CIOs stress diversification for 2024, anticipate impact of ESG on inflation

Higher borrowing costs continue to plague investors

CIOs stress diversification for 2024, anticipate impact of ESG on inflation

Amid persistent inflation, elusive growth, and evolving economic landscapes, asset owners are adapting to uncertainties in 2024 by integrating diverse strategies, as reported by

Investors, anticipating opportunities amid uncertainties, are focused on tactical asset allocation. CIO Sriram Lakshminarayanan of the Iowa Public Employees Retirement System emphasized a mindset change and constant communication for tactical investing.

While a consensus predicted falling borrowing costs in 2024, higher rates continue to impact cash-bond dynamics. Many investors held more cash entering 2024, anticipating a better environment for bonds if a recession materialized and central banks lowered rates.

Higher borrowing costs also prompted considerations among pension funds, as observed at the Pennsylvania Public School Employees' Retirement System and TTC Pension Plan in Canada, where costs persist as a factor influencing the strategic use of leverage by these pension funds in 2024.

A few investors plan to reduce active equity exposure, favoring passive allocations. “We are hoping to implement decent-sized passive allocations by year-end. I don’t think looking for long-only US equity managers that outperform is a great use of our time. I’d rather take active risk in private markets than in public equities or credit,” says Geeta Kapadia, CIO of Geeta Kapadia.

Despite doubts about the value of active equity, discussions center around opportunities within the US equity market. Advancements in technology, such as large language models (LLM) driving the AI revolution, along with breakthroughs in life-changing drugs, are expected to present unprecedented prospects in public markets.

“A rising tide will lift all boats, just be invested in boats, just be invested in equity. Who is going to reap the benefits of this productivity? It’s not going to go to labor – it’s going to go to the capital providers; to the equity investors, and it’s already priced into the market,” says Charles Van Vleet, CIO of the Textron pension fund.

While planning to execute an active stock-picking strategy throughout 2024, he also highlighted the potential benefits for passive allocations stemming from corporate innovation.

Private equity and sustainability

In private equity, a mixed outlook prevailed. Higher interest rates continue to impact portfolio companies, and uncertainties persisted around exit strategies via IPO and M&A activity.

Suyi Kim, global head of private equity at CPP Investments, emphasized the challenging returns and risk associated with private equity. “I have to remind our senior managers and board that returns will be more challenging going forward. Yes, private equity is the best performing asset from an absolute return perspective, but you must also look at it from a risk adjusted basis, and private equity is the most risk-taking allocation in the fund,” says Kim.

There is also notable shift from the term ESG towards more cohesive sustainability themes. The ASCOR project (Assessing Sovereign Climate-Related Opportunities and Risks) published its first independent academic assessment of 25 countries’ climate targets and policies.

“Investors haven’t had an academically rigorous, transparent, and publicly available holistic lens through which to assess climate mitigation and adaptation in their sovereign holdings until now,” says Adam Matthews, co-chair of ASCOR and chief responsible investment officer at Church of England Pension Board.

Sustainability teams are also grappling with approaches to emerging markets in 2024, with pension funds assessing the impact on their carbon footprints.

“The easiest way to reduce that footprint would be to sell carbon intensive companies in emerging markets, but this does little for the real-world impact. We are keen to see real world change and that’s why we continue encouraging the highest emitting companies we invest in to reduce their carbon emissions,” says Mirko Cardinale, head of investment strategy at USS.