The Public Employees Retirement Association Of New Mexico Focused On 'Innovative And Creative Structures' | LeAnne Larrañaga-Ruffy, Director Of Equity/Co-Head Of Alpha | Q&A
LeAnne Larrañaga-Ruffy is the Director of Equity/Co-Head of Alpha at the Public Employees Retirement Association of New Mexico and oversees the Global Equity portfolio which is approximately $5.5 billion and includes liquid and illiquid assets. She has been leading the program for eight-plus years. Previously, LeAnne was an investment officer at the New Mexico Educational Board overseeing the Public Markets portfolio and managing the in-house S&P500 and REIT passive portfolios. LeAnne holds a Bachelor of Science from New Mexico State University.
In this interview, LeAnne discussed why it's an exciting time to be a team member at PERA; seeking innovative and creative structures that will enhance value within the fund; and handling the economic impact of COVID-19 across all asset classes within the portfolio.
LeAnne Larrañaga-Ruffy was named on Trusted Insight’s 2020 Top 30 Pension Private Equity Investors.
Trusted Insight: Tell us about the Public Employees Retirement Association of New Mexico and your responsibilities there?
LeAnne Larrañaga-Ruffy: The Public Employees Retirement Association of New Mexico (PERA) is a public pension plan established in 1947. The fund serves over 90,000 members, both active and retired, and distributes over $1 billion in pension benefits to the state of New Mexico annually. PERA manages a $15.6 billion multi-asset portfolio, as of February 29, 2020, and is currently 72% funded.
It’s an exciting time to be a team member at PERA. I genuinely believe we are doing things differently. And although our team is small (12 investment professionals) we dig in and demand better from our partners. Most importantly we never lose sight of our mission, serving our members in providing a stable, multi-generational retirement benefit.
"In 2017, the PERA portfolio evolved even further, introducing the concept of separating beta from alpha, and managing these dynamics accordingly."
I've been with PERA since 2011. I was initially hired as a portfolio manager overseeing the public market portfolio which included equity and fixed income. In 2014 PERA changed its Strategic Asset Allocation, restructuring its assets across risk exposures. At that time, my role changed, and I began reviewing liquid and illiquid equity opportunities. I quickly realized that the management of equity risk is similar across the liquidity spectrum and my experience in liquid markets served me well in my new illiquid initiatives. For example, the Amazon effect is seen across all equity opportunities, from large-cap public equity managers to venture capital. Our Board of Trustees have defined the policy benchmark for liquid and illiquid equity as the MSCI ACWI IMI, and this serves as the base expectation for the entire portfolio.
In 2017, the PERA portfolio evolved even further, introducing the concept of separating beta from alpha, and managing these dynamics accordingly. I now serve as the Co-Head of Alpha, where it is my responsibility to oversee the mining of alpha opportunities and the allocation and monitoring of active risk contribution within the overall portfolio.
Trusted Insight: How has your private program impacted your organization since joining? What’s your outlook for the next 5-10 years?
LeAnne Larrañaga-Ruffy: Our first decision point, when considering impact is “Did it pay to be illiquid?” We answer this question through the utilization of Direct Alpha and PME analysis.
Now funded at approximately 8% of the portfolio, absolute performance has outpaced PERA’s 7.25% required rate of return and has outperformed its policy benchmark across most time horizons. Furthermore, as we track the measure of direct alpha for this portfolio, we continue to see consistency in value over liquid proxies; tracking at approximately 1.5-2% Direct Alpha quarter-over-quarter.
"We strive to be known in the industry as a strong partner and reliable provider of capital, and we are constantly seeking innovative and creative structures that can enhance value within the fund."
We’ve spent the last 6 years improving the portfolio construction process. We have worked diligently to consolidate relationships, make commitments that are sizeable and meaningful, and partner with best in class, strong strategic partners. We strive to be known in the industry as a strong partner and reliable provider of capital, and we are constantly seeking innovative and creative structures that can enhance value within the fund.
In a low return environment, such as the one we are investing in today, Private Equity returns assist the plan in meeting its return targets. We anticipate this will continue to be the case over the next 5-10 years. Although value can be harder to identify, and returns are expected to be lower across all asset classes, Private Equity is still one of the very few asset classes that we forecast will outpace our required rate of return over the next 10 years.
Trusted Insight: What are your efforts in venture? Some say it doesn't really move the needle given their institution’s size.
LeAnne Larrañaga-Ruffy: When I took over the program in 2014, we held a large concentration to venture, which provided information technology overweight. Since that time, we have chosen to further diversify the portfolio geographically and to smaller sector specialist funds, recently committing to financial services and healthcare funds. We are not active venture investors currently, and when we do commit to an opportunity the decision is driven by the value of the strategic partnership.
Trusted Insight: Recently we’re dealing with the COVID-19 situation and we don't really know what to expect in the near term. Is this matter of a growing concern for your organization?
LeAnne Larrañaga-Ruffy: Absolutely. The economic impact of COVID-19 has been significant, and we continue to see the effects resonate across all asset classes within our portfolio. The recent spike in volatility and the momentum in which it occurred is unlike anything we’ve seen before. PERA’s priority has been the health and safety of our members and employees. Our offices have been closed for about two weeks, and our investment team is working remotely. We are 100% operational and continue to perform all the critical tasks that our members and partners expect of us.
"I’ve built my career in pension systems, I’ve had the opportunity to work for both plans in New Mexico and can definitively tell you it is exactly where I want to be."
From an investment perspective, these times of market uncertainty can lead to reactive tendencies. In these moments I take comfort in our long-term investment horizon and our Strategic Asset Allocation. Maintaining appropriate allocation weights and liquidity is so important right now, and the team is monitoring this daily. I would also add that although we were not expecting a disruption like this, we believe we are weathering the storm relatively well. Our defensive portfolio has preserved capital, and our liquidity will allow us to take advantage of near-term opportunities.
Trusted Insight: The organization is return driven first for the beneficiaries and members. After looking at that, are you looking to fund areas that provide additional impact?
LeAnne Larrañaga-Ruffy: You’re correct. Our primary mission is return-driven. Our key mission is the solvency of our fund, as long as there is an unfunded liability, our investment initiatives will first be driven by potential returns.
We have a pacing plan for private equity and don’t want to deviate far from that. We know if we slow down during disruption, we could lose out on what could be one of the best vintage years. We are focusing on separate accounts, co-investments, and fund-of-ones where we can strengthen LP rights and increase the alpha capture of our opportunities.
Trusted Insight: Pensions systems tend to have tenured teams, so can you share on what’s kept you grounded there investing through the lens of a pension?
LeAnne Larrañaga-Ruffy: I’ve built my career in pension systems, I’ve had the opportunity to work for both plans in New Mexico and can definitively tell you it is exactly where I want to be. Investing in a multi-generational pool of capital presents the opportunity to invest in various asset classes, across liquidity and risk spectrums. There’s also the added benefit of access to some of the most innovative individuals in the industry.
From a more personal perspective, I’m a native New Mexican whose family and friends are beneficiaries of the Fund’s success. It’s a rare and meaningful opportunity to be able to work for 10% of the population that are our state employees. Our mission to our members is why I’m excited to come to work each day.
Trusted Insight: Do you have any thoughts on interesting topics that investors should be addressing more?
LeAnne Larrañaga-Ruffy: We believe it’s no longer acceptable to approach the illiquid space with a “more art than science” mentality. Quantitative advancements have been significant and holding our managers to higher expectations based on sound quantitative analysis will lead to better results. Challenge your managers to consider performance attribution, identify beta, and rethink terms. There is an unbelievable amount of capital in the space, and if we were able to be more unified in our expectations, we can continue to create more LP favorable opportunities.
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The full list of 2020 Top 30 Pension Private Equity Investors can be found here.