private credit as a whole has a 0.3 information ratio. At the plan level, we are targeting an excess return of 1% with a The NMSIC is the permanent endowment for the tracking error of 1.5%, and there are bands around state of New Mexico and the third largest domestic sovereign wealth fund in the U.S. Its current AUM that,” Garcia said. tops $24 billion, with 95% of its assets in two “So, in that scenario, we weight private credit at permanent funds: the Land Grant Permanent about a 4-5% capital allocation, which makes it Fund and the Severance Tax Permanent Fund. a modest risk contributor to our active budget,” Combined, these funds deliver almost $1 billion Garcia noted. “We think the risk/return trade-off in annual benefits to the state, funding primarily is good, but not the best, it’s not our best risk/ public education and about 15% of the state’s total return trade off in the alpha space,” he said. budget overall.

New Mexico State Investment Council

Council (NMSIC), also has not seen a standardized benchmark in the space. “Each of our peers has their own solution; there are lots of options for benchmarking this strategy, and therefore a combination of benchmarks are being used throughout the industry,” he said.

While their benchmarks regarding private debt may differ, these New Mexico funds have apparently come to the same conclusion: To each its own.

RESEARCHERS OFFER ALTERNATIVES TO INAPT PRIVATE CREDIT BENCHMARK STRATEGIES BY LESLIE KRAMER

here are a variety of product types within the private-debt asset class, making it hard to evaluate these investment products all under one roof, according to investors and consultants. Researchers also point to the evolving nature of the asset class, which includes a relatively small number of funds and many different strategies, as part of the benchmarking challenges that they face. That may be why a new paper titled Performance of Private Credit Funds: A First Look, from the Institute For Private Capital, a multi-university effort to promote academic research on private investments, came to the conclusion that,“On an adjusted basis, we find that there is no single benchmark that is clearly preferred for calculating relative performance,” for private credit. However, if one must choose a benchmark from the existing indexes, the researchers say that in many instances, the leveraged loan index (LLI) could be the best bet. The report is slated to be released in this fall’s issue of The Journal of Alternative Investments. Rose Dean, a managing director at Wilshire Consulting, however, cautions against coming up with a singular approach. “The implications of this benchmarking deficiency are that allocation decisions can be made based on inaccurate return/ risk premium expectations,” said Dean. “It may seem that an allocation to a private-credit strategy has generated stellar performance against a leveraged loan index, but that performance could

have been the result of incorporating meaningful equity-related risk in the strategy to generate high returns. Inappropriate benchmarks will fail to reflect the risk premium associated with the particular type of private credit strategy, leading to a flawed asset class and/or manager performance assessment,” she said.

The authors surmised that a more definitive analysis would likely rely on observing an additional credit cycle, where the performance of a large number of more recent funds can be observed.

Direct-lending focus

One type of private-credit fund that has gained in popularity of late is the direct-lending fund. “There are credit funds that have formed in the post-crisis period that are targeting opportunities that in the past a traditional bank might have financed on the private side, but today they don’t or can’t or won’t,” he noted. “They have origination platforms tied to them, and they have professionals that go out and source credit opportunities. They work directly with the underlying companies to structure a solution that is flexible enough to meet borrowers needs, while providing incremental risk protections for the lender,” he explained. Could the leveraged loan index The Burgiss database (a database of institutionalquality private-credit funds) did not have a be the best bet? With just one full cycle and a limited number of categorization of direct-lending funds, so we funds—most private credit funds were formed worked with them to develop one, and then did after 2009, resulting in a small volume of data to all the same analysis around those direct-lending be evaluated—it is empirically difficult to identify funds,” Munday said. the precise risk characteristics of different private So what did they find? “Direct-lending funds credit strategies. “That said, it appears that the demonstrate relatively low beta and positive leveraged loan index provides the best fit among alpha, when compared to leveraged loans and benchmarks we examined for most private credit high-yield, and that is pretty important. What’s probably the most impactful is that direct lending strategies,” Munday stated.

“This is an important asset class to institutional investors, and shockingly little benchmarking is done around it, today, so maybe we need to codify by definition the different buckets of private credit,” said the report’s lead authors, Shawn Munday, professor of the practice at UNC Chapel Hill, Kenan Flagler Business School, in Chapel Hill, NC. “LP’s [limited partners] are constantly making choices about where to invest their capital. Without the ability to evaluate risk/ return on a relative basis, their job is made more difficult,” he said.

VOLUME 1, ISSUE 2

funds have very low correlations with all the benchmark indices we evaluated, suggesting they could provide important diversification benefits for investor portfolios,” Munday said.

across a range of strategies and vintage years. This performance is noteworthy given that the sample period included the global financial crisis. Additionally, while we found that no single benchmark was preferred for evaluating relative Private credit strategies performance, the leveraged-loan index provided collectively The team’s analysis concluded that “When the the best fit among benchmarks for most private underlying private-credit strategies were compared, credit strategies with the exception of mezzanine collectively, to each benchmark, the leveraged funds and direct lending funds. In the case of Mezz loan index also did the best job collectively, but and DL, the Cliffwater Direct Lending Index if you invest in mezzanine funds, it would be a provided the best fit among benchmarks,” he said. misrepresentation to say that the leveraged-loan index would be your best benchmark,” Munday Munday added that for direct lending, excluding said. “What we found was more subtle than ‘the mezzanine, the high-yield index provided the leverage loan index is the right answer,’” he said. best fit from a benchmarking perspective. In Munday continued: “We found that credit conclusion, “Choosing the appropriate index has funds, on average, provide mid- to high-single- significant implications for investor perceptions digit returns with the top three quartiles of of relative risk and return inherent in their funds providing consistently positive returns investment portfolios,” he said.

PANEL A: TRADITIONAL PRIVATE CREDIT AND BENCHMARK INDICES 3.5

3.0

2.5

2.0

The researchers used the Burgiss database of institutional-quality private-credit funds to evaluate the performance of 476 different funds dating back to 2004. Various private credit strategies evaluated included direct lending, mezzanine and generalist and distressed funds, among others. The authors also compared these funds to several benchmark indices, including a high-yield index, leveraged-loan index, the S&P Net Total Return BDC Index, and the Cliffwater Direct Lending Index, in order to develop an early view of both performance and risk across the asset class. “Burgiss [a portfolio management, software, data and analytics provider] maintains a research quality database that includes the complete transactional history for thousands of private capital funds with a total capitalization representing trillions of dollars across the full spectrum of private capital strategies. It is representative of actual investor experience because the data is sourced exclusively from limited partners (LPs), which avoids the natural biases introduced by sourcing data from general partners. The data includes the date of cash flows and are further supplemented with fund profiles,” Munday said. “As a result, the Burgiss data includes the exact size and timing of cash flows as well as precise to-date fund valuations, which allows for much more robust analysis of both performance, risk and benchmarking,” he added. The paper’s other authors are Wendy Hu, senior researcher at Burgiss; Tobias True, partner, investment strategy and risk management, Adams Street Partners, a provider of global private markets investment management services; and Jian Zhang, principal, investment strategy and risk management, Adams Street Partners.

1.5

1.0

0.5

0.0

2005

How the research was compiled

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

BDC

CDLI

All Funds

Mezzanine

Distressed

Generalist

NEC & Unknown

PANEL B: DIRECT LENDING AND BENCHMARK INDICES 3.5

3.0

2.5 (Left to right) Rose Dean, managing director, Wilshire Consulting

2.0

Shawn Munday, professor of the practice at UNC Chapel Hill, Kenan Flagler Business School

1.5

1.0

0.5

0.0

2005

2006

2007

2008

2009

2010

2012

2013

2014

2015

2016

BDC

CDLI

All Funds

All Direct Lending

Direct (excl. Mezz)

2011

INSTITUTIONAL ALLOCATOR

ASSET OWNER SPOTLIGHT

MSBI CIO MANSCO PERRY BRINGS INVESTMENTS BACK TO THE BASICS B Y K A I T LY N M I T C H E L L

Mansco Perry, executive director and chief investment officer, Minnesota State Board of Investment

eporter Kaitlyn Mitchell recently spoke with Mansco Perry, longtime executive director and chief investment officer (CIO) of the $93.5 billion Minnesota State Board of Investment (MSBI). Perry has had a long career in financial analysis, and has overseen MSBI through excellent returns in his time with the fund—in 2017, the fund had a 15.1% return, one of the highest returns that year. Returns remained solid at 10.3% for the fiscal year ending June 30, 2018, again securing the fund’s spot in the first quartile of all North American pension funds. Perry’s time-tested techniques include keeping investment simple, maintaining a long-term view and fostering strong relationships with managers. KM: What type of institution is MSBI?

MP: The current asset allocation for the combined funds is: 1.6% of the portfolio is invested in cash MP: MSBI is an investment board that is versus a 2% target; 8.9% is in Treasuries versus responsible for managing the assets of three an 8% target; 13.8% is in private markets versus state-wide pension organizations–the Teachers’ a 25% target; 15.8% is in fixed income versus an Retirement Association, the Public Employees’ 18% target; and 60% is invested into public equity Retirement Association and the Minnesota State versus a 47% target. Retirement System; each has separate pension funds. There are nine funds collectively. Seventy It will be a long time before we hit 25% in private percent of the assets we manage are for these equity because of the way we invest in that specific retirement plans; in addition, we manage money asset class. The discrepancy between our current for defined contribution-like (DC) plans, non- asset allocations and targets is not major for a fund retirement endowment plans and state cash of our size—we don’t rebalance every day.

accounts. The assets for the three retirement associations are in defined benefit (DB) pension plans—we refer to them as the combined funds.

We go through a process and have policies that help us determine how we go about making investment decisions. We can’t put all of the money into private markets at one time, so the In most states, you’ll find an investment division difference is put into public equity. We’re making as part of their pension system; in Minnesota, more private market commitments; if we were to we’re responsible for investing the money for all make a commitment of $100 million, in most statewide entities, and the pension plans are just cases the manager would draw down and invest the biggest chunk of money that we invest. over a three- to five-year period. That’s why you KM: What is your institutions’ asset allocation see the large variances for the private markets and breakdown? public equity relative to their target allocations. photograph by Kyrsten Bloch

KM: What is your fund’s funded status? MP: The pension funds have a decent funded

status. The MSBI is not the pension fund, we just manage the money for the various pension plans; they are collectively at about an 80% funded status. When managing the assets, the approach we’ve taken for the last several decades is: try to get the best return possible with prudent levels of risk. KM: Tell me about your career path—How does

one become the CIO of a mega state pension fund? MP: I was born in Newark, New Jersey in 1953

and graduated high school in 1970. I went to Carleton College in Northfield, Minnesota. I graduated from Carleton in 1974 and after that attended the University of Chicago for business school and graduated in 1976. I returned to Minnesota to work and attend law school—I started my career as a financial analyst at Cargill in 1976 and attended law school at night. I graduated from the William Mitchell College of Law in January 1981 (it’s now called the Mitchell Hamlin College of Law). VOLUME 1, ISSUE 2

ASSET OWNER SPOTLIGHT

After two years at Cargill, I went to work for a company called the Dayton Hudson Corporation, (which is now Target), where I was the manager of financial planning and analysis. I left Target in 1985. After that, for a short period of time I was at the Federal Reserve Bank of Minneapolis and then in 1987 went to work for the Minnesota Department of Revenue. At both institutions I worked in planning and analysis-type jobs.

find good managers who have good strategies that wouldn’t consider those mistakes. If we could all they execute well. project what the markets will do, we wouldn’t have At Cargill, I learned to take a long-term view portfolio problems. When you come to grips with with things and not to worry so much about the fact that some things don’t always go your way, quarterly performance, which can be difficult at it makes it a lot easier to go forward if you accept times. This outlook requires the ability to stick that reality. But it also doesn’t hurt to be the boss!

with an approach through good and bad times, KM: In what part of the industry have you and sticking to the original purpose for which we witnessed the most change? started the endeavor. I got a pretty good grounding MP: I’ve been in the industry pushing 30 years, I came to work for the MSBI in 1990, where I in this while at Target, which had excellent and there’s always a plethora of new ideas and started as an investment analyst. In 1998, I was financial management systems. products. However, the basics haven’t really promoted to assistant executive director for MSBI. I’ve learned to take a long-term view and not to changed. An investor can really only do two In 2008, I left for a job as the CIO of the Maryland worry so much about quarterly performance. things: they can own assets or lend money to Retirement System. I was there until 2010, when entities. You want to own things that are going to KM: Who are MSBI’s consultants and managers? I left to become the CIO of Macalester College, give you a solid return and provide growth or lend a college that had tried to recruit me when I was MP: Our consultants are Aon and Pension money to things that give you back what you lent, in high school; I was there until 2013 as CIO. In Consulting Alliance. We have more than 100 plus an appropriate return for the risk you took 2013, I came back to the State Board of Investment managers, including BlackRock, Blackstone, in lending that money. That’s pretty simply what KKR, Goldman Sachs, Neuberger Berman and we’re here to do. A lot of smart people have come as its executive director and CIO. Western Asset. We have multiple managers in each up with all sorts of ways to do this and package it KM: How do you characterize your investment asset class, and manage by trying to determine the as a product, but the basics are what I’m looking philosophy? role that each class plays in the portfolio. We seek for. I’ll hire a manager that I have confidence will MP: I keep it simple with basic investment managers who enable us to achieve our objectives invest in assets that generate good returns. I try approaches. What I learned from Howard Bicker, in each asset class. to give money to debt managers that make good executive director at MSBI for 30 years, was: For a fund of our size, 100 managers is not a lot— judgements. determine your approach, keep it simple and stay when you have active management programs, you KM: What aspect of the industry would you most on top of what’s going on. I replaced him and end up having quite a few managers to handle risk. like to see changed and why? also worked for him when I was here before. To Most of the managers are in private markets; there develop our asset allocation, an understanding of are 20 in domestic equity and 20 in international MP: I’d like to see better fee alignments between the purpose of each asset class is required. I try to equity with eight to nine bond managers. We have asset allocators/owners like myself and asset managers. Fee transparency has evolved quite a lots of private equity, private debt, energy and real bit, but there’s still a ways to go. My belief is that if estate managers. We have 10% fewer managers Mansco Perry, executive director and chief investment officer, you’re not getting what you want from a manager, on the public side, which is five or six less than a Minnesota State Board of Investment there is no one holding a gun to your head saying couple of years ago. that you have to stay there. I do not focus only KM: What has been the best experience in your on fees—I focus on having good partners as career? managers. Most public pension funds are resourceMP: I’ve had the pleasure of working for some challenged, and managers need to be willing to really good people since I started in the investment help investment organizations like ourselves side of finance in 1990. Coming to work for by providing information and helping us think Howard Bicker at the MSBI, I got broad exposure through problems—this is not always to their to various asset classes and operational aspects benefit, but if they do their job the partnership of an institutional investment organization. will be long. At the Maryland fund, I received exceptional KM: Are you married and do you have children? support from the Board and my colleagues, as we MP: I’ve been married 24 years. My wife Nancy navigated through the financial crisis of 2008. At was a computer program manager, and when I Macalester College, my Investment Committee took the job in Maryland in 2008 she resigned her Chair Jeff Larson challenged me to focus less on job and we decided to move. But then everything what we were investing in and appreciate more crashed and we never sold our house in Minnesota, why we invest and the importance of the role the so I commuted to Maryland for two-and-a-half endowment played in enabling the College to years while my family stayed in Minnesota. achieve its mission. Here at MSBI I’m trying to Despite the personal hardship, Maryland was a fulfill the promise made to people who worked in fantastic professional experience. public service for the state of Minnesota to provide their benefits in retirement. I’m especially proud My wife and I adopted two girls from China – that in each of these organizations, we achieved the youngest is 16 and a junior in high school, the oldest is 18 and about to attend Lawrence first quartile results. University in Wisconsin. I hope that they will KM: What was the worst experience in your career? become good citizens with happy lives and MP: I’ve learned that people, myself included, will contribute to society. My family motivates me to make mistakes, and sometimes things don’t work continue doing a good job. out as expected. People have different perspectives, KM: Do you have any hobbies? and we don’t always reach the same conclusions. We’ve had managers that don’t work out, but I MP: I collect baseball cards and coins—I have 16

INSTITUTIONAL ALLOCATOR

photograph by Kyrsten Bloch

ASSET OWNER SPOTLIGHT

spent most of my life here in Minnesota, and I American gold rush. I like novels based on history; love it, but I’m just a kid from Newark and am I was a history major in college. Also, I’m currently still a big, big New York Yankees fan! in the middle of a book about the events leading KM: What are you reading? up to the 2012 presidential election between MP: I’m about to read Bound for Gold by William Barack Obama and Mitt Romney, called The Martin, which is a historical novel about the Stranger by Chuck Todd. I also like John Grisham’s

legal thrillers, James Bond novels and books about baseball history. KM: Where have you travelled to recently? MP: I took off a few weeks in August to go to

Montreal with my family.

MSBI COMBINED FUNDS PERFORMANCE (NET OF FEES)

The Combined Funds’ performance is evaluated relative to a composite of public market index and private market investment returns. The Composite performance is calculated by multiplying the beginning of month Composite weights and the monthly returns of the asset class benchmarks. QTR

FYTD

1 YEAR

3 YEAR

5 YEAR

10 YEAR

20 YEAR

30 YEAR

COMBINED FUNDS

1.5%

10.3%

8.3%

9.5%

7.8%

6.8%

9.1%

COMBINED FUNDS– COMPOSITE INDEX

1.4%

9.7%

8.3%

9.3%

7.4%

6.6%

8.8%

EXCESS

0.2%

0.6%

0.0%

0.2%

0.4%

0.1%

0.3%

15.0% 12.5%

RETURN

10.0% 7.5% 5.0% 2.5% 0.0% 3 month COMBINED FUNDS

1 year

3 year

5 year

10 year

20 year

30 year

COMBINED FUNDS–COMPOSITE INDEX

Cash 1.2%

ASSET MIX

Treasuries 8.6%

The Combined Funds actual asset mix relative to the Strategic Asset Allocation Policy Target is shown below. Any uninvested portion of the Private Markets allocation is held in Public Equity.

MILLIONS

ACTUAL MIX

POLICY TARGET

PUBLIC EQUITY

$41,430

60.7%

49.0%

FIXED INCOME

$10,695

15.7%

16.0%

PRIVATE MARKETS

$9,432

13.8%

25.0%

TREASURIES

$5,880

8.6%

8.0% 2.0%

CASH

$851

1.2%

TOTAL

$68,288

100%

Public Equity 60.7%

Private Markets 13.8% Fixed Income 15.7%

VOLUME 1, ISSUE 2

ASSET OWNER SPOTLIGHT

SPECIAL INFRASTRUCTURE REPORT 18

INSTITUTIONAL ALLOCATOR

ASSET ALLOCATION

Institutional Allocator took on the infrastructure asset class in this edition, focusing on three areas in a three-part series of reports. We look at the sector from the perspective of investors considering renewables, European vs. North American, and emerging markets infrastructure. We interviewed pension funds, an insurance company, a research firm and an auditor to elicit insight into this subcategory of the real asset classâ&#x20AC;&#x201D;considering where the best deals are now, and how investors are perceiving opportunity in the asset class going forward. > > > > VOLUME 1, ISSUE 2

ASSET ALLOCATION

RENEWABLE ENERGY INVESTMENTS TAKING HOLD IN INSTITUTIONAL PORTFOLIOS BY LESLIE KRAMER

INSTITUTIONAL INVESTORS ARE LOOKING FOR opportunities to invest in renewable energy, and the markets have taken note. In fact, more than half (54%) of the infrastructure deals completed in Q2 2018 were for renewable energy assets, while energy assets and utilities assets each accounted for 11% of all infrastructure deals, according to a recent report by research provider Preqin. The $10.5 billion Chicago Teachers’ Pension Fund does not currently have a dedicated allocation to clean technology or renewable energy, but it does secure meaningful exposure to the asset class through the existing globaldiversified-infrastructure funds in its portfolio, according John Freihammer, real assets portfolio manager for the fund. “It’s a growing part of the market—wind farms, solar and some biomass landfill plays, as well,” Freihammer said. The Chicago fund has an 11% target allocation to real assets, and within that it has 25% of the portfolio, or approximately $225 million, invested in infrastructure and approximately 75% allocated to real estate, representing some $760 million. “Renewables are a growing part of the energy production market, so it’s definitely part of our portfolio,” he said. Over the last several years, Freihammer has observed the steady development and growth of renewable energies, which he attributes to new adoption standards in Europe and the U.S. as well as the increasing cost competitiveness of renewables versus carbon-based solutions. “The rapid decline in the cost of producing and delivering renewable energy over the past decade in the U.S. and internationally has been dramatic. As the use of renewables continues to grow as a share of overall global energy consumption, assets that produce them will continue to ascend in number and value. This alone will organically lead them to become a bigger part of funds’ allocations, even if the strategies are not specifically focused on renewable investments,” he said.

INSTITUTIONAL ALLOCATOR

The Toronto, Canada-based insurance company Manulife, with $850 billion in assets under management (AUM), is also a big investor in renewables. During the summer, it announced the closing of approximately $2 billion in capital commitments to the John Hancock Infrastructure Fund. The fund provides thirdparty investors the opportunity to invest alongside Manulife’s general account in direct, private-equity investments and co-investments in the infrastructure sector in the U.S. (The company operates primarily as John Hancock in the U.S. and as Manulife elsewhere.) Renewables currently account for a 29% weighting in the John Hancock fund, which has a 30% aspirational allocation to the class. All of the projects in which the fund invests are U.S. based. “ManuLife has been involved in wind, solar, biomass, hydro, and energy efficiency for over the 17-year history of the program, according to John Anderson, Manulife’s head of corporate finance, who heads the fund. “We were early practitioners in the industry and active in the Department of Energy’s accelerating investment into wind and solar. It’s an important part of our portfolio now,” he said. ManuLife also financed the first solar farm in the U.S., at the Nellis Air Force Base outside Las Vegas, in 2007, and was a founding member and the first insurance company to join the American Council on Renewable Energy (ACORE) in 2003, Anderson noted. Currently, the fund is about 60-65% committed. It has deployed $1.2 billion in capital and has $800 million left to go. Anderson declined to comment on expected returns for the fund. “Renewables have been a long-running theme for us, because we have seen retail electricity customers tell their governors and state assemblies that they want to see more renewable energy in their states’ energy supply, and in those states we see utility commissions and public electricity-system-planning authorities asking, ‘how do we get more wind and solar into the mix for the U.S, and how do we do it on the most affordable bases?’ ” he said. While the North Dakota Retirement & Investment Office (NDRIO), which

ASSET ALLOCATION has $13.8 billion in AUM, does not seek out renewable energy mandates, it is invested in the class through its externally managed infrastructure funds, according to David Hunter, the fund’s executive director and chief investment officer. NDRIO’s infrastructure managers are JP Morgan Asset Management, which manages $450 million in infrastructure assets, GCM Grosvenor, and its most recent managerial addition, to which it granted a mandate in the spring, I Squared Capital. The retirement system added the new manager to deliver better diversification to its $550 million infrastructure investment mandate. Going forward, rather than sharply paring back investment with JP Morgan, the fund will push more assets to the two other managers, Grosvenor and I Squared. “We prefer an equal threelegged stool as opposed to a two-legged stool that is lopsided,” Hunter said. The North Dakota retirement office currently has “strong capital inflows and manages money for the North Dakota Pension Trust, Insurance Trust and the Legacy Fund. The Legacy Fund was created in 2010, when North Dakota voters approved a constitutional amendment to mandate that 30% of oil and gas production and oil extraction taxes produced after June 30, 2011 be transferred to the fund. Since inception, the Legacy Fund has earned more than $1 billion of net investment income. Cumulative deposits into the Legacy Fund have exceeded $4.6 billion. Hunter said the fund witnessed a real surge in large wind farms and solar parks during the financial crisis and in the five to seven years after. He explained that, “Our managers do have renewables invested in their diversified portfolios, such as wind generation and solar. But we look at what is the best risk-adjusted-return opportunity set, so we do not specifically say the next deal is renewables, but if it’s the best opportunity then perhaps it will be. We hope that our managers would consider them as a viable opportunity.” A CLASS DRIVEN BY CLIMATE-CHANGE POLICIES “Renewables have been a big part of the deal-making market for several years now, linked to broader climate-change policies in Europe and in Asia, said Patrick Adefuye, head of real-assets products at Preqin. Asian deals are not as prevalent as deals in Europe, but they are growing all the time, he noted. Returns for infrastructure investments, overall, are about 10%, but there is concern going forward that returns could decline, due to competitive pressures and more interest in the area, Adefuye said. That said, “based on our survey, investors are pretty satisfied with their returns or are surprised how good they are.” In fact, according to the Preqin report, 46% of investors feel renewable energy infrastructure represents an attractive investment opportunity. For the time being, “returns are in line with the rest of asset class,” Manulife’s Anderson added. EUROPE AHEAD OF THE CURVE The reason renewable energy investment transactions are more prevalent in Europe is likely due to the targets that have been set in many European

countries to reduce energy use. European governments are evaluating how much production there is of renewable versus conventional energy in their countries and have been encouraging the creation of environmentally sound energy sources, which have also become attractive to investors, Adefuye said. In Asia, the driver is population growth and a need to meet the energy demands that it creates, he said. Anderson has also seen evidence of European governments being more aggressive on moving to renewable energy than in the U.S. “One indicator is that the first solar park happened in southern Germany, before there were any in the U.S. And, as it happens, Arizona and southern California are way better places to put a solar park than in Bavaria,” he observed. GROWING INTEREST IN THE SECTOR Interest in renewables picked up after the financial crisis, and over the last few years has been driven by state governments and federal tax incentives, as well as state governments that are encouraging utilities to run auctions for solar parks and wind farms, Anderson said. Recently, he has seen activity that has gone beyond the large utilities to smaller-scale solar parks, including moves in New England toward the introduction of solar rooftop providers. Anderson has also seen strong support for renewables in the Canadian markets. “Canada has really gone off coal faster than the U.S, which has a bigger legacy of using coal,” he said. In fact, Canada has reduced use dramatically and has used more hydropower in terms of the electricity mix, he said. Overall, Anderson is Pollyannaish about opportunities for renewables in the U.S., going forward. “We saw a real surge in large wind farms and solar parks during the financial crisis and in the five to seven years after. That has since slowed down a bit, in terms of large utility scale, but we are now seeing residential and municipal facilities picking up in recent years. It continues to be a topic investors want to see in the mix,” he said. “The other trend will be Americans transitioning away from coal into natural gas, and we are definitely seeing that as well,” Anderson noted. “We have had a lot of cases of technology advances around directional drilling and recovery techniques that have half the carbon of coal and cleaner smoke stack emissions. As the transition off coal to natural gas happens, it will be helpful for our carbon footprint, and that has been part of our opportunity set,” Anderson said. Investors, overall, seem to be fans of renewable investments in their portfolios. “When we do renewable investment, that is the one that we know will be on the slide show and the holiday party at the end of year; it goes up on the homepage, colleagues get excited about it and employees give good feedback,” Anderson said. “Investors are pleased that there was a strong renewable energy content in the Hancock fund and want to share it with their board that they were participating in it,” he asserted.

(Left to right) John F. Freihammer, real assets portfolio manager for Chicago Teachers’ Pension Fund; John Anderson, head of corporate finance, ManuLife; David Hunter, executive director / chief investment officer, North Dakota Retirement & Investment Office

VOLUME 1, ISSUE 2

ASSET ALLOCATION

INVESTORS ARE MISSING OUT ON EM INFRASTRUCTURE BY LESLIE KRAMER

THERE ARE MANY REASONS NORTH AMERICAN investors are currently taking a pass on buying emerging market infrastructure: compliance, due diligence, unfamiliarity with those markets, to name three. But is their caution warranted, or are attractive opportunities being missed? Kamal Suppal, chief investment auditor at Emerging Markets Alternatives, an investment auditor, and former senior research consultant at NEPC, believes it’s a little of both. “North American investors are, for the most part, aware of the fact that there are bigger opportunities outside of North America that are very attractive investment opportunities, but there is a familiarity bias, or a home bias, that keeps them closer to home,” Suppal said. Also, with European infrastructure having become expensive of late (see related story p.24,) many investors are now holding too much dry powder, rather than venturing abroad. “One third of assets under management slated for infrastructure is now dry powder; that is too much cash,” according to Suppal. The result is that there is an abundance of investors looking for European deals or North American deals, which has greatly depressed the rate of return investors can command in those markets, he said. “It is indicative of the fact that there are too few opportunities.” “Investors do know that there is a greater opportunity set outside of the U.S. and North America, and that if you are pursuing those opportunities, you can command a premium for your capital,” Suppal noted. The median annual return of 17% for infrastructure funds that began investing between 2000 and 2005 averaged about 10% post the financial crisis,” Suppal said. Managers peg Organization for Economic Co-operation and Development (OECD) private infrastructure equity returns at 11-12% annualized with a potential to capture an emerging market risk premium of 6-7%, according to The Investor Perceptions of Infrastructure, 2017, a survey conducted by the EDHEC Infrastructure InstituteSingapore. Nevertheless, U.S. investors continue to allocate increasing amounts of money to developed-market infrastructure funds that are being raised by big, household-name firms in the U.S. and Europe, Suppal said. He calls the situation a “vicious circle” of “too much money chasing too few opportunities, inflated assets and compressed returns, and capital concentrated into a limited number of funds.” Suppal suggested that investors seem to be blinkered where seeing beyond developed markets for opportunities in the class is concerned. “A familiarity with [developed markets] is probably breeding contempt for new vistas of growth in EM that can potentially impact both portfolios and the socioeconomic quality of the developing world,” he warned. THE WATER’S NOT THAT INVITING There are at least a couple of very real factors holding investors back from investing in emerging markets infrastructure. One is recognizing cultural nuances. The other is the amount of due diligence needed to research and evaluate these deals, all of which takes resources—resources that many investors don’t have. “North American institutions need to develop a level of comfort and need to have the resources and bandwidth and governance structure to do due diligence on these opportunities, and that is what keeps them away from looking at some of these opportunities outside of North America,” Suppal said. “When you look outside the U.S., the bar is higher, in terms of pursuing those opportunities,” he added.

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Patrick Adefuye, head of real assets products at Preqin, said he has seen a reticence by investors to expose funds’ portfolios to risk. “Activity in Asia is less than in the developed markets because there are different pressures there, in terms of the risk of making investments in those regions.” So investors shy away. According to data from Preqin, the number of emerging markets infrastructure funds have been on the decline since 2016, while capital raised by those funds has risen, reaching a record high of $25.9 billion in 2017. In fact, three funds are primarily responsible for the record fundraising total. “We’re seeing a concentration of capital on a few large funds—a trend seen across many different alternative asset classes,” said Naomi Feliz, a spokesperson at the research firm. Unfortunately, investors tend to be more comfortable investing with brandname managers with global mandates whose local insights and networks and access to deal flow might be limited in some ways, according to Suppal. “Underlying a $420 billion-plus AUM [assets under management] industry is investors’ continued reach for yield, which lured more than 500 unlisted infrastructure funds (mainly North America and Europe) to raise $300 billion-plus in assets over the last seven years, whereas Asia, in a similar time frame, saw its AUM grow to only about $60 billion, which now accounts for approximately 13% of global infrastructure AUM,” Feliz said. SOME FUNDS STILL NOT READY, OTHERS ALMOST ARE Chicago Teachers’ Pension Fund, with an AUM of $10.5 billion, is not quite ready to allocate any of its infrastructure portfolio to emerging markets, despite the potential for high returns. “We are not there yet,” said John Freihammer, real assets portfolio manager for the fund. “There is activity there, but there is enough opportunity in Western Europe and the U.S., where the most investor dollars are flowing. That is where the most fundraising is, and our focus has done well for us,” he said. The fund is seeing net returns ranging from 10-12% for its European deals. In the U.S., returns have varied. “For our open-end infrastructure funds we see returns ranging from 8-10 % net IRR. The closed-end infrastructure funds have weighed in with returns from 12-18% net IRR,” Freihammer said. The Chicago teachers’ fund is continually looking for infrastructure funds in which to invest, but with a U.S. or North American or European focus. In March it issued a request for proposals (RFP) seeking open-end infrastructure equity funds to bring its exposure to the asset class back up to its 2% strategic allocation. The fund’s exposure has fallen slightly of late because of maturing investments, Freihammer said. David Hunter, executive director, chief investment officer of the $13.8 billion North Dakota Retirement & Investment Office (NDRIO), is more open to investing in the EM infrastructure sector, but remains cautious. “We focus on OECD-based infrastructure investments over the emerging markets,” Hunter said. “We do not yet have a dedicated allocation to emerging markets infrastructure, although we do gain exposure to some non-OECD assets via our globally diversified funds and would expect those areas to continue to develop and grow in the future,” he said. For the time being, the largest portion of the fund’s infrastructure portfolio remains invested in the U.S. That’s because at the time the NDRIO was looking to deploy its infrastructure capital, “the U.S. was where we saw the best opportunity set,” Hunter said. The fund also has some investments in Europe and an even

ASSET ALLOCATION smaller percentage in Asia (10%). So, will the NDRIO consider broadening its EM infrastructure portfolio in the future? “We will be more cautious in areas where there is great uncertainty, regarding governance, currency, rule of law or greater volatility in the capital markets,” Hunter stated. The fund’s infrastructure portfolio is broadly invested within North America (45%) and Europe (35%) with smaller exposures in Australia and various emerging markets, including Asia.

investments just not worth the effort it takes to conduct due diligence. Suppal

ASIAN INFRASTRUCTURE PLAYS John Anderson, head of corporate finance at Manulife, which has $850 billion in AUM, agrees that the requirement of good governance is key to investing in the emerging markets. For infrastructure in Asia, “It’s all about the rule of law,” he said. “You are making investments in 20-year assets, so you have to look at whether or not your contract is enforceable. You have Japan, where there is great rule of law, but returns are low; it’s a low-rate environment there,” he said. “In other Asian markets, you frequently have more emerging market risk, good infrastructure needs and demand, but more emerging, less-tested rule of law and reliable contract enforcement,” he said. “Our Asian strategy for infrastructure investing includes a mix of developed and emerging economies, across both listed and private companies, in both debt and equity. Where the precedents on contract enforceability are less tested, we do smaller investment sizes and favor investments in public companies and securities,” he explained. Investments in Asia can also present challenges for investors due to the region’s varied financial and regulatory regimes. “If you have 12 countries, you have 12 different environments. You don’t have the uniformity in place that you have in places like the European Union and the U.S.,” Anderson said. Australia and Canada offer inviting rule-of-law, pro-market policies and competitive opportunities. By contrast, “There are countries in Asia and the emerging markets where contract enforcement might not be as strong, and where things are not as developed. You want to be careful, and maybe do deals with organizations such as development banks, the IMF or the World Bank, as partners,” he said. Asia has produced an average of 20% of the global aggregate infrastructure deal flow in the last three years, according to Preqin’s Adefuye.

spread their bets and diversify. Instead of writing a $100 million check to just

SMALLER DEAL SIZES Another reason investors may be avoiding emerging-market infrastructure investments is that many of these deals tend to be smaller in size, making the

pipeline in emerging markets to increase over what was seen in the last three- to

(Left to right) Kamal Suppal, chief investment auditor, Emerging Markets Alternatives; John F. Freihammer, portfolio manager, Chicago Teachers’ Pension Fund; David Hunter, executive director / chief investment officer, North Dakota Retirement & Investment Office; John Anderson, head of corporate finance, ManuLife

concedes that, “You need to commit more resources for due diligence, so that becomes a challenge.” For those investors who do attempt to invest outside the U.S., “they need to develop the right mindset and commit the resources required to do the due diligence, because opportunities outside U.S. are not a slam dunk,” he cautioned. For those willing to take the plunge, “They could spread the money out. U.S. institutions have big checks to write, so they could one fund, they could allocate it over three to four funds in infrastructure in the developing world, where infrastructure has a broader definition and potentially bigger social impact,” he said. Projects situated in emerging markets may bring other risks, still. In Suppal’s blog post: Infrastructure Investing Your Lasting Impact on EM and Portfolios, he writes that, “according to a recent Indian government report, as many as 359 infrastructure projects have shown cost overruns of $30 billion, from delays in land acquisition, forest clearance, supply of equipment, funding constraints, legal cases and slack law and order. Systemic corrupt behavior, including nepotism in business-contract allocation, unfair distribution of regional transfers from the central government, and distorting data can jeopardize investments.” To offset some of these risks, “experienced investors try to…ensure a country’s GDP is resilient and demand inelastic, affording pricing certainty. They also emphasize long-term committed revenue contracts from investment grade counterparties and ensure all operating permits are in place,” Suppal wrote. He concluded: “For a positive lasting experience, investors should carefully diligence local infrastructure managers to understand their strategies, execution and historical returns (time-weighted, risk-weighted) including loss history.” Despite the difficulties associated with EM investments, North American investors’ view of EM infrastructure projects is softening. According to EDHEC’s report, 85% of surveyed respondents (62% asset managers and asset owners, including insurers, pension plans, and sovereign wealth funds, with the remaining 38% representing commercial and international banks, consultancies, government agencies and rating agencies) said they expect the infrastructure five-year period, versus just 35% who said they expect to see more growth in developed markets.

“It’s a vicious circle of too much money chasing too few opportunities, inflated assets and compressed returns, and capital concentrated into a limited number of funds.” VOLUME 1, ISSUE 2

ASSET ALLOCATION

BRAVING THE NEW WORLD: CIOS PASS ON PRICEY EUROPEAN INFRASTRUCTURE BY LESLIE KRAMER

EUROPE HAS, FOR SOME TIME, BEEN THE SWEET spot for institutional investors seeking infrastructure exposure. But with so many investors chasing the same deals, supply-demand pressures have depressed returns in the asset class there. Though some North American institutional investment officers are now seeking newer or less-trodden paths to more attractive infrastructure-investment opportunities in markets in their own backyard, some market participants ask why aren’t more? The North Dakota Retirement and Investment Office (NDRIO) is forging down that path. “European opportunities appear to be more challenged in the infrastructure sectors we’re considering,” declared David Hunter, executive director and chief investment officer at the $13.8 billion pension fund. “There are good opportunities, but so many assets appear to be more fully valued at this point,” he said. “It’s difficult to be overly optimistic about European infrastructure.” That’s why NDRIO is looking more closely now at North America for infrastructure deals. “There appears to be a better opportunity set of proper risk-adjusted returns in the U.S. and Canada,” he said. The North Dakota fund has dedicated 4% of its portfolio, or about $550 million, to infrastructure investments. Over the next couple years, it plans to increase that to 5%, Hunter said. Regarding returns, “three percent of our portfolio is core to core-plus, bringing in returns in the six percent to eight percent range. The fund is currently seeking lower double-digit returns for valued-added opportunities. Its infrastructure portfolio is seeking 7% to 8% net returns, overall. “Managers are paying higher than they would like to for infrastructure deals in Europe,” asserted Patrick Adefuye, head of real-assets products at research firm Preqin. “While fundraising has been strong, we have seen dry powder rise to record highs, potentially indicating that fund managers are wary of deploying capital into overvalued assets,” Adefuye said in August. “Ultimately, with the market remaining crowded and with capital still plentiful, fund managers will have to find ways to effectively deploy funds into available assets,” Adefuye said, adding that the highest level of deal activity remained in Europe, while levels for the U.S. and Asia were flat. DEALS DRY UP “Infrastructure deal activity overall slumped in Q2 2018, with the quarter seeing five-year lows for the number of deals completed and for total deal value,” Adefuye said. In total, there were just 569 infrastructure deals completed in Q2, worth a combined $49 billion, according to a Preqin report. This represents the record-lowest aggregate-deal value for the industry, the report said. The previous lowest quarter in the last five years was $57 billion in Q1 2014. “Europe was primarily responsible for the slowdown, as activity in the region fell by 72%,” Adefuye said. Deal activity in Europe fell from $63 billion in Q1 to about $18.4 billion in Q2, Adefuye noted. Deal activity will have to pick up significantly in the second half of 2018 for the industry to come close to levels seen in previous years, Adefuye noted. As of press time in September, the aggregate deal value for Q3 2018 had already risen to $29.3 billion according to Preqin data. John F. Freihammer, portfolio manager at Chicago Teachers’ Pension Fund, with $10.5 billion in assets under management (AUM), said the fund invests primarily in North American infrastructure assets, but that it also has exposure to Western Europe and to Australia. “There is good demand for assets in Europe, so our portfolio has benefitted from that as valuations continue to increase. Managers have remarked that competition and bidding for assets in Europe

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remains fierce, so that has certainly helped to increase valuations as well,” Freihammer added. The market value of assets is influenced greatly by recent comparable sales of similar assets. As prices paid for recent sales increase due to competitive bidding, so do the valuations for comparable assets, he explained. POLITICAL AND REGULATORY HURDLES STYMIE DEALS Australia and Canada have had a big head start with respect to institutional investment and private/quasi-private ownership of infrastructure assets, due to earlier adoption and acceptance of these transactions. They are thus much further along than the U.S. in terms of widespread acceptance of infrastructure as a viable institutional asset class, according to Freihammer. “The U.S. has been catching up, but there remain complex political and regulatory hurdles to successfully transacting on many of these assets. Multiple agencies and regulatory bodies at the local, state, and federal levels are often involved, and it can be a challenge politically as these can be critically important assets that affect residents on a daily basis,” he said. The Chicago Teachers Pension Fund invests in infrastructure through closedended and open-ended commingled funds. “We see value and opportunity in both of those structures, although we only utilize commingled funds, since it would take too much capital to efficiently invest through a separate account,” Freihammer said. For real estate investments, the fund expects 7% to 9% gross return for core/core-plus real estate over the long term. For core infrastructure, it expects 6% to 8% gross returns over the long term. As of August, the Chicago fund had an 11% target allocation to real assets, of which roughly 25%, or about $225 million, was invested in infrastructure. The remaining 75% was allocated to real estate, representing approximately $760 million. The fund’s target allocation to real estate is 9% and its target allocation to infrastructure is 2%. The fund recently issued an infrastructure-investment request for proposals (RFP) to maintain its current infrastructure allocation because “Some of our older vintage-year closed-end funds are liquidating, so we were slightly below our target. We want to bring it back up to two percent,” Freihammer said. ANOTHER FUND SETS ITS SIGHTS ON NORTH AMERICA The Pennsylvania Public School Employees’ Retirement System (PSERS), with $54.1 billion in assets, is also targeting North American infrastructure. In January, the fund announced it would invest up to $500 million in the open-ended Blackstone Infrastructure Partners (BIP) fund, which will invest in infrastructure assets across the energy, transportation, water and waste, and communications sectors, with a primary focus in North America. A commitment to the fund will be allocated from the infrastructure portion of PSERS’ real-assets portfolio. The infrastructure portfolio is slated to be 66% private funds and 44% listed securities. Investment in this fund will increase PSERS’ infrastructure exposure, which is currently below a long-term target of 2% of total assets. TYPES OF INVESTMENTS Secondary stage deals continue to represent the largest proportion (64%) of deals investors are buying up, while greenfield assets made up 33% of deals and brownfield projects comprised just 3%, according to the Preqin report. The most activity has been in mature assets, which have less risk, so investment has been focused on those assets, resulting in competitive pressure, Adefuye said. The Chicago Teachers’ fund’s infrastructure investments are predominately in brownfield and core projects, Freihammer noted.

ASSET ALLOCATION

CALENDAR OF EVENTS FOR 2019 INSTITUTIONAL

ALTERNATIVES

CENTRAL STATES INSTITUTIONAL FORUM February 26 | St. Louis

ALTSHK March 7 | Hong Kong

SWITZERLAND INSTITUTIONAL FORUM February 28 | Zürich

ALTSLA March 14 | Los Angeles

FRANCE INSTITUTIONAL FORUM March 13 | Paris

ALTSPB April 10 | Palm Beach

OHIO INSTITUTIONAL FORUM March 13 | Columbus

ALTSCHI June 11 | Chicago

TRI-STATE INSTITUTIONAL FORUM March 27 | New York

ALTSSV July 18 | Seattle

MOUNTAIN STATES INSTITUTIONAL FORUM April 9 | Denver NORDICS INSTITUTIONAL FORUM-DENMARK April 10 | Copenhagen PACIFIC NORTHWEST INSTITUTIONAL FORUM April 30 | Seattle CANADA EAST INSTITUTIONAL FORUM May 9 | Toronto EUROPEAN INSTITUTIONAL FORUM May 14 | London MID-ATLANTIC INSTITUTIONAL FORUM May 14 | Washington DC MIDWEST INSTITUTIONAL FORUM June 4 | Chicago JAPAN INSTITUTIONAL FORUM July 3 | Tokyo BENELUX INSTITUTIONAL FORUM September 5 | Amsterdam SOUTHWEST INSTITUTIONAL FORUM September 10 | Sante Fe AUSTRALIA INSTITUTIONAL FORUM September 10 | Sydney GREAT PLAINS INSTITUTIONAL FORUM September 19 | Minneapolis NEW ENGLAND INSTITUTIONAL FORUM October 3 | Boston UK & IRELAND INSTITUTIONAL FORUM October 10 | London SOUTHEAST INSTITUTIONAL FORUM October 23 | Atlanta MICHIGAN INSTITIONAL FORUM October 29 | Detroit PENNSYLVANIA INSTITUTIONAL FORUM November 6 | Philadelphia NORDICS INSTITUTIONAL FORUM-SWEDEN November 12 | Stockholm

MARCH

APRIL

MAY

JUNE

JULY

AUGUST

SEPTEMBER

OCTOBER

NOVEMBER

DECEMBER

ALTSTX October 15 | Dallas GREENWHICH ECONOMIC FORUM November 12 | Greenwich ALTSMIA November 13 | Miami

PRIVATE WEALTH PRIVATE WEALTH TEXAS February 6 | Dallas PRIVATE WEALTH NORTHERN CALIFORNIA February 12 | San Francisco PRIVATE WEALTH NORDICS March 6 | Stockholm PRIVATE WEALTH SWITZERLAND March 12 | Geneva PRIVATE WEALTH NEW ENGLAND March 27 | Boston PRIVATE WEALTH GREAT PLAINS April 2 | Minneapolis PRIVATE WEALTH EUROPE–SPRING April 9 | Paris PRIVATE WEALTH UK–SPRING May 1 | London PRIVATE WEALTH SPAIN May 8 | Madrid PRIVATE WEALTH SOUTHEAST May 14 | Atlanta PRIVATE WEALTH ASIA–SPRING June 5 | Singapore PRIVATE WEALTH SOUTHERN CALIFORNIA June 12 | Los Angeles PRIVATE WEALTH EAST–SPRING June 26 | New York

KOREA INSTITUTIONAL FORUM December 3 | Seoul

PRIVATE WEALTH WEST July 31 | Seattle

CALIFORNIA INSTITUTIONAL FORUM December 4 | Napa

PRIVATE WEALTH FLORIDA August 21 | Palm Beach

GERMANY INSTITUTIONAL FORUM December 11 | Frankfurt

PRIVATE WEALTH BENELUX September 17 | Amsterdam PRIVATE WEALTH MID-ATLANTIC September 25 | Philadelphia

TEXAS INSTITUTIONAL REAL ESTATE INVESTOR FORUM April 3rd, 2019 | Austin

PRIVATE WEALTH ASIA–AUTUMN October 10 | Hong Kong

EAST INSTITUTIONAL REAL ESTATE INVESTOR FORUM April 10, 2019 | New York

PRIVATE WEALTH GERMANY October 16 | Munich

WEST INSTITUTIONAL REAL ESTATE INVESTOR FORUM June 5, 2019 | San Francisco

PRIVATE WEALTH LATIN AMERICA October 22–23 | Miami

CANADA INSTITUTIONAL REAL ESTATE INVESTOR FORUM August 14, 2019 | Toronto

PRIVATE WEALTH MOUNTAIN STATES October 23 | Denver

MIDWEST INSTITUTIONAL REAL ESTATE INVESTOR FORUM September 18, 2019 | Chicago

PRIVATE WEALTH OHIO November 7 | Columbus

GLOBAL INSTITUTIONAL REAL ESTATE INVESTOR FORUM December 11–12, 2019 | New York

PRIVATE WEALTH EUROPE–AUTUMN November 7 | Milan

PRIVATE EQUITY

FEBRUARY

ALTSSV September 8 | Mountain View

TEXAS INSTITUTIONAL FORUM November 19 | Austin

INSTITUTIONAL REAL ESTATE

JANUARY

PRIVATE WEALTH UK–AUTUMN November 12 | London

PRIVATE EQUITY US FORUM May 6–7, 2019 | New York

PRIVATE WEALTH EAST–AUTUMN November 13 | New York

PRIVATE EQUITY EUROPE September 11–12, 2019 | London

PRIVATE WEALTH CANADA November 20 | Toronto

PRIVATE CREDIT US FORUM November 6–7, 2018 | New York

PRIVATE WEALTH SWITZERLAND-ZÜRICH December 11 | Zürich

PRIVATE EQUITY LATIN AMERICA FORUM December 9–10, 2019 | Sao Paulo

PRIVATE WEALTH MIDWEST December 12 | Chicago

*Dates Subject to change

WWW.MARKETSGROUP.ORG VOLUME 1, ISSUE 2

ASSET ALLOCATION

PALTRY RATES PERPLEX LIFE INSURERS AS PRE-CRISIS DEBT MATURES BY MARK FORTUNE

nvestment executives at U.S. life insurance companies continue to lose sleep over identifying the best reinvestment opportunities for maturing debt in which they invested a decade ago. With interest rates much lower now than before the financial crisis, the challenge for life insurers is to find new investment classes that meet their yield requirements without taking on additional risk. To meet the challenge, insurers are increasing their exposure to classes to which they have traditionally shown scant interest. As a function of this, they continue to seek to acquire more internal resources, i.e. staff with the requisite investment skills, and to outsource investment in those classes. When asked what is a difficult challenge for them currently, “the most frequent response you get from insurance investors is the challenge of investing in a low- or rising-interest-rate environment according to David Holmes, managing director at Insurance Asset Outsourcing Exchange, a research unit established by Louisville, Kentuckybased asset management consultancy Eager, Davis & Holmes, to promote knowledge about thirdparty insurance asset management. “If you go back 10 years, interest rates were much higher. Longer term bonds were around 5% then. Now, as insurance funds look to reinvest those assets, it’s problematic. They can’t get the same rate now. Finding a way to earn a return that allows them to stay competitive and to remain profitable remains quite a challenge,” Holmes said.

large representative set of life insurance companies, the book yield on their fixed-income portfolios fell from about 4.8% to about 4.2%--so it’s falling about 20 basis points per year. That’s the yield on all bonds as well as commercial mortgage loans. So, this is creating problems because life insurance companies generate their income primarily from their fixed-income portfolios,” he explained. U.S. life insurance companies aggregate approximately $3.9 trillion of balance sheet assets. Snyder noted that as a regulated industry in which life insures seek exposure primarily to highquality investments, they do not have a wealth of investment options from which to choose.

Historically, large life insurers have done a lot of commercial real estate lending, but primarily in large loans in very large markets, represented by the top-10 metropolitan statistical areas. Now, they are moving into the middle-market space, Snyder said, underscoring that investment grade Life insurers have typically weighted their emerging market debt, munis, and high-quality portfolios 90-95% in fixed income, Snyder said. commercial mortgage loans qualify as investment He pointed to trends that he has seen developing grade fixed-income strategies. “Insurers have been in insurers’ investment strategies, which include increasing or considering increasing allocations to try to offset the declining yield in their portfolios.” increasing allocations to: On the alternative investments side, there is more interest in high-quality real assets that §§ Taxable municipal bonds; generate income. “Because of high-regulatory §§ Middle market commercial mortgage lending; capital charges on real estate equity investments, §§ Income generating alternatives, such as the industry has historically focused on private equity. But we have seen interest recently in infrastructure equity and leasing strategies; high-quality infrastructure equity that generates §§ High yield private credit. income as well as leasing strategies around Concerning emerging markets “it tends to be transportation assets,” Snyder said. He noted investment grade and U.S.-dollar denominated that in the below-investment-grade fixed-income debt, both corporate and sovereigns,” he said. “They are using the class to offset declining reinvestment yields, which is due to both lower interest rates and tight spreads across the board. This activity is not unprecedented, but we’re talking about increasing allocations that used to be one percent up to three percent of their overall investments. Some companies have historically held allocations in the class around three percent or four percent, but now other companies are catching up with them, increasing these allocations.” §§ Emerging market debt;

“Yes, that is happening; we have data to verify that,” concurred Mark Snyder, global head of institutional strategy and analytics for J.P. Morgan Asset Management. The situation is primarily affecting life insurers, he explained. “The life insurance industry uses book-yield accounting as a key measure—and this is in most cases the purchase yield of bonds. Insurers buy bonds that generate sufficient interest income to allow them to pay their policyholders’ claims and generate Due to changes to the U.S. tax code at the end profit,” he said. “What we’ve seen in the past few of 2017, investing in certain long-duration taxyears is that from 2014 to the end of 2017, for a exempt municipal bonds is now favorable for life 26

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insurers, where historically they only invested in taxable municipal bonds, according to Snyder. “Their focus there is in diversifying their long bond portfolios and getting incremental yield, while still invested in high-quality fixed income.” Allocations to tax-exempt municipal bonds would be in addition to the recent increases in taxable bonds.

David Holmes, managing director, Insurance Asset Outsourcing Exchange

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class, the investment activity has been broadly flat. “So, there is a tension where insurers do want to get more yield in their portfolios, but spreads are historically tight on high-yield bonds as well as the fact that some insures are worried about the end of the credit cycle, where default rates may increase.” Snyder said he has also noticed in the last few years “indications” of an increase in high-yield private credit, such as real-estate mezzanine debt, corporate mezzanine debt and high-yield private placements. “We have seen an increase in the median allocation to this among life insurers, but it’s gone from one percent to one-point-five percent—so it’s quite small overall and allocations vary dramatically from insurer to insurer.”

move into mezzanine debt or move into private equity. And if you look at our non-U.S. portfolio, in the U.K. for example, we are making an effort into reverse mortgages. It’s not a traditional product for us, but it’s actually quite high yielding.”

Where are the resources?

A healthy bi-product of the changes in investment strategies that insurers are making in response to market conditions is more diverse investment portfolios. “So, we would think that these strategies should persist for the long term, because they are better diversified,” Snyder said. Historically, these investors did not invest in asset classes beyond their traditional core asset classes because they didn’t necessarily have the capabilities, he said. Timothy Matson, chief investment officer, “So, these may be permanent features once they Reinsurance Group of America, said the group’s become part of the portfolios and insurers become investment portfolio has almost no equity. “But, comfortable with them,” he said. it’s difficult to get excited about fixed-income at To accommodate these non-traditional investment the moment. We’ve been on strike for triple-Bs classes, insurers are using a combination of for almost two years at this point. We’d rather expanding internal resources and hiring thirdeither trade up in credit quality or we’d rather put party asset managers for certain mandates. the money into mezzanine debt. I mention that because we see it as alternative to public high yield. “Large companies have internal investment But we also don’t think you are necessarily being staffs. Now that they are looking to other types of paid for the kind of risk you are taking with public investments, like structured products, real estate, infrastructure, private equity, bank loans and BBB corporate debt.” emerging markets—this is the kind of investing He continued that his fund’s general thinking in which they don’t have the expertise, hence the currently is to move into illiquid assets. “We can rise in outsourced investing by insurance cos. Most insurance cos, except the very largest ones, don’t have that kind of staff,” Holmes said

Mark Snyder, global head of institutional strategy and analytics, J.P. Morgan Asset Management

He added that the Insurance Asset Outsourcing Exchange has been tracking the market since the early ’90s. So, outsourcing has been going on for 25 years on a regular, substantial basis, but that prior to the financial crisis, relatively smaller companies—those with less than $1 billion in assets—were the most likely outsourcers. “Now that has changed, and you are seeing large insurance cos doing the same thing.” Currently, less than 20% of life insurer’s assets are managed by non-affiliated asset managers, Snyder said.

VOLUME 1, ISSUE 2

INVESTMENT GOVERNANCE

ARE OCIOS CHASING THE ELUSIVE PENSION POT OF GOLD? B Y K A I T LY N M I T C H E L L

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INVESTMENT GOVERNANCE

oves by public pension funds this year to entrust outsourced chief investment officers (OCIOs) with discretionary oversight of substantial portions of their portfolios have industry insiders asking: Have OCIOs finally cracked the code to access public pension plan accounts?

appointees who don’t want to relinquish control. [environmental, social and governance] stuff?’ This is an interesting move for Illinois, which is in ‘How can we influence an OCIO firm to invest in our favorite project?’” terrible pension shape,” he added. In a move similar to ISBI’s, in July 2017 Arizona State University Enterprise Partners retained BlackRock as its OCIO to oversee the roughly $1 billion ASU Foundation endowment. “We’ve seen clients looking for whole-portfolio OCIO solutions—they’re thinking about a range of investments from the role of indexed, factor-based, and alpha-seeking strategies, to liquid versus illiquid investments, to how they can think about gaining access to China,” said Sarah Melvin, managing director and head of the institutional client business for the U.S. and Canada at BlackRock. “Pensions, foundations and endowments are facing more regulations and compliance requirements, as well as cost and efficiency challenges.”

In October 2009, the San Diego County Employees’ Retirement Association (SDCERA), outsourced management of its assets to an OCIO firm named Integrity Capital, headed by Lee Partridge, a former deputy CIO of the Teacher Retirement System of Texas. The specially tailored arrangement with Integrity began well but then hit turbulence amid disagreement by the fund’s board over the OCIO’s investment strategy. Under Partridge’s tutelage, the fund was heavily exposed to a risk-parity strategy. Intense local press criticism of the fund’s governance, and infighting at the fund’s board, culminated with the fund terminating the contract with Salient Partners.

“Assets that pensions, endowments and other institutions are outsourcing are now growing Christopher between 10 percent and 15 percent per year— Philips, head of Vanguard [outsourcing] is a very meaningful opportunity for Institutional BlackRock to help our clients,” said Jeffrey Saef, Advisory Services a managing director at the firm. BlackRock had Since June 2013, asset manager Vanguard has $6.3 trillion in assets under management (AUM) managed 90% of the Montgomery County as of June 30. (Pa.) Employees’ Retirement System, and wealth “The holy-grail pool of money for OCIO firms is manager SEI manages the remaining 10%. public pension money,” declared Charles Skorina, Currently, the pension assets stand at $522 million, principal of an eponymous executive recruitment said Steven Potynski, retirement manager at the firm that specializes in placing chief investment Montgomery County fund. “Our experience with officers. “With $6 trillion in assets under this model has been a positive one—it has helped management, BlackRock certainly has the scale us reduce investment management fees and we to take public pension money as well as supervise plan to continue with it in the future,” said Dean a portfolio. The problem with public pensions Dortone, CFO of the Montgomery County fund. like CalPERS is that they’re often run by political “We are seeing more organizations looking to a third-party to manage some or all of their legacy pension fund[s] both in the public and private space,” said Christopher Philips, head of Vanguard Institutional Advisory Services.

The rise and fall of the fund’s five-year experiment with an OCIO is viewed by many in the industry as a cautionary tale about the challenge in adopting and managing OCIO structures at public institutions, notwithstanding the fact that for the five years Partridge served as CIO the fund generated an 8.8% annualized net return, which represented a $4.1 billion gain.

In particular, news in the summer that the $18.4 billion Illinois State Board of Investment (ISBI) voted to retain BlackRock Financial Management as a strategic partner to manage on a non-discretionary basis approximately $9.3 billion, or 51%, of its passive portfolio, came as a surprise to industry pros. Additionally, BlackRock has discretionary oversight over a specified roster of active public market managers who handle approximately $2.7 billion, or nearly 15% of ISBI’s assets under management, according to Eric Herman, managing director at Kivvit, SBI’s public relations firm. The BlackRock partnership is ISBI’s fourth hiring of a strategic partner within the past year. Only one-third of the portfolio is under discretionary oversight, Herman added. Discretionary oversight grants a manager or other third-party freedom to execute investment allocation changes and manager-roster changes on behalf of the asset owner without seeking permission in advance.

Charles Skorina, principal, Charles Skorina & Co.

Integrity Capital was acquired by Houston-based Salient Partners in 2010, at which point Partridge relocated back to Texas, working for SDCERA remotely This turn of events generated more recriminations at the fund, which terminated the contract in June 2015 after it suffered downgrades by Standard and Poor’s and Moody’s Investors Service. Partridge departed Salient in 2016; the firm closed its OCIO business that year also. Salient is now a real asset and alternative investment firm.

“By most accounts, the trend towards outsourcing will continue to increase,” Vanguard’s Phillips said. “In five-to-ten years, we think that we’ll see many more organizations, both large and small, using a third-party to manage their investment portfolios—but with two notable shifts,” he said. “First, while more organizations are entering the OCIO space, it’s very difficult for firms to differentiate themselves or articulate a unique value proposition. As a result, newer firms will likely find it difficult to grow and scale. One outcome of this will likely be a growing wave of M&A among OCIO providers. Second, as the needs and expectations of organizations looking to outsource increase, the era of providing asset Unrequited love? “The OCIO firms would love to have the public allocation services and articulating out- or pension business, but most public pension boards underperformance versus a bogey is over. If you are not ready to give up control,” Skorina said. are unable to measure and show risk attribution, “But it’s not just that, as you will find, if you dig return drivers, stress-testing and scenario analysis into the San Diego pension’s attempt to outsource, on multiple investment pools, you will be left there are many in the media and many public behind,” Phillips predicted. advocates who also attacked the idea. ‘Why The OCIO business is seeing tremendous industry should we pay outsiders?’ ‘How can we control growth, as investors as seeking professionals to what an OCIO firm might invest in, i.e., ESG manage their institutional assets with a more VOLUME 1, ISSUE 2

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hands-on approach, Timothy Ng, CIO at consultant Clearbrook, told IA. “The increased volatility and magnitude of price moves in the financial markets causes institutions to hire investment professionals with deep and seasoned asset management skills, who can make timing, strategic and tactical asset allocation decisions,” he added. “This has prompted institutions to fuel the growth of the OCIO business globally.”

Goldman Sachs (GSAM), another mega asset manager with $1.5 trillion in total assets under management, will roll out a web-based investment dashboard to its clients later this year, as part of its OCIO services, confirmed Patrick Scanlan, v.p. of corporate communications at GSAM.

BlackRock’s Services to ISBI

BlackRock will manage indexed and factor investments and provide discretionary portfolio oversight for ISBI, along with operations services and a risk and reporting platform. “[ISBI] may wish to upgrade the pension management, and outside firms have more expertise,” said Skorina. “From a political standpoint, fund administrators don’t want to be Johara Farhadieh, ISBI’s executive last man standing when their plan collapses—if director and CIO you outsource, at least you can say: ‘They were “While I am skeptical about anything that claims handling it, not us.’” to predict future prices, the new technology ISBI also launched a $700 million allocation to platforms and investment insights do allow for the factor-based investing that will also be managed construction of multi-billion-dollar portfolios in by BlackRock using its Aladdin platform. The more innovative and superior ways than in the Aladdin platform (Asset, Liability, and Debt and past,” according to Vijoy Chattergy, the former Derivative Investment Network) is an operating chief investment officer of the $17 billion system for investment managers that combines Honolulu-based Employees’ Retirement System sophisticated risk analytics with comprehensive of the State of Hawaii (HIERS). “A portfolio can portfolio management, trading and operations be managed more holistically—it doesn’t really tools on a single platform “BlackRock’s Aladdin matter to an asset owner to have the best fixedplatform allows us to stress-test client portfolios income or real estate portfolio in the world if the in different scenarios down to the manager and total portfolio misses its objectives.” security level, and understand the impact on asset allocations and implications for potential portfolio In the case of Illinois and BlackRock, the drawdown and losses,” Saef said. mandate appears to take advantage of BlackRock’s

considerable resources and uniquely meets Illinois’ goals. For example, by BlackRock managing a sleeve of Illinois’ external fund managers, it can net trades and dynamically risk-manage factor exposures across asset classes in the portfolio. “There are few firms that can provide such a comprehensive solution for large asset owners, and it will be interesting to see how this trend takes shape,” Chattergy said. The move allows ISBI access to more resources while saving the fund money, Johara Farhadieh, ISBI Executive Director, stated in a press release. “There are several ways to play the OCIO game,” Skorina said. “As an alternative to active management, larger managers like BlackRock, Mercer, Vanguard and State Street do it the cheaper way—they put the money into index funds and ETFs and charge the client less. This is a way for OCIOs to take advantage of the current trend of low-cost investing.” The Illinois Board issued an RFP in April and BlackRock was the sole finalist. Some observers noted that there are only some half a dozen firms like BlackRock, with the scale to take on a $30 to $300 billion mandate. “Most of the firms on my list do not have the staff or infrastructure to take on large pension funds,” Skorina said. Other ISBI portfolio managers hired within the past year include Perella Weinberg Partners, Rock Creek Group, and Hamilton Lane. The latter had been ISBI’s real estate consultant and was given discretionary authority over $1.2 billion in private equity, $520 million in opportunistic credit and $400 million in non-core real estate.

“[ISBI] may wish to upgrade the pension management, and outside firms have more expertise,” said Skorina. “From a political standpoint, fund administrators don’t want to be last man standing when their plan collapses— if you outsource, at least you can say: ‘They were handling it, not us.’ ”

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INVESTMENT PRACTICE

EPOCH’S COO VALUES LEFT AND RIGHT BRAIN IN SEEKING ALPHA BY MARK FORTUNE

hilipp Hensler, president and chief operating officer of New York City-based equity manager Epoch Investment Partners, has alpha on his mind—on the left and right side of his brain, to be clinical. Based on doctoral research he conducted at Case Western University in 2010, Hensler posits that investing is a decision making process or science, and that decision making—the emotional element, how to deal with uncertainty in the investment business, thinking about decisions and creating organizations that make decisions effectively—is the key to success. Hensler said that a presentation on the topic, titled Seeking Alpha Requires Left and Right Brains, that he delivered earlier his year, is based on his interviews of investors about their experience during the financial crisis. “Not very surprisingly, everybody I interviewed said it was a game changer, that life will never be the same again, and all the models investors used to rely on no longer hold true.” He then asked these investors to tell him what they had done differently since the crisis and 80% of the interviewees said that they had changed nothing at all. Hensler said his research paper was a discussion of how this 80% bridged this cognitive dissonance. The majority showed a steadfast reliance to a rulesbased investment approach despite the fact it had just failed them. Regardless of whether the rule was based on an algorithm, a time horizon or an asset allocation methodology, they showed an increasing commitment to it. illustration by TONY PATRYN

He noted that 20% of the interviewees had done Unfortunately, the world is not that simple, he something fundamentally different since the crisis. argued. It is far more uncertain, complex and ambiguous. The term the military uses for such This group had four characteristics, he said: an environment is VUCA (Volatility, Uncertainty, 1. They were women Complexity and Ambiguity), he said. 2. They were focused on the present. They didn’t argue with the past, nor did they prognosticate Hooyah! into the future There are similarities between the armed forces 3. They were extremely alert and aware. They and asset management, he suggested: “NAVY seemed to have had an “environmental scan”, Seals are extremely well trained; they are very, very i.e. constantly looking at what was going on skilled and have the best equipment and the most accurate intelligence at their disposal when they around them. go into battle. But what happens is the moment 4. And once they found something new, they they land in a danger zone, the environment can were non-judgmental to that new information. change in a heartbeat, and if you are unable to “They didn’t dismiss it just because it was adapt, you might actually die.” If NAVY Seals outside of their mental model.” want to be successful, they must possess a high While the first point was interesting, Hensler said degree of contextual sensitivity to operate in a his research focused on the last three dimensions, highly complex, non-linear environment. which showed that this group had a high degree Similarly, financial markets can be erratic and of “contextual sensitivity.” This group Hensler irrational and investors need to be mindful if labeled the mindfulness group, based on those they want to successfully navigate unforgiving three dimensions. “What surprised me was that the behavior of the 80% resembled that of passive investments, such as ETFs [exchange traded funds]—they simply adhered to a predetermined rule irrespective of the changes in the environment,” Hensler said, observing that this behavior can cause problems if markets behave in unpredictable ways. “To be clear, I am not dismissing passive investment strategies outright. There is a time for active and a time for passive investing,” he said, adding that “if you believe in a future environment of synchronized growth and low dispersion of returns, it is perfectly rational to buy passive investments or ETFs. All you need is efficient access to equity markets.”

Philipp Hensler, president and chief operating officer, Epoch Investment Partners

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Hensler. “They have no motivation to make any changes because their rules are absolutely binding. Those would be true for ETFs or similar passive investment strategies, as an example.

market conditions. Unfortunately, an entire generation of investment professionals has been brought up learning the concepts of neo-classical economic models, Hensler said. The problem is that these models rely on a normative world view that fails every time the market’s behavior is outside the model parameters. While this has been well documented, what is surprising, he said, is that a large number of investment professionals continue to rely on these models, despite their shortcomings. “Finance academics are still reliant on linear models and they believe that finance is a hard science like physics. In other words, they are suffering from physics envy.” he declared. Unlike physics and other hard sciences, finance is a social science, which is subject to a “reflexive feedback loop,” he said. “We influence the system with our actions and in return our actions are influenced by the system. The interaction among actors in financial markets matters greatly.” Hensler posited that the neo-classical economic theory is ill-equipped to deal with a VUCA world because it starts with a top-down view of how the system is supposed to work and deducts the optimal behavior of individuals. Although we know that this model doesn’t work, unfortunately, we haven’t come up yet with an alternative. There is promising work being done in many areas. One of Hensler’s favorites is the agent-based theory. It starts with a bottom-up view of how individuals actually make decisions and tries to incorporate emergent behavior, which can often times lead to non-linear outcomes “You look at the behavior of individuals and try to make sense of it.”

Left Brain vs. Right Brain

Hensler explained that though he has been juxtaposing the passive group and the active group in his research, one could also term the groups the “left brain group” and the “right brain group”. “The left brain group is people that exclusively rely on algorithms and analytics based on historic data for decision making—a skill that computers do much better than humans, quite frankly. This approach works as long as the world behaves within the model parameters. However, I’ve found that if the market starts to misbehave, people with strong right brain capabilities—and based on my research that is especially true for women—tend to adapt and absorb new information much quicker, which allows them to take decisive action when it is needed the most.” To be clear, investors that have strong right brain capabilities are also guided by investment philosophies and processes, but they are not that strict about it, he said. “They have a high capacity to learn. They fail as well, they are not perfect. But when they fail, they start to realize what was going on and try to incorporate that learning into their decision-making processes. Environmentally agnostic behavior, on the other hand, is often exhibited by investors that are not mindful or contextually sensitive, according to

Contextual Sensitivity? So, the question is how does one become contextually sensitive? Hensler said there is interesting research on so called high-reliability organizations (HROs) (Weick and Sutcliffe, 2007) that might provide some guidance.

“Finance academics are still reliant on linear models and they believe that finance is a hard science like physics. In other words, they are suffering from physics envy.”

High-reliability organizations operate under challenging conditions yet experience fewer problems than would be anticipated. They have developed ways of “managing the unexpected” better than most organizations, he said. He pointed to aircraft carriers and nuclear power plants as examples. “As you can imagine, one little mistake in the operations can have devastating consequences,” he said. Hensler noted that there are five traits exhibited by HROs that can also be translated into asset management: §§ They have a preoccupation with failure—They are always worried that something will go wrong and fight overconfidence along the way. Asset managers should always question their investment thesis and exhibit humility; §§ They are reluctant to simplify—The world simply isn’t linear. Neo-classical economic models are beautiful, very elegant, but they just are not a fair representation of reality. Asset managers should avoid linear extrapolation, have a strong commitment to forward looking fundamental research, and understand that ignorance and knowledge generation go hand-in-hand. §§ They have sensitivity to operations—The best active managers only invest in companies whose business model and value drivers they fully understand in order to avoid unpleasant surprises. §§ They have a commitment to resilience—Asset managers should accept that failure is inevitable and learn from failures and adapt quickly. §§ They defer to experience—That is almost the most important. Many of the large organizations in asset management are very hierarchical. However, some of best asset management organizations have a rather flat hierarchy, an open communication culture where the best idea wins irrespective of rank. Only a strong investment culture brings the above points together, Hensler argues. “I’m convinced that culture is one of the most important things in active asset management. We need to create a safe environment in which people feel comfortable to voice an unconventional opinion or point of view. That safety makes for very fertile ground to come up with interesting ideas that are the ingredient of successful active management,” he concluded. VOLUME 1, ISSUE 2

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E&F’S FULFILL IMPACT INVESTING MANDATES; PENSIONS LAG BEHIND BY LESLIE KRAMER

nvironmental, Social & Governance (ESG) investing is in vogue with institutional investors. But impact investing, or investing with the intention of making a measurable impact as well as competitive returns, appears to be a point of divergence in the investment community. IA spoke to several endowments and foundations (E&Fs), pension funds and asset managers to ascertain why the E&F community seems now to be pursuing impact investing in earnest, while pension funds have generally yet to jump on that bandwagon.

E&F’s moving to make investments more impactful

Today, institutional investors and asset managers across the board are demanding that the companies in which they invest start implementing ESG guidelines and policies— from the board level to management and all the way down to supply-chain operations. But impact investing, while related, hasn’t gained the same momentum as ESG. The endowment and foundation community is now looking to change that. “Endowments and foundations are, at their core, mission-driven institutions that look for ways to use all of the assets at their disposal to create the world they want to see,” said Beth Bafford, vice president, syndications and strategy at Calvert Impact Capital, an organization that sells community investment notes and then invests the proceeds in organizations worldwide that administer operations that have intentional and measurable social impact. “For many of them (E&Fs), it is a mission imperative to understand what the bulk of their assets are supporting and, where possible, create better alignment between their assets and the values of their organizations and the stakeholders they serve,” she said. So, is the mission to move toward more impactful investing finally taking hold in the E&F 34

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community? “There is not a foundation out there that has not at least discussed impact investing with their committees,” Bafford asserted.

What exactly is impact investing?

to a company, a private-equity fund, venture capital fund, real asset funds, a clean tech secondaries fund and three direct-equity positions in small companies,” she said. “We are relatively agnostic about the asset class—we see opportunities for impact across all types of investment approaches,” she added. McKnight’s impact investing goals are focused on the foundation’s overall priorities, which include promoting the transition to a lowcarbon economy; affordable housing; thriving local economies; and commercial agriculture, McGeveran said.

Impact investing can be administered across all asset classes, but is mostly done through private investments, often in real estate, private equity, private debt and infrastructure deals. What makes it different from ESG is that it relies more on outcome than process. “Impact investing enables people to add another variable to consider when looking at investments; they look at risk and return, and ESG, “In our $200 million high-impact commitment, but then add impact as another variable to assess, we have a general goal of $75 million into public stock and bond markets, $75 million deployed— when seeking investments,” Bafford said. with more committed—to private investments and then $50 million for ‘charitable investments’ Nice, but is it profitable? Typical returns on impact investment deals, like or ‘program related investments,’ which are defined other investments, depend on the risk and the by the IRS as below market return,” she explained. terms, but are generally in the 5%-7% return range “For the bulk of that $200 million, we are looking for a three- to seven-year fixed-income or private- for market-rate returns, but we are willing to take loan transaction, Bafford said. “You are adding the on some additional risk in private investments if additional variable of impact, but at the end of day, an opportunity is closely aligned with the impact you are looking at the same risk/return profile of priorities of the foundation,” McGeveran said. any asset class, just like you would in a normal In addition to that $200 million investment investment,” she said. Most of the foundations goal, McKnight has also made adjustments to and endowments that invest with Calvert, which existing investments to bring them more in line has $400 million under management, make these investments through the private-debt allocation with its mission. “An additional $603 million [of investments] have ESG processes or are aligned portion of their portfolios, she noted. with our mission in other ways. That means 33% of McKnight’s entire endowment is aligned with Two Minneapolis foundations our mission,” McGeveran said. For example, we already investing in impact The McKnight Foundation, with $2.3 billion in moved $100 million from a Russell 3000 tracker assets under management, has long made impact fund into a carbon-efficiency strategy that has investing part of its mandate. It currently has a similar fees, tracking error and risks, but it reduces commitment to invest at least $200 million in the carbon intensity of that investment by 50%. high-impact investments in asset classes that We have almost four years of track record, and offer such characteristics, according to Elizabeth it’s performing beautifully,” she declared. By McGeveran, director of impact investing at that, she said she means it is meeting its financial the foundation. “As of Q2, we had [impact] expectation in terms of returns, volatility and investments in public equities, public fixed tracking error, and its impact goals in terms of income, private-debt funds, a private line of credit having less carbon exposure than the benchmark.

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Many foundations invest in earlystage start-up funds that can handle a few million dollars’ worth of investments, but there is a need for larger funds that can accommodate hundreds of millions.

The Minneapolis Foundation, which has $850 million invested in donor advised funds and other charitable funds, began offering donors the opportunity to invest in its impact investing fund, called InvestMPLS, in 2016. Currently, the InvestMPLS loan fund has $5.5 million in invested assets and the foundation projects the fund’s size to grow to $10 million. InvestMPLS assets are invested with qualified intermediary organizations, including Community Development Financial Institutions (CDFIs), mostly located in the Twin Cities. The fund comprises loans that are offered at belowmarket rates to partner organizations, which then use the money to make smaller loans to assist in economic development or educational initiatives. “The Invest MPLS revolving-loan fund has specific, well-articulated goals, measurements and metrics in place that tell us and our donors what has been achieved by the investment,” said Karen Florez, manager of investments at the Minneapolis Foundation. “The money is not a gift or grant, it’s a loan,” she emphasized. “The theory behind it is that the principal is repaid with a modest amount of interest and can be loaned out again, so the money keeps rotating and gets used many times instead of just once,” Florez explained. From a social impact perspective, “the fund is designed to help our donors expand their impact beyond grant making to pursue a shared vision of racial, social and economic equity in our community,” Florez said. Two areas on which the investments in InvestMPLS are focused are creating living-wage jobs in the Minneapolis area and helping high-performing schools that serve low-income students of color to expand. For example, assets in the fund support an organization called Propel Nonprofits, which

offers finance, strategy and governance services to many Minneapolis-based nonprofit organizations. Propel is using InvestMPLS funds to support construction of a new high school, which will open in the city this fall.

creation, wages, benefits and the training taking place at the businesses to be sure that the loans are making a positive social impact for both the people working at the businesses as well as for the broader community they are serving,” Bafford explained. The fund was expected to close at the Propel Nonprofits provided term-financing to end of September. Calvert declined to quantify the the school, which the school will repay to Propel, expected rate of return for the fund. and then Propel will repay that money to the InvestMPLS loan fund. “The rate of return is Calvert, typically, offers investors private loans not going to be like an investment portfolio, but that range in size from $10 to $40 million per there is a modest return to the donors and then deal and brings multiple institutions into a single the principal will be returned to the fund and investment fund at a $1 million investment be available for grant making or reinvestments,” minimum. In aggregate, Calvert has syndicated Florez said. Donors receive a 1.75% return on $165 million of transactions in the last year. It their investments and the loans made to Propel also puts its money where its mouth is: “Calvert lends into every transaction that we syndicate,” are at a rate of 2%. Bafford said. We hold a piece of the risk for every The Minneapolis Foundation is also now deal we offer to institutional investors. We serve developing a plan to direct an impact-investing a unique function in the markets, because we not lens on other investment pools it manages. For only structure deals as bankers, but also put money instance, with its money-market accounts, the into the deals with our peers in the transaction,” foundation is considering how to invest in a she said. money-market fund, short-term deposit or CD of a bank that makes loans to low-income Interest by E&Fs continues neighborhoods, Florez explained. to grow While impact investing is not a new asset class, Calvert focuses on small there has been a clear peak in interest in the sector business loans over the last few years, Bafford said. The Mission Currently, Calvert is raising money for a $25 Investor Exchange, an impact investing network million small-business, capital-lending fund that for foundations dedicated to deploying capital provides affordable, flexible capital for businesses for social and environmental change, with in located in low-income communities. “The fund excess of 200 members, has seen attendance at its targets small-business owners, who often lack conferences grow exponentially over the past few access to affordable capital, such as women or years, “not only in interest and attendance growth, entrepreneurs and businesses of color,” Bafford but sophistication of the conversation has grown,” said. The organization funds private, flexible Bafford said. “And the question being asked at the loans that allow the recipients to grow and conference has moved from ‘why would you do build their businesses. The fund also tracks job this’ to ‘how do you do it successfully?’” she said. VOLUME 1, ISSUE 2

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Inadequate deal structures said also need to demonstrate attractive returns, or provide a historical track record of financial to be slowing pensions’ entrée to they [investors] won’t care or replicate it, which returns to investors,” said Christine Looney, is the goal if you’re looking to unlock a big deputy director of mission investments at the impact investing Impact investing has piqued the interest of many forward-thinking pension funds, as a way to contribute to positive environmental and social change while also reaping significant returns. But a lack of appropriately structured and sized investment vehicles may be holding many of them back from doing so.

“One reason why impact investing has not drawn more interest is that many issuers of these products have found difficulty creating an investment vehicle that fits the size, shape and structure that works for institutional investors,” Bafford said. “There are structural elements that are important to them [pension funds]” she said. Those elements seem to be hard to find in smaller impact investing funds or deals. Impact investing demands standards on both sides of the equation. To formulate an impact investment fund that will have traction “takes knowledge of the institutional investors—what they look for in terms of structure, rate, tenor, liquidity, and scale—all the things you need to reach an institutional investor, but you also need to find the shape and structure that meets the needs of these underserved communities we are trying to reach,” Bafford explained.

wave of mainstream capital into these types of investments,” he said. The problem lies in the fact that many of the creators of impact investing products “do not have deep Wall Street knowledge about how to structure it or define arcane terms, so that they will sing to Wall Street,” he said.

Consultant Wilshire Associates sees impact investing as a “growth market,” said Daniel E. Ingram, vice president of responsible investment research and consulting at the firm. In the findings of a survey by the US Forum for Sustainable and Responsible Investment (US SIF) there was a very clear delineation between the amount of interest investors had in socially responsible investing (SRI), which excludes certain investments and is still the most popular approach among institutional investors, followed by environmental, social, governance (ESG) integration, and then a relatively small tranche devoted to impact investing. “There is a long way to go,” Ingram said. Many pension funds are still struggling to figure out their impact investing objectives and what to include in their investment policy statements, while at the same time ensuring they can actually implement their strategic, impact investing objectives,” Ingram said.

$13.7 billion Ford Foundation, which has committed to invest $1 billion over 10 years to impact investments.

In April 2017, the foundation launched its mission-related investment (“MRI”) fund, through its Mission Investments program, marking the first time it has sought, intentionally, to generate positive social returns along with attractive financial returns,” Looney said. The foundation is doing so by committing capital exclusively to private-equity funds “because our board considers that strategy to be a highly effective approach to driving intentional impact intended to reduce inequality,” Looney said. The fund has a committed $40 million to-date to the fund. As for financial returns, time will tell. “Given that the portfolio is allocated primarily to private equity funds, which invest capital and gather returns over a ten-to-twelve-year life cycle, it is too early to report meaningful returns,” Looney said. While the impact investing team at the Ford Foundation is encouraged by the momentum being generated by the E&F community, they are hopeful that the rest of the institutional investor community will get on board.

“Our $1 billion MRI fund is around 7.5% of our total endowment. Now, if we assume all Metrics matter Rob Day, a general partner at Spring Lane foundations, like Ford, allocated roughly 7.5% of So what can organizations do to make their impact Capital, a private-equity firm that offers their roughly $900 billion in aggregate assets to investing strategies more appealing to institutional affordable financing for smaller-scale, sustainable MRI, that $68 billion is a paltry sum compared investors? infrastructure projects, agrees. “The challenge with the trillions of dollars needed to solve the [for the impact providing community] is that “We encourage organizations to provide a clear liabilities—shortage of affordable housing; they need to speak the same lingo, to structure impact thesis and metrics by which they will under-employment; societal cost, stemming from things correctly to be replicable,” he said. “They measure their social return. They should also structural and systemic racism and gender bias;

Impact investing enables people to add another variable to consider when looking at investments;

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ENDOWMENTS & FOUNDATIONS

for smaller-scale projects, just like the same kind of capital that is already being provided for big wind turbine or solar farm developers,” he explained. “Big investors, like pension funds, are often interested in investments into operational infrastructure projects, because of their relatively lower-risk Size matters profile. But at the smaller scale of these individual In the meantime, the small size of deals on By contrast, European pension funds have long offer continues to be a roadblock to impact- projects–pension funds with their minimum check been comfortable pursuing social and financial market participants. “The large public plans sizes, sometimes as high as $100 million depending returns within fiduciary standards, as they serve still face a challenge of scale—finding attractive upon the size of the pension fund—wouldn’t be a their beneficiaries, Swan said. According to opportunities at the right ticket size, which fit without aggregation of some kind,” Day said. Global Impact Investing Network‘s (GIIN) 2018 warrant the due diligence they would have to do, Spring Lane Capital itself is backed by institutional Annual Impact Investor Survey, pension funds, and the time it takes, so that the impact investment investors, and SEC filings indicate the fund is $400 worldwide, invested in aggregate $5.4 billion moves the dial toward meeting their return seeking million in size. in impact investments in 2017 and have so far objectives,” Ingram said. planned $4.27 billion of investment in 2018. Local investing is a way into the Day concurs: “If you are big pension fund, you can Gil Crawford, chief executive officer of MicroVest, see a trend toward sustainability, and you want to impact market a global impact investing asset management firm place 30-year bets. But when many of the solutions One way that pension funds are entering the with the $385 million in AUM, that seeks to invest that are emerging are actually very small projects, impact investing space is through local bond capital in under-banked markets and provide you have to find out how you will take the $130 offerings. The proceeds of these offerings are often access to financial services for rising middle- billion that you have to invest and apply it in $5 used on the local city and state level to provide a class communities around the world, agrees that million increments,” he said. “It doesn’t scale.” To positive impact on the local communities, through larger institutions need to get involved. “Many help solve that problem, Spring Lane’s approach projects such as repairing infrastructure or building foundations invest in early-stage start-up funds is to put dozens of smaller projects together into hospitals or schools. Crawford has also become that can handle a few million dollars’ worth of “project pools” ranging in size from $10-40 million. aware of institutional investors starting to ask if investments, but there is a need for larger funds This aggregation allows Spring Lane to invest at a they can do impact investing directly. “Pension that can accommodate hundreds of millions,” he size that works to spread out the costs and risks of funds in Canada are doing less investing in funds said. “In order to move the needle, we need to talk an individual project, while still providing smaller and more direct investing. They will invest directly project developers with the financing they otherwise about that kind of money.” in infrastructure projects, for example. I’ve seen couldn’t find at their small scale. this trend start in institutional investors’ impact Where are impact investments It also means that these investments into smaller portfolios, as well,” he noted. being made? projects can, together, become large enough to be Today “the impact markets are more mature in attractive to institutional investors, to solve what Going forward, Calvert will continue to play a the private markets, so that is where the bulk of Day called “the missing middle” between individual role in introducing pension funds into the impact attractive investable options have been to-date,” impact investments and large institutional capital. space. “We see our role as to act as a translator Ingram said. But the scale of the public markets “Large investors like pension plans need to write a between institutional investors interested in could be attractive, going forward, he noted. check that is big enough to make sense for them, impact investing and the communities seeking “Investors are now looking at what kinds of but at the same time there’s this need for capital capital,” Bafford said. and environmental degradation, to name a few,” said Roy Swan, director of mission investments at the Ford Foundation. “So, the real action is not just the foundations, but other asset owners who take a special interest in the public welfare and civil society: pension funds, sovereign wealth funds, university and endowments,” he said.

impact they can have in public markets, as there are differing risk return considerations in both markets. So the question being asked now is: ‘Do certain asset classes deliver better impact bang for your buck?’” he said.

(Left to right) Christine Looney, deputy director of mission investments, Ford Foundation; Beth Bafford, vice president, syndications and strategy, Calvert Impact Capital; Daniel E. Ingram, vice president of responsible investment research & consulting, Wilshire Associates; Elizabeth E. McGeveran, director of impact investing, McKnight Foundation; Roy Swan, director of mission investments, Ford Foundationl; Gil Crawford, chief executive officer, MicroVest; Karen Floez, manager of investments, Minneapolis Foundation and Rob Day, general partner, Spring Lane Capital

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TECHNOLOGY

AS AMS RACE TO RAMP-UP TECH, INSTITUTIONS MUST CLARIFY THEIR NEEDS BY MARK FORTUNE

he investment data and transparency demands of institutional investors, and their drive to reduce asset management costs, have had a “transformative” effect on technology development in the investment industry since the financial crisis, according to investment consultants and tech-sector specialists. They caution, however, that to optimize how they adopt or use these new tools, institutions need to be clear and realistic in their own minds—and with their asset managers— on what applications and amount of data is appropriate for them.

represents becoming a truly next-generation asset manager. You must rethink the role of data in your organization and how you manage it and how you enhance your clients’ experience,” she said.

The evolution and maturation of the asset management market is going to revolve around scale at the largest firms. “There are now close to a dozen $1trillion-plus U.S. asset management firms at the top of the market. That scale, knowledge and investment technology has led to much of this transformation. They have the revenue to drive innovation to develop resources and scale their Technology solutions available to asset owners AUM to make it payback,” Keefe said. today are far superior to a generation ago. At the other end of the asset management size Sophisticated institutions now demand risk- spectrum, she continued, are small, boutique based portfolio attribution and the unbundling managers who have very specific investment of manager-fee arrangements, among other things, capabilities that enable very specific services to meet changing regulatory requirements. models and customizations. “They are specialists, One pitfall, some specialists say, is that in their and they are investing in technology that is very zeal to maximize transparency in the services they targeted and is part of a much larger service receive, institutions may waste scarce resources model,” Keefe said. “The challenge is for the firms trying to manage data they have neither the time in the middle—what do they do? And how do they nor the ken to exploit. invest in technology and how do they compete? Nevertheless, the demand from asset owners for The boutiques deliver a certain experience and their asset managers to deliver a higher-quality investment strategies and are very competitive service experience, and the digitization and regarding net asset inflows. At very large firms, management of data that this demand implies, their sustainability as asset managers is based on is a near-existential matter for some classes of being as much a technology firm as an as an asset asset managers, according to sector specialists, management firm. But, again, the question is how who characterize the situation as dynamic and will this play out for those middle-tier firms?” a harbinger of evolutionary changes in asset management operations. According to Lesley Keefe, executive director and Americas asset management advisory leader at consulting firm EY, with the correct application of technology, asset managers have the potential to transform themselves as organizations. “You can change the experience that your investment clients are having. You can drive down your costs. If you really reconstruct the way you manage your data, and you can deliver it one way to your account managers, another way to your portfolio managers and to your risk and compliance people, then you can start to drive down the cost of your business— which is what the institutional investor wants as well; they want more competitive fees. So, to us that

INSTITUTIONAL ALLOCATOR

Russel Kamp, managing partner, Kamp Consulting Solutions

Be Careful What You Ask For?

Though Russell Kamp, managing partner at investment consultancy, Kamp Consulting Solutions, finds the subject of data delivery to investors interesting, he is skeptical about the amount of information pension plans can effectively utilize. “Here’s my skepticism: too much information can sometimes overwhelm one’s ability to focus on the salient points,” he said. “There are obviously sophisticated pension plans in the corporate and public sectors, but I don’t think the average plan sponsor will not be able to react to all that information in a way that will be beneficial. Most plan sponsors meet once on a quarterly basis, they receive actuarial data once every year or six months, which trails by six months—generally, I don’t know that if they have real-time data they have the ability to react to it.” “We have been increasing our requests for transparency around the details of fees and expenses, especially from our managers of private assets—PE, infrastructure, etcetera—or managers of hedge-fund-type structures that include miscellaneous fees and expenses,” Bob Jacksha, Chief Investment Officer of the $13 billion New Mexico Educational Retirement Board (NMERB), confirmed. “We are looking closely at systems that might help us aggregate incoming reports and data. Acquiring these systems would allow us to standardize the handling of data and reporting,” he said. Nevertheless, he added, “I would agree with the question around too much information, especially with portfolios that have substantial and diverse allocations to alternative investments, as ours does. Thus, in our looking at systems to help manage the data, it is important to focus on the relevant data and [not] just become a data collector.” “Obtaining more data can be more of an issue than a solution,” the chief investment officer of a large Mountain State’s public retirement fund concurred. Because resources (staff, time and money) are scarce, “the focus needs to be on quality and integration of data into analysis. Less time gathering data, more time making judgments based on data, both quantitative and qualitative. photograph by TONY PATRYN

TECHNOLOGY

“The key to assessing this tech-based trend will be to discern whether and how it adds value to the decisionmaking process.”

Lesley Keefe, executive director, asset management advisory, EY

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TECHNOLOGY

Too much time now is spent gathering, moving and correcting data quality issues. All of this data integration takes resources, which can make it difficult for small organizations to manage without significantly leveraging external advisors,” he said. What first comes to the mind of Alan Kosan, head of alpha research at institutional investment consultancy Segal Marco Advisors, regarding the world of tech applications, is AI and machinelearning, specifically how they are being utilized by managers to advance data-driven decisions, trend or pattern recognition, and trade execution. “AI is the principal tech theme we have asked the analysts to start inquiring about in due diligence of the Process principle,” he said. The firm analyzes asset managers based upon seven distinct topics, which it dubs pinciples. Process is one of these principles.

Keefe’s practice involves consulting with asset According to a report titled Optimizing Data managers that are seeking solutions to challenges in a Transparent World, published in May presented to them by their institutional clients by Northern Trust in conjunction with the and business prospects. “I’ve worked in the Economist Intelligence Unit, a growing wave of industry for almost 30 years and never before data transmission, aggregation and analysis tools have the managers tried to figure out how to invest significant amounts of money in transformational can help asset owners find a balance and make technology programs like now,” she said. “We have transparency less of an operational burden and an eye on what the asset manager of the future will more of an opportunity to achieve goals. look like, and by extension what does that mean “Asset owners, in particular, need to manage for the asset owner—and what’s the dynamic a proliferation of data. We believe the same between the two?” Keefe said. technology that produces those reams of data “But what does digital really mean in asset can be deployed to make the best use of it,” said management and what does the institutional Penelope Biggs, chief strategy officer for corporate client experience?” Keefe asked, rhetorically. She and institutional services at Northern Trust. “In continued: “The way we think about it is asset our view, there is a convergence in the expectations management firms are data-driven organizations. of asset owners and investment managers around Most asset management firms are siloed in terms the need for real-time, flexible and portable data of their front, middle and back-office operations. and intuitive analytics. And so, as firms have grown through acquisitions

Drowning in Data?

of other firms or through product-line extensions, often the infrastructure that supports those new assets classes has lagged,” she said.

Alan Kosan, head of alpha research, Segal Marco Advisors

Early observations are uneven among the managers and asset classes and still in the development stage, he said. “Earliest penetration and traction is in quant-based and model-driven strategies, but the field is gathering steam and expanding to target discretionary investment decision-making and back-office applications. Clearly, the use of advanced technology to make back-office and administrative functions more efficient will confer a profit advantage to those firms.” He said asset managers in the more traditional asset classes and hedge funds have expressed interest, with private market managers more interested in investing in the space than employing in their practice.

She characterized data flow at asset management firms as akin to passing through an hour glass, with information on all assets coming together to some degree in firms’ middle office. “Assets classes come together in the middle office in varying velocity. The speed at which it goes from my idea that I want to invest in a particular asset or class of assets, Penelope Biggs, through my middle office into my accounting chief strategy officer for varies by asset class. So, that means it’s very siloed corporate and in the middle. And then I go to my back office. institutional, Northern Trust My back office platforms are typically structured She explained that asset management firms by product. So what I wind up with is as an asset are using artificial intelligence (AI) to analyze manager with a siloed middle office—I’ve got my structured data, (e.g., asset flows and performance) products sitting here, here, and over there to be and to extract information from unstructured/ digitized and integrated.” alternative data (e.g., images, documents, social She explained that being able to deliver data across media posts) through image recognition and a diverse geographic range, with clients globally, natural language understanding capabilities. Asset and to do that in the context creating reports is a managers are also using machine learning (ML) difficult undertaking . “I’m going to have to draw models to predict price movements in securities, from many different platforms—silos. And that’s and their roboadvisor platforms use AI to help the problem for the institutional asset manager – investors decide on their asset allocation, she said. It’s a siloed infrastructure, and I’m going to have to “Emerging technologies, such as ML, enable rethink how I’m going to manage all in an efficient Northern Trust to mine, interpret and deliver way that I can scale. We’re saying that if you truly increasingly insightful information to our clients, want to be a digital firm you need to think a little including investment teams in the front office of differently about the way you’ve orchestrated data large asset owners, while AI can be applied to drive and delivered it to all those various components operational productivity, enhance cybersecurity of your business and manage risk,” she claimed. In the institutional investment market, technology adoption is evolving and is still to be defined regarding what are benchmarks for institutional The AM’s Perspective Asset managers are thinking about technology as asset managers.

“The key to assessing this tech-based trend will be to discern whether and how it adds value to the decision-making process, which results in better investment selection and performance results. Those firms utilizing advanced tech successfully in these areas will certainly have established a an enabler, according to EY’s Keefe. Technology is competitive advantage,” he said. a big category, she said, and the question for asset New technology can help drive transparency, but managers is how do they evolve from where they communication between asset owners and asset are now technology-application wise to dealing managers is crucial to helping owners drill down with legacy infrastructure and employing shorterinto the most important data that will allow both term tactical technologies, such as robotic or AI, to drive quality and scalability. sides to meet their goals. 40

INSTITUTIONAL ALLOCATOR

It is being defined by experience in other industries, she said. “In other words, how do I interact with an online retailer or how does and online search engine provide me with information? So people take that experience and say, ‘Well if I can oneclick on-demand reports for this service over here’—another completely different or disparate

TECHNOLOGY

industry but a digital experience—‘why can’t I have that experience at from my asset manager? They’re the best and brightest in the world’”

Growing AM Tech Spending

industry. She said that approximately 10% of that spending represents “straight tech spending” (meaning expensed spending, not capex) in the institutional asset management sector. She explained that the biggest share of this spending is for regulatory compliance technology and order and portfolio management, at approximately 20%, adding that 60% of that spending is with external vendors to financial services firms and 40% is on internal spending at those firms.

Spending on technology in all segments of the financial services industry globally approximates $100 million year to date, versus less than half that amount a decade ago, according to Danielle Tierney, a senior analyst at New York-based Aite Group, an independent research and advisory firm focused on business, technology, and regulatory “There’s definitely been an increase in asset issues and their impact on the financial services management compliance spending—that’s been a big area in recent years with a higher rate of expenditure. Unbundling [providing transparency on how asset management fees are composed], that’s a conversation in European markets and in the U.S. too,” she said. “The biggest chunk of spending has been on portfolio management systems,” she said, noting that a rough approximation is 40% of spending has been in the U.S., 30% in Europe and the balance in Asia and the rest of the world.

Data Push Danielle Tierney, senior analyst, Aite Group

Northern Trust’s paper notes that some measure of the drive for greater transparency by investors has been fueled by a new wave of disclosure rules

that bring previously hidden or unknown costs and conflicts to light. With transparency in mind, many asset managers go beyond mandated disclosures, taking advantage of new technologies, such as chatbots, to answer clients’ questions, automated tools and AI-enabled data analysis platforms to provide more data and analytics to clients and prospects. Both sides need to be aware that doing so sometimes leads to overwhelming amounts of data for asset owners to manage, according to the report. “Transparency requires context and insight, not just more data for asset owners,” according to Northern Trust’s Biggs. “New technology can help drive transparency, but communication between asset owners and asset managers is crucial to helping owners drill down into the most important data that will allow both sides to meet their goals.” To avoid data overload, asset owners need to consider the purpose of the data they request and how that information would help them achieve their intended outcomes. For instance, large asset owners may want to know more about the market impact of their trade orders so that they can mitigate how their transactions affect stock prices. But for small investors with no market illustration LESLEY VOLUME 1,byISSUE 2 KEEFE 41

TECHNOLOGY

impact, such information may only complicate there, but how do I get my IBOR to give me both in an integrated view?” Keefe said. She explained analysis, according to the paper. that historically asset owners has had to rely on Asset owners are starting to look like asset monthly or quarterly position and performance managers and think like asset managers, even if statements. they are purely asset allocators, Keefe observed. “So, things like an IBOR [investment book of IBORs are often provided by custody providers. records] and looking and seeing positions in near Basically, The IBOR consolidates the accounting real time—I want to see all my positions, I don’t book of record (ABOR) position data from want latency of more than a day or two. I don’t the custodian service provider and various subwant to wait to the end of the month to get my advisors’ accounting systems and provides a view statement. So, they are all looking at how to be into the consolidated investment book of record more sophisticated in terms of how they oversee IBOR to asset owner. This gives the asset owner a middle office view across their asset allocation and and govern their investments,” she said. asset classes (see illustration above). “The way they are starting to think about this is the concept of IBORs. A way to intermediate and “So the industry is attaching to this concept aggregate but also provide analytics and look- because this is the middle office. So if I can stick through (what people think of as a middle-office my nose in right there that’s how I get my view on view) is to use a third-party administrator or tech what’s going on go with my investments across platform, which aggregates data for providers managers and asset classes.” and gives the investor an integrated view,” Keefe explained. The challenge currently is that it is hard to get a consolidated view of both public and private assets. “I can see my Treasury bonds over here and I can see my private holdings over

Keefe said custodians who are also the asset servicers are typically more than happy to sell services to asset owners. “So, I can have either software provides and I’ll install this software at my pension plan. But now all of a sudden l have to

build a staff or infrastructure to manage this new data capability. Or I can go to custodian and have them supply and manage the IBOR.” The complexity of the business is complicating the data and expanding the volume of data at the same time that asset managers are having to manage data more effectively. The basic problem that asset managers have is dealing with almost exponentially expanding data. It takes a very significant effort to do this,” Keefe said. “They are very good at doing this, but it requires an incredible effort. “It’s the standard of quality and the accuracy and timeliness of reporting to all constituents—regulators, investment consultants, and clients—and then the ability control that data and ensure its accuracy is what being an asset manager is all about now. That’s the challenge. “There are dozens of service providers and software providers that are trying to solve that problem, but that’s how asset owners are thinking about it as a solution. It’s not easy to find a solution, but it’s technology that solves that problem for you.” Keefe concluded. photograph by TONY PATRYN

“It’s not easy to find a solution, but it’s technology that solves that problem for you.”

INSTITUTIONAL ALLOCATOR 42 Lesley Keefe, executive director, asset management advisory, EY

TECHNOLOGY

4, 6 13

FRONT OFFICE SOLUTIONS: EASING THE PAIN OF THE CHIEF INVESTMENT OFFICER BY MELANIE PICKETT

hief investment officers face a number of challenges in today’s investing environment. This is especially true for investment officers at endowments and foundations, with an evergrowing set of requirements around transparency and reporting to external stakeholders, on top of their already difficult job of delivering superior risk-adjusted returns to their institution.

reference. This results in an incomplete picture of the portfolio’s overall risk, exposure and liquidity characteristics across the risk factors these organizations care most about. As asset owners have expanded into such diverse portfolios, most have attempted to piece together a technology and operations infrastructure to support their needs. This requires multiple vendors and manual data integration. And, if it works, each additional requirement often leaves the overall infrastructure in a more manual, and therefore precarious, state. This can result in systems that are redundant or not scalable or secure, and may also result in business processes that may rely on inconsistent or outdated data.

Over the past decade, institutional investment has grown substantially more complex and the asset servicing industry has struggled to keep up with this change. Endowments and foundations in particular have made increasingly large allocations to complex and often opaque instruments, including hedge funds, private equity funds, All of this can lead to investment decisions derivatives, and direct investments into private that are challenged by operational limitations. equity and credit opportunities. Rather than having a platform that allows for But with these opportunities come great increased efficacy and investment insights, some challenges: To maximize returns and minimize asset owners are missing out on potential return inefficiency, investment offices need a solution opportunities because their current infrastructure set and target operating model that offers a much cannot handle a more data-driven investment more comprehensive way to manage the tangled process. They also risk being unable to meet new web of data that accompanies such complex, demands for information from regulators or multi-asset class portfolios. provide transparency to other stakeholders, such as donors and trustees.

Part 1: Complex Assets = Complex Data Requirements

What these investment teams need most is an infrastructure that supports and nurtures their Institutional investors have long gravitated towards investment process, versus being required to adapt alternative investments because of their long-term their investment process around an infrastructure investment horizon and desire to obtain a premium that fails to meet their needs. in exchange for the illiquidity of these assets. In fact, the 2018 NEPC Endowments and Foundations Part 2: Applying the Survey shows that 80% of asset allocators polled ‘Operational Alpha™’ standard believed the return of market volatility to be a longA useful metric for mitigating these investment term trend, and that hedge funds are best positioned challenges is the application of the Operational to maximize this new environment. The same Alpha standard. Operational Alpha is best survey also found that private equity is expected known as a measure for asset managers to create to be the alternative investment that will generate better performance through a comprehensive the highest return over the next three to five years. examination of their operational processes. It uses Increased allocations to more complex investment classes has not just happened at endowments and foundations, but also at family offices, sovereign wealth funds, superannuation funds, pensions and insurance companies. Alternative assets are often investments that come with an operational tradeoff for their projected higher returns—less liquidity, lower transparency, and far less frequent valuations, as compared with traditional asset classes. Understanding the existence and valuation for these investments is often more complicated, with fewer points of

Melanie Pickett is the practice executive and head of Front Office Solutions at Northern Trust. She previously was the chief operating officer and managing director for a top U.S. endowment.

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TECHNOLOGY

3 CHALLENGES

FACING FRONT OFFICE INVESTMENT AND OPERATIONS TEAMS

Data floods into the front office from different sources in varying formats Sharing data across teams isn’t easy or seamless Investment teams must fix errors and gaps before analyzing data

119%

Few multi-asset class platforms manage public and private market data equally well

Lack of communication across teams and workflows creates inefficiency

Custom solutions don’t exist for integrating disparate data

Managing risk and regulatory requirements is challenging

Extracting key information is slow and tedious

No automated oversight of daily trading, cash flows and reconciliations

+200-10

Increase in investments in alternative assets over the past 10 years

Custodians manage around 10 data points while asset owners track the rest

Source: Preqin

Source: Northern Trust

the language and approach of the front office and applies it to middle- and back-office processes. Operational alpha can be equally effective when applied by asset owners seeking higher-quality investment decision-making. To help ensure the strategy’s success, operations and technology teams need access to and buyin from senior investment professionals, ideally including the chief investment officer and/or the chief operations officer. The team should also set success metrics at the outset to measure improvement on a weekly, monthly, quarterly and annual basis. An effective process starts by taking a comprehensive view of how data is currently handled in the investment decision process. This includes third-party systems used by an organization, service providers and data sets they support, along with internal models and macros created inside the organization. Employees may have additional data sets they keep in the course of their jobs. If an organization takes the time to ask the right questions at the outset of the project, their process can lead to the greatest amount of realized Operational Alpha. With the inventory established, it can take time to realize savings. Many opportunities to increase portfolio alpha lie within the operations of the portfolio outside of just simply lowering internal overhead—these range from increasing the

efficiency of the investment team to identifying areas of tax leakage or inefficient portfolio implementation. When it comes to Operational Alpha, there are three main ways it can be applied to large, complex asset owners.

Investment and operations teams need a unified platform to enable data integration, team collaboration and portfolio analysis that leads to meaningful insights and confident decisions

Public cloud solutions are proving to be as safe (or safer) for many institutions to utilize than internal systems.

Be lean and mean. Wherever possible, look to move from fixed costs to scalable solutions. With data, quality is king. The saying is widely Third-party providers can be scaled up or down known but still quite accurate: “Garbage In, depending on the changing need of the investment Garbage Out”. Bad inputs—whether out-of-date, organization. With effective oversight by the inaccurate or skewed—can impact investment organization, service providers can often provide results. Test all sources AND uses of data to see if additional levels of expertise that are expensive and they are still relevant for decision making. Form an time consuming to build internally. organizational inventory and hierarchy of data by importance, frequency, and type of usage. Diagram The challenges inherent in today’s investment exactly how each data source currently fits in the office represent a chance for thoughtful CIOs investment and operational infrastructure, and to improve decisions and raise standards of note duplicates and unused parts of the process. transparency. Trustees and leaders need to take Audits can also uncover opportunities to eliminate a comprehensive approach to building a better investment infrastructure in order to enable or consolidate rarely or seldom used systems. the positive impacts of this change. Technology Make better use of resources and technology. innovation is crucial as investment teams manage Ensure that investment data can be easily tagged the proliferation of data coming from multiple and located throughout your system. Newer platforms in diverse formats. systems may be able to provide more frequent updates or ensure the accuracy of assumptions But technology alone won’t solve all problems. used in investment models. Also, ensure that the Technology solutions require a dedicated team data model allows for flexible classification of assets to provide support and to implement these based on multiple risk factors, such as geographical solutions. As long as CIOs continue to innovate and sector exposure, along with leverage, liquidity new investment strategies to meet investment and counterparty risk. Don’t forget data security— objectives in difficult markets, they will need to today’s organizations must apply as much vigilance work closely with their operations teams to apply towards internal controls and data loss prevention technology in the most effective ways. The human as they do preventing external data breaches. element will always be relevant.

This content represents the views of the author. It was submitted and edited under IA’s guidelines but is not a product of IA’s editorial team.

INSTITUTIONAL ALLOCATOR

source: Northern Trust

PEOPLE MOVING

PLAN SPONSOR PEOPLE MOVES BY MARK FORTUNE

In this column, IA lists senior executive personnel moves at institutional asset-owner organizations in the calendar quarter preceding the magazine’s press deadline. The accuracy of the information in this column, which is aggregated from many sources, is deemed reliable but cannot be guaranteed.

July 2018

investment officer of the New York Common Retirement Fund, succeeding Vicki Fuller, who was set retire at the end of July. Titarchuk had been deputy CIO since February 2015.

system, as CIO of its $16.5 billion pension fund. Burton replaces Vijoy Chattergy, who departed the system in February.

$50 billion Maryland public employee pension

Benefit Fund of Cook County and the

§§ Samuel Kunz, managing director of asset allocation and investment strategy, and Ronnie Swinkels, director of public equity, §§ The Cook Children’s Health Care System lost at the Office of the Chief Investment Officer §§ Former New York State Common Retirement its chief investment officer, Patrick O’Connor, Fund CIO Vicki Fuller joined The Williams of the University of California, took on new and deputy CIO Apurva Mehta. Eli Bloshtein Companies, an energy company, as an responsibilities. Kunz now leads investment is serving as the interim CIO at Cook independent director on the board’s audit and strategy for the fund’s passive public equities; Children’s, which is working with executive nomination and governance committees. Swinkels now leads the active component. Both search firm David Barrett Partners to secure report to CIO Jagdeep Bachher. The news of §§ Eduard van Gelderen was named senior successors for the vacant investment roles. Cook vice president and CIO of the Ottawa-based the appointments came in the wake of three Children’s manages approximately $2 billion in Public Sector Pension Investment Board’s resignations: managing director Eduard van foundation assets for the regional health care C$153 billion ($116.3 billion) pension fund. Gelderen, investment officer Tom Fischer, network headquartered in Fort Worth, Texas. He replaced Daniel Garant, who left last year. and public equities chief Scott Chan. §§ Dennis Smith resigned as chief investment §§ J. David Enriquez and Gabriel Morrow §§ Troy Searles, chief investment officer of the officer of the $905 million Ohio Highway Patrol $4.1 billion Louisiana Parochial Employees’ were appointed as interim co-heads of private Retirement System, Columbus. Smith resigned Retirement System in Baton Rouge resigned. equity in New York City’s Bureau of Asset to join the $99.6 billion Ohio Public Employees’ He joined the pension fund as CIO in July Management. The two will oversee the city’s Retirement System, Columbus, as associate 2014 from the $11.6 billion Louisiana State five retirement funds’ private equity portfolios, counsel, benefits. The fund said it will announce Employees’ Retirement System, where he had which together exceed $12 billion. a new CIO within the next several months. been deputy CIO. §§ Russell Read, chief investment officer of the §§ The executive director of $118 billion State of §§ William Grey, the head of IBM’s U.S. defined Alaska Permanent Fund Corp., resigned benefit pension fund, is retiring from the Wisconsin Investment board, Rick Smirl, left from the $65 billion sovereign wealth fund. company. Grey had spent the last 14 years the post after just six months to join Russell Read reportedly left to pursue an opportunity with IBM, where he led a $50 billion portfolio Investments as COO. based in London. Marcus Frampton, director and reported to companywide chief investment §§ Trustees of the State of Wisconsin Investment of investments, real assets and absolute return, officer Harshal Chaudhari. Board (SWIB) appointed Rochelle Klaskin, was named acting CIO. SWIB’s lead attorney and assistant director, as §§ Ron Baker was named executive director of interim executive director. Klaskin’s new duties §§ The Illinois State Board of Investment named the $49 billion Colorado Public Employees’ include oversight for the state’s $107 billion CIO Johara Farhadieh to replace William Retirement Association. Baker had been pension plan. R. Atwood as Executive Director. Farhadieh interim executive director since the December maintains his responsibilities as CIO. 2017 death of former executive director Gregory §§ Chris McDonough, director of the Division of W. Smith, who died suddenly while vacationing Investments, left his position with the State of §§ The Colorado County Officials & Employees with his family in Hawaii. Baker was previously New Jersey’s Division of Investment, to join Retirement Association was seeking an PERA’s chief administrative officer. a consulting firm in the fall. Corey Amon, will executive director. The previous executive serve as Acting Director. director, Jacob Kuijper, retired in March. §§ Nickol Hackett, the executive director Executive search firm Leading Associations §§ The Hawaii Employees’ Retirement System, and chief investment officer of the County was commissioned to head the search. Employees’ and Officers’ Annuity and hired Elizabeth Burton, the head of risk at the §§ Anastasia Titarchuk was named interim chief

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for the past three years. Prior to SAFE, Meng being named CIO of the $8 billion St. Louis Forest Preserve District Employees’ Annuity nonprofit health care organization, Thomas and Benefit Fund of Cook County, both of was at CalPERS for seven years with his last role served their as co-interim CIO with Doug Chicago, announced plans to step down at as the investment director of Asset Allocation. Garrett, director of investment research. the end of her contract. The Board planned He also was a portfolio manager in fixed to name an interim Executive Director and income. Meng replaced Ted Eliopoulos, who September 2018 conduct a search for a permanent successor is left CalPERS to relocate to New York. §§ Mary McLean retired as the CIO of the $2.4 billion Ewing Marion Kauffman Foundation. §§ Lisa Murray was named chief investment August 2018 officer of the $2 billion Ewing Marion Lisa Murray, who served as the managing §§ The California Public Employees’ Retirement Kauffman Foundation in Kansas City, Mo. director of investments, was appointed as the System tapped a new CFO, its second such new CIO. McLean worked with the foundation hire in less than a year, amid scrutiny over its She replaces Mary McLean, who retired in since 1996, and became CIO in 2012. vetting and hiring processes. CalPERS, hired September. Murray was previously managing former California Department of Finance §§ Roselyn Spencer, executive director and chief director in investments. Brian Scharf, director Michael Cohen. He replaced Charles previously a principal at Paragon Capital investment officer of the $1.8 billion Baltimore Asubonten, who left the post in May. Management, replaced her in that role. City Employees’ Retirement System, left the fund following a report from the city’s Office §§ The Alaska Permanent Fund Corporation §§ The $10 billion San Bernardino County of the Inspector General that found that a Employees’ Retirement Association named (APFC) promoted Marcus Frampton to the retirement plan official had misused assets to Debby Cherney as its new CEO. Cherney, a role of chief investment officer. Frampton renovate the Retirement Savings Plan offices. certified public accountant, joined the pension joined APFC in September of 2012. He recently Spencer was named executive director of the system from the Eastern Municipal Water served as the Acting CIO and the Director of Baltimore City Employees’ Retirement System District of Southern California. Cherney Investments, Real Assets & Absolute Return. in 2003. formerly worked as an executive director of Prior to joining the APFC, Marcus held diverse finance and administrative services at Irvine §§ Scott A. Lupkas was named vice president, roles ranging from investment banking with Ranch Water District. pension investments at Raytheon in Waltham, Lehman Brothers, private equity investing Mass. Lupkas will oversee Raytheon’s $38 §§ Dan Villa was named executive director of the with PCG Capital Partners, and was an billion in combined pension and defined Montana Board of Investments, replacing executive with LPL Financial, a private equity contribution funds. He will report to Kevin David Ewer, who announced in April backed portfolio company. DaSilva, vice president, treasurer. he would be retiring. The board oversees about $11.3 billion in assets for nine state pension funds.

§§ The California Public Employees’ Retirement §§ Mark Steed was named chief investment officer of the $9.8 billion Arizona Public Safety System hired Yu Ben Meng as the pension Retirement System in Pheonix. He replaces fund’s new chief investment officer. Meng §§ BJC HealthCare named Joe Thomas CIO and Ryan Parham, who retired in July. Steed had returned to CalPERS to assume the CIO treasurer, replacing Greg Schuler, who left to been acting CIO since Parham’s departure; he after serving as the Deputy CIO at the State join the University of Pittsburgh in July as Administration of Foreign Exchange (SAFE) CIO of its $3.9 billion endowment. Prior to was previously deputy CIO and chief of staff.

INSTITUTIONAL ALLOCATOR

FUND FLOWS

FIN SEARCH CHART Q1

8,070

12,055

11,140

COMPLETED SEARCHES Active Equity US Equity

1,919

4,240

6,908

International

3,226

1,401

3,041

Emerging Markets

860

1,268

944

Global

2,055

5,146

247

Passive Equity

4,270

1,140

9,555

Active Fixed-Income

4,285

8,508

4,876

US Fixed-Income

4,193

7,551

4,356

Emerging Markets

132

461

Global

825

Passive Fixed-Income

1,441

27,793

204

Alternative

239

28,042

250

27,991

235

32,182

Hedge Funds

2,873

5,265

6,687

Private Equity

135

16,809

163

16,647

158

20,255

Credit/Distressed Debt

4,552

4,346

4,485

Other

3,808

1733

755

Real Estate

8,922

8,085

6,087

Consultant

Asset Study

Record Keeper

Commodites/Real Assets

4,610

3,891

3,953

he quarterly search data includes all completed mandates from U.S. public pension funds and foundations and endowments as reported by FIN|Searches. The accuracy of the data, which is compiled from comprehensive reporting, institutional board meeting minutes and investment reports, is deemed reliable but cannot be guaranteed. All amounts are in US$ millions unless otherwise stated. fin|searches is a powerful sales and marketing tool that aggregates manager search leads from its U.S. defined benefit product, fin|daily, as well as its Foundation & Endowment product, Nonprofit News. For further information on U.S. institutional manager search leads, please contact: Gene Dolinsky, director of business development, on (646) 810 1072 or gdolinsky@finsearches.com

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