“Chase has consistently demonstrated exceptional leadership and talent in managing SWIB’s $2.5 billion Multi-Asset Strategies Portfolio. He brings not only technical expertise, but also an innovative approach to strategy development. What sets Chase apart is his ability to combine the theoretical with the practical, resulting in strategies that are both academically sound and highly effective in real-world markets. His collaborative style and commitment to fostering diverse perspectives have led to unique investment solutions leveraging the collective expertise of his team. With his proven track record, forward-thinking mindset and balanced understanding of both technical aspects and market dynamics, I’m confident that Chase represents the next generation of leaders in our industry.”
—Edwin Denson, Executive Director/CIO, State of Wisconsin Investment Board
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 Chase Nicholson.
CIO: How can allocators address the growing global headwinds of demographics, geopolitical tensions and changing supply chains?
Nicholson: Challenging demographic trends combined with increased potential for deglobalization paint a pessimistic picture for long-term market returns versus recent history. For allocators, this means that simple, asset-based returns may not be sufficient to satisfy return targets. One way to alleviate this issue is to place more emphasis on active returns (and increasingly alternative active returns) to supplement the lower return generated from an allocator’s strategic allocation.
Whether generated internally or externally, these returns typically require people, systems and processes that are distinct from more traditional allocator setups. They also can come at a greater expense, but the potential to add significant returns to the portfolio and the independence of those returns from other sources make the pursuit of active returns a reasonable proposition.
CIO: What roles do AI and large language models play in institutional investing?
Nicholson: AI is an extension of traditional quantitative techniques, the main purpose of which is to extend our understanding of signals’ effects on asset returns from simple independent linear relationships to nonlinear relationships and interaction effects. The native inclusion of these concepts in many AI methods allows for enhanced information transfer from signal to returns, which can increase the efficacy of those signals in live portfolio implementation.
LLMs offer something a bit different. Besides their ability to help fundamental analysts quickly consume and incorporate large, text-based information releases into their subjective views, the ability of LLMs to rapidly generate usable code will substantially shorten the development cycle within investment firms. I expect this to occur both at the front of the house as well as within the back office.
CIO: Which component of ESG-driven investing do you think will have the most influence on institutional investing going forward, and why?
Nicholson: Many ESG offerings in their early iterations seemed to focus primarily on subtraction of certain companies and industries. More recently, it seems that has shifted to using scoring models based on company disclosures on metrics relevant to ESG, such as board composition or carbon emissions. Both of these approaches addressed the core concerns relevant to ESG investing, but in my opinion did not offer sufficient evidence of alpha production.
More recently, I have seen strategies that use ESG information to develop active return strategies with promising results. Allowing allocators to engage with the ESG concept while still having a reasonable return proposition will open up the possibility of widespread adoption that is not contingent on allocators having a predetermined allocation to ESG strategies.
CIO: What traditional and/or alternative asset classes do you think are most important for institutional portfolios, and why?
Nicholson: The majority of pension risk has been corporate earnings risk packaged in various ways (equities, corporate bonds, private equity, etc.). Any asset class of size that diversifies this risk is important from a strategic allocation standpoint. Traditionally, this has been government bonds and real estate. Government bond returns have not lately had stable relationships to other asset classes, so that leaves real estate.
Any risk-oriented asset class will suffer drawdowns in stress events, and real estate is no exception. However, it does have key return drivers that are unrelated to standard corporate earnings risk—this means that in normal market environments, it can diversify total return streams, as well as provide an attractive return profile that is available at scale.
CIO: What should be an investment trend, but isn’t (yet)?
Nicholson: Allocators should consider the inclusion of standardized scalable alternative risk premia as a part of strategic asset allocation. These strategies have strong academic grounding and long-term track records. They also have the potential to diversify standard portfolio allocations while providing compelling total returns. An increase in low cost and capital-light options also makes these premia an appealing real-world solution.
CIO: What new skills do you think allocators need to be leaders in the field in the coming decade?
Nicholson: I think that the separation between empiricists with technical skills and those that rely on experience and subjective analysis has been narrowing—I expect this trend to continue. Experienced market analysts that possess basic technological skills have a tremendous advantage in translating their ideas into actionable investment strategies versus those who don’t. Similarly, those with very sharp technical skills but no market intuition or sense of underlying market mechanics are at a significant disadvantage versus those who understand the base drivers of market behavior.
I think that the translation losses when ideas must be passed between two parties with these differing skill sets is a significant inefficiency. This is why I think that the convergence of intuition-based idea generation and technical idea evaluation skills is the most important pursuit for anyone interested in becoming a skilled investor in the future.
