Larry Johnson has been manager of investments at Idaho Endowment Fund Investment Board since 2005, where he manages over $2 billion in assets. Previously, Johnson served as the director of pension investments at Abitibi Consolidated, the manager of planning at Boise Cascade, and as a financial analyst at Intermountain Gas Company. He holds a BBA from Boise State University and is a CPA and CFA charterholder. Johnson is to retire in January from the institutional investment world.
In this interview, Johnson discusses how his investment style differs from the herd, the key lessons he's learned during his three decade career, as well as what new investor should keep in mind when entering the market.
Trusted Insight: A majority (92%) of the Idaho Endowment Fund’s assets are allocated in public assets, which is a sharp departure from the endowment model used by many institutions. What is the rationale behind your approach?
Larry Johnson: A little over a year ago, we made our first foray into private assets. That was a major change for our fund that occurred during my tenure in that we now have 8% of the fund in core private real estate funds. However, 92% of the fund remains as publicly traded stocks and bonds. There are a couple of drivers to why we have chosen to invest the way we have. We are an agency of state government. Meaning, we have a lot of public scrutiny and having assets that the public is familiar with and can read about in the paper helps them understand our performance. When there has been a string of bad performance in the equity market, people know that we are heavily weighted to public equities so expect our results to mirror that. That makes communication to relatively unsophisticated stakeholders much easier.
"Many tried to emulate the success at Yale and others expanded staffs and got very aggressive in private assets. Some of the bloom has gone off that rose."
What is the reason behind that? In a state government context, we are always asked: "How can we deliver these services for the lowest possible cost?" Cost is measured two different ways: how many working employees you have working and how much you are paying them. At least in our governance context, it is much more practical to maintain a small investment staff and hire outside managers than it is to do internal management. And we simply do not have enough assets to cost-effectively build an internal management governance structure. About 15 years ago, there was a lot of talk about the endowment model. Many tried to emulate the success at Yale and others expanded staffs and got very aggressive in private assets. Some of the bloom has gone off that rose.
Trusted Insight: Can you elaborate on your experience of investing through the financial crisis? Did it change your approach to investing in this current market?
Larry Johnson: In most aspects, the short answer is no. It did not change our approach. At that time, our fund was 70% equity and 30% fixed income. We recognized the potential of that assets mix to suffer a 20 or 25% drawdown. And I think we prepared our stakeholders for that.
When people ask, "What are your most important risk controls?" I say, "Well, my most important risk control is I tell my stakeholders what risks I am taking." And so, in 2009, as we are kind of at the nadir of the markets, I could go back to my stakeholders and say, "Well, remember a year ago or two years ago, I said that a 70-30 portfolio on a three-year average, could have a return as low as x? By the way, that is where we are right now.” And that reassured them what happened was not at all unusual”.
The only area where our approach to investing changed significantly was with regards to securities lending. We had grown increasingly nervous about the risk that was taken and the collateral pools for securities lending. However, we had not yet mustered the courage to pull the trigger and scale back our commitments. When the crisis hit, we ended up having to spend quite a bit of time monitoring the custodian who, was our securities lending agent, and watch them dig out of that mess.
I think we developed a greater appreciation for the value of segregated accounts versus commingled funds because some of the commingled funds we were invested in became impaired by securities lending. Now, the good news is that we did not have any significant liquidity needs through that crisis. So, it did not really hurt us for our pools to be locked up, but it made us withdraw from securities lending and we remain skeptical of cash collateral lending pools. Post-financial crisis, we have a much stronger bias for segregated accounts.
If I look forward at the valuations in the market, from where we are at now, I think it looks really good. And of course, that has proved to be true.
Trusted Insight: Your investment team is Chris Halvorson and yourself. What is your dynamic and decision-making process?
Larry Johnson: The decision process is like a three-legged stool. It is Chris and me, one independent consultant, and a nine-person board. There is a consensus decision-making process inherent in the nine-person board. Feeding into that, staff and the consultant are independent sources of information. Chris and I come up with our strategy. The consultant presents theirs. Obviously, we confer with the consultant ahead of time. Usually, we come to the board with the same story, but not always. From my perspective, it is good to have a colleague in the office to kick ideas around with and hone our concepts. It is also very helpful to have a savvy external consultant to confer with. I think that that creates good information for the board to base their decisions on.
"In the institutional investment world, the investment process is very humbling. The market will hand you your head on a regular basis."
Moreover, we have an open-door policy for suppliers, potential managers and others who come through town to visit with us. As a public entity, we have nothing to hide and are very open in telling people, "Hey. Here is what we are doing. Here is what we are thinking about." - this gives us an opportunity to receive feedback, ideas, and reactions to what we are considering, what we are concerned about. Most of the folks who come through town on the sales trail have great perspective and serve as useful sounding boards for our ideas.
Trusted Insight: Your well-deserved retirement is coming up in January. What characteristics would your ideal replacement possess?
Larry Johnson: I officially handed over the reins at our last board meeting. I am pleased to say that the board extended an offer which was accepted by Chris Anton. He was formerly the chief investment officer of the Boise State University Foundation.
I guess in terms of the characteristics, the board was looking for somebody better than me. Every hiring decision is an opportunity for an upgrade.
Trusted Insight: What advice would give to anyone entering institution investing?
Larry Johnson: Nothing earth-shaking. I would say pay close attention to what your investment horizon is and make sure the item you are investing in matches that horizon. We tell people that if you have an investment horizon that is less than 20 years, you better not have very much in the equity market. Beware that there are a lot of things that are exposed to the equity market, but that do not appear to be on the surface.
One fundamental thing to keep in mind as a new investor is to match your liquidity needs and your investment horizon with your investment vehicle.
Trusted Insight: Have you decided what you will do next?
Larry Johnson: Things have been busy enough here, so I have not had a chance to think about that too much. My wife and I have four lovely grandchildren who are the age 10 and under, so I think it is a wonderful opportunity to enjoy my life with them.
Trusted Insight: Any final thoughts on your career or the industry?
Larry Johnson: Well, I would just say that having spent the first half of my career in a standard corporate finance role versus the last half of my career in an institutional investing role, I would say that one thing I notice about the institutional investing market is that it is filled with folks who are both very intelligent and fairly humble.
In the institutional investment world, the investment process is very humbling. The market will hand you your head on a regular basis. And in most organizations, the investment role is far removed from the mainstream of the entities’ mission. It drives people with high ego needs out of the industry. It is just a wonderful business to work in when I am surrounded by people that are smarter than I am and also very nice and easy to talk to.
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