In The News

The boom around artificial intelligence has created persistent concentration at the top end of the U.S. stock market, leading to a multistep problem for investment consultants helping their clients navigate both a fast-evolving technology and a unique investment environment.

NEPC’s longtime investment chief Tim McCusker will succeed Michael Manning to lead the $1.7 trillion investment giant — first as president, then as CEO — as part of a multiyear transition plan.

. . .

Sarah Samuels, a partner at NEPC, has been appointed to CIO as part of this succession plan.

. . .

“A really important part of this transition is to create continuity,” McCusker said. “That’s not to say we won’t change; NEPC will continue to evolve… we [just] want to do it in a way where our DNA, our values, our culture, don’t change.”

. . .

“We’re going to maintain the strength of the investment team [and] enable our people to stretch and grow,” Samuels said.

Higher education institutions saw strong returns across asset classes, especially in equities, and significant exposure to themes related to digital assets and artificial intelligence.

. . .

Colin Hatton, a principal in NEPC’s endowments and foundations practice, explained that the firm still expects private market assets to provide strong returns.

“Over the long term, we still believe that private markets will outperform the public markets,” Hatton says. “However, we’ve seen that turnaround the last three years. If you look at a 10-year time period, those with heavy alternative allocations did outperform, and if you go back beyond that as well.”

. . .

Hatton notes that because secondary sales lead to a decline in the value of the portfolio—because the assets are generally being sold at a discount—endowments are examining how the haircut will affect spending and distributions to the university.

“I think another thing that institutions are thinking about is how it will affect their spending if they go and do a secondary sale,” Hatton says. “The effect that that can have on the spending policy and the support for the institution is another consideration that these groups are having to think through as they go through this.”

In a year marked by political headwinds, budget cuts and volatile markets, U.S. colleges, universities and associated foundations scored positive returns for a third straight fiscal year.

As exchange-traded funds continue to become a bigger part of the investing landscape, institutional investors are using the vehicles more broadly.

. . .

“Will Forde, head of marketable equities at NEPC, agrees that ETFs offer niche exposure and tactical opportunities in a way that is hard to replicate with other vehicles.”

. . .

“ETFs can be easier operationally and cheaper to use than traditional index funds for NEPC’s smaller institutional clients, Forde says, since these smaller investors do not have the size and scale to negotiate favorable pricing.

Forde says his clients will use ETFs if they need to quickly implement tactical exposure, such as hedges. He also reports seeing them used for portfolio completion, such as if a client has a structural bias, like a country underweight. For taxable clients, ETFs are useful in tax-loss harvesting.”

. . .

“Forde sees use cases for ETFs evolving as asset owners continue to get comfortable with the vehicle.

‘People get really creative with how to use things that even five or 10 years ago seemed pretty basic, but now they’re using them in different ways,’ he says.”

During one of Harvard University’s most challenging years, donors helped fund the endowment, which in turn supported the university’s operations.

. . .

“A lot of educational institutions are struggling with balancing their operating budgets, and you’re seeing a number that are running deficits. In some cases, they’re using the endowment to help bridge that deficit,” said Colin Hatton, a principal at NEPC, where he advises endowments and foundations.

Hatton said endowments’ mounting contributions to university operations, in addition to rising inflation expectations, has many of his clients planning to increase their returns in the coming year. NEPC, he said, recommends funds do this through strategic asset allocation decisions, particularly by prioritizing an equity-centric portfolio, allocations to private markets and fixed income exposure, including private debt.

US investors reported a renewed risk appetite for the first time since July, along with an optimistic outlook for near-term equity market performance not seen since January.

. . .

“There has been a lot of optimism built into markets despite some of the concerns around elevated valuations or geopolitics, so markets have been able to look through the government shutdown due to some of the tailwinds that have driven markets since April, such as accelerated rate cut expectations,” Jennifer Appel, senior investment director at NEPC, said in an interview.

Although the shutdown could become one of the longest for the government, markets are focused less on its duration and more on its economic impact, which should be minimal, Appel said.

“When thinking about economic growth, inflation or monetary policy, it’s hard to say that we’re going to see the 2025 shutdown derailing some of those tenets of the current environment,” Appel said. “We would expect this to be a pretty short-lived event for the market even if the shutdown itself is lasting longer.”

U.S. public pension funds chalked up a third straight year of positive returns for the fiscal year ended June 30, but unlike the prior two years, domestic equities was not the asset class that posted the highest returns.