“Kan has all the makings to one day be an investment leader. He came to us as a graduate intern from [the} Massachusetts Institute of Technology and has improved dramatically since then. He has emerged as a primary voice in uncovering high quality opportunities in the private equity and private credit space. Kan has [a] world-class work ethic, an insatiable appetite to learn, refined critical thinking and analysis skills and deep listening capabilities. His colleagues listen to his thoughtful commentary and respect his opinions. Kan is the consummate professional who is well on his way to making his mark in the investment industry.”
—Statement about Kan Zuo from Ted Wright, CIO, State of Connecticut
The CIO Editorial Team shared a dozen questions with all of our NextGen nominees and asked them each to pick six to answer. Their answers informed our decision to include them as a NextGen. Below are the answers from Kan Zuo.
CIO: How are you dealing with rising inflation and interest rates?
Zuo: In the context of rising inflation and interest rates, institutional investors with thoughtful approaches in strategic and tactical asset allocation will stand out more than before. One key to success is selecting the right investment themes. For example, themes such as supply chain solutions, agricultural technology, and sustainability may have a stronger likelihood to outperform a generic, all-sector benchmark. Another crucial dimension to consider is how the investment managers or underlying portfolio companies create value. Strategies that focus on improving operating margins rather than relying on multiple expansions will likely prevail even more in this market environment. In addition, business models that have been built on continuous, viable innovations rather than access to credit will likely be more resilient.
CIO: What is the best way to bring more diversity to the financial industry?
Zuo: Diversity for a team is a free source of alpha for performance. Teams that are strong in diversity and inclusion perform strongly, just like a diversified investment portfolio performs strongly. When people have unique ideas and opinions, even some that may strike others as unpopular or anachronistic at the time, the probability of achieving robust results toward the team’s goal will be magnified. When people can connect and engage with different backgrounds and perspectives, and differences are respected and appreciated, the probability of risk being effectively managed is enhanced.
Also, investment managers with diverse backgrounds tend to bring in different viewpoints and unique perspectives, which can lead to more differentiated portfolios and excess returns. I recently conducted an effort to further develop the Connecticut Inclusive Investment Initiative (Ci3) program for the private market portfolio at the State of Connecticut. Through this initiative, we will make significant allocations to investment managers who are emerging and of diverse backgrounds. I believe the initiative will generate strong risk-adjusted returns, from its commitments to investment managers in niche themes, unique areas of markets, and investment ideas that are not crowed.
CIO: What are the most important alternative asset classes for institutional investors, and why?
Zuo: Private credit may be an increasingly important asset class for institutional investors in the next couple of years. It is a very complementary alternative asset class given its low covariance with other asset classes of an overall portfolio. Most private credit strategies are of a floating rate structure, so they tend to benefit from the type of higher interest rates and higher spreads environment that we will be in for the foreseeable future. The returns of the asset class include an illiquidity premium; moreover, robust managers in distressed or special situations credit strategies can have strong resiliency even in a recessionary environment, finding more opportunities to choose from and potentially capturing upside optionality.
CIO: What should be an investment trend, but isn’t (yet)?
Zuo: Enhancing transparency in the private fund market space. The rapid development of the private equity industry left some rules and policies behind. It is crucial to address these issues, because private fund investors include many public and private pension plans that provide retirement benefits to the public. During my graduate studies at MIT, I had the opportunity to study under Professor Gary Gensler, current Chairman of the SEC. Under his leadership, the SEC recently proposed new rules and amendments under the Investment Advisers Act, a potential reform advancing better governance and alignment for the private fund industry. I believe that with enhanced regulations, private market investment activities will come to have greater transparency and accountability.
CIO: Which asset manager (exclusive of their firm) has most influenced your growth as an institutional asset manager?
Zuo: Several thinkers have influenced how I look at institutional investment management. I’ll name two Connecticut-based managers: David Swenson, for in the importance he places on alternative asset classes, and Ray Dalio, for designing strategies distinguishing between beta investments and alpha investments.
CIO: What new skills do you think allocators need to be leaders in the field in the coming decade?
Zuo: Allocators will need the skills to allocate globally, beyond the U.S. In the past decade, U.S. equity has performed strongly, and this partially masked the home country bias issue some institutions may have had. Even so, for certain asset classes and sectors, the risk adjusted returns in other markets have been considerably higher than those in the U.S. The challenge tends to be allocators’ lack of experience (and therefore lack of confidence) in allocating internationally, which may lead them to miss out on return premiums from non-U.S. markets. The skills to formulate effective strategy in allocating internationally will be an important component for leaders in the field moving forward.
