“Didier is a great investor and a great colleague. He is part of LACERA’s private equity team with an area of focus on growth, venture and co-investments. Didier excels at identifying interesting opportunities. His diligence is at the highest level. Didier identifies and implements new private equity vehicles for LACERA. He is also a valued voice in our internal investment committee discussions. Didier is also a key member of LACERA’s Towards Inclusion Diversity and Equity initiative.”
—Jonathan Grabel, CIO, Los Angeles County Employees Retirement Association
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 Didier Acevedo.
CIO: How are you dealing with interest-rate risk and economic uncertainty?
Acevedo: LACERA’s strategic asset allocation carefully architects a diversified portfolio that is resilient across various market environments, including significant shifts in interest rates. The board-approved strategic asset allocation, updated in May 2024, balances long-term growth with short-term liquidity needs to pay benefits while earning premiums through the prudent implementation of alternative assets where no public market substitute is available.
We continuously monitor LACERA’s portfolio to ensure exposures to each asset class remain within the board-approved strategic asset allocation, allowing us to mitigate risks and adapt to economic uncertainties effectively. Our strategic asset allocation is reassessed every three to five years to ensure it remains aligned with our long-term objectives and ever-changing market conditions.
To further safeguard against interest-rate risk, LACERA also invests in asset classes less sensitive to rate fluctuations, such as real assets and certain alternative investments. LACERA’s risk management framework includes rigorous scenario analyses and quantitative risk monitoring through our Portfolio Analytics Group to evaluate potential outcomes under various economic scenarios.
By leveraging these strategies, LACERA remains well positioned to navigate economic uncertainties and interest-rate volatility, ensuring the long-term financial stability and growth of our portfolio.
CIO: What is the best way to bring more diversity to the financial industry?
Acevedo: There isn’t a single best way to bring more diversity to the financial industry; it’s best addressed through multiple approaches. First, financial services participants need to believe that diverse workforces deliver better risk-adjusted returns. This belief must be ingrained in the company culture and reflected in all business practices. The second approach is to define and memorialize what diversity, equity and inclusion mean to each organization by establishing standalone DEI policies. These policies should be clear, actionable and integrated into the company’s strategic objectives.
Expanding recruiting practices and creating a culture of inclusion are vital steps. This involves fostering diverse candidate pools, ensuring unbiased hiring processes and widening recruitment funnels to include a broader range of backgrounds and experiences. Additionally, creating a culture of acceptance and inclusion can be achieved through regular training programs, open dialogue about diversity issues and ensuring that all employees feel valued and heard.
Lastly, advocating for industry-wide change will help create a supportive DEI network. Allocators can support investment partners by inquiring about their workforce composition, DEI policies and any allegations of bias or harassment. Annual reviews are important to ensure ongoing commitment and progress.
CIO: What asset classes offer the best options for avoiding or mitigating drawdown risk in an institutional portfolio?
Acevedo: The best strategy for avoiding drawdowns in institutional asset portfolios is to maintain a broadly diversified portfolio with a finely tuned allocation that matches the institution’s investment objectives. Traditional risk-mitigating asset classes include fixed income, uncorrelated hedge fund strategies and real assets, which demonstrate negative or low correlation to more volatile asset classes.
Fixed income, particularly high-quality bonds, provides stability and predictable income, acting as a buffer during market downturns. Uncorrelated hedge fund strategies, such as market-neutral or global macro, can offer protection by generating returns independent of market movements. Real assets, including real estate, infrastructure and commodities, often have intrinsic value and can provide a hedge against inflation and economic uncertainty.
Additionally, incorporating other alternative assets can enhance diversification and offer attractive risk-adjusted returns. These assets are less liquid but can provide substantial upside potential and portfolio resilience as part of a well-diversified portfolio.
CIO: How can allocators address the growing global headwinds of demographics, geopolitical tensions and changing supply chains?
Acevedo: There is no magic elixir to address worldwide changes other than to have exposure to the beneficiaries of change through a broadly diversified portfolio. Selecting the next investment trend is difficult to forecast. However, carefully creating a diversified asset allocation that matches a plan’s investment objectives while minimizing risk will help mitigate headwinds from changing demographics, geopolitics and supply chains. We do not need to be early to the beneficiaries of change. However, we must have exposure to the change as it occurs.
For example, the adoption of technology has helped offset declining population growth by increasing the productivity of the existing population. Investing in sectors that leverage technological advancements can provide resilience against demographic shifts. Health care exposure caters to the long-term tailwinds of an aging population, allowing portfolios to benefit from the increased demand for medical services and innovations in health care.
Additionally, having a global perspective in asset allocation allows for diversification across different regions, reducing the impact of geopolitical tensions. Investments in logistics, automation and distributed manufacturing can address disruptions in supply chains, ensuring stability and continuity.
By maintaining a well-diversified and adaptable portfolio, allocators can effectively navigate the complexities of global headwinds, ensuring resilience and long-term durability.
CIO: What roles do AI and large language models play in institutional investing?
Acevedo: AI and large language models are still in the early stages of adoption among institutional investors. Their potential to analyze extensive information and derive insights has yet to be fully realized. However, responsible implementation can significantly increase workforce productivity, organize large datasets and assist in creating investment materials.
For allocators, AI enhances strategic decisionmaking by integrating multiple data sources, such as due diligence documents and consensus from independent research providers in real time. This leads to a comprehensive understanding of market conditions and potential investment opportunities. AI tools can support and enhance skills in various financial software and analysis packages, allowing for more sophisticated analyses.
AI aids in risk management by identifying patterns and anomalies that human analysis might miss. It can optimize portfolio performance by providing real-time data analytics and insights, enabling allocators to adjust strategies proactively. AI-driven simulations and predictive modeling help allocators foresee potential market shifts and prepare accordingly.
Responsible implementation of AI requires careful consideration of risks. Confidentiality and checking for hallucinations or biases are crucial. Institutional investors handle sensitive information, and ensuring this data remains secure is paramount. Accurate and unbiased data support informed decisions and help maintain confidence in financial markets.
CIO: What traditional and/or alternative asset classes do you think are most important for institutional portfolios, and why?
Acevedo: The most important asset categories are those that serve an institutional portfolio’s specific goals. No two plans are alike, and therefore no two asset allocations should be the same. However, for pension plans, there should be a balance of long-term, growth-oriented strategies such as public and private equity, combined with fixed income to provide liquidity to pay benefits and downside risk mitigation.
In addition to these core components, real assets like infrastructure and commodities provide inflation-hedging properties and potential for stable income. Real estate investments offer both capital appreciation and income generation, adding another layer of diversification. Hedge funds can provide uncorrelated returns and risk mitigation through various strategies, enhancing the overall risk-adjusted performance of the portfolio. Credit investments, including private debt, offer attractive yields and diversification benefits compared to traditional fixed income.
Implementing a mix of these asset classes allows for a diversified investment strategy that aims for incremental returns with moderate levels of risk. This approach helps in achieving a balanced portfolio that meets the long-term objectives of institutional investors while managing liquidity and risk effectively.
CIO: What new skills do you think allocators need to be leaders in the field in the coming decade?
Acevedo: To be leaders in the field, allocators need to develop deeper asset category analysis skills, enabling them to understand and evaluate various asset classes comprehensively. Being more aware of different dimensions of portfolio risk is essential to eliminate overlapping exposures and select the cheapest and most liquid assets to achieve investment goals efficiently.
Allocators need to develop advanced skills in data analysis and technology integration and a deep understanding of various asset categories. Proficiency in analyzing large datasets and using technology for investment decisions is beneficial. This includes interpreting complex data, identifying trends and making informed decisions based on quantitative analyses.
Technology integration is critical. Allocators should be adept at using advanced financial software and other technologies to enhance efficiency and accuracy in portfolio management. This includes improving risk assessment, performance monitoring and scenario analysis.
Investors should stay current with industry trends and continuously enhance their skills and capabilities. Embracing lifelong learning and adapting to new developments, asset implementation methods and financial innovations will help investors navigate the complexities of modern portfolio management, thereby supporting higher risk-adjusted returns.
