Robert Maynard is the chief investment officer of the Public Employee Retirement System of Idaho (PERSI), a pension with $15 billion in assets under management. Previously he served as deputy executive director of the Alaska Permanent Fund. Maynard graduated from Claremont Men's (now Claremont McKenna) College and received his J.D. from the University of California, Davis School of Law.
Mr. Maynard was recently named on Trusted Insight’s Top 30 Public Pension Chief Investment Officers. He graciously spoke with us on November 14, 2016.
In this interview, he explains why investing is done best when done simply for a pension fund like PERSI, how to manage a portfolio effectively with a small staff and why it is one of the world’s best jobs that he’d pay people to have it if he was rich.
Trusted Insight: You are a firm believer in conventional investment strategies, with the majority of your portfolio invested in public equity and fixed income. How was your investment philosophy formed?
Robert Maynard: It's actually due to the nature of our particular liabilities, the history of the Idaho Pension Fund and the difficulties that the fund had before I got here in going down a more aggressive tactical allocation path in the first 15 to 20 years of its existence.
As you know, there are a thousand ways to invest and probably a thousand right ways to invest, depending upon what you're trying to accomplish and the resources you can reasonably get to accomplish them. For us, we have been blessed by a legislature that have been heroes with regard to keeping the liabilities and the promises of the pension system within a very reasonable limit across a wide range of issues.
In fact, we already had most of the changes that other pension systems have made over the last five years. As a result, the types of liabilities we have to meet are much simpler and easier to reach than those you see for other institutional investors. I'm not just talking pension funds. I'm also talking about endowments, corporations and organizations of that nature. They have promises or obligations that are much more far-reaching than we do.
You know the debate right now about the discount rate, or the hurdle rates, that pensions have to reach? Our particular discount rate is 7 percent nominal. That puts us at the low end to start out with. It's even easier than that, because if you look the types of liabilities that we have, particularly those for the active members, they're really inflation-dependent. If inflation is higher than what the actuaries are currently predicting, then the benefits are going to be higher than we currently expect. Therefore, we're going to have to make more than that 7 percent, because most of the defined benefit is based on final salaries. We have an expectation of what those final salaries are going to be. Right now, if those final salaries are higher, we're going to have to make more than 7 percent.
It also works the other way. If inflation is lower and salaries are lower than we expect, we don't have to make 7 percent. We could make less than that, and that has actually been the case over the last few years. While we have the nominal rate of 7 percent, the inflation assumption that our actuaries have built into the system is 3.25 percent. What that means is we only have to make 3.75 percent above inflation in order to meet basic statutory goals.
Many systems, in order to make that real return hurdle rate, have to make 5, or sometimes even 6 percent above inflation. In fact, a number of endowments have to make, sometimes, even 8 percent above inflation.
Trusted Insight: How does conventional investing help achieve your goal of return better than investing in alternatives?
Robert Maynard: Basically, I have an objective that is much easier to reach than most other people in institutional investing land. If you go back to the major decisions one makes, the first is: what's your equity/fixed allocation? I have to make 3.75 percent above inflation, what's my basic equity/fixed split? Can I get there with a normal capital market? Over the last 200 years, over rolling 20-year periods, equities have given you, in the U.S. in particular, between 5 and 7 percent above inflation. If you have a good 20 years, like the years ending up in the 1990s, you'll make 7 percent or more above inflation. If you have a bad 20 years, like we're just ending up, you get about 5 percent above inflation with a 70/30 equity/fixed split.
If you look at my particular liabilities, 3.75 percent above inflation and 1 to 2 percent above inflation for bonds, even if you have a poor 20-year period, a 70 percent equity/30 percent fixed income in a base S&P 500/ Barclay’s Aggregate is going to get me there.
My goal therefore is simply not to kick away capital market returns, because even a poor capital market will get me there. That is a much different position than most other people in the industry. If I had a 7 percent real return requirement like endowments, conventional investing doesn't get me there. I also know that if I'm trying to do something more exciting and trying to beat the markets, to get the better than average manager after fees, to get the top quartile fixed income, I'm going into a game where the odds are against me.
We're in a situation where the odds are in favor of us if we basically are a standard, professional and reasonably diversified institutional investor that assures the delivery of good market returns. If we just get out there, do standard, transparent, focused and relatively simple investments and don't kick away the markets, we will be fine.
Trusted Insight: Evidently, you are not so pressured as many other investors to get the best managers.
Robert Maynard: No. I just don't want my active managers to hurt me.
...if the managers that we hire have the same resources, have the same style, stick to their knitting and have a discipline that they keep to during tough times, then when they underperform the market, that says more about the nature of the market than it does about them.
Trusted Insight: So, what criteria do you use when selecting managers? What managers are good enough?
Robert Maynard: We don't over-rely on active management to reach our goals. The first decision is: what's our equity/fixed-income mix? The second is: what is our home country bias? The third is: what do you do to get a reasonably diversified fund? How many bets are you going to make? The fourth is: how much are you going to allow yourself to drift away from that base position before you rebalance? Finally, after you've done those four, the question is: how much active management do you want, and how much do you want to rely on it? One thing you don't want to do by active management is to substantially underperform the markets.
We are looking for managers that are clear to us and relatively straightforward for us to follow. That means they either have clear styles that are pretty easy to understand, or they have focused portfolios, so that deviations from what we expect them to do are relatively clear and quick.
One of our mantras is we don't fire for performance alone, because if the managers that we hire have the same resources, have the same style, stick to their knitting and have a discipline that they keep to during tough times, then when they underperform the market, that says more about the nature of the market than it does about them.
Sometimes bad performance is an indicator that the organization is breaking down. If the organization breaks down, they lose key people and merge into a different culture. Almost all major managers are either coming out of a blowup, in a blowup, or are about to go into one. The question is: Do you have a manager who can go through these instances of different market styles and sticks to his knitting? We like managers who have been through it, so that when you get a 2007 to 2009, you know what you have. You could see what's been going on in the market on a daily basis, and you know that your people are performing the way you would expect them to.
Trusted Insight: In your last interview you mentioned that a trend you observed during your career is the easier access to information nowadays. In fact, people are losing focus as a result of too much information. Therefore, it is important to figure out what not to pay attention to. How do you go about differentiating what’s important from distractions?
Robert Maynard: By keeping our focus on the most important things. That's knowing our basic diversification, that we are in areas that we understand and have been in for a period of time. We don't have things that are overly complex -- we can see what's happening on a daily basis. All of our public securities are separate accounts. There's a requirement that they'd be able to be daily and independently priced by our custodian, not model pricing. So a lot of relatively complex black box strategies are things we don't do. We don't do hedge funds, for example.
In private equity we keep to 15 to 20 relationships, and they are primarily the standard names that you know and other people have money in. Private realty is relatively focused separate accounts, and everything else can be daily priced.
We're very careful also not to outrun our supply lines. We know that we are a small and conservative state. They are not going to be paying huge salaries, or allow us to build up a lot of staff. We use strategies that at the end of the day we know exactly where they should be. We daily price the fund, because it's an option in our supplemental DC plan. That's the most popular option.
As a result, we know at the end of the day where we should be within about 5 to 10 basis points. If we're outside of that, we can track down why it is there's a disparity between what we expect. Usually, it's because it's been a huge movement day, and we know that for each of our managers too.
Basically, we're very careful, where we watch extremely closely what the fund is doing on a daily basis, and we don't take any action on a portfolio basis for many years -- kind of more of a barbell strategy in portfolio management.
Trusted Insight: Since you adopt mostly a passive investment strategy, I suppose the job could get boring sometimes. What keeps you doing it?
Robert Maynard: I get paid for reading great newspapers like The Financial Times, Wall Street Journal and New York Times, watching TV and talking to incredibly brilliant people who are smarter than me that have to answer my dumb questions with a smile on their face.
I have told my legislature and my board at times that if I were independently wealthy, I'd pay them to have my job. I also get to go to interesting places and talk to people about interesting things. What's to dislike? It's a great job. It's the best job that I could possibly ever have.
Trusted Insight: In our last interview you predicted 2016 return would be in low single-digit. After the few major political changes, including Brexit and the U.S. election, that have happened since then, does your prediction still hold?
Robert Maynard: As of right now, our investment return of calendar year to date is 5.71%. We might make it above 7 to 8% by the end of 2016. That prediction still looks pretty good.
The nature of the market has shifted twice this year, and it just shifted back, where that return is going to come from is a different issue. The overall return will be in mid-low to mid-single digits. It still looks pretty good.
Trusted Insight: In the longer term, where do you see the challenges and opportunities for public pensions?
Robert Maynard: I don't see the panic that many others do. I understand the angst over Donald Trump, the Brexit and a number of issues on trade and immigration. I have strong feelings that way. In terms of the things that I'm worried about, of the ten things one might be worried or excited about depending upon your political point of view, markets to me is number eleven. In other words, I don’t think it will a top concern – at least for the next couple of years.
It is true that trade is going to be a problematic issue over the next five to ten years, but I don't expect a massive breakdown in the system or the barriers that were up in the 1950s, 1960s and 1970s. We're going to have lower taxes, huge infrastructure spending and less regulation. On trade, the rhetoric isn't to stop trade, but to renegotiate major provisions of trade, which isn't necessarily the same thing. It's going to take a year to figure out what the heck is going on.
In that interim, they really simply can't tell. You better stay fairly close to home. You can tell in the last week that while the U.S. stock market is going higher, inflation expectations are coming back up, which keeps the Fed on track for raising interest rates. The emerging markets have collapsed, so have REITs, because of the expectation of higher interest rates. Our emerging markets and REITs holdings are looking terrible.
You're getting a different shift. Generally, markets have been predicting for some time that bonds were dead money. It looks like that's still going to be true. At best, over the next five years, you're going to get about 1 to 1.5 percent bond return. Equities still could get 8% a year. That, on a “70/30”, gives you 6 percent return overall with 2% inflation. That's still a 4% real return. Not exciting, tepid. But I don’t think that's panic time.
With regard to the economic and capital market issues over the next five years, I'm not sure except for marginal changes: 1) with regard to more growth and inflation in the United States. 2) possibly tougher things coming out of trade in the emerging markets. I don't see something that's a monster game changer there yet. The previous way we've been positioned, I don't see any reason to take any radical moves in advance.
Trusted Insight: What career advice would you give to young people who look to work in public pensions, or institutional investing in general?
Robert Maynard: Be lucky.
Trusted Insight: Be lucky?
Robert Maynard: Yeah. This is one of the world's great jobs. You don't get compensated like you can in the private areas, but it has so many rewards, if you can find yourself in a position to get into it and are willing to recognize that the compensation is very good for public service. As long as you can get beyond that issue, just be lucky in finding a place you like to work, because like I said before, if I was independent and wealthy, I'd pay people to do it.
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