Jeremy Wolfson, chief investment officer, currently manages the investment section of the $12 billion Los Angeles Water and Power Employees' Retirement Plan. He is responsible for all pension plan asset classes including broad equity, fixed-income, real-estate, private equity, real return and cash. Prior to joining DWP, Mr. Wolfson worked for the Los Angeles City Treasurer for two years where he was responsible for actively managing the City's $7.5 billion dollar fixed-income portfolio, and was promoted to Chief Investment Officer just prior to transferring to the pension plan. Jeremy holds a BS in finance from California State University, Northridge and an MBA from Pepperdine University. He is also a member of the CFA Institute and the CAIA Association.
Mr. Wolfson was recently named to Trusted Insight's ranked list of the Top 30 Penion Chief Investment Officers. He graciously spoke with Trusted Insight on January 19, 2016. The following interview has been edited and condensed for clarity.
Trusted Insight: Let’s talk about your career history leading up to your current position. You worked in fixed income as vice president and managing principal for Bank of America for roughly 11 years in their institutional fixed-income group on the sell-side. You and your partner from Bank of America then moved FTN Financial where you both carried out the same responsibilities. Following that, you began working for the city of Los Angeles. What brought you into the realm of pension investing?
Jeremy Wolfson: To give you a flavor of what the city and county of LA have: there's three city pension systems, and one county pension system. There are also two treasuries: one city and one county. All in, it's about $200 billion.
They have about $50 billion at the county pension and $40-to-$50 billion at the county treasury. At the city of LA, there's three pension systems: there's the city system, the Fire and Police system, the Department of Water and Power (DWP) system, and the city treasurer's office. They all operate independently, but they're all still “sister funds”, if you want to call them that.
When I first moved to the city, it was to the City Treasurer's office, where we were responsible for investing the city’s working capital.
The City Treasurer’s office internally manages about $7.5 billion in fixed income, and was interested in hiring experienced investment professionals in order to help institutionalize their investment group. Jumping from the sell side to the buy side of the Street was a pretty exciting opportunity, because I was one of the youngest CIOs in the nation. I believe I was around 33 at the time.
I was able to help build that entire platform. The internal staff were great, but when I got there, I was able to really transform the entire process. With the knowledge I brought coming from the Street, we were able to make it more effective and institutional. We saved millions of dollars for the City by implementing new procedures to help lower the cost of trading. I spent two years working for the City Treasurer’s Office.
At the time, there was a position available at the DWP pension plan, and I made the choice to come over and help lead the team that manages the pension assets. It was very different. Previously, everything I had dealt with was internal, from the sell side of the Street where I was actively trading bonds, to the buy side at the treasurer's office, where we were actively managing the portfolio internally.
In comparison, at the pension side, it's very strategic. We have all the asset classes. We're asset allocators, but the assets themselves are managed externally. There are some pension plans that have a hybrid investment process, where they bring in some of the asset classes and manage them internally. We have $12 billion here at DWP. We still do it more traditionally, where we have the institutional investment managers manage the funds, and then we allocate across different mandates, across the entire platform.
With regards to not ending up in endowments or foundations, that's just the way my career took me. That just happened to be where the opportunity presented itself at the time, and I felt it was the right career choice to make.
Trusted Insight: Tell me about your investment team. What's the structure that you've set up? What's the team dynamic like? How might your team differ from peer institutions?
Jeremy Wolfson: First of all, I've tried to create a culture here that's very similar to a Wall Street culture, within the constraints that we have at the government. It's a very collegial, high-performance team.
Right now, there is about 10 of us. We have investment officers that cover different asset classes, for example, global equity, global fixed, private equity, real return, hedge funds, private real estate, and some REITs. It's broken down into different asset classes (even though hedge funds aren't really an asset class). The investment officers are responsible for monitoring and managing those portfolios within those asset classes.
One of our senior investment officers is responsible for all the private markets and the alternatives, and one is responsible for all the global public markets. We do not currently have a Deputy CIO position, but we are exploring the potential to bring in that position. As CIO, I’m the one that's responsible and accountable for the investment section of the Plan.
Trusted Insight: What is your investment philosophy, and how has that developed over your career?
Jeremy Wolfson: My investment philosophy is very idiosyncratic, because it's specific to our constituents. At the end of the day, I work for the beneficiaries of the plan. The number one priority is making sure the retirees get their paychecks consistently, and that we've funded the pension appropriately and haven't over-extended our risk.
My other constituents include the retirement board. My board is conservative and does a great job at managing risk. For instance, when we go to the board with asset liability studies, it's taken from the perspective that our board has the same intention of managing risk to ensure the stability of the Plan. They want cash flow, risk-adjusted growth and to preserve as much capital as possible during times of high volatility. At the same time, they want us to be as opportunistic as possible within the risk constraints that they've approved. These constraints are documented in the Board’s investment policy.
Each pension you go to is unique in how they apply similar concepts to achieve similar goals. A lot of it is driven by their respective boards and how well funded they are. We're extremely well funded. As of our last actuarial valuation, our Plan is 90% funded on a market-value basis, and approximately 88% on an actuarial basis. We have the ability to maintain the status quo and at the same time, look for opportunities with the dry powder that we have.
Over the years, we've won awards for ingenuity and design. For example, we redesigned our fixed-income program. We finished it less than a year ago, but we started it prior to that because we were trying to get ahead of the Fed. We've also been building our alternatives platform. When I first got here about nine years ago, the Plan had a very young alternative investment platform. It still is. Nine years is not that long for private equity and real estate, and there wasn't much in those portfolios at the time. By design, we had a 5% long-term target, because we wanted vintage-year diversification, and also to make sure we built it out and paced it appropriately.
Recently, we conducted an asset liability study. We increased those targets to 8% from 5%. We had got to a point where we had designed it pretty well, and were therefore taking the appropriate bite size. We're getting vintage-year diversification, and we have the dry powder to take advantage of dislocations in the market. That's been really positive for the portfolio overall.
The redesigned fixed-income had to do with the fact that, as a “bonds” guy, I was trying to get ahead of the Fed, given how low interest rates were and the potential for a policy shift. It's very process-oriented, as most public pensions are. We do an asset liability study usually every three-to-five years, and then we do a what we call an “asset class structural review” about every two-to-three years. Those rotate through, depending on the asset class.
We were going through the fixed-income review, and totally redesigned the allocation by not incrementally increasing the risk. At the same time, we had the opportunity to be much less sensitive to interest rate rises should the Fed shift their policy to one where they are raising rates. They've already been doing this at a very slow pace, of course, but we wanted to make sure that if there was any surprise in the market, or if they increased their pacing schedule faster than expected, that we would be prepared and positioned appropriately.
All in all, that's the disciplined process we follow. In terms of how we invest, we do our best to take opportunities as we see them, but we're not tactical investors. We're strategic investors. It's a perpetuity, and we're here for the long run. We try to make sure that we're managing risk and positioning the portfolio appropriately, given where we are in the market cycle.
Trusted Insight: To what degree are you concerned about near-term market volatility in terms of meeting your annual return requirements, but also maintaining a long-term perspective?
Jeremy Wolfson: I don't have any overly optimistic views that we're going to see increased returns in the short run. The U.S. is still trudging along, and although we're still going to generate growth, it will be slow growth. Maybe 1.5%-to-2% real GDP growth in 2016.
The slowdown in China is affecting everybody. With emerging market countries that rely on exports to China having obviously been impacted, and commodity prices impacted as well. The commodity super-cycle is over. Look at where oil is. Furthermore, valuations in the U.S. equity markets were extremely frothy. They've come back down now, although still slightly above their long-term average.
If you look at specific mandates, you're going to find opportunities across the board. We're somewhat contrarian, in the sense that we're looking for opportunities to get into certain markets where we can take advantage of higher volatility, if we feel it’s a good fit for the portfolio and the appropriate level of risk.
We looked at distressed debt strategies in the private markets. Those guys are pretty excited now, given current spreads and valuations, whether it's distressed debt for control or distressed debt trading.
The energy markets obviously have seen significant cracks. If oil stays where it's at for a protracted period of time, then it's extremely unsustainable. However, that can provide growth equity opportunities in the private markets for takeover targets. It's just a matter of timing in terms of when to get in, and that's the toughest part for all of us. We’re not market timers, but if you wait too long for certain opportunities, you run the risk of entering into a crowded trade. You want to be able to time it appropriately, if possible. If everyone's chasing the same thing, you can miss the boat.
It really comes down to being disciplined, managing risk appropriately, being transparent with your board and your constituents, and assuring them that we are in this for the long run. Staying diversified and having uncorrelated assets as best we can within the portfolio should help us meet our objectives. In the short run, it's going to be a challenging couple of years – that’s for sure.
Trusted Insight: Unlike most other types of institutional investing, pension funds are not tasked with perpetuating the wealth of a small handful of high-network individuals. Instead, you're managing a huge pool of money comprised of average Americans' wages. Is that a burden to bear, a righteous cause, or just the same as managing any other large AUM that needs to be employed strategically?
Jeremy Wolfson: I think it's a combination of the latter two. Ultimately, as an institutional investor, you still have to make sure that you're managing risk appropriately, as I mentioned previously. You have to design the portfolio and position it well, based on opportunities that you see in the market and the risk profile that your board has set. Ultimately, it comes down to the fact that you are trying to protect the income of retirees, and provide a paycheck for them that's consistent and stable. The goal is for the pension plan to be there forever. The work we are doing is extremely rewarding, because we are ultimately providing that stable paycheck to retirees.
Trusted Insight: What trends have you identified in your time at the public pension?
Jeremy Wolfson: We’ve witnessed trends is governance. For us, it starts at the city charter level, in terms of what's required of the board members, and then the board sets the policy. Some of the trends across other public pension plans surround the different levels of discretion with staff, and how they're set up. Do they have consulting mandates? How much do they rely on consultants versus internal staff? Do they manage things internally? Do they manage it all externally? I've definitely seen those types of trends over the last nine years. Although it's very idiosyncratic; each public pension plan approaches things slightly differently, depending on various factors that are specific to their funds and financial condition. I think governance is always going to be a topic of discussion across the public pension space.
Another trend I've seen in the private markets relates to transparency issues on private equity. As limited partners and large public pension plans, we’ve been trying to focus on how portfolio expenses are applied to the fund. What's being charged to the fund, versus the general partner? How much leverage do LP’s have in negotiating side letter provisions? How much transparency are we getting? How equitable is it? As well as issues relating to the overall GP and LP relationship. Essentially, what's the alignment of interest between the GP and LPs, and how does that play out? These are long-term investments that you’re in for seven to 10 years typically, so you need to ensure everything is setup correctly at the time of the initial investment.
I've seen the issue of transparency being addressed by different industry groups as well, for instance, ILPA (Institutional Limited Partner Association). They are in the process of designing a new expense template that they're trying to standardize. It's much more involved than some of the basic ones being used by some funds. It’s a challenge getting GPs to adopt it - some do, some don't. I'm hoping that there's enough LP pressure for them to either adopt the ILPA template or something similar. This would provide additional transparency into the way they allocate and report expenses and how the waterfall is structured.
A third trend is the fragmentation of the equity markets, venue analysis and transparency. Predatory high-frequency trading is an issue that is being discussed by regulators and Wall Street firms. About a year or so ago, when the ‘Flash Boys’ book came out, it shed light on this issue when a lot of investors didn't understand the structure of the markets. This may have changed their perspective. Unfortunately, it's probably a game that we can't necessarily win, because of the fragmentation in having 13 or so public exchanges and 40-plus dark pools. The last time I checked, IEX (a dark pool that is attempting to even the playing field for investors) was growing, and now they're about 2% of the market.
We do transaction cost-analysis (TCA) on our portfolios, and we also do TCA on our big transition trades, when we move money around to transition assets or re-balance the portfolio. We're starting to look at more of the venue analysis data to see how well they're executing trades at different venues. I'm not marketing IEX by any means, but having said that, we've noticed that exchanges like IEX that are providing a more fair trading platform, have been producing pretty good results.
How do we address those types of issues? Again, it's transparency. Getting the data from the trades at specific venues, and then conduct venue analysis. Making sure that the Plan’s investment managers are providing best execution. Contractually, we're looking at ways of how to put in provisions to increase the level of transparency so that we can analyze it more effectively. Hopefully, this will help change trading behavior across the industry so that it ends up being a benefit to all market participants down the road.
Trusted Insight: What is the biggest challenge to pension investing that's unique to pensions?
Jeremy Wolfson: I think the biggest challenge that CIOs, and pension plans in general, face is trying to achieve their actuarial rate of return. 8% used to be the national average, and now we’re at 7.5%. If you're looking more short term, and the markets are producing low protracted rates of return across different asset classes, how do you achieve that 7.5%? You don't want to be chasing yield, and you don't want to be going off the reservation from a risk management perspective. This means that we have to maintain the discipline of being diversified and having uncorrelated assets across the portfolio. In the short run, you may end up producing lower results, but this is a marathon - not a sprint. Everyone is optimistic that the actuarial rate can be accomplished over the long run, but in this environment it's definitely a short-run challenge.
Trusted Insight: One of the goals that Trusted Insight has is to help foster the next generation of managing directors and CIOs. If you could share the number one rule that you've learned in your institutional investing career with the next generation, what would that be?
Jeremy Wolfson: I go back to my alma mater, and I mentor a lot of MBA students. I enjoy speaking to the classes and the finance club. It’s important to start while students are still in school and attempting to plan out their careers. I try to get them excited about the investment space, whether it's public pension plans, the buy side or the sell side, trading, portfolio management, private equity, real estate and so forth.
Getting out there, providing information and exposure to the business and letting them know what types of career paths there are on Wall Street is the first step. Then the next step is to narrow down that focus by explaining what I’ve done in the past, how I got there and what I'm doing specifically for the public pension plan. I explain to them how important I think the work is and how rewarding it can be.
As far as leadership skills, if your goal is to move your way up into management, managing director, CIO, etc., it's about developing the ability to lead a high-performance investment team, whilst also managing both internal and external constituents.
A lot of the time, students will ask me what's the secret to success. Probably a lot of leaders have said this, but I truly believe it can be summed up in one word: passion. Be passionate about what you do. Love what you do. Don't chase the money. If all you care about is the money, there is a good chance you will not be successful. If you define success with money, you may not have the work-life balance to enjoy it and be happy. At the end of the day, you may get paid well, but it's really about lifelong fulfillment and giving back. You're going to spend more time at work than you probably are anywhere else, so really love what you do. And it can be anything, it doesn't have to be a career in finance.
If you're an entry level analyst, who is really excited about what you do and believes in the vision and the mission of the firm, then you have a much higher probability of being successful. You're going to end up doing a great job and learning from mistakes that you make. Hopefully have a good mentor and good management that's going to help guide you in the right direction so that you can succeed. If you do love what you do, and you're passionate about it, life can be fulfilling and the money will follow.
Trusted Insight: What did I fail to ask that I should know about you, about DWP or about pension investing in general?
Jeremy Wolfson: Again, I just keep coming back to the fact that I really enjoy the work. I think it's really important work that we're doing. We have approximately 9,000 employees and about 9,000 retirees. It's about 50/50. They shouldn't necessarily have to know what we do, unless they take an interest in it. We're very transparent in that aspect through public meetings and newsletters. They just want to know that they're getting that steady paycheck so they can enjoy their retirement. We need to make that happen. We have really good people here. It’s important to ensure we’re recruiting and retaining talent, and maintaining and fostering that team through a collaborative culture that focuses on fulfilling our fiduciary duty to our beneficiaries.
I don't know if that philosophy is unique to us, but I think it's the right thing to do. Thankfully we’ve been successful in providing that stability. We’re doing our jobs pretty well, and we have a passion for the work. That leads to a rewarding career, which has a positive impact on other peoples’ lives. I think that's maybe the last, and most important, point I will leave you with.
To learn more about the the Top 30 Pension Fund Chief Investment Officers, click here.
Mr. Wolfson was recently named to Trusted Insight's ranked list of the Top 30 Penion Chief Investment Officers. He graciously spoke with Trusted Insight on January 19, 2016. The following interview has been edited and condensed for clarity.
Trusted Insight: Let’s talk about your career history leading up to your current position. You worked in fixed income as vice president and managing principal for Bank of America for roughly 11 years in their institutional fixed-income group on the sell-side. You and your partner from Bank of America then moved FTN Financial where you both carried out the same responsibilities. Following that, you began working for the city of Los Angeles. What brought you into the realm of pension investing?
Jeremy Wolfson: To give you a flavor of what the city and county of LA have: there's three city pension systems, and one county pension system. There are also two treasuries: one city and one county. All in, it's about $200 billion.
They have about $50 billion at the county pension and $40-to-$50 billion at the county treasury. At the city of LA, there's three pension systems: there's the city system, the Fire and Police system, the Department of Water and Power (DWP) system, and the city treasurer's office. They all operate independently, but they're all still “sister funds”, if you want to call them that.
When I first moved to the city, it was to the City Treasurer's office, where we were responsible for investing the city’s working capital.
The City Treasurer’s office internally manages about $7.5 billion in fixed income, and was interested in hiring experienced investment professionals in order to help institutionalize their investment group. Jumping from the sell side to the buy side of the Street was a pretty exciting opportunity, because I was one of the youngest CIOs in the nation. I believe I was around 33 at the time.
I was able to help build that entire platform. The internal staff were great, but when I got there, I was able to really transform the entire process. With the knowledge I brought coming from the Street, we were able to make it more effective and institutional. We saved millions of dollars for the City by implementing new procedures to help lower the cost of trading. I spent two years working for the City Treasurer’s Office.
At the time, there was a position available at the DWP pension plan, and I made the choice to come over and help lead the team that manages the pension assets. It was very different. Previously, everything I had dealt with was internal, from the sell side of the Street where I was actively trading bonds, to the buy side at the treasurer's office, where we were actively managing the portfolio internally.
In comparison, at the pension side, it's very strategic. We have all the asset classes. We're asset allocators, but the assets themselves are managed externally. There are some pension plans that have a hybrid investment process, where they bring in some of the asset classes and manage them internally. We have $12 billion here at DWP. We still do it more traditionally, where we have the institutional investment managers manage the funds, and then we allocate across different mandates, across the entire platform.
With regards to not ending up in endowments or foundations, that's just the way my career took me. That just happened to be where the opportunity presented itself at the time, and I felt it was the right career choice to make.
Trusted Insight: Tell me about your investment team. What's the structure that you've set up? What's the team dynamic like? How might your team differ from peer institutions?
Jeremy Wolfson: First of all, I've tried to create a culture here that's very similar to a Wall Street culture, within the constraints that we have at the government. It's a very collegial, high-performance team.
Right now, there is about 10 of us. We have investment officers that cover different asset classes, for example, global equity, global fixed, private equity, real return, hedge funds, private real estate, and some REITs. It's broken down into different asset classes (even though hedge funds aren't really an asset class). The investment officers are responsible for monitoring and managing those portfolios within those asset classes.
One of our senior investment officers is responsible for all the private markets and the alternatives, and one is responsible for all the global public markets. We do not currently have a Deputy CIO position, but we are exploring the potential to bring in that position. As CIO, I’m the one that's responsible and accountable for the investment section of the Plan.
Trusted Insight: What is your investment philosophy, and how has that developed over your career?
Jeremy Wolfson: My investment philosophy is very idiosyncratic, because it's specific to our constituents. At the end of the day, I work for the beneficiaries of the plan. The number one priority is making sure the retirees get their paychecks consistently, and that we've funded the pension appropriately and haven't over-extended our risk.
My other constituents include the retirement board. My board is conservative and does a great job at managing risk. For instance, when we go to the board with asset liability studies, it's taken from the perspective that our board has the same intention of managing risk to ensure the stability of the Plan. They want cash flow, risk-adjusted growth and to preserve as much capital as possible during times of high volatility. At the same time, they want us to be as opportunistic as possible within the risk constraints that they've approved. These constraints are documented in the Board’s investment policy.
Each pension you go to is unique in how they apply similar concepts to achieve similar goals. A lot of it is driven by their respective boards and how well funded they are. We're extremely well funded. As of our last actuarial valuation, our Plan is 90% funded on a market-value basis, and approximately 88% on an actuarial basis. We have the ability to maintain the status quo and at the same time, look for opportunities with the dry powder that we have.
Over the years, we've won awards for ingenuity and design. For example, we redesigned our fixed-income program. We finished it less than a year ago, but we started it prior to that because we were trying to get ahead of the Fed. We've also been building our alternatives platform. When I first got here about nine years ago, the Plan had a very young alternative investment platform. It still is. Nine years is not that long for private equity and real estate, and there wasn't much in those portfolios at the time. By design, we had a 5% long-term target, because we wanted vintage-year diversification, and also to make sure we built it out and paced it appropriately.
Recently, we conducted an asset liability study. We increased those targets to 8% from 5%. We had got to a point where we had designed it pretty well, and were therefore taking the appropriate bite size. We're getting vintage-year diversification, and we have the dry powder to take advantage of dislocations in the market. That's been really positive for the portfolio overall.
The redesigned fixed-income had to do with the fact that, as a “bonds” guy, I was trying to get ahead of the Fed, given how low interest rates were and the potential for a policy shift. It's very process-oriented, as most public pensions are. We do an asset liability study usually every three-to-five years, and then we do a what we call an “asset class structural review” about every two-to-three years. Those rotate through, depending on the asset class.
We were going through the fixed-income review, and totally redesigned the allocation by not incrementally increasing the risk. At the same time, we had the opportunity to be much less sensitive to interest rate rises should the Fed shift their policy to one where they are raising rates. They've already been doing this at a very slow pace, of course, but we wanted to make sure that if there was any surprise in the market, or if they increased their pacing schedule faster than expected, that we would be prepared and positioned appropriately.
All in all, that's the disciplined process we follow. In terms of how we invest, we do our best to take opportunities as we see them, but we're not tactical investors. We're strategic investors. It's a perpetuity, and we're here for the long run. We try to make sure that we're managing risk and positioning the portfolio appropriately, given where we are in the market cycle.
Trusted Insight: To what degree are you concerned about near-term market volatility in terms of meeting your annual return requirements, but also maintaining a long-term perspective?
Jeremy Wolfson: I don't have any overly optimistic views that we're going to see increased returns in the short run. The U.S. is still trudging along, and although we're still going to generate growth, it will be slow growth. Maybe 1.5%-to-2% real GDP growth in 2016.
The slowdown in China is affecting everybody. With emerging market countries that rely on exports to China having obviously been impacted, and commodity prices impacted as well. The commodity super-cycle is over. Look at where oil is. Furthermore, valuations in the U.S. equity markets were extremely frothy. They've come back down now, although still slightly above their long-term average.
If you look at specific mandates, you're going to find opportunities across the board. We're somewhat contrarian, in the sense that we're looking for opportunities to get into certain markets where we can take advantage of higher volatility, if we feel it’s a good fit for the portfolio and the appropriate level of risk.
We looked at distressed debt strategies in the private markets. Those guys are pretty excited now, given current spreads and valuations, whether it's distressed debt for control or distressed debt trading.
The energy markets obviously have seen significant cracks. If oil stays where it's at for a protracted period of time, then it's extremely unsustainable. However, that can provide growth equity opportunities in the private markets for takeover targets. It's just a matter of timing in terms of when to get in, and that's the toughest part for all of us. We’re not market timers, but if you wait too long for certain opportunities, you run the risk of entering into a crowded trade. You want to be able to time it appropriately, if possible. If everyone's chasing the same thing, you can miss the boat.
It really comes down to being disciplined, managing risk appropriately, being transparent with your board and your constituents, and assuring them that we are in this for the long run. Staying diversified and having uncorrelated assets as best we can within the portfolio should help us meet our objectives. In the short run, it's going to be a challenging couple of years – that’s for sure.
Trusted Insight: Unlike most other types of institutional investing, pension funds are not tasked with perpetuating the wealth of a small handful of high-network individuals. Instead, you're managing a huge pool of money comprised of average Americans' wages. Is that a burden to bear, a righteous cause, or just the same as managing any other large AUM that needs to be employed strategically?
Jeremy Wolfson: I think it's a combination of the latter two. Ultimately, as an institutional investor, you still have to make sure that you're managing risk appropriately, as I mentioned previously. You have to design the portfolio and position it well, based on opportunities that you see in the market and the risk profile that your board has set. Ultimately, it comes down to the fact that you are trying to protect the income of retirees, and provide a paycheck for them that's consistent and stable. The goal is for the pension plan to be there forever. The work we are doing is extremely rewarding, because we are ultimately providing that stable paycheck to retirees.
Trusted Insight: What trends have you identified in your time at the public pension?
Jeremy Wolfson: We’ve witnessed trends is governance. For us, it starts at the city charter level, in terms of what's required of the board members, and then the board sets the policy. Some of the trends across other public pension plans surround the different levels of discretion with staff, and how they're set up. Do they have consulting mandates? How much do they rely on consultants versus internal staff? Do they manage things internally? Do they manage it all externally? I've definitely seen those types of trends over the last nine years. Although it's very idiosyncratic; each public pension plan approaches things slightly differently, depending on various factors that are specific to their funds and financial condition. I think governance is always going to be a topic of discussion across the public pension space.
Another trend I've seen in the private markets relates to transparency issues on private equity. As limited partners and large public pension plans, we’ve been trying to focus on how portfolio expenses are applied to the fund. What's being charged to the fund, versus the general partner? How much leverage do LP’s have in negotiating side letter provisions? How much transparency are we getting? How equitable is it? As well as issues relating to the overall GP and LP relationship. Essentially, what's the alignment of interest between the GP and LPs, and how does that play out? These are long-term investments that you’re in for seven to 10 years typically, so you need to ensure everything is setup correctly at the time of the initial investment.
I've seen the issue of transparency being addressed by different industry groups as well, for instance, ILPA (Institutional Limited Partner Association). They are in the process of designing a new expense template that they're trying to standardize. It's much more involved than some of the basic ones being used by some funds. It’s a challenge getting GPs to adopt it - some do, some don't. I'm hoping that there's enough LP pressure for them to either adopt the ILPA template or something similar. This would provide additional transparency into the way they allocate and report expenses and how the waterfall is structured.
A third trend is the fragmentation of the equity markets, venue analysis and transparency. Predatory high-frequency trading is an issue that is being discussed by regulators and Wall Street firms. About a year or so ago, when the ‘Flash Boys’ book came out, it shed light on this issue when a lot of investors didn't understand the structure of the markets. This may have changed their perspective. Unfortunately, it's probably a game that we can't necessarily win, because of the fragmentation in having 13 or so public exchanges and 40-plus dark pools. The last time I checked, IEX (a dark pool that is attempting to even the playing field for investors) was growing, and now they're about 2% of the market.
We do transaction cost-analysis (TCA) on our portfolios, and we also do TCA on our big transition trades, when we move money around to transition assets or re-balance the portfolio. We're starting to look at more of the venue analysis data to see how well they're executing trades at different venues. I'm not marketing IEX by any means, but having said that, we've noticed that exchanges like IEX that are providing a more fair trading platform, have been producing pretty good results.
How do we address those types of issues? Again, it's transparency. Getting the data from the trades at specific venues, and then conduct venue analysis. Making sure that the Plan’s investment managers are providing best execution. Contractually, we're looking at ways of how to put in provisions to increase the level of transparency so that we can analyze it more effectively. Hopefully, this will help change trading behavior across the industry so that it ends up being a benefit to all market participants down the road.
Trusted Insight: What is the biggest challenge to pension investing that's unique to pensions?
Jeremy Wolfson: I think the biggest challenge that CIOs, and pension plans in general, face is trying to achieve their actuarial rate of return. 8% used to be the national average, and now we’re at 7.5%. If you're looking more short term, and the markets are producing low protracted rates of return across different asset classes, how do you achieve that 7.5%? You don't want to be chasing yield, and you don't want to be going off the reservation from a risk management perspective. This means that we have to maintain the discipline of being diversified and having uncorrelated assets across the portfolio. In the short run, you may end up producing lower results, but this is a marathon - not a sprint. Everyone is optimistic that the actuarial rate can be accomplished over the long run, but in this environment it's definitely a short-run challenge.
Trusted Insight: One of the goals that Trusted Insight has is to help foster the next generation of managing directors and CIOs. If you could share the number one rule that you've learned in your institutional investing career with the next generation, what would that be?
Jeremy Wolfson: I go back to my alma mater, and I mentor a lot of MBA students. I enjoy speaking to the classes and the finance club. It’s important to start while students are still in school and attempting to plan out their careers. I try to get them excited about the investment space, whether it's public pension plans, the buy side or the sell side, trading, portfolio management, private equity, real estate and so forth.
Getting out there, providing information and exposure to the business and letting them know what types of career paths there are on Wall Street is the first step. Then the next step is to narrow down that focus by explaining what I’ve done in the past, how I got there and what I'm doing specifically for the public pension plan. I explain to them how important I think the work is and how rewarding it can be.
As far as leadership skills, if your goal is to move your way up into management, managing director, CIO, etc., it's about developing the ability to lead a high-performance investment team, whilst also managing both internal and external constituents.
A lot of the time, students will ask me what's the secret to success. Probably a lot of leaders have said this, but I truly believe it can be summed up in one word: passion. Be passionate about what you do. Love what you do. Don't chase the money. If all you care about is the money, there is a good chance you will not be successful. If you define success with money, you may not have the work-life balance to enjoy it and be happy. At the end of the day, you may get paid well, but it's really about lifelong fulfillment and giving back. You're going to spend more time at work than you probably are anywhere else, so really love what you do. And it can be anything, it doesn't have to be a career in finance.
If you're an entry level analyst, who is really excited about what you do and believes in the vision and the mission of the firm, then you have a much higher probability of being successful. You're going to end up doing a great job and learning from mistakes that you make. Hopefully have a good mentor and good management that's going to help guide you in the right direction so that you can succeed. If you do love what you do, and you're passionate about it, life can be fulfilling and the money will follow.
Trusted Insight: What did I fail to ask that I should know about you, about DWP or about pension investing in general?
Jeremy Wolfson: Again, I just keep coming back to the fact that I really enjoy the work. I think it's really important work that we're doing. We have approximately 9,000 employees and about 9,000 retirees. It's about 50/50. They shouldn't necessarily have to know what we do, unless they take an interest in it. We're very transparent in that aspect through public meetings and newsletters. They just want to know that they're getting that steady paycheck so they can enjoy their retirement. We need to make that happen. We have really good people here. It’s important to ensure we’re recruiting and retaining talent, and maintaining and fostering that team through a collaborative culture that focuses on fulfilling our fiduciary duty to our beneficiaries.
I don't know if that philosophy is unique to us, but I think it's the right thing to do. Thankfully we’ve been successful in providing that stability. We’re doing our jobs pretty well, and we have a passion for the work. That leads to a rewarding career, which has a positive impact on other peoples’ lives. I think that's maybe the last, and most important, point I will leave you with.
To learn more about the the Top 30 Pension Fund Chief Investment Officers, click here.