“Andy is a smart and thoughtful investor and a leader in the sustainable investment space.”
—Anastasia Titarchuk, CIO, NYS Common Retirement Fund
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 Andrew Siwo.
CIO: How are you dealing with rising inflation and interest rates?
Siwo: While there is not an inflation-proof strategy per se, a diversified investment approach is suitable for long-term investors. Avoiding decisions with a low probability of success is paramount due to the cyclical nature of markets, and the impossibility of accurately and consistently predicting macro events. Moreover, reassessing value is key given that satisfactory results are probable when investments are acquired or held at a discount to their intrinsic value.
CIO: What is the best way to bring more diversity to the financial industry?
Siwo: The business case for ethnic and gender diversity has become increasingly apparent to more LPs. According to Nobel laureate and economist Harry Markowitz, “diversification is the only free lunch” in investing. Conceptually, modern portfolio theory posits that a portfolio of investments in different asset classes mathematically leads to lower risk as a result of less correlated assets. Similarly, firms that have ethnic and gender diversity intuitively benefit from comprehensive and nuanced views that may be a blind spot for homogeneous teams. Attracting and maintaining diverse staff members involves an introspection of leadership teams and hiring practices as well as leading with data when conveying diversity-related efforts. Investors who request detailed diversity data from asset managers can compare a manager’s stated diversity-related intentions to the results achieved.
CIO: How will the pandemic ultimately change the economic/financial world?
Siwo: COVID-19 essentially ended an uninterrupted decade-long bull market. Today, we are experiencing rising interest rates, record inflation, slow growth and geopolitical turmoil—an unusual confluence of events. Although financial markets have been mostly resilient, and in many cases performance has exceeded pre-pandemic levels, investors are reminded of the importance of maintaining a well-constructed, “all-weather” portfolio.
CIO: Which component of ESG investing do you think will have the most influence on institutional investing going forward, and why?
Siwo: In the future, ESG factors will likely vanish as a standalone spectacle and be completely absorbed into standard investment practices. Environmental, social and governance factors have always existed and are not inherent alpha signals. Since the term was coined around 2004 by the United Nations, ESG has continued to evolve. The healthy friction surrounding ESG stems from a view that the commercial case for ESG has often outpaced the investment case; consequently, some believe that its application has become increasingly bombastic. In what may be considered a “must-read” for investors, “The Intelligent Investor,” Benjamin Graham (Warren Buffett is his most famous protégé) outlines three elements of evaluating an investment: (1) thoroughly analyzing a company and the soundness of the underlying business; (2) deliberately protecting against severe loss; and (3) aspiring to perform adequately. Graham’s assessment is eerily similar to characteristics prevalent in environmental, social and governance factors, which capture various critical stakeholder issues that can imperil an investment. The low correlation of ESG scores across data providers should compel institutional investors to isolate a manager’s perceived source of alpha and maintain a healthy skepticism when assessing ESG-focused investment strategies. Going forward, the desire of the SEC and European regulators to curb greenwashing will likely impact management fees and sharpen the opportunity set of sustainable investment options.
CIO: What should be an investment trend, but isn’t (yet)?
Siwo: Sustainable investments have attracted zeitgeist appeal and contain attributes that can de-risk an investment portfolio through opportunities in secular trends that persist. Climate change, for example, is a known investment risk, and its aggregate perils are largely unpredictable. Observations have compelled investors to take note of the financial magnitude and large-scale physical risks, such as floods, cyclones, droughts and other weather-related shocks. Additionally, transition risks highlight stranded assets that can occur when assets experience shortened useful lives. Investments in renewable energy projects, such as solar and wind, tend to be lower in correlation to energy sources with higher exposure to transition risks. Successful sustainable investments have proven to seize secular trends (e.g., resource efficiency, renewable energy, affordable housing, financial inclusion) and have led to accretive investment solutions for an array of investors.
CIO: What investing decision have you made for your organization that you’re most proud of?
Siwo: Overseeing the doubling of capital committed to sustainable investments (from $8 billion to $18 billion) for a premier institutional investor is a point of pride, particularly in meeting a constitutional obligation to provide outstanding returns at a prudent level of risk for more than a million pensioners. One investment included participation in the landmark $1 billion Social Bond issued by the Ford Foundation during the height of COVID-19. The net proceeds were used to help support nonprofit organizations impacted by the pandemic and prevent charitable organizations from folding. The investment was one of the first taxable corporate bonds offered by a U.S. nonprofit foundation.
