“Excellent investment insights across asset classes, strong risk management practices and developing staff management skills.”
—Jason Klein, SVP & CIO, Memorial Sloan Kettering Cancer Center
The CIO Editorial Team shared a dozen questions with all 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 Steven Kaell.
CIO: How are you dealing with rising interest rates and economic uncertainty?
Kaell: The risk/reward profile has shifted for a range of asset classes, driven by higher interest rates, persistent inflation and a muted global growth outlook amid elevated economic uncertainty. We’ve incorporated the new interest rate regime into our long-term investment planning by recalibrating our nominal and real return expectations, shaping our views of the optimal asset mix for Memorial Sloan Kettering. Fixed income and cash offer a more attractive return profile due to higher base rates, although credit spreads may not sufficiently reflect the risks of future economic weakness. Real assets also play an increasingly valuable role in the portfolio, given their inflation-hedging characteristics. Equity markets have been more resilient than expected, given the shock of a 500-basis-point increase in short-term U.S. interest rates within a year. Long-term equity returns may be subdued, so we have favored investment strategies with less equity market sensitivity and with flexibility across various dimensions (e.g., capital structure, directionality, asset types, sectors, geographies) to navigate market volatility. Meanwhile, we continue to invest in private equity and venture capital strategies that can capitalize on lower entry valuations and create value through active management and technological innovation.
CIO: What is the best way to bring more diversity to the financial industry?
Kaell: Multiple approaches are needed to bring more diversity to the financial industry. Adopting best practices in hiring is important (e.g., sourcing a diverse candidate pool proactively, designing an interview process to mitigate bias, prioritizing candidates with different backgrounds, experiences and perspectives), but not sufficient. An inclusive culture is necessary for attracting, retaining and developing diverse talent. Team leaders need to embrace the idea that diversity and inclusion drive excellence, being purposeful about the actions, behaviors, policies and practices that align with this value. We can do this on our own teams and as limited partners: The more we collectively ask investment managers about how they are approaching diversity, the more likely they will focus on these issues.
CIO: What asset classes offer the best options for avoiding or mitigating drawdown risk in an institutional portfolio?
Kaell: With higher interest rates, maintaining liquidity in relatively safe cash and short-duration, investment-grade fixed income can mitigate drawdown risk and provide flexibility to lean into equity risk when investors panic. The opportunity cost of holding elevated cash and fixed income is lower now than it has been over the past decade when interest rates were suppressed.
In addition, certain hedge fund strategies can deliver low volatility returns with limited correlation to equity markets, although the trade-offs include leverage, less transparency and less liquidity.
CIO: What roles do AI and large language models have in the future of institutional investing?
Kaell: Initially, AI and large language models have the potential to increase productivity for institutional investors. As this technology continues to become integrated into software, it will enhance efficiency and help to uncover new questions and insights. While leveraging these immediate benefits, we need to be discerning consumers of the output, which may be inaccurate or lack nuance. Over time, I can envision the power of training models using proprietary data (e.g., meeting notes, private placement memoranda, financial statements, regulatory filings, performance data, etc.) that may facilitate the identification of key issues that can inform investment decisionmaking. We have seen some managers start to experiment with applying large language models to their own data. Quantitative investment firms are incorporating new modeling techniques that will likely unlock new alpha opportunities, but the rate of alpha decay may increase, given the rapid pace of innovation.
CIO: What asset class or investment troubles you most right now, and why?
Kaell: I worry about some venture capital deals from 2020 and 2021, when capital was abundant, interest rates were low and speculation was high. Some of these companies will endure, but it may take a long time to grow into their valuations, resulting in lower returns and a longer path to liquidity than initially expected. Other businesses may face a reckoning when they need to raise additional capital in a markedly different financing environment, leading to unsuccessful outcomes.
CIO: What new skills do you think allocators need to be leaders in the field in the coming decade?
Kaell: Keeping up to speed with technological advances will continue to be essential for investment leaders. More specifically in the decade ahead, authenticity will be a critical skill for allocators to engender trust and communicate effectively with investment managers, colleagues, peers and others in our ecosystem. Authenticity will be increasingly important as we interact more with generative AI (text, audio and visual content) and navigate relationship building in hybrid virtual/in-person settings.
