Thomas F. Richards is treasurer, chief investment officer and senior associate vice president for finance at the University of Missouri System. In this interview, he discusses why the UM System is reducing risk while peers reach for returns, his experience in navigating a bank through the financial crisis and the importance of humility when trying to predict the markets.
Thomas Richards was recently named on Trusted Insight's 2018 Top 30 Endowment Chief Investment Officers. He graciously spoke with us on Feb. 1st, 2018. The following interview has been edited and condensed.
Trusted Insight: You’ve been with the University of Missouri System since 2011. What did the portfolio you inherited look like then and how has it evolved during your time there?
Thomas Richards: I inherited fairly traditional portfolios that had undergone some element of perceived ‘de-risking’ after the financial crisis, in terms of exchanging public equity risk for things like high yield and emerging markets debt. At the time I took over the portfolios, we were very much a consultant-led investment office, with our staff largely implementing decisions that had been driven by the consultant and approved by our Board. We've evolved significantly on many fronts since that time.
"The best thing that we can do is to try, as much as we can, as much as our governance process allows, to build a more balanced, diversified portfolio that can offer some protection regardless of what happens in markets."
In terms of strategic direction, while our investment consultant continues to be a valued partner, we’ve expanded our base of support to include strategic and meaningful relationships with key investment management firms. To enhance our overall governance process, we created an Investment Advisory Committee to help provide stability and continuity while serving as a sounding board for the investment team and University leadership. While our Board continues to maintain control over our investment policies and objectives, the investment team is now driving discussions on strategic direction and has been given delegated authority to hire and fire investment managers.
Our current initiatives include efforts to further reduce equity exposure while improving the overall balance of the portfolio with increased exposures to U.S. Treasuries and TIPS. Concurrently, we’ve recently expanded the size of our portable alpha program.
Trusted Insight: A family office CIO once told us that is institutional investing shaped by human behavior. How does your education in psychology play a part in your role as an asset allocator?
Thomas Richards: A topic growing in popularity these days seems to be behavioral finance, specifically an awareness of the biases we all bring to decision-making. We all need to be aware of the many biases that exist and that potentially cloud our judgment in terms of good decision-making. Nobody knows for sure what's going to happen in the markets. The best thing that we can do is to try, as much as we can, as much as our governance process allows, to build a more balanced, diversified portfolio that can offer some protection regardless of what happens in markets.
Trusted Insight: You were the chief financial officer at Landmark Bank after having been an audit manager at PricewaterhouseCoopers. How has that experience influenced your approach toward endowment investing?
Thomas Richards: Landmark is a larger community banking organization, with more than $2 billion assets and locations in three states. I'd say that the most challenging part of that experience was helping to successfully manage the bank through the financial crisis, at a time when banking and related liquidity issues were at the epicenter of the crisis. That banking experience, combined with my public accounting background, keeps me thinking a lot about the management of risk.
"In this environment, while I see some peers in the endowment and public pension space continue to reach for returns, we are in the midst of reducing risk in our own portfolios and preparing for lower returns going forward."
One of the biggest lessons learned from the financial crisis in both the banking and institutional investing worlds was the importance of liquidity. We need to be thinking about things that could possibly happen and try to be prepared. Again, it's the idea that you never really know what will happen, so you want to be as prepared as possible for a variety of different outcomes. It’s important to try to have contingency plans in place that will enable you to get yourself through difficult situations.
Trusted Insight: Given the ultra-low interest rates; high valuations; and crowded public and private markets, do you recognize the markets as they are today?
Thomas Richards: While it might seem similar to conditions that existed prior to the financial crisis, it's not quite the same due largely to the absence excessive leverage that existed at the time. The banking system is also much better capitalized today than it was at that point in time. While real estate valuations are certainly up there, you don't see the kind of leverage or spec building that previously existed.
As we know, a big part of what's going on today has to do with the ramifications of the central bank quantitative easing and how that's beginning to unwind at different paces in terms of the U.S. versus Europe and Japan. I’m sometimes surprised by how few people really seem to truly understand these dynamics. In this environment, while I see some peers in the endowment and public pension space continue to reach for returns, we are in the midst of reducing risk in our own portfolios and preparing for lower returns going forward.
Trusted Insight: There’s been an increasing number and sophistication of investment offices. Does that present a challenge in differentiating from the herd?
Thomas Richards: The University of Missouri System is pretty unique in terms of innovation and having the support of a good governance structure. The ways that we manage risk and, frankly, the ways in which we've de-risked makes us unlike peers.
I think the biggest risk for a CIO is to look different than peers. In our case, that’s been a significant consideration as we’ve begun to reduce our equity and credit exposures while beginning to build our positions in U.S. Treasuries and TIPs. Fortunately, we’ve got a great governance structure that’s been very engaged in the process. We’ve specifically discussed the issue of peer risk, but our Board has been more focused on doing the right thing which, in our case, is taking some risk off the table.
Trusted Insight: What do you consider to be the most notable challenge in the university endowment industry?
Thomas Richards: Certainly, it would be the demands of generating needed investment returns against maintaining a tolerable level of risk. In terms of what we manage here at the University of Missouri System, the endowment is actually our smallest investment pool at about $1.6 billion. Our defined benefit retirement plan is about $3.6 billion and our working capital pool is $2 billion.
From my perspective, the return challenges are similar for both retirement plans and endowments in that you need a certain level of return to make things work. Across the board, in both the pension and endowment worlds, we see peers continuing to stretch further out on the risk spectrum, reaching for that additional return. All of this is happening with asset sector valuations at historic highs. Anecdotally, it would seem like portfolios contain more overall risk today than what existed prior to the financial crisis. What will happen in many of these portfolios when we finally experience a significant market event?
Trusted Insight: To what extent do you think machine learning and artificial intelligence will have an impact on the institutional investing world?
Thomas Richards: I think it's important. I don't think it's ultimately going to drive overall portfolios. But, when you think particularly about certain asset classes, equities for example, it's pretty intriguing what some of these managers are able to do. We have several managers that are in that space that we invest with.
One of the things that occurred to me is that these firms are really trying to automate, in many cases, how the human mind has always approached markets. But they’ve been able to automate many of these thought processes through algorithms, enabling so much more to be accomplished simultaneously.
Trusted Insight: What advice would you give to aspiring chief investment officers?
Thomas Richards: One of the biggest differentiators among leaders that I’ve seen across my career is humility. While it’s often a constant struggle, it’s so important not to fall into the trap where you think that you know everything, that you know more than other people, especially in investing. This field is so complex; there is always something new to learn, and new people to learn from. Don't assume that you know everything or that you can somehow predict markets. Try to stay humble.
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