New Realities in Asset Management | Global Conference 2024

Market Context & Panelists: The session addressed a shift from tailwinds to headwinds driven by higher interest rates, inflation, de-globalization, and the climate imperative for energy transition.

• Panelists:
  • Wellington: Terry Burgess (Head of Investment Boutiques), leveraging a private partnership structure with 600 global employees.
  • CalSTRS: Scott Chan (Deputy CIO), the second-largest US public pension fund.
  • Ontario Teachers (OTPP): Jonathan Hausman (Strategy), a pioneer in public pension models founded in 1990.
  • Citadel: Joanna Welsh (Risk Management), identified by LCH as the world's best-performing hedge fund.

Differentiation Strategies:

• Wellington:
  • Leverages a unique combination of private partnership status, independence, and control over its own balance sheet to maintain long-term innovation.
  • Utilizes a "global conversation" model where 600 experts debate across all asset classes to replicate non-trivial knowledge flows.
  • Focuses on "adjacencies" where new solutions plug into existing capabilities, solving client problems while diversifying the business.
• CalSTRS:
  • Implemented a "cloud model" over six years to bring assets in-house, shifting risk to private markets while maintaining passive public market exposure.
  • Differentiates through partnership structures including minority ownership, revenue shares, co-investments, and SMAs to overcome regulatory and compensation constraints.
• OTPP:
  • Built on three pillars: Delegated Authority (unpoliticized governance), Innovation by Necessity (early use of derivatives when holding non-tradable debentures), and Global Execution (eight offices worldwide).
  • Owns operational businesses like Cadillac Fairview (real estate) to build internal execution expertise in private equity, infrastructure, and natural resources.
• Citadel:
  • Cites 33 years of compounding returns and an investment grade (IG) rating held for 20 years as foundational strengths.
  • Claims to contribute approximately 40% to the total returns of the multi-strategy hedge fund space.

Innovation & Goal Setting:

• Citadel:
  • Uses a top-down goal-setting process led by CEO Ken Griffin to raise aspirations rather than assign tasks.
  • Prioritizes eliminating low-value work to free up capacity for building world-class careers and innovation.
• Wellington:
  • Employs an "invest, measure" framework where business leaders allocate partner capital to high-potential strategies.
  • Scales successful pilots (e.g., embedding data scientists within fundamental teams) rather than building isolated, massive tech initiatives.
• OTPP:
  • Focuses on a "culture of innovation" where tools like Copilot are distributed to all employees to identify use cases.
  • Views the next two years as critical for building guardrails and data infrastructure before AI application reaches a "bunker" phase.

Risk Management & Paradigm Shifts:

• Systemic Risks: All panelists identified rising systemic risks (climate, geopolitics, inequality) that cannot be inoculated against via traditional diversification.
• Scenario Planning:
  • OTPP: Conducts "muscle-building" exercises to anticipate 1-in-100 shocks, acknowledging specific scenarios may not occur but the organizational capacity to pivot is vital.
  • Citadel: Focuses on systemic shock DNA (e.g., lender impatience, liquidity constraints) rather than granular portfolio losses; emphasizes understanding the 4-5 most common crisis types (e.g., LTCM, oil shocks).
• Data & AI:
  • Citadel: Built internal data labeling models to group risks intuitively (e.g., seasonal energy markets) rather than relying on vendor aggregations; uses cloud computing for heavy compute (weather simulations) and memory-heavy tasks.
  • OTPP: Argues digitized data is the lifeblood for AI; notes a 90/90 disconnect where 90% of leaders view GenAI as critical but 90% have taken no action.
  • CalSTRS: Faces a dilemma where technological adoption outpaces regulation and talent acquisition; emphasizes a unified, enterprise-wide approach to AI to manage security and infrastructure.

Talent & Competitive Landscape:

• CalSTRS: Attracts talent via mission (serving 1M+ California educators) and stability during recessions; maintains a 4-5% annual turnover rate.
• OTPP: Balances mission-driven recruitment with competitive compensation to match private sector pay scales; utilizes an apprenticeship model where junior staff often train senior staff on new technologies.
• Wellington: Attracts raw talent by offering diverse career pathways (public, private, hedge funds) within one ecosystem.
• Citadel: Competes for engineers and analysts against tech giants (OpenAI, Tesla, Google) but leverages top-tier results and operational robustness as a selling point; notes that raising capital is easier than hiring top talent who must deploy capital day one.

Private Markets & Capital Allocation:

• CalSTRS:
  • Allocated 42-43% of the portfolio to private markets/alternatives, shifting $50B from public to private over the last five years.
  • The "denominator effect" persists due to a freeze in exits; the fund is under-levered and cautious on equity but sees opportunity in senior debt (5-6% over SOFR).
  • Launching internal managers to capture value across the entire investment chain (e.g., originating private debt, securitizing, and trading it).
• OTPP:
  • Maintains a significant private equity allocation, focusing on value creation via active ownership (e.g., circular economy initiatives) to avoid stranded assets.
  • Prioritizes liquidity management to pivot during market dislocations.
• Citadel: Identifies slow growth as its primary challenge; seeks scale by partnering with global wealth managers and adding higher-price-point solutions to its existing infrastructure.

Future Outlook & Challenges:

• OTPP: Faces the strategic challenge of "strategic imperfectionism"—remaining convinced in a thesis while being ready to adapt quickly ("crossing the river feeling the stones").
• CalSTRS: The primary challenge is organizational alignment; unifying the board, staff, and stakeholders across asset classes to address systemic risks and technology shifts holistically.
• Wellington: Faces the challenge of scale in generating years of alpha without seeding the space with excess capital, while simultaneously navigating poorly thought-out regulations.
• Citadel: Cites poorly considered regulation as a significant hurdle regarding cost-benefit analysis and operational burden.