Investors favor governance, tilts and liquidity

In a high-profile session at the Chicago Booth School of Business’ Fiduciary Investors Symposium, investment leaders from HOOPP, CalSTRS, USS and Cbus reflected on the need for strong climate governance currency, diversification and liquidity.

The need for diversification when so many assets are struggling requires detailed conversations with trustees and governors about how to better balance the portfolio factor, said Michael Wissell, chief investment officer of the HOOPP Canadian fund.

“It helps to bring management and the board together,” he said during a roundtable that recognized the importance of well-defined risk parameters and governance to support positions if market conditions deteriorate. Wissell, who said HOOPP’s portfolio is still defensively positioned, cited the fund’s thoughtful approach to opportunities where he predicts gathering assets today that will sow the seeds for decent future returns.

Scott Chan, deputy chief investment officer of CalSTRS, noted how the market was struggling to price in uncertainties related to inflation, supply chains and deglobalization. CalSTRS priorities include managing liquidity and providing lines of credit where needed. Chan noted that this could lead the fund to sell assets in parts of the portfolio as values ​​fall in a risk-mitigation strategy.

“We will liquidate and put ourselves in a position to invest in distressed assets,” he said. In March 2020, CalSTRS already had billions to “go shopping,” but as it happened, it only needed to pull stocks back up in the V-shaped recovery. Chan said CalSTRS is focused also on building its private credit allocation which will provide some degree of inflation protection. “Doing more of these types of things will move the needle,” he said.


At Cbus in Australia, the strategy is to steer asset allocation, position around a shorter duration and favor domestic equities over international equities. Cbus has also structured options protection strategies over the past month, said Kristian Fok, CIO at Cbus. Elsewhere, the fund seeks to resist rising interest rates and inflation via real estate and infrastructure. Fok noted that infrastructure will continue to provide a buffer, smoothing the risk-free rate and providing increased GDP activity and inflation protection, but only so long as rates do not rise too much. Fok added that the fund was also looking to build capacity internally.

Panelists noted how construction companies have been pressured by inflation and supply chain issues, forcing some to collapse. It creates a changing dynamic for investors in greenfield real estate and infrastructure, pushing investors to learn about risk sharing and develop new skills.

Cbus is not the only investor to seize the opportunities. Rather than owning the S&P, investors might favor inflation-sensitive stocks or stocks focused on green energy. In the UK, the USS is tilting towards the public markets, especially assets that are expected to perform well due to the cost of living and high inflation. Bruno Serfaty (pictured), head of dynamic asset allocation at USS, told delegates that strategies require a strong governance process to understand the extent of a tilt over an investment period.

Hedging provides another layer of protection with panelists referring to tail risk mandates and strategies that hedge when markets fall. However, they highlighted the importance of proper allocation sizing, which is difficult when the magnitude of drawdown is unknown, and reported that these strategies are also typically associated with slowdown.

Panelists added that regulatory frameworks make it difficult to take large positions unless investors can change their strategic asset allocation to suit the investment environment.

Reflecting on where they would invest if they had a free hand, Serfaty pointed to opportunities in energy and liquidity security. Far from the high risk premia inherent in financial assets, he said energy is currently not expensive. Other investors cited the opportunity of real return bonds, the focus on cash management and the pivot to new areas. Fok concluded that a new political regime in Australia signals opportunities in renewable energy where he predicts that private capital could increasingly invest alongside public investment in a scenario that could bring guarantees, but also the ability to take risks.

Pandemic learnings

Panelists discussed how their organizations had weathered the pandemic. HOOPP wrote more tickets in March 2020 than ever before and emerged confident in its ability to work from home. On the other hand, Wissell noted mental health challenges, especially among the younger members of the squad.

Chan explained how CalSTRS added more hires during Covid to grow its direct investment model. CalSTRS now internalizes about three-quarters of its allocation to public markets as part of a strategy designed to reduce fees.

“During Covid, we captured a lot of hires, and now it’s hard to hire,” he said. The fund emerged from Covid focusing on its organizational goals, in particular trying to shape its framework around net zero.

At Cbus, pandemic-related challenges included $2.4 billion in withdrawals from the fund as beneficiaries withdrew money in accordance with government policy allowing members access to their accounts. Elsewhere, the fund invested in the local market and navigated new rules on super funds and allocations to top performing funds only.

At USS Serfaty, he described an early pandemic rush to sailed margin calls and collateral issues. In a second step, USS stepped in to support the financing of some of its private market investments hard hit by Covid such as Heathrow Airport. He said USS’s strategies then focused on shifting its position from fixed income to assets, including commodities.

Helen D. Jessen