Asset Owners Take on the New Global Reality

Uncertainty and pragmatism shaped every conversation at MSCI’s 20th Institutional Investor Forum in Sacramento last month and its 12th Canadian session in Toronto last week. Leaders from the world’s largest pension funds, endowments and asset managers agreed that markets, risk assessments and technology are changing too quickly for most traditional investment models and tools to keep pace. 

Panels and conversations centered on the evolving concept of diversification, the time and care needed to introduce and refine a total portfolio approach (TPA), the expanding role of private assets and integrating AI into day-to-day workflows.  

The evolving definition of diversification 

At Sacramento, conversations first centered on diversification — long considered the first principle of institutional investing but now being redefined and expanded.  

MSCI’s Chief Research & Development Officer Ashley Lester used the U.S. equity market to illustrate the dilemma investors have faced this year when considering their portfolio’s country mix. Despite the appearance of strength of U.S. public markets, returns are dominated by a handful of mega-cap technology names. “The 10 largest stocks have gained almost twice as much as the rest of the market,” he noted, warning of the growing concentration risk masked by headline performance. 

That concentration has forced investors to look beyond geography or asset class and toward factor and thematic diversification. Private assets have offered one release valve. For example, one panelist at the Sacramento event noted that private markets became an area to look for uncorrelated returns when bonds stopped performing their traditional role of ballast earlier this decade.

But even in privates, realism has replaced exuberance: Distributions have slowed, valuations remain high and new capital keeps pouring in. In Sacramento, MSCI’s Head of Analytics R&D Peter Shepard asked the question many were thinking: Is private equity still as attractive as it once was? Ralph Eissler, MSCI’s Head of Private Assets R&D, drew a historical parallel, explaining that much like the post-2008 period, some vintages of private equity are still carried at optimistic valuations, while newer vintages, priced in a higher-rate world, may fare better. 

Panelists at both North American events agreed that diversification today means more than spreading bets — it means re-examining the assumptions that underpin them. In Toronto, attendees  discussed how growing AUM can actually present the danger of being “too diversified.” That is, bumping up against market-liquidity constraints, holding a portfolio with seemingly different positions but concentrated factor exposures and, for active funds, it can make it more difficult to stay true to “high conviction” holdings. This all means finding creative new ways to manage portfolios.

One of these ways — newer for some asset owners than others — is a total portfolio approach. Once a niche idea among a few pioneering funds in the APAC region and Canada, the forums revealed how the TPA has become an increasingly popular organizing framework for institutional investing worldwide.  

One reason is that the neat boxes of traditional strategic asset allocation (SAA) no longer fit the market’s blurred lines. Under a TPA, the portfolio is managed as a single entity, with decisions based on total-fund objectives rather than asset-class-silo goals. In a world of overlapping risks and disruptions, investors need the flexibility and a unified language for decision-making that a TPA brings. 

At the Sacramento forum, senior investment leaders described the cross-asset diversification inherent to the TPA as game-changing for sustainability and climate investment. After all, sustainability teams at asset owners have historically looked across markets to capture investment opportunities and heed risks around the global energy transition. One senior portfolio manager noted that his plan’s shift to a TPA has allowed him to integrate hybrid strategies (i.e., public-private transition investments) into the portfolio, and revisit existing instruments, like green bonds, as efficient tools for decarbonization. 

“The total-portfolio approach is giving investors the flexibility to allocate where real-world disruptions like the energy transition are most material,” Laura Nishikawa, MSCI Head of Sustainability & Climate R&D, said. “It’s becoming a bridge between sustainability objectives and financial outcomes, helping investors capture value where change is creating both risk and opportunity.” 

Regardless of the structure of an asset owner’s total portfolio strategy, governance issues can often bottleneck change. Boards accustomed to setting allocation targets must instead define outcomes and boundaries, giving management discretion within those limits. On the flipside, what boards give up in control, they gain in coherence, said one participant in Toronto. 

While many large asset owners around the world have adopted a TPA framework, governance and investment structures vary widely. Longtime users have eschewed asset-class-focused investment teams, eliminated benchmark goals and broken down silos between public and private assets. More recent adoptees described a hybrid model, maintaining asset-class specialists and performance benchmarks while deploying total-return teams to foster discussion among these groups and identify opportunities that might be missed using SAA. 

In Sacramento, this theme emerged as a communications challenge. One U.S. CIO described how asset-class teams initially saw themselves as competitors for capital and how challenging it can be when public and private markets specialists struggle to compare the performance of their respective slices of the portfolio pie. According to one senior investment leader, CIOs should work to frame TPA as an opportunity to galvanize the full team around their pension plan’s mission to secure the financial futures of retirees. He added that his biggest investment during his tenure has been in people — and ensuring they are comfortable with cultural change is paramount to investing success.  

Even when the conversation reached Toronto, where many have moved beyond the concept of a TPA to the mechanics of execution, there was still much importance placed on cultural change. Such long-term transformation is made harder by the fact that, as one senior leader put it, SAA is a “thing” you can feel and touch, while TPA was described as a “mindset,” a “language” and even a “cloud — easy to see, difficult to grab hold of.” 

Both sessions revealed how investors are wrestling with the contradictions of private markets that promise diversification but can behave much like the public markets they’re meant to hedge. Others argued that to speak about private assets in the context of a TPA misses the point; that it’s not a question of public vs. private but rather identifying and managing the underlying factors that drive risk and return across the entire portfolio.  

That said, private assets elevate the need to focus on transparency, liquidity and valuations. For example, Toronto attendees discussed that when markets corrected in 2022, many realized how stale valuations had become, with one asset manager equating volatility with market maturity. 

Given the current state of private assets, one participant in a Toronto panel led by MSCI Head of Private Assets Luke Flemmer described his approach to valuation as a "buy-to-sell" approach that empowers him to sell should a better opportunity come along in either private or public markets. Flemmer observed in response: "It's almost like a public-security portfolio mindset where you mark your book every day and look at tradeoffs and opportunities."  

Flemmer then turned the discussion to investors’ need for the most sophisticated tools to benchmark private assets. In discussing a public-market equivalent (PME) approach to benchmarking privates, another senior investment leader said PME can create difficulties when you start trying to equalize assets that have very different liquidity profiles.  

Liquidity, in fact, remains the dominant concern. Panelists at both events described operating across a private asset “liquidity spectrum,” from traditional closed-end funds to fully liquid replication products. As one senior investor put it, however, assessing liquidity is not about the holdings. It’s about the fund, because people need access to cash when they don’t expect to, echoing a point made by MSCI’s CEO and Chairman Henry Fernandez earlier in the day.  

Fernadez added, “There isn’t enough institutional capital on the planet to fuel private markets. We need retail participation.” His comment captured the broader trend of the growing importance of wealth management firms and the rise of evergreen funds and tokenized vehicles that blur the line between institutional and retail capital.