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Exclusive Q&A: Robert Maynard, Chief Investment Officer, Public Employees' Retirement System Of Idaho

by trusted insight posted 5years ago 8468 views
Robert Maynard is the chief investment officer for the Public Employees' Retirement System of Idaho, a pension with $15 billion in assets under management. Previously, Maynard served as deputy executive director of the Alaska Permanent Fund and as assistant attorney general for the State of Alaska. Maynard graduated from Claremont Men's (now Claremont McKenna) College and received his J.D. from the University of California, Davis School of Law.

Mr. Maynard was recently named to Trusted Insight’s ranked list of the Top 30 Pension Fund Chief Investment Officers. He graciously spoke with Trusted Insight on January 18, 2016. This interview has been edited and condensed for clarity.

Trusted Insight: You earned your law degree from University of California and then went on to serve as assistant attorney general of Alaska. Then eventually deputy director of the Alaska Permanent Funds. Can you tell me about your transition from law to institutional investing and how your law background has come to inform your investment philosophy?

Bob Maynard: Back when I was in Alaska, I went to serve the Supreme Court, before joining the attorney general’s office, and becoming the assistant attorney general. My primary area of focus was supervision of oil and gas. In the 70s, Alaska went from being like a third-world country to hitting the jackpot with oil. Alaska is a small place; it’s like being in high school. With all the money pouring in, I wasn’t just responsible for oil and gas, I ended up being counselor of the governor, on the bond council and ethics supervisor for the state, all around the same time. There was a lot of stuff going on, and people were given a lot of responsibility for a lot of things. We were building refineries and selling oil world-wide. 

It was during this period that the Alaska Permanent Fund was established. When it was initially set up, it was basically a piggy bank of government bonds. Then we realized that simply being long-term in bonds may not be the best thing for a portfolio, particularly when you want the fund to grow by inflation. Even though a lot of the money coming in was due to oil royalties, it was also from taxes on excess surplus revenue. 

When the idea of being a more broadly diversified fund became more widely accepted, the statute was changed to allow the Alaska Permanent Fund to invest in equities and real estate, although still within certain height restrictions. I was delegated to help the Alaska Permanent Fund to set up a number of their programs, real estate in particular. All my previous work with pipelines and international stuff helped in setting up some of the international investing programs. In the course of my duties, I became counsel to the Alaska Permanent Fund and counsel attorney general for the retirement fund. 

My main job in the mid-80s was primarily putting through a lot of big litigation, such as the Trans-Alaskan pipeline litigation and the royalty litigation. At the time, the Trans-Alaskan pipeline litigation was the largest piece of litigation in U.S. history. I’d been doing it for a number of years, but in my own mind, I had been doing it too long. A lot of the several billion dollar litigation pieces dragged on like Charles Dickens’ Bleak House, and I was becoming a witness of my own cases. These cases would go on in front of the ICC (International Criminal Court) for a really long period of time.

At that time, the Alaska Permanent Fund was expanding fast, and had grown to be over $12 billion in assets under management. I was asked to come over and be deputy executive director, and by that time I had gained familiarity with the fund and with what it was doing. I had to go back into litigation briefly to head up the NTSD hearings when the Exxon Valdez tanker ran aground, but after that I became full-time at the Alaska Permanent Fund. 

Trusted Insight: What would you say your investment philosophy is and how has that developed over your time as an institutional investor?

Bob Maynard: For the most part, I have come to conclusion there’s a thousand ways to invest. The key is trying to find the best way to invest given your institution or constituency’s history and traditions. I put a high premium on explainability. If you look over the four different decades that I’ve been intensively involved with portfolio investment, once you get to a reasonably diversified portfolio -- in terms of seven-to-eight different asset types -- any greater complexity does not add to returns over time.

New things come up from time to time, as is the case with the market at the moment. It’s not a matter of fact, it’s a matter of face as to whether they add returns after the additional fees. It is difficult to beat the market, but that also means that it is difficult for a professionally diversified portfolio to lose too much. So long as you’re not doing anything really stupid, like betting it all on red. 

Depending upon your constituency and the history of your institution, the key is keeping with an approach over a prolonged period of time. That means five-to-10 years at the very least. You’ve got to choose the investment approach that’s most appropriate and explainable to your constituency. For some, that can be highly in house. For instance, Matt Clark’s operation, South Dakota, has been doing an in-house tactical approach for forty years and is probably the best in the world at it. Alternatively, it can be like Washington State, who have been dealing in private equity since the 90s. 

Our mantra is simple, transparent, focused and patient. We are a two-person operation with a small back office. Being able to explain what we do in times of crisis and keeping the constituency on-course has achieved great value for us.

Trusted Insight: Tell me how that two-person team dynamic works and how your team might differ from peer institutions?

Bob Maynard: Richelle Sugiyama and I are the two investment professionals. We have an assistant and two positions budgeted for in the fiscal department, who form the back office. I have a five person board, three business people appointed from the state, as well as two active members who have 10 years’ service. It is very important for us not to outrun our supply lines. So, that’s the window into which we need to be able to invest our program.

As a result, Richelle and I cover everything. This includes private equity and real estate, although we rely on external managers. We have a general consultant and a three boutique managers to oversee. We rely on daily pricing. All of our managers are separate accounts. They are instructed to only invest in instruments in the public markets that are independently daily priceable, which saved our bacon during 2008 and 2009. It has allowed us to know exactly where we are and correct any mistakes that may be out there. We know within 10 basis points of clip how our portfolio and its various parts should have acted. Within private equity we have 20 relationships, and within real estate we have two or three relationships. That allows us to know where we are, see instantly if something is wrong, correct it quickly and explain it to our board and our constituency when things go south.

Trusted Insight: To what degree do you rebalance your portfolio to counter the near-term volatility that we’ve experienced recently?

Bob Maynard: We do not make tactical allocations with a three-year or under view. Our view is that in order to make a tactical allocation, you don’t have to make one decision right, you’ve got to make three decisions right. When to get out, when to get back in and where to put the money in the meantime. In 2008, illiquid cash crushed a lot of people.

As a result, our re-balancing tends to be moderate. In other words, we basically look toward overall equity exposure, and we don’t try to re-balance into private equity, private or real estate. We look at our overall equity fixed-income exposure. We tend to naturally run hot on equities, public U.S. and international equities to suck up excess manager cash. We will tend to re-balance more quickly if the bond allocation gets higher. If the equity allocation gets high, we may let that run a bit. While we don’t have strict re-balancing discipline, we will re-balance after extremely volatile moves, for instance, if you get a 10 or 12 percent move in the total fund. In 2008, we re-balanced for the two big drops in October 2008 and at the end of February 2009. The more volatile the move, the more you benefit from rebalancing. 

Right now, we have been as close to our underlying asset allocation, with the exception of underweight emerging markets, than I can ever remember. And we’ve been for about a year. This is an uncertain time. I don’t know whether it’s going to be good, bad or indifferent. It’s clear we are going through one of those periods where the interest rate cycle shifts. These interest rate cycles go through very long periods. From the American Civil War to 1899, it went down to where it almost is now. Then it went up to 1929. 1930 to 1949 was the last time you had the Federal Reserve keeping interest rates artificially low, right about to where they are now as a matter of fact. Then from 1950’s all the way up to where interest rates rose in 1981. The 50s show that when the Federal Reserve comes off an artificially induced interest rate cycle, it doesn’t necessarily have to be bad for the next decade for stocks. I recommend A History of Interest Rates by Sidney Homer and Richard Sylla. It’s a fascinating book and discusses interest rates dating back to Ancient Greece and Rome. 

As they always say, in a potential storm, stick close to the boat. And we are about as close as we’ve ever been.

Trusted Insight: What is your outlook for 2016? What geographies and sectors are you looking to for sustained growth?

Bob Maynard: Earlier this year, I gave a presentation to my legislature, and my view for the economy and markets then was tepid. Now I’m just hoping we get back to tepid! Tepid means low single-digit total fund returns. Last fiscal year, we were around three percent. We’ve been stuck neutral kind of since August 2014, when everybody knew that QE3 was ending. If you look at the worldwide capital markets, not just the stock market, it’s really gone sideways since then. 

We’ve had those periods of adjustment before. For example, the U.S. downgrade and Euro crises. This has been going on for about 16 months, and I expect it for a few more months.

One thing that really helps our particular investing approach, is whatever you may think about Idaho legislature, they have then heroes with the pension fund. They have kept our obligations and our liabilities low, which has allowed our board and our political system to keep the low discount rate. Our discount rate is seven percent net and 3.5 percent real return. A 3.5 percent real return, even in sub-normal times, should be easily reached with a 70 percent equity allocation, when reasonably diversified. If it doesn’t, that means the comets hit the earth and the condition of the pension fund won’t be front page news.

As a result, we are a fund that simply has to capture reasonably professionally diversified market returns. We don’t have to consistently beat the market. We are in a much cushier position than many investors out there, such as pension funds with higher obligations and higher discount rates, or endowments that need sometimes six or seven percent real investment return.

If you have to consistently beat the market, then you’ve got to do something different to what we’re doing. That’s why for pension funds or endowments, it is about more complex, swinging from the fences, approaches for getting the top-docile venture capital fund, or the top-docile hedge fund manager, are needed in order to beat the dial. We’re not there. We don’t need to do that.

Trusted Insight: What trends have you identified in your time at public pensions?

Bob Maynard: Too many! One you keep seeing similar products come to have traction then die, only to come back again. The number of times I’ve seen tactical asset allocation come back is at least four or five. It’s like buying your underwear at JCPenney's, and all of a sudden it comes back as lingerie from Victoria’s Secret. Same product, packaged differently. It’s just seeing similar sorts of approaches or explanations come around again. 

Probably the biggest change since the late 70s to mid-80s until now has been the plethora of information available. It used to be that there was a lack of information, and you really paid a premium for data. You had to find people that had better information and better access to information, whether that is in emerging markets or regular markets or small cap. That there was a lack of data, and you really paid a premium to your managers.

What has changed now is that from a lack of information, there is now the too much of it. The biggest danger I see now is that really smart people, in the presence of too much information, will reach a conclusion and find a justification for it very quickly. The professionals will sometimes tell what you want to hear. It’s like when you keep reading until you find something that supports the lifestyle you have now, and tells you that coffee and cigarettes are good for you. I think that’s probably the biggest industry from when I got into the industry to now -- figuring out what I don’t need to pay attention to. 

Trusted Insight: What’s the biggest challenge of pension investing that is unique to pensions as opposed to other types of institutional investing?

Bob Maynard: One of the biggest difficulties we face now is that we’re players on a field where other people make the rules and are the referees. It is hard to keep a program on a consistent track over the years, when you’re getting buffeted by arguments that we’re the players on a field.

In particular, is an idea held by the actuaries and accountants as to what an appropriate discount rate is, what a valuation should be and how we should react to them. Ultimately, what is an appropriate way to value a pension obligation? A number of legislatures and programs are facing a crisis because people are yelling and screaming over their heads about those issues. They may not be able to keep a long-term program on track.

For example, with the DB-DC (defined benefit; defined contribution) debate; it’s the same employees, the same capital markets, the same mortality assumptions and in theory, the same amount of money you should set aside. You can construct from the beginning a DC program and a DB program, and they will probably give the same net result to the beneficiaries, as long as they invest correctly and people put the appropriate amount of money aside. The problem is that once you go down a certain path, switching from a DB to a DC program becomes extremely difficult. It’s like going trying to change from one unicycle to another while moving. It’s practically impossible once you’ve gone down a road for 10 or 20 years, and you end up getting the worst of both worlds.

People are trying to change investment programs to react to these external debates right now, and that’s probably the most difficult issue we face. We have a DC supplemental plan and we have a base DB plan that we offer to the DC participants, which is supplemental, and they can invest in daily. So we don’t have a horse in that race. We’re trying to get people to understand why investing for a 3.5-to-4 percent real return is an appropriate decision for the long term. It’s causing a lot of people difficulties in the pension industry.

Trusted Insight: Where do you see that arugment heading?

Bob Maynard: Back in 2000, which was the last time DB plans were under attack, people opposed them because they could make more in the DC. They said, “You’re only trying to make 3.5-to-4 percent. I can day trade in the Nikkei and make quadruple that. Plus you just made 20 percent, how come I’m not getting that?” DB plans were trashed because they were too stingy. Now they’re getting trashed because they are too generous. That started to calm down a bit, although having a couple of tepid years is going to bring it back up again. 

Where is it going to end? I think it’s extremely difficult to switch in midstream. The ones who have done it have found themselves in bigger problems than they were in before. The way actuaries and accountants set it up DB plans a decade or so ago depends on the plan continuing to get new entrants. Once you shut in new entrants, the old DB plan becomes extremely volatile. Public institutions that still value long-term employees and keeping employees will keep the DB plans. I think it’s the institutions that have transit populations, and don’t place a high value on keeping people around for decades, who will continue to move to DC. DC is probably more appropriate for those type of institutions.

Trusted Insight: What is the number one rule that you’ve learned in your career as an institutional investor?

Bob Maynard: Do you remember what the Hitchhiker’s Guide To The Galaxy had on its first page? Don’t panic. The worst time to make a decision is in the middle of a crisis. Have a plan and stick with it. The most interesting phrase I heard from consultants during the middle of the 2008-2009 crisis, was telling their boards “Don’t blindly re-balance.” That’s what re-balancing is, it’s blind. That’s the discipline.

Now in their defense, they were giving cover to a lot of their clients who had gotten themselves into illiquid positions and couldn’t re-balance. There was a little bit of cover fire going on there. But I think that’s the primary idea: if you have a well thought out plan, there are going to be periods of time -- sometimes three-to-six years -- where it doesn’t work. If you have a plan and it’s well thought out, stick with it. That doesn’t mean you say no unknowingly. A lot of my job could be done by a three-year-old just saying “No, I don’t want to.” The difference is that I’ve got to continually understand why I’m saying no and whether it’s still appropriate. It may be appropriate for others, but not for us.

We are different to others not because we think this is necessarily a better way to invest in the abstract, but because of the individual nature of our particular plan, history, tradition and constituency.

To learn more about the the Top 30 Pension Fund Chief Investment Officers, click here.