By Muskan Arora
CEO Pedro Antonio Guazo Alonso looks to the approaches of Bertrand Million, head of sustainability at CDPQ and Claudia Kruse, chief sustainability and strategy officer at APG Asset Management if facing a challenge leading the $95.4bn United Nations Joint Staff Pension Fund.
When asked what sets the UN Pension Fund apart from other pension funds, Pedro Guazo, Representative of the Secretary-General for the investment of the UNJSPF assets and Chief Executive of the Office of Investment Management, highlighted the strategic decision to internally manage most of the fund’s portfolio.
“It makes us very nimble on adjusting our portfolios and really making certain decisions and implementing them,” said Pedro Guazo.
The fund’s Office of Investment Management manages 82% of its portfolio internally, with portions including small cap equities, corporate bonds and high yields which are externally managed.
Internal management has allowed the fund to “react immediately” while paying less money to external managers.
Currently, the portfolio is over-funded at 111%, which has reduced the risk appetite of the fund. Further, the pension fund has a higher number of younger active participants as compared to retirees, which allows for more inflow than outflow.
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“We have just updated our risk appetite denominations, and we have decided that we have a low-risk appetite for not achieving the long-term goal to pay pensions,” said the CEO, with an aim to continue generating a 3.5% real rate of return.
Owing to the current market volatility and disruption, this year, the CEO is moving towards a total portfolio approach, to help with a more dynamic approach with a “quantitative methodology of generating portfolios based on factor analysis that will help us build an informed strategic asset allocation.”
He joined the pension fund in 2020, right before the pandemic hit in full swing, and has been responsible for growing the fund from $63bn to $95.4bn. His tenure has also seen growth within the team from 102 to 183 employees in the span of five years.
Reflecting on the pandemic, the CEO highlighted changes in working methods, and an under-resourced investment team as key struggles.
With disruption in the supply chain and structural inflation, in 2021 the CIO Toru Shindo and Guazo took a strategic decision to expand its cash to 7% from the regular allocation of 1% to 2%. This acted as a hedge against losses experienced in the markets during 2022.
Over the last five years, the fund has been able to reduce its portfolio’s carbon emissions to almost 50%, by divesting an estimated 3% of the portfolio from fossil fuel companies and from companies which aren’t transitioning to net zero.
“Our new customized benchmark is 70 basis points than the plain benchmark in public equities, so 0.7% on a yearly basis of additional return has been generated just by not investing in those companies that are harming the environment,” said the CEO.
Having the most exposure to global public equity, with a 1-year return of 26.8%, Guazo finds more opportunities investing in the Mag 7 than challenges.
“The valuation that we see on all these companies, it's massive. That shows you the high expectation that we all have on their capability of generating revenue on different markets in the near future,” Guazo said.
While many allocators in the current environment are adopting passive management, Guazo’s experience shows active management provides alpha.
Being an international organization, UNJSPF has exposure to emerging market allocations through all its asset classes with a portfolio allocation of close 10% in all asset classes.
“What we have seen historically in our allocation – including each time that we do an asset allocation study– is that making investments in the local currency, over time, pays off,” said the CEO.
Apart from understanding the political environment of the region, the pension fund has people who really understand the regions, and also diverse opportunities available within a region.
Further, the CEO finds it simpler to implement new technologies in emerging markets than developed countries as the infrastructure is not as rigid, which makes the space very attractive for him.
As the pension fund is not in need for liquidity, within private equity they are holding onto investments to have “different vintages in our portfolio”.
However, the CEO has observed most allocators measuring the private equity’s performance using public equity benchmarks which creates a havoc of severe underperformance as public equity has had a good couple of years or over performance like in 2022, neither of which really reflects the relative performance of the asset class.