Gary Bruebaker is the chief investment officer of the Washington State Investment Board, where he manages over $128 billion, invested on six continents, within 76 countries and 49 currencies. He was recently named on Trusted Insight's 2018 Top 30 Public Pension Chief Investment Officers, and graciously spoke with us on March 22, 2018. 

In part two of this interview, he discusses the advantages of early real estate and private equity investing in the '80s; the pension fund's 'Innovation Portfolio,' which is used to test out opportunities around machine learning and AI; and how he helped Washington State's assets grow 2.4 times since joining in 2001.

Trusted Insight: Washington State beat its 3-, 5- and 10-year return benchmarks. To what do you attribute this success?

Gary Bruebaker: I think it's really a combination of a few things. First, we have an excellent Board. About three years after I got here, I worked with the Board to develop a set of 17 investment beliefs. It's really paid a lot more dividends than I would've even guessed at the time. It keeps both the staff and the Board disciplined and focused in terms of what our beliefs are and what's really important to us.

"What makes Washington State Investment Board different is the strategy we employ here. We have 48 percent of our assets in illiquid investments, and we've been investors in real estate and private equity since 1980 and 1981, respectively.​"

For instance, if you look at 2007 and 2008, that happened to coincide with almost a 50 percent turnover of our voting Board members, and so, we were a little nervous. We weren’t sure if the board was going to have the discipline to stick with investment strategies that were put in place by a previous Board. We do an asset allocation study at least every four years, but we did one out of cycle then, right in the middle of the crisis. We did this because we wanted the Board to know that the staff did not want to make a change, but we wanted to be sure the Board was behind us on that. And they were, which is why they didn't change our risk/reward profile.

The Board’s discipline and focus, coupled with the fact that we're able to hire the kind of staff that we have today, has really benefited the fund.

Trusted Insight: Washington State is invested in six continents, within 76 countries. What geographies are you optimistic about in 2018 and beyond?

Gary Bruebaker: We're more of a strategic investor than we are a tactical investor. Having said that, we do pay attention to market trends, and we'll do things on the margin. However, we don't make wholesale changes as a result of thinking that we can time the market, because we just don't believe we can. We're more favorable towards Europe than we have been in the past, and you would see that reflected in some of the investments that we're making now. If you look across, we manage 35 different funds and we manage things besides retirement funds. Out of the $128.8 billion we manage, about $98.5 billion of that is defined benefit assets.
 

"We have something called the 'Innovation Portfolio,' which represents up to five percent of the commingled trust fund, and is managed 100 percent exclusively by staff. The Innovation Portfolio is an area where we're looking to test investment opportunities around machine learning and artificial intelligence.​"

If you look at the defined benefit assets, it's 17 different plans that we manage collectively as one fund. We have about 60 percent of that in North America, probably 16 percent in Europe, which I think will go up as a result of how we feel about the world as a whole. We have 7 percent in Latin America, 14 percent in Asia Pacific and 1 percent in Central Asia, Africa, the Middle East, and in other things that would be global, which we can't classify geographically.

Trusted Insight: Some institutional investors say machine learning will provide a big boost to the investment process, while others think that it’s not so optimal in this industry. What are your thoughts on machine learning and its capabilities?

Gary Bruebaker: Machine learning is going to be “a” game changer, but I don't necessarily think it's going to be “the” game changer. We think the game changer is demographics, which is why it’s always the central theme of our planning process. We believe demographics will change things in a very remarkable way so we continue to pay a lot of attention to that.

We have something called the 'Innovation Portfolio,' which represents up to five percent of the commingled trust fund, and is managed 100 percent exclusively by staff. The Innovation Portfolio is an area where we're looking to test investment opportunities around machine learning and artificial intelligence.

Also, that's where we tested the tangible asset class using hard assets rather than derivatives. We tested it, the Board liked what we were doing, then it graduated to become its own asset class.

Trusted Insight: If the current low-return environment persists, how achievable is your assumed rate of return over the next few years?

Gary Bruebaker: That's really one of the major challenges. In fact, if you asked me what the future challenges are, that would be number one. It’s a combination of managing return expectations and meeting our current 7.7 percent assumed rate, which the legislature's working now to possibly move it down to 7.5, which is still a pretty challenging number. Our since inception return is 8.9 percent, so the math works so far, but we know that the next 20 years is probably not going to look like the last 20 years. It certainly is not going to look like what we've earned to date. We're not going to earn 8.9 percent over the next 30 years, in my opinion.

I do think our portfolio is positioned to do as well or better than most, even on a risk-adjusted basis. What makes Washington State Investment Board different is the strategy we employ here. We have 48 percent of our assets in illiquid investments, and we've been investors in real estate and private equity since 1980 and 1981, respectively. We have relationships that other funds couldn't buy today. If other funds haven't been in the business for 40 years like us, they're not going to be able to develop some of the relationships that we have.

We have a real estate program that's extremely unique. If you look at our program from the outside, you'd say "Well, Bruebaker, you're an LP, you invest with GPs, you look a lot like all the other funds that I look at." Then, you'll find out there's only one LP in a given investment, and it's us. We can fire the GP without cause and the GP works exclusively for us and has a significant amount of their liquid net worth tied up into the venture. Once you start drilling down, you find out our real estate program looks completely different, and I think that's why we generate such good returns in that space.

We've got a tangible asset class that makes up the rest of the private market. We have a unique structure, and I think it's going to help us in the future. But if we're not able to earn the 7.5 percent over the next 5 to 10 years, I believe the legislature may have to look at increasing the contributions. In Washington, 50 percent is paid by the member and 50 percent by the employer and taxpayers.

There is a risk sharing in that piece of it, but we're one of the top-10 funded states in the United States. I think our legislature has been very responsible in terms of keeping benefit improvements in check and making the contributions they need to make. All of our newer programs are at or almost fully funded. It's our two of the three closed programs that are underfunded, and they do have an amortization to close that gap.

Trusted Insight: Any final thoughts?

Gary Bruebaker: I've been here 17 years, and the assets are up 2.4 times in the time I've been here. It's been a great time in my career for doing this kind of work. When you feel like you can really make a difference in people's lives by securing their financial futures through managing these defined benefit plans, it makes a huge difference, and I am thankful for the opportunity.

You can view our full catalog of interviews with institutional investors here. Read part one of Gary 's interview here. 

Click here to view the complete list of Top 30 Public Pension Chief Investment Officers.