John D. Skjervem leads an investment team at the Oregon State Treasury that manages a financial and real asset portfolio valued at $95.5 billion (as of June 30, 2017). In this interview, Skjervem discussed the ambitious change in the public pension's investment strategy and approach; why investment strategies should be aligned with empirical truth; and the Oregon brand's roots in innovation.

Skjervem was named on Trusted Insight's 2017 Top 30 Public Pension Chief Investment Officers. He graciously spoke with us on Oct. 5, 2017. The following interview has been edited for clarity.

Trusted Insight: How have you impacted the Oregon State Treasury’s investment office in your time at its helm?

John Skjervem: I'm coming up on my fifth-year anniversary, and during the past five years, my team and I have changed almost everything. The investment division today is dramatically different than it was five years ago.

Location
First of all, we have a new office. When I got here five years ago, the staff was bifurcated between an office here in Tigard and Treasury's official headquarters in Salem, the state capital. We managed cash, fixed income and a couple other functions in Salem, while the majority of risk assets were managed up here in Tigard.

The reason that's important is because the offices are 40 minutes apart. In terms of team dynamics, morale and other important qualitative issues, that bifurcation presented a real challenge. Just the physical consolidation of everybody in one office has been tremendously powerful in terms of building a contemporary culture with positive esprit de corp in a place people want to show up for work every day.

Portfolio
The other thing we've done is change the fund’s strategic asset allocation in two deliberate, successive moves. These changes are pretty material in that we've moved what historically was a very aggressive growth portfolio toward one that we hope is much better diversified and more resilient. Specifically, we're shifting 12.5 percent out of long-only public and private equity and into alternative assets and investment strategies that we hope will be less than perfectly correlated with traditional equity beta.

“Alternatives” for us is everything except private equity and private real estate, and includes exposures like minerals and mining, infrastructure, timber and agriculture in private markets and long/short risk premia and trend-following strategies in public markets. Given our size ($75 billion), this shift is an ambitious change in strategy.

Team
We've also changed the organization chart and staff roster. The original team was small and very silo-based. We had a senior person on top of each asset class, and each group essentially did their own thing often independent of one another and broader “total fund” considerations. Today, the investment staff has nearly doubled in size, and we have much more collaboration among the asset class groups. We also have a new leadership structure to support and promote this more collaborative approach.

Technology
We've also upgraded all our systems. Two years ago, we brought in BlackRock and now use their Aladdin platform as the basis for everything we do. We are, to my knowledge, still the only public pension plan in America that uses Aladdin from soup to nuts: from portfolio management and order entry; to reconciliation and settlement; all the middle- and the back-office functions; plus, risk management and compliance too.

We don't have a large, dedicated IT staff, and therefore can’t afford the cost and hassle of constantly trying to stitch together and maintain multiple systems. We wanted something that was completely integrated from end-to-end, a unique capability we found in Aladdin. Our implementation was on-time and on-budget, and Aladdin now serves as the backbone for everything we do.

So, we have really changed not only the human complexion of the organization, but also its investment strategy, systems and physical facilities. It's been an exciting, challenging and very productive five years!

Trusted Insight: How do you attract and retain talent in your investment office, given the red tape associated with being a government entity?

John Skjervem: My hypothesis is that there are two primary elements to successful recruiting and retention. One is universal, and one is perhaps unique to Oregon.

Universal
The universal element is that somebody who comes to work in a public pension plan gets an opportunity to apply their skills, training and experience in an environment that certainly isn’t perfect, but has far fewer conflicts with fiduciary duty and responsibility than anything they'll find in the private sector.

I haven't been in the endowments and foundations space, as all my prior experience was in the private sector for commercial enterprises. In the public pension world, you have politics, resource constraints, transparency expectations and activist pressures. But you also don't have quarterly earnings targets. You don't have to win clients or try to save clients. You don’t have to sell or constantly fight for shelf space in the market. Instead, you get to pursue your profession from the moral high ground of fiduciary duty on behalf of myriad beneficiaries and stakeholders, a position that can be very liberating.

Again, I don't have explicit E&F experience so I can't opine on that environment, but relative to the private sector, I think the public plan world offers a purer version of fiduciary duty and service. We make investment decisions based entirely on what we think is best for the plan and its beneficiaries with no pressure about earning targets, product quotas or market share. Again, it’s far from perfect, but our constraints and conflicts are usually overt while many of the constraints and conflicts in commercial enterprises are covert. And I’ll take overt over covert any day!
 

"One of the hallmarks of our culture is intellectual honesty, and an extension of that relative to your question is that we are fervent in our belief and very outspoken about the fact that we are returns takers, not returns makers.​"

Oregon
I described what I think is probably the universal appeal of working for a public plan. The second element to successful recruiting and retention is perhaps more unique to Oregon, namely that we offer a healthy, balanced lifestyle and this is a great place to live. Particularly for people who enjoy the outdoors, Tigard, Oregon is a fantastic place to live and work. Draw a 90-minute driving radius from our office, and within the resulting circumference you can enjoy world class hiking in the Columbia Gorge, great alpine and Nordic skiing on Mount Hood, pristine beaches and challenging surf along the beautiful Oregon coastline or sample some of the world's best pinot noir at various Willamette Valley wineries.

In terms of a diverse and active outdoor lifestyle, there are few places in the world that rival what we have here in Oregon. So, for staff recruitment and retention, the universal element of success would be the relative purity of our fiduciary mandate, while the unique element would be the strong appeal of the Oregon lifestyle.

Trusted Insight: One of the biggest hurdles for a pension is to achieve its assumed rate of return. If the current low-return environment persists, how achievable is your assumed rate of return over the next few years?

John Skjervem: One of the hallmarks of our culture is intellectual honesty, and an extension of that relative to your question is that we are fervent in our belief and very outspoken about the fact that we are returns takers, not returns makers. Our job is to harvest the betas that the market gives us as efficiently and effectively as possible, and when and where the application of skill is sufficiently rewarded after fees and transaction costs, pursue and apply that skill judiciously in the hope of earning some incremental alpha.

We also believe that the areas in which the application of skill is sufficiently rewarded net of all fees and transaction costs are few and far between. Again, an important part of our culture is intellectual honesty and humility, but the consequence of that culture and those beliefs is that we don't think we can engineer returns. We are returns takers, not returns makers. We will consider our job well done if we harvest the betas as efficiently as possible and add a little alpha in those places where there's empirical support for the application of skill.

Trusted Insight: You held various leadership and investment roles at Northern Trust during your 20+ year career there. Can you elaborate on how those experiences help you better serve in your current role?

John Skjervem: In terms of my experience at Northern Trust, more than anything else is the leadership opportunities I had there and the many lessons I learned from those experiences. Specifically, I was fortunate to have had the opportunity to lead several big change initiatives at Northern Trust. When I was CIO there, my role included a very broad geographic and human resource footprint comprised of 80 offices across 18 states, with over 200 portfolio managers and 42,000 unique client accounts. So, it was both broad and complex in terms of geography, people, places and clients, and that breadth and complexity made for a very challenging and rewarding leadership experience.

On the surface, the scope of my role in Oregon may seem smaller and more concentrated, but the change initiatives here have been every bit as interesting and challenging, so the leadership experience I had at Northern Trust has served me well here. As we discussed earlier, we’ve changed our physical plant, infrastructure, org chart and investment strategy over the past five years, each one of which was a significant change initiative. I don't think I would have been nearly as effective in any one of those initiatives had I not had similar leadership experiences at Northern Trust.

Trusted Insight: What’s the number one lesson you have learned during your 25+ year investment career?

John Skjervem: The number one lesson I've learned is that you can't change up. You can only change down. And for me, that was a hard lesson to learn. Truth will always prevail, and I’m talking here about small “t” empirical truth, not capital “T” absolute Truth. Absolute Truth is the domain of God or maybe Stephen Hawking, but is certainly outside the bounds of this conversation and my personal expertise. But small “t” empirical truth should be the foundation for investment strategy, especially for someone serving in an express, fiduciary capacity. Unfortunately, in the investment management business, empirical truth is often inconvenient for commercial and even some public actors. Many current investment practices simply don’t comport well with empirical truth.

I’ve worked hard my entire career to pursue business and investment strategies aligned with empirical truth as I believe empirical truth is a good proxy for proper and prudent fiduciary stewardship. As a leader endowed with management authority, changing business and investment strategies to better align with empirical truth is always challenging. But with persistence and perseverance, it is possible to achieve such alignment provided the direction of change in the organization is down. However, and what I’ve learned the hard way, the imperative for change, even when clearly aligned with empirical truth and fiduciary duty, is not always well accepted (and in fact often resisted!) when the direction of change within the organization is up.
 

"I think becoming an accomplished artist is predicated on a thorough understanding and application of the science, otherwise you can get distracted or seduced by strategies, products or approaches that aren't supported by empirical truth."

That was, and remains, a tough lesson and is reflective of what economists have long described as “agency costs.” In public markets, activist investors like Nelson Peltz and Carl Ichan can force C-suite level change, while in private markets it’s the Apollos and Blackstones of the world that can overcome and remove these types of agency costs.

Successful investing is part art and part science. Moreover, finance in general and investments in particular are extensively well-studied disciplines. The result of all these studies is robust insight and information about what's true, what's not true and what remains uncertain. I encourage future leaders to become expert in empirical truth. If you're expert in "what is," then you won't waste your time on those things that are not supported by empirical truth.

That's not to say that we know everything, there remains much that is uncertain which in many ways comprises the art of investment management. So, there's a lot of art too, but I'm shocked at how few investment professionals really understand and apply the science. Either they don’t understand the science or they choose to ignore it, both of which are bad outcomes in my opinion. I think becoming an accomplished artist is predicated on a thorough understanding and application of the science, otherwise you can get distracted or seduced by strategies, products or approaches that aren't supported by empirical truth.

Trusted Insight: Is there anything that you’d like to add about yourself, the pension or your role at Oregon State Treasury?

John Skjervem: Our brand has its roots in innovation that started in 1980 when Oregon partnered with KKR to finance the LBO of Portland-based Fred Meyer stores, a transaction many consider the industry’s first institutional-caliber private equity investment. The first-mover advantages that accrued from that and other early transactions became an important and competitive differentiator for us. But today, we don’t take our 37-year innovation reputation for granted, and in fact show up every day working hard to fortify and advance our brand.

This resolve is particularly important today as the investment management business isn't getting any easier, even for a plan with a strong brand. The emergence of sovereign wealth funds represents a new and very potent competitive dynamic, while endowments and foundations continue to leverage their perennial advantages in organizational structure and governance. These players, massive sovereign wealth funds and agile endowments and foundations, make success as an institutional investor an ever more challenging brand proposition.

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