Bob Jacksha has been the chief investment officer for the New Mexico Educational Retirement Board (ERB) since 2007. In this role, he supervises an investment team of 14 individuals who are responsible for the management of ERB’s $13 billion investment portfolio. Prior to this role, he served as deputy state investment officer with the New Mexico State Investment Council and has had various positions in the investment field with other organizations over the past 35 years.
In this interview, he tells us about New Mexico ERB's investment division and strategic asset allocation strategy; how they are building a more diversified portfolio that could compound well; and how they intend to play the upside during a market downturn.
Bob Jacksha was named on Trusted Insight’s 2019 Top 30 Public Pension Chief Investment Officers.
Trusted Insight: Tell us about the New Mexico Educational Retirement Board and its investment office.
Bob Jacksha: The retirement board is the pension fund for the state's educational employees. It's not just teachers, but it covers everyone from the custodian to the administrative people. It covers K through 12 and the state colleges in New Mexico.
There are about 120,000 members, covering retired and active. We're over $13 billion in assets. There are somewhere between 60 and 65 staff members. We have 14 on the investment team comprised of 10 investment professionals and 4 operations people.
We have three offices and the main office is in Santa Fe. We outgrew that, so the Santa Fe investment staff is in another building in the city. We also have staff in the Albuquerque office which also has client-service people. That’s a snapshot of the fund and team.
Trusted Insight: You spoke on the CIO Panel at the Trusted Insight Summit 2019, which covered topics such as strategic asset allocation strategy. Can you share more on your strategy?
Bob Jacksha: We're actually going through our 3-year process right now. Any changes from where we are now will be incremental. There's a percentage point or two moving here and there.
As far as our targets, our target's public equity is 33%, and that's 19% in domestic and 14% international. We have a target for core bonds of 6%, a 2% target in emerging market debt, and 18% in what we call opportunistic credit. I would include opportunistic credit as one of the areas of alternatives. We have a private equity portfolio, and the target is 13%, real assets at 8%. That does not include real estate, which is a target of 7%. We have a category we call diversifying assets at 12% and 1% to cash. We're pretty much on target at the moment.
We're actually overweight in private equity due to appreciation. Philosophically, we've been trying to build a more robust portfolio. When I started, we were at 70-30 equity, core bonds and some high yield, but 70-30 portfolio. We're trying to build a more diversified portfolio that overtime should compound well. We know we won't do as well in a raging bull market, we're willing to accept that. In a bear market, we're not going to do as poorly. The concept has proven out over time, our long-term returns are good.
As we discussed on the panel, one of the things we're looking for is to add to the diversifying-assets category. Those are more idiosyncratic risks than they are market risk. That adds an element of diversification. If we go into a market downturn, we'll cushion that to some extent.
Trusted Insight: In regards to the diversifying assets, you mentioned you are looking at reinsurance, aircraft leasing and other areas?
Bob Jacksha: We have also done drug royalties. In general, royalties is an area that we can fit in. We also look at intellectual property royalties that might cover what you think of as patents, as well as music royalties.
We have done a more credit-related investment which has to do with actually buying derivatives from banks so they can get them off their balance sheet. It's sort of the last leg of a premise we've been working on for a long time which was to do what the banks don't do anymore. We are a capital provider for banks when they need to unload things like non-performing loans. Those things are running toward the end of their life.
The other thing we've done is energy-project finance. We have a fund that does that. We are also talking to a couple of managers right now about them doing some co-investment portfolios for us in diversifying assets that would encompass all of those areas so we might be able to add some more capital. We're still building this out.
Trusted Insight: What markets outside of the U.S. are you focused on investing more in? Have you pushed back on investing in countries like China?
Bob Jacksha: We still have the same weight to emerging markets, and 33% in total equities. Of that, 9% is in emerging markets, which would be overweight relative to a market portfolio. And we're keeping that as a long-term strategy.
We don't do this country by country. We pick managers who will pick the countries and they'll decide if China's a good investment right now, or if a particular company in China is a good investment. We don't feel we have the expertise in-house to do that. I don't think China is any more of a concern than it's ever been. On emerging markets in general, they certainly haven't kept up with the U.S. markets lately. From a valuation perspective, that just makes the valuation differential even larger. It's probably not the time to throw that premise overboard, even though it hasn't worked in the recent past.
Trusted Insight: Most U.S. public pensions are underfunded which brings on various challenges. How is your team dealing with that hurdle?
Bob Jacksha: We are underfunded. It's about 65% currently. The first thing is that we don't run out of money. You look as far forward as you want, and say, "Okay, if our assumptions hold true, we'll be able to pay benefits going forward indefinitely with no problem." We're pretty confident about that.
Looking far forward, the second thing is that we eventually get to full funding but it takes longer than we would like. I can share that projection because we just did a presentation for the legislature. It'd be about 46 years which is longer than we want it to be. We did earn roughly our target of 7.25% this past fiscal year. We're a few basis points better than that, so it's not going to meaningfully change that kind of full funding.
We went to the legislature last year to address that and we asked them for a number of changes. Some of them were on the benefits side. For instance, we changed our multiplier and it is now a tiered multiplier. The longer you work, the higher the multiplier is. We also asked them for increased contributions of a total of 3% more from the employer. They gave us .25%. If we put other changes in place, it would have gotten us the full funding in less than 30 years. The changes that were implemented did help but it wasn't as much as we were asking for.
I always look from the investment side, our job is to earn an actuarial rate of return over the long-term, which in our case is 7.25%. You look at most time periods and we've done that. The problems really have been on the investment side. We earned too many years ago and everybody took it for granted that we could earn 9% a year. We have done it over the last 30 years. The outlook for trying to do that going forward is not very good. Like most public pension funds, past changes were made based on those assumptions and resulted in giving out more benefits and not paying for them. That's where we ended up.
Bob Jacksha: I would like to drop back to one thing related to diversifying assets. I look at the way we're positioning the portfolio. The diversifying assets are there to cushion the downturn. Hopefully, if we have a downturn in the market we will do okay. What's equally important is how you come out of that downturn, and if you will play the upside.
One thing we are looking at doing is adding the ability to get our positioning in public markets through derivatives, and that would be a policy change. It would also allow us to add some leverage. If we have a big downturn in the equity market, we've got a reasonably illiquid portfolio. It'd be hard for us to rebalance that to our targets. If we wanted to put more exposure on we really couldn't do it. We couldn't sell our private equity, real estate, etc.
We could do that through the derivatives market by adding a modest amount of leverage. That's what we're going to propose to our board. I've already talked to them briefly about doing that so it's no secret. It's in a public meeting. Hopefully, we can add that to our toolbox.
View our full catalog of interviews here.
The list of 2019 Top 30 Public Pension Chief Investment Officers can be found here.
In this interview, he tells us about New Mexico ERB's investment division and strategic asset allocation strategy; how they are building a more diversified portfolio that could compound well; and how they intend to play the upside during a market downturn.
Bob Jacksha was named on Trusted Insight’s 2019 Top 30 Public Pension Chief Investment Officers.
Trusted Insight: Tell us about the New Mexico Educational Retirement Board and its investment office.
Bob Jacksha: The retirement board is the pension fund for the state's educational employees. It's not just teachers, but it covers everyone from the custodian to the administrative people. It covers K through 12 and the state colleges in New Mexico.
There are about 120,000 members, covering retired and active. We're over $13 billion in assets. There are somewhere between 60 and 65 staff members. We have 14 on the investment team comprised of 10 investment professionals and 4 operations people.
We have three offices and the main office is in Santa Fe. We outgrew that, so the Santa Fe investment staff is in another building in the city. We also have staff in the Albuquerque office which also has client-service people. That’s a snapshot of the fund and team.
Trusted Insight: You spoke on the CIO Panel at the Trusted Insight Summit 2019, which covered topics such as strategic asset allocation strategy. Can you share more on your strategy?
Bob Jacksha: We're actually going through our 3-year process right now. Any changes from where we are now will be incremental. There's a percentage point or two moving here and there.
As far as our targets, our target's public equity is 33%, and that's 19% in domestic and 14% international. We have a target for core bonds of 6%, a 2% target in emerging market debt, and 18% in what we call opportunistic credit. I would include opportunistic credit as one of the areas of alternatives. We have a private equity portfolio, and the target is 13%, real assets at 8%. That does not include real estate, which is a target of 7%. We have a category we call diversifying assets at 12% and 1% to cash. We're pretty much on target at the moment.
"In a bear market, we're not going to do as poorly. The concept has proven out over time, our long-term returns are good."
We're actually overweight in private equity due to appreciation. Philosophically, we've been trying to build a more robust portfolio. When I started, we were at 70-30 equity, core bonds and some high yield, but 70-30 portfolio. We're trying to build a more diversified portfolio that overtime should compound well. We know we won't do as well in a raging bull market, we're willing to accept that. In a bear market, we're not going to do as poorly. The concept has proven out over time, our long-term returns are good.
As we discussed on the panel, one of the things we're looking for is to add to the diversifying-assets category. Those are more idiosyncratic risks than they are market risk. That adds an element of diversification. If we go into a market downturn, we'll cushion that to some extent.
Trusted Insight: In regards to the diversifying assets, you mentioned you are looking at reinsurance, aircraft leasing and other areas?
Bob Jacksha: We have also done drug royalties. In general, royalties is an area that we can fit in. We also look at intellectual property royalties that might cover what you think of as patents, as well as music royalties.
"We are a capital provider for banks when they need to unload things like non-performing loans. Those things are running toward the end of their life."
We have done a more credit-related investment which has to do with actually buying derivatives from banks so they can get them off their balance sheet. It's sort of the last leg of a premise we've been working on for a long time which was to do what the banks don't do anymore. We are a capital provider for banks when they need to unload things like non-performing loans. Those things are running toward the end of their life.
The other thing we've done is energy-project finance. We have a fund that does that. We are also talking to a couple of managers right now about them doing some co-investment portfolios for us in diversifying assets that would encompass all of those areas so we might be able to add some more capital. We're still building this out.
Trusted Insight: What markets outside of the U.S. are you focused on investing more in? Have you pushed back on investing in countries like China?
Bob Jacksha: We still have the same weight to emerging markets, and 33% in total equities. Of that, 9% is in emerging markets, which would be overweight relative to a market portfolio. And we're keeping that as a long-term strategy.
We don't do this country by country. We pick managers who will pick the countries and they'll decide if China's a good investment right now, or if a particular company in China is a good investment. We don't feel we have the expertise in-house to do that. I don't think China is any more of a concern than it's ever been. On emerging markets in general, they certainly haven't kept up with the U.S. markets lately. From a valuation perspective, that just makes the valuation differential even larger. It's probably not the time to throw that premise overboard, even though it hasn't worked in the recent past.
Trusted Insight: Most U.S. public pensions are underfunded which brings on various challenges. How is your team dealing with that hurdle?
Bob Jacksha: We are underfunded. It's about 65% currently. The first thing is that we don't run out of money. You look as far forward as you want, and say, "Okay, if our assumptions hold true, we'll be able to pay benefits going forward indefinitely with no problem." We're pretty confident about that.
Looking far forward, the second thing is that we eventually get to full funding but it takes longer than we would like. I can share that projection because we just did a presentation for the legislature. It'd be about 46 years which is longer than we want it to be. We did earn roughly our target of 7.25% this past fiscal year. We're a few basis points better than that, so it's not going to meaningfully change that kind of full funding.
"The problems really have been on the investment side. We earned too many years ago and everybody took it for granted that we could earn 9% a year."
We went to the legislature last year to address that and we asked them for a number of changes. Some of them were on the benefits side. For instance, we changed our multiplier and it is now a tiered multiplier. The longer you work, the higher the multiplier is. We also asked them for increased contributions of a total of 3% more from the employer. They gave us .25%. If we put other changes in place, it would have gotten us the full funding in less than 30 years. The changes that were implemented did help but it wasn't as much as we were asking for.
I always look from the investment side, our job is to earn an actuarial rate of return over the long-term, which in our case is 7.25%. You look at most time periods and we've done that. The problems really have been on the investment side. We earned too many years ago and everybody took it for granted that we could earn 9% a year. We have done it over the last 30 years. The outlook for trying to do that going forward is not very good. Like most public pension funds, past changes were made based on those assumptions and resulted in giving out more benefits and not paying for them. That's where we ended up.
Bob Jacksha: I would like to drop back to one thing related to diversifying assets. I look at the way we're positioning the portfolio. The diversifying assets are there to cushion the downturn. Hopefully, if we have a downturn in the market we will do okay. What's equally important is how you come out of that downturn, and if you will play the upside.
One thing we are looking at doing is adding the ability to get our positioning in public markets through derivatives, and that would be a policy change. It would also allow us to add some leverage. If we have a big downturn in the equity market, we've got a reasonably illiquid portfolio. It'd be hard for us to rebalance that to our targets. If we wanted to put more exposure on we really couldn't do it. We couldn't sell our private equity, real estate, etc.
We could do that through the derivatives market by adding a modest amount of leverage. That's what we're going to propose to our board. I've already talked to them briefly about doing that so it's no secret. It's in a public meeting. Hopefully, we can add that to our toolbox.
View our full catalog of interviews here.
The list of 2019 Top 30 Public Pension Chief Investment Officers can be found here.