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Interview

What’s on the Minds of CIOs

Goldman SachsPaget MacColl, Liz
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  • The role of Chief Investment Officers (CIOs) has become critical for managing global portfolios amidst 2020 pandemic volatility and lower interest rates.
  • CIOs serve three primary investor types with distinct pandemic-related challenges:
    • Pension plans (corporate and public): Focused on raising liquidity to cover benefit payments amidst lower interest rates and equity volatility.
    • Nonprofit healthcare organizations: Relied on long-term capital pools to fund operations after elective surgeries were halted, eliminating a major revenue driver.
    • Endowments and foundations: Prioritized positioning investment pools to support university operations facing uncertainty around reopening, tuition, and enrollment.

Current Major Themes for CIOs

  • Target Return Constraints: Investors face a 6% to 8% return target while fixed income yields approach zero.
  • Election and Pandemic Volatility: CIOs are implementing broad risk mitigation strategies across equities, fixed income, and alternatives due to uncertainty surrounding the U.S. election and COVID-19.
  • Risk Awareness Evolution: The pandemic highlighted the need to reassess portfolio risks beyond anticipated market events.
  • ESG Integration: Environmental, Social, and Governance (ESG) factors have moved from a niche focus to a primary risk and return consideration for all asset classes.

Impact of Ultra-Low Interest Rates on Allocation

  • Shift to Risk Assets: To achieve target returns, CIOs are increasing exposure to public equities and private assets.
  • Focus on Alternatives: There is heightened interest in private equity, private credit, and private real estate infrastructure.
  • Return Expectations for Alternatives:
    • Private credit and infrastructure target current yield.
    • Public equity and other alternatives target returns in the mid-teens to 20%.

Election Risk Mitigation Strategies

  • Time Horizon: Despite a 5-to-10-year investment horizon, portfolios must be positioned for near-term election-related volatility.
  • Forecasted Risks: Broad consensus anticipates market volatility leading into the election, with potential for extended volatility into 2021 if the election is contested.
  • Hedging Tactics:
    • Use of derivatives and direct portfolio hedging.
    • Hiring external asset managers to execute hedging strategies.
  • Quantitative Analysis: Quantitative equity groups have identified specific "U.S. election factors" to flag companies sensitive to election outcomes (positively and negatively).

ESG and Diversity Trends

  • Market Growth: Global assets utilizing ESG data have doubled in the past four years and tripled in the past eight years, now exceeding $40 trillion.
  • Integration Strategy: ESG is no longer a separate allocation but is integrated into all investment strategies (fixed income, equities, and alternatives).
  • Manager Requirements: CIOs expect managers to have thorough processes for assessing, measuring, and reporting ESG risks.
  • The "S" Factor: The Social component of ESG has gained prominence, focusing on employee treatment, diversity, and inclusion.
  • Diversity as an Alpha Driver:
    • Organizations prioritize diverse internal teams and inclusive cultures, viewing this as a driver for better investment decisions.
    • Manager due diligence now includes evaluating team diversity across investment committees and named portfolio managers.
  • Allocation Evolution: While carved-out allocations for women and minority-owned firms persist, broad asset managers are increasingly integrating diversity and inclusion diligence into all strategies.