Molly Murphy is the chief investment officer at Orange County Employees Retirement System (OCERS), where she provides leadership and investment oversight to more than $17 billion of defined benefit pension plan assets. Previously, she was the CIO at Mercy Health, where she served for over 12 years. Prior to that, she was CIO at Seasongood Asset Management.
In this interview, she discussed how OCERS' generalist structure is different than their pension peers; the system's 20-year outlook for rapid growth; and how they're implementing software and technology solutions to their investment process.
Murphy was named to Trusted Insight's 2020 All-Star Chief Investment Officers.
Trusted Insight: Tell us about the Orange County Employees Retirement System and your role there as CIO.
Molly Murphy: The Orange County Employees Retirement System (OCERS) is celebrating its 75th year. We're a fairly long-lived system. Currently, we have about $17.5 billion in assets under management. We are a multiemployer plan. Oftentimes, people think because of our name that we only represent the county and its pensioners, but we actually have quite a few active plan sponsors, and we are the administrator. It's a very similar design to what you see in CalPERS, only just on a much smaller scale. For example, we have the sheriff's department, the superior court system, transportation authority and fire authority, a nice mix of plan sponsors.
In terms of our team, we are a mid-sized plan, and we have an interesting team design. We have more of a generalist structure, which is a little different than a lot of the larger pension plans in the U.S., which have built asset class-dependent teams. Although we are all generalists, we do have focus areas. Those focus areas are rotational in order to keep our team very nimble so that everyone can debate everyone. We think that that just makes us stronger investors at the end of the day.
We have been actively hiring and raising the professional bar for our organization over the last three years since I got there. When I arrived, we had three investment professionals. We are going to be hiring our ninth person shortly. For those who read this, I hope they give us some good referrals for a new hire that we hope to post at the beginning of 2021. We are also a growing plan. We are still cash flow positive, meaning we take in more contributions than we pay out in benefits, which is extremely rare in the U.S. pension systems.
We actually do not use the corpus or the income generated by our plan yet, which means our assets are going to be growing for the next twenty years at a pretty rapid pace. Then we will mature into the slower growth pattern that the rest of our pension peers of size are already accustomed to. It's a nice trajectory, and it gives us a lot of opportunities in our investment portfolio. We can take longer investment time horizons than some can, and it's just going to be a really incredible next 10-20 years for our system.
Trusted Insight: You’ve been there for over 3 and a half years - how has the investment office/efforts evolved under your leadership?
Molly Murphy: As we've been able to add staff, we are walking through the evolution of the roles of consultants versus the roles of internal staff. We've brought in a lot of people with varied experiences onto our team, and we are continuing that effort in the near term. We have three consultants with who we work really well with, and they know that we're in this evolutionary period.
As we are still growing, we want to work on all the foundational things that we will need to support where we are headed. We need to focus on risk management, where we've introduced an internal risk management platform into our team toolbox this year. We're currently working with a new software team to help guide us with the development of that risk management platform.
We implemented a CRM system for all of our manager due diligence over the past couple of years. Overall, there's been a big technology push for us. We've realized that our team growth requires a more formal, better-documented process for posterity’s sake. It’s also been helpful for just brainstorming ideas because we are all now working remotely as well.
We also are beginning to move towards more direct investing. As pension plans mature and assets grow, it is natural for systems such as ours to look to remove fees, gain more from strategic partnerships and get closer to the deal, as they say. We are beginning our work in that regard as well.
Trusted Insight: Given the nice trajectory for the next 20 years to really grow your AUM, how does that translate to allocating to more opportunities in private markets?
Molly Murphy: I believe that thought process was already percolating at OCERS before I got there, but it hadn't been realized into governance decisions and consultant decisions that we now are focused on. When I got there, we had about 6% of AUM invested with some private equity fund of funds. We had a hedge fund program that was dismantled, because it was built in a generalist way to solve the volatility issues that people were afraid of coming out of 2008. It didn't have a specific purpose at the manager level.
As manager decisions were getting made, the team was a little disconnected. It was largely consultant driven. I think I was an attractive candidate for CIO at OCERS because of my previous position. I had grown a hedge fund and a private markets book of business from the ground up. I think they saw that that same skill set was going to be useful as OCERS realized its next 10 to 20 years.
Within my first year, OCERS did a search for a private markets consultancy, and we've been off to the races ever since. Private equity has now been sized up to 13%. In the last three years, we've doubled our commitment pace to private equity.
Private credit was already fairly well established at OCERS when I got there. However, it needed to be refined. We're being more precise, we're being more intentional. We've actually been shrinking the number of managers we're working with because we want to write larger checks and use our scale to our advantage in that marketplace. We are focused on what type of collateral we want behind our credits, what geographic exposures we want, what industry sector exposures we want. Today, there's more scrutiny behind the private credit markets for us.
We also do some private hard asset strategies, where again, we're trying to be a little bit more specific. With our investments in energy, real estate, agriculture, and infrastructure, our goal is not necessarily spending more money, but being able to thoughtfully tell the market what we're looking for and even create those exposures moving forward.
Trusted Insight: Have you been able to take advantage of the market volatility in the last months and then potentially going forward, or were you a little bit more on the defensive side?
Molly Murphy: This has been an interesting situation because the distress in the markets this year was only about a four-week event. It was so short-lived that if you hadn't prepared for it in advance, it was really hard to take advantage of from the pension CIO standpoint. As they say, pension portfolios are more of a barge than a speed boat.
That said, at OCERS, we were increasingly concerned about a market reversal beginning in 2019, especially in the credit markets, which is where my background lies. I actually started my career as a trader and PM for fixed income strategies long ago. It's my thought that when something breaks, usually the foreshadowing event happens in the credit markets, and then the big seismic event happens across markets. We had been investigating and due diligencing quite a bit of accordion structure type of dry powder moments throughout 2019. We hadn't really found much that we liked until the end of '19.
We did locate a manager in the credit markets that could play public as well as private. They used volatility triggers to enter markets, and then they would reduce the book when markets came back to rational volatility levels. One of the things that is always interesting about these accordion structures is they can open up on the volatility spike, but the capital gets returned in a more traditional, protracted way. This particular manager was very precise in how they were going to go in and out of markets, which we liked.
Actually, our timing was perfect and was dumb luck. I can't remember if it was January or February, but it was pre-COVID. We had that manager in place, and lucky for us, they were still raising capital when COVID hit, and we actually up-sized it from our initial commitment. We had quite a bit of capital to be able to deploy in that four-week period around the end of March.
We also had two other strategies in our pipeline that closed subsequent to COVID. For those, we were really searching for firms that, while they could exploit those volatile market opportunities, were still creating top quartile results regardless. They could operate in distressed markets as well as normal markets, I would say. Some of that additional capital did get put to work and we think we have plenty of dry capital. We were exceptionally lucky to have that moment where we were prepared for the prices to come to us.
It was really hard to deploy capital, though. I would say that most of my messaging to our committee was a stay-the-course message because I've always heard the saying, "When you're in the eye of the storm, hold on. There's not much you can do." March and April did feel that way a little bit. The nice thing is, that because of OCERS' cash flow positive status, we really don't have to stress about market drops like others do because we aren't forced to raise liquidity from our portfolio to pay our benefits. With that in mind, we were able to shift to playing offense in April and finalized a new asset allocation model, shifting 15% of total AUM into equity strategies, both public and private. We have been dollar-cost averaging into markets throughout this year, which has paid off handsomely with the performance of stock markets since the Q1 lows.
Trusted Insight: What career advice would you offer to women in finance that aspire to be CIOs or leaders at organizations like OCERS?
Molly Murphy: I entered the business of investments at a time when, if I were in a room with my fellow investors, I was the token female. If I looked to my right and my left, it was rare to see someone else that wasn't white and male at that time. I worked in Ohio for most of my career, and there's not as much diversity even today in certain markets, geographically.
The best thing that happened to me was that I was required to do sales. I had a sales quota, a new business quota, even for my trading and portfolio management role. You learn when you're doing new business development that “no” is not a dirty word. No is just the first step on the path to a yes, if you're persistent, and you have to play the long game. The first thing that I always tell women is don't take no for an answer. You have to deep down believe in your intellect, your grit, your determination, the value you bring to the table. You have to inherently believe in those things because you're going to get a lot of nos. I would say that to men as well in this business.
These jobs are wonderful jobs, but they aren't falling from the sky. You really have to fight for these positions. More and more are opening up to diverse candidates, which is great, but you're still going to get a lot of no's. When women are told no, they feel that it's a comment on them as opposed to just a "Not now." I really tell women that are starting out in this business that "You're going to have to get tough skin and rely on that because this is a prove-it business."
The other thing that I would say is women tend to want to be perfect before they shoot for the next thing. There's a perfection standard that's somehow ingrained in us. Now I'm in the privileged seat to get to recruit, and I often ask the question, "How much of the job you're interviewing for today do you think you can do on day one?" It's interesting because most of the male candidates will say, "I think I know about 60%, and I'm really a fast learner, and I'll pick up the rest." Most of the women will say that they are 80% or more already there. I would say, "Well, you're almost outgrowing the job you're now interviewing for if you're already there." I would like women to have the 50 to 60% mentality and learn it on the job because it will be interesting for you as well.
Learning new things is fun. I want people to come in excited to learn new things. I don't want people to wait extra years in their job before they shoot for the next great thing. I tell people, "Believe that you're just as good at learning as you are at doing because you don't have to know everything." I want people to be encouraged to just believe in themselves. Their talents will take them the next 40%.
Trusted Insight: Are there any final thoughts you’d like to add?
Molly Murphy: I would just say the OCERS organization as a whole has been so supportive. I have put forth and suggested quite a bit of change, and organizations are hard to change, and we've been in existence for 75 years. There's a lot of embedded DNA and history here. I just can't say enough about how our committees, board, and leadership have embraced looking forward to our next 20 years and planning for it today. It's just been such a great atmosphere.
The other thing is that you always need support, whether it's just intellectually or it's budgetary, to do these things. It was a large ask to free up the budget, bring in the software, technology solutions, triple the team, and to bring in additional support from consultants. We got everything that we needed to really do the best for our members that rely on us to bring these returns in and to bring the pension plan into the future. I just can't get over how supportive it's been.
I would like to just mention my team as well. I joke that my team is a mini-United Nations. It's such an interesting dynamic coming from the Midwest and then recruiting in Southern California. We are blessed to have some of the best weather and activities that you could ask for in the U.S. It's a lot easier just to recruit in general. We have 50% females on our investment team, 50% males. A little bit over 50% of our team are people of color. We have about 50% of our team born outside the US. We have lots of languages that are native to our team.
It's just a wonderful experience. I think where it's really showing up now is in our network. It’s just so much broader because we have a team of such varied experiences. They've lived in so many different places. It's nice to recruit talent like that, but it really pays dividends in your portfolio because you don't get the same stale ideas that you get when your ecosystem is, for example, largely Midwestern or it is only male.
We get a lot more opportunities on the private equity side, in particular, because of our diversity. We have a team member who grew up in the Middle East. We have a team member who is Swedish, which gives us a connection to some Nordic funds. Other systems might not get the access we do because we have someone that has knowledge of the region and has a network of their own. We also have team members from China, Vietnam, and India. For a mid-sized US pension, we just really have a wider net that we get to cast because of that. I really believe it's going to pay dividends for the OCERS program going forward.
View our full catalog of interviews here.
The full list of 2020's All-Star Chief Investment Officers can be found here.
In this interview, she discussed how OCERS' generalist structure is different than their pension peers; the system's 20-year outlook for rapid growth; and how they're implementing software and technology solutions to their investment process.
Murphy was named to Trusted Insight's 2020 All-Star Chief Investment Officers.
Trusted Insight: Tell us about the Orange County Employees Retirement System and your role there as CIO.
Molly Murphy: The Orange County Employees Retirement System (OCERS) is celebrating its 75th year. We're a fairly long-lived system. Currently, we have about $17.5 billion in assets under management. We are a multiemployer plan. Oftentimes, people think because of our name that we only represent the county and its pensioners, but we actually have quite a few active plan sponsors, and we are the administrator. It's a very similar design to what you see in CalPERS, only just on a much smaller scale. For example, we have the sheriff's department, the superior court system, transportation authority and fire authority, a nice mix of plan sponsors.
"We have more of a generalist structure, which is a little different than a lot of the larger pension plans in the U.S., which have built asset class-dependent teams."
In terms of our team, we are a mid-sized plan, and we have an interesting team design. We have more of a generalist structure, which is a little different than a lot of the larger pension plans in the U.S., which have built asset class-dependent teams. Although we are all generalists, we do have focus areas. Those focus areas are rotational in order to keep our team very nimble so that everyone can debate everyone. We think that that just makes us stronger investors at the end of the day.
We have been actively hiring and raising the professional bar for our organization over the last three years since I got there. When I arrived, we had three investment professionals. We are going to be hiring our ninth person shortly. For those who read this, I hope they give us some good referrals for a new hire that we hope to post at the beginning of 2021. We are also a growing plan. We are still cash flow positive, meaning we take in more contributions than we pay out in benefits, which is extremely rare in the U.S. pension systems.
"We can take longer investment time horizons than some can, and it's just going to be a really incredible next 10-20 years for our system."
We actually do not use the corpus or the income generated by our plan yet, which means our assets are going to be growing for the next twenty years at a pretty rapid pace. Then we will mature into the slower growth pattern that the rest of our pension peers of size are already accustomed to. It's a nice trajectory, and it gives us a lot of opportunities in our investment portfolio. We can take longer investment time horizons than some can, and it's just going to be a really incredible next 10-20 years for our system.
Trusted Insight: You’ve been there for over 3 and a half years - how has the investment office/efforts evolved under your leadership?
Molly Murphy: As we've been able to add staff, we are walking through the evolution of the roles of consultants versus the roles of internal staff. We've brought in a lot of people with varied experiences onto our team, and we are continuing that effort in the near term. We have three consultants with who we work really well with, and they know that we're in this evolutionary period.
"Overall, there's been a big technology push for us. We've realized that our team growth requires a more formal, better-documented process for posterity’s sake."
As we are still growing, we want to work on all the foundational things that we will need to support where we are headed. We need to focus on risk management, where we've introduced an internal risk management platform into our team toolbox this year. We're currently working with a new software team to help guide us with the development of that risk management platform.
We implemented a CRM system for all of our manager due diligence over the past couple of years. Overall, there's been a big technology push for us. We've realized that our team growth requires a more formal, better-documented process for posterity’s sake. It’s also been helpful for just brainstorming ideas because we are all now working remotely as well.
We also are beginning to move towards more direct investing. As pension plans mature and assets grow, it is natural for systems such as ours to look to remove fees, gain more from strategic partnerships and get closer to the deal, as they say. We are beginning our work in that regard as well.
Trusted Insight: Given the nice trajectory for the next 20 years to really grow your AUM, how does that translate to allocating to more opportunities in private markets?
Molly Murphy: I believe that thought process was already percolating at OCERS before I got there, but it hadn't been realized into governance decisions and consultant decisions that we now are focused on. When I got there, we had about 6% of AUM invested with some private equity fund of funds. We had a hedge fund program that was dismantled, because it was built in a generalist way to solve the volatility issues that people were afraid of coming out of 2008. It didn't have a specific purpose at the manager level.
"Private equity has now been sized up to 13%. In the last three years, we've doubled our commitment pace to private equity."
As manager decisions were getting made, the team was a little disconnected. It was largely consultant driven. I think I was an attractive candidate for CIO at OCERS because of my previous position. I had grown a hedge fund and a private markets book of business from the ground up. I think they saw that that same skill set was going to be useful as OCERS realized its next 10 to 20 years.
Within my first year, OCERS did a search for a private markets consultancy, and we've been off to the races ever since. Private equity has now been sized up to 13%. In the last three years, we've doubled our commitment pace to private equity.
Private credit was already fairly well established at OCERS when I got there. However, it needed to be refined. We're being more precise, we're being more intentional. We've actually been shrinking the number of managers we're working with because we want to write larger checks and use our scale to our advantage in that marketplace. We are focused on what type of collateral we want behind our credits, what geographic exposures we want, what industry sector exposures we want. Today, there's more scrutiny behind the private credit markets for us.
We also do some private hard asset strategies, where again, we're trying to be a little bit more specific. With our investments in energy, real estate, agriculture, and infrastructure, our goal is not necessarily spending more money, but being able to thoughtfully tell the market what we're looking for and even create those exposures moving forward.
Trusted Insight: Have you been able to take advantage of the market volatility in the last months and then potentially going forward, or were you a little bit more on the defensive side?
Molly Murphy: This has been an interesting situation because the distress in the markets this year was only about a four-week event. It was so short-lived that if you hadn't prepared for it in advance, it was really hard to take advantage of from the pension CIO standpoint. As they say, pension portfolios are more of a barge than a speed boat.
That said, at OCERS, we were increasingly concerned about a market reversal beginning in 2019, especially in the credit markets, which is where my background lies. I actually started my career as a trader and PM for fixed income strategies long ago. It's my thought that when something breaks, usually the foreshadowing event happens in the credit markets, and then the big seismic event happens across markets. We had been investigating and due diligencing quite a bit of accordion structure type of dry powder moments throughout 2019. We hadn't really found much that we liked until the end of '19.
We did locate a manager in the credit markets that could play public as well as private. They used volatility triggers to enter markets, and then they would reduce the book when markets came back to rational volatility levels. One of the things that is always interesting about these accordion structures is they can open up on the volatility spike, but the capital gets returned in a more traditional, protracted way. This particular manager was very precise in how they were going to go in and out of markets, which we liked.
Actually, our timing was perfect and was dumb luck. I can't remember if it was January or February, but it was pre-COVID. We had that manager in place, and lucky for us, they were still raising capital when COVID hit, and we actually up-sized it from our initial commitment. We had quite a bit of capital to be able to deploy in that four-week period around the end of March.
We also had two other strategies in our pipeline that closed subsequent to COVID. For those, we were really searching for firms that, while they could exploit those volatile market opportunities, were still creating top quartile results regardless. They could operate in distressed markets as well as normal markets, I would say. Some of that additional capital did get put to work and we think we have plenty of dry capital. We were exceptionally lucky to have that moment where we were prepared for the prices to come to us.
It was really hard to deploy capital, though. I would say that most of my messaging to our committee was a stay-the-course message because I've always heard the saying, "When you're in the eye of the storm, hold on. There's not much you can do." March and April did feel that way a little bit. The nice thing is, that because of OCERS' cash flow positive status, we really don't have to stress about market drops like others do because we aren't forced to raise liquidity from our portfolio to pay our benefits. With that in mind, we were able to shift to playing offense in April and finalized a new asset allocation model, shifting 15% of total AUM into equity strategies, both public and private. We have been dollar-cost averaging into markets throughout this year, which has paid off handsomely with the performance of stock markets since the Q1 lows.
Trusted Insight: What career advice would you offer to women in finance that aspire to be CIOs or leaders at organizations like OCERS?
Molly Murphy: I entered the business of investments at a time when, if I were in a room with my fellow investors, I was the token female. If I looked to my right and my left, it was rare to see someone else that wasn't white and male at that time. I worked in Ohio for most of my career, and there's not as much diversity even today in certain markets, geographically.
"There's a lot of embedded DNA and history here. I just can't say enough about how our committees, board, and leadership have embraced looking forward to our next 20 years and planning for it today."
The best thing that happened to me was that I was required to do sales. I had a sales quota, a new business quota, even for my trading and portfolio management role. You learn when you're doing new business development that “no” is not a dirty word. No is just the first step on the path to a yes, if you're persistent, and you have to play the long game. The first thing that I always tell women is don't take no for an answer. You have to deep down believe in your intellect, your grit, your determination, the value you bring to the table. You have to inherently believe in those things because you're going to get a lot of nos. I would say that to men as well in this business.
These jobs are wonderful jobs, but they aren't falling from the sky. You really have to fight for these positions. More and more are opening up to diverse candidates, which is great, but you're still going to get a lot of no's. When women are told no, they feel that it's a comment on them as opposed to just a "Not now." I really tell women that are starting out in this business that "You're going to have to get tough skin and rely on that because this is a prove-it business."
The other thing that I would say is women tend to want to be perfect before they shoot for the next thing. There's a perfection standard that's somehow ingrained in us. Now I'm in the privileged seat to get to recruit, and I often ask the question, "How much of the job you're interviewing for today do you think you can do on day one?" It's interesting because most of the male candidates will say, "I think I know about 60%, and I'm really a fast learner, and I'll pick up the rest." Most of the women will say that they are 80% or more already there. I would say, "Well, you're almost outgrowing the job you're now interviewing for if you're already there." I would like women to have the 50 to 60% mentality and learn it on the job because it will be interesting for you as well.
Learning new things is fun. I want people to come in excited to learn new things. I don't want people to wait extra years in their job before they shoot for the next great thing. I tell people, "Believe that you're just as good at learning as you are at doing because you don't have to know everything." I want people to be encouraged to just believe in themselves. Their talents will take them the next 40%.
Trusted Insight: Are there any final thoughts you’d like to add?
Molly Murphy: I would just say the OCERS organization as a whole has been so supportive. I have put forth and suggested quite a bit of change, and organizations are hard to change, and we've been in existence for 75 years. There's a lot of embedded DNA and history here. I just can't say enough about how our committees, board, and leadership have embraced looking forward to our next 20 years and planning for it today. It's just been such a great atmosphere.
The other thing is that you always need support, whether it's just intellectually or it's budgetary, to do these things. It was a large ask to free up the budget, bring in the software, technology solutions, triple the team, and to bring in additional support from consultants. We got everything that we needed to really do the best for our members that rely on us to bring these returns in and to bring the pension plan into the future. I just can't get over how supportive it's been.
I would like to just mention my team as well. I joke that my team is a mini-United Nations. It's such an interesting dynamic coming from the Midwest and then recruiting in Southern California. We are blessed to have some of the best weather and activities that you could ask for in the U.S. It's a lot easier just to recruit in general. We have 50% females on our investment team, 50% males. A little bit over 50% of our team are people of color. We have about 50% of our team born outside the US. We have lots of languages that are native to our team.
It's just a wonderful experience. I think where it's really showing up now is in our network. It’s just so much broader because we have a team of such varied experiences. They've lived in so many different places. It's nice to recruit talent like that, but it really pays dividends in your portfolio because you don't get the same stale ideas that you get when your ecosystem is, for example, largely Midwestern or it is only male.
We get a lot more opportunities on the private equity side, in particular, because of our diversity. We have a team member who grew up in the Middle East. We have a team member who is Swedish, which gives us a connection to some Nordic funds. Other systems might not get the access we do because we have someone that has knowledge of the region and has a network of their own. We also have team members from China, Vietnam, and India. For a mid-sized US pension, we just really have a wider net that we get to cast because of that. I really believe it's going to pay dividends for the OCERS program going forward.
View our full catalog of interviews here.
The full list of 2020's All-Star Chief Investment Officers can be found here.
