Ms. Dhvani Shah, CFA, is the chief investment officer of the Illinois Municipal Retirement Fund, a pension fund with $34.9 billion assets under management. Previously, Shah was the managing director of private equity at the New York State Teachers' Retirement System. Shah has a BBA from Loyola University and an MBA from the University of Chicago Booth School of Business.
Ms. Shah was recently named to Trusted Insight’s ranked list of the Top 30 Pension Fund Chief Investment Officers. She graciously spoke with Trusted Insight on January 28, 2016. The following interview has been edited and condensed for clarity.
Trusted Insight: Let’s begin by talking about your career history leading up to your current position. You started your career at the Northwestern University Endowment and then spent some time on the private equity side at Bank of America before eventually taking a position at the New York State Teachers' Retirement System. How did you end up in the pension system? Was it how your career led you or was it a conscious choice to enter the realm of pension investing?
Dhvani Shah: It is a combination of conscious choice and the investment skill set that I was building that led me to the realm of pension investing. At the start of my career at Northwestern University’s Investment Office, I was a junior member of the investment team across all asset classes including risk management, operations and investments. I was building my career with exposure across asset classes and strategies at a junior level, and it was all to build up my skill set to be a CIO.
One of the things I recognized early on in my career, is that I wanted to be part of an investment program from different perspectives. It was a conscious choice to go from an endowment fund to a financial institution, like Bank of America, where I specialized in venture capital, private equity, real estate, distress funds and other opportunistic funds. A different institution meant different processes, different due diligence practices, different ways of looking at things.
In between Northwestern and Bank of America, I spent a short time at a dot-com company to get a better feel for what it is like to be at a portfolio company, which helped me evaluate venture capital fund investments later. While I was at Bank of America, I oversaw for a client, as a third party assignment, a portfolio of early-stage IT companies where I evaluated and recommended follow-on financings, liquidations and exits.
So, it's all about knowing the gamut of the investing world. The next natural step was to become a senior member of a team, and the pension world certainly gives you that opportunity. At New York State Teachers Retirement System I was a member of an executive staff team that oversaw $100+ billion, and I was leading the private equity portfolio. I had an opportunity to work on a $13+ billion private equity portfolio, while being part of an internal investment committee that considered all investment actions.
All of my experience and strong academic credentials made reaching my goal of being a CIO possible. My career path intentionally included an endowment fund, a financial institution and public pension plans. What IMRF and NYSTRS have in common, is they both have strong governance with an elected board – no ex-officio or appointed board members – and strong investment programs. Because of the solid organizational backdrop, I can focus on the investment program and meeting the objectives, including an assumed rate of return of 7.5% at IMRF.
So, it is a combination because I was purposely building up my experience and academic credentials. When I was at Northwestern, I pursued the CFA program, and I am a CFA charter holder. When I was at Bank of America, I pursued my MBA, and I completed the Masters of Business Administration Degree from Booth School of Business, University of Chicago.
Trusted Insight: You said that early on you knew you wanted to be chief investment officer. Speaking with other CIOs, I haven't heard anyone explicitly state that as their goal. A lot of them say they ended up in the position. How did you come about figuring out “this is the path I need to take to get here?”
Dhvani Shah: It started with undergraduate school. I majored in finance and minored in economics. I had an excellent GPA, was a member of six honor societies and did all those things that you should do to have a strong academic profile. All I knew back then was that I was going to work for a living. Whatever the job, I wanted to make an impact; to make a difference. My goal was to make sure I had great grades and a strong profile, so that I would love my job.
That kind of drive led me to have a profile that allowed me to join an Endowment Fund straight out of undergraduate. Because I had this overall goal of having a job that I would love and make an impact in, whenever I saw a learning opportunity in my environment, I took advantage. I was fortunate enough to have folks who were supportive. I would describe Northwestern as a very collegial environment that was intellectually challenging. I joined as an operations assistant, but I took on every task as an opportunity to learn investments across the major asset classes.
I also knew to be a CIO you need to have a general skill set across the asset classes, but I also wanted to specialize in something. I chose alternatives purposely because I felt that this is something that I could build over time. If I got an early start in this industry, I would just have even more insight into the industry just by virtue of being able to follow this industry for the past 20 years.
That actually led to why I left Northwestern. I loved it there and could have been there forever, but then it conflicted with my goal of being a CIO one day, because I truly believed that you had to build your skill set. You have to build your experience so that you can bring something to the table. I actually made myself move, and I am still in touch with some of the folks that I worked with back then.
Trusted Insight: You mentioning you wanted to make a difference. Unlike most other types of institutional investors, pensions funds are not tasked with perpetuating the wealth of a small handful of high net-worth individuals. Instead, you're managing a pool of money comprised of average Americans' wages that are more than likely not particularly wealthy. For you, is that kind of a burden bear, a righteous cause, or similar to strategically deploying any other large AUM?
Dhvani Shah: I am attracted to the not-for-profit world, whether that's an endowment fund, foundation or a pension plan. Because I worked at a financial institution, I could compare the difference in how it felt. Only after I was at BofA, I realized although I loved my experience and skill set there, to your point, I wasn't doing something that had a direct impact on something important.
At an endowment fund, it was the operating budget, and I was helping the academic institution. I realized that I do like the idea of having a mission.
Within the pension world, I like that my work is important for retirement security. I think retirement security is critical to our society, especially with individuals living longer. Pension plans are an important part of retirement security, and I like that aspect of my job.
There is a burden of operating in a pension plan investment program, but I think that's true in any setting. I just recognize what our constraints are, and I will adapt accordingly. For example, we have a small team, but that's fine. It can actually help attract and retain talented staff because they have an opportunity to work on many different aspects of a very large portfolio. We have about $34.3 billion in assets as of year-end 2015. I think the small team part means that everybody gets a lot of work; it actually helps you retain staff. But, we have to plan. We plan our investment committee meetings in advance so that we can do everything we set-out to do.
To summarize my answer, I think there are burdens or challenges, but the overall mission makes it worthwhile.
Trusted Insight: Tell me a little bit about your investment team. What is the structure? You said it was a small team. What's the team dynamic like? How might it differ from peer institutions? A small team I would assume you're more generalists than specialists; correct me if I'm wrong.
Dhvani Shah: First, I will describe the structure when I walked in the door four-and-a-half years ago. All of the titles were investment analysts, reporting to an investment manager. By function, some folks focused on certain asset classes over others, but they had generalist titles. In June 2014, I restructured the department, and we did add three junior positions called associate investment analyst. We created a layer where certain analysts, three positions, turned into investment officers, and that investment manager title also became an officer.
Today, this is how it looks: The investment team fully staffed is a team of 14 and is organized by key function areas: private markets, public markets, emerging manager program and total portfolio, and operations. Public Markets and Private Markets officers, each have two analysts and one associate analyst reporting to them, an associate analyst reports to the Investment Officer for Emerging Manager and Total Portfolio. Two administrative professionals report to the Investment Officer for Operations. The officers and analysts are encouraged and supported to pursue the CFA and CAIA program for their professional development.
The department is structured such that there is opportunity for growth and advancement. An associate analyst can move up two levels under the existing structure. By creating that growth opportunity, you can attract and retain staff.
How is it different than other institutions? I think a lot of institutions have it organized by function area. But because we are a team of 14 investment professionals, it is just large enough to specialize in something, yet small enough that you can be part of broader projects. The annual asset allocation and the tri-annual asset liability study are two examples of broad projects where everyone is involved.
I really modeled the structure from my experience at Northwestern, where I had a chance to work on so many different things. That was great for Northwestern, but it was also great for my professional development not just being pigeonholed to one thing.
Trusted Insight: These are tough markets to navigate both on the public and private side. To what degree are you concerned about or reacting to the near-term market volatility?
Dhvani Shah: 2016 has definitely been a tough year in terms of performance, so what are we doing?
We utilize our strategic asset allocation as a guideline for our investment activity in the long-run, but I prioritize projects in the short-term, according to current environment opportunities or challenges.
Last year, real estate investments were one of our major efforts based on being under target in terms of asset allocation and attractive market opportunity. In 2015, we committed $595 million compared to $294 million in 2014. To reduce our overweight in domestic equity, we withdrew $800 million from active domestic equity strategies in 2015 and some of that capital went to fixed income.
We committed to real estate to adjust to the environment with modest return expectations. You're seeing increased volatility in the equity markets. It helps to have a more diversified portfolio.
Trusted Insight: When you're approaching an investment on the private side what primary characteristics are you looking for in a manager and how does that differ when you're approaching other public markets?
Dhvani Shah: For private markets, I am looking for skill, expertise in a given strategy and competitive terms—we will negotiate the LPA. For public markets, I am looking for skill, particularly the ability to consistently perform and not deviate from target strategy and competitive terms. All investments are evaluated in terms of people, performance, price and process.
Trusted Insight: What geographies and/or sectors intrigue you in terms of sustained growth in 2016 and beyond? Or are there any?
Dhvani Shah: Sustained growth, that's a tough one. Some of our activities have been in the real estate area where the current income component provides downside protection. We like that. We have invested in private debt funds and real estate debt funds.
Trusted Insight: What is the biggest challenge of pension investing that is unique to pensions?
Dhvani Shah: Defined benefit pension plans are not the favorite due to the large unfunded pension liabilities across various states. Short-term returns and the impact it has on employer contribution rates and the pension fund liabilities add to the unfavorable image of defined benefit pension plans. I think a challenge unique to pensions is planning for that long-term performance, while being able to sustain the short-term volatility in the returns.
Trusted Insight: What trends have you identified in your time at public pensions?
Dhvani Shah: Consistent with this challenge of the returns and the volatility, I do see a trend toward more risk measurement and risk management efforts. I see a trend toward evaluating alternative models for asset allocations. Many institutional investors utilize mean variance optimization models, and there has been more interest in multi-factor based investment strategies.
Trusted Insight: One of the goals that Trusted Insight has is to foster the next generation of chief investment officers. If you could impart the number one rule you've learned in your career as an institutional investor that might be able to help them along, what might that be?
Dhvani Shah: Investment conviction is critical to making good decisions. Develop skills that will strengthen your investment conviction. This investment conviction should be based on rigorous, quantitative work, and not hunches. That would be it. That's what allows you to do everything else.
Conducting the quantitative and qualitative work to pick the best investments means you have discipline and can work hard. Think about implementation. It's not just about making one deal, and moving on to the next deal. A lot of younger folks starting out might be focused more on, “Here's what I invested. Here's what I committed,” but it's also about how did that do? How did that get implemented? Do you also know legal documents for the investments you made? What are the unintended consequences? To me, investment conviction means discipline.
To learn more about the the Top 30 Pension Fund Chief Investment Officers, click here.
Ms. Shah was recently named to Trusted Insight’s ranked list of the Top 30 Pension Fund Chief Investment Officers. She graciously spoke with Trusted Insight on January 28, 2016. The following interview has been edited and condensed for clarity.
Trusted Insight: Let’s begin by talking about your career history leading up to your current position. You started your career at the Northwestern University Endowment and then spent some time on the private equity side at Bank of America before eventually taking a position at the New York State Teachers' Retirement System. How did you end up in the pension system? Was it how your career led you or was it a conscious choice to enter the realm of pension investing?
Dhvani Shah: It is a combination of conscious choice and the investment skill set that I was building that led me to the realm of pension investing. At the start of my career at Northwestern University’s Investment Office, I was a junior member of the investment team across all asset classes including risk management, operations and investments. I was building my career with exposure across asset classes and strategies at a junior level, and it was all to build up my skill set to be a CIO.
One of the things I recognized early on in my career, is that I wanted to be part of an investment program from different perspectives. It was a conscious choice to go from an endowment fund to a financial institution, like Bank of America, where I specialized in venture capital, private equity, real estate, distress funds and other opportunistic funds. A different institution meant different processes, different due diligence practices, different ways of looking at things.
In between Northwestern and Bank of America, I spent a short time at a dot-com company to get a better feel for what it is like to be at a portfolio company, which helped me evaluate venture capital fund investments later. While I was at Bank of America, I oversaw for a client, as a third party assignment, a portfolio of early-stage IT companies where I evaluated and recommended follow-on financings, liquidations and exits.
So, it's all about knowing the gamut of the investing world. The next natural step was to become a senior member of a team, and the pension world certainly gives you that opportunity. At New York State Teachers Retirement System I was a member of an executive staff team that oversaw $100+ billion, and I was leading the private equity portfolio. I had an opportunity to work on a $13+ billion private equity portfolio, while being part of an internal investment committee that considered all investment actions.
All of my experience and strong academic credentials made reaching my goal of being a CIO possible. My career path intentionally included an endowment fund, a financial institution and public pension plans. What IMRF and NYSTRS have in common, is they both have strong governance with an elected board – no ex-officio or appointed board members – and strong investment programs. Because of the solid organizational backdrop, I can focus on the investment program and meeting the objectives, including an assumed rate of return of 7.5% at IMRF.
So, it is a combination because I was purposely building up my experience and academic credentials. When I was at Northwestern, I pursued the CFA program, and I am a CFA charter holder. When I was at Bank of America, I pursued my MBA, and I completed the Masters of Business Administration Degree from Booth School of Business, University of Chicago.
Trusted Insight: You said that early on you knew you wanted to be chief investment officer. Speaking with other CIOs, I haven't heard anyone explicitly state that as their goal. A lot of them say they ended up in the position. How did you come about figuring out “this is the path I need to take to get here?”
Dhvani Shah: It started with undergraduate school. I majored in finance and minored in economics. I had an excellent GPA, was a member of six honor societies and did all those things that you should do to have a strong academic profile. All I knew back then was that I was going to work for a living. Whatever the job, I wanted to make an impact; to make a difference. My goal was to make sure I had great grades and a strong profile, so that I would love my job.
That kind of drive led me to have a profile that allowed me to join an Endowment Fund straight out of undergraduate. Because I had this overall goal of having a job that I would love and make an impact in, whenever I saw a learning opportunity in my environment, I took advantage. I was fortunate enough to have folks who were supportive. I would describe Northwestern as a very collegial environment that was intellectually challenging. I joined as an operations assistant, but I took on every task as an opportunity to learn investments across the major asset classes.
I also knew to be a CIO you need to have a general skill set across the asset classes, but I also wanted to specialize in something. I chose alternatives purposely because I felt that this is something that I could build over time. If I got an early start in this industry, I would just have even more insight into the industry just by virtue of being able to follow this industry for the past 20 years.
That actually led to why I left Northwestern. I loved it there and could have been there forever, but then it conflicted with my goal of being a CIO one day, because I truly believed that you had to build your skill set. You have to build your experience so that you can bring something to the table. I actually made myself move, and I am still in touch with some of the folks that I worked with back then.
Trusted Insight: You mentioning you wanted to make a difference. Unlike most other types of institutional investors, pensions funds are not tasked with perpetuating the wealth of a small handful of high net-worth individuals. Instead, you're managing a pool of money comprised of average Americans' wages that are more than likely not particularly wealthy. For you, is that kind of a burden bear, a righteous cause, or similar to strategically deploying any other large AUM?
Dhvani Shah: I am attracted to the not-for-profit world, whether that's an endowment fund, foundation or a pension plan. Because I worked at a financial institution, I could compare the difference in how it felt. Only after I was at BofA, I realized although I loved my experience and skill set there, to your point, I wasn't doing something that had a direct impact on something important.
At an endowment fund, it was the operating budget, and I was helping the academic institution. I realized that I do like the idea of having a mission.
Within the pension world, I like that my work is important for retirement security. I think retirement security is critical to our society, especially with individuals living longer. Pension plans are an important part of retirement security, and I like that aspect of my job.
There is a burden of operating in a pension plan investment program, but I think that's true in any setting. I just recognize what our constraints are, and I will adapt accordingly. For example, we have a small team, but that's fine. It can actually help attract and retain talented staff because they have an opportunity to work on many different aspects of a very large portfolio. We have about $34.3 billion in assets as of year-end 2015. I think the small team part means that everybody gets a lot of work; it actually helps you retain staff. But, we have to plan. We plan our investment committee meetings in advance so that we can do everything we set-out to do.
To summarize my answer, I think there are burdens or challenges, but the overall mission makes it worthwhile.
Trusted Insight: Tell me a little bit about your investment team. What is the structure? You said it was a small team. What's the team dynamic like? How might it differ from peer institutions? A small team I would assume you're more generalists than specialists; correct me if I'm wrong.
Dhvani Shah: First, I will describe the structure when I walked in the door four-and-a-half years ago. All of the titles were investment analysts, reporting to an investment manager. By function, some folks focused on certain asset classes over others, but they had generalist titles. In June 2014, I restructured the department, and we did add three junior positions called associate investment analyst. We created a layer where certain analysts, three positions, turned into investment officers, and that investment manager title also became an officer.
Today, this is how it looks: The investment team fully staffed is a team of 14 and is organized by key function areas: private markets, public markets, emerging manager program and total portfolio, and operations. Public Markets and Private Markets officers, each have two analysts and one associate analyst reporting to them, an associate analyst reports to the Investment Officer for Emerging Manager and Total Portfolio. Two administrative professionals report to the Investment Officer for Operations. The officers and analysts are encouraged and supported to pursue the CFA and CAIA program for their professional development.
The department is structured such that there is opportunity for growth and advancement. An associate analyst can move up two levels under the existing structure. By creating that growth opportunity, you can attract and retain staff.
How is it different than other institutions? I think a lot of institutions have it organized by function area. But because we are a team of 14 investment professionals, it is just large enough to specialize in something, yet small enough that you can be part of broader projects. The annual asset allocation and the tri-annual asset liability study are two examples of broad projects where everyone is involved.
I really modeled the structure from my experience at Northwestern, where I had a chance to work on so many different things. That was great for Northwestern, but it was also great for my professional development not just being pigeonholed to one thing.
Trusted Insight: These are tough markets to navigate both on the public and private side. To what degree are you concerned about or reacting to the near-term market volatility?
Dhvani Shah: 2016 has definitely been a tough year in terms of performance, so what are we doing?
We utilize our strategic asset allocation as a guideline for our investment activity in the long-run, but I prioritize projects in the short-term, according to current environment opportunities or challenges.
Last year, real estate investments were one of our major efforts based on being under target in terms of asset allocation and attractive market opportunity. In 2015, we committed $595 million compared to $294 million in 2014. To reduce our overweight in domestic equity, we withdrew $800 million from active domestic equity strategies in 2015 and some of that capital went to fixed income.
We committed to real estate to adjust to the environment with modest return expectations. You're seeing increased volatility in the equity markets. It helps to have a more diversified portfolio.
Trusted Insight: When you're approaching an investment on the private side what primary characteristics are you looking for in a manager and how does that differ when you're approaching other public markets?
Dhvani Shah: For private markets, I am looking for skill, expertise in a given strategy and competitive terms—we will negotiate the LPA. For public markets, I am looking for skill, particularly the ability to consistently perform and not deviate from target strategy and competitive terms. All investments are evaluated in terms of people, performance, price and process.
Trusted Insight: What geographies and/or sectors intrigue you in terms of sustained growth in 2016 and beyond? Or are there any?
Dhvani Shah: Sustained growth, that's a tough one. Some of our activities have been in the real estate area where the current income component provides downside protection. We like that. We have invested in private debt funds and real estate debt funds.
Trusted Insight: What is the biggest challenge of pension investing that is unique to pensions?
Dhvani Shah: Defined benefit pension plans are not the favorite due to the large unfunded pension liabilities across various states. Short-term returns and the impact it has on employer contribution rates and the pension fund liabilities add to the unfavorable image of defined benefit pension plans. I think a challenge unique to pensions is planning for that long-term performance, while being able to sustain the short-term volatility in the returns.
Trusted Insight: What trends have you identified in your time at public pensions?
Dhvani Shah: Consistent with this challenge of the returns and the volatility, I do see a trend toward more risk measurement and risk management efforts. I see a trend toward evaluating alternative models for asset allocations. Many institutional investors utilize mean variance optimization models, and there has been more interest in multi-factor based investment strategies.
Trusted Insight: One of the goals that Trusted Insight has is to foster the next generation of chief investment officers. If you could impart the number one rule you've learned in your career as an institutional investor that might be able to help them along, what might that be?
Dhvani Shah: Investment conviction is critical to making good decisions. Develop skills that will strengthen your investment conviction. This investment conviction should be based on rigorous, quantitative work, and not hunches. That would be it. That's what allows you to do everything else.
Conducting the quantitative and qualitative work to pick the best investments means you have discipline and can work hard. Think about implementation. It's not just about making one deal, and moving on to the next deal. A lot of younger folks starting out might be focused more on, “Here's what I invested. Here's what I committed,” but it's also about how did that do? How did that get implemented? Do you also know legal documents for the investments you made? What are the unintended consequences? To me, investment conviction means discipline.
To learn more about the the Top 30 Pension Fund Chief Investment Officers, click here.