April 2022 – Lori Johnstone, Portfolio Manager, Pacific Life

Lori, it’s a real pleasure having you join us on Private Capital Call.

1. The Current Environment. Investors today are faced with so many conflicting economic signals. Does higher inflation signal more growth this year, or will higher interest rates risk a recession? How do you think about where we are in the business cycle?

We consider what the business cycle might look like in an environment that hasn’t really experienced one in a long time. We see companies struggling to hire people, facing rising input costs, and yet achieving record profits. Rising interest rates by themselves don’t have to lead to recession or signal more growth.

I think it will really matter how supply pressures unfold at the same time, and whether the Fed will withstand political pressure if there are signs that their hiking cycle is pointing us toward recession. On balance, I’m more wary and cautious than usual, but not clear at all on what all of these conflicting signals point to.

2. Russia/Ukraine.  Exogenous risk is always out there, but this war adds a major humanitarian factor. Do you consider it to play any significant role in your investing decisions? 

The war in Ukraine is heartbreaking from a humanitarian perspective. It’s hard to want to analyze it from an economic standpoint but, from that point of view, it probably magnifies the cost and supply pressures that were already issues we are considering across all of our investments.

3. Interest Rates. Speaking of rates, it now seems clear we are at the beginning of a “higher for longer” phase. How does that factor into your portfolio allocation decisions?

Our portfolio allocations are going to be more driven by our product needs, though, as an insurance company, we will always have demand across the spectrum. It’s nice to have an opportunity to invest in higher quality assets at more attractive yields than we’ve seen in quite some time, though.

4. ESG – Pacific Life seems to be increasingly integrating ESG factors into its investment decisions. How has that developed over time, and where do you think the future of ESG is headed?

Yes, we have been actively developing a framework for how we measure and evaluate ESG. It’s a broad effort cutting across multiple areas and making real progress. I think we will see that, even before naming them, ESG considerations have long been important factors in underwriting because, when well-managed, lead to better outcomes.

5. Private Capital – We know you consider this asset class an important part of a diversified investment portfolio. What things do you take into account in choosing the right managers?

Without a doubt, private capital is playing an increasingly important roll in our investment portfolio. More than most, we approach this asset class from the perspective of a partnership with the right managers. We recognize that the people are the crucial component, and there has to be a lot of trust there. Integrity, experience, and an alignment of interests and goals are as important as a stellar track record. We are very selective about who we want to enter into these long-term partnerships with, and want them to be mutually beneficial.

6. Final Question – Lori, one last question. When you think about the year so far – and there’s been a lot packed into it – what’s been your biggest surprise?

My biggest surprise about 2022 is learning how fragile the world order really is, and how far we still seem to be from realizing the most hopeful promises of globalization.

Churchill Asset Management
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