The $83 billion HESTA is looking to build resilience into its total portfolio approach (TPA) as its head of portfolio design, Dianne Sandoval, is creating playbooks for the fund to handle a wide range of economic scenarios.
Having held senior investment positions at CalPERS and Saudi Arabia sovereign Public Investment Fund (PIF), Sandoval joined the health industry fund in September last year to lead its top-down macroeconomic, dynamic asset allocation, risk and strategic tilting team.
It took more than a year and a global talent search for HESTA to hire Sandoval after her predecessor, Stephanie Weston, left to join Dutch pension investor PGGM in 2022. Sandoval now works in synergy with head of portfolio management Jeff Brunton, who leads the bottom-up operations including asset class and manager selections.
In an interview with Investment Magazine, Sandoval says HESTA realised in 2017 that adopting a TPA is the best way to exploit its competitive advantage and generate outperformance.
“With our focus on universal ownership and systemic risk, we knew we needed a model that enabled and facilitated the consideration of horizontal issues alongside traditional investment strategies,” Sandoval says.
“What we saw [with TPA] was an opportunity to better align our teams behind product and market objectives and horizontal thematic, and this has been effectuated through the different mandate designs of myself versus Jeff and the incentive, alignment and culture [of the broader team].”
Sandoval’s role primarily involves primarily forecasting activities including for GDP, inflation and asset class returns, but she says the real goal is to put a plan in place for different economic outcomes and manage tail risks.
“[We] plan for the right tail, which is what we’ve been seeing actually with the advent of AI and this incredible run up in markets, particularly by the Magnificent Seven. We plan for how we nimbly act in those moments,” she says.
“But we also plan for the left tail, which is a global financial crisis or a COVID event.”
HESTA’s approach to weatherproofing its portfolio for left tail risks is “diversifying the diversifiers”, Sandoval says, amid changing asset class dynamics like positive stock-bond correlation.
“Diversifying your diversifiers means don’t just have bonds but really think through inflation strategies that can protect you in those moments, and [using] left tail strategies such as puts or derivative exposures,” she says.
“The most important thing though, is knowing your source of liquidity… because in moments of fear or greed, we know that the human mind is least rational. Unfortunately, it works against us.”
International learnings
Her previous employer CalPERS came to realise the importance of TPA after the global financial crisis and created a dedicated team then, Sandoval says.
“It became really evident that some of these siloed decision makings really would have been enhanced and helped create greater resiliency, through that crisis, if we had been talking more,” she says.
“Stress that we saw… in the MBS [mortgage-backed securities] market wasn’t being communicated well to the real estate team. So they might have been making bets that they might not have otherwise made if they had that deeper conversation and greater collaboration.”
Having worked across different markets in funds with various mandate designs, Sandoval says it’s surprising how many similarities there still are, including the common commitment to “creating a good society”.
Part of the reason is that members and investment purposes at all three funds she has worked at are deeply tied with ESG issues, Sandoval says.
HESTA’s members are mostly female healthcare workers who tend to have lower retirement savings; CalPERS serves state workers such as firefighters, police officers and teaching administrators; and PIF is the sovereign wealth fund of a nation that desperately needs to diversify away from oil, which made up close to half of its GDP in 2023.
“For them [Saudi Arabia], it was an existential moment – they really had an incredible urgency to move their economy away from fossil fuels,” she says.
“The biggest common thread would be on how we really create impact for our members, how do we find the best ideas and become brave enough to pursue the hard topics, then prioritise impactful opportunities and risks so that we can be really action-oriented and see continuous improvement [on ESG issues].”
