Robert Maynard is the chief investment officer at the Public Employee Retirement System of Idaho (PERSI), a pension with $18 billion in assets under management. In this interview, Maynard shares how the PERSI portfolio weathered several crises since the late 90's; why changing investment policies is similar to washing your car; what caused the “scariest day on Wall Street” on February 5th and how it wasn’t scary after all.
Robert Maynard was named as one of Trusted Insight's 2018 Top 30 Public Pension Chief Investment Officers. He graciously spoke with us on March 21, 2018.
Trusted Insight: How has the PERSI of Idaho portfolio evolved since you joined?
Robert Maynard: Our portfolio has basically been the same since the late 1990's. The last major addition was in the late 1990’s when we added 10 percent of Treasury Inflation-Protected Securities (TIPS) to the portfolio structure.
Our portfolio has weathered the '97-98 Asian/long-term capital crises, the “Tech Wreck in 2001-2003, and the Great Recession from 2007 to 2009. Moreover, the portfolio is relatively easy to explain and follow by our constituency, both by the legislature and the membership. On the other hand, we are able to do a conventional investment style due to liabilities that are relatively easily met. Moreover, the contribution rates have always been more than enough to keep apace. If that were not the case, you would see us doing something very different.
I have been around to suffer the consequences of my own investment decisions. That makes you think twice before making a major change to your portfolio.
Trusted Insight: How does your portfolio structure help you weather different market conditions?
Robert Maynard: In the 2000s, you kept hearing that the old way of doing things did not work. In our experience, this is not true. What we have experienced since the mid-'90s has been exactly in line with the volatility and the return patterns that we projected.
The core problem that many institutions encountered was the inability to handle standard volatility. For whatever reason, whether it's that contribution rates were not high enough, return needs were too high or that their liabilities behaved differently than expected. If I was in the position that many endowment funds are with seven or higher percent real return needs, I would not be using the same approach as we are using right now. If you are an endowment fund or a public pension fund that has six percent or higher real return expectations, you have to beat the market. We do not need to beat the market.
What is the reasoning behind not trying to beat the market? Over the long term, if we get real returns from stocks in the five to seven percent range, which has been the general history since the 1800s, or if we get one to two percent real return in bonds rolling over 10 to 20 year periods, we are fine. Trying to make more than that is dangerous for us. If you try to make more you also enter an environment where there are more losers than winners. When you are bold and try to get the top quartile active manager, the best performing hedge fund, or the top decile venture capital fund, the odds are against you. An increased risky strategy also makes it more difficult to explain the outcomes when times go bad.
Trusted Insight: Do you think a market downturn looks imminent in the near future given that we have been at the top of the cycle for quite some time?
Robert Maynard: Today’s valuations are stretched both historically and relatively. However, it is going to be tough to get a sustained down market without a recession. You simply do not see any signs of that happening in at least a year.
The market started to get interesting in February, but I see no sign of an economic downturn. If you look at all the indicators, we cannot see any speculative excess or signs of an upcoming recession.
What people call “the scariest day on Wall Street in years” on February 5th was simply a recognition that the economic environment had gotten too warm. The economy was almost too strong. What you saw was a big jump, not only in current interest rates but in the five-year forwards. You saw about a 50 basis point jump in what people were expecting two to five years out in terms of the yield curve. It was mostly a real interest rate jump. The inflation portion of that was only about 10 basis points out of the 50, and that indicates that people were all of a sudden repricing stronger than expected growth. In that environment, when you have higher real yields in the expected bond market, that is what hits the stock market and created the reaction that we are seeing.
As of now, it looks like we have a market that is more volatile and is moving mostly sideways. In the current market, you do not see the bubbles you saw in the late '90s, or before the bond wreck of the early '90s, or the excesses you saw before the housing crisis. Even though you see stretched valuations in the real estate industry, there is little speculative building you see when there are market bubbles. What you do see are high overall valuations, but relatively, everything is quite evenly valued.
Trusted Insight: In your last interview, you mentioned that there is an increased access to information and that it is causing a loss in focus. Do you think that machine learning and artificial intelligence can reestablish that focus?
Robert Maynard: The reason is that artificial intelligence and machine learning needs huge amounts of data, and needs to be assured that the data that you are drawing from still has the same consistent substructure. It is similar to predicting the weather. The closer in, the shorter term you are predicting, the more accurate you are. It may work for daily moves, but as you stretch out for longer periods of time, you just do not have the data and appropriate consistent market structure.
Furthermore, normal randomness (the bell-shaped curve) does not apply for shorter time frames If you look at the movements of the markets on a daily, weekly or monthly base, it looks like a seismograph. And the math you use for dealing with that sort of dynamics is discrete math, it is not continuous. Different types of tools are needed. You have to go out to five, seven years before the types of tools we have to put a portfolio together work.
I don't see machine learning and artificial intelligence being useful for portfolio-wide tools in the foreseeable future. High peaks and fat tails are the patterns you see for shorter-term time frames. People have heard about fat tails, about the earthquake events, the tsunami events, the nine standard deviation events, but the high peaks are just as dangerous. When you are in one of those periods of time where little incremental gains are occurring with certain strategies. These things get crushed when a fat tail event arrives.
Machine learning and AI may help you with daily or shorter term things, but you cannot swing an entire portfolio to find those patterns. But, another problem is that often you cannot explain why it is doing what it is doing. That is also why it might work, because it is doing something nobody else can understand. However, because nobody else can understand it also means that if it does go wrong, in one of those earthquake events, you are left out there hanging with those you report to – boards, legislatures, and members. You need to be able to explain what you are doing.
Trusted Insight: What challenges have you found in pension investing with the relatively slow decision making process?
Robert Maynard: Over the past 25 years, we have never taken quick action. Any time I get an idea for a big change, I go to a dark room, lie down and wait for the feeling to pass.
The worst time to make a major move is in the middle of a crisis. We stick to our knitting and it has worked out well for us. We do not expect to make any changes until maybe after the next crisis. It could be one of the new innovative approaches will prove itself able to survive a crisis. However, looking back, all innovations of the mid-2000s did not survive from 2007 to 2009. If one of the new innovative approaches survive the next crisis, we will look into adopting it. As of now, nothing has popped up during this millennium.
Trusted Insight: How does the PERSI investment office differentiate from its peers?
Robert Maynard: There is a large number of funds that are on my side of the divide of complex versus relatively straightforward investment strategies. Some are probably simpler than we are. There are a number of funds that do things completely differently from us and are very, very successful.
For instance, Oklahoma and Nevada tend to be more straightforward. Washington State has one of the best private equity programs in the world. South Dakota does in-house investing with top-notch returns. The key takeaway is keeping with what you have picked to be your approach over the long term, not switching back and forth. It is very similar to washing your car. As soon as you wash it, it rains. As soon as you change your portfolio, you will hit a market bump that will make your transition incredibly rocky.
You can view our full catalog of interviews with institutional investors here.
Click here to view the complete list of Top 30 Public Pension Chief Investment Officers.
Robert Maynard was named as one of Trusted Insight's 2018 Top 30 Public Pension Chief Investment Officers. He graciously spoke with us on March 21, 2018.
Trusted Insight: How has the PERSI of Idaho portfolio evolved since you joined?
Robert Maynard: Our portfolio has basically been the same since the late 1990's. The last major addition was in the late 1990’s when we added 10 percent of Treasury Inflation-Protected Securities (TIPS) to the portfolio structure.
Our portfolio has weathered the '97-98 Asian/long-term capital crises, the “Tech Wreck in 2001-2003, and the Great Recession from 2007 to 2009. Moreover, the portfolio is relatively easy to explain and follow by our constituency, both by the legislature and the membership. On the other hand, we are able to do a conventional investment style due to liabilities that are relatively easily met. Moreover, the contribution rates have always been more than enough to keep apace. If that were not the case, you would see us doing something very different.
I have been around to suffer the consequences of my own investment decisions. That makes you think twice before making a major change to your portfolio.
Trusted Insight: How does your portfolio structure help you weather different market conditions?
Robert Maynard: In the 2000s, you kept hearing that the old way of doing things did not work. In our experience, this is not true. What we have experienced since the mid-'90s has been exactly in line with the volatility and the return patterns that we projected.
The core problem that many institutions encountered was the inability to handle standard volatility. For whatever reason, whether it's that contribution rates were not high enough, return needs were too high or that their liabilities behaved differently than expected. If I was in the position that many endowment funds are with seven or higher percent real return needs, I would not be using the same approach as we are using right now. If you are an endowment fund or a public pension fund that has six percent or higher real return expectations, you have to beat the market. We do not need to beat the market.
"The market started to get interesting in February, but I see no sign of an economic downturn. If you look at all the indicators, we cannot see any speculative excess or signs of an upcoming recession."
What is the reasoning behind not trying to beat the market? Over the long term, if we get real returns from stocks in the five to seven percent range, which has been the general history since the 1800s, or if we get one to two percent real return in bonds rolling over 10 to 20 year periods, we are fine. Trying to make more than that is dangerous for us. If you try to make more you also enter an environment where there are more losers than winners. When you are bold and try to get the top quartile active manager, the best performing hedge fund, or the top decile venture capital fund, the odds are against you. An increased risky strategy also makes it more difficult to explain the outcomes when times go bad.
Trusted Insight: Do you think a market downturn looks imminent in the near future given that we have been at the top of the cycle for quite some time?
Robert Maynard: Today’s valuations are stretched both historically and relatively. However, it is going to be tough to get a sustained down market without a recession. You simply do not see any signs of that happening in at least a year.
The market started to get interesting in February, but I see no sign of an economic downturn. If you look at all the indicators, we cannot see any speculative excess or signs of an upcoming recession.
What people call “the scariest day on Wall Street in years” on February 5th was simply a recognition that the economic environment had gotten too warm. The economy was almost too strong. What you saw was a big jump, not only in current interest rates but in the five-year forwards. You saw about a 50 basis point jump in what people were expecting two to five years out in terms of the yield curve. It was mostly a real interest rate jump. The inflation portion of that was only about 10 basis points out of the 50, and that indicates that people were all of a sudden repricing stronger than expected growth. In that environment, when you have higher real yields in the expected bond market, that is what hits the stock market and created the reaction that we are seeing.
"I don't see machine learning and artificial intelligence being useful for portfolio-wide tools in the foreseeable future. High peaks and fat tails are the patterns you see for shorter-term time frames."
As of now, it looks like we have a market that is more volatile and is moving mostly sideways. In the current market, you do not see the bubbles you saw in the late '90s, or before the bond wreck of the early '90s, or the excesses you saw before the housing crisis. Even though you see stretched valuations in the real estate industry, there is little speculative building you see when there are market bubbles. What you do see are high overall valuations, but relatively, everything is quite evenly valued.
Trusted Insight: In your last interview, you mentioned that there is an increased access to information and that it is causing a loss in focus. Do you think that machine learning and artificial intelligence can reestablish that focus?
Robert Maynard: The reason is that artificial intelligence and machine learning needs huge amounts of data, and needs to be assured that the data that you are drawing from still has the same consistent substructure. It is similar to predicting the weather. The closer in, the shorter term you are predicting, the more accurate you are. It may work for daily moves, but as you stretch out for longer periods of time, you just do not have the data and appropriate consistent market structure.
Furthermore, normal randomness (the bell-shaped curve) does not apply for shorter time frames If you look at the movements of the markets on a daily, weekly or monthly base, it looks like a seismograph. And the math you use for dealing with that sort of dynamics is discrete math, it is not continuous. Different types of tools are needed. You have to go out to five, seven years before the types of tools we have to put a portfolio together work.
I don't see machine learning and artificial intelligence being useful for portfolio-wide tools in the foreseeable future. High peaks and fat tails are the patterns you see for shorter-term time frames. People have heard about fat tails, about the earthquake events, the tsunami events, the nine standard deviation events, but the high peaks are just as dangerous. When you are in one of those periods of time where little incremental gains are occurring with certain strategies. These things get crushed when a fat tail event arrives.
Machine learning and AI may help you with daily or shorter term things, but you cannot swing an entire portfolio to find those patterns. But, another problem is that often you cannot explain why it is doing what it is doing. That is also why it might work, because it is doing something nobody else can understand. However, because nobody else can understand it also means that if it does go wrong, in one of those earthquake events, you are left out there hanging with those you report to – boards, legislatures, and members. You need to be able to explain what you are doing.
Trusted Insight: What challenges have you found in pension investing with the relatively slow decision making process?
Robert Maynard: Over the past 25 years, we have never taken quick action. Any time I get an idea for a big change, I go to a dark room, lie down and wait for the feeling to pass.
The worst time to make a major move is in the middle of a crisis. We stick to our knitting and it has worked out well for us. We do not expect to make any changes until maybe after the next crisis. It could be one of the new innovative approaches will prove itself able to survive a crisis. However, looking back, all innovations of the mid-2000s did not survive from 2007 to 2009. If one of the new innovative approaches survive the next crisis, we will look into adopting it. As of now, nothing has popped up during this millennium.
Trusted Insight: How does the PERSI investment office differentiate from its peers?
Robert Maynard: There is a large number of funds that are on my side of the divide of complex versus relatively straightforward investment strategies. Some are probably simpler than we are. There are a number of funds that do things completely differently from us and are very, very successful.
For instance, Oklahoma and Nevada tend to be more straightforward. Washington State has one of the best private equity programs in the world. South Dakota does in-house investing with top-notch returns. The key takeaway is keeping with what you have picked to be your approach over the long term, not switching back and forth. It is very similar to washing your car. As soon as you wash it, it rains. As soon as you change your portfolio, you will hit a market bump that will make your transition incredibly rocky.
You can view our full catalog of interviews with institutional investors here.
Click here to view the complete list of Top 30 Public Pension Chief Investment Officers.