2025 WINTER ROUNDTABLE
INSIGHTS
Seattle, Washington • March 5-7, 2025
The Pacific Pension & Investment Institute (PPI) convened in Seattle, Washington, from March 5-7 for its 2025 Winter Roundtable. Speakers from around the globe addressed trade tensions, technological developments, and the implications of ongoing high interest rates for institutional investors. The new U.S. administration’s tariff policy was a primary focus of the roundtable discussions. Still, investment leaders found significant room for optimism on other topics, given substantial capital availability and the revolutionary potential of artificial intelligence to drive productivity gains.
Artificial Intelligence Use Cases and Productivity Gains
Artificial intelligence (AI) will likely be a turning point for productivity on par with past technological innovations like the Internet, mobile devices, and cloud computing. It will be adopted in one form or another throughout the economy, and it is possible to identify the most promising use cases across sectors. Data readiness is crucial to training AI, and the world is running out of public data to train broad-based models. Meanwhile, companies that can generate their application-specific data will prefer to keep such proprietary outputs in-house. AI models trained on such in-house data and focused on making work cheaper, faster, and more reliable in discrete use cases will generate the most significant productivity gains.
AI’s “winners” will be firms that thoughtfully assess the integration and workflow implications of introducing it without creating new bottlenecks. Whole sectors may benefit if AI can add clear value, such as replacing low-skill labor with a high level of quality. Generative AI is proving especially useful in coding and other numeric applications because it performs at its best in cases where a “right answer” can be determined. Rather than picking winners at the firm level, investors should consider a broad, sector-based approach that excludes poorly performing companies.
Powering AI’s Exponential Growth
AI’s continued growth depends on the widespread availability of data centers. While 60-65 percent of all data center capacity is being built in the U.S., other global players are getting in on the potential gold rush. Nations like Bahrain are so eager to establish themselves as AI infrastructure hubs that they extend embassy-like legal status to foreign firms’ data centers. Investment opportunities in the data center sector will continue to grow over the coming years, with expected returns increasingly in line with those seen from traditional infrastructure investments. Capital demands are expected to total between $1 trillion and $1.5 trillion between now and 2030.
Data centers are highly energy intensive, accounting for an exponentially growing share of global energy usage. Continued sector growth requires continued growth in global energy production. Solar, wind, and batteries will be essential investments, as will natural gas in the short- to medium-term. Industry players are confident that data centers and energy will be profitable long-term investments as AI growth launches a virtuous cycle where energy supply and demand each grow as costs and consumption-per-application fall. In this environment, the most successful players in the data center sector will pursue an integrated approach that combines data centers with infrastructure, energy, and other key considerations.
AI and energy infrastructure investments should be aligned. Energy supply lags behind expected demand from AI and data centers, but it is catching up. If investors do not allocate funds to continued energy growth now, all industry players will fall short within the next decade. Nuclear fusion is expected to hit the commercialization threshold in the second half of the 2030s. There is cross-sectoral investment potential in seeing whether this timeline can be accelerated.
U.S. Policy Outlook: Tariffs
The world is facing a global trade environment unprecedented in modern times. President Donald Trump is a true believer in protectionism, with a fixation on trade deficits in goods and a preference for tariffs that long predates his interest in electoral politics. While he has assembled an economic team with diverse historical views on trade, Trump is the ultimate decider. His trade policy is motivated by three primary factors: desire for leverage over foreign countries in non-trade areas like drug trafficking, raising revenue, and addressing what he sees as other countries ripping off the United States.
While President Trump is responsive to market signals, he is more willing to accept short-term adverse reactions and economic pain for businesses than in his first term. Still, consumers will likely react badly to economic blowback and create political pressure to back off at least some of the tariffs. Already, members of Congress are encountering significant constituent anger at town hall meetings.
As in his first term, Trump’s tariffs have continued to target China. He has expanded his trade war to include other targets, notably Mexico and Canada. He likely hopes to use tariffs on these two countries to build leverage ahead of the 2026 U.S.-Mexico-Canada Agreement (USMCA) review, which his administration reportedly seeks to trigger a year early. Trump is unlikely to leave USMCA altogether, but the North American trade environment will feature high uncertainty until the review concludes and any changes are agreed upon.
Nations seeking stable trading relationships will increasingly hedge their bets with other partners. For example, Mexico is already seeking to draw closer to China in manufacturing and energy, driven partly by adversarial U.S. trade actions. Chinese companies see the U.S. alienating allies and ceding market share as a substantial global growth opportunity.
U.S. Policy Environment: Taxes
Higher interest rates and borrowing costs complicate President Trump’s objective of renewing tax cuts enacted during his first term. Congress has not yet agreed to offsets, and it is unclear whether it will be able to do so. Budget cuts achieved by the Department of Government Efficiency (DOGE) are minimal in the context of the federal budget; its primary mission is not deficit reduction but an ideological effort to transform the administrative state and pare back the regulatory process. Meanwhile, while it is unlikely that Congress will lock tariffs in as a significant revenue source, the administration will likely use reports of how much money the tariffs are raising to expand the size of any tax cut extension at the margins. Some Republican leaders in Congress have also called for using a budgeting tactic called the “current policy baseline” to minimize official cost estimates. If significant offsets are not agreed upon, the administration may seek a more modest two- or three-year extension over its desired decade-long renewal.
Navigating Persistently High Rates
Regarding economic trends, commentators often claim that “this time is unprecedented, and we’re going to see a structural change.” In some ways, the present moment is unprecedented. Concerning interest rates, uncertainty is high. Still, market signals like falling bond yields suggest that in the likeliest scenarios, rising inflation from global trade tensions will be temporary, and inflation will fall in the long term as tariffs bite into liquidity and macroeconomic growth.
These high-probability scenarios could include higher interest rates over the next two or three years as the Federal Reserve responds to upward pressure on prices. Over a three- to four-year period, however, rates will likely fall again. By the ten-year point, the likeliest overall picture is one in which rates are stable or falling. As this continues, investors should seek target returns based on each time horizon. Given the possibility of a short-term downturn in response to tariffs and higher rates, they should ensure that their portfolios do not rely too much on assets that perform poorly in low-liquidity scenarios.
Opportunities in Innovation, Deregulation, and Growth
The present economic moment is uncertain and risky for investors, as measured in indices like the Volatility Index (VIX). High capital costs, an anti-merger turn in U.S. anti-trust enforcement, and ongoing tariff volatility all present formidable headwinds to growth. But it is also a time of significant opportunity. AI is poised to drive significant innovation and may produce productivity increases strong enough to overwhelm the negative growth impacts of deglobalization. It has even become sophisticated enough to help investors navigate volatility. Some funds have created investment-focused advisory bots that help weed out bias and draw connections across vast data sets.
Investors who prioritize AI investments they can leverage for learning across their portfolios stand to reap some of the most extensive benefits up and down their value chains. Successful funds need high-level engagement from investors who can speak about AI intelligently and are familiar with the business applications that demonstrate the most transformative potential. For instance, software companies using AI to write code are seeing significant cost reductions of up to 30 percent.
The AI innovation cycle underway will align with an infrastructure investment cycle that will likely generate significant additional opportunities. Plenty of private capital is available to meet growing infrastructure and energy needs, and investors should take a global view. While the U.S. and China will continue to be powerful innovation centers, new technologies are accelerating worldwide. The Gulf countries, for example, are increasingly seeking to establish themselves as innovation investment destinations, not just places to raise capital.
AI is driving demand for infrastructure investment. Given that capital investment tends to come in waves, there is a market opening for institutional investors to provide sustained support across this period of high demand. Governments worldwide are running large deficits as a percentage of GDP, limiting their ability to keep pace with infrastructure investment demands. This is another significant opportunity for private capital from institutional investors.
Global Retailers in a Challenging Economic Environment
A long-term mindset, a great business model, ongoing innovation, and a commitment to employees, customers, and communities can help retailers succeed through an era of sticky inflation. A positive brand identity is a valuable asset, and businesses willing to absorb reduced profit margins or losses to maintain quality, affordability, and consumer trust will benefit in the long run as inflation cools. Brand identity and value proposition should also be at the forefront of the mind when designing business operations. For example, decisions about deploying buying power can shape better customer experiences and generate savings that can be returned to employees and consumers. Happy customers will keep returning, and happy workers will yield returns in low turnover and high performance.
Innovation is essential, and its benefits can be maximized by grounding it within a high-performing retailer’s overall brand and business model. For example, new technologies such as AI can potentially increase operational efficiency and productivity. Adopting a long-term mindset and returning these savings to customers and employees is a way to reinforce brand loyalty in a challenging economic environment.
Building a Global Real Estate Portfolio Across Market Cycles
A portfolio built to last across market cycles should conceptualize its offerings as broader than commodity space. For example, while remote and flexible work continues to be part of many business models, video or virtual reality meetings will not fully replace beautiful, desirable, and well-located physical spaces. Institutional investors who are in close touch with how tech innovation is changing people’s behavior will be at the forefront of identifying real estate assets with the right value-adds to prosper across cycles and trends.
Successful investors will also monitor climate risks. The technology to build increasingly climate-resilient homes is available, but climate-related weather trends and natural disasters may still cause declining populations in heavily impacted cities. Insurer withdrawals from markets on the frontlines of climate change represent the most significant unresolved operational risk in this area of investing. Fund leaders should select resilient locations and asset types when building a global real estate portfolio.
Asset Owner Perspectives:
Total Portfolio Management, CIO Priorities, and Organizational Culture
A total portfolio management approach, or TPA, focuses on a portfolio’s overall risk and return and can help institutional investors increase portfolio agility, diversification, and competitiveness. Funds looking to adopt this approach should have a well-defined vision of what they hope to achieve for their portfolios and a clear sense of their risk appetite. From a governance point of view, a TPA requires high specificity about the respective roles of the board and fund managers in decision-making and buy-in from all parties on their roles. Ideally, boards will make high-level calls, like defining risk appetite, while management is given the discretion to decide how best to use that risk across the portfolio. Communication is key. It is incumbent on managers to report on their decisions and how the investments they have chosen are performing and serving portfolio needs.
CIOs highlighted the need for state investment fund leaders to prioritize returns for their investors over politics. While it is essential to maintain communication with political leaders and track trends, high-performing funds usually enjoy a substantial degree of insulation against political interference.
Organizational culture is also essential. New leadership should enter an organization willing to listen and learn from members’ perspectives. Drawing on qualified people internally will boost organizational confidence that the new leadership will not turn everything on its head without stopping to see what is already working and what is not.