Trusted Insight: Can you tell me about JM Family Enterprises’ business and its investments?

Ron Virtue: JM Family is a diversified automotive company. Its primary subsidiaries include: Southeast Toyota Distributors, which is the world’s largest independent distributor of Toyota vehicles; JM&A Group, which is a leading independent provider of finance and insurance products and World Omni Financial Corporation, a diversified financial services company. JM Family also own JM Lexus, an independent Lexus dealership and also the largest volume Lexus dealership in the world.

That ties into the makeup of our investment portfolios. We have to wear different hats in this investment department. For example, JM&A is an insurance company, so we have an insurance pool, which is governed by Florida regulations as JM&A includes a Florida-regulated insurance company.

Then we have a retirement pool of about $1 billion for the over 4,000 associates who work at the company. We have three main retirement pools: a defined benefit (DB) plan and two defined contribution (DC) plans -- a profit-sharing plan and a 401(k) plan.

We also invest corporate money, money that is beyond the day-to-day cash that is managed by the Treasury Department.

So, we have a medium-term portfolio, a strategic portfolio and a long-term portfolio. That's the basic makeup. We have three different investment committees that we report to and three different goals for each of those pools (Retirement, Insurance, and Corporate).
 

Trusted Insight: Within the retirement pool, tell me about your governance structure and your investment team. What is your decision making process like?

Ron Virtue: For the retirement investments we want to have broad representation across the company.

We have a retirement investment committee structured by position. It consists of four corporate members and one member from each of the three main business units: the Corporate Controller, who is my boss,  the Treasurer, the VP of Strategy and the VP of Total Rewards.

In addition, we have one representative from JM&A, one representative from Southeast Toyota and one representative from World Omni. The Retirement Investment Committee reports to the Retirement Committee, which is a four-person body of executive members who decide on administrative changes of the plans.

If we're making an administrative change, that needs to be voted on by the Retirement Committee, and if it's an investment change, that's the Retirement Investment Committee. The Retirement Investment Committee meets on a quarterly basis with extra meetings as needed. The Retirement Committee meets less often. More on an as-needed basis.

Our Investments Department is a four-person group: myself, an investment manager who reports to me, an investment analyst who reports to him, and a senior operations analyst.
 

Trusted Insight: How do you allocate assets for the retirement pool?

Trusted Insight: Is this makeup typical for corporate pensions?

Ron Virtue: Our defined contribution plans definitely are. Pensions traditionally invest a little bit more in alternatives, but we've actually tried to keep a balance between how we invest our profit-sharing plan (our largest DC plan) and the pension plan because we have a total return mandate.

Many pensions in the U.S. nowadays are frozen or not providing benefits to new people anymore, so they have gone to LDI (liability-driven investment) strategies. They are more concerned with just buying long-term fixed income to match their liabilities, whereas we envision our plans to continue to grow as new people join JM Family.

We were a little bit risk averse in terms of adding private equity in the past. We did have opportunistic real estate and core real estate. However, more recently we have been developing a longer-term private equity plan to add different kinds of private equity like buyouts and lending.
 

Trusted Insight: Higher allocation in alternatives also means higher management fees, which gets a lot of mentions in media right now. Is that something that worries you?

Ron Virtue: We try to take a holistic approach. We constantly look at our fees and then compare to what we're getting and sometimes look at making changes as well. When we were adding a few of those past alternatives - such as increasing emerging markets or real estate and commodities – that could have increased our fees, we lowered fees elsewhere. For example, in U.S. large-cap, we substantially lowered our fees, so net our fees stay pretty constant.
 

Trusted Insight: You've been with JM Family Enterprises for quite a long time. Are there any trends within corporate pensions that you find interesting?

Ron Virtue: The biggest trend we have seen is the shift to LDI (liability-driven investment). I think what matters is how big the pension is compared to your corporate balance sheet. For larger firms with longer, well-established pension plans, such as IBM and Exxon, the pension can become so large that LDI makes much more sense for them.

The other trend is that many companies are selling their pensions off to insurance firms like Prudential.

We're very different than that. We're a very paternalistic company and we want to be differentiated. We are consistently on Fortune's 100 Best Places to Work List. That is not by accident. We want to offer great benefits to our associates because they are our most important assets. We invest in them and that's why the pension plan is still open and we have such a rich profit-sharing plan as well.
 

Trusted Insight: Can you talk a little bit about your investments before and after 2008?

Ron Virtue: Before 2008 we had a lot more of our exposure in equities and we were a little bit closer to that traditional 60/40 portfolio.

We quickly realized that a 60/40 portfolio has that equity portion generating 90% of your risk. That's not what we wanted to do. Luckily we did have some differentiators at that time that helped, such as global tactical asset allocation and global bonds. The global bonds were probably what helped our plan the most in that time. However, we still wanted to both diversify our equity and the total pool by adding in more alternatives and different sources of return, and lower the overall correlations between the pieces of our investments.
 

Trusted Insight: Within the alternative space, where do you see opportunities for corporate pensions in today's market and in the near-term future?

Ron Virtue: We like the global asset allocation strategies because currently the valuations are quite poor for a standard stock and bond investor. With our governance structure, we don't have the ability to be extremely tactical day to day. We need a committee to vote on everything, a consultant to advise us, and our investment department needs to get together. The decisions we make are going to be different than a day-to-day shift in asset classes. We like having those managers that can shift their portfolios based on market conditions quickly.

We also like some differentiated private equity investments. As a team we've learned more about private equity investing through the private equity investing we have done with the corporate funds. We are taking that knowledge and combining it with our retirement consultant's knowledge to develop a plan. For example, one of the funds that we identified originally came from the corporate plan. We had them meet with our retirement consultant.

We're looking for funds that have a specific edge because even in private equity, the valuations are quite high right now. We're looking for new strategies where there is an identifiable edge that is repeatable for a manager.
 

Trusted Insight: Industrywide, what are the main challenges facing corporate pensions now?

Ron Virtue: The low rate environment has definitely been a challenge. It has forced companies to fund more than they would have otherwise due to the actuarial assumption of discount rates. The low rate environment eliminates that base return that we used to see. The risk-free rate is so low right now that we can't have a 5% money market return below that risk. It naturally takes down all of the returns.

Another challenge is the new actuarial table. However, I think that was long overdue.

Other challenges include setting expectations and realizing that a large amount of returns, especially in the U.S., have been pulled forward over the last few years with the Federal Reserve reducing rates to so low that investors are encouraged to go out on the risk curve. Now both bonds and equities look rich. There are not many places one can invest for easy returns.

The expectations for many pensions haven't changed, but they are going to have to rethink that. It's always been difficult to achieve 5% real return, for example. If inflation is low and asset prices seem to be at least fairly valued, if not overvalued in many cases, it's hard to achieve that return without significant alpha. It would seem to be impossible for the average pension to get 7.5-8%.
 

Trusted Insight: On that return pressure note, do you think pension investors should be more long-term focused?

Ron Virtue: Yes, but accounting makes it difficult. The changes in interest rates and the reduction in interest rates we've seen over the last several years has driven the funding decisions. We do think long-term, and we believe that's the way people should invest. That's why we are going to be cautious and take time to put together our plan as we're shifting our asset allocation a little bit.

Trusted Insight: If you were to give career advice to young people who want to enter institutional investing, what would that be?

Ron Virtue: Depending on what your talents and skills are, you have to make the most of those skills. Michael Jordan's math teacher told him to go for math because that's where the money is. But obviously Michael Jordan had other talents that he could use and have a life without being a math teacher.

It’s really about knowing yourself -- what you're good at, what drives you and what you enjoy. If you have a passion for investing, definitely make it a career for yourself. If you do not, you should probably do something else.
 

Trusted Insight: You have a degree in math and statistics. How has that background informed your job as an investor today?

Ron Virtue: I definitely do not have the standard degree of the investment professional. That's probably why I went to University of Chicago after my undergrad to study finance and economics.

The thought process that I learned in the actuarial math program taught me how to solve problems and analyze. I don't think a lot of people realize this, but higher math is really right-brain thinking. When you come up through the lower math, that's very left-brain thinking. But once you reach higher math you need to be able to combine those different parts of your mind. It often helps you think outside the box, which is a term that is used too often. However, in this case being a problem solver and thinking of new approaches and looking at problems from different angles has been something that has stuck with me from my initial training in the actuarial program.