“From the moment Christine joined ERS, she has taken on increasing levels of responsibility and quickly established herself as a critical member of our organization. She has improved organizational processes, assisted in the build-out and further refinement of our complex and highly technical Diversifying Strategies portfolio, and led our responsible investing initiatives with both passion and a dedication to our members. Her technical and rigorous analysis skills are second to none, and she is never one to shy away from a challenge. Christine has a knack for spotting opportunities and bringing fresh ideas to the table. She is never content to simply follow the status quo; instead, she embraces change and pushes us all to do better. One of the things I truly admire about Christine is her passion for our team culture. She is always seeking ways to support her colleagues and help us all to thrive. But even more impressive is her dedication to the Hawaiian entrepreneurial ecosystem and her tireless efforts to support the current and future generations of local talent. She is a true leader in this regard and a valued and respected member of the community.”
—Kristin E. Varela, CIO, Employees’ Retirement System of the State of Hawaii
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 Christine Chang.
CIO: How are you dealing with rising interest rates and economic uncertainty?
Chang: The best way to deal with economic uncertainty is to have a broadly diversified portfolio that can generate positive returns through a variety of different economic scenarios. Hawaiʻi ERS has not needed to make significant tactical changes to deal with this uncertainty, given we already have this structure in place as part of our long-term strategic asset allocation between Broad Growth, which is positioned to capture economic growth and corporate earnings growth, and Diversifying Strategies, which is positioned to benefit from downside moves. We additionally diversify our diversifiers. Duration does not do well in a rising rate environment, and the traditional approach of hedging purely with duration mandates exposes the portfolio to shifts in correlation, as recent market moves have shown that stocks and bonds are not always inversely correlated. Therefore, in addition to duration, we also incorporate strategies like tail-hedging and trend-following, which can protect against sharp or prolonged drawdowns, regardless of stock-bond correlations, as well as long-short and relative value strategies. Exposure to short managers may dampen return during periods of outsized market performance but provides liquidity and outperformance during difficult periods and ultimately protects our retirees’ assets over the long term.
CIO: What is the best way to bring more diversity to the financial industry?
Chang: Achieving diversity requires intention at the senior level and resources to support long-term commitment. Unless leadership is explicit about fostering diversity, hiring outcomes will still exhibit nepotism, especially given the emphasis on relationships and networking in the financial industry. It is also important to recognize that underrepresentation begins early in the pipeline. If we narrowly define talent using traditional heuristics, such as Ivy League education and bulge bracket experience, then we will perceive a limited supply of diversity. We must employ a holistic understanding of talent. Another solution is to increase resources/compensation given supply/demand. Acknowledging that there is a racial wealth gap, we must also remove more subtle forms of inequity, such as delayed pay periods or unpaid internships, which can exclude talented candidates from valuable resume-building experiences due to financial circumstances. Because inequity is cumulative, pipeline must be intentionally addressed, and this requires long-term commitment. Internally, resources must be dedicated to providing training and advancement opportunities for diverse talent, including executive champions who can advocate, as well as mentors who can help navigate cultural barriers. Externally, financial institutions need to cultivate relationships with HBCUs and organizations such as SEO, Toigo and Rock the Street Wall Street.
CIO: What asset classes offer the best options for avoiding or mitigating drawdown risk in an institutional portfolio?
Chang: Illiquids can mitigate drawdowns and hedging strategies (liquid alternatives) can offset them. Illiquids can offer insulation from short-term market volatility, but most illiquids have at least some beta, so the benefit is more in magnitude (potential muting of sharp intra-period moves) and reporting timing. However, magnitude may not always benefit, and given the lumpier returns of illiquids, they can be a source of overall portfolio-level drawdowns themselves. Liquid hedging strategies provide a more direct offset, given that they are either anti-correlated to the broader markets or have an absolute return mandate and are cycle-agnostic. While these strategies can also have periods of negative performance, these usually occur when growth assets are doing well and driving positive performance for the overall portfolio. Additionally, the more liquid nature of these hedging strategies allows for fulfillment of plan obligations—such as pension payments—without the realization of losses during broad market drawdowns and can even support buying opportunities. The caveat to these strategies is that some of them can exhibit high volatility and high cost of carry. These strategies need to be right-sized, with full understanding and buy-in from the board and other senior-stakeholders.
CIO: What roles do AI and large language models have in the future of institutional investing?
Chang: AI and large language models will be an enhanced tool for mitigating risk and sourcing opportunities going forward. Whereas current automation tools are generally focused on enhancing efficiency, AI provides more dynamic assistance in strategic decisionmaking. I don’t believe that AI, as yet, can completely replace human skill, but rather will be complementary. A key reason for this is that AI is only as good as the data it is trained on, and not all data is open source. For example, we could not make portfolio decisions with ChatGPT, as we cannot give it sensitive portfolio data. If data is shared in contractual relationships, the vendors that achieve the widest adoption will have the edge, as is the case with current data and analytics services. At an investment manager level, as these technologies progress, they will be refined within each organization, with humans providing additional data and guardrails specific to particular mandates. Thus the quality of AI models will vary depending on how they’ve evolved, and discretion in manager selection will still be key, even when choosing amongst managers who all employ machine learning.
CIO: What traditional and/or alternative asset classes do you think are most important for institutional investors, and why?
Chang: From a pension perspective, public equities will always be the foundation, given that it is the most accessible alternative for our retirees and is therefore at least an implicit, if not explicit, benchmark. It sets the standard for transparency and stewardship and can be a leading indicator for regulatory developments in other asset classes. All other asset classes play a critical role in boosting returns and diversifying away from some of the risks inherent in public equities, but inevitably some portion of their value proposition is evaluated relative to public equities: Treasurys offer a haven when equity markets are down, real estate offers better inflation protection, credit sits higher on the capital stack, illiquids mute equity volatility, hedging assets offset equity risk, etc. In addition, for institutional investors with defined liabilities, the liquidity of public equities means it is critical to maintain a public equities allocation to ensure fulfillment of these obligations. Allocation will vary greatly depending on the needs of each institutional investor, but an understanding of public equities underpins the understanding of every other asset class, and I say this as someone whose current preferred asset class is liquid alts!
CIO: What new skills do you think allocators need to be leaders in the field in the coming decade?
Chang: Fundamentally, leaders need to understand relationships. As AI takes over technical work, human edge can be found in building relationships. Proficiency in interpersonal relationships cultivates peer leadership by fostering a collaborative and motivating team environment and allows us to bring out the best in ourselves and our colleagues. Relational skills also help us to perceive and work toward our stakeholders’ needs and concerns, whether those stakeholders are our members, our board or our legislators. Understanding relationships is also a technical skill, as the goal of most data analyses is to discern patterns and frameworks within data sets—these are fundamentally relational in nature. Asset class leaders need to understand how different strategies may or may not be related in order to properly diversify risk exposure. Institutional leaders need to understand the correlative relationships of asset classes to one another in order to properly allocate the portfolio. And ultimately, given the large pools of capital controlled by allocators, institutions need to understand the relationship of their portfolios to more expansive issues such as climate change or the strength of the broader economy, particularly when there is a significant impact and stakeholders would benefit from a strong local economy, such as is the case in Hawaii.
