Han Pham is director of public equities at San Francisco Employees’ Retirement System (SFERS). At SFERS, Han manages the $10 billion public equities portfolio, which is ranked #1 in performance among public pensions for trailing 1-, 3-, and 5-year periods ending on June 30, 2020.
In this interview, Han spoke with Trusted Insight about the challenges of public pension investing in a city known for its political activism, why SFERS became a thought leader in ESG investment, and how she and her team overhauled the SFERS public equities portfolio to achieve the top ranking among public pensions.
Han Pham was named to Trusted Insight's 2020 Top Institutional Rising Stars.
Trusted Insight: Tell us about your current role at San Francisco Employees' Retirement system.
Han Pham: I joined SFERS a little over five years ago. What attracted me to the position was the new CIO, Bill Coaker. He came to SFERS from the University of California Board of Regents, but before that he was actually in my role, which was called Head of Public Equities. When he returned, SFERS was undergoing substantial changes. It had done very well prior to the GFC, and was over 100% funded. SFERS had significant exposure to public equity, much of which was passively managed. The Trust suffered both a large loss and underperformed during the GFC, and subsequently struggled to recover.
The GFC prompted a reconsideration of investment practices—the team, the staff, the governance, and the underlying investments. When Bill joined in 2014, there were fewer than 10 investment staff; today our staff is about 25. SFERS previously had more of a consultant-driven process. Bill is a big believer in David Swensen's Yale endowment model: being really differentiated from the benchmark, embracing alternative asset classes, and concentrating capital among high-conviction managers. Bill noted that Yale University had outperformed in public equity by well over 5% annualized for 20 years, and that he believes public equity is a source of very high excess returns. So I saw an opportunity to add a ton of value. He liked my experience at Makena, which is a spin-out of the Stanford endowment, whose investment approach is similar to the Yale endowment's.
Joining SFERS when I did gave me the chance to overhaul the public equity portfolio. When I arrived in 2015, we had all these style box strategies and many managers who hugged their benchmarks or were overly diversified. Our performance was average at best. I had the chance to significantly upgrade the portfolio. We revised our Investment Policy Statement to eliminate sub-asset allocation targets and tracking error limits on most of our managers, which allowed us to be nimbler and make high conviction investments in growth, specifically in technology, biotech, and China. These three areas are what have driven our performance and differentiated SFERS from other public pensions.
Trusted Insight: You mentioned that SFERS overhauled the team as well as its portfolios since you arrived. What’s the team looking like these days?
Han Pham: We've built up staff over the last few years and attracted really bright people. We added new roles and teams such as Absolute Return, Private Credit, ESG, and Asset Allocation and Risk Management. For example, our Head of Asset Allocation and Risk Management, Anna Langs, is highly qualified: she has three degrees from MIT, served in a CRO-capacity for several prominent investment managers and asset owners, and is very experienced with quantitative analysis.
SFERS was one of the first public plans to invest in venture capital. The team has delivered great returns. Since the inception of our private equity portfolio in 1987, the SFERS venture capital portfolio has posted an IRR of 21.5%. The team is generally comprised of specialties, but we interact extensively. Right now we have virtual lunches during the week, weekly staff meetings where we share ideas, and occasional virtual social events after hours. We have a strong team and collaborative culture, with each asset class focused on their specialization while the entire team is well versed on the strategy and initiatives throughout the portfolio.
Bill also believes in promoting from within, and giving talented professionals opportunities in new asset classes. Seven of the 13-member investment management team have been promoted in the past five years, and our Director of Real Estate recently was given an opportunity as our Director of Buyout Strategies.
Trusted Insight: You mentioned that your experience with Makena made your profile attractive to the CIO at SFERS. But you've also racked up some pretty diverse experience in the investment world before that. So what was it that made you decide that a public pension fund was where you wanted to be, rather than, say, an endowment?
Han Pham: At first it was the opportunity to take an underperforming portfolio and totally overhaul it. I'm so proud of what we've done and the outperformance we have achieved. We've added really great managers, some who historically didn't want to work with public pensions.
I also live in San Francisco, and it honestly means a lot to me that I work for the city. The pension supports more than 74,000 active members, retirees, and their beneficiaries: they’re firefighters, teachers, doctors, nurses, and educators. They rely on this pension. They’re all busy with their own important work and the pension helps to reduce some of their stress and provides them with some financial security.
SFERS originally was established as a fund to assist families and orphans of firefighters and police; today it covers all city employees. These pensioners are people you see every day on the street: MUNI drivers, airport workers, firefighters, police, etc. Many are essential workers who continue to work in the field today amid truly challenging times brought on by a global pandemic.
Trusted Insight: This is a city well-known for its citizen activism and its lively participation in local government.
Han Pham: Which is something I wasn't fully aware of when I joined the pension.
Trusted Insight: Well, that leads to the next question. Could you tell us how governance works at SFERS, and what kind of exposure SFERS has to members in terms of oversight and accountability in such a politically active town?
Han Pham: We have monthly Board meetings, and all new recommendations are approved by the Board. Public equity is usually done in what we call an “open session.” Every open session is live-streamed (and recorded) and any member of the public, regardless of whether they live in San Francisco, can attend and comment on each agenda item. Public interest groups sometimes come and present their case. To be honest, it wasn't something I was prepared for.
We have a seven-member board; three members represent various retiree constituencies, three are mayoral appointees, and one is a member of the City’s Board of Supervisors.
We have public interest groups that represent several important social issues. We have five different investment restrictions regarding tobacco, firearms, Sudan, oil and gas, and thermal coal.
Trusted Insight: Related to those five restrictions that you mentioned: is there anything lately that people have been showing up and expressing concerns about, in terms of the city's investments?
Han Pham: We have an annual update on ESG every October and we sometimes get some feedback at that meeting.
Over the past few years, SFERS has developed a highly regarded ESG platform. In the past, the SFERS response to ESG matters was mainly through investment restrictions. Today, SFERS takes a risk-based approach to integrating ESG considerations into investment processes across all asset classes. We have three “pillars” to our ESG platform: Active Ownership (engagement), ESG Investment Management (integration), and ESG Collaboration and Communication. We hired a sustainable investments manager in Public Equity nearly 2 ½ years ago, and that manager has outperformed by nearly 6% annualized since then.
We currently have active initiatives to engage with the public equity companies we own, to increase women and diversity on boards. These issues have gained increasing attention this year, and SFERS is active in this movement.
"We believe investors should not rely on market returns going forward to provide them with the returns they need."
Trusted Insight: There's a lot of talk in the financial media about active management underperforming market averages over the long haul. How do you defend active management? What can you point to, maybe in your record or in trends overall, as an area that still requires your expertise?
Han Pham: We've been told by consultants and other experts that it's hard for active public equity managers to outperform. We made several high conviction investments, and added several hundred basis points above the index. For the year ending June 30, 2020, the SFERS public equity portfolio was up 7.9%. The global public equity benchmark (MSCI ACWI) was up only 1.2%. In the active space, meaning ex-passive and passive-like strategies we use to fund capital calls from private markets managers, our public equity portfolio outperformed by more than 8% this past fiscal year. We've proven we can add outsized returns with active managers. We believe investors should not rely on market returns going forward to provide them with the returns they need.
There's pressure on market returns—especially today, with valuations high and so much uncertainty around COVID-19, the economic recovery, the US Elections, global politics, etc. We were recently at record highs in the major US equity indices. We're seeing a slight correction over the last few weeks, but you see many companies struggling to recover and some have permanently shut down.
There are a few companies that have benefited from COVID-19. But the vast majority have revenues and earnings that are depressed. It's going to be challenging to just rely on beta to post the returns investors need. Most public pensions have a required hurdle; ours is 7.4%. I don't think we can rely on passive investments in public equity to make that return target. We have demonstrated that we can post high excess returns in public equity through good manager selection
Trusted Insight: U.S Pension funds—and more recently, college endowments—have come under fire from the Trump Administration for funding Chinese tech companies, including some competitors to American firms, as well as others with military applications, such as drone manufacturers. Some of these companies are publicly traded; others are held privately. At Trusted Insight we're trying to understand how pension and endowment fund managers have responded to the Administration’s directives to divest from China, as well as its subsequent threats surrounding the potential delisting of Chinese firms from American exchanges. What kind of conversations have you had with your peers about this, both at SFERS and with colleagues at other pension funds?
Han Pham: We have spent much time recently discussing and researching this topic internally, with our institutional peers, portfolio managers, and China experts. We’ve made material China investments, and those strategies have posted high returns. But we understand the scrutiny China is under in the current climate. Our job is to dig deeper to understand the issues.
In our view, China continues to be a significant source for growth and innovation, which provides attractive investment opportunities. SFERS first invested in dedicated China public equity managers in early 2017, before they were included in the major equity indices. Their annualized returns in aggregate since inception is 17.6% (vs. 11.5% for the S&P 500 and 9.1% for ACWI over the same time period).
Most developed markets and many other emerging markets are struggling with their own economies and political challenges, which makes China more attractive. This stated, we continue to closely assess the investment risks and opportunities in China.
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"We are in constant dialogue with our managers across all asset classes and with leading strategists and experts on China. We have conducted an in-depth analysis of the many risks of investing in China, as well as the opportunities. Our Board and our entire staff are fully briefed on both."
Trusted Insight: Do you or any peers have any contacts at Treasury or any of the other departments that are putting out some of these statements?
Han Pham: We do not have direct access to some of the government officials you mentioned, but many of our managers do. Our managers are highly connected and monitor the China situation closely. We are in constant dialogue with our managers across all asset classes and with leading strategists and experts on China. We have conducted an in-depth analysis of the many risks of investing in China, as well as the opportunities. Our Board and our entire staff are fully briefed on both.
Trusted Insight: You're managing public equity investments in the VC capital of the world's largest economy. I realize public equity is still the biggest and most important part of the portfolio at SFERS, nearly a third of the assets under management. But do you ever feel like you're missing out on the action in VC? Or maybe another way of asking this is: how do you get in on that action?
Han Pham: Actually, much of the innovation and subsequent investment returns occur when companies are public, not private. Consider Amazon, for example. It went public in 1997 as an online bookseller at a valuation of less than $450 million. Today it is a leader in diversified e-commerce, cloud computing, digital streaming, and groceries, with a valuation of more than $1.5 trillion, a 3,300x return in 23 years since going public. The innovation and value it created in the public market is much more significant than what it created in the private market.
Today we’re seeing many biotech companies come to market. Many of these companies go public before they have commercially approved products. They rely on public equity capital to bring potentially life-saving therapies to the market. As one of our biotech managers says, “we can do well and do good.” We believe the next decade will be truly transformative in healthcare and have invested accordingly.
Bill believes the human experience is fast evolving from the Industrial Age to an era of Science, Technology, and Innovation. He also believes that an investor can post venture-like returns investing in Public Equity by investing similarly to venture managers. Hence, in Public Equity we have a strong tilt toward technology, software, the digital transformation, biotech, and innovation. As we have emphasized investing in leaders in these themes, our excess returns in public equity have moved much higher.
There's also so much data, information, and transparency available in the public market, which allows you to be a more thoughtful investor. Public equity is much more liquid than private equity, which allows investors to transact more easily when more data and information becomes available.
Trusted Insight: According to the asset mix listed on the SFERS website, public equity is about a third of your overall portfolio. So could you tell us how you've been negotiating the market volatility generated by COVID-19, especially thinking back to those chaotic early days in February and March when the pandemic went global?
Han Pham: We were very well-positioned going into the COVID-19 crisis. We had significant investments in tech, biotech, and China, and they have substantially outperformed. Many of our tech investments have benefitted from the stay-at-home orders.
COVID-19 has accelerated the adoption of innovation—it has pulled forward trends in digitization, cloud computing, remote working, biotech, and even in more traditional technology. For example, DocuSign has been around since 2003, but it wasn't really until the recent stay-at-home order that many people started using DocuSign instead of faxing, or signing and scanning. COVID-19 accelerated tech adoption and market trends. That's what really helped us this year: we were very well-positioned to take advantage of accelerating trends in tech, biotech, and China.
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