Steven Meier is the chief investment officer for $278 billion New York City Retirement Systems, which includes New York City Employees' Retirement System (NYCERS), the Teachers' Retirement System for the City of New York (TRS), the New York City Police Pension Fund (POLICE), New York City Fire Pension Fund (FIRE), and the New York City Board of Education Retirement System (BERS). As fund managers and allocators gravitate towards investing in AI, Meier discussed the strategies and sectors he finds most attractive.
Muskan Arora: I wanted to understand the
areas that you see promising or developing in the next five years in AI.
Steven Meier: Well, if you look at
artificial intelligence, it's been around for a while. I'm told several
decades, versus years, but I still consider it a somewhat nascent technology,
which is rapidly developing. We look at this as being transformational technology,
which will have broad implications for investors, the economy, and society.
In terms of what we think will be significant over the next 10 years in
terms of, driving, gross domestic product growth, impacting inflation,
impacting productivity, and ultimately impacting government spending and
private investment. A number of those things include decarbonization
demographic changes in the impact on the labor force and labor force
dynamics, and debt sustainability in terms of sovereign debt levels that are
out there that are very high at this point.
Also, I'd say, again, digitization of transformational technology as it
applies to artificial intelligence, globalization, or nearshoring, or
onshoring. And lastly, all this is wrapped in a geopolitical change dynamic... those are the themes that we think will drive the investment landscape over
the next 10 years.
So, again, artificial intelligence, we believe that transformational
technology will have broad implications, and it touches every aspect of our
public and private holdings at this point, I'm happy to go into that in some
detail.
Arora: Yeah. That sounds
fascinating. Before we dive deeper into that, I wanted to also understand that
while decision making, are there certain activities that AI would be best
suited to help you with?
Meier: We look at artificial
intelligence in terms of how it's impacting our portfolio with the opportunity
sets, or both in public and private markets. We are also developing a use case
in terms of how we can deploy artificial intelligence within our own offices to
be more efficient, to use it for the support writing data analysis to improve
our performance in terms of our quantitative system development.
It's a wonderful tool in terms of its pilot capabilities and in terms of
helping with programming. So those are some of the low-hanging fruits that we
see. But again, as I said earlier, Muskan, it’s still a nascent technology, and
we think it has an enormous potential impact. There are a few different paths
that the development, deployment, and use of artificial intelligence can take.
Those are broadly quite uncertain. But we are starting to develop the
fact that there will be a significant impact on what we do, how we do it, and
how our portfolios perform, frankly.
Arora: What approach are you
taking when it comes to investing in AI? (Both investing in AI and using
AI?)
Meier: When I think about investing
in artificial intelligence, there are two aspects of it, directly
investing in artificial intelligence-related companies, but perhaps more
importantly, more broadly, the way it touches our portfolio. In the
picks and shovels element, those activities, those asset classes, those sectors
that are on the edge of artificial intelligence that are being significantly
impacted.
We see several things that are being touched at this point in terms of
the use of energy, and the impact on utilities, the impact on data center development, so it’s interesting: artificial intelligence uses about 10 times
the amount of energy through its data centers to support artificial
intelligence operation. So, we do think that's another area where we're
investing through either real estate or through infrastructure in the private
market sector. Strategies that can support the development of data centers, centers
for various users as tenants, that we think will be very promising.
We also look at the fact that those data centers will need to use a lot
of electricity. And certainly, that's a big part of, you know,
leveraging the initiatives around clean energy. Also, midstream data in terms
of midstream infrastructure, in terms of, say gas pipelines, and the like, that
are considered not necessarily dirty technologies, but cleaner tech, fossil fuels, as we work through that transition to a clean economy to a clean
energy source.
I'd say other things are software companies, both public and private, that are in our portfolios are dramatically impacting, are being impacted by the development of artificial intelligence and the deployment of artificial intelligence. So, it's really, it's everything in the public sector. It's everything in the private sector as well, in different forms, direct and indirect.
So, I did a quick query a little while ago, just in terms of our holding or aggregate holdings across the five plans in six companies, those
being Google or Alphabet, both their AMC shares, Amazon, Apple, Meta platforms,
Microsoft and Nvidia. And our current holdings, as of last night, were a little
over $15 billion in assets just across those six stocks. And again, that's off
a $278 billion asset base. We’ve seen some nice growth there... also quite
substantial in terms of their size and impact on the market.
In the US, I'd say as a general matter, we're more of a passive
investor, though, we do have about 25, or 30% of our assets in active
strategies, we're a little bit more active in the developed market X-US and
emerging markets. There we see significant opportunities to invest in companies
also on an active or passive basis at the touch of artificial intelligence in
different ways. I should also mention the data set and development is not just
here in the United States, it's in Europe and Asia as well. And we're investing
in those technologies through again, real estate and infrastructure development
products.
Arora: Any regions that you could
highlight in Europe and Asia, where you're looking at investments?
Meier: It's broad in terms of the
demand, I mean, the demand for artificial intelligence technology, artificial
intelligence-related data centers, and how that impacts the need for, you know,
higher levels of energy, be it more fossil fuel related, or hopefully more clean energy or sustainable energy sources.
Arora: I think it's very similar
market sentiment right now that everybody is looking to invest in data centers
through real estate and infrastructure. I'd also like to know, why you think
this is a good time to invest in AI considering other market variables.
Meier: So as a general matter, we're
more strategic, we're not tactical, it's hard to be an
institutional investor of our size and scale. We have a long-term strategic asset allocation. We're in these
markets for years, we're active owners, even though
we may have a passive investment through say, the S&P 500 index, we vote
all our proxies in-house. So, we're consistently engaged. And again, we think
broad exposure to those economic drivers over time will make a difference in
terms of our portfolio returns, but if we're not tactical, we're not looking at
valuations, which I believe are a little on the elevated side, particularly as
it applies to artificial intelligence.
But again, the path of deployment is still somewhat
uncertain in terms of how it will impact the underlying companies that use
artificial intelligence to improve their productivity to reduce their cost
structure. And as I said, all that is still playing out in the economy and the
marketplace.
Arora: Which sector and sub-sectors are you focusing on in AI?
Meier: The sectors and sub-sectors are
either passive index weights or through active strategies. We have significant
investments in say, chip technology, software companies, and some of those other
companies, such as Amazon, or Alphabet that leverages artificial
intelligence for other reasons, to leverage their business and be more
effective in delivering services to customers. So, again, it's direct and
indirect. And as I said, you know, again, good old-fashioned picks and
shovels, we invest in the infrastructure that supports artificial intelligence
through again, a data center investment as well as clean energy.
Arora: What are the challenges you think that allocators will face
when investing in AI?
Meier: Well, for us, it's
straightforward as we're an allocator. But we're not a market timer, we believe
that you get better results at our size and scale having time in the market
as opposed to market timing. So again, we're consistent investors over time.
And you know, again, we're not tactical, and we're not in and out of
opportunities, by design.
Arora: Are there any emerging
markets and emerging managers that you're focusing on with AI?
Meier: Yeah, not necessarily
directly. So, we have emerging market equity positions, we invest in private
equity, we invest in global infrastructure, we invest in global real estate
opportunities that will have different elements that will touch either software
or chip development, or data centers or sustainable energy infrastructure. But
again, in our US domiciled fund, we have about 84% of our assets
embedded in our investments and strategies. But again, 16% of our assets are
abroad. Yeah, that's closer to $40+ billion in assets we have
deployed elsewhere to take advantage of those opportunities.
Arora: With the geopolitical tensions in China and China being known for
chipmaking. How, how are you handling that 16% bit of the portfolio?
Meier: Yeah, it's more Taiwan that's
known for the chipmaking. There's a lot of infrastructure built up there. I
know Nvidia has its chips made by a manufacturer that's physically located
there. There has been, as I mentioned earlier, some significant movement to,
let's say, shore up supply lines by bringing production closer to home. So
those technologies mean even look at the states with the chipset, there's a lot
of development of technology and infrastructure here in the United States that
can ultimately support and feed the artificial intelligence initiatives, as
well as a good and a stable source of energy, which I think is very, very
important as well.
Arora: How are you assessing these
opportunities in artificial intelligence, as you can perhaps, also talk about
managers or consultants that are helping you out?
Meier: We have each of the five plans
that we manage has a general consultant. So, we also have several specialty
consultants, and specialized, typically and nontraditional alternative assets.
Again, I mentioned private equity infrastructure, core non-core real estate,
hedge funds, as well as private credit, we're big investors in private credit.
And we do think there's a significant opportunity to invest in in-depth
strategies that support the development of that critical infrastructure. So
again, in terms of our use of consultants, it's not specifically, can help
us invest in artificial intelligence. But a lot of the deals that are getting
done now in software, somehow, in many ways, touch private equity. I believe
this statistic is something like 98% of all software companies are private. We
have those investments into private software companies, again, through
a private equity initiative. And we do look at the performance drivers, the
sector allocations, and the focus areas of those managers. And that's something
that makes it attractive for us.
Arora: My next question was very
similar about, how is AI interacting with private equity and private
investments. So, could you expand a bit more on what you find attractive? And
what do you think is going to happen in the next five years with these interactions,
private equity, and AI?
Meier: it's a nascent technology; the
paths of how it's going to be developed and deployed are uncertain. But I can
say with humility and confidence that this is a transformational technology. It
is changing the way we think, the way we function, and our opportunity set from
an investment standpoint, it's picking up speed as well through the deployment,
elements of artificial intelligence throughout our society and in the companies
that we invest in. So, again, an uncertain outcome.
But its a technology, which I think has tremendous potential for positive
impacts in terms of just looking at the impact of artificial intelligence on
the broader global economy. We think it is going to contribute to GDP growth
around the world, anywhere between 1% to 1.5% We think
it'll have a deflationary 10 or disinflationary 10, meaning moving the level of
inflation a little lower, and we think it's positive for productivity.
We also have to recognize that there will be some social
dislocations at least early on, in terms of people that are displaced from
their jobs, as associated with an increased use of artificial intelligence that
lends itself to supporting an FTE producing more knowledge work. So, I do think
this is more of will probably be more of a challenge for white-collar workers,
to say that they can't be retooled to still be actively part of this, this
expanding economy but in a different capacity.
Arora: Are there any sectors in
private equity or any strategies in private equity that excite you the most
about AI?
Meier: Buyout and growth, we
certainly think that we'll see a consolidation in software companies, again,
that occurs over time, as I mentioned, 90% of all software companies are
private. There’s always a lot of activity in those areas. And you know,
software is something that can typically have a significant amount of positive
leverage, because the technology once it's developed, it's easier to deploy.
The margins are significant there. So again, I'd say just looking at our
traditional private equity managers that look for strategic fit, to drive,
process efficiencies, and those companies. But again, growth and buyouts seem
to be the beneficiaries. I suspect you were also a very small investor in
venture capital. But I suspect over time, that that will be a significant area
of opportunity as well.
Arora: I am curious to know if you
are keeping a separate amount just to allocate in AI. Essentially, how do you
go about allocating to AI?
Meier: We're a traditional
institutional investor, everything we do is professionally managed. Again, we
don't time the market, we're a consistent investor, we adhere to a strategic
asset allocation plan, and we deploy money, say, into the private markets, which
we're in the process of increasing our exposure to over some time to make sure
we get vintage year diversification.
We're not tactical, we're not in and out of the markets, and we're not
specifically targeting any managers who are only somehow impacting artificial
intelligence. But we have, as I said, significant public stock holdings as well
as private equity holdings, in either chip companies or software companies that
will benefit from or be involved in the development of technology.
All those adjacencies, those companies, and industries that are at the
edge of artificial intelligence, somehow support the delivery of artificial
intelligence benefits over time.
Arora: How are you accessing
managers when it comes to investing in AI?
Meier: In every meeting, we have with
external managers, I always ask about their approach to artificial
intelligence, how is that impacting their business? How is it impacting their
business in two ways? What's the impact on the opportunity set, as we move
forward with the development deployment and use cases for artificial
intelligence? And how are they using it internally, and some of that's a little
self-serving, and that we're trying to come up with a strategic plan of how we
can incorporate the use of artificial intelligence.
Again, protecting confidential information, making sure that nothing
about our portfolios around in the general cloud is available for general
access. We want to be careful about confidential information. We want to be
respectful of intellectual property rights out there. We’re still going through
that exercise so I can tell the investment professionals I have the privilege
of working with here at the Bureau of Asset Management, using artificial
intelligence in some way. A lot of it is simple chat GPT 4.0. In terms of how
that works, a lot of that work is done on their private computers, just to make
sure that we don't in any way jeopardize the confidentiality for information on
confidential information that we have within our operating group.
Arora: Are there any red flags
that you look for while accessing managers?
Meier: We don't use artificial
intelligence as a specific screen, we do ask questions to see how the
technology is being deployed and used. We're curious about the potential impact
on our portfolio companies from an investment and return standpoint, and how this
potentially impacts the risk associated with those operating companies.
We don't necessarily focus on specific use cases. But we ask
everyone in terms of what they think the potential is for artificial
intelligence, and what's the path over the next three to five years, I do think
that the world will look different in five years than it does today. And I do
think that the deployment of artificial intelligence will certainly surpass and
exceed what we saw in terms of the use of the Internet.
And obviously, we had a little bit of a questionable track record as an
industry. And as a marketplace back in 2000-2001, where things had gotten to
such an excessive level in terms of just a bubble in internet-related
companies. The difference today is that these companies pick Nvidia in
particular, they are a tremendously profitable company generating just enormous
levels of free cash flow that can be reinvested in the business or distributed
over time. So those are real companies with real earnings. And the growth
trajectory has been just incredible.
So, we're optimistic, also recognizing that the valuations have probably
gotten to relatively high levels, I think perhaps they were a little higher
last year than they are today. But certainly, something to watch. That's
necessary to act on, we're not going to disinvest or divest from any artificial
intelligence, or chip companies, because we think that the valuations are too
high, but I think it's not unreasonable to expect some level of volatility over
time.
I also think as a general matter, musket, we're going to see the level
of right now, the real benefits of artificial intelligence, in terms of from an
investment and stock perspective, on a direct basis are concentrated in a
handful of companies. We talked about a few of them earlier, I do think you'll
see a broadening of the positive impacts of artificial intelligence throughout
the market over time. We haven't seen that yet. But I do think it's reasonable
to expect. And that will come over time.
Arora: How do you think climate,
technology, and AI will meet? And what do you think that it's going to happen
in that sector?
Meier: I think that's a wonderful
question. So well, maybe look at it this way, from a sustainability, climate
sustainability issue. We need just enormous amounts of energy to be able to
support the functioning of artificial intelligence at the data center. So, we
think that's a positive impact that there'll be more hopefully more focus on,
well, probably traditional, but also nontraditional sources of energy, which we
think will be positive.
Chip generation requires a lot, you know, clean rooms, cool, cold rooms,
a lot of water, as you said. And I do think the current administration, Joe
Biden's administration has done a very good job in terms of the Chips Act, the
Infrastructure Act, and the Inflation Reduction Act in terms of putting more
money into our local economy, to develop those manufacturing industrial base
that we think is important, and again, to mitigate the risks of supply chain
disruptions down the road.
Perhaps there are some national security issues associated with those,
those chat changes as well, which we view as positive. So that's the
interaction now in terms of how we think we can use our artificial intelligence
to improve our performance around sustainability issues. I had a meeting
earlier today with an investment manager, a world-class investment manager who
showed me a quick example in her life: how they were able to use
artificial intelligence to develop a prototype of a hotel, located outside the
United States that was energy efficient in terms of how many windows it needed,
and what level of heating and ventilation was required.
Artificial intelligence for very little money can generate a complete
analysis in terms of how you build sustainable infrastructure, what the cost
is, the things you need in terms of watering, so it will automate
that whole process and perhaps, speed the process of development. And this was
just an example of how their architects use our artificial intelligence, again,
to improve the delivery, of building properties out there, hotels, office
space, multifamily housing, etc.
Arora: Before you leave, I’d love to ask you about that one thing that
keeps you up at night.
Meier: I'd say my only concern would
be the missed opportunity. There are probably two ways to answer that to make
sure we're getting good relative value as we continue to deploy capital into
those areas, again, not just as a public equity holder and a big investment and
say, passive and active strategies. When we deploy money into private markets,
are we taking advantage of the opportunity from, again, picks and shovels,
infrastructure, and sustainable energy initiatives.
I don't lose a lot of sleep, because things I would lose sleep over are
probably out of my control, as, as an investor as an institutional investor.
But again, I think we've done a wonderful job in terms of building
all-weather portfolios that will, hopefully, perform consistently well, over a
long period. One last point I would make is that we are long-term investors.
I'm not looking at the next quarter, or the next year, or even the next five
years, we're thinking about what the dynamics in the marketplace are. And what
are the opportunities going to drive our investment performance in the next
ten, fifteen, or twenty years? So really, to try to match the time horizon for
investments to the liabilities. So, the promises we have made, collectively to
the pension plan beneficiaries and participants.
