Stephanie Weston has had a diverse career, working in investment roles across super funds, insurers, and central banks. She is now drawing on the experience gained from these roles to contribute to PGGM’s development of total portfolio management thinking.
When the Chartered Alternative Investment Analyst Association published a paper on the total portfolio approach, or total portfolio management (TPM), last year, it became clear asset owners have quite different interpretations of this approach to investing.
For Canadian fund CPP Investments, TPM is intrinsically linked with factor investing, while for the Future Fund it means looking beyond a traditional strategic asset allocation and testing investment ideas across asset classes.
But no matter what the interpretation is, all approaches are linked by the desire to put risk, rather than return, at the centre of portfolio construction.
When Weston joined PGGM in the Netherlands in 2023, she took on a senior role contributing to the evolution of TPM for the investment manager of the €240 billion Dutch pension fund Pensioenfonds Zorg en Welzijn.
“TPM isn’t a formula that you can just take and apply. It’s more of a philosophy,” Weston, Head of Client Portfolio Asset Management at PGGM, says in an interview with [i3] Insights.
“Once you’ve agreed that the philosophy is a good idea, then you have to work out how you can actually create a workable framework within your own organisation and within the regulatory environment you operate in. Over the past few years, I’ve been putting my mind to how we can include a sustainability metric into the TPM process as well, so you’re not just risk-budgeting for return, you’re also risk-budgeting for sustainability.
“It’s like leapfrogging to the next dimension from a TPM perspective,” she says.
Organisations have been investing in sustainable assets for decades and many have also allocated part of their portfolio to impact investments. But consistently integrating sustainability at the total portfolio level and assessing the sustainable benefit of a new investment requires vast amounts of data on all asset classes, something that is not always available, particularly when it comes to private markets.
The Sustainable Development Goals (SDG) provide one framework that can be used to map investments’ sustainability contribution. Weston is on the board of the Sustainable Development Investment (SDI) Asset Owner Platform, where PGGM is a shareholder alongside a handful of peers, including APG Asset Management and AustralianSuper.
The end game is to have data that allows us to compare the marginal return and sustainability benefit of an additional dollar in any public market to any private market opportunity
“We have a strategic investment in the SDI Asset Owner Platform, which basically uses AI technology to work out the proportion of a company’s revenue that actually contributes to the sustainable development goals,” Weston says.
“It’s clever, smart, quick and it’s providing us with a time series of what’s happening in these companies as well. What we’re trying to do now is to roll that out, not to just public companies, where there’s obviously a lot of good and audited information, but to the private portfolio as well.
“The end game is to have data that allows us to compare the marginal return and sustainability benefit of an additional dollar in any public market to any private market opportunity” she says.
But Weston also acknowledges the data will never be perfect, and investors shouldn’t delay making sustainable investments on the basis of information accuracy alone.
“In investing, your role is to make decisions amidst uncertainty. That’s your job. There are uncertain outcomes and you have to make a decision based on the information that you have to hand,” she says.
“We all assume that return and risk is fantastically well-measured, and the reality is it’s not. If I back test my return and risk assumptions against actual portfolio experiences, there is quite a big distribution.
“Now we’re adding sustainability data into portfolio decision making, that information is also not perfect, but it’s part of your job as an investor to make decisions with imperfect information in an uncertain environment,” she says.
Addressing Liability Risks
It is still early days in the development of the TPM framework, but it is not just a matter of aligning with the SDGs – it is also about assessing the many dimensions of risk.
The risk of not meeting your liabilities is a central concern for any pension fund. To deal with this risk, Weston draws on established concepts such as value at risk (VaR), and adapts them for a pension context.
“You always need more than one risk management measure; you can’t rely just on a single number. One risk metric I find particularly useful in this process is what we are calling PVaR: pension value at risk.
“It allows you to look at the marginal benefit of any investment with respect to the pension liability benchmark.”
It's fair to say that there is a lot more flexibility in the Dutch system to be different to the standard market benchmark than there is in Australia
Weston illustrates her point with an example.
“If I’ve got the option between investing in a long-dated infrastructure asset or a public equity, the characteristics of the infrastructure asset might naturally offset some of the liability on the pension side. Even in a DC (defined contribution) environment, it may have more attractive term-risk hedging characteristics than the public equity investment.”
In practice, the portfolio may run up significant tracking error compared to the benchmark, in an effort to reflect sustainability considerations, as well as the liability obligations of the fund.
“It’s fair to say that there is a lot more flexibility in the Dutch system to be different to the standard market benchmark than there is in Australia,” she says. “I would argue that TPM is much more difficult in Australia now as a consequence of the benchmarking approach to Your Future, Your Super,” she says.
Working Through September 11
In thinking through a sustainability-aware TPM framework, Weston draws on a diverse career. She has worked in Australia for industry super funds, such as AustralianSuper and HESTA, but also for retail organisation AMP. Her CV also includes investment roles at Genworth Australia and Mercer.
An early formative role was with the Reserve Bank of Australia (RBA), where she held senior roles across the Financial Markets Group and Payment Policy Department. There, she oversaw high-value payment systems and contributed to enhancing the financial market infrastructure.
She ended up spending more than 15 years at the RBA and was working in London managing the trading desk when the planes hit the Twin Towers on September 11, 2001. The RBA had an office at One Liberty Plaza, just a block away from where the Twin Towers stood. At this office, there was a team that managed the central bank’s US dollar reserves.
“The jet fuel hit the windows of our offices; they had to evacuate the building. And what happened is that most of the traders ended up relocating to London and working in the office alongside my London team for three months,” she says.
“People literally just left their desks. Trades had been entered into but had not been put into the system. So you had this massive issue of everybody trying to work out what trades were where, who owed what money and what have you,” she says.
“You’re having to deal with the whole settlement function that sits behind the trading operation at the same time as working out what the hell has happened with markets and how are you managing your portfolio and what you need to do about your own risk position.
“What surprised me about that time was how good people were to one another. We were a big player in the repo market. We lent a lot of government bonds, to help people settle trades that would otherwise have failed. There was a big demand for bonds in the market. Any market participant could have taken advantage of that situation by charging a lot to lend out bonds, but nobody did.
“It was quite formative in many ways. One, how do you cope with stress, but two, how do you draw on the experience you have and make sure that you get what you need done in a way that is very collaborative,” she says.
Dutch vs Australian DC System
On 1 July 2024, The Future Pensions Act (Wet Toekomst Pensioenen) became law in the Netherlands, setting the direction for the Dutch pension system to move from a largely defined benefit (DB) structure to DC pensions.
It is one of the biggest reforms ever undertaken in the country as not only will future pension savings become DC, but existing DB assets will also transition to the new system. Pension schemes will have until January 1, 2028, to comply with the new regulation.
Having worked under both the Dutch and Australian systems, Weston is in a unique position to compare the two and she finds there are some significant differences in the approach to DC.
“In Australia, we’ve gone down the path of creating a superannuation system that in many ways is wealth creation. When I die, my children will get whatever balance is left in my superannuation account,” she says.
“For my [Dutch] colleagues, their pension lives and dies with them. So even in this new defined contribution arrangement, they’ll be sharing the market risk of the pool, and people who die younger will subsidise those people who live longer.
“I don’t think we could do this in the same way in Australia. I think that this idea of banding together without choice, without really asking people to opt in, that boat has sailed in Australia,” she says.
Because of this element of shared market risk, she notes Dutch DC funds still carry a degree of liability-like risk.
“The actuaries will tell you that it’s no longer a liability, but it’s a quasi-liability. You pool the money together and you have age cohorts that will invest in slightly different proportions of growth to defensive assets,” she says.
“But the swings and roundabouts of those price movements are shared so that you can smooth this over time and generate a pension for the people who are moving through the retirement phase.
“The big difference is participants – which is what they call members here – will bear the market risk from 1 January, whereas in the past the employer bore some of that risk,” Weston says.
Another key difference is the fact the Dutch pension system doesn’t have a choice of fund regime and, therefore, is not confronted with the requirement to transfer an account balance within three business days if the member chooses to switch funds or changes their risk profile.
Sometimes people forget about that and start to think the money is theirs. It never is. You're investing the money for the client and I think it's really important that you always keep sight of that
“Switching doesn’t happen here, because people can’t leave their super fund. If I’m a participant at the occupational pension fund, I can’t just say: ‘No, I prefer ABP.’ So liquidity risk is far less of an issue.”
This doesn’t necessarily result in significantly higher levels of illiquid assets, since Australian pension funds have long held substantial allocations to real assets such as unlisted property and infrastructure.
“I suspect if you started a superannuation fund [in Australia] now with all of the characteristics that are in play – you have to pay people out after three days, you have to allow switching to other funds – I suspect the appetite for illiquids would actually be lower.”
Looking back at her various investment roles over the years, Weston says each one of them adds a new element to her experience, like the many layers in an onion. But ultimately, there is a common thread through all of them. And it is this common thread that guides Weston in thinking about investment strategy.
“For me, it’s very much about who is the end beneficiary here? How is this helping them? Whether that end beneficiary is a member of a superannuation fund, or a policyholder of an insurance company, or a shareholder or, in the case of the Reserve Bank of Australia, the average Australian taxpayer … how are you looking after their interests?” she says.
“Sometimes people forget about that and start to think the money is theirs. It never is. You’re investing the money for the client and I think it’s really important that you always keep sight of that.”
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[i3] Insights is the official educational bulletin of the Investment Innovation Institute [i3]. It covers major trends and innovations in institutional investing, providing independent and thought-provoking content about pension funds, insurance companies and sovereign wealth funds across the globe.