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City Of New York Focused On Creating 'Resilient And Prudent' Portfolios | Wesley Pulisic, Head Of Alternative Credit | Q&A

by trusted insight posted 3weeks ago 142 views
Wesley Pulisic is the Head of Alternative Credit for the Bureau of Asset Management, in the Office of the New York City Comptroller, where he has served for over 9 years. In this role, he is responsible for managing New York City’s exposure to public and private, performing and non-performing credit and credit-oriented strategies. 

In this interview, he discussed how the organization was among the first investors to establish allocation to opportunistic credit; how many government entities are increasing their allocations to private markets strategies; and why an effective global vaccine/treatment for COVID-19 will be the greatest influence on their portfolio.

Wesley Pulisic was named to Trusted Insight's 2020 Top Private Credit Institutional Investors.

Trusted Insight: What is the Bureau of Asset Management, Office of the New York City Comptroller? Tell us about your role in its investment division.

Wesley Pulisic: The Bureau of Asset Management is responsible for oversight of the investment portfolio of the New York City Retirement Systems, which comprises five NYC pension systems: Police, Teachers, Fire, Employees, and the Board of Education. We advise the Trustees of those Systems on how to allocate their $200+ billion portfolio, which is primarily managed by external investment managers. About 75% is invested in public equities and fixed income, and the remaining 25% is invested across distinct mandates for private equity, real estate, infrastructure, hedge funds, and opportunistic fixed income, which others may refer to as private credit. My team manages the opportunistic fixed income allocation, as well as the high yield and bank loan mandates. I’m also a rotating member of the Bureau’s Investment Committee, so I get to see and opine on manager and co-investment recommendations, as well as asset allocation and rebalancing activities.
 

"In the pursuit of diversification, we were among the first large institutional investors to establish a standalone allocation to opportunistic credit."


With respect to opportunistic fixed income, I describe it as our exposure to public and private, performing and non-performing credit and credit-oriented strategies. It’s a broad opportunity set, and I think about it as a matrix of strategies with underlying collateral types. On the performing side, we have direct, unitranche and subordinated lending, as well as structured products. On the non-performing side, we think of single name stressed and distressed, non-performing loan portfolios, and debt for control strategies. And all of these strategies potentially have various sources of collateral, including corporate credit, commercial and residential real estate, asset-based, consumer, infrastructure, and sovereigns and municipals. Permeating the exposure matrix, along a z-axis, we also consider geography, transaction size, and sector or industry specialization. The benchmark for our opportunistic fixed income program is an average of a global high yield and a leveraged loan benchmark, which we know is not perfect, but we think is directionally accurate. From this point of view, I see opportunistic fixed income as a broad and exciting asset class with potentially interesting sources of alpha relative to other private markets exposures.

Trusted Insight: Has the organization consistently increased allocation to areas like private equity and private credit in the last years? What shifts has there been in the allocation strategy?

Wesley Pulisic: After the global financial crisis (GFC), our CIO at the time, Larry Schloss, worked with our Trustees and Consultants to expand the existing private equity and real estate mandates, while also creating new programs in hedge funds, infrastructure, and opportunistic fixed income. If you remember, during and after the GFC, many institutional investors were surprised at how correlated their portfolios were, and subsequently endeavored to differentiate and expand their exposures to be more resilient in the face of another broad market downturn. We did the same, and in the pursuit of diversification, we were among the first large institutional investors to establish a standalone allocation to opportunistic credit. Of course, we also have a 7% return target, and private markets are essential to achieving that return, so we think our private markets exposures are accretive from both risk and return perspectives.
 

"Most of the government entities I know seem to be increasing their allocations to private markets strategies, including private credit."


Today, since we seem to be in a low-and-getting-lower rate environment, we will likely continue to rely on our private markets strategies to achieve our overall return targets. So to answer your question, yes, since the GFC, we have consistently increased our allocation to private markets. However, New York State law limits how much non-traditional exposure we can have in our portfolios, so the bar is high for allocating to new asset classes. Also, if we allocate less than 2-3% to any one asset class, it's typically not enough to move the needle. For all the asset classes I mentioned, we have at least a 3% allocation.

Trusted Insight: Is having a limited allocation to non-traditional asset classes common among government entities?

Wesley Pulisic: These days, I don’t think it’s common for government entities to have specific limits on their allocations to non-traditional asset classes. Of course, it makes sense to limit potential excessive risk taking or reaching for yield. Also, given the size of some government entities, there’s a real challenge to how much they can allocate – on an absolute level – to top tier managers in any asset class. And finally, we need sufficient liquidity to pay our beneficiaries, so limits to non-traditional asset classes, which are sometimes less liquid, complex, and capacity constrained, could be quite appropriate and prudent for large institutional investors with all of the aforementioned constraints.

To put it more simply, our liability profile dictates our exposure. However, most of the government entities I know seem to be increasing their allocations to private markets strategies, including private credit.

Trusted Insight: LPs frequently mention the importance of risk management. How do you approach risk within the asset classes you cover and perhaps even at the total portfolio level?

Wesley Pulisic: With respect to investment risk management, it really is building the right exposures with the right managers, in other words, a top down and bottom up approach, followed by manager-level exposure monitoring. When I fortuitously inherited the opportunistic credit portfolio, it had too much single name stressed and distressed corporate credit exposure, so we recommended to our Trustees to diversify away from that exposure by adding different strategies and collateral types. Later on, when spreads were tight pre-COVID, we sought idiosyncratic exposure, which was inherently less scalable, as you can imagine. So that’s a bit of our top down thought process.
 

"We need to thread the needle through our governance process to create resilient and prudent portfolios that will fund NYC pensions in the long-term."


From the bottom up, when we underwrite a manager, we try to identify the manager’s sources of alpha relative to the public market benchmarks I mentioned earlier, and then we assess the sustainability of that alpha over time and changing market conditions and participants. We think a credit manager can outperform through premia relating to credit selection, origination, illiquidity, complexity, structuring, mandate flexibility, leverage (either structural or fund-level), and improved governance in control situations. It’s typically a confluence of those factors that lead to relative outperformance. For example, if a manager has a history of minimal realized losses, resulting in consistent benchmark outperformance, we try to understand the source and quality of such outperformance, which could derive from a mix of what they’re originating, how they’re structuring deals, and how they understand and navigate complexity. Once we think a manager has the ability to provide a sustainable and differentiated exposure, we evaluate all the usual things: people, philosophy, process, organization, operations, risk management, and culture of compliance.
 

"The greatest potential influence on our portfolio is if there will be an effective vaccine or treatment for COVID-19 available for global, mass distribution within the next 6 to 12 months."


With respect to monitoring, we realize that it is difficult to do factor modeling on private credit exposures, so we look at both monthly and quarterly reporting, line by line, and have frequent conversations with our managers to understand what we actually have in the portfolio. Of course, it’s not possible to do this with a large number of managers, so, despite our size, we have a relatively concentrated opportunistic credit program with only 17 managers.

Trusted Insight: Being a government entity, what are some challenges faced as an asset allocator? How is the investment process affected?

Wesley Pulisic: We have many thoughtful, diligent, and passionate Trustees across the five NYC pension Systems that do right by their members and our City, and as investment advisor, we need to thread the needle through our governance process to create resilient and prudent portfolios that will fund NYC pensions in the long-term. It can be laborious to manage, but I really do think the questions and issues that arise throughout the process actually result in better portfolios. Sure, it would be easier if the process was streamlined, but given the various interests across a City as dynamic as ours, collectively, I think we’re doing a great job.

Trusted Insight: What are investment themes or strategies that the organization (or yourself) are trying to get a better grasp of in the near-term?

Wesley Pulisic: Outside of the US presidential election, the greatest potential influence on our portfolio is if there will be an effective vaccine or treatment for COVID-19 available for global, mass distribution within the next 6 to 12 months. It seems the market is assuming a base case of vaccine development and distribution by 2Q or 3Q 2021, so we’re having discussions with our managers to understand how our portfolios would hold up if the base case doesn’t transpire.

Also, we have seen monetary policy driving the cost of capital lower, resulting in higher valuations, ceteris paribus. As such, we are trying to gauge the capacity for continued monetary and fiscal policy accommodation, which we know is not infinite. With respect to below investment grade credit, we saw recent high yield issuance with a 2 7/8ths coupon, so after we get through this COVID-19-related dislocation period, maybe three years from now, what total return levels should we expect in both public and private below investment grade credit strategies, and how will this influence portfolio construction with an overall 7% return target?

And most recently, we’ve recommended market-based trigger allocations to our Trustees, which would allow our managers to lean into dislocation periods. As implied earlier, we wouldn't necessarily have the ability to make those allocation decisions quickly enough, given our process, so we think it’s a good idea for some of our multi-strategy credit managers to have access to additional capital when spreads widen, for example.

Trusted Insight: How has some of your previous experiences investing through different market cycles influenced your investment approach?

Wesley Pulisic: With every type of downturn—including the GFC, the 2015 commodity cycle, the last two weeks of 2018, and now COVID—what I realized is that it's a testing period. You get to see how your portfolio reacts. You take time to put together a resilient portfolio and then the market shock happens. That’s when you get to see what's important—what worked and what didn't.

Assuming you’ve built a portfolio with some resistance to volatility, I think mandate flexibility and being a liquidity provider are crucial during those periods. Downside beta should be minimized across the portfolio, and some elements of the portfolio should be in a position to deploy capital. It’s a difficult balancing act that is much easier to describe than to create, especially in a long-biased mandate, which is what we manage.

Also, on a more general level, maintain transparency and good relations with your boards, managers, and consultants, because when unexpected events occur, such as COVID-19, those relationships are required to get things done.

View our full catalog of interviews here

The full list of 2020 Top Private Credit Institutional Investors can be found here

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