For chief investment officers at large U.S. asset owners, uncertainty may be the only thing that awaits them in 2025 — but some are optimistic about growth prospects in both public and private markets.
“Even with a unified Congress and presidency, things are still very uncertain,” said Angela Miller-May, chief investment officer of the $56.4 billion Illinois Municipal Retirement Fund, Oak Brook. Investors still don’t know what’s going to happen, and when it’s going to happen, she said. That includes Fed independence.
"Everything is being questioned,” Miller-May added.
“We just follow our asset allocation policy because we try to block out the noise,” the CIO said in a Dec. 6 interview. “We do pay attention that inflation is sticky and rate cuts are still going on, but we think interest rates will stay higher for longer, and we felt that way before the new administration.”
Other CIOs echoed Miller-May's concerns.
“Uncertainty is a word that we used quite a bit last year and will continue to use this year,” said Benjamin Cotton, CIO of the $77.4 billion Pennsylvania Public School Employees’ Retirement System, Harrisburg, in a Dec. 6 interview. “We’ll need to see how the rest of the world reacts to the posture that America takes. The way we approach the rest of the world drives a lot of economic activity in the world. It’s fairly important that we keep a close eye on that.”
Cotton said, however, the markets have been highly resilient in the face of a lot of uncertainty. He cited the Dec. 3 declaration of martial law by South Korean President Yoon Suk Yeol and the collapse of the French government the very next day following the ouster of Prime Minster Michel Barnier in a no-confidence vote as events requiring immediate attention.
“My first reaction was to get the team on standby because we might need to go into a kind of what we would call a heightened position of monitoring to make sure that we’re continuing to report things that are going on, and what that might mean to the portfolio,” Cotton said, “but you witnessed this last week, the markets kind of swallowed that. Quite well, and they’re moving along quite well.”
Indeed, for the year-to-date ended Dec. 13, the Russell 3000 index and MSCI EAFE index returned 27.8% and 6.4%, respectively, comparable with the impressive positive returns seen in the prior year ended Dec. 31, 2022, when the indexes returned a respective 26% and 18.9%.
Will AI's promise materialize?
Much of the public equity rally of the last two years has been driven by the promise of artificial intelligence and big tech, and how that develops will be something to watch in 2025, said Sriram Lakshminarayanan, CIO of the $45.3 billion Iowa Public Employees’ Retirement System, Des Moines, in a Dec. 4 interview.
“The growth numbers that these companies have put up, the pace of innovation does make an investor look at them seriously,” Lakshminarayanan said. “You can’t just dismiss it as a fad. It definitely does not feel like the dot-com era. There seems to be a bit more substance behind it.”
He said one of the more important things to watch in 2025 will be the further peeling of the onion of AI, whether these promises of new technology will raise productivity and increase earnings.
“So I think the AI story is promising, but it remains to be seen how the markets behave based off that,” he said.
Also top of mind among asset owners CIOs is the continued surprising resiliency of the U.S. economy, and how the impending return of Donald Trump and his familiar policies to the Oval Office will affect that.
“If I was 99% convinced, I’m now 100% convinced we don’t have an edge here at calling and making a big portfolio position based on inflation or anything like that,” said Marcus Frampton, CIO of the $79 billion Alaska Permanent Fund Corp., Juneau.
“It seems like we’re in a 2.5% world, on both 2.5% inflation, 2.5% real GDP growth,” he said. “I don’t think inflation is getting down to where Jerome Powell once said, but we're going to live with it being a little high. Everyone would prefer the economy to go 3% but it’s kind of 2.5%. So it seems like in spite of all the threats out there — tariffs and different things — it seems like the base case is the kind of soft landing everyone was hoping for. But then you’ve got the overlay of the risk that gets presented by tariffs and a new administration that doesn’t seem shy about shaking things up.”
“So I don’t know,” Frampton said. “I’m convinced that what we should do is focus on just executing well and picking top-quartile managers instead of second-quartile managers and sharpening our pencils on (challenges, like) does this real estate investment continue to make sense?”
A close eye one policy
Lakshminarayanan said that investors, once their initial euphoria or disappointment regarding the election results fades away, are watching to see what actual policy changes are made.
“Elections are when promises are made. Governance is when promises are kept, and policy changes that need to be made to keep those election promises usually takes a really long time and a lot more deliberation during that time,” Lakshminarayanan said. “Cynics might call it a dilution of election promises, but a realist might perhaps call it a more thoughtful implementation of election promises.”
What he said, however, that as a team, his office definitely feels that the U.S. going forward is going to have a lot of geopolitical and policy divergence from other developed nations.
“I don’t know if that’s a good or a bad thing,” he said. “I just know there is going to be a difference in terms of how major economies think about how to construct their businesses. We’ve already seen beginning of the realignment of near-shoring and bringing manufacturing in house, creating jobs in house.”
Regarding Trump’s vow to create new tariffs, Lakshminarayanan said there is going to be a retaliation among the U.S.’s trading partners and a bit of rewiring of the global trade network, at least at the beginning.
Andrew Junkin, CIO of the $117 billion Virginia Retirement System, Richmond, said in a Dec. 6 interview that the end of 2024 feels a lot like the end of the prior year, with the economy remaining strong despite interest rates still high, even after the recent rate cuts.
“The new administration, with the plans they they have in terms of renewing tax cuts, adding tariffs (and) deregulating, I would say some of those have mixed economic share packs, but net, it’s probably not enough to derail the economy,” Junkin said. “The tariffs are kind of a one-time resetting of price levels, so it is inflationary, for sure, but it’s not a consistent and persistent tailwind so much as a kind of one-time thing.”
Lakshminarayanan said the Federal Reserve’s recent rate cuts and tacit promise of more cuts in 2025 has proven to create a tailwind on certain assets, those that “are heavily dependent on reissuing debt or that are not very cash-flow strong, whether it’s in the equities market or the bonds market.”
He expects a few opportunities occurring as a result, although he said it’s more difficult to identify those opportunities.
“We went through a period this year where we had an inverted yield curve and there was a lot of talk about how a recession is coming and this is portending a recession,” Lakshminarayanan said. “I don’t know if we’ve avoided that 100% — nothing can be avoided 100% — but it seems like that that tuned out defaults, given how growth was positioned or risk assets were positioned.”
With the steepening of yield curves, he said, there is more normalization going on, although he said that normalization is more something that resembles a duck.
“You’re very calm up top, but there’s a lot of battling going on underneath,” Lakshminarayanan said. “That’s how I frame the economy. All along it looks calm from up top, but there are a lot of pieces which could essentially put it into risk, events that are yet to be seen.”
Private, public market reviews
All CIOs said changes may be ahead in both public and private markets.
Miller-May said that IMRF is conducting structural studies of one asset class at a time over the next year beginning in December with an international equity structural study to see how the pension fund’s overall portfolio will function under the new macro environment.
“We’re trying to understand if we have the strategies, if we have the managers for this new environment, because we've had these managers for a while, and maybe it was great for the environment of the last two years, but this one is very different,” she said.
One of those differences that may have a positive impact, she said, is the expectation for deregulation in the financial markets.
“What we are faced with is the environment has been in over the last 18 months where we have just seen our exits slow, our distributions slow, and so (our) unfunded ratio is kind of creeping up. We either have to pull back on our pacing or hope that the deregulation will spur M&A and IPOs.”
Miller-May also expressed hope resulting from small-cap equities beginning to perform well, and is hopeful value stocks can follow in 2025.
Jase Auby, CIO of the $211.6 billion Texas Teacher Retirement System, Austin, said in a Dec. 9 interview that “the investment question for the next year, as well as longer term for public pension funds, will be the large valuation gap between the U.S. and the rest of the world.”
“With Europe trading at a PE (price-to-earnings ratio) of 12, there is substantial opportunity and margin of safety built into those valuation levels that is not present in the U.S.,” Auby said, “so we will really need to see if growth prospects in the U.S. can continue to support that valuation difference.”
Meanwhile, in private markets, PennPSERS’ Cotton is optimistic, saying private market assets are showing signs of upside and that more people believe those assets are well-priced going in 2025.
“Last year, I think the big impact of higher rates was the cost of capital for assets to change hands, and that’s particularly relevant in private markets,” Cotton said, “and so we have not seen a lot of write-ups in private markets. Because of that, we’ve seen healthy distributions, but not high distributions.”
While Cotton said that PennPSERS has broken even on its capital calls vs. its distributions, particularly over this past year, he said staff expected to see much more in their modeling, so it has made it more challenging to reach private market targets.
Even though models that have previously helped understand pacing aren’t as illustrative as they used to be, Cotton said he believes managers have become more disciplined in valuing their investments.
“While markets have been performing strongly, the underlying businesses tend to be holding their own and doing well, so we expect that divide between buyers and sellers eventually will kind of close out,” Cotton said. “We’ll start seeing more healthy distributions.”
Cotton said the pension fund’s recent $822 million sale on the private equity secondary market was illustrative of how assets are becoming more well-priced.
“We structured (the deal) in a way to where we sold a higher proportion of vintages 10 years or older than was represented in our book,” he said. “More broadly, we didn’t see it as a ‘must-sell.’ We saw it as a good opportunity to freshen the book and we got pretty good pricing.”
While that price is not disclosed publicly, Cotton said it was a very good price and a number of firms offered very strong bids.
“So it gives us an indication that there are others out there who believe those assets are well-priced and provide upside value,” Cotton said.
