Jude Perez is the deputy chief investment officer at New Mexico Public Employees Retirement Association (PERA). He was recently promoted to this position in 2015 from his previous role as a portfolio manager. Perez holds an MBA from the University of New Mexico and a B.A. in philosophy from the University of Nevada, Las Vegas.
Before entering government pension funds, Perez was a snowboard retailer and a land associate at the homebuilding company KB Home, where he gained experience in real estate underwriting. In his own words, he “stumbled into the pension investing world” when a former colleague called and offered a private equity portfolio manager opportunity at a pension fund in New Mexico.
Like many other big pension funds with diversified portfolios, New Mexico PERA was deeply hurt in 2015 by the turmoil in energy and natural resource sector. In this interview, Perez shared his insights on investing in a down market and unique challenges pension funds are facing.
Mr. Perez was recently named on Trusted Insight’s ranked list of Top 30 Future Chief Investment Officers At Pension Funds. He graciously spoke with us on April 21, 2016. The following interview has been condensed and edited for clarity.
Trusted Insight: What’s the story of going from a real estate associate to a pension fund investor?
Jude Perez: One of my co-workers at KB Home, where I was a land associate, left to go help start the alternatives program at another fund here in New Mexico. He had a prior relationship with some people at the fund, so they asked him to come over to help build the alternatives program. After he left, he called me up to see if I could help him with the private equity portfolio. He already knew my finance background and my research capabilities from our previous job, and he thought it would be a good fit for me, so I kind of just stumbled into the pension investing world.
From that point, I did my research and decided that it could be something I would enjoy doing, and here I am today, and I'm still enjoying it.
Trusted Insight: How has your previous experience outside pension funds informed this job?
Jude Perez: When I was a land associate, what we would do is look for the parcels of land that the homebuilders put their developments on. My job as a land associate was to find these large pieces of land, negotiate with the landowners and then produce financial models, such as cash-flow models, to make sure that these investments or these land purchase would make sense from a business standpoint. From that point, we would write a business plan, and if successful, the company would get the funds needed to invest in these large parcels of land.
That was my experience of investing and also why one of my co-workers wanted me to join him because I did have real estate underwriting experience. He thought it would work well in the private equity space. So I started out by concentrating on private equity, but that expanded as my career grew.
Trusted Insight: You were recently promoted to the deputy CIO position. How is this new job different from your previous role as a portfolio manager?
Jude Perez: It is different, as most promotions are. I have more responsibility. I have a broader scope of work that spans the entire portfolio, not just an individual area or part of a portfolio, as I did when I was a portfolio manager. I also work closely with our CIO and the other team members here. My role as the deputy is to make sure that our ideas and decisions are executed in the best possible manner. In other words, take an idea from infancy to completion.
Another aspect of the job that is different is that I oversee the daily operations of the fund now. In my mind, this is a large part of running a successful investment program. I am lucky enough to have a great team here that does an amazing job in this area. Operations can be very time-consuming, but the team here makes that part a lot easier.
Other differences that come to mind include interacting with our board members more often as well as our executive staff. In my new position, I am more accountable for outcomes than in my prior role.
Jude Perez: I won't say that we're happy with this return. It is important to look at returns in the context of global markets. We are not going to generate returns well in excess of the categories in which we invest. For example, if global equities return a negative 2% in 2015, they will shape our performance. With that said, you can never be happy with missing your goal. I think what people have to realize with pension funds is that, for an analogy, we're tanker ships, and to move our portfolios takes time. We know where the holes are; it just takes time to adjust. We know, for example, in our real assets portfolio that we are over-allocated to energy and natural resources. That had a very large impact on our portfolio. We understand that, but to adjust that portfolio takes time.
It also takes time to bring in new managers and implement the proper diversification. The one good thing is that our CIO, who has been here for about two-and-a-half years, has brought forward some great ideas. He knows what we need to do. It just takes time to implement that, and that is just the nature of being part of a public pension fund.
2015 was a difficult year. I think it's important to go back to basics and remember that diversification across the whole portfolio is essential. I think investors who have tried to call the bottom, for instance, in energy prices and made concentrated bets have been hit hard. I think investors who said interest rates could go nowhere, but up have also been disappointed as the Federal Reserve has remained dovish.
I think being selective makes sense, but not at the expense of diversification. Timing markets is a fool’s errand. When in doubt, strategic asset allocation targets, which are developed with a longer time horizon and ought to be diversified across risk factors, should act as the anchor positioning for the portfolio.
Trusted Insight: During our interview with your CIO, Jon Grabel, he emphasized the importance of rigorous process, especially in a down market. Can you tell me about your decision-making process as a team?
Jude Perez: To start off, I'll say that all of our decisions are dictated by our investment policy statement and strategic asset allocations. We also make a lot of our decisions as a team. What happens is the portfolio managers know their portfolios the best, and they bring ideas to us as a team. Then, we look at these ideas from a bottom-up approach and see how such an investment strategy would fit into our current portfolio and if it meets the objective for that individual portfolio.
We have been working on getting away from looking at the fund from a product level, or a money manager level. Rather, we want to create a better risk-adjusted portfolio by looking at it from a security level. At that point, if the investment seems to fit the criteria we're looking for, we will get our consultants involved. We will do a side-by-side due diligence process, while comparing notes along the way. It's a very time-consuming process, but it is getting better and improved upon with every decision. We work with some of these managers for years before a decision is made. One average, I would say it takes about six months to a year to get through our due diligence process.
Before we make any decisions, we run risk analysis and scenario analysis. We try to get as much data as we can from the manager’s security level positions so that we can model to the portfolio to see how it would impact our portfolio as a whole. Our process is not limited to modeling a portfolio as we have to do legal due diligence, which we involve our in-house counsel, perform a qualitative assessment of an investment organization, document our findings in detailed memos and eventually taking it to the board for approval.
Then, from that standpoint, we take a step back and develop a whole new process in order to monitor it. We want to make sure that our product or strategy is doing what we wanted it to do from a portfolio standpoint.
Trusted Insight: What do you think are the biggest challenges in pension fund investing?
Jude Perez: I'm going to take it just from a public pension standpoint. We are limited to what's out there when it comes to customized solutions. We can be involved in creating custom products, but we often don't have the resources to accomplish some of the things we would like to.
Trusted Insight: What trends in pension funds have you identified throughout these years in the industry?
Jude Perez: I've seen a shift in the categorization of investment strategies as either traditional or alternative. Rather, investment strategies can be mixed and matched to construct portfolios that provide specific exposures. These exposures might include inflation, growth, real rates, currency, etc. I think this is in recognition that some of these alternative strategies are not separate asset classes, but more opportunistic mandates that utilize mainstream assets.
One reason it's topical is because we are proposing changing our asset allocation to our board. Through my talks with other pensions, we all have noticed that this is a trend coming through: people start to look at their asset allocation differently, as opposed to making two portfolios -- public and alternative.
Trusted Insight: Looking forward, where do you see the most appealing opportunities in the market for pensions?
Jude Perez: This is obviously the tough question, especially in the current market as mainstream assets are priced richly. I think that's true in public and private equities and fixed-income markets around the world. There's been a pickup in private credit opportunities to take advantage of the disintermediation of banks through direct lending.
Selective investments in credits trading at distressed or stressed levels could also provide solid risk-adjusted returns provided the upfront credit analysis is accurate. Inflation-linked strategies, such as MLPs, are offering attractive yields, but are trading in tandem with energy prices to a much greater degree than is warranted by the fundamental characteristics of the structure, so that makes it difficult.
I think investors have to be prepared to endure higher levels of volatility in pursuit of the total return. It's a little bit more difficult, because we are in such a different return environment than before. In the 80s and 90s, you could have a 60/40 portfolio. You basically just had to show up to work on a 60/40 portfolio, and Treasuries were producing 6% or 7% on its own. It was easy to hit your number. But in a day where Treasuries are returning maybe 1.8%, and we need safe, liquid assets, it is difficult to build a portfolio that returns 7.75% without too much risk. I think that's where asset allocation becomes that much more important.
Trusted Insight: What is the number one career lesson you have learned?
Jude Perez: I would say understanding that nothing is going to be given to you. You have to work for everything. Also, to be well-rounded and don't be afraid to be a solution provider. Help out anywhere you can, and never take an attitude that something is beneath or above you.
Trusted Insight: What career advice do you have for younger investors in pension funds?
Jude Perez: For junior investing professionals in pensions, I would say learn to be a problem solver and don't be afraid to voice your opinion. I think the one thing about working for a public fund or a pension is that the organizations are very hierarchical. Sometimes junior professionals don't speak up as much as they should because of this. I have plenty of employees that won't bring anything up in a meeting but then come talk to me separately, and I'm like, “You should bring that up in a meeting.” I think voicing your opinion and not being scared to do so is good.
To learn more about the the Top 30 Future CIOs At Pension Funds, click here.
Before entering government pension funds, Perez was a snowboard retailer and a land associate at the homebuilding company KB Home, where he gained experience in real estate underwriting. In his own words, he “stumbled into the pension investing world” when a former colleague called and offered a private equity portfolio manager opportunity at a pension fund in New Mexico.
Like many other big pension funds with diversified portfolios, New Mexico PERA was deeply hurt in 2015 by the turmoil in energy and natural resource sector. In this interview, Perez shared his insights on investing in a down market and unique challenges pension funds are facing.
Mr. Perez was recently named on Trusted Insight’s ranked list of Top 30 Future Chief Investment Officers At Pension Funds. He graciously spoke with us on April 21, 2016. The following interview has been condensed and edited for clarity.
Trusted Insight: What’s the story of going from a real estate associate to a pension fund investor?
Jude Perez: One of my co-workers at KB Home, where I was a land associate, left to go help start the alternatives program at another fund here in New Mexico. He had a prior relationship with some people at the fund, so they asked him to come over to help build the alternatives program. After he left, he called me up to see if I could help him with the private equity portfolio. He already knew my finance background and my research capabilities from our previous job, and he thought it would be a good fit for me, so I kind of just stumbled into the pension investing world.
From that point, I did my research and decided that it could be something I would enjoy doing, and here I am today, and I'm still enjoying it.
Trusted Insight: How has your previous experience outside pension funds informed this job?
Jude Perez: When I was a land associate, what we would do is look for the parcels of land that the homebuilders put their developments on. My job as a land associate was to find these large pieces of land, negotiate with the landowners and then produce financial models, such as cash-flow models, to make sure that these investments or these land purchase would make sense from a business standpoint. From that point, we would write a business plan, and if successful, the company would get the funds needed to invest in these large parcels of land.
That was my experience of investing and also why one of my co-workers wanted me to join him because I did have real estate underwriting experience. He thought it would work well in the private equity space. So I started out by concentrating on private equity, but that expanded as my career grew.
Trusted Insight: You were recently promoted to the deputy CIO position. How is this new job different from your previous role as a portfolio manager?
Jude Perez: It is different, as most promotions are. I have more responsibility. I have a broader scope of work that spans the entire portfolio, not just an individual area or part of a portfolio, as I did when I was a portfolio manager. I also work closely with our CIO and the other team members here. My role as the deputy is to make sure that our ideas and decisions are executed in the best possible manner. In other words, take an idea from infancy to completion.
Another aspect of the job that is different is that I oversee the daily operations of the fund now. In my mind, this is a large part of running a successful investment program. I am lucky enough to have a great team here that does an amazing job in this area. Operations can be very time-consuming, but the team here makes that part a lot easier.
Other differences that come to mind include interacting with our board members more often as well as our executive staff. In my new position, I am more accountable for outcomes than in my prior role.
for an analogy, we're tanker ships, and to move our portfolios takes time. We know where the holes are; it just takes time to adjust.Trusted Insight: In 2015, New Mexico PERA reported a 1.9% return, as opposed to an expected number of 7.75%. That seems a pretty big gap.
Jude Perez: I won't say that we're happy with this return. It is important to look at returns in the context of global markets. We are not going to generate returns well in excess of the categories in which we invest. For example, if global equities return a negative 2% in 2015, they will shape our performance. With that said, you can never be happy with missing your goal. I think what people have to realize with pension funds is that, for an analogy, we're tanker ships, and to move our portfolios takes time. We know where the holes are; it just takes time to adjust. We know, for example, in our real assets portfolio that we are over-allocated to energy and natural resources. That had a very large impact on our portfolio. We understand that, but to adjust that portfolio takes time.
It also takes time to bring in new managers and implement the proper diversification. The one good thing is that our CIO, who has been here for about two-and-a-half years, has brought forward some great ideas. He knows what we need to do. It just takes time to implement that, and that is just the nature of being part of a public pension fund.
2015 was a difficult year. I think it's important to go back to basics and remember that diversification across the whole portfolio is essential. I think investors who have tried to call the bottom, for instance, in energy prices and made concentrated bets have been hit hard. I think investors who said interest rates could go nowhere, but up have also been disappointed as the Federal Reserve has remained dovish.
I think being selective makes sense, but not at the expense of diversification. Timing markets is a fool’s errand. When in doubt, strategic asset allocation targets, which are developed with a longer time horizon and ought to be diversified across risk factors, should act as the anchor positioning for the portfolio.
Trusted Insight: During our interview with your CIO, Jon Grabel, he emphasized the importance of rigorous process, especially in a down market. Can you tell me about your decision-making process as a team?
Jude Perez: To start off, I'll say that all of our decisions are dictated by our investment policy statement and strategic asset allocations. We also make a lot of our decisions as a team. What happens is the portfolio managers know their portfolios the best, and they bring ideas to us as a team. Then, we look at these ideas from a bottom-up approach and see how such an investment strategy would fit into our current portfolio and if it meets the objective for that individual portfolio.
We have been working on getting away from looking at the fund from a product level, or a money manager level. Rather, we want to create a better risk-adjusted portfolio by looking at it from a security level. At that point, if the investment seems to fit the criteria we're looking for, we will get our consultants involved. We will do a side-by-side due diligence process, while comparing notes along the way. It's a very time-consuming process, but it is getting better and improved upon with every decision. We work with some of these managers for years before a decision is made. One average, I would say it takes about six months to a year to get through our due diligence process.
Before we make any decisions, we run risk analysis and scenario analysis. We try to get as much data as we can from the manager’s security level positions so that we can model to the portfolio to see how it would impact our portfolio as a whole. Our process is not limited to modeling a portfolio as we have to do legal due diligence, which we involve our in-house counsel, perform a qualitative assessment of an investment organization, document our findings in detailed memos and eventually taking it to the board for approval.
Then, from that standpoint, we take a step back and develop a whole new process in order to monitor it. We want to make sure that our product or strategy is doing what we wanted it to do from a portfolio standpoint.
Trusted Insight: What do you think are the biggest challenges in pension fund investing?
Jude Perez: I'm going to take it just from a public pension standpoint. We are limited to what's out there when it comes to customized solutions. We can be involved in creating custom products, but we often don't have the resources to accomplish some of the things we would like to.
Trusted Insight: What trends in pension funds have you identified throughout these years in the industry?
Jude Perez: I've seen a shift in the categorization of investment strategies as either traditional or alternative. Rather, investment strategies can be mixed and matched to construct portfolios that provide specific exposures. These exposures might include inflation, growth, real rates, currency, etc. I think this is in recognition that some of these alternative strategies are not separate asset classes, but more opportunistic mandates that utilize mainstream assets.
One reason it's topical is because we are proposing changing our asset allocation to our board. Through my talks with other pensions, we all have noticed that this is a trend coming through: people start to look at their asset allocation differently, as opposed to making two portfolios -- public and alternative.
Trusted Insight: Looking forward, where do you see the most appealing opportunities in the market for pensions?
Jude Perez: This is obviously the tough question, especially in the current market as mainstream assets are priced richly. I think that's true in public and private equities and fixed-income markets around the world. There's been a pickup in private credit opportunities to take advantage of the disintermediation of banks through direct lending.
Selective investments in credits trading at distressed or stressed levels could also provide solid risk-adjusted returns provided the upfront credit analysis is accurate. Inflation-linked strategies, such as MLPs, are offering attractive yields, but are trading in tandem with energy prices to a much greater degree than is warranted by the fundamental characteristics of the structure, so that makes it difficult.
I think investors have to be prepared to endure higher levels of volatility in pursuit of the total return. It's a little bit more difficult, because we are in such a different return environment than before. In the 80s and 90s, you could have a 60/40 portfolio. You basically just had to show up to work on a 60/40 portfolio, and Treasuries were producing 6% or 7% on its own. It was easy to hit your number. But in a day where Treasuries are returning maybe 1.8%, and we need safe, liquid assets, it is difficult to build a portfolio that returns 7.75% without too much risk. I think that's where asset allocation becomes that much more important.
Trusted Insight: What is the number one career lesson you have learned?
Jude Perez: I would say understanding that nothing is going to be given to you. You have to work for everything. Also, to be well-rounded and don't be afraid to be a solution provider. Help out anywhere you can, and never take an attitude that something is beneath or above you.
Trusted Insight: What career advice do you have for younger investors in pension funds?
Jude Perez: For junior investing professionals in pensions, I would say learn to be a problem solver and don't be afraid to voice your opinion. I think the one thing about working for a public fund or a pension is that the organizations are very hierarchical. Sometimes junior professionals don't speak up as much as they should because of this. I have plenty of employees that won't bring anything up in a meeting but then come talk to me separately, and I'm like, “You should bring that up in a meeting.” I think voicing your opinion and not being scared to do so is good.
To learn more about the the Top 30 Future CIOs At Pension Funds, click here.