Tom Tull is the chief investment officer at the Employees Retirement System of Texas, a $28 billion defined benefit pension fund. In this interview, he discusses what attracted him to pension investing as early as the '70s, the emerging markets that TRS wants to be more actively involved in and how his experience as a U.S. Army veteran translates to his role as an asset allocator.
Tom Tull was named on Trusted Insight's 2018 Top 30 Public Pension Chief Investment Officers. He graciously spoke with us on April 3, 2018.
Trusted Insight: You’ve been involved with pension investing as early as the 1970’s. What brought you to the realm of pension funds as opposed to other areas of institutional investing?
Tom Tull: The best explanation would be that I've always been in engaged or interested in finance and investments. I got my first stocks certificate as a gift back when I was a teenager. This opened the door for a whole new world of excitement, adventure and ways to make money. With that, I studied finance, accounting and economics in my undergrad and graduate school days. Eventually, I went on for the Chartered Financial Analyst designation.
In the early years, I worked as an analyst for a mutual fund at Nationwide, then a bank as a Trust Officer and then on to the corporate world managing ERISA money, doing corporate acquisitions and working with our corporate partners in the US, Canada, Japan and Australia. This opened my eyes to prospective investment opportunities in non-US markets, LBO’s, private equity, venture capital and currency hedging. This was back when global was in its infancy, at least as far as U.S. investors.
Trusted Insight: What's the team structure and dynamic like at ERS?
Tom Tull: We have a team of 74 employees, and we break responsibilities down by asset class. We have public equities, private equities, private real estate, infrastructure, fixed income, high yield and hedge funds. Add to that a trading group, operations and admin. Of that, we break the asset pool down into what's called return seeking and risk reducers. Return seeking would be what you'd expect the more actively managed type of asset classes, whereas the risk reducers are things like absolute return hedge funds and rates, more diversifiers and liquidity-oriented type products.
"There’s artificial intelligence now, which will take on a life of its own, both good and bad. Hopefully, it’ll allow folks to be more opportunistic, timely and tactical."
We also manage over 60 percent of our assets internally, which gives us some competitive advantages. We have a tremendous team, and we also have the opportunity and advantage to travel the world, looking at deals and doing deals.
Trusted Insight: How much of an impact will machine learning and artificial intelligence have on the asset allocator side of investing?
Tom Tull: I think it's going to be very similar to the development of international investing back in the 80s. We're already beginning to see managers that are mining data and taking advantage of artificial intelligence to run risk models for what-ifs. We called it different things in terms of modeling in the past.
There’s artificial intelligence now, which will take on a life of its own, both good and bad. Hopefully, it’ll allow folks to be more opportunistic, timely and tactical. Also, with more digitalization and expanding social networks, there's also the risk of picking up fake news or fake data. You'll have situations where you think you've come to the right conclusion, but if data has not been scrubbed, it may produce inaccurate conclusions. In that situation, you may shoot yourself in the foot, so there are pros and cons just like anything else.
Trusted Insight: You speak of being more opportunistic moving forward. What nuanced approaches are you taking to support that statement?
Tom Tull: Absolutely. We've just gone through an asset allocation study. We do this about every three to four years, and we just completed it in the latter part of last year. We found that there's different credit issues, or credit deals that don't fall neatly within any of the other asset classes.
"We find that there are tremendous return opportunities and good rule of law, for the most part, in India versus other emerging markets such as China."
For example, it could be distress financing. It could be royalty streams. It could be financing for ships or airlines, things that don't fall neatly into an asset pool. Because of that, we have set up a bucket for 3 percent of our assets to go into what's called opportunistic credit.
Trusted Insight: You were also intrigued by the increasing hedge fund activity in Brazil. Is this something that you’re still pursuing, or are there other areas that you’re optimistic about?
Tom Tull: We are sitting back with Brazil only because of the political environment. Brazil has a tendency to move two steps forward and one step back. We're waiting to see how the dust settles with Brazil. It doesn't mean that we're avoiding Brazil, but we're seeing more opportunities in India right now. We've been doing some real estate and infrastructure deals in India. We find that there are tremendous return opportunities and good rule of law, for the most part, in India versus other emerging markets such as China.
China is another market that we'd love to do more in and get actively involved, but it's going to take a little more time. Their rule of law isn't as user-friendly, plus we haven't been able to get the relationships, contacts or investments that we really need. We have invested in Asia, and have some deals in South Korea and the Philippines. We've also done some deals in Latin America, in Chile.
Trusted Insight: With respect to your long-term perspective, what steps will you take to mitigate risks of a major market correction?
Tom Tull: We are refining our risk models, running stress tests and doing tactical asset allocation. Realistically, we're nine years into this economic cycle, and I think the easy money has been made. It definitely becomes more challenging. I think we have 12 to 18 more months of reasonably positive economic performance, but with that comes the risk of more volatility and higher interest rates. There’s also the risk of more adjustments needed in terms of deployment of capital into areas that offer better values, for example, international versus the U.S.
In addition, we are seeing deal inflation with respect to fees, profit sharing, expenses and terms. Generally speaking, managers aren’t willing to be as accommodating in terms of the negotiations and expense coverage. We're also seeing a case where some of the GPs and some alternative asset classes are beginning to sell off parts of their GP interest.
To me, that's a red flag if they're selling off parts of their company. Yes, you have succession planning and you have the opportunity to monetize capital, which has been tied up, but it also tells me that they see pretty good valuations for their interest. Because of that, it may be time to step back and look further down the scale in terms of the mid-smaller firms that are willing to be more accommodating and where there are more niche players.
Trusted Insight: You’re a U.S. Army veteran that served in Korea and Vietnam. How has that life experience influenced your role as an asset allocator?
Tom Tull: I was in a combat zone in Vietnam, but not in Korea. I learned early on, in working with teams, you earn respect, you don't get respect. You really need to work closely, get buy-in and communicate well with your team. It’s important to work for the common goal, whether it's in a platoon or a team of individuals working on generating risk adjustment performance.
I’m very much concerned with what's best, not only for the trust, but also for the team. I don't take things personally when people leave for a better opportunity, as it’s part of the growth process. I'm happy to have them for a good number of years before they do that. The primary points are earning respect and having a team that’s working for the common goal.
Bottom line, my team is extremely important to me, and my objective is to have them get any awards, commendations or glory there is. If I can succeed in having them do well, then the trust will do well.
Trusted Insight: If there anything that you'd like to ask about yourself, ERS or pension investing in general?
Tom Tull: I think the investment business will continue to be challenged with instantaneous information flows, some good and bad. You have to be very careful with what you read and who your sources are, which is why it’s important to work with reliable sources and relationships over time.
Remember to be humble. If you're not humble, the markets will make you humble. Don't get wrapped up in the psychology of the day. Concentrate on value, fundamentals and reality checks.
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