“April has risen through the ranks in the Investments Branch at CalSTRS over the last 15 years and is an industry leader in investment operations.”
—Christopher Ailman, CIO, California State Teachers’ Retirement System
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 April Wilcox.
CIO: How are you dealing with rising inflation and interest rates?
Wilcox: Having a diversified, balanced portfolio is a crucial component in dealing with rising inflation and interest rates. It’s also important to have the flexibility to shift the portfolio to investments that have performed well in inflationary environments. We have increased our allocation to real estate, which is a traditional hedge against inflation. We also added to our inflation-sensitive asset class, which uses various tools including TIPS [Treasury inflation-protected securities], infrastructure, inflation-linked bonds and commodities. When investing in equity, lean towards stocks with solid fundamentals. Energy industries traditionally outperform, and financials have greater pricing power to adjust with inflation. The recent surge in inflation has brought on memories of the late 1970s, in which the Fed raised interest rates to historical highs in response. It’s important that we thoughtfully allocate to these inflation-resistant strategies, but also plan to address potentially significant increases in short-term rates. This includes adding shorter-term and floating-rate debt. In real estate, overweight residential due to the ability to raise rental rates quickly, which will likely slow home purchases and drive rental demand. Each asset class is expected to lean into the strategies they feel are best suited to weather the storm, and our culture at CalSTRS supports this level of autonomy and responsiveness.
CIO: What is the best way to bring more diversity to the financial industry?
Wilcox: I fundamentally believe diversity of experience, background, skills, gender, race, culture and all the ways people can differ from one another—visibly and not—produces a diversity of thought that leads to better decisionmaking and better results. It’s particularly important for diverse individuals at an early age to gain financial literacy, in order to segue into the finance industry. There are many programs and volunteer opportunities throughout the country where you can teach financial literacy to children and young adults. A great example of this is the nonprofit organization Junior Achievement. I’ve had the privilege to volunteer at this amazing organization and highly recommend giving one day of your time to this great cause.
It’s also essential for organizations in the financial industry to support mentor programs, internship programs and partnerships with diverse affinity groups in order to create a recruitment pipeline made of the next generation of financial leaders. To generate a diverse recruitment pipeline, it’s important to review your recruitment program to ensure a diverse candidate pool exists and advertise/promote job opportunities without unintended biases. To promote a culture of diversity, equity and inclusion in the workplace, a commitment toward continuous education opportunities (i.e., training, workshops, forums) for your team, including leaders and decision makers, is key. With your asset managers, ask questions on the diversity of their management team and efforts of their firm—it’s important that they get these questions from their clients on a regular basis to drive continuous improvements and awareness. Proactive ongoing discussions provide an opportunity to engage on their efforts during the initial and ongoing stages of the due diligence process.
CIO: How will the pandemic ultimately change the economic/financial world?
Wilcox: The pandemic has opened up a world where valued employees have shown they can, and often demand, to work remotely or in a hybrid environment. With an abundance of remote job opportunities, this creates more competition for desirable jobs since geographic location is no longer a constraint. The new norm of offering telework and flexible schedules can potentially save hours a day on commute, reduce carbon emissions and significantly improving work/life balance, especially among women. Working mothers commonly struggle balancing a career and family, often forgoing promotional opportunities. The added flexibility has the potential to improve gender equality in the financial industry by allowing for more career opportunities globally.
Coming out of COVID, we are observing a much greater demand for social interaction and live experiences. Vacation destinations have thrived as states opened up. Home shopping has become the norm, with Amazon sales and other retailers reaching a wider audience as many shoppers prefer the convenience of online shopping. With more telework, higher demand for better living has fueled apartment rentals and home sales as well as unexpected jumps in consumer spending on furniture and home electronics. These could be short-term responses, or perhaps trends that investors should consider taking advantage of.
CIO: What role do blockchain or tokenization have in the future of institutional investing?
Wilcox: Blockchain technology has the potential to revolutionize the entire trade life cycle and operational services in the finance industry. If implemented successfully, it can reduce operational and counterparty risk, increase transparency and significantly reduce the settlement cycle. Tokenization could give alternatives an ability to be digitalized and traded, and increase their liquidity. An interesting impact blockchain could have on institutional investing is shifting candidates’ desirable skillsets. Instead of understanding traditional trade management services, institutional investors will seek individuals who have a knowledge of data, investment technology and analytics. Not only could this disrupt institutional investors but also the services custodians provide.
Whether blockchain technology will replace elements of the financial industry is still unclear. There are many open questions around risks such as security, scalability and decentralization, as well as a learning curve that may pause its adoption, but it’s an area that we have to closely watch as we plan for the future.
CIO: Which component of ESG investing do you think will have the most influence on institutional investing going forward, and why?
Wilcox: It’s important to remember that ‘ESG’ is really a simplifying construct to help us navigate how sustainability-related factors are shaping our investment universe, creating risks and opportunities. I think the environmental component is the most likely to have the greatest influence on the institutional investment world. Historically, interpretations of ‘ESG investing’ have varied significantly by investor. However, since the signing of the Paris Agreement in 2015 and the subsequent United Nations’ Race to Zero campaign, many institutional investors, governments and global corporations are committing to achieving carbon reduction goals aligned with science-based targets to help stabilize the climate. More investment firms are now including their net-zero goals and results in their investment philosophies and marketing materials. Most importantly, there are active collaborations to develop increasingly sophisticated tools across the industry to measure climate risk. “What gets measured, gets results” is proving out in a very competitive investment industry.
As many institutional investors are shifting their portfolios to manage ESG-related risks and opportunities, it’s crucial to ensure effective change management across your organization. An important factor in the success of transitioning your portfolio—for example to a net-zero emissions goal—is how to ensure each division or asset class across the total fund are working in the same direction toward a common vision and with a common purpose. Balancing innovation in each asset class with a consistent ESG-related investing philosophy requires extensive collaboration and communication, not only within your organization but with peers and partners across the industry to make significant change, and most importantly, support the beneficiaries we serve.
CIO: What new skills do you think allocators need to be leaders in the field in the coming decade?
Wilcox: As the finance industry continues to evolve, there are several skills that are important to be a successful leader in the future. First, integrating and understanding the impacts of ESG or sustainable investing. The industry will likely continue focusing on climate risk, so the importance of developing professionals with a clear understanding of the intersection between risk, return and emissions is going to grow. Another skill that will gain more attention is around technology and data solutions. With the explosion of digital assets, the potential for future technology and data-driven investments could lead to new exciting asset types that would require allocators to understand the fundamentals of these new technologies and data platforms. The third skill is private market structuring. More institutional investors are raising allocations in the private markets, outside of traditional fund options, to drive returns and cost savings. Sophisticated investors have the opportunity to structure these relationships with better alignment of interests. Investors can control the timing of the allocation of capital, including approval of investment purchases, sales and leverage levels. Large commitments to innovative strategies as a lead investor also can garner a share of the GP promote or even a share of the operating company.
