Saving An Underfunded Plan: De-Risking & Educating Participants | Exclusive Q&A With Mo Jalajel, Pension Manager Of Pfizer
Mo Jalajel is a senior manager of pension investments at Pfizer, Inc., a major pharmaceutical company headquartered in New York City. He is responsible for the global public equity and fixed income allocations within Pfizer’s U.S. defined benefit plan, including the selection, monitoring and termination of external investment managers. Previously, he was an associate at Mercer Investments and a researcher for Dow Jones. Mo Jalajel holds an MBA in finance from Saint Peter's University and a BBA in management from New Jersey City University.
In this interview, Jalajel discusses adapting to the new fee structure for hedge funds, following a liability-driven investment philosophy and how institutions should “take every opportunity to de-risk their defined benefit plan.” He also shares career insights for young people looking to enter institutional investing.
Jalajel was recently named on Trusted Insight Insight’s Top 30 Corporate Investment Office Rising Stars. He graciously spoke with us on Apr. 14, 2017.
Trusted Insight: How large is your total investment pool, and how are the assets invested?
Mo Jalajel: The total U.S. and non-U.S. pension plan is roughly $24 billion. I oversee the $13 billion U.S pension plan with two of my colleagues. In terms of how we allocate our assets, we have roughly 40 percent in fixed income and 40 percent in public equity. The remainder is in alternative/multi-asset class strategies.
Trusted Insight: Is your portfolio structure typical for similar-sized corporation plans?
Mo Jalajel: It depends on the characteristics of the plan. Our plan is currently closed and freezing at the end of this year, so for the past four years, we have been following an LDI (liability-driven investment) investment strategy, as we are in the process of de-risking the plan. Again, that's because our plan is closed and will be frozen at year end. Plans that are open and still accruing benefits for their participants will mostly likely have a higher allocation to growth assets such as public equities and alternatives.
Trusted Insight: How does your return stand relative to your short-term and longer-term targets?
Mo Jalajel: Our long-term expected return is 8 percent. We've been able to reach that goal, thanks to the favorable equity market coming since the end of the financial crisis. We've been able to achieve our long-term return almost on a yearly basis. The only exception was two years ago, in which we did not achieve that return. But our concern going forward is if we the markets have pulled forward future investment returns. That's one thing we constantly think about.
Trusted Insight: What is the plan’s strategy within alternative assets?
Mo Jalajel: We are opportunistically investing in alternatives. Within the private assets allocation, if new interesting opportunities come up or existing managers raise a fund, we'll allocate and look to maintain our policy target. However, we have put a hold on absolute return/hedge funds for now. We have decided not to commit to any new funds until we feel the asset class is appropriate for us to allocate too.
I think hedge funds are feeling the pressure that traditional asset managers have been feeling. Investors across the institutional investment landscape, be it pension plans, endowments or foundations, are now becoming very conscious of the management fees being paid. So we feel the industry needs to start to finally adapt to a new fee structure. Additionally, the lack of volatility in the markets has not helped them either.
Private equity funds have an illiquidity premium, so they are immune from it for now. Whereas hedge funds are now facing more scrutiny, because some of them are more public about what they do, while private equity funds are able to invest out of the public eye.
Management fees concern me more than the carry. Paying 2 percent of assets even when returns are negative is a tough pill to swallow. I think 1 percent would be fair depending on the asset class.
Trusted Insight: What's your strategy within fixed income? Are there any new trends or investment products that interest you at the moment?
Mo Jalajel: Our fixed income allocation is 100 percent actively managed. Since we've started to de-risk the plan, we've been allocating more to the asset class. We took a lot of our short duration, intermediate duration fixed income and extended the duration. We've moved our assets to long corporate, Treasurys and strips. We've been doing that over the past few years.
We call that our liability-hedging portfolio. The objective is to hedge the interest rate risk of our liabilities. In terms of interesting strategies, something that I'm working on now is looking to create a custom benchmark with our managers where they target a duration that is equal to our liabilities or higher in order to help us increase our hedge ratio.
The other allocation within the fixed income portfolio is what we call “growth fixed income.” This portion of the portfolio consists of high-yield debt, emerging market debt, global bonds and structured product. We separate them out because of the risk profile of these asset classes.
We are currently comfortable with our allocations and current managers. I think it's something that could change over the next few years – possibly taking a little bit more risk in that portfolio and looking at managers that will invest across the capital structure but allocating more to long-duration strategies is the priority.
Trusted Insight: What do you look for in asset managers? Do you have a preference between someone with a solid track record and those with innovative specialties?
Mo Jalajel: It's a mix. While we built up our long-bond portfolio, we are looking for managers that have a large scale, able to get the allocation desired when companies issue debt and have a track record with clients focused on LDI. Additionally, skill in security selection is important to us as well.
In the meantime, we are starting to look at more of the niche bond managers that could be half the size of the managers we currently have, but are able to find opportunities that are too small for larger managers, so they could add value on that side. That's something that's getting more of my attention.
Long-term performance is important, but risk-adjusted return is a large driver of how we differentiate between managers. An important metric is downside capture. I believe that any manager can keep pace with the market when it is moving higher. But when the markets turn, can they protect on the downside? That's where you can start to see the difference between a good manager and a bad manager.
Trusted Insight: Underfunding is a problem for many pension plans, whether it’s defined benefit or defined contribution plans, across corporate and government spheres. What do you think pension investors can do to address the problem?
Mo Jalajel: I think for companies, it's making the hard decision to close and freeze their plans. A lot of corporate pension plans have done that and are moving more people to defined contribution plans.
In hindsight, it is easy to say that plans should have de-risked during the tech bubble or before the financial crisis. But timing the market is very hard and not many are successful at it. Staying disciplined to your glide path and de-risking as triggers are reached is a great way to avoid prior episodes of not de-risking before a market correction or crash.
In terms of defined contribution plans, I think that companies need to offer participants a good mix of active and passive equity and fixed income products. What participants need the most is to be invested in the markets and contribute enough to get the company match. They also need to be offered the opportunity to meet investment professionals at no cost to look at their risk tolerance, investment time horizon and recommend an appropriate asset allocation.
On the government side, what they’ve been doing in recent years is increasing the PBGC premiums and having companies fill their budget holes. They need to stop that and help educate people on the importance of saving for retirement. It would be beneficial to the country for the government to help more people invest in 401(k) plans if their employer does not offer it. Similar to 529 plans offered by many states.
Trusted Insight: How has your asset management and research experience informed your decision-making in selecting managers or your overall job as a plan sponsor?
Mo Jalajel: My first job out of college was at Dow Jones in which I focused on private equity and venture capital research. That’s where I received a lot of experience and knowledge about alternative asset classes. Coming out of college, I honestly had no clue what it was. So I learned a lot about investing and the value that private equity and venture capital firms add.
Then, the position at Mercer gave me the experience working in the public markets and how pension and 401(k) plans function and invest. Coupled with that is that a lot of our clients were corporate pension plans that were either looking to de-risk or had de-risked already. So the Mercer position really provided me with the information and knowledge that I needed to move to the plan sponsor side.
Mercer had their own research division that looked at managers and rated them. We would screen the database and select from the list of top-rated managers. I always felt that there were managers out there that weren’t rated, because they might be too small for the consulting community to recommend, but would be great to have as a partner. That's where I learned that you have to dig a deeper and look for niche managers that can really add value. You want someone that can move very quickly, navigate the markets and look for opportunities and inefficiencies to exploit.
Trusted Insight: What career advice you would give young people who are looking to enter institution investing?
Mo Jalajel: The asset management - plan sponsor landscape is changing with the growth of passive management, machine learning coming into play and the power of quantitative investing. I think if students had more education in computer programming coupled with a finance background that would be very beneficial to their careers.
They also have to be open to the active/passive debate. There are areas to be active, and there are areas to be passive. They have to really enjoy investing and understand the economic aspect of it, and not just think, “I want to work in the industry because there's money to be paid.” That's not why you should pick an industry or a career. You have to love and enjoy what you do.
View the complete list of Top 30 Corporate Investment Office Rising Stars.