Scott Davis is the interim chief investment officer of the Indiana Public Retirement System, a pension fund with approximately $30.2 billion in assets under management. Previously, Scott Davis was the deputy chief investment officer and director of public equity at the Indiana Public Retirement System. Davis received a B.S. with honors in accounting and finance from the Kelley School of Business at Indiana University.
Mr. Davis was recently named to Trusted Insight’s ranked list of the Top 30 Pension Fund Chief Investment Officers. He was unable to participate in a full-length interview, but kindly provided his responses via email.
Trusted Insight: Let’s begin by talking about your career history leading up to Indiana PRS. Tell me about your transition from the Indiana Finance Authority into the pension. What insights did that experience provide that have been helpful at Indiana PERS?
Scott Davis: Early in my career, I was responsible for the State of Indiana's debt issuance and management, and going through the global financial crisis in that position had a tremendous impact on how I have approached risk management since. The unexpected volatility and dislocation we experienced in the municipal market, which had always been considered a quiet and boring market up to that point, is always in the back of my mind now as we evaluate asset allocations and different strategies. I spend much more time and attention on thinking through and preparing for what could go wrong prior to making a decision.
Trusted Insight: You graduated from Indiana University and have worked from the state for nearly your entire career. Is this just how your career has played out, or is there a sense of pride and duty to represent and perpetuate the pension payments of the citizens of Indiana?
Scott Davis: Growing up in Indiana, attending college within the state and now having a family of my own here, there is a real sense of pride in doing my small part to make the state a better place. First, I was able to do that through the management of the state’s debt, and now I am able to do that through the management of the state's pension fund.
I have also been fortunate to work for administrations that were focused on building a meritocracy where employees that produced were given more and more responsibility regardless of age. As a result, I have been able to take on management roles much earlier in my career than I may have been able to within the private sector.
Trusted Insight: Tell me about your investment team. What is the structure, team dynamic and how might your team differ from peer institutions?
Scott Davis: We have tried to construct an investment organization that is fairly flat to make sure the best ideas are escalated quickly and to get diversification in thought. When I first started, the team had a silo mentality, and there was little collaboration amongst asset class directors/analysts to share best ideas. However, we have tried different ways to break down those barriers across the team, including opening up all manager meetings to each team member, education sessions for the entire team and analyst-only meetings to encourage discussion. This is an area we are continually trying to come up with creative ideas for improvement.
Trusted Insight: The past few months have been a tough time to be an investor. To what degree are you concerned/reacting to near-term market volatility?
Scott Davis: As a public pension, our investment horizon is extremely long-term. While we have constructed a strategic asset allocation that seeks to achieve our target rate of return over 30+ years, we have also tried to lower our dependency on equities to perform well. As a result, the reemergence of volatility in equity markets has enabled us to rebalance the portfolio using gains from diversifying asset classes and, hopefully, gain better entry points.
Trusted Insight: How are you positioning/have you positioned the portfolio to achieve your required annual return, while still maintaining a long-term perspective in today’s volatile markets?
Scott Davis: Given our extremely long time horizon and more conservative target rate of return (6.75%), our primary focus is on building a diversified asset allocation and controlling our emotions so that we are able to stay the course as we experience market volatility.
Trusted Insight: What are the primary characteristics that you are looking for when you make an investment in private market as opposed to public market?
Scott Davis: Our starting point is a stance of skepticism. We need to be convinced there is a premium from skill, illiquidity, diversification or some other source that cannot be obtained in the cheaper, more liquid public markets.
Trusted Insight: What trends have you identified in your time at the public pension?
Scott Davis: There has been a growing spread between required rates of return for public pensions and the return on cash. Ten years ago, the average required spread over cash may have been around 3%, but since then, that spread has grown to around 7% as the cash rate has fallen. I believe this has put greater pressure on pension funds to stretch into riskier and less liquid strategies in order to achieve their return targets.
Trusted Insight: What is the biggest challenge of pension investing that is unique to pensions?
Scott Davis: The greatest challenge in managing a pension portfolio is the necessity to construct a portfolio with long-term goals while facing public scrutiny, which has been very short-term focused historically. However, INPRS is fortunate to have a courageous board that (1) was willing to lower the target rate of return to 6.75% (lowest in the country) because we believed it was more realistic given global market dynamics and (2) has an open mind to different investment approaches that we believe better align with our long-term investment objectives.
Trusted Insight: What’s the #1 rule you’ve learned in your career as an institutional investor?
Scott Davis: Brian Portnoy said it best in his recent Forbes article, “Diversification means always having to say you're sorry." This is true of commodities today, equities in 2008 and bonds in 2006. I believe every part of the portfolio has a purpose though and will have its day as long as an investor has sized it right and the stomach to stick with it.
To learn more about the the Top 30 Pension Fund Chief Investment Officers, click here.
Mr. Davis was recently named to Trusted Insight’s ranked list of the Top 30 Pension Fund Chief Investment Officers. He was unable to participate in a full-length interview, but kindly provided his responses via email.
Trusted Insight: Let’s begin by talking about your career history leading up to Indiana PRS. Tell me about your transition from the Indiana Finance Authority into the pension. What insights did that experience provide that have been helpful at Indiana PERS?
Scott Davis: Early in my career, I was responsible for the State of Indiana's debt issuance and management, and going through the global financial crisis in that position had a tremendous impact on how I have approached risk management since. The unexpected volatility and dislocation we experienced in the municipal market, which had always been considered a quiet and boring market up to that point, is always in the back of my mind now as we evaluate asset allocations and different strategies. I spend much more time and attention on thinking through and preparing for what could go wrong prior to making a decision.
Trusted Insight: You graduated from Indiana University and have worked from the state for nearly your entire career. Is this just how your career has played out, or is there a sense of pride and duty to represent and perpetuate the pension payments of the citizens of Indiana?
Scott Davis: Growing up in Indiana, attending college within the state and now having a family of my own here, there is a real sense of pride in doing my small part to make the state a better place. First, I was able to do that through the management of the state’s debt, and now I am able to do that through the management of the state's pension fund.
I have also been fortunate to work for administrations that were focused on building a meritocracy where employees that produced were given more and more responsibility regardless of age. As a result, I have been able to take on management roles much earlier in my career than I may have been able to within the private sector.
Trusted Insight: Tell me about your investment team. What is the structure, team dynamic and how might your team differ from peer institutions?
Scott Davis: We have tried to construct an investment organization that is fairly flat to make sure the best ideas are escalated quickly and to get diversification in thought. When I first started, the team had a silo mentality, and there was little collaboration amongst asset class directors/analysts to share best ideas. However, we have tried different ways to break down those barriers across the team, including opening up all manager meetings to each team member, education sessions for the entire team and analyst-only meetings to encourage discussion. This is an area we are continually trying to come up with creative ideas for improvement.
Trusted Insight: The past few months have been a tough time to be an investor. To what degree are you concerned/reacting to near-term market volatility?
Scott Davis: As a public pension, our investment horizon is extremely long-term. While we have constructed a strategic asset allocation that seeks to achieve our target rate of return over 30+ years, we have also tried to lower our dependency on equities to perform well. As a result, the reemergence of volatility in equity markets has enabled us to rebalance the portfolio using gains from diversifying asset classes and, hopefully, gain better entry points.
Trusted Insight: How are you positioning/have you positioned the portfolio to achieve your required annual return, while still maintaining a long-term perspective in today’s volatile markets?
Scott Davis: Given our extremely long time horizon and more conservative target rate of return (6.75%), our primary focus is on building a diversified asset allocation and controlling our emotions so that we are able to stay the course as we experience market volatility.
Trusted Insight: What are the primary characteristics that you are looking for when you make an investment in private market as opposed to public market?
Scott Davis: Our starting point is a stance of skepticism. We need to be convinced there is a premium from skill, illiquidity, diversification or some other source that cannot be obtained in the cheaper, more liquid public markets.
Trusted Insight: What trends have you identified in your time at the public pension?
Scott Davis: There has been a growing spread between required rates of return for public pensions and the return on cash. Ten years ago, the average required spread over cash may have been around 3%, but since then, that spread has grown to around 7% as the cash rate has fallen. I believe this has put greater pressure on pension funds to stretch into riskier and less liquid strategies in order to achieve their return targets.
Trusted Insight: What is the biggest challenge of pension investing that is unique to pensions?
Scott Davis: The greatest challenge in managing a pension portfolio is the necessity to construct a portfolio with long-term goals while facing public scrutiny, which has been very short-term focused historically. However, INPRS is fortunate to have a courageous board that (1) was willing to lower the target rate of return to 6.75% (lowest in the country) because we believed it was more realistic given global market dynamics and (2) has an open mind to different investment approaches that we believe better align with our long-term investment objectives.
Trusted Insight: What’s the #1 rule you’ve learned in your career as an institutional investor?
Scott Davis: Brian Portnoy said it best in his recent Forbes article, “Diversification means always having to say you're sorry." This is true of commodities today, equities in 2008 and bonds in 2006. I believe every part of the portfolio has a purpose though and will have its day as long as an investor has sized it right and the stomach to stick with it.
To learn more about the the Top 30 Pension Fund Chief Investment Officers, click here.