Institutional Allocator - May 2019 | Volume 2 | Issue 2 by Markets Group

SPRING 2019

4 9 10 15

AS ESG INVESTING ESCALATES, AUSSIE COAL MINE COURT RULING ILLUMINATES SECTORâ&#x20AC;&#x2122;S REG. RISK S&P TO SPOTLIGHT ESG RISK IN CORP DEBT ACROSS THE BOARD ON ESG RENEWABLES TO DOMINATE INFRA SECTOR AS ESG RESONATES

VOLUME 2 | ISSUE 2

TABLE OF CONTENTS COVER STORY 4 Aussie Coal Mine Court Ruling An Australian court this spring prohibited the opening of a coal mine because the mine would contribute to greenhouse gas emissions and set back the fight against climate change. It is being characterized by some socially responsible investing specialists as a judicial first in the ESG area that may prove to be a watershed in the field.

9 S&P to Spotlight ESG Risk in Corporate Debt 10 Across the Board on ESG IA asked its advisory board members to comment on a few basic but still not necessarily widely understood questions around ESG imperatives in investment decision making.

15 Renewables to Dominate Infrastructure Sector as ESG Resonates

ASSET OWNER PROFILES 18 Chicago Teachers’ Burbridge Driven to Keep a Promise Charles “Chuck” Burbridge boasts a 40-year-plus professional career in economics, finance and Academia, lending him a clear-eyed perspective on public pension fund administration.

21 Blue Cross Blue Shields’s Black Follows the Money Cameron Black is chief investment officer and treasurer of Blue Cross Blue Shield of Arizona in Phoenix. He is responsible for the company’s short- and long-term investment strategies and overseas its risk management. Though Black has an affinity for biology and found the cutting-edge science in that field “invigorating,” in the end he wanted to manage large pools of capital.

INSTITUTIONAL ALLOCATOR

25 Albright’s Philosophy Boils Down to Three I’s: Invest, Innovate and Impress Jerry Albright, chief investment officer of the Teacher Retirement System of Texas, spoke with IA Managing Editor Leslie Kramer about his Texas roots and how he sets the investment strategy of the $154.6 billion system.

ASSET OWNER INVESTMENT STRATEGIES

ASSET ALLOCATION 34 CTPF Enters Africa… Cautiously The approximately $11 billion Chicago Teachers’ Pension Fund evidently was attentive when it visited South Africa in the spring of 2017 and Senegal and South Africa one year later. The upshot: This year the fund approved a $20 million allocation to two managers that will focus on African private equity.

PRIVATE WEALTH

28 Texas ERS, PAAMCO Building 36 Keel Point’s Chief Econ Steven Skancke Compares HNW HF Seeding Platform Investing to Institutional An innovative joint venture, emerging hedge fund seeding and support platform launched by Texas ERS and Pacific Alternative Asset Management has so far whittled a field of hundreds of emerging firms vying to participate in the platform down to an initial “pipeline” of 35 firms.

30 Arizona PSPRS Rejects Active Management of U.S. Equities When investing in U.S. equities, Bill Thatcher, portfolio manager, equities and private credit at the $10 billion Arizona Public Safety Personnel Retirement System, thinks index funds are the way to go.

32 Kentucky Systems Look to Exploit Coming Distressed Cycles The investment team at the Kentucky Retirement Systems is preparing for what they believe is a coming recession, by looking for opportunities to invest in distressed assets.

Steven Skancke, chief economic advisor at Keel Point, an investment advisor serving ultra-high-net-worth families, institutions and private clients, spoke recently on his industry experience, categories of investing considering current volatility, and on the growth of family–office–like entities in the industry.

GUEST COLUMN 39 The U.S. Pension Crisis, by Ronald J. Ryan If pensions were to mark to market their assets and liabilities, corporations and multiemployer plans would each show a deficit of more than $200 billion and public plans would show a deficit of more than $4.4 trillion vs. a reported deficit of $1.6 trillion How could this happen?

PLAN SPONSOR PEOPLE MOVES 42 Plan Sponsor People Moves IA lists senior executive personnel moves at institutional asset-owner organizations in the calendar quarter preceding the magazine’s print deadline.

EDITORIAL TEAM Mark Fortune Editor

Leslie Kramer Managing Editor

CREATIVE DIRECTOR Tony Patryn Senior Graphic Designer & IT Projects Manager EXECUTIVE STAFF Adam Raleigh Chief Executive Officer Tim Raleigh Chief Financial Officer Samantha Pitre Head of People Operations Brett Friedberg Head of Sales Giseli Akaboci Head of Operations & Logistics Group Jessica Kaplan Operations Associate Joyce Riley Operations Associate Paul Hamann Head of Alternatives and Strategic Partnerships Paloma Lima-Mayland Head of Private Equity Group

Kim Griffiths Head of Institutional Sales & Co-Head Institutional Production Andres Ortiz Head of Private Wealth Investor Relations; Head of Production‚ EMEA Jason Peet Co-Head of US Investor Relations Michelle Quilio Head of Real Estate Investor Relations John Zajas Marketing Manager & Data Protection Officer William Coba Co-Head of US Investor Relations William Kazlauskas Operations Associate Grayson Sanders Office Manager

Paola Segura Head of Asia Pacific PROGRAM MANAGERS/INVESTOR RELATIONS Kaitlyn Mitchell Adena Baichan Amanda Jiang

Kari Walkley

Andrew Schulte

Karishna Perez

Audrey Kadenge

Kevin O’Connor

Ben Ettlinger

Logan Brodsky

Betty Ho

Lucas Alexandre

Brian Intemann

Mandy Lam

Carolina Gomez-Lacazette

Maxime Laurent

Christopher Hoarty

Nicole Morisette

Christopher Nelson

Nicole Vranizan

Georgia Quinones

Olga Gorlatova

Gerlim De La Cruz

Patrick Murray

Harry Garland

Stephen Deiner

Jacopo Gaspardone

Sunil Mampilly

James Silverman

Xiang Qin Lim

Jane Popova RELATIONSHIP MANAGERS Brendan Davey

Orlanda Poblete

Cory Stavis

Poola Prithvi

Earl Blasi

Thomas Mallon

Jade Benoit

Tom Hind

Lissa Campos

Tony McLean

Max Tattersall

Will Hamilton-Hill

Nawshad Noorkhan

William McArdle

DELEGATE SALES Andrew Baranich

Michelet Cimeus

Brett Windisch

Roberta Dalla

Eliseo Giusfredi

Sean Walsh

Javier Grullon

Stephen Patchen

MARKETS GROUP ADVISORY BOARD MEMBERS Mansco Perry, Executive Director and Tim Barron, CIO, Segal Marco Advisors Chief Investment Officer, Minnesota State Cameron Black, CIO, Treasurer, Blue Board of Investment Cross Blue Shield of Arizona Anand Philip, Vice Chairman of the Chuck Burbridge, Executive Director, Investment Committee and Trustee, Ohio Chicago Teachers Pension Fund Wesleyan University Joe Cullen, CIO, Montana State Board Ian Toner, CIO, Verus Investments of Investments Carolyn Weiss, CFO & Treasurer, The Bob Jacksha, CIO, New Mexico New York Community Trust Educational Retirement Board

PRODUCTION Institutional Allocator (Volume 2, Issue 2) is published 4 times a year by Markets Group. No part of this publication may be reproduced or transmitted in any form without the publisher’s permission. Authorization to photocopy items for internal or personal use, or the internal or persnal use of specific clients, is granted by Markets Group. © 2019 Markets Group. Entire contents copyrighted.

LETTER FROM THE EDITOR

Mark Fortune, Editor, Markets Group

With this edition of Institutional Allocator, we’re tipping our hat, so to speak, to the green zeitgeist now sweeping the developed world, with its implications for a social, economic and ecological change. In the financial markets, this change is manifesting itself in a growing uptake of environmental, social and governance (ESG) imperatives, with an evolving nomenclature that includes designations such as sustainable investing (SI), socially responsible investing (SRI), impact investing (II), responsible investment (RI), and mission investing (MI). Though the U.S. lags Europe in embracing the concept of SRI, according to a recent report from investment research firm Opimas, the responsible investment market grew to more than $30 trillion globally in 2018. Half those assets are in Europe. Opimas expects the global aggregate to climb to $35 trillion by 2020. Concomitant with that growth, ESG data (and ratings) are increasingly in demand, with burgeoning providers entering what is essentially a new cottage industry. So, fittingly we think, our cover story for this edition is about an Australian court ruling in February that prohibited the opening of a coal mine because, as the judge in the case opined, “The [greenhouse gas] emissions of the coal mine and its coal product will increase global total concentrations of GHGs at a time when what is now urgently needed, in order to meet generally agreed climate targets, is a rapid and deep decrease in GHG emissions.” Some ESG watchers anticipate the ruling may prove to be a watershed in the ESG investing space. As part of our cover focus, IA asked its Advisory Board members to chime in with their thoughts on a few basic, but still not necessarily widely understood, questions around ESG factors in investment decision making. See our new section titled Across the Board (p.10). We intend to publish this feature in forthcoming issues as a vehicle to tackle ad hoc but timely investment topics and themes. And, extending IA’s coverage, which to date has been limited to the institutional investment arena, this edition verges into the world of wealth management in the guise of a Q&A discussion with Steven Skancke, chief economic advisor of Keel Point, a registered investment advisor that serves wealthy families as well as institutions. We opted to run the interview in appreciation of a growing market reality, which is that the lines between high-net-worth asset management and institutional asset management are blurring, with many wealth management firms moving to incorporate multifamily offices into their wealth management services. Which brings me to IA’s latest content experiment—our introduction in April of video interviews of market practitioners. For our inaugural effort (IA, April 17, 2019) Managing Editor Leslie Kramer sat with Segal Marco Advisors CIO Tim Barron at Markets Group’s Tri-State institutional Forum in New York to discuss how changing demographics (retiring Baby Boomers) may impact retirement savings management. Barron discusses how to assess if an incoming asset management team is as good as a retiring, senior team, and will investment manager mergers & acquisitions be conducive to or detrimental to firms achieving their stated performance objectives? We plan conduct many more of these video discussions going forward, so be sure to look out for them. Finally, a labeling note. With this edition, we have changed the name of one of IA’s regular features to Asset Owner Profile from Asset Owner Spotlight. As I hope you already know, the feature (one of IA’s most popular) is an interview with set questions that is designed to deliver some insight into who the subject “is”—their outlook, philosophy, pet industry peeves, best industry experiences, personal pursuits, that kind of thing. In today’s magazine we bring you three of these features, namely: Chicago Teachers’ Pension Fund’s CIO Chuck Burbridge; Blue Cross Blue Shield of Arizona’s CIO Cameron Black; and Teacher Retirement System of Texas’ CIO Jerry Albright. As I’ve noted previously, the addition of new features in IA and the fine-tuning of old ones is simply part of our efforts to improve the comprehensiveness and quality of IA’s content on an on-going basis. Onward! Mark. Fortune@marketsgroup.org

VOLUME 2, ISSUE 2

AUSSIE COAL MINE COURT RULING ILLUMINATES ESG SECTORâ&#x20AC;&#x2122;S REGULATORY RISK by Mark Fortune

INSTITUTIONAL ALLOCATOR

The decision by an Australian court in February to prohibit the opening of a coal mine because the mine would contribute to greenhouse gas emissions and set back the fight against climate change was immediately characterized as a judicial first by some socially responsible investing specialists that, they said, may prove a watershed in the environmental, social and governance (ESG) investing sector. They added that the court’s decision represented another lesson to investors on how ESG issues can be reflected in regulatory risk—a real-world business risk that can negatively impact shareholder value. The ruling comes at a time when the concept of socially responsible investing (SRI) appears set to leap into the mainstream investment arena after decades of residing on the fringes—an attractive alternative investment approach to some, but a difficult fiduciary challenge to others with respect to their investmentreturn objectives. As institutions’

embrace of SRI— an approach to investing that seeks to incorporate ESG factors into investment decisions to better manage risk and generate sustainable, long-term returns—has accelerated in recent years, certain challenges have come to the fore, including the development of a potentially confusing alphabet soup of terminology, subjective class

definitions, a need to navigate an increasing number of data providers and rating agencies, and questions on how best to weigh non-financial outcomes against investment returns.

A WATERSHED RULING “The Australia decision is a watershed,” asserted Sudhir Roc-Sennett, head of thought leadership and ESG at Vontobel Asset Management’s Quality Growth Boutique in New York. “This is the first time we are aware of a judge using climate change as a reason for a judgement against fossil fuel extraction; It’s the first time we have actually seen someone take that step. My personal feeling is that if there is a chance that we humans are involved in heating the planet then we’ve got to do something. I think this is a broadly held view which has the potential to shift from sentiment to regulatory impact—even if this specific ruling is appealed.” The case involved mining concern Gloucester Resources Limited, which sought permission from a local Department of Planning to open the Rocky Hill mine in New South Wales to produce a total of 21 million tons of metallurgical coal, which is used in steel production. In summing up the verdict of the New South Wales Land and Environmental Court, Chief Justice Brian Preston wrote: “In short, an open cut coal mine in this part of the Gloucester valley would be in the wrong place at the wrong time. Wrong place because an open cut coal mine…will cause significant planning, amenity, visual and social impacts. Wrong time because the

Green House Gas (GHG) emissions of the coal mine and its coal product will increase global total concentrations of GHGs at a time when what is now urgently needed, in order to meet generally agreed climate targets, is a rapid and deep decrease in GHG emissions. These dire consequences should be avoided.” The ruling goes to an area of risk to shareholder value of ESG issues that must be considered regarding sustainability as the basis of effective ESG policy, Roc-Sennett explained. ESG issues, particularly in social and environmental, are often reflected in regulatory risk, he said, adding that he doesn’t see ESG as a short-term return performance driver. “There is very little impact on short-term investment returns. I don’t know how on earth there could be. The ESG effect is like driving without mirrors—you may not have a problem on the first few trips (or months in the case of ESG

Sudhir Roc-Sennett, head of thought leadership and ESG, Vontobel Asset Management

GROWTH OF RESPONSIBLE ASSETS 2006-2020 40 35

US $ TRILLION

30 25 20 15 10 5 0

2006

2008

2010

2012

2014

2016

2018(E)

2020(E)

RESPONSIBLE ASSETS UNDER MANAGEMENT Source: Opimas

VOLUME 2, ISSUE 2

SPENDING ON ESG DATA 800 700

ANNUAL GROWTH RATE 2017-2018

37%

ANNUAL SPENDING (US $MN)

600

17%

500 400 300 200 100 0

2004

2015

2016 ESG INDICES

2017

2018

2019(E)

2020(E)

ESG CONTENT

Source: Opimas

investing), but the point is, eventually, you are likely to have a worse outcome than if you used them. Fundamental risks can take time to show through.” To investors, ESG matters a great deal, particularly on the governance side, Roc-Sennett continued: “On the global warming and pollution sides of environmental, we feel regulation will drive behavior change quicker across economies, where unlisted companies play an important role. New regulation can have a material impact on even the most powerful company and can be one of the largest macro risks a dominant company faces. Internally, we refer to it as ESG-R, because we think regulation is important and like to keep it top of mind. But it’s basically about sustainability.” He observed that, generally, shareholder value is maximized if a franchise can sustain its growth

Amin Rajan, CEO, CREATE-Research

over many years, pointing to Unilever and Disney as good examples of this. “For a business to sustain it needs to balance its impact on society while selling an attractive product or service as demand evolves. ESG catches important elements of a business that do not appear in the income statement.”

since it will provide a fresh impetus for financial markets to price-in the climate change risk in earnest.” “Anyone who invests without looking at ESG risk and opportunity is willfully ignoring relevant and material issues. It’s not so much this individual ruling, or this jurisdiction, but the fact that ESG analysis links

“DOUBTLESS, THE MINING INDUSTRY EVERYWHERE WILL BE WATCHING THE FALLOUT FROM THIS RULING WITH HAWKISH EYES.” “This court ruling may be seen as a local Aussie difficulty. But it will be hugely consequential in hindsight, for miners and investors worldwide,” according to Amin Rajan, CEO, CREATE-Research, a U.K.-based think tank that specializes in future trends in global fund management. “[The ruling] provides a glimpse into how our march into a low-carbon future will create a massive pile of stranded assets. Doubtless, the mining industry everywhere will be watching the fallout from this ruling with hawkish eyes.” Rajan suggested that supporters of the ruling will take comfort that, at last, the legal system is waking up to the reality of global warming caused by fossil fuels. “Investors of ESG funds, too, will draw comfort from the ruling,

INSTITUTIONAL ALLOCATOR

financial markets to the real world, and, ultimately, companies need to make money in the real economy,” argued Jon Lukomnik, managing partner at Sinclair Capital, a New York City-based boutique consultancy involved in corporate governance and institutional investment. It is important that the ruling be placed in proper perspective, Lukomnik said: “Though I have not seen a ruling like this before, I think that point misses the forest for the trees. ESG risks and opportunities manifest themselves in various ways. There are certainly regulatory risks and legal challenges to specific projects, but also to broader sets of companies. Looking at it narrowly makes it too easy to miss the similar-but-not-exactly-thesame risks and opportunities.” He

explained there are environmental impact studies required for many projects and various jurisdictions have emissions standards that impact different fuel-source projects differently. “I want to make sure that investors look through the right end of the telescope, starting from the ruling and expanding outward, not narrowing the focus so much that they miss the trendline, which is made up of a series of differentiated events.”

ESG INVESTING SOARING According to a recent report from investment research firm Opimas, the responsible investment market grew to more than $30 trillion globally in 2018, with half those assets located in Europe. It expects that number to climb to $35 trillion by 2020. Concomitant with that growth, ESG data is increasingly in demand, with numerous players entering the game. One clear measure of growing interest and inclusion of ESG criteria in investment analysis is that spending on data is climbing. “Despite an inconsistency in the definition and heterogenous regulations around the world, the inclusion of ESG factors into the investment process is spreading beyond the once purely responsible investment sphere and is becoming a mainstream phenomenon,”according to Alex Pierron, managing director, in an introduction to an Opimas report he co-authored and was published in February, titled ESG Data: Mainstream Consumption, Bigger Spending. The report estimates that the total

a disclosure auditing process to verify reported data.

Jon Lukomnik, managing partner, Sinclair Capital

spending on ESG data at $505 million in 2018, predicting that that figure will hit $745 million by 2020, representing an increase of almost 300% since 2014. “This growth is mainly due to increasing use of ESG data by all types of market participants,” according to the report. “ESG indices, in particular, are burgeoning in the equity space and more recently in fixed income,” the report says.

ESG ANALYSIS LACKS UNIFORMITY The ESG data market is dominated by a handful of players. But, according to the report, a lack of consistency in their metrics and methodologies contributes to opacity and confusion for investors. “For those who simply want to invest in a responsible company, it can be difficult to navigate ratings that can vary greatly from one rating agency to another,” the report observes. Currently, there are no standardized rules for ESG disclosures, nor is there

Last year, the American Council for Capital Formulation (ACCF) questioned the ratings process used for ESG investments. In a report titled Ratings that Don’t Rate, ACCF noted that, “As the trend of Environmental, Social, and Governance investing has risen, so too has the influence and relative importance of ESG rating agencies.” It continued: “Individual agencies’ ESG ratings can vary dramatically…Individual companies can carry vastly divergent ratings from different agencies simultaneously, due to differences in methodology, subjective interpretation, or an individual agency’s agenda.” (IA, 8/5/2018) “There are studies that have shown that as the large data providers tend to score using different methods there is little consistency,” according to RocSennet “This means from a practical stand point you need to stick with one and compare relative to their consistent approach. However, it also depends on what you find scores useful for. We use them as a broad indicator but are always very mindful that powerful but small indicators (e.g. a future risk) can easily be hidden in scores with many components— the danger is diluted by the no news.” Data providers in the space include Sustainalytics, Truevalue Labs, Arabesque, EthiFinance, Asset4 (Thomson Reuters) and MSCI. There are also several major disclosure frameworks, which make the filings from companies available and which are used by investors to research specific companies and/or the issues

disclosed. Prime examples are CDP (a not-for-profit charity that runs the global disclosure system for investors, companies and cities and states to manage their environmental impacts) and GRI, an international independent standards organization that helps businesses, governments and other organizations understand and communicate their impacts on issues such as climate change, human rights and corruption.

of sustainability data can help them fine-tune their risk management practices and investment decisions,” BNY Mellon stated in a press release accompaning the launch of the service. “Additionally, the demand for ESG scoring is increasing as ESGrelated regulatory requirements, including clauses within the European Union’s Directive on Pensions (IORP II), went into effect starting in January of this year.”

And as recently as late March, BNY Mellon jumped into the sector with its launch of a service to evaluate ESG in investment performance. The service will deliver a range of reporting tools that will enable clients to track their portfolio investments based on environmental, social and governance (ESG) issues and United Nations Global Compact (UNGC) principles. (UNGC is a non-binding United Nations pact to encourage businesses worldwide to adopt sustainable and socially responsible policies, and to report on their implementation.)

More than 100 ESG risk rating agencies exist, Sinclair Capital’s Lukomnik noted. He argues, though, that “they offer different things. People are trying to accomplish different things with different goals in their ESG analysis. So why would one say the analysis is inconsistent? That’s naïve,” he asserted. He explained that the purpose of asset management is to one, give investors optimum investment risk-return, and two, to intermediate the efficient allocation of capital for economic and societal good. “So, you have these two functions. And one issue is that ESG analysis tries to encompass everything along that spectrum,” he said. “One could look at ESG and be solely concerned about the risk/

“The new reports are being introduced at a time when an increasing number of institutional investors are exploring how ESG and other types

“THERE ARE DIFFERENT WAYS FIRMS INTEGRATE ESG—IT VARIES. IT’S VERY BROAD, IT’S INCONSISTENT, IT’S RICH, IT’S FULL OF GOOD INFORMATION, BUT IT’S ALSO FULL OF NOISE”

DISTRIBUTION OF RESPONSIBLE INVESTMENT STRATEGIES US $ TRILLION

Exclusionary Screening

15,02 10,37

ESG Integration Corporate Engagement and Shareholder Action

8,37

Norms-Based Screening

6,21

Positive/Best-in-Class-Screening

1,03

Sustainability-Themed Investing Impact/Community Investing

0,33 0,25

20%

40%

60%

80%

100%

% OF SRI ASSETS UNDER MANAGEMENT Source: Opimas

VOLUME 2, ISSUE 2

return side at one extreme. On the other extreme, one could say ‘I just don’t want to own ‘carbon intensive’ stocks. I don’t care about risk-return.’” Similarly, Eileen Neill, a managing director and senior consultant with Verus, in a 2018 IA interview, said she believed “we should not expect consistency or uniformity of ESG adoption and implementation by investment managers because they need to adopt an approach that is coherent given their respective investment processes and strategies. Additionally, managers are also incorporating client preferences and demands into the equation in determining the extent to which they integrate ESG into their respective investment processes and strategies. Thus, one should not expect ‘consistency’ or ‘uniformity’ of ESG adoption among investment managers. Those would be, frankly, undesirable outcomes.” “I think we are still in the early innings here,”Lukomnik continued. “I’ve spent 30 years in the field, and I think it is unfair to expect standardization. I get frustrated hearing about ESG integration as if it were a standardized thing. There are different ways firms integrate ESG—it varies. It’s very broad, it’s inconsistent, it’s rich, it’s full of good information, but it’s also full of noise,” he said. In the future he anticipates more consistent corporate disclosure regarding ESG—much like current financial disclosure regimes— but, he noted, “If you give the same financial disclosure to six banks, you’ll get six different interpretations.”

SRI BUCKS ARE UP, BUT WHAT IS THE BANG? The slow but inexorable movement of socially responsible investing from the “tree-hugging” fringes of the institutional investment

industry toward the mainstream and much wider adoption over the last couple of decades continues unabated, with several indications that its adoption is now developing real momentum. Though generally trailing the European Union, interest and adoption of ESG criteria in the U.S. has taken several concrete steps toward a more widespread embrace of the concept, representing an educational process that continues to ask evermore meaningful questions requisite of best practices Every investor group has embraced ESG wholeheartedly in Europe but less so in America and Asia. It is gaining momentum everywhere. But it is not plain sailing, as many investors are discovering, CREATE-Research’s Rajan wrote in his blog on SRI in late February. He observed that there is no widely accepted understanding of what the individual components of ESG mean. “There is a tendency among companies to rely on userfriendly definitions when it comes to setting up their ESG stalls. Second, there is also a tendency to exaggerate their ESG footprints, as there is no mandatory requirement to compile the necessary data. ‘Greenwashing’ is not uncommon,” Rajan wrote. Though regulators worldwide are moving to address some of these market unclarities, he wrote— pointing to Financial Stability Task Force recommendations that require companies and their investors to provide climate-related information in their annual filings and actions taken to mitigate climate-related risks—identifying and modelling ESG risks is even more challenging. The Task Force on Climate-Related Financial Disclosures (TCFD) was set up in 2015 by the Financial Stability Board (FSB) to develop voluntary, consistent climate-related financial risk disclosures for use by companies in providing information to investors, lenders, insurers, and other stakeholders. The FSB’s methodology is also used by institutional investors. The Task Force published its final recommendations in June 2017. “The task entails making numerous assumptions at each stage: the creation of climate change scenarios, and the identification of risks, their likelihoods and their impacts on asset allocation. Assumptions are stacked up like a wedding cake,” Rajan wrote.

Eileen Neill, managing director and senior consultant, Verus

He concluded, encouragingly, however, that enormous effort is now being made in creating a workable

INSTITUTIONAL ALLOCATOR

template for measurement and reporting purposes. And that more importantly, pension investors are also developing modelling expertise that is essential in identifying risks and opportunities. “A new infrastructure of data and expertise is now emerging. Investing will never be the same again. Companies and their investors are wising up to what climate change risks are and how to measure them and mitigate them.”

HOW DOES VONTOBEL ANALYZE FOR ESGR FACTORS? Vontobel says it looks at a broad array of factors business by business. There is not a single play book of rules that constitute ESGR, as the factors vary considerably by industry and geography. Its analysis includes reported or publicly available information, but goes further to look at what it believes management might resort to in order to achieve a goal. A sample of ESGR factors it looks at include: • QUALITY OF LABOR RELATIONS – invest in management’s ability to incentivize and motivate employees throughout the organization. • AGGRESSIVE ACCOUNTING – often an indicator of broader aggressive management practices. • DUBIOUS BUSINESS PRACTICES – e.g. relying on inside government contacts for business. • MANAGEMENTS WITH HISTORIES REFLECTING DISHONEST OR ABUSIVE TRACK RECORDS – individuals can be remarkably consistent. • ENVIRONMENTAL DAMAGE – when not recognizing the full costs of the product it sells, a business runs the risk of hostile public reactions, negative publicity, litigation and/or political pressure. • New laws and rules being introduced by a government as well as keeping a pulse on sensitive political issues that can spill into punitive government action. • Look for managements willing and able to invest for the long term and not excessively focused on near-term performance.

S&P TO SPOTLIGHT ESG RISK IN CORPORATE DEBT BY: LESLIE KRAMER

Nicole Martin, senior director, sustainable finance, S&P

S&P Global Ratings is moving to add more transparency on environmental, social and governance (ESG) analysis within its corporate credit rating reports. “What we are doing is making it easier for a reader [of our reports] to find any credit-related ESG factors that are driving the credit rating,”said Nicole Martin, senior director, sustainable finance, at S&P. “It’s for the ease of readership and better transparency, but in terms of our criteria there is no change,” Martin said. “We’ve always considered all factors that could affect credit.” Last fall, S&P published a “look back” on social issues and governance issues, which reviewed how often those issues were mentioned in the rating agency’s reports from 2013 to 2015 and from 2015 to 2017. It found that the number of instances where it mentioned ESG or climate as being important to a credit doubled from the first period to the second. “It was only on two data points, but it is an interesting observation, Martin said. She highlighted the fact that “often ESG factors can enhance a credit rating. It is not always a negative to credit quality, so the look-back study also gives information on the status of when it contributes to a change in an outlook, or a positive versus negative change,” she said.

The firm expects to put its new sections into 2,000 credits, which represents about 40% of the rated corporates in the S&P universe, throughout the course of the year. “If it’s material, we will include it in the rest of the companies, although in some companies, governance already contributes to the rating,”Martin said. “The assessment is part of our criteria, but ESG factors may or may not have a material effect on our credit rating, so those may not be a section [in the report],” she said. “But there could be an event in which it would mean there was a social issue that was important to credit, and then we would include it in the rating action,” she said.

INVESTOR RESPONSE “S&P’s announcement means fixed income and other investment managers will have a stronger and more complete sense of risks. It’s exciting news—and we’re looking forward to how this will elevate ESG conversations in the future,” said Michael Garland, director of corporate governance at the New York City Comptroller’s Office. S&P has been conducting outreach for many years on ESG. But of late, “this has become a much more topical issue and investors are asking for the information. They are taking it into consideration in their investment decisions, according to several surveys

that have been executed over the years. The results show that there is an increasing appetite from pension funds and investors to get more transparency in this space,” Martin said. “Many of the investors we speak with echoed the same sentiments,” said Mike Ferguson, a director in the Sustainable Finance team at S&P, in a video posted on the S&P’s website. “ESG risk can be meaningful to credit; while our methodology has always captured ESG risk factors that have been considered material to credit quality, the credit risk can be captured in a variety of different ways,” he said. “I’d say there is a likelihood that these risks are going to evolve over time, especially with the changes in the regulations and changes in the climate.”

UN PRINCIPLES FOR RESPONSIBLE INVESTMENT The move by S&P to focus its ratings more on ESG factors coincides with the publication of the UN Principles for Responsible Investment (UNPRI)’s third installment of its Shifting Perceptions: ESG, Credit Risk and Ratings report series, which recommends that credit rating agencies (CRAs) explicitly signpost credit-relevant ESG risks and opportunities in rating reports. The ESG analysis will also make governance more explicitly part of its rating criteria than before. “We look at governance scores on a stand-alone basis, and we score them from strong to weak,” Ferguson said in the video. “Companies that have boards that are not that independent or have had managers that have a misalignment of incentives–those could have scores that are weak, and, if that is the case,

Mike Ferguson, director, sustainable finance, S&P

that can drive a rating lower,” he said.

EMPHASIS ON HOW ESG RATINGS WORK S&P produced separate sections of its reports last summer and fall that include analysis of all its “high profile” issuers. It will follow up with reports on all its issuers to evidence the ESG risk factors that will be materially impactful to credit quality. Research updates will also be added to the reports to discuss any changes in ratings that are driven by ESG risk. The agency will additionally issue industry report cards, with trends in multiple company analysis for the same industry. The S&P reports also highlight variations between the environmental, social and governance factors. For instance, while environmental factors were split evenly between having negative and positive risk, social risk factors were generally negative. “Governance risk factors were also generally negative, and in some cases resulted in multiple notch downgrades, so, certainly, these will be considered material for credit quality,” Ferguson said.

UTILITY & RETAIL COMPANIES Ferguson cited utility companies as an example of companies that could be most at risk to a change in rating due to ESG factors. A utility company may have had significant exposure to carbon, whether through coal or gas or fire generation, Ferguson noted. Therefore, the company “might, over time, be exposed to a carbon tax in which case its financial metrics could weaken,” he explained. Retail companies are another example of the type of company that could be at high risk of receiving a lower credit rating, due to ESG factors. For retail companies “brand is very important,” Ferguson said. If it [the retail company] had a significant public or social controversy it could weaken its business risk profile, and its competitive position could weaken over time,” he explained VOLUME 2, ISSUE 2

ACROSS THE BOARD ON ESG BY MARK FORTUNE

INSTITUTIONAL ALLOCATOR

With this edition of Institutional Allocator, we bring you this new feature we’ve dubbed Across the Board. In it, IA asks advisory board members–who collectively represent broad investment industry expertise–to share thoughtful observations on selected industry themes and topics. To inaugurate the feature, IA asked board members to comment on a few basic but still not necessarily widely understood questions around environmental, social and governance (ESG) imperatives in investment decision making. The following discussion pinpoints some of the complexities of so-called socially responsible investing, from the development of a potentially confusing alphabet soup of terminology, to subjective class definitions, a need to navigate an increasing number of data providers and rating agencies, and weighing non-financial outcomes against investment returns. IA: How do you define ESG?

approach to investing that aims to incorporate environmental, social and governance factors into investment decisions, to better manage risk and generate sustainable, long-term returns.

Cameron Black, cio, treasurer, Blue Cross Blue Shield of Arizona

CAMERON BLACK: If you ask 10 investors to identify the environmental, social and governance issues that are important to them you are likely to have some overlap but not unanimity. It’s a term that opens the door to some interesting conversations.

Carolyn Weiss, cfo, treasurer, New York Community Trust

CAROLYN WEISS: When integrating environmental, social and governance factors into investment analysis and portfolio construction, environmental criteria focus on companies’ ability to manage reputational and operational risks and to capitalize on opportunities created by the shift toward a more sustainable economy; social factors center on diversity, occupational safety, human rights, and more; and governance factors emphasize loyalty to shareholders, board structure, shareholder rights, misconduct and political spending.

JOE CULLEN: ESG investing, impact investing, socially responsible investing, mission investing, and responsible investing are all investment-related topics, but often it can be difficult to understand how these topics might be similar or what their differences may be. It seems important for each of these approaches to add a qualifier or emphasizer to suggest it is different than “investing.”I believe the naming approach suggests that all of these are a segment, type or approach of investing and therefore a sub-set of overall “investing.” For years, investors have been developing sub-categories for investing: style segments, capitalization categories, and ratings or sector classifications, which have each led to further segmentation into sub-sub-categories. The reason for this compartmentalization is to help provide transparency and improve the understanding of risks. However, just because the parts can be better described, doesn’t mean the whole can be better understood.

Timothy Barron, cio, Segal Marco Advisors

TIM BARRON: One of the complexities revolving around ESG and related topics is the fact that there has developed an alphabet soup of terminology that can easily confuse an investor (SRI, SI, II, RI, and ESG). We would define ESG specifically using the language of the Principles for Responsible Investing (PRI)—Responsible investment is an

Bob Jacksha, cio, New Mexico Educational Retirement Board

Joe Cullen, cio, Montana State Board of Investments

BOB JACKSHA: We do not have an ESG policy, thus no formal definitions for ESG or impact investing, except that we would at least somewhat cover governance with our proxy voting policy for U.S. public equities. Our policies are clear—our mission is to balance the risk and return of our

investment portfolio for the financial benefit of our participants. Period. As an underfunded pension fund, we do not have the luxury of giving up some of the risk/return balance to pursue environmental or social causes. The G [governance] is a different matter. Properly governed companies perform better. Thus, we do pursue prudent governance and have a proxy voting policy to cover that area. E: [environmental] would include “green” investing such as wind, hydro and solar power and the prohibition of fossil fuel investment. Also, I guess it would include the avoidance of investment in companies or organizations that participate in activities that degrade the environment. We do have investments in wind, solar and hydro power and mitigation banking in our private investment portfolio. I suspect we have some in our public securities portfolio as well (much of our public equities are in indexes and thus we do not do a lot of research on individual companies). If we can find an investment opportunity that first has an attractive risk/return profile and it is environmentally beneficial, we do view the environmental aspect as an additional attraction, but that is secondary to the financial aspects of the opportunity. In addition to the power generation investments, we also invest in organic farming in our agriculture portfolio and have two investments in Conservation Forestry funds. We do, however, also invest in oil and gas. We are in New Mexico and much of our state economy is dependent on fossil fuels. It would be difficult to prohibit such investments. So, to the extent that we practice E, it is by inclusive means, that is including some “green” investments in our portfolio rather than through VOLUME 2, ISSUE 2

prohibitions of investments like fossil fuels. S: [social] The definition is a little less clear to me. As I think about it, I don’t really know what it encompasses. I guess it would cover how companies interact with employees, suppliers, competitors and the community at large: do they pay well? have employee friendly policies? deal fairly with suppliers? promote diversity? etc. Are there good educational and employment opportunities available for the populace at large in a region? We don’t impose our standards on our managers, but we do frequently quiz them about diversity when we see a non-diverse team. G: [governance] Good corporate governance includes proper board oversight, including having board members from the outside, proper executive compensation plans, audits, internal controls and observance of shareholder rights (looking at you Facebook!).

Chuck Burbridge, executive director, Chicago Teachers’ Pension Fund

CHUCK BURBRIDGE: ESG is an extension of the balanced scorecard concept that suggests that organizations should be evaluated on non-financial criteria. In the public sector, this resulted in the Service Level and Accomplishments reports issued by many units of government. Often, the best units of government were the first adopters of the report. Governments that scored well on the balanced-scorecard criteria were often considered to be the best managed and sustainable units of government. Similarly, with ESG, corporations are being evaluated based on non-financial criteria and those who score well are considered the best managed and sustainable corporations. Recent research suggests that these managers are being rewarded by investors. I believe ESG is neither an investment sector nor an investment product. I view 12

these three factors as philosophical viewpoints, which investors should advocate as approaches that if adhered to could promote behaviors which have the potential to result in better outcomes. These concepts should be part of the investment decision making process, as they may possess financial relevance. IA: How do you define Impact Investing? BLACK: An impact investment targets a specific non-financial outcome as a goal alongside the traditional considerations of return and risk. BARRON: Again, here we would look to the expertise of the Global Impact Investing Network (GIIN), which defines II as: Investments made with the intention to generate positive, measurable social and environmental impact alongside a financial return. WEISS: Double-bottom-line investing. Being cognizant of social or environmental impact as well as a financial return. JACKSHA: That would be investing to improve the situation of poor or underprivileged individuals. The situation may be a lack of financial resources, educational opportunities, availability of clean water, employment opportunities, etc. We did our first investment in an “impact” fund through TPG’s Rise Fund. We thought this was a unique opportunity because they had been doing this type of investing, and doing it profitably, with their growth funds. We have been an investor in several of those funds. Thus, there was a history of performance that we were comfortable with and found the added “impact” desirable. BURBRIDGE: Impact investing is designed to achieve a particular outcome beyond the financial ROI or perhaps even in lieu of a financial ROI.

Mansco Perry, executive director and cio, Minnesota State Board of Investment

INSTITUTIONAL ALLOCATOR

PERRY: An investment approach where the desired impact may be paramount to the investment return. IA: Have you seen growth in interest in ESG over the past year? Why? BLACK: Yes. The ESG framework is a powerful tool for engaging individuals who are not otherwise finance and investment minded. I sit on the investment committee of a community foundation that has recently created an ESG-oriented investing option for its donor-advised funds. I think this makes perfect sense. Charitably minded investors are also likely to want to express their social views in their investments. BARRON: Yes. We attribute growth in interest to four principal influences: 1. Time—since the GFC and generally favorable capital markets make it easier for investors to consider a wide array of factors including ESG; 2. The rise of the millennials as investors who appear, in general, to have an interest in having investment options available to them that are more responsibly focused; 3. Marketing—a plethora of products are now being sold/offered with various ESG screens or processes—availability and sales raise visibility and interest. 4. Data— we now have multiple benchmarks and tools for ESG investors and many data-based studies and analyses that investors can access to understand and gain comfort. WEISS: Yes. The next generation of investors are convinced that ESG investing can be done with excellent returns. Or, there is a belief that ESG investing is more important than returns. BURBRIDGE: I believe interest has grown as demonstrated by the numerous articles and conferences devoting time to the subject. Why? Because long-term investors perceive that ESG can be isolated as a factor to identifying high-reward investments. PERRY: Yes. There appears to be significant demand for investments which have some societal benefit as well as providing financial performance. Some pursue because they believe consideration of ESG factors will result in better financial outcomes. Others pursue because of a belief that the factors are essential and are less concerned about the financial impact.

IA: Have you seen growth in interest in Impact Investing over the past year? Why? BARRON: Modest. WEISS: Yes. Because now it’s understood that impact and returns aren’t a tradeoff. There’ve been plenty of studies showing that doing good isn’t at the price of lower returns. BURBRIDGE: Yes. But not as much as in ESG. Why? The universe of institutional investors that are drawn to impact investing to accomplish non-financial goals is smaller than that of investors looking to increase financial returns. PERRY: Yes. There appears to be increased demand where the proponents desire a specific outcome and the financial performance is irrelevant. IA: How has the socially responsible investing sector changed over time? BLACK: Broadly, we are seeing more ESG options that are truly active and customizable. The first frameworks for ESG investing (and its predecessor SRI) were focused on exclusionary screens. Now, there seems to be no end to the number of managers who are happy to help you express your specific sociopolitical beliefs through your investments. BARRON: We are seeing more movement towards full integration as opposed to screening or elimination methodologies. We add that this isn’t a “sector”, but rather is another way to assess information that, even in the parlance of the current administration’s SEC, may have relevance in better understanding what may drive long-term returns for investors. In short, it is difficult to deny that ESG factors may have a material impact upon future earnings and share price and credit quality. CULLEN: I don’t know the order in which these investment-related terms were introduced, but the terms that were created more recently seem to suggest that the earlier terms were inadequate, while at the same time it was important to brand the new term as distinctive from traditional investing. Years ago, the emphasis was more on excluding certain items, now the emphasis is increasingly on integration, which I see as a positive trend, but not necessarily easier. Based on the volume of recent discussions, maybe the current emphasis will

find broader support. I expect we will continue to sub-divide investing into increasingly niche specializations. Although this trend will make it easier to create and market new investment products, I’m unclear if it will make it less problematic to reach our investment objectives. BURBRIDGE: New sources of data have allowed investors to drive decisions on factors that were previously the subject of speculation and opinion. PERRY: Both approaches are derivatives of responsible investing. Responsible investment approaches continue to gain in popularity due to greater awareness. IA: What’s the most interesting thing about the sector? BLACK: ESG is a good branding tool because if you ask someone if they support a healthy environment, a strong social fabric and good corporate governance, of course they are going to say “Yes!” But there are significant subjectivity issues around definitions and implementation. There are also disparate approaches to ESG measurement and reporting. While ESG managers are quick to point to evidence that their approach can translate into higher returns, much of the research I have seen smacks of data mining. I have no problem whatsoever with anyone who wants to allocate their investment portfolio in accordance with a broader set of beliefs, but I think the jury is still out on whether ESG leads to better returns. BARRON: If we turn to Impact Investing, we think the opportunity for investors to simultaneously earn an attractive return while helping to change the world for the better in a proactive way has the potential to be a game changer for our future. From clean energy, to potable water, to agriculture, to waste and sanitation management, there are many issues to address if we are going to be able to sustain a livable planet for generations to come. The concept that private capital can play an important role in accomplishing what must be done is both promising and exciting. WEISS: There are many ways to begin investing. Pooled investments are a good start and support a learning curve. BURBRIDGE: Recognition that there is a feedback loop between corporate behavior, quality of life, and investments.

IA: How does your organization invest in or address ESG or impact investing in your portfolio? BLACK: Before ESG was a part of the investing zeitgeist, we had put restrictions on direct investment in tobacco companies. This was at the direction of our board of directors, which was rightly concerned about the optics of a health insurer doing anything to support a product with such indisputably negative health consequences. More recently, we discussed the possibility of implementing a more complete ESG investing framework but have not chosen to pursue that now. Relative to impact investing, we do invest in low-income housing tax credits, not because we have CRA [Community Reinvestment Act] requirements— we don’t—but because affordable housing is a cause we believe in as a company. There is a strong link between affordable housing and economic security generally, and positive health outcomes. WEISS: We’re not presently investing in ESG. As an endowment, we feel that we support organizations through our grantmaking and earn investment returns in our portfolio. It’s a different skill set to be able to combine ESG and impact investing knowledge while following a standard investment policy statement. However, we’ve invested our administrative surplus (positive bottom line) in several pooled impact investments. We’ve outsourced the due diligence in a similar way to our private equity investments. CULLEN: If your institution’s primary or secondary mission is defined beyond an investment return objective, compartmentalizing investments may help refine an investment process to better align with your mission. However, if your mission is best achieved by improving long-term investment returns, then keeping a broader definition of investing will create more opportunities for success, while still allowing you to add value through employing appropriate governance and integrating and evaluating fair pricing for a growing list of multidimensional risk exposures. If I chose words to describe my focus it would be fiduciary investing. I believe this describes a balanced emphasis on mission and the broadest opportunity set of investments.

PERRY: We have adopted ESG considerations. They are part of our investment beliefs. We have no position on impact investing. IA: Do you expect to see more interest in the area going forward? BLACK: Based on the marketing dollars that continue to be spent on promoting the many variants of ESG, I would guess we are nowhere near peak ESG. BARRON: Yes. We believe that evaluating ESG factors will become just another part of the fabric of investor behavior, where the responsibility of the asset manager or fiduciary is to assess all factors that might be material. BURBRIDGE: Yes. I believe that research is identifying additional sources of data that will be the subject of analysis and testing to gain an advantage for constituents. IA: What is your outlook on the sector? BLACK: We don’t believe ESG is so much a sector but rather a framework for aligning investment choices with personal or institutional beliefs about how the world should be. I don’t know that we will be talking about ESG specifically 20 years from now, but I would guess as technology and big data continue to advance, we will be provided with even more granular ways to align our financial and philosophical goals. There will always be a desire to do good while doing well. WEISS: Very positive. Impact investing is not more or less risky than other investment strategies. Some argue that as soon as an investment decision is constrained, for example, by adding a social or environmental requirement, the financial product will perform worse. BURBRIDGE: I believe investors will continue to research the opportunities and make modest, at first, investments in ESG

BURBRIDGE: At this stage we are educating ourselves on the opportunity. VOLUME 2, ISSUE 2

INSTITUTIONAL ALLOCATOR

RENEWABLE ENERGY DOMINATES INFRASTRUCTURE SECTOR by Leslie Kramer Renewable energy deals heated up the infrastructure sector last year, as investors sought to put an environmental, social and governance (ESG) focus on more of their investments. The trend should continue this year, according to Patrick Adefuye, head of real assets at research firm Preqin. Europe has been leading the charge in renewable deal offerings, but the U.S. appears to be hard on the Continent’s heals in developing renewable infrastructure projects. “The drive toward clean energy is a big factor [in infrastructure], in Europe, which is a leader on that front,” Adefuye said. “But it has also become increasingly important in the U.S., which is catching up to some degree. There is a lot of interest in renewable energy, and going forward you would expect that to continue to be the case,” he said.

AN ESG LENS Overall, the energy industry has seen a move away from high-carbon energy sources to low-carbon renewable energy sources, Adefuye said. Within the sector, core deals are more popular

Patrick Adefuye, head of real assets products, Preqin

than value-add or opportunistic vehicles, due to the higher risk involved. “In the renewable energy space, if you are looking to build a new wind farm from scratch, that would be a risky investment, because you have to construct the wind farm, which takes a lot of time and cost, versus with core projects that already exist, and where the asset is already generating return and capital,” Adefuye explained. But for those investors who are looking for higher returns, the valueadd and opportunity vehicles may be the place to make their bets. Investors take on construction risk with these projects, “so if you get in early you can get potential returns, and they can pay off in a greater way than if you invested in an existing asset that is already generating steady returns,” Adefuye said. “It’s a big decision that investors have to weigh up: Do we want to take greater risk with investments that might not come to fruition at all, or do we want to stick to an asset that could be expensive to access and returns would be not as great as if we build it from scratch, but we know what the guaranteed returns will be,” he said. From a portfolio perspective, overall, “renewable energy is attractive because it meets some of the ESG

goals that some investors have, and the fact that there are more investors setting ESG goals means the prospects for renewable energy are positive going forward,” Adefuye added.

HIGHER RISK, HIGHER RETURNS IN ASIA Preqin’s latest infrastructure report, the 2019 Preqin Global Infrastructure Report, shows that there has been a push by infrastructure investors overall to find higher returns, as the infrastructure landscape has become more competitive and returns are being compressed. Many investors are training their sights on Asia. “There is an element of necessity,” Adefuye said. “If you want higher returns, then you may have to seek it out in Asia. The Asian infrastructure market is growing, and renewable energy is important in that region, so that is creating a lot of opportunity for investors as well.”

RECORD RETURNS IN 2018 Overall, 2018 was a bumper year for the infrastructure sector, boasting records in the amount of capital raised and in distributions or capital being returned to investors, according to the Preqin report. It was also a record

year for assets under management for the asset class, hitting $491 billion at year’s end 2018. Capital calls reached $35 billion in H1 2018, while capital distributions reached $33 billion. This is on par with $83 billion and $77 billion, respectively, in all of 2017, according to Preqin’s data. Preqin expects growth in the sector to continue this year. “2019 looks very positive for the asset class,” Adefuye said. “It seems that lots of investors have the intent to increase allocation to the asset class, with a portion of investors planning to invest more in 2019 than they did in 2018,” he said. According to the Preqin research, half of investors surveyed plan to increase their allocations to infrastructure over the longer term, while just 6% plan to decrease their allocations. Adefuye also noted that in some ways the year-end infrastructure data was “surprising,” because there are clear indications that there is lots of competition in the market. “At the moment, we are seeing very high valuations, raising concerns [about returns] by investors and fund managers.” He said that while some investors already have capital dedicated to chasing structured deals, there is a contraction in the amount of deals that were completed in 2018 versus 2017. “It’s a function of the VOLUME 2, ISSUE 2

amount of competition and how high valuations are,” Adefuye said. “Investors are not willing to pay for high valuations, and the key reason why we see less is a concern about return compression.” The high valuations are due to the fact that there is a lot of money in the asset class. But that has not deterred investors from seeking to make more commitments in 2019, Adefuye said. “That shows positive sentiment toward the asset class from a fullreturns perspective,” he deduced. “There has been some compression in returns, but distributions are high and have grown as well, so that continues to make investors willing to make future investments in the asset class,” he noted. According to the Preqin survey, over half of investors and fund managers find that asset valuations present a key challenge for return generation in 2019. The greatest proportion (35%) find that value-added funds present the best opportunities, a shift from previous years when core strategies were most attractive. “Looking ahead, the industry is facing challenges posed by increased competition and higher asset

valuations. Investors are looking towards higher-risk, higher-return strategies in search of yield, and fund managers report that asset pricing is higher, and opportunities are harder to find,” the report stated.

GLOBAL ECONOMIC ENVIRONMENT The push for higher returns, despite the risk, will also be dependent on what happens in the global economy. “I think investors will be willing to take those risks if the economy is sound. The push for the higher returns is coming from those riskier value-added opportunistic type investors, but if the economy takes a downturn, which many people think we are on the brink of, we might not see it play out. We will see investors migrate away from risky investments to core-style investments, and they will be willing to take lower returns, because those segments are quite populated,” Adefuye said. There is lots of competition out there, returns are being compressed, but if we are in a situation where the broader economy is in that state, that is where we will see investors seek to invest in infrastructure,” Adefuye concluded

INFRASTRUCTURE DEALS IN RENEWABLE ENERGY, 2008–2018 4,500

No. of Deals

Aggregate Deal Value ($bn)

400

3,500

350

3,000

300

2,500

250

2,000

200

1,500

150

1,000

100

500 0

50 2008

2009

2010

Source: Preqin

INSTITUTIONAL ALLOCATOR

2011

2012

2013

2014

2015

2016

2017

2018

AGGREGATE DEAL VALUE ($BN)

NO. OF DEALS

4,000

450

LEGEND

KEY INFRASTRUCTURE TRENDS 2018 WAS A RECORD YEAR • 2018 was a record year for unlisted infrastructure fundraising, with 68 funds raising a record-high aggregate $90bn in capital. • Assets under management also reached a record high, hitting $491bn as at June 2018 (the latest available data).

INFRASTRUCTURE IS POISED TO SEE FURTHER GROWTH • Half of investors surveyed plan to increase their allocations to infrastructure over the longer term, while just 6% plan to decrease their allocations. • Capital calls reached $35bn In H1 2018, while capital distributions reached $33bn. This is on par with $83bn and $77bn, respectively, in all of 2017.

• As of January 2019, there were a record 207 unlisted infrastructure funds in market targeting an aggregate $188bn in commitments

GREATER COMPETITION COULD MEAN THE RISE OF HIGHER-RISK, HIGHER-RETURN STRATEGIES • A larger proportion (26%) of investors expect lower returns in 2019 than those who expect increased returns (15%). • Over half of investors and fund managers find that asset valuations present a key challenge for return generation in 2019. • The greatest proportion (35%) find that value-added funds present the best opportunities, a shift from previous years when core strategies have been most attractive.

VOLUME 2, ISSUE 2

ASSET OWNER PROFILE

“To borrow from the “Great One,” [Hall of Fame former professional hockey player Wayne Gretzky] you must skate to where the puck will be, not where it is. Same with economic growth.” Charles Burbridge, executive director, Public School Teachers’ Pension and Retirement Fund of Chicago

INSTITUTIONAL ALLOCATOR

ASSET OWNER PROFILE

CHICAGO TEACHERS’ BURBRIDGE DRIVEN TO KEEP A PROMISE BY MARK FORTUNE

harles “Chuck” Burbridge is executive director of the approximately $11 billion Public School Teachers’ Pension and Retirement Fund of Chicago (Chicago Teachers or CTPF). Boasting a 40-year-plus professional career in economics, finance and academia (he was twice an adjunct professor), Burbridge has witnessed myriad changes in pension fund administration and investment, lending him a clear-eyed perspective acquired only by long service. It’s the kind of experience that prompted IA late last year to invite Burbridge to join its Advisory Board. Burbridge shared with IA Editor Mark Fortune some insights into his career path and his outlook on public pension fund administration.

IA: What is the mission of Chicago Teachers’

Pension Fund?

Burbridge: CTPF’s mission is to provide,

protect and enhance the present and future economic wellbeing of members, pensioners and beneficiaries through efficient and effective management of benefit programs, investment practices and customer service, and to commit to earning and keeping the respect and trust of the participants through quality service by protecting retirement benefits, in compliance with applicable laws and standards.

of Education to make contributions to CTPF from interest accumulated on education funds. This represented the first time that funding for pensions would come from sources other than teachers. Where once the requests for annuities, refunds and survivor benefits were handled directly by the Trustees and the Clerk of the Board, today CTPF operates as an independent organization, governed by the Board of Trustees and administered by the executive director, to oversee the day-to-day operations and to assure that benefits continue to be paid out on a timely basis. IA: In a sentence, what does that mission mean

to you?

Burbridge: Sixty-eight thousand members

trust us to ensure that promises made are promises kept.

IA: How did you get to the role of CTPF

executive director?

Burbridge: Everything I have done in my

career has helped to prepare me for my current role. Each position I have held provided an opportunity to learn lessons that have proven to be valuable. From gaining an understanding of actuarial science, to investment theory, to information technology, to economics, budgeting, customer service and internal controls, I have acquired insights into the issues The Chicago Teachers’ Fund has been providing facing a pension fund. Most of all, I have had retirement, survivor and disability benefits for the opportunity to create and lead groups of certain certified teachers and employees of highly talented people to tackle the challenges the Chicago Public Schools since 1895. State present in each situation. Representative William C. Eakins of Chicago My career started as I completed my M.A. in introduced a bill to the Illinois legislature “for Economics at Sangamon State University (now the purpose of establishing a fund to be used University of Illinois, Springfield) in 1980 and to pension school teachers.” The law helped was an economics intern for the Illinois Office to establish a system that would ensure the of Planning with a focus on environmental and financial stability and dignity of teachers in energy economics. That experience prepared retirement, not just in Chicago, but in the State me for a role at the Illinois Economic and of Illinois. Fiscal Commission (IEFC), a tenure that ran In 1907, two bills were passed that set the from 1979-1991, where I co-authored a report course for the future: one bill reorganized on the Illinois coal industry and later became benefits and granted teachers an elected Board the Commission’s econometrician and chief of Trustees, and the second allowed the Board economist, specializing in regional economic photograph by Hannah Davis

and state revenue forecasting from 1983-1991. As chief economist, I was assigned to analyze issues related to Illinois pensions and group insurance, among other public policy and government finance issues. Following my 12-year career at IEFC, I was recruited to Cook County, Ill. where I further developed my budget and public financing skills over a four-year tenure (1991-1995) and eventually served as deputy CFO, interim revenue director and budget director. The experience prepared me for a 17-year career in K-12 education at three major school districts: the Chicago Public Schools (1995-2000), the Los Angeles Unified School District (LAUSD, 2003-2007), and the Atlanta Public Schools (APS, 2007-2015). I took on various assignments at these districts that included serving as chief financial officer at both LAUSD and APS. During this period, I also took a three-year detour (2000-2003) to serve as director of management assurance services at KPMG for its Chicago public-sector internal audit practice. It is the combination of State of Illinois, pensions, school district, internal audit, technology and business operations that opened the opportunity for me at CTPF, which I joined in March 2015 as executive director. The greatest skills that I developed during this journey are leadership and team development. IA: How is your investment team at CTPF

structured?

Burbridge: Angela Miller-May is our chief

investment officer and leader of our investment team. She supports the Board’s Investment Committee. Her staff consists of four portfolio managers who cover specific asset classes. Each manager has a portfolio analyst. These teams are organized by private equity, domestic equity, international equity and other markets, comprising fixed income, infrastructure and real estate. Her team also includes a portfolio analyst with an accounting background who oversees the fund’s custodian, security lending VOLUME 2, ISSUE 2

ASSET OWNER PROFILE

substitute for economic growth, so long-term investors must look for long-term growth IA: What are CTPF’s total assets? opportunities. As such, we are patient and seek Burbridge: Assets fluctuate with market out active managers whose strategies capitalize conditions; we are trading in a range of $10 on research and specialized knowledge. billion to $11 billion. As of December 31, 2018, CTPF’s assets were close to $10 billion To borrow from the “Great One,” [Hall of Fame former professional hockey player Wayne after a volatile fourth quarter. Gretzky], you must skate to where the puck will IA: What is the asset allocation breakdown of be, not where it is. Same with economic growth. CTPF? IA: What is your view on active versus passive Burbridge: The asset allocation targets include: management? domestic equity 30.5%; international equity 30.5%; fixed income 23%; infrastructure Burbridge: Our view is that both strategies 2%; real estate 9%; and private equity 5%. have a place in the tool box. While all active As of December 31, 2018, the actual asset managers may not persistently out-perform allocation stood at domestic equity 29.8%; the index, some can. We believe that with international equity 29.9%; fixed income appropriate research, we have a good chance of 26.9%; infrastructure 2.4%; real estate 7.4%; identifying those managers. and private equity 3.6%. IA: How would you describe your management IA: Which investment consultants does the style? agent and special projects.

fund use?

Burbridge: We use Callan for all asset classes except private equity. The private equity class is managed internally, absent a third-party advisor. IA: How would you characterize your investment philosophy? Burbridge: Our investment philosophy starts

with the basics: Asset class diversification, monthly rebalancing and capital preservation. We overlay the basics with tilts toward defensive classes and active management. We keep a watchful eye on opportunities for women and minority managers (42% of total assets are managed by women and minorities). Due to improvements in the mix of employer revenues, we have cautiously explored more illiquid, alternative asset classes.

Burbridge: From an investment management perspective, we are disciplined investors. We have processes in place for manager selection, continuing due diligence and termination, if necessary. We dip our toes in new asset categories only after substantial research. From a leadership perspective, my style is to match talent to task and show appreciation. I try to build collaborative, self-guided teams and help foster an environment that promotes continuous examination of our processes. Where needed, I attempt to clarify and prioritize goals to build a sustainable organization. Essentially, I provide opportunities to talented teams to accomplish goals that may not have been in their imagination, let alone their reach. I believe that every employee wakes up and wants to make a positive contribution to the organization. It is a leader’s responsibility to help them know what a positive contribution looks like and to remove barriers to their success.

Burbridge: Being the leader of the Chicago Teachers’ Pension Fund. IA: What has been the worst experience in your

career?

Burbridge: Watching the faces of a payroll implementation team when the system crashed during the first payroll, following “go-live” in 2007. To witness the disappointment was tragic. To see the resolve to right the ship was inspiring. It took some four months to rectify and resolve the situation. IA: In what part of the pension industry have you witnessed the most change? Burbridge: The political environment. There seems to be greater recognition that mistakes were made in the past from which one cannot walk away. There’s a growing recognition that the only thing unsustainable about defined benefit pension plans are employers not making actuarially-based contributions, and that defined contribution plans are not the perfect substitute for DB plans that many had hoped they would be. The goal is to win a race for retirement security, not a race to the bottom. Retirement security is economic security for our nation—there must be retirement security for all, if there is to be retirement security for any one. IA: Are there any initiatives in which CTPF is currently engaged that you can share? Burbridge: Our recent initiative in private

equity in Africa will be of interest both because of the journey that we have taken to get to this place and the results of the effort. [CTPF in Feb. made its first allocation to African PE: $20 million split equally between Advanced Finance and Investments Group (AFIG) and Development Partners International (DPI) (see story, pg 38).

My personal philosophy regarding investments IA: Do you have a family and what do you like is that markets are driven by information, and information is not shared equally across all IA: What has been the best experience in your to do in your free time? market participants. Furthermore, there is no career? Burbridge: Yes, I have a wonderful family.

My wife, Debbi Gillespie, is exploring opportunities for change as she retires from the Joyce Foundation. Our daughter, Megan, and her husband, Matt, continue to amaze and delight us with their lives, not the least of which are our two grandsons, Ben (4) and Luke (2). We golf, travel, and have developed a taste for rye whiskey. IA: What are your hobbies? Burbridge: Golf and gardening. We

landscaped a new home in Saint Joseph, Mich. last year. The carpet roses and grasses have done well.

IA: What was the last book you read? Burbridge: The Hard Thing About Hard

Things, by Ben Horowitz. It was a gift from one of my colleagues. When I was an econometrician, I read about econometrics. As a leader, I read about leadership

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ASSET OWNER PROFILE

ARIZ. BLUE CROSS BLUE SHIELD’S BLACK FOLLOWS THE MONEY BY MARK FORTUNE

My next stop after business school (the W.P. Carey School of Business at Arizona State University) was another startup organization in Phoenix called Translational Genomics Research Institute (TGen), which was launched in 2002 as a public-private partnership to conduct fundamental and clinical research and advance the development of genomicLike many insurers, our portfolio is designed to based diagnostics and therapeutics. The then have one foot in total-return land and one foot CEO of BCBSAZ, Rich Boals, was on the in current-income land. As a health insurer, we board of TGen and he told me about an open don’t expressly liability match. Because the tails position working on investments in BCBSAZ’s on health claims are so short, we wouldn’t own treasury department. The Treasurer, Kate Baker, anything but T-bills if we matched. We do have was a phenomenal mentor who gave me lots of runway to take the investment program to the a bias toward short duration, however. next level. When she retired in 2015, I became IA: What are Blue Cross Blue Shield of Arizona’s treasurer and chief investment officer. total assets? IA: How is your investment team at BCBSAZ Black now serves on the investment committees Black: The general account is currently $1.8 structured? of the Arizona Community Foundation, one of billion. There is another $600 million so in Black: My treasury department is segmented the state’s largest philanthropic organizations, retirement-related assets. with approximately $1 billion assets, and the IA: What led you to your current role with into investments, cash and risk management. I have three dedicated investment positions. Arizona State University Operating Fund. He BCBSAZ? also sits on the finance advisory board of the W.P. Carey School of Business, (the business school of Black: My undergraduate degree was in Arizona State University) and is an IA Advisory international relations, and my first job after college in 1992 was in television production Board member. in New York City. It would be hard for anyone IA: What is the mission of Cross Blue Shield to predict where I might end up if you had of Arizona? met me even three years after college. But, Black: Blue Cross Blue Shield of Arizona is out of personal interest, I began collecting a taxable, not-for-profit health insurer serving designations including the CFA [Chartered customers in the State of Arizona. We are an Financial Analyst] and CAIA [Chartered independent licensee of the Blue Cross Blue Alternative Investment Analyst] charters as Cameron Black, Shield Association. We have been in business well as a CFP [Certified Financial Planner] chief investment for 80 years. Being a taxable not-for-profit designation. And, after a stint at an internet officer and treasurer, Blue entity makes us a bit of an anomaly: we pay full startup in San Francisco, I decided to pursue Cross Blue Shield of Arizona federal corporate income taxes as well as state an MBA. ameron Black is chief investment officer and treasurer of Blue Cross Blue Shield of Arizona (BCBSAZ) in Phoenix. He is responsible for the company’s short- and longterm investment strategies and overseas its risk management. Prior to joining BCBSAZ, Black held positions in television production, was an independent investment adviser and a director in the foundation arm of a biomedical research institute. At the foundation, Black raised money and developed its investment policy statement and investment strategy. Though Black has an affinity for biology and found the cuttingedge science and level of commitment of the principal scientific investigators “invigorating,” he says, “I wanted to manage larger pools of capital.”

premium taxes, but nobody owns equity in the business, which means we don’t have to pay dividends to shareholders. Consequently, when we have profits, we retain the capital. Over time, BCBSAZ’s investment portfolio has become a meaningful contributor to net income, which allows us to offer lower premiums on our policies than we could otherwise.

VOLUME 2, ISSUE 2

Cameron Black (second from right) and family at Antelope Canyon on the Navajo Reservation, Arizona, July 2017

ASSET OWNER PROFILE

I hire generalists like myself and they are all CFA charter holders or working towards the charter. We run lean and know our limits. We only manage certain high-grade fixed-income internally and outsource most of the portfolio to specialists. We spend most of our time sourcing compelling opportunities and developing informed opinions about the markets. IA: What is the asset allocation breakdown of

Blue Cross Blue Shield of Arizona?

Black: AM Best has described our investment

portfolio as being ‘bold’ for an insurance company. I assume that is their way of saying that we own less fixed income than the average health insurer. But I doubt most of your readers would find us particularly bold. Nevertheless, I am proud of what we have done: We regularly benchmark to our peers, and not only do we have very strong relative returns but generally have better risk-adjusted returns. Our current targets are: 48% diversified investment grade fixed income, 14% liquid non-core fixed income (includes HY, bank loans, structured credit and EMD), 6% private market debt, 15% domestic equity, 6% international equities, 11% alts (including real estate, private equity and some niche strategies).

That’s not an exaggeration. It’s literally, “We are raising our next fund, how much are you in for?…Sorry, we can’t give you that big an Black: We only have one investment consulting allocation…How about 75% of that…Okay, relationship and that is with Wilshire. We use great, we will circulate documents in a week.” them mostly for performance reporting, risk analytics and asset allocation studies. Tom Toth IA: What is your view on active versus passive management? is the fund’s representative at Wilshire. IA: Which investment consultants does the

fund use?

IA: How would you characterize your Black: We believe both have a place, but the answer is not the same for every asset class. investment philosophy? The difficulty in adding value through active Black: I am philosophically opposed to losing management within large-cap U.S. equities money. is well known—especially if you are a taxable Aside from that tongue-in-cheek answer, I investor who cares about net-of-tax returns, would say that an investor needs to know his like BCBSAZ. So, over the years, we have shed or her edge when they make allocation and all our true active public equity exposure and manager decisions. For instance, it isn’t typical now our public equities are split between taxfor health insurers to have private equity in managed passive and what I’ll call semi-activetheir investment portfolios, but we decided to factor tilt portfolios. focus only on healthcare private equity because, However, within fixed income, we are 100% by virtue of who we are, we can get access to active, and we don’t see that changing. Most of the top-decile managers that would not take our long-term outperformance has come from our money if we were just an anonymous pile our public and private market fixed-income of money looking to allocate. In the middle- portfolios. market PE space, the really good managers stick to their fundraising hard caps and they have IA: How would you describe your management no trouble raising money. For instance, one of style? the GPs we do business with is usually done Black: I try to lead by example and endeavor raising money for a new fund in two weeks. to overcommunicate. I find that it is easy to

Cameron Black (right) and family at Snowbowl Ski Resort, Flagstaff, Arizona, December 2018

VOLUME 2, ISSUE 2

ASSET OWNER PROFILE

“The difficulty in adding value through active management within large-cap U.S. equities is well known—especially if you are a taxable investor who cares about net-of-tax returns, like BCBSAZ.” get people on board when they are truly in the There is no corner of our personal and loop and understand ‘the why’ of what they are professional lives not impacted by this. But if I had to highlight one thing, it might be the rise being asked to do. of factor investing. With all the available ways IA: What has been the best experience in your to cheaply and easily slice and dice a portfolio career? and to target desired exposures, it has made life Black: It’s hard to narrow it down to a single very difficult for the traditional, fundamental experience. I am fortunate that in my position equity investment shops that used to dominate I get to work with so many smart folks both the landscape. within BCBSAZ and outside the company. IA: Are there noteworthy initiatives in which Very few days go by where I don’t have an Blue Cross Blue Shield of Arizona is currently illuminating conversation with somebody. engaged? IA: What has the worst experience in your Black: BCBSAZ, as a company, is focused on career? the social determinants of health, and we try Black: During the GFC [Global Financial to make an impact not only with our business Crisis], there were many points where I just initiatives and charitable endeavors but even wanted to crawl under my desk and not come through the investment portfolio. For example, out until it was over. I felt that my crystal ball we look to support the development of lowhad completely broken and literally anything income housing through tax credit investing could come next. I also found myself being because of the importance of economic stability asked questions I couldn’t confidently answer— to health outcomes. questions like “which firms are most exposed to IA: How about your personal life? Do you have a potential AIG failure and how can we hedge a family and what do you like to do in your that risk?” In the end, it was fine for BCBSAZ, free time? but it was a humbling period. Black: I’ve been married to my wife Nikki IA: In what part of the industry have you for 18 years, and we have a 16-year-old boy, witnessed the most change? Xander, and a 13-year-old girl, Julia. My family Black: That’s a tough question because I feel keeps me on my toes. Both are involved in like everything is changing so fast. Technology competitive sports. It’s cross country and track is dramatically changing the way we interact for my son and tennis for my daughter. My with, think about and consume information. daughter also competes in speech and debate 24

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and my son has a charity he started in middle school that has now raised over $100,000 for rare disease research. We also love to travel, and we all love nature. The next two family trips on the calendar are to Costa Rica and to New Zealand. IA: Do you have any hobbies? Black: Before I had children, I would have

said scuba diving and photography. Now, it’s spending time with my children and watching them grow up to be these awesome and fascinating people.

IA: What was the last book you read? Black: I tend to read newspapers, trade journals and research reports, but I listen to lots of books on tape while I am traveling or at the gym. I am currently listening to Strategy Beyond the Hockey Stick by a couple of McKinsey consultants and re-listening to Ray Dalio’s Principles. Probably the most fascinating book I have listened to lately is Life on the Edge: The Coming Age of Quantum Biology by McFadden & Al-Khalili. The book discusses how quantum mechanics may answer probing questions regarding what life is

ASSET OWNER PROFILE

ALBRIGHT’S TRS PHILOSOPHY BOILS DOWN TO THREE I’S: INVEST, INNOVATE AND IMPRESS BY LESLIE KRAMER

erry Albright, chief investment officer of the Teacher Retirement System of Texas (TRS), had a private sit down with members of Institutional Allocator’s editorial team when they flew down to Austin to attend Markets Group’s 6th Annual Texas Institutional Forum. Institutional Allocator’s Managing Editor Leslie Kramer later followed up with Albright to find out more about his Texas roots, and how he sets investment strategy for system’s $154.6 billion in assets under the management.

IA: Tell us about your career path to becoming

a CIO.

Albright: I grew up in Gause, Texas. It’s a rural town about a hundred miles east of Austin. After graduating from Texas A&M in 1980, I went to work at the Austin National Bank, six blocks down the street from TRS’s current location, near the State Capitol. Banking in Texas was very fragmented at the time, and that was driven by state law. In order to advance in the business, you needed to move around in the banking community, improving your position at each step. Eventually, due to economic downturns in Texas, the banking industry was allowed to consolidate and the banking business in Texas was dramatically changed. The consolidations led to many changes of ownership, and, ultimately, I decided that the banking industry was not in my long-term plan.

A position at the Teacher Retirement System of Texas opened up, which looked interesting, so I decided to leave banking for the public pension world. What a great decision! I have been here ever since—26 years. I received a great education on the job, with many mentors, and have always been thankful to be a part of Texas Teachers.

Real Return totals 22% including: Global TIPS 3%, real estate and other real assets 16%, energy & natural resources 3%, commodities 0%, REITS 0%. IA: How would you describe or characterize your investment philosophy? Albright: We are always looking out for the

best interests of our members—the state’s education professionals. My philosophy boils breakdown? down to three I’s: invest, innovate and impress, Albright: TRS’s central strategy is composed of and of course surround yourself with the best a 57% allocation to global equity markets, with people. In terms of our portfolio, we invest 80% structurally high allocations to both emerging of our assets with a long-term approach and markets and private equity. The remaining 20% with an opportunistic approach. 43% is composed of three additional strategies IA: What was the best experience in your career? designed to diversify the total fund when either a deflationary or inflationary regime arises. The Albright: I was fortunate to join TRS just percentage allocations to the four strategies when office technology was erupting all around were based on the likelihood of each scenario the public pension fund business. It is hard occurring—based on historical experience. The to believe that I was at TRS when email first scenarios are each defined by GDP growth, became a requirement to do business. I took inflation, earnings growth, productivity, advantage of the tech opportunity and ran a successful project that modernized all of TRS’ political stability and valuation. investment applications. In order to accomplish Stable Value totals 16% including: Treasuries this, I had to know the details of everything we 11%, stable value hedge funds 4%, cash 1% were investing in. That laid a strong foundation absolute return 0%. for my future in investing at TRS. Spending the Global Equity totals 57% including: 13% last two years as CIO at TRS and getting the private equity and 44% public equities. The Building the Fleet initiative (see IA article, Dec. public markets side is made up of U.S.18%, 17, 2018) approved by the Board of Trustees non-U.S. developed 13%, emerging markets and implementation underway is also proving 9%, directional hedge funds 4%. to be a great experience—especially when you IA: What is your institution’s asset allocation

VOLUME 2, ISSUE 2

ASSET OWNER PROFILE

Jerry Albright, chief investment officer of the Teacher Retirement System of Texas

INSTITUTIONAL ALLOCATOR

ASSET OWNER PROFILE

are part of a growing team of really smart, energy and natural resources, infrastructure as talented and motivated investors like we have well as hedge funds. at Texas Teachers. IA: What aspect or element of the industry IA: What was your worst experience in your would you most like to see changed and why? career? Albright: External manager fees should not Albright: Without a doubt, I’d say the

Great Financial Crisis and trying to navigate the drawdown effectively. However, that was followed by one of the most successful transformations at TRS when we were able to use our values and capitalize on our ‘5 L’ strengths, namely, being large, liquid, having low leverage, a long-term dedication and keeping our presence local. Those strengths really allowed us to take advantage of the dislocations in the market.

IA: In what part of the industry have you

witnessed the most change?

Albright: The low interest-rate environment has required significant industry change. This has spurred alternative investing by public plans, like ours, and has certainly changed the landscape of investing. I believe it will continue to do so as institutional entities like TRS become more experienced in direct private investing. To our asset allocation in the past 10 years we have added: private equity, real assets,

take most of the alpha from the fund. I would like to see external managers be more willing to get paid solely from their contribution to the Trust rather than a management fee. Institutional investors like TRS are seeking ways in which to lower cost as a secondary way to improve total return. We will manage what we can internally, when we have adequate expertise. Accessing the full breath of the market will require partnership with external managers.

IA: What is the fund’s funded status? And

if underfunded, what is the fund’s plan to address it?

Albright: As of August 31, 2018, the plan’s

funded status was 76.9 percent. State lawmakers are responsible for setting contribution rates for the state, members and employers. The legislature approved in 2013, a three-phase, stair-step contribution-rate increase for the years 2015-2018. We manage the Trust’s money based on an actuarial rate of return assumption of 7.25%.

IA: What is your key to success? Albright: We are grateful for a very strong,

dedicated and professional Board of Trustees. We provide them with full transparency about the investments we are making, and they delegate the investment responsibility to the investment management division. There are five professional investors and four member representatives on our Board, and they serve the state and members without compensation. IA: Who makes up your family, what are your

hobbies, and what books are you reading? Any travel plans? Albright: I am married to Dr. Brenda B.

Albright, and we have two adult children: Brooks Albright, who works with the Llano County, Texas, Sheriff’s office and my daughter Kelcey Lambert, who is married to Steven Lambert. They have two twin girls, Addie and Jillie. I love any activity involving the beautiful lakes around Austin: jet skiing, waterskiing, and having fun with family and friends. I also enjoy running on the trails around Lady Bird Lake in downtown Austin. I am currently reading the Presidents of War by Michael Beschloss. And next, I will take up Capitalism in America by Alan Greenspan and Adrian Wooldridge

“I had to know the details of everything we were investing in. That laid a strong foundation for my future in investing at TRS. Spending the last two years as CIO at TRS and getting the Building the Fleet initiative approved by the Board of Trustees and implementation underway is also proving to be a great experience—especially when you are part of a growing team of really smart, talented and motivated investors like we have at Texas Teachers.”

VOLUME 2, ISSUE 2

STRATEGY

TEXAS ERS, PAAMCO BUILDING PIPELINE FOR HF-SEEDING PLATFORM BY MARK FORTUNE

n innovative joint-venture, emerging hedge fund seeding and support platform launched by the approximately $28.5 billion Employees Retirement System of Texas (ERS) and Pacific Alternative Asset Management Company (PAAMCO), last summer, whittled a field of hundreds of emerging firms vying to participate in the platform down to an initial “pipeline” of 35 firms, according to Sharmila Kassam, deputy chief investment officer at ERS. She said the platform, called PAAMCO Launchpad, continues to look for more managers that are seeking a partner to help build their hedge funds.

like. The partnership also allows ERS to expand on its $1 billion emerging manager program with the goal of bringing such investments to nearly 10% of its externally managed investment portfolio.

“Since the formal announcement, last June, we have worked on sourcing, which included a cohosted ERS/PAAMCO Forum held in New York City. As anticipated, we are looking through a high number of high-caliber candidates that are seeking to partner with us. At the moment, we would say we are on pace with a number of high-level discussions, and although we don’t have a concrete date in mind for our first seed deal, we are hopeful it takes place in the second or “The program is a unique mix of an institutional third quarter of this calendar year,” according to investor working with an asset manager as Panayiotis Lambropoulos, a portfolio manager at a partner. Particularly with U.S. pensions, ERS who is leading the ERS’ effort in the joint there exists something of a problem with venture. innovation as it relates to investing in early-stage Though Kassam declined to name the 35 firms managers—they are most comfortable doing selected for the pipeline so far, she explained the same old thing. It has taken us two years that at the New York City Forum, which was to formulate PAAMCO Launchpad; it’s taken hosted at the offices of KKR over two days in that long because when you do something late October, the selected firms were interviewed innovative you have to come out with a strong by PAAMCO and ERS representatives for an win,” Kassam asserted. hour each, at which details of the program Kassam added that the program’s goal is to and the individual firms’ qualities and fit for invest $300 million in two to three managers in the program were discussed. “The discussions its first two years. The long-term goal is always were at a high level of detail regarding the nature to have seven to 10 managers on the platform, of the program and the characteristics of the firms seeking to participate on the platform,” she said. Kassam said.

Austin, Texas Powwow

In February, ERS and PAAMCO met in Austin with other investors to discuss with them their interest in participating in PAAMCO Launchpad’s “eco-system”, Kassam said. The meeting was attended by key decision makers from various institutions, including other public pension plans. The goal of the meeting was to more formally introduce PAAMCO Launchpad and to discuss in greater detail the thought process behind its design and execution. PAAMCO, which is seeking other Launchpad relationships similar to ERS, expects to deliver $3 billion in assets to emerging hedge fund managers on the platform. The goal is to attract other institutions onto the platform, including pension plans, sovereign wealth plans, and the 28

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How Managers Are Selected

The hedge fund managers were selected for the pipeline based on a compelling investment strategy and the potential for them to grow their firms. The initial pipeline and selection of managers was based on strategies with which ERS already focuses and invests, such as Global Macro, Relative Value, Credit (long/ short, structured), Event Driven and to a lesser degree Equity long/short. Jeff Willardson, head of portfolio solutions for PAAMCO, is leading manager due diligence for prospective PAAMCO Launchpad managers. Andrew Gitlin serves as CEO of the program. ERS is the inaugural partner with PAAMCO Launchpad, but both organizations are willing

to work with other capital allocators on a coinvestment basis, Kassam said. PAAMCO Launchpad is a co-investment drawdown structure. Both ERS and PAAMCO need to agree on a manager for a full due-diligence process to begin. Once an agreement is reached, PAAMCO oversees the entire due-diligence process, but ERS shadows that process and retains veto rights, Lambropoulos explained. For every dollar ERS is willing to invest in the manager’s commingled structure, PAAMCO will match that investment in equal or perhaps slightly higher amounts but through a separately managed account. PAAMCO Launchpad serves as the sub-advisor to PAAMCO and will oversee manager fee negotiations, manager sourcing, manager oversight, board oversight, etc., on behalf of ERS or any other future clients.

A Compelling Solution?

ERS and PAAMCO believe the platform will be a compelling solution to help burgeoning managers with high-growth potential establish institutional-caliber firms. By combining their resources, experience and investment capital, ERS and PAAMCO believe they can provide a meaningful opportunity to hedge fund managers that have the foundation to grow into successful and profitable businesses, according to a press release issued upon the initiative’s launch. PAAMCO and ERS received more than 180 requests for Launchpad consideration, and more than 150 separate requests to attend Launchpad NY Forum, according to Lambropoulos. Of the 150 requests, 84% were U.S.-based managers, 16% international (including Australia, Switzerland, U.K, France, Argentina, Brazil, South Africa, India, and China), Lambropoulos said. In total, more than 70 collective hours were spent meeting with emerging managers over two days by PAAMCO and Texas ERS representatives, he said. The strategies of emerging managers in attendance included: LSE (TMT, Consumer, Healthcare, and Infrastructure), EMN, Global Macro, Quant and AI, Volatility, Structured Credit, FX trading, and Emerging Markets Credit

Sharmila Kassam, deputy chief investment officer, Employees Retirement System of Texas

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VOLUME 2, ISSUE 2

STRATEGY

ARIZONA REJECTS ACTIVE MANAGEMENT OF U.S. PUBLIC EQUITIES

BY LESLIE KRAMER

hen investing in U.S. equities, Bill Thatcher, portfolio manager, equities and private credit at the $10 billion Arizona Public Safety Personnel Retirement System (AZ PSPRS), thinks index funds are the way to go. Thatcher’s research on the active versus passive asset management question, which touts his concept, The Purity Hypothesis, was published this winter in the 2019 edition of The Journal of Index Investing. The paper is an update to his two previous articles on the topic, published in 2009 and 2012 in The Journal of Investing and The Journal of Index Investing, respectively. Thatcher looked at more than 150 independent time periods across the Russell U.S. indexes from 1979 to 2017 to base his conclusions.

wins. Conversely, in the worst performing asset categories, the index tends to underperform active managers. But that still doesn’t do much for the reputation of active investors because, as Thatcher puts it, “Why would you want to invest in the worst performing categories?”

The fund’s portfolio now comprises 16% U.S. equities, 14% international equities, 12% private equities, 16% private credit, 12% global trading strategies, 9% real assets, 10% Thatcher said “it’s tough to find active managers real estate, 4% risk parity, 5% fixed income and in U.S. equities who have consistently 2% cash. outperformed their index. That’s why AZPSPRS currently has about 30% of its portfolio The purity hypothesis invested in equities, most of which is passively Thatcher’s purity hypothesis is predicated on managed. “We have not hired active managers the notion that most active managers do not for public equities, U.S. or international, for a cleave purely to their investing style when while,” Thatcher said. “We think it’s easier to investing. The result is that active managers find active managers who have outperformed tend to underperform their index in the top in other asset classes.” AZ PSPRS uses active performing equity categories and tend to

“Conventional wisdom says that domestic equity indexing is more likely to outperform active managers in efficient markets, like large stocks, and is more apt to underperform active Russel domestic managers in less efficient areas, like small stocks,” equity index stocks Thatcher originally wrote in 2009. But the data over a 10-year period does not support this idea. Instead, it shows that “domestic equity indexing tends to outperform active management in the highest-returning asset classes and tends to underperform active management in the lowest-returning asset categories,” he wrote. To conduct his most recent study, Thatcher looked at the stock performance of the Russell domestic equity indexes over the last 39-year period. The categories at which he looked include core, growth and value stocks broken down into small-, medium- and large-cap stocks, resulting in nine boxes of investible equities, which can be viewed in the Morningstar Style Box (right). What he found was that within U.S. equities for the asset categories that do the best, index investing 30

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managers for its private equity, private debt, real estate, real assets and hedge fund portfolios.

MORNINGSTAR STYLE BOX

+2.35 +0.04 +1.03

LARGE

-0.82 -2.63 -3.01

MEDIUM

-0.98 -2.05 -5.07

SMALL

VALUE Source: Mornignstar

BLEND

GROWTH

STRATEGY

Bill Thatcher, portfolio manager, equities and private credit , Arizona Public Safety Personnel Retirement System

outperform their index in the worst performing equity styles. Take large-cap growth stocks, for example. “Large-cap growth stocks have been crushing everything for a long time; they are the best performing class.” And what Thatcher’s research has found is that the large-cap growth index has tended to outperform large-cap growth active managers in that box, Thatcher said. That’s because large-cap growth active managers typically don’t have their entire portfolio invested in large-cap growth stocks. “These active managers are not style pure,” Thatcher said. “They will also have non-large growth stocks, maybe some medium growth stocks, that are not performing as well and that drags down their return versus the large-cap growth index,” he said.

worst performing box and all active managers are not style pure, then the companies in which they invest outside of small-cap value, such as small blend or midsize blend, will pull the active managers’ investment up, and help them to outperform the index, Thatcher explained. What it boils down to, he said, is that “active managers are punished for their style impurity in the best performing asset class and are rewarded for style impurities in the worst performing asset categories.”

Implementing the purity hypothesis

So, how should investors best use the purity hypothesis concept to boost returns? “To take advantage of the purity hypothesis, one needs to have a view on which of the nine Morningstar style boxes is going to outperform the other over the next three to five years or longer. Once you take a view on which box might outperform, buy the index fund associated with that box. The investment time frame is key. In the short run, there can be times when active managers tend to do better than the index in the top performing box. But as the timeframe lengthens, the percentage of active managers that outperform the benchmark index tends to drop. It remains to be seen if we have reached an inflection point for value to outperform growth. It seemed to be happening in the short term towards the middle of 2018, but growth seems to be beating value again now,” he said.

The concept works the opposite way in the worst So, for those who see this as an on-going performing style box. If small-cap value is the trend, Thatcher’s recommendation, based on

the purity hypothesis, would be “to tilt their portfolio toward value stocks, depending on a number of indicators.” And they should use index funds to do so. “Because, if your tilt is right and value stocks outperform growth, then active value managers as a group are likely to underperform the index. It’s just another reason to avoid active managers,” Thatcher said.

Are active managers the better choice for international equities? While passive is the way to go with U.S. equities, Thatcher cautions against using the purity hypothesis when looking to invest in international public equities. That’s because of the fluctuations in the currency markets. “If there were not currency movements, maybe the same thing (purity hypothesis) would occur, but we don’t know,” he said. Thatcher is also quick to point out that he didn’t come up with the seminal idea behind the research he is touting. He credits William J. Bernstein, the editor of the quarterly assetallocation journal Efficient Frontier and a principal at Efficient Frontier Advisors, an investment advisory firm, and Steven Dunn, the founder of Dunn’s Law, for formulating the basic theory in 1999. Thatcher was so impressed with their research that he began updating it every few years. He is surprised that it hasn’t gotten more traction. “The data is really strong, and people don’t know about it yet,” he said

“When an asset class does well, an index fund in that asset class does even better.”—Steven Dunn, founder of Dunn’s Law, which seeks to explain certain elements of fund performance.

VOLUME 2, ISSUE 2

STRATEGY

KENTUCKY SYSTEM LOOKS TO TAKE ADVANTAGE OF COMING DISTRESSED CYCLE BY LESLIE KRAMER

he investment team at the Kentucky Retirement Systems (KRS), which includes the Kentucky Employees Retirement System, the County Employees Retirement System, and the State Police Retirement System, is preparing for what they believe is a coming recession, by looking for opportunities to invest in distressed assets. The team is also lightening its public equities exposure, moving more fixed income and stocks into index funds and looking for partnership opportunities in private equity.

should buy cheap, because they [the assets] will recover.” He also noted that while this strategy is easy to talk about, “making yourself do it can be difficult. That is why we rebalance every month back to our target, so that means selling the winners and adding to losers,” he said.

sense approach of investing—buy low, sell high—doing it in practice can be tough,” he admits. “You have to believe that the sky is not falling, that if it [the market] is down 30%, you

At the end of March 2019, KRS had 37.5% of assets invested in public equities. Of that 37.5%, roughly 19% is currently indexed, about half of the total allocation. “We will look

As it turns out “selling the winners” is often not as easy as it sounds. Robben said it all boils down to self-control and not being greedy. He summed up his philosophy as such: “Pigs get fat, but hogs get slaughtered; there is no reason to be a hog.” As such, Robben is looking to sell public equities in particular. “It’s time to back “There will be a distressed cycle, and I want to away from the trough and find other places to make sure we have plenty of dry powder for it,” get returns, after a 10-year tear,” he said. said Rich Robben, the systems’ chief investment officer. Robben and his team are not wasting Index your equities and fixed any time in doing so. “Governance structures income take so long to make an investment that if we The Kentucky Systems, with approximately were to wait until we know the distressed cycle $17.6 billion under management, currently is here, and we could capitalize on it, it would be runs roughly 23% of total assets in indexed half over,” he said. “You have to be out in front strategies. “With the current review, we of stuff.” Robben’s team is currently talking to anticipate moving up another 5% to 6% managers about potential opportunities. “You into pure indexed mandates,” Robben said. get a bite out of that apple once every eight to Of that 23%, 19% are in indexed equities funds and 4% in indexed bond funds. “We ten years,” he said. have an additional 13% of assets in what we would consider “indexed” core fixed-income Not afraid to buy in the mandates, but these are not technically pure downturn While Robben adheres to the “common indexed investments,” Robben explained.

INSTITUTIONAL ALLOCATOR

at potentially bringing that indexed number up closer to 25%, by the end of the year, which would be roughly three-quarters of the total public equity allocation,” Robben said.

Looking at a move toward PIMCOs Stocks Plus KRS currently runs a $1.5 billion internal equity fund, indexed to the S&P, but it is considering replacing it with a product like PIMCO’s Stocks Plus, to enhance the return from those assets. Stocks Plus is a portable alpha strategy whereby investors get the equity beta from stock futures, and then port fixed-income alpha on top of that in order to generate alpha, Robben explained. “The idea behind the Stocks Plus effort would be to earn some incremental return,” Robben said. “We are just looking into the idea currently; it would be a fall initiative

Rich Robben, chief investment officer, Kentucky Retirement Systems

STRATEGY

if we get the Board approval to move forward want to focus on the specialty finance manager,” efficient. Robben believes in the Efficient Market Hypothesis. “An efficient market is with the idea,” he noted. he said. one where all participants have equal access The Kentucky systems’ overall dedication to The majority (70%) of the Systems’ core fixedto all necessary information. In efficient equity index funds is a simple one. “There is income, which accounts for 18% of total assets, markets, it’s hard for a manager to generate no reason to spend our time or fees on large- is also indexed. “About 70% of our core-fixed alpha because, by definition, the manager has cap U.S. equities [active managers]; they can’t portfolio is invested in what I would call enhanced no informational advantage,” he explained. In outperform,” Robben asserted. “Where markets indexed strategies, where the managers don’t take “the private markets, we can be strategic, like are really efficient, it doesn’t make sense to duration bets, but try to add idiosyncratic alpha with our partners,” Robben continued. “As a spend time and fee dollars trying to outperform. via security selection,” Robben said. “With flat fund, we bring an incredibly long time horizon, It’s better off to take beta cheap as we can get yield curves and low yields and public bonds for very deep pockets, and an almost $18 billion it,” he said. which the dispersion between the bottom and pool of assets, so that is my proposition to The decision is also a practical one: “We have top managers is 40 basis points, it doesn’t pay to the market. Capitalize on it where you can be strategic,” he said. Robben also believes that an investment staff of four, so we need to be be active there,” he said. cognizant of where we spend our time,” Robben In February, The KRS investment team “there is value for a manager to say that they said. “We want to spend staff time looking for presented to the Board, during which they have a state pension fund on the client roster; I managers and strategies that have the best explained that they would like to see 50% of want to capitalize on that,” he said. chance of outperforming. Fundamentally, the portfolio’s total assets indexed. “We want to When choosing a private equity partner, we want to focus our staff on managers get the cheapest beta you can get and set it and KRS tends to focus on investing with smaller, and strategies that can move the needle by forget it,” Robben said. The Board responded more specialized asset managers as opposed producing meaningful alpha. For example, favorably to the presentation, he noted. to larger money managers within its private should we focus staff time on determining if markets’ portfolio. “Our investment would a core fixed-income manager can consistently Active management in the be less meaningful to the Aries [Capital] and produce 50 basis points of excess return over private markets Blackstones of the world, but pretty meaningful the U.S. Aggregate, or trying to find a specialty The private markets are where KRS is looking to other people; so, you want to fish in the right finance manager who can produce returns of to dedicate most of its time and fee-spend pond so that you can be meaningful capital to LIBOR plus 700 basis points? Obviously, we on active management, on areas that are less your partners,” he said

“Pigs get fat, but hogs get slaughtered; there is no reason to be a hog.”

VOLUME 2, ISSUE 2

STRATEGY

CTPF TIPTOES IN Investors’ Long Day’s Journey to Africa Investing Continues BY MARK FORTUNE

he approximately $11 billion Chicago Teachers’ Pension Fund (CTPF) evidently was attentive and took careful notes as part of a delegation of investors that visited South Africa in the spring of 2017, and Senegal and South Africa one year later. The upshot: At its Jan.17 board meeting, the fund approved a $20 million allocation to two managers that will focus on African private equity, representing the fund’s inaugural allocation to the class and adding its name to a small coterie of U.S. institutions that are considering or have recently gained direct exposure to the PE investment class in Africa. CTPF chose London-based Development Partners International (DPI) and Mauritius registered Advanced Finance & Investment Group (AFIG). Each manager was awarded $10 million. “The fund has been expanding its exposure to private equity in recent years to reach its target allocation of 5%,” according to CTPF CIO Angela Miller-May. The fund also recently conducted a search for MWDBE

Angela MillerMay, cio, CTPF

INSTITUTIONAL ALLOCATOR

asset management firms (minority, women and persons with disabilities-owned business enterprises), to which it also allocated $10 million apiece, she said.

visit Africa and meet with pension funds and to gain a sense of the investment environment there. Finally, after three years of educating ourselves, we issued an Africa PE RFP last summer, which received 20-plus responses,” At its March 2019 meeting, CTPF’s board Burbridge said. approved the engagement of several managers and funds. They included Hispanic owned NASP is an organization that assists people managers AUA Private Equity Partners (to of color and women achieve inclusion in its AUA Private Equity Fund II) and Estancia the financial services industry. USAID is an Capital Management, a Hispanic owned international developmental agency. CTPF manager (to its Estancia Capital Partners II); was part of the second delegation of U.S. P4G Capital Associates, a women-owned investors organized by the NASP-USAID manager (to its P4G Capital Partners); and Investment Partnership for Mobilizing PiPV Capital, an African-American manager Institutional Investors to Develop Africa’s Infrastructure or MiDA. MiDA’s mandate is (to its PiPV Capital I). to expand opportunities for U.S. institutional CTPF was planning to launch a venture capital investors seeking infrastructure investments fund-of-funds request for proposals at the close in Sub-Saharan Africa (SSA) for commercial of March (as this story went to print), and at profit, while making a meaningful impact in that time had not decided on the timing of the region. an additional private equity MWDBE search, Burbridge was accompanied by Miller-May according to Miller-May. on the first and second Africa field trips (both are menders of NASP’s Africa Advisory CTFC’s Africa PE Foray The chronology of events leading to the fund’s Committee). The delegations included other first Africa PE allocation began in 2015, U.S. state and city pension funds, namely from according to Chuck Burbridge, CTPF’s chief Illinois, New York, California, Philadelphia, investment officer. “We’ve been participating San Francisco, Atlanta and Chicago, along with USAID [United States Agency for with endowments and foundations, various International Development] and the National banks and insurance companies, unions, Association of Securities Professionals [NASP] consultants, investment managers and industry to educate ourselves and our members on organizations, according to Miller-May. The investment opportunities in the PE class in fund’s two Africa tours were for eight days and Africa,” he said, explaining that the fund was 10 days, respectively. first introduced to the opportunity at a June 2015 NASP summit in Chicago. (CTPF has attended the annual summit every year since; this year the meeting will be in Baltimore, June 23-26). “At the summit, the discussion grew; NASP then sponsored a trip with USAID to

“It is our belief that the growth opportunity identified in various African regions hold long-term potential for investments that will yield positive returns. We believe that the growth of the middle class, the growth of the working class, urbanization and modernization

STRATEGY

“We are a $15 billion EM private equity fund; we’ve invested around US$4.5 billion in Africa since inception, so that is around oneBurbridge characterized the relatively small third of our exposure,” a spokesman for Actis initial allocation into the Africa PE class (it confirmed, adding that around half the fund’s represents a mere 0.18% of the fund’s total investors are U.S. institutions. assets) as “shooting bullets before cannon balls,” a reference to a book on management by Jim While the approximately $132 billion Collins and Morten Hansen titled Great by Washington State Investment Board (WSIB) Choice: Uncertainty, Chaos, and Luck–Why Some does not now have any funds with a defined Thrive Despite Them All. The book posits that Africa focus in its PE portfolio, “we have foolish leaders look for big solutions, giant leaps recently visited Africa and intend to continue and dramatic success, whereas wise leaders take researching various economies there. That is the case with most emerging and frontier markets small steps before making giant leaps. globally,” according to Chris Phillips, WSIB’s “This modest initial gambit will allow us to Director, Institutional Relations and Public understand more the framework of these Affairs. He added that WSIB is a member of investments, the risks involved and the layers the 20-20 Investment Association, a group of we’re dealing with,” Burbridge said. “This is pension and asset management organizations not a throwaway investment by any means,” he interested in exploring the long-term capital emphasized, “but it’s not so large that we have to market characteristics of frontier and emerging hit a home run. This allocation is as much about markets. education as anything—it’s to test if we really know what we think we know.” He added that “We participated in our first 20-20 Association he hopes the investments, which he expects will trip to West Africa last fall (October 2018) run for approximately seven years, will generate in order to deepen our understanding of the a 15% return. The fund did not use a consultant economies and market conditions in Nigeria, Ghana, Cote d’Ivoire and Morocco. The trip for the allocation. Burbridge noted that all the was strictly exploratory for research purposes fund’s PE transactions are researched in house. and did not involve investment commitments CTPF’s current asset allocation targets are or specific prospects,” Philips said. 30.5% Domestic Equity, 30.5% International Regarding the value that the fund derived Equity, 23% Fixed Income, 9% Real Estate, 2% from the trip, he said: “We gained first-hand Infrastructure and 5% Private Equity. knowledge of the opportunities and challenges in these markets, personal contacts with Other Investors Circle Africa business and government leaders, along with The City and County of San Francisco a better understanding of the partnership Employees Retirement System and the Seattle, efforts necessary to develop successful longWash.-based Casey Family Foundation are term investment ventures.” He noted that two institutions that were part of the investors’ the South Africa housing fund investment to delegation that have already made investments which Aymeric referred may have been part in infrastructure in Sub Saharan Africa, after of an internally managed emerging markets having attended MIDA trips, according to real estate fund-of-funds, which is no longer Aymeric Saha, a managing director at the making new investments. He said he would NASP-USAID Investment Partnership need more details to be certain who is responsible for the MiDA initiative (IA, 5/15/2018). He pointed also to a $180 million 2017 direct investment by Prudential in the African financial service sector and a $50 million 2017 investment in a South Africa housing fund by the Washington State Investment Board.

Shooting Bullets Before Cannon Balls

Chuck Burbridge, executive director, CTPF

will act as a growth catalyst making Africa a very attractive investment destination. We believe that the movement toward democracy in certain regions and the improvement of macroeconomic fundamentals further reduces the political risk and market instability. At a time when the population of various regions are aging and growth is slowing across the developed markets, we find emerging markets and Africa, in particular, attractive markets that can provide growth opportunities and increased return potential,” Miller-May explained. CTPF opted to award mandates to DPI and AFIG because the principals at both firms have long track records of investing in Africa; they both have invested through cycles in Africa; and both firms have long runways with the current teams, according to Miller-May. “In all our private equity investments, we underwrite teams of people. We look for high character, ‘safe pair of hands’, cultural alignment in doing the right thing and a proven ability to outperform public markets,” she stated. In addition, the AFIG Fund II co-investment vehicle affords CTPF exposure to lower-middlemarket buyouts at a greatly reduced fee and visibility into existing investments,” Miller-May claimed. AFIG also targets financial services, consumer goods, agribusiness, light industrial and manufacturing—all sectors that will capitalize on Africa’s growth story, she observed. The DPI Fund II partnership opportunity was chosen because it gives CTPF exposure to larger buyouts that are profitable or have cash-flow-positive African companies with strong projected growth rates and experienced management. DPI targets industrials and logistics, consumer/retail, financial services, healthcare, natural resources and telecommunications. “We expect that DPI will be a great complement to AFIG with both managers exposing CTPF to lower middle market and large market growth sectors in Africa. DPI also invests in a diversified Pan-African geography, while AFIG focuses on nine core countries,” Miller-May explained.

Saha noted that it is difficult to assess or quantify U.S. institutions’ appetite for Africa exposure because many investors are exposed to the class by virtue of their investments in emerging markets funds and indexes, which have historically delivered exposure to Africa in varying degrees. “For instance, Actis in London, is one of the biggest EM funds (it recently raised $2.7 billion for its 4th energy fund). Typically, 50% of its investors are U.S. funds and one third of its expose is in Africa,” Aymeric observed.

Aymeric Saha, a managing director at MiDA

VOLUME 2, ISSUE 2

PRIVATE WEALTH

KEEL POINT’S SKANCKE SEES HNW INVESTING AS THE SAME BUT DIFFERENT TO INSTITUTIONAL INVESTING BY ADENA BAICHAN

teven Skancke, chief economic advisor of Keel Point, a registered investment advisor (RIA) serving ultra-high net-worth families, institutions and private clients, with approximately $2.2 billion in assets under management and another $2 billion in assets under advisement, spoke recently with Institutional Allocator. Skancke discussed his industry experience, categories of investing considering current volatility, and shared his thoughts on the growth of family-office-like entities in the industry.

IA: Tell us about your background. What led you to your current role at Keel Point? Skancke: I’ve been here 12 years. I came to join a friend who started the firm 20 years ago to help build out the investment side. I spent 15 years in government, much of that time at the White House, working on national security and economic international policy matters. I left in 1984 at the end of the first Reagan administration and joined up with my former boss from [the Department of ] Treasury, George William Miller, who had been chairman of the Federal Reserve and then Secretary of the Treasury. We were a merchant-banking firm, G.W. William Miller & Company, advising, principally, large international institutions, companies, international development associations, countries and exceptionally highnet-worth families and sovereign wealth funds. 36

INSTITUTIONAL ALLOCATOR

I left in 2006, when Miller died, [and] started at Keel Point. IA: What roles have you played at Keel point? Skancke: My function has been to, first, build

out an investment program serving our clients and, second, to be particularly attentive to investment strategies and opportunities as we observe the way investing and interacting with ultra-high-net-worth clients—be they families or institutions—is evolving. When I was with Miller, we were early adopters of hedge fund investing and index fund investing. Now, we think of exchange-traded funds as being the foundational level of diversified portfolios. It was all very new in the 1990s. When we were looking at an ETF, one of the first things that we needed to check was the ability of the offeror to meet investment demand, and next, what portion of its shares could trade at any day.

your portfolio, be sure that you’re getting paid for the risk that you’re taking, and always be mindful of diversification. IA: Where are you currently investing? What asset classes are you focusing on right now?

Skancke: Well, we look at the larger groups of asset classes as being stock and possessing stock-like risk. That can be individual stocks, exchange-traded funds, mutual funds and the like, along with bonds and bond-like risk in portfolios. We would put stocks and their equivalents in the offense category along with offense alternatives. The offense category would include U.S. international emerging markets, energy, master-limited partnerships, real estate,

My role has also been to see how the alternatives strategies—of which there is an extraordinary abundance—can really be sculpted and managed to play an important and integral role in a diversified portfolio. In this, we position the clients—be it institutional or families— to capture a market return when the markets are running up and be defensive when they’re not—when they’re running the other way. IA: How would you characterize your investment philosophy? Skancke: To pay particular attention to risk in

Steven Skancke, chief economic advisor of Keel Point

PRIVATE WEALTH

structured notes, and some of the hedging strategies that are more market-oriented— equity long-short, for example. And then in the middle, we have what we would call ‘flex’ or ‘dynamic’ equity strategies. On the other side, we have defensive positions, which would include bonds, gold, managed futures, market neutral, and multi-strategy investment classes. IA: With the increased market volatility of late,

have you made any changes to your portfolios?

Skancke: Not so many changes. We’re always

looking at the managers we have within our asset classes and evaluating their performance against the benchmark for that asset class. For example, for U.S. large-cap stocks, we seek first to capture the allocation to that market with an exchange traded fund. After that, we look for managers, whether they’re mutual fund managers or separate-account managers that can differentiate themselves from the benchmark index and show outperformance or less risk. We have, for example, a separate account manager that does better in down markets than the index. So, when the S&P was down, I think, 4% for the year, this manager was down less than 1%. So, we’re always looking for managers that can differentiate. Within the last four months, we have changed some of our managers if they underperformed

or if they didn’t differentiate. We’ve also continued to look for more opportunities in defensive positions. And we’ve continued to look for and invest in the ‘flex’ or ‘dynamic’ equity strategies. This includes quantitative equity, where we have several equity managers that use big data—artificial intelligence, machine learning—to manage their portfolios. They’re not high-frequency traders, but they’re looking for a way of investing that differentiates itself from the basic trends and that shows outperformance in average markets and exceptional performance in down markets. So, last year, again, when the global stock index was down 9%, these quantitative ‘flex’ equity managers were down 2.5%.

profile is of the overall portfolio.

When we come into correcting markets, as we expect that we will, whether it’s later this year or next year, it’s important to know what the risk in the portfolio is. If, in communicating with their clients, they come to believe a client is seeking, for example, an intermediate portfolio, which traditionally would be a 60/40, and volatility continues the way it is, and corrections come, it would be unfortunate for that portfolio to exhibit greater drawdown than what would be expected. If someone had an intermediate portfolio, the drawdown would be expected to be down 8.6%, but if it turns out that the portfolio is in fact down 10% or 11% or 12% for any reason, that client has been disserved IA: What advice would you give to other and that manager is likely to encounter the investors given the current market? consequences of that. Skancke: The first thing would be to IA: Keel Point has a multi-family office division. make sure they have a clear and complete What’s your view on the growth of familyunderstanding of the risk profile in their office entities within the wealth management portfolios—to understand what the risk really industry? is. For example, people talk about a 60/40 portfolio—60% equity risk, 40% fixed-income Skancke: You see in the popular press the focus risk—and many investors, we see, might even of wealth dispersion being so concentrated in add up how much they have in equities and the upper end with the top 1% controlling 40% how much they have in bonds, but they also of the wealth in this country. It’s a result, at least tend to have alternatives in them. As a result, in part, of a lot of folks who started companies it gets a little bit fuzzy regarding what the risk over the last 10 or 12 years coming to the point profile is of those alternatives and what the risk of a liquidity event, monetizing their work

“We’ve inherited all this money, and we need to figure out what it’s about, what to do with it, and how we can use it for impact with the values that we have as individuals”

VOLUME 2, ISSUE 2

PRIVATE WEALTH

and pumping out between $20 million and $2 billion in some cases. The question then is, how do they manage their wealth along with all the things around it, which includes planning, estate planning, wealth transfer planning, philanthropy—how they organize it, how they pass down their values to the next generations, how they deal with what are sometimes the detrimental effects of wealth in a family, and next-generation mentoring. There’s also certainly bookkeeping and administration, then there is the matter of the one-off deals in which they get they get invited to participate. There’s the organization of homes and travel. So, the idea comes to mind—”oh, we need a family office!” So, what does a family office look like, what does it really mean, and what does it cost to operate it? The answer is, it’s actually very expensive to have your own family office compared to connecting with someone who provides family office services for multiple families. Because, when you sign up with a multi-family office, it can hire the top talent in all those fields— strategies, next-generation mentoring, family coaching, family meetings, philanthropy, the what and why of the money—and can handle the investment side, too, with the top talent. Otherwise, with a hundred-million-dollar family, if you were going to spend 1% of your wealth per annum, are you going to hire a really top investment strategist? Or are you going to hire someone who’s really good at planning? Are you going to hire someone who is really good at, I’ll just call it, family therapy? Because a million dollars doesn’t go very far if you’re looking for top talent in any of those areas. And if you’re not looking for top talent, you’re really underserving yourself. Better that you go somewhere that has the top talent already. They provide the services for you, and they have the talent on staff. No one, not even a billion-dollar family, is likely to fully use a top investment strategist or investment manager.

INSTITUTIONAL ALLOCATOR

And so, a multi-family office [MFO] can apply like a 70/30, to build for future generations and those resources to meet those requirements as to future use. Those decisions by the family come out of, first, understanding the family they’re needed. mission. IA: How does your firm tackle having affluent families achieve their return targets? What is IA: Are there similarities between ultra-highnet-worth families and institutional clients? your philosophy? Skancke: First, it’s to understand what the

money is about and what represents success from their perspective; what is it that they’re trying to achieve in life generally, and what role does the money play. It’s what we call the “mission, vision, values, and goals” for the family, and where does the money fit in to that.

IA: What do you find are the most common goals of affluent families in the current market? Skancke: The most common themes people

are coming to us in the multi-family space with is: “We’ve made all this money,” or “We’ve inherited all this money, and we need to figure out what it’s about, what to do with it, and how we can use it for impact with the values that we have as individuals. As a family, how we can pass this on to our children and grandchildren so that the money will be a blessing in achieving and perpetuating family goals as opposed to as a disrupter?” They’re more focused on use rather than growth. All of them want to keep it safe so that it can be used in the way they want to use it. This is not about creating wealth, this is about preserving wealth and growing it moderately overtime. And making sure it’s available when and as they need it. Some families sort of bifurcate their pots of money. They will have a pot of money that is to provide for the living expenses for the family over time. The allocation of their wealth will be invested in what would be, typically, a more moderate or intermediate portfolio—sort of a 50/50 equity/bond risk profile. And then they’ll have another pot of money for future generations and philanthropy. For that, they’ll have a different risk profile, maybe something

Skancke: There’s always a difference

between an institutional client and a family, even an ultra-high-net-worth client, because institutions don’t die but individuals do. At the end of the day, that does have an impact on the way they think. It goes to things about children and grandchildren, family values, philanthropy and things like that, that can evolve and must make those generational jumps, which doesn’t happen so much with institutions. Even though they must evolve, a foundation or an endowment usually has a focus or purpose and operates for that. On the investing side, yeah, there are similarities, just because of the size of the wealth. Investing for someone with $50 million is different than investing for someone with $5 million. Whether it’s an institution or an individual, there’s a broader array of things that you’re looking at. Part of that has to do with liquidity and illiquidity. An investment portfolio with a long-term view can invest in things like private credit, private equity and private real estate, where typically the money goes in over a period, and it’s just there. It’s not liquid. People expect to get paid for accepting that illiquidity, which is why private equity, in general, generates a higher return—because your money is tied up. Institutions and ultra-high net-worth families are better equipped to deal with that than are other investors

GUEST ARTICLE

THE U.S. PENSION CRISIS If pensions were to mark to market their assets and liabilities, corporations and multiemployer plans (unions) would each show a deficit of more than $200 billion, and public plans would show a deficit of more than $4.4 trillion (Moody’s study) vs. a reported deficit of $1.6 trillion. How could this happen? Blame it on inappropriate accounting rules that misinform and misdirect the pension asset allocation.

Lucent Technology was sold to Alcatel, Lucent reported that pension income was 92% of reported earnings! When I testified before the ERISA Advisory Council in Wash. DC in 2003, I brought in a five-foot pencil, named Woody. I explained that Woody is a weapon of mass destruction in America; Woody could do much to artificially enhance financial statements. With Enron and World Com fresh on people’s minds at that time, I emphasized that pension rules require pensions to use market valuations for pension assets and liabilities. I urged that the discount rates used are real market rates that a pension can buy to defease liabilities, and that there be a requirement that the financial truth be told so pensions can understand the problem at hand and then solve it. The council was very reactionary and impressed.

BY R O N A L D J . R YA N , C FA

Pension benefit payments are usually the largest liability and expense in their budgets. According to Government Accounting Standards Board (GASB) accounting rules, pension asset valuations are smoothed over five years and liabilities are priced at the ROA discount rate. Smoothing distorts the true economic value of assets. Using the ROA as the discount rate for liabilities has undervalued liabilities by 40% to 60% since 2000. How the ROA as a single and static discount rate could price monthly benefit payments stretching out over 30+ years is hard to believe. More important is that the ROA has nothing to do with liabilities. It is an asset forecast! The ROA makes assets and liabilities have the same projected growth rates. This means that the only way to cure a deficit by the actuary is through higher contributions.

Corporations (Private Plans) Corporations are earnings led and not liability led. There’s nothing wrong with that until one understands and connects how pension assets affect earnings. The real villain of this story is the Return on Asset (ROA) assumption. Financial Accounting Standards Board (FASB) accounting rules allow corporations to forecast the ROA for pension assets rather than using actual returns. Since pensions are an expense item, they can hurt earnings. The offset is the return on pension assets. Since FASB allows corporations to forecast the ROA, why not forecast a high enough ROA that converts pension expense into pension income? Such pension income flows directly into EPS Public Pension Plans creating “phantom earnings”. In 2006, when Cities and States are budget or cost oriented. Many cities and states have been hard hit by VOLUME 2, ISSUE 2

GUEST ARTICLE

spiking contribution costs of five to 20 times higher since 1999. Moody’s assigned a negative outlook to the creditworthiness of all local governments due to their cash flow crisis on April 7, 2009. This was the first time Moody’s had ever issued such a blanket report. Moody’s has also disregarded the ROA as a discount rate in favor of the FASB approach of an AA corporate yield curve. Such improper asset and liability valuations misinformed public pensions regarding their true funded ratio (market value of assets/ liabilities). Unfortunately, many pensions believing they were actuarially fully funded in the early 2000s behaved accordingly by raising benefits and decreasing contributions when they could not afford to do either.

same problems as public plans. MPs may have 2002, pension assets were hit hard due to an even worst funded status than public plans, their increased allocation to equities and risky assets. What few pensions realize is that pension due to their increased benefits focus. liabilities behave like long bonds, which grew A major problem for all pensions is how the significantly in present value as interest rates ROA affects asset allocation (AA). The ROA trended downward since 1982 when Treasury must be validated by an auditor based upon bonds were yielding 14%. Double digit liability an AA that supports the ROA assumption. growth appeared in several years during this Rather than base the AA on the true economic secular trend to lower interest rates. funded ratio, consultants are required to base their models on validating the ROA. This means Smoothing and amortization techniques that 60% and 90% funded plans could have the combined with higher than market discount same AA if they have the same ROA (usually). rates (ROA) distorted economic reality. As Such AA models use historical returns for every the Society of Actuaries recommended in asset class except bonds to support the ROA their October 2004 research (“Principles assumption. Bonds go into these models at Underlying Asset/Liability Management”), their current yields. When bond yields went pensions need to create a set of economic below the ROA assumption in the late 1980’s books that mark to market assets and liabilities they became a drag on AA and made it harder on an accurate and frequent basis so assets can to validate the ROA. This meant that asset be managed and monitored correctly versus allocation models had to skew their weights liabilities.

Multiemployer Plans (MP) MPs are benefit oriented and are always striving for increased benefits. They use the ROA as away from bonds to equities and risky assets the discount rate for liabilities and have the continually since late 1980s to validate the ROA.

Solutions Once assets and liabilities are marked to market frequently, asset allocation can then function effectively by focusing on the economic funded ratio. A large deficit should have a different asset allocation than a surplus. Bond asset management should certainly be the core portfolio whose mission is to match and fund liabilities, thereby reducing the volatility of the funded ratio and contributions. Performance measurement should monitor the risk/reward behavior of assets versus liabilities. All these asset functions require a Custom Liability

Pensions had a true economic surplus in the late 1990s, but they did not respond and change their asset allocation to more bonds to match liabilities and secure their victory. When the equity correction happened in 2000 through

20 YEAR ASSET VS LIABILITIES 12% Liability Index is represented by the (Ryan STRIPS Indexes ( 1 thru 30 years)

ANNUALIZED RETURN

10%

ML CONV 7.27%

ML HY 6.49%

RUSSELL 2000 7.42%

6% BARCLAYS AGG 4.55% 4%

MS EAFE 3.99%

SHORT

0% 0

INTERMEDIATE

LONG

VERY LONG

VOLATILITY OF TOTAL RETURN (STD)

Sources: Ryan ALM, Standard & Poor’s, Barclays Capital Inc., Merrill Lynch, Morgan Stanley, Frank Russell, CSFB/Tremont, Dow Jones. The information presented was compiled from sources believed to be reliable, and is furnished without responsibility for accuracy. Past performance does not guarantee future results.

INSTITUTIONAL ALLOCATOR

GUEST ARTICLE

Index (CLI) as the proper benchmark for assets. Without a CLI, it would be difficult to measure the true funded ratio, manage bonds vs. liabilities and calculate proper performance measurement. Given the inappropriate accounting rules, pensions need to protect themselves and understand the true economic realities of their situation. Pensions need to first create a set of economic books (CLI) that use market valuations to determine their true economic funded status and, secondly, use bonds’ cash flow matched to fund benefit payments chronologically

“The ROA makes assets and liabilities have the same projected growth rates. This means that the only way to cure a deficit by the actuary is through higher contributions.”

Ron Ryan, CFA, founder and CEO, Ryan ALM, Inc.,

About the Author Ron Ryan, CFA, is founder and CEO of Ryan ALM, Inc., a Palm Beach Gardens, Fla.-based provider of custom liability indexes and structured asset management products.

FUNDED RATIO 1988- 2018 180.0 156.5

160.0 140.0 120.0 100.0

94.6

80.0

83.6

60.0

65.0

55.8

40.0 20.0 0.0

VOLUME 2, ISSUE 2

PEOPLE MOVING

PLAN SPONSOR PEOPLE MOVES BY MARK FORTUNE

In this column, IA lists senior executive personnel moves at institutional asset-owner organizations in the calendar quarter preceding the magazine’s press deadline. The accuracy of the information in this column, which is aggregated from many sources, is deemed reliable but cannot be guaranteed. §§ Pennsylvania State University is reviewing investment officer of the UJA-Federation candidates to replace John Pomeroy, the of New York, as its first CIO. The Mother §§ Elizabeth McGeveran was promoted to first and only CIO to ever run its investment Cabrini Health Foundation starts its life director of investments of the McKnight portfolio. Pomeroy retired at the end of 2018 with $3.2 billion in cash, raised from the Foundation on Jan. 1. She joined the after 17 years at the helm of the university’s Catholic Church’s sale of a nonprofit health Minneapolis-based foundation as director of $4 billion investment pool. The new plan to a for-profit company. Ambrose will impact investing in 2014. She will retain her CIO will report to David Branigan, the be responsible for building an investment duties in impact investing. The foundation longtime CEO of Penn State’s investment portfolio and team at the New York Cityrestructured its finance department in management office. based organization. advance of the June 30 retirement of Richard Scott, vice president of finance §§ Elisabeth Bourqui resigned as CalPERS’ §§ Steve Yoon was promoted to investment and compliance. Therese Casey was named chief operating investment officer. Bourqui officer of the $4.2 billion Chicago director of finance. She was controller was responsible for business and operations, Municipal Employees’ Annuity & Benefit previously. And Bernadette Christiansen’s including matters related to the investment Fund. Yoon, who joined the pension fund in role as vice president of operations was policy, investment compliance and October 2016, is now the fund’s sole leader expanded to vice president of finance and operational risk. CalPERS is now recruiting to of investments. operations, including compliance. fill the vacated position and has named Dan §§ The UJA-Federation of New York Bienvenue, the pension fund’s managing §§ Karen Roggenkamp was named deputy promoted Investment Director Devana investment director, global equity, as acting executive director at the $13.9 billion Ohio Cohen to chief investment officer. Cohen’s chief operating investment officer in the School Employees Retirement System. appointment came one day after news broke She joined SERS on Jan. 28, reporting interim. that UJA’s then-CIO Colin Ambrose had to Richard Stensrud, executive director §§ Reginald D. Tucker, a senior investment accepted a position to build an investment of the Columbus-based pension fund. officer of opportunistic investments and office for the nascent Mother Cabrini Roggenkamp replaces Helen Ninos, who absolute return strategies at the New York Health Foundation, which has $3.2 billion retired last August. General Counsel Joe Common Retirement Fund (NYCRF), left in cash to be invested. Marotta had taken over the duties on an his post after five years to join The Orange §§ The Cook Children’s Health Care System interim basis. Roggenkamp was previously County Employees Retirement System hired Tony Bagwell, a senior investor deputy executive director and chief operating (OCERS) in a newly created managing from Columbia University’s endowment, officer at the Kentucky Retirement director position. At OCERS, he will as its new chief investment officer. Cook Systems. Rebecca Adkins, the retirement continue to source investments across all Children’s manages some $2 billion in system’s division director, operations: asset classes and risk mitigation strategies. foundation assets for the regional health enterprise and technology services, has taken care network, headquartered in Fort Worth, over as interim deputy executive director and §§ The $3 billion Mother Cabrini Health COO at Kentucky. Foundation hired Colin Ambrose, chief Texas. Bagwell has spent the last 17 years at

January 2019

INSTITUTIONAL ALLOCATOR

PEOPLE MOVING

Columbia’s endowment, most recently as a managing director. The fund’s previous chief investment officer, Patrick O’Connor, left last August with deputy CIO Apurva Mehta.

join Penn State University’s endowment. being conducted because the pension fund’s current executive director, Michael Nehf, Steinbugl’s position is new, and he will report announced his plans to retire when his to the university’s long-term investment current contract expires on June 30, 2020. pool’s (LTIP) deputy CIO, Sonali Dalal. The LTIP totals approximately $4.1 billion §§ Jim Keohane, president and CEO of the and has 5.5 full-time staffers Healthcare of Ontario Pension Plan February (HOOPP), Toronto, announced plans to §§ Wyoming Retirement System (WRS) is §§ Melissa A. Koch was named treasurer of retire from the pension fund next year. He searching for a new executive director, as Wayne County, Mass. on Feb. 7. Koch will continue in his current roles until he Ruth Ryerson prepares to retire at the end of previously served as the deputy treasurer retires in March 2020. Keohane will leave July. Ryerson has led the pension organization for delinquent collections. She replaced after having spent 20 years at HOOPP, for six years, overseeing the addition of Interim Treasurer Beverly Shaw. The Wayne which he joined in 1999 as a manager of more than $2 billion in total portfolio County Commissioners office appointed equity trading. He became CEO of the performance, bringing the fund’s investment Shaw in January to fill the office left vacant C$79 billion ($59 billion) pension fund in portfolio to about $8 billion currently. The by the late Dawn Zerrer. Zerrer, who died 2012. WRS board has formed a committee to in January, had served as the county treasurer search for Ryerson’s replacement. The board §§ Ellen Taggart was named executive vice since 2011. expects to conduct a nationwide search for president, chief financial officer and §§ Rich Robben was named chief investment its new executive director. treasurer at Church Pension Group. officer of the Kentucky Retirement She replaced former CFO Dan Kasle, §§ The New Jersey State Treasurer named Systems effective April 1, nearly two years who retired. Taggart is now responsible Corey Amon as the permanent director of after becoming interim CIO of the $18 for directing the corporate financial the New Jersey Division of Investment billion retirement system. Additionally, management of CPG, overseeing the (DOI), the state agency responsible for Andy Kiehl, director, real estate and real group’s project management program, the management of New Jersey’s $76 return investments, will serve as his deputy managing its corporate risk management billion-plus public pension system. Amon CIO. Robben, who joined KRS in January process and overseeing information had been acting director of New Jersey’s technology. She will report to Mary Kate 2015 as deputy CIO and director of fixed investment division since the departure of Wold, president and CEO income, was promoted to interim CIO for Christopher McDonough last summer. the system after former CIO David Peden Prior to becoming acting director, Amon left in January 2017. Kiehl joined KRS in had been deputy director of the division of 2015 and was director of investments for the investment since 2014. McDonough left to real estate and real return asset classes. His accept a position at investment consulting new role was also effective April. firm Investment Performance Services after four years as director of DOI.

March

§§ Jim Steinbugl, an investment officer who §§ The Ohio State Teachers Retirement System issued an RFP for an executive search worked on private equity and other asset firm to look for an executive director for the classes at Johns Hopkins University’s $76.2 billion pension fund. The search is endowment, departed the endowment to

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VOLUME 2, ISSUE 2

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