Panel, Conference Presentation
The View from Institutional Investors: Where Will Returns Come From?
Milken InstituteChristopher Ellman, Jane Modelo, Kei-Ping Ling, Seesma Hingorani, Jerry Albright, Michael Sabian
- Harvard Management expects to capture value in natural resources and real estate by leveraging a 50-year horizon, a specialized internal team of over 200 staff (35 investors each in public and alternative assets), and a "knowledge network" to access deals overlooked by external managers, while planning to plant 100 million trees to sequester 2.5 million metric tons of CO2 annually.
- The New York City Pension Plans manages $150 billion with zero assets currently managed internally and aims to increase alternative asset allocations from 10-11% to roughly 25% by 2016, contingent on a legislative fix to the New York State Basket Clause that currently caps alternatives, with the goal of achieving a 7% annual return over the next 20 years despite a $2 billion annual funding gap and $12 billion in annual payouts.
- The Texas Teachers Retirement Fund, a $126 billion entity with a 24-to-25-year liability stream and a $3 billion annual negative cash flow, targets an 8% actuarial rate by achieving a 7.4% strategic return plus an additional 100 basis points through internal management, while planning to utilize leverage via risk parity and focus on energy, opportunistic fixed income, distressed European real estate, and direct student lending.
- The Caisse de dépôt et placement du Québec manages $200 billion for 8 million Quebecers with 85% to 90% of assets held internally, focusing on an absolute return public equity strategy, energy infrastructure, U.S. real estate, and the food chain, while avoiding areas where internal competence is lacking.
- The China Investment Company (CIC) oversees more than $600 billion in assets, split between a domestic shareholding company ($400 billion+) and CIC International, with a target to allocate roughly 50% to long-term private markets including private equity, real estate, infrastructure, and agriculture, though it currently manages 60% to 70% of assets externally.
- A significant trend across funds involves shifting from benchmark-relative strategies to absolute returns to justify large concentrated positions in high-quality businesses, with specific thematic focuses on the "food chain" (from farmland to retail), "protein trade," and emerging markets transitioning from export-led to consumer-led growth.
- Internal management capabilities vary significantly, with Harvard managing 30% of assets (60% of public equity), Texas at 60%, the Caisse at 85-90%, and New York at 0%, creating diverse approaches where funds with internal expertise seek co-investments or direct deals while others rely on partners to execute strategies like distressed Eurozone assets or advanced direct investing.
- Key risks identified include legislative constraints limiting asset allocation, the difficulty of hiring and retaining talent in jurisdictions with lower median compensation, the challenge of balancing short-term performance pressure against long-term horizons, and the risk of drifting into investment areas lacking internal operational competence such as specific Chinese A-shares or distressed debt.
- Material funding constraints persist for several entities, including New York's $2 billion annual deficit and Texas's negative cash flow, whereas the Caisse benefits from a net inflow position that allows a focus on long-term goals without immediate liability pressure, and Harvard faces payout obligations equal to 35% of its university's operating budget.
- Valuation opportunities are highlighted in emerging markets with price-to-earnings discounts of 40% compared to developed markets and beaten-down equities, alongside the belief that market froth has allowed long-term investors to capitalize on breakthroughs in biotech and tech, and that the current low-yield fixed income environment necessitates a move toward private markets and alternative strategies.