SWIB’s U.S. Large Cap Outperformance Aided by AI investments

By Muskan Arora

The $156 billion State of Wisconsin Investment Board’s U.S. large cap outperformed the small cap portfolio due to major boost from AI investments within the large cap tech sector.

Yet the U.S. small cap portfolio still outperformed its benchmark in Q1 by 2.3%, making the three and five-year relative returns positive.

The Q1’s performance was aided by strong Q4 2023 earnings reports from the companies owned by the portfolio, according to a presentation by Joy Mukherjee, head of small cap strategy, at the recent meeting.

The dramatic changes in the interest rate expectations from Q4 2023 to Q1 2024, drove a complete reversal in relative performance of large cap vs small cap indices, as per sources at Bloomberg.

While reviewing the U.S. small cap strategy, Mukherjee also highlighted industrial and healthcare sectors to be most favorable.

The industrial sector was the best performing for SWIB in Q1, as capital goods outperformed other industry groups.

“Strong trends stemming from re-shoring, high-tech manufacturing, and data center construction are continuing,” presented by Mukherjee, as per the meeting materials.

Investors in the healthcare sector are gravitating towards more safer investments; however, the seasonal dip in utilization from Q4 23 to Q1 24 was more than what was projected.

Moreover, the security breach at Change Healthcare, the largest clearing house, impeded collections and consequently cash flows.

Despite the slight increase in real estate returns, decline in occupancy “across most verticals, rent growth normalizing (particularly in industrials), hotel rate growth slowing, and multi-family bottoming”, resulted in weak returns for the portfolio.

Earnings for the communication sector were strong, but the market outlook remained varied.

“There were strong positive revisions in Interactive Media & Services as well as Movies & Entertainment, while the telecom verticals (Wireless Telecom, Cable & Satellite, Alternative Carriers) have seen large negative EBITDA revisions,” presented Mukherjee.

Recent chatter about AI

As AI becomes the talk of the town Tim McCusker, NEPC’s CIO believes AI is the “next big platform shift” amid pension funds and consultants weighing investments in the sector.

“With the new activities and efficiency benefits that would be created by AI, in the current times, more than 80% of the growth is focused on China, Europe and North America,” said McCusker.

China is doing a tremendous amount of research and pouring a tremendous amount of money into artificial intelligence,” added the CIO.

Larry Fink, CEO and Chairman of Black Rock also highlighted huge growth opportunities in AI infrastructure and collaborating with technologists to build data centers in the US.

Mark Steed, CIO of $21 billion Arizona Public Safety Personnel Retirement System has been studying AI for over a decade, and in a recent interview with Markets Group, he highlighted allocators using both “supervised and unsupervised models” to make better financial decisions.

As pensions and foundations move towards AI, recently $8 billion Kellogg Foundation also invested 20% of its hedge funds allocation to AI to write algorithms in its quantitative strategies. 

Related Stories

1. Exclusive: NYC CIO Steven Meier Discusses Strategies and Sectors for AI investments

2. Data Centres to Become the Epicenter of AI Investments, Here's What the Leaders Have To Say

3. Exclusive: CIO Mark Steed on Mastering Artificial Intelligence for Portfolios