“Upon joining the fund as an analyst in 2017, Alessandro quickly demonstrated a desire and ability to improve processes and outcomes across the investment business. Having successfully automated our asset allocation models, Alessandro quickly progressed to the role of associate in 2019, when his focus shifted more toward equities. Given his proactive attitude, he took the initiative to build a framework for enhancing our monitoring of PPF’s manager decisionmaking and improve the forecasting models used in informing our market outlook. In 2022, he was promoted to junior portfolio manager, where he further excelled, taking ownership of the management of the equity portfolio. His keen interest in systematic equity investing and macroeconomic forecasting continued, resulting in him developing a bespoke stock selection framework, taking ownership of the research of alpha strategies within equities, which ultimately led to the fund’s first insourcing of equity management in 2023. Today, Alessandro is the lead fund manager for PPF’s equity portfolio, where he oversees both external and internal mandates for assets in excess of 2 billion pounds. Alongside being a trusted and valued member of my direct reports team, Alessandro serves as a great role model to younger members of the business, leading by example in both standards and behaviors.”
—Barry Kenneth, Chief Investment Officer, Pension Protection Fund
The CHIEF INVESTMENT OFFICER 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 Alessandro Gregori.
CIO: How are you dealing with interest-rate risk and economic uncertainty?
Gregori: Rising interest rates have created both opportunities and concerns. From one side, central banks’ rates are at the highest in decades. On the other hand, the tightening cycle has yet to fully impact the economy. When we think about asset allocation, we ask ourselves which asset classes have discounted the new interest rate environment and reflect economic uncertainty, and which ones haven’t. Compensation for taking risk is vital: When interest rates were extremely low, the compensation for investing in bonds was minimal, and risk premia in other asset classes (such as equities and alternatives) were very elevated. The situation is now the opposite, as low-risk investments such as bonds offer some of the highest risk-adjusted returns on offer, while many risky assets have seen a substantial compression in risk premia. Forecasting the economy and monetary policy is extremely difficult, but we can reliably measure the long-term attractiveness of each asset given the macroeconomic context, which helps in setting an asset allocation that is fluid enough to mitigate uncertainty. In the current environment, I think short-duration bonds look attractive, while risky assets such as equities look expensive and do not offer compensation for economic and monetary policy risk.
CIO: What asset class or investment troubles you most right now, and why?
Gregori: Rather than a specific investment, what looks more troubling for me is the lack of productivity and economic growth in many economies. Many asset classes have performed very well in the last decade, which has masked the underlying issue. Much of the strong asset performance can be attributed to cheap borrowing and very loose monetary policies by central banks. But it is concerning that in a period of such favorable financing conditions and asset appreciation, economic growth and productivity have been so poor. The consequence of such loose monetary policy is becoming clear today when disparity has risen sharply, fueled by the outperformance of financial assets relative to the real economy. The market value of traditional financial assets has reached almost 200% of global GDP and has increased by 100% relative to GDP in the last decade. The world is in dire need of economic growth, and it’s not surprising, given such elevated expectations for artificial intelligence. Should AI turn out not to be a productivity miracle, then I do worry that the size of financial assets relative to GDP is just unsustainable, and future returns are going to be much lower than what we have been used to.
CIO: What asset classes offer the best options for avoiding or mitigating drawdown risk in an institutional portfolio?
Gregori: Historically, government bonds have been the best mitigator of downside risk during recessions, when risky assets such as equities tended to fall in value. However, decades of ultra-low interest-rate policy have caused a marked shift in the way the bond market operates. I believe that, today, prevailing macroeconomic conditions determine the best mitigator of downside risk. In a stagflation environment of high inflation and low growth, bonds do not offer diversification to traditional risky assets, as we saw during 2022. Commodities, particularly those that are energy related, tend to perform well in these scenarios. More complex strategies such as trend-following hedge funds have also proven to offer significant downside protection. But, in a more traditional recessionary environment driven by weak demand rather than inflation, bonds would still offer the best downside protection. Ultimately, I believe institutional investors should heavily focus on macroeconomic analysis to determine the best risk mitigator. Relying on a traditional approach of using bonds to mitigate risk is no longer feasible. Asset owners need to build the expertise to understand the drivers of the economy and become more active in tailoring asset allocations to the prevailing risk, whether that is inflation or economic growth.
CIO: What investing decision have you made for your organization that you’re most proud of?
Gregori: Increasing the exposure to quantitative strategies within our listed equity portfolio was a very positive decision I took toward the end of 2021. While we did not foresee the inflation issues that we would face in 2022, market conditions suggested a need to significantly reduce exposure to the COVID-19 winners, which were generally growth stocks and beneficiaries from ultra-low interest rates. We saw the valuations gap between underpriced businesses (generally called value stocks) and high-flying growth companies as excessively wide. As real interest rates stood at the lowest level ever, we thought that conditions could rapidly change, as the economy was experiencing a boom following the COVID reopening and massive fiscal support. We decided to increase exposure to managers that had bias for value stocks in their portfolios and at the same time could capture changes in market leadership and benefit from macroeconomic volatility. The mix of trend-following strategies and value investing was key in delivering large alpha relative to our benchmark in 2022 and 2023, when inflation spiked and equity markets sold off. This decision also helped the overall PPF portfolio in delivering positive returns during a year when most institutional investors struggled.
CIO: What is the best way to bring more diversity to the financial industry?
Gregori: When I studied at university, around seven years ago, I never felt that the lack of diversity was an issue. Both in Italy and in the U.K., where I studied, I always had a very broad representation of cultures and genders across my fellow students. In a similar way, I see this diversity in junior positions in finance. Where diversity has become an issue is when we look at the representation within senior management, whether it is in investment management or in the wider corporate world. Because seniority plays an important role in our industry, I believe that it will take time for the diversity seen at the university and junior levels to move up to the most senior roles. It is therefore important in my view that our society continues to bring down the barriers for people of all cultures, genders and sexual orientation to study and enter the industry, whether it is through scholarships or apprenticeship programs. Our industry should instead keep pushing for talent building and promote based on meritocracy such that the diverse workforce that we see at university and junior levels can be given the opportunity to progress in their careers and become leaders.
CIO: How can allocators address the growing global headwinds of demographics, geopolitical tensions and changing supply chains?
Gregori: I view these headwinds as a stark change from the globalization we have experienced over the last two decades. Inherently, I think these risks will have a material impact on monetary policy and inflation. The great benefit of globalization has been low inflation as supply chains moved to low-income countries that exhibited enormous expansion in their workforce, such as China and India. Relative political stability benefited greatly the development of these countries and ultimately allowed for an abnormal (by historical standards) period of low inflation in developed countries. Clearly, things are changing. The workforce expansion is over, particularly in China. Labor capital will become scarcer, which may put upward pressure on wages. Asset allocators need to consider a world in which inflation is back to more normal levels. Asset allocations will need adjustments to include assets that better protect real purchasing power. Alternative assets may be better suited for this environment, particularly asset classes such as infrastructure or commodities. Within traditional investments, fixed income may not be the answer unless central banks are willing to maintain elevated interest rates. Equity markets, particularly stocks more linked to nominal economic growth, have tended to offer better inflation protection over the long term.
