“Jason has the rare combination of being a strong subject matter expert in financial markets and a great team leader in the asset management business. He has a rigorous process for manager selection and understands security selection as well as the portfolio managers we hire. I can also put Jason on any strategic or critical business project, and he will execute well.”
—Paul Colonna, President and CIO, Lockheed Martin Investment Management Company
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 Jason Chang.
CIO: What is the best way to bring more diversity to the financial industry?
Chang: The financial services industry can greatly benefit from more diversity, equity and inclusion, as it will enable broader sets of perspectives and opportunities to be considered, relative to what has historically been a very homogenous and closed environment. I see my role as being particularly important in this push, as I am positioned as a gatekeeper who can drive greater access, which can eventually lead to more equity. As a fiduciary, my primary responsibility involves choosing the best and most appropriate strategies for our investment portfolios, which may not lead to the most equitable outcomes, given the existing state of the investment management world. However, I strongly believe that continuing to include diversity, equity and inclusion metrics in our diligence process will eventually lead to further transformative change in the industry and more equity. Incremental steps like incorporating explicit questions in due diligence questionnaires focusing on prospective managers’ diversity, inclusion and equity policies is a first step. Further, annual reviews of internal and external partner practices, including gathering demographic data and information focusing on diversity and inclusion, will result in greater awareness and focus leading to more equitable outcomes over time.
CIO: What roles do AI and large language models play in institutional investing?
Chang: While it is still early, AI and large language models do have the potential to greatly enhance and improve efficiency for institutional investing. First, with respect to research or idea generation, AI and natural-language processing models could help investors quickly and broadly identify whether ideas or themes are consensus views or not. This would enable investors to determine if it is worth spending more time doing further research on a topic or pivoting to focus on more non-consensus ideas and themes. Second, AI and NLP models have tremendous potential to improve the efficiency in drafting and reviewing of legal documentation. The technology could be used to quickly search a database of investment documents to highlight differences or precedents in agreements, thereby saving time and expenses associated with legal documentation review. Lastly, AI and NLP models have the potential to help systematic investing become even more fundamental-like in its execution, allowing systematic models to learn more robust decision rules that evolve over time. AI and NLP models will not necessarily generate new factors or novel ideas for investing, but rather will be a tool that can help enhance and improve the efficiency of fundamental analysis.
CIO: Which component of ESG-driven investing do you think will have the most influence on institutional investing going forward, and why?
Chang: While the push toward ESG-driven investing seems to have quieted down more recently, I believe that, going forward, environmental considerations will have the strongest influence on institutional investing. This is primarily due to several reasons, the most important being 1) the component is still not widely adopted or accepted by investors as an investment consideration, 2) potential liabilities from environmental impact will have meaningful financial implications to financial performance going forward and 3) the issue has entered mainstream thought and broad social consciousness. In contrast, the other components of ESG, like governance, are already broadly accepted and integrated into investment considerations; or in the case of social [considerations] continue to evolve and change over time and thus do not have a consistent definition or focus. Lastly, environmental considerations continue to gain significant government attention and support (particularly in Europe and Asia) and are already impacting company capital expenditure and investment decisions.
CIO: What asset class or investment troubles you most right now, and why?
Chang: The last several years have seen a tremendous amount of capital allocated and invested into private credit funds. As traditional banks have pulled back from lending, the rise in this asset class has created concerns around how private credit funds diligence their loans, as well as the potential for mis-valuation of these illiquid assets. These concerns have been further elevated as the growth of the market has occurred away from the oversight of regulators. Unlike banks, which must mark to market assets on their balance sheet, private credit funds do not need to do so. Private credit funds can renegotiate, extend terms and delay valuation adjustments on their investments away from the oversight of regulators and limited partners, as well as employ different assumptions to value portfolios. Furthering my worries is the magnitude of growth of the asset class, as seen in recent years, and the hidden leverage and vulnerability that exist in the financial system from these investments particularly as interest rates have risen.
CIO: What should be an investment trend, but isn’t (yet)?
Chang: Even after more elevated concerns about inflation over the past two years, most investors have done little, outside of their allocation to equities and real estate, to identify or allocate to uncorrelated inflation protection assets such as real assets (e.g. infrastructure, commodities, gold). Many investors believe that their existing equity and real estate exposure will provide more than enough protection in an inflationary environment. The concern I have is around currently stretched valuations and the high correlation to other publicly traded assets, as well as the common factor risks that both are exposed. In contrast, other real assets have seen declining allocations in portfolios or outright abandonment by investors. Many real assets have inflation automatically embedded into their pricing structure and are direct beneficiaries of a rising price environment. They tend to function more independently of financial markets and therefore offer uncorrelated streams of returns.
CIO: What investing decision have you made for your organization that you’re most proud of?
Chang: My decision to implement an overlay equity portfolio to manage the unintended risks in our public equity composite is one that I believe will be transformational to how my organization views and generates excess returns. The overlay portfolio seeks to minimize the beta mismatch between our combined active equity strategies’ real investable universes against the equity policy benchmark so that the excess return of the total strategy is reflective of managers’ stock selection skill. The overlay portfolio further enables a closer examination of the beta mismatch existing between a strategy’s actual investable universe and the benchmark that it is being measured against. In reframing a strategy’s potential returns against its appropriate investable universe rather than a broad benchmark, a portfolio manager’s skill is more accurately measured, evaluated and captured. This allows the focus to remain on managers’ stock decisions and portfolio construction decisions, rather than focusing on broad beta drivers that a manager is not explicitly seeking to control or capture. This novel approach to risk required communicating and convincing numerous stakeholders within the organization, ultimately resulting in a successful outcome with full organizational buy-in.
