“Carmen has consistently demonstrated exceptional qualities and has proven herself as a rising star in the field of institutional asset allocation and management. Carmen’s proactive and innovative mindset sets her apart. She is an invaluable asset to our sovereign wealth fund, consistently generating investment ideas that have proven to be successful. Her ability to think outside the box and identify opportunities across various asset classes has been instrumental in achieving great results and meeting the mandates expected by our board.
“Furthermore, Carmen’s passion for the investment business is contagious. She approaches her work with enthusiasm and dedication, always striving for excellence. Her clear and concise communication skills enable her to effectively articulate her views and ideas to colleagues and stakeholders alike. More specifically, I enjoy (most of the time!) her ability to push hard for her ideas not only on the investment side of things, but also in the overall office environment.”
—Abdiel Santiago, CIO, Fondo de Ahorro de Panamá
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 Carmen Lugo.
CIO: What new skills do you think allocators need to be leaders in the field in the coming decade?
Lugo: To be an effective leader in the future, a CIO or institutional allocator should possess a range of skills. Adaptability is crucial to assess the latest trends, technologies and market dynamics, allowing for timely adjustments to strategies. Strategic thinking enables the anticipation of challenges and identification of growth opportunities. Effective communication and collaboration are essential for a cohesive team. I believe that developing AI skills is also beneficial, as it aids in decisionmaking and resource allocation as a tool. Understanding AI limitations, biases and ethical considerations is important. Integration into workflows allows for analysis of large datasets, pattern recognition and data-driven investment decision. A forward-looking mindset embracing innovation and emerging technologies is paramount. By continuously learning and staying informed about industry trends, allocators can position themselves as leaders, driving sustainable success in the future.
CIO: What traditional and/or alternative asset classes do you think are most important for institutional investors, and why?
Lugo: For institutional investors, a combination of traditional and alternative asset classes is significant. As we adhere to strict guidelines and investment policies for a long-term horizon, our portfolio must withstand different economic cycles.
Traditional asset classes such as equities and fixed income retain their crucial role due to their established record and relative stability. Equities present the potential for long-term growth and capital appreciation (for instance, the S&P 500 has seen a growth of 140% over the past 10 years), while fixed income provides income generation and portfolio diversification.
In addition, alternative asset classes have gained prominence due to their potential for enhanced returns and diversification benefits. Private equity, for example, offers opportunities to invest in non-publicly traded companies with the potential for higher returns. Hedge funds provide risk management strategies and uncorrelated returns. Moreover, infrastructure investments provide long-term stability and potential inflation protection.
CIO: What asset classes offer the best options for avoiding or mitigating drawdown risk in an institutional portfolio?
Lugo: To minimize drawdown risk in a portfolio while targeting a maximum drawdown of 10% or less, a prudent approach would involve a combination of strategies. First, allocating a portion of the portfolio to high-quality fixed-income assets, such as government bonds or investment-grade corporate bonds, can provide stability and function as a cushion during market downturns. In addition, diversifying across different asset classes can help spread risk. Consider including alternative investments like private equity or infrastructure, which often exhibit lower correlation to traditional equities and can provide income stability.
Implementing risk management techniques is crucial. Utilizing hedging strategies, such as options or futures, can protect against downside movements. Alternatively, employing risk-parity strategies, which allocate assets based on risk, rather than traditional weights, can provide better risk diversification. Active monitoring and periodic rebalancing of the portfolio are essential to ensure it stays aligned with risk tolerance and investment goals.
CIO: What roles do AI and large language models have in the future of institutional investing?
Lugo: I believe that AI and large language models like GPT-3 will play a significant role in the future of institutional investing.
However, it is important to note that while these technologies offer valuable tools, they should not replace human expertise and judgment. Institutional investors should view AI and large language models as complementary tools that can assist in generating insights and improving efficiency. These technologies offer advanced data analysis capabilities, including processing vast amounts of financial data and identifying insights. AI algorithms contribute to portfolio management by optimizing asset allocation and risk assessment, while large language models aid in investment research and decisionmaking.
Nonetheless, human/financial adviser or CEO or CIO expertise and judgment will remain essential and cannot be replaced.
CIO: What is the best way to bring more diversity to the financial industry?
Lugo: There are several strategies that we can implement to bring more diversity in the financial industry, but certainly there are some valuable options that we can implement into the workforce: Set organizational goals: Define specific objectives aligned with institutional core values and ensure leadership commitment to diversity and inclusion initiatives.
Share industry association best practices: Collaborate with industry associations to exchange successful strategies like UNPRI signatories with an ESG criteria, conduct joint research and develop initiatives aimed at increasing diversity throughout the industry.
Implement a clear, leadership-driven strategy: Emphasize the importance and benefits of diversity through public campaigns, industry awards and recognition programs. Introduce diversity training across the organization, encourage knowledge sharing among employees and establish a mentorship program. Expand networking and mentorship opportunities: Encourage diverse professionals to engage in networking events, conferences and mentorship programs. Facilitate meaningful connections that offer guidance, support and opportunities for career advancement.
Through clear objectives, collaboration, leadership commitment and networking opportunities, the industry can attract and retain diverse talent, benefiting from the broad range of perspectives and experiences that diversity brings.
CIO: Which component of ESG-driven investing do you think will have the most influence on institutional investing going forward, and why?
Lugo: For institutional investors, the governance component of ESG-driven investing is expected to have the most influence going forward.
Governance encompasses factors such as board composition (diversity and inclusion is especially important), executive compensation, shareholder rights and corporate transparency.
Institutional investors are acutely aware of the significance of effective corporate governance practices, recognizing their potential to yield superior long-term performance and enhance shareholder value. To ensure greater accountability and transparency, regulatory bodies have begun enforcing disclosure requirements and advocating for independent oversight. Institutional investors, in turn, acknowledge that robust governance practices are instrumental in managing risks and averting corporate scandals and controversies.
It is evident that the governance component of ESG-driven investing will wield substantial influence over institutional investors. This component serves as a comprehensive framework for evaluating management and board practices, effectively mitigating risks and safeguarding the interests of shareholders, thus aligning harmoniously with the long-term objectives and fiduciary responsibilities of institutional investors.
