Bob
Jacksha, who is the Chief Investment Officer of the New Mexico Educational
Retirement Fund did something pretty unusual in 2022 at a time when CIOs were
struggling to stay in the black and avoid negative numbers for their
portfolios. He actually returned positive results that year and he became one
of the top 3% of funds for the year of all funds over $1 billion.
We'd
like to go into how he did that during the pandemic just to learn what kind of
investments really made sense and how he's been protecting his portfolio. He’s
in the top third percentile of his peers: the results for the three, five, ten,
and twenty year performance measurements exceed the funds long term actuarial
annual return assumption of 7%. And since 2017, the fund has returned 8.4% net
of fees, outperforming the policy index by 90 basis points and ranking in the
top seven percentile of the public funds higher than $1 billion.
Markets
Group will award Bob Jacksha with a Strategy Award during the 8th
Annual Southwest Institutional Forum in Santa Fe, New Mexico on October
12.
Markets
Group’s Christine Giordano: There
lot of kudos to your credit here. I was hoping we could start by you explaining
some of the key actions that you took to make that happen and what parts of the
portfolio performed well enough to keep you ahead?
Bob Jacksha: Thank you, Christine, and good to be with you today. First of all, when we look at our strategy, we start with what the conditions are for the fund. There are a couple of things, probably not uncommon for funds, but maybe a little more so for us than average. For one, we are not fully funded and we have a negative cash flow with more benefit payments than contributions, which is not uncommon for a public pension plan that's mature like ours. When you put those factors together, the math works out such that hitting the highest highs doesn't help you as much as avoiding losses.
Our longer term strategy is to protect the
fund, to lower volatility, or control that volatility and still try to make a
decent upside on it, which we have done, as what worked well during the year.
The way we're trying to do that is with very broad diversification, if you look
at our asset allocation, there are a lot of categories in there. And that has
helped us during the years when some of those things that went well were
opportunistic credit, which was somewhere between 15% and 20% of the portfolio.
Global tactical asset allocation also did very well, and the private asset
categories in real estate, private equity, and real assets also were positive.
And of course, when we're talking about 2022, we're on a fiscal year, June 30
2022, like many funds are. During that time period, public markets did not do
well and they were pretty much all negative. The private assets and the
alternatives helped us during the year and targeting a lower volatility was
also helpful.
Giordano:
In your strategy to protect
the portfolio from the downside that could have happened during the pandemic,
your private investments actually made the returns for you?
Jacksha: Right,
exactly.
Giordano: You have other less conventional ways of
diversifying the portfolio. You're invested in reinsurance, litigation,
finance, drug and music royalties, and water rights. Can you go into detail on
some of the things that you're looking at that are especially promising for the
future?
Jacksha: Sure. The reason we landed in some of those
things was to capitalize on our smaller size. In terms of public pension funds
we're a little short of $16 billion, which is a lot of money but one of the
smaller state funds. Over time, what we've tried to do is find more inefficient
corners of the market. As a smaller fund, we make smaller allocations than
other funds might make, but it's still meaningful to our returns. This is
getting more difficult as there is more capital going into out-of-the-way,
previously inefficient areas of the market. So knowing what's attractive going
forward is more difficult. But the allocations we've done so far can still
provide benefits because of diversification. For instance, you mentioned
reinsurance, litigation finance and some of the royalties. Those are not
correlated to the public markets, so they're going to give you a different
return profile in different circumstances. Like the consensus that I hear quite
a bit from other public funds, we do think that private or opportunistic credit
can offer some attractive opportunities in certain areas going forward.
Giordano: I know
you have strategy around mitigation banking and water rights for the future.
You found ways to make a profit off of what people might call ESG investments.
I know you also try to stay in the middle of the lane on ESG, but can you
explain what kind of returns these investments create and why it makes sense
for you to do it?
Jacksha: First of all, just a general comment on ESG. I think we're fortunate that we don't have a mandate, either from the board or the legislator to be pro or con on ESG. That can blur your focus on what should be the main duty of what you're doing, which is to deliver financial returns to the fund. So, we're able to focus more on that and I'm glad we are.
In terms of mitigation banking, there are two ways they can create a revenue stream. The first one is by selling credits. This comes about if a developer, whether they are state or private, does a project like a highway, mine, or a building project in retail or housing. In doing so they might have to cover over some wetlands, and so really they're no longer wetlands. For instance, a highway has to go where it has to go and it may have to go through a wetland. There are federal laws through the Environmental Protection Act that require they offset that by creating or restoring the wetland.
Most of the people that build these projects don't have that expertise, and even if they did, it would probably be a smaller project that wouldn't be very environmentally helpful. So, this manager will do a larger project which does help the environment, restore a wetland and will sell credits, which is more efficient for the developer and gives us that revenue stream. They also do something called fee for service, where they'll be hired by some governmental entity to help out with a project. For instance, they are working on one in Florida on Lake Okeechobee to mitigate the damage from agricultural runoff, which is really hurting the lake. So they'll get a fee for that rather than selling credits. That's how mitigation banking creates revenues for us.
On the water rights side, that typically involves buying a
piece of land, usually agricultural, and repurposing those water rights,
perhaps for a municipality or something, which then creates a long-term stable
revenue stream. If they aren't able to sell the water rights or something goes
wrong, they own a piece of agricultural land which can be used for farming, and
usually is until they get the water rights deal done. That's something we've
looked at for a long time because living in the southwest, we see that water is
going to get more and more valuable. And to quote a local truism, "whiskey's
for drinkin' and water's for fightin'" because of the value of water
rights. We think it's a good investment going forward as it continues to be
more critical.
Giordano: How do
you find those properties? Are they all in the United States or are they all
over the world?
Jacksha: These
two are in the United States. The managers would find the properties, so I
can't speak a whole lot to their process. But we rely on them and their
connections and their expertise. In the case of mitigation banking, some of the
people that have worked there have connections with the Army Corps of
Engineers, which may be doing similar projects or may have some projects that
need to be done and they can work that up.
Giordano: Interesting. In that spirit, as far as looking
forward to what people are calling a new economy with a lot of new factors and
the rising rate environment, can you describe your recent asset allocation
revisions?
Jacksha: We have a policy of looking at our asset allocation every three years. Going into this, we were already pretty comfortable with how we're situated on a long-term basis, but we did some tweaks. This was our REM asset allocation (as in Losing My Religion) as we lost faith in certain allocations, so we eliminated risk parity and emerging market debt while reducing emerging market equity. On the other side, we increased private equity just a little bit along with real assets, opportunistic credit, and domestic equity, and those increases were in the 2% to 3% range. As far as what we eliminated, we've been concerned with risk parity for some time and the impact of what we thought the Fed was going to eventually have to do in raising rates, which obviously they've done. We had been reducing that primarily to provide diversification but didn't do a very good job of it.
As the Fed raised rates, it hurt one leg of the strategy, which
is interest rates and it also hurt equities, which is the second leg of Risk
Parity. The third leg is essentially commodities like gold and oil and things
like that. That didn't help as much as it was theoretically supposed to. In any
case, we lost our religion in risk parity, and as of today, we're completely
out of that strategy. Emerging Market (EM) debt never performed all that well
and since it was only 2% of the portfolio, was just a distraction. With EM
equity, we had a higher than market weight for a number of years and, again,
that just didn't work out. We cut that about in half. So that was it, in a nutshell.
And in terms of the things we have increased, like opportunistic credit, we
expect that there are some opportunities there, so we wanted to put a little
more capital in there to have it available. We think domestic equity will
probably do better than EM going forward. And the private assets, as we
mentioned, they've done well for a long time historically, so we're putting a
little bit more in those as well.
Giordano: There are so many different types of credit
that are available, why be opportunistic in this environment?
Jacksha: We have
two kinds of fixed income categories.
One is core bonds, which is investment grade. And the other one we simply call
opportunistic credit, which started back in 2008, when that is truly what it
was. But philosophically, we're looking for some of those idiosyncratic
potential returns and looking to take advantage of opportunities. Part of the
reason for being there is we think we'll see more stress as interest rates went
up really fast, 500 basis points or so, that will create some opportunities
here and there. It's hard to say exactly where that's going to be, but we'll be
looking at managers who can take advantage of that and we're pretty close to our
target right now.
Giordano: You
mentioned starting that opportunistic credit fund in 2008. Are you expecting
similar opportunities as there were back then?
Jacksha: I hope
not because that was a nearly catastrophic period in the markets and so we're
not expecting it to present that level of opportunity. You could make a lot of
money just buying investment grade bonds back then because it looked like the
world was coming to an end in terms of the credit markets. We don't think it's
going to get that bad but there will be some stress here and there, that will impact
pricing and create opportunities for some of our managers.
Giordano: Any certain niches or areas that interest you?
Jacksha: We're
definitely going to take a hard look at distressed areas, as we already have
some distress managers, including adding a new one we've already identified, and
capital that can be deployed there. There will probably be some opportunities
in structured credit, whether that includes CLOs or asset backs and those types
of things. Those are just a couple that come to mind as we continue looking.
Giordano: When I
talk to younger allocators, I've asked a few of them which CIOs they like to
learn from you and your name comes up because they find you interesting and easy
to learn from. Now, you are fully staffed for the first time in quite a while
and your fund is nearly $16 billion. What's this like? How did you recruit for
it considering the salary and talent challenges that are going on all across
the United States?
Jacksha: Someone gave their notice at the end of the summer, so we are at 15 full time employees. It actually highlights one of our challenges you touched on. That individual will be leaving to work for a local bank, not a large national bank, but will still be doubling her salary. I can't compete with that in terms of the compensation level and that's one of our constant challenges in that our salaries are too low. In terms of recruiting people, we look nationally. In the latest group of hires, we brought on three people, two of whom were local and it's always helpful if someone wants to stay in New Mexico when they want to get into the investment industry. Both of those guys are relatively new in the industry, so it helps for people who have a reason to stay here because the investment industry can be tough to get in.
It's certainly an entrée for
them and provides me hope that it's an opportunity to learn things and grow. While
I say our compensation is low compared to some banks, it's still a decent
compensation for the sector. So, part of the strategy that has to be applied to
all public funds is to hire people who are relatively new to the industry.
You're not going to go out and hire 20-year veterans from a private equity shop
unless they don't care about compensation. So it's difficult and it's the first
time in I don't know how many years that we did get up to full staffing. It's tough
all over and we're always recruiting.
Giordano: The
longevity on your team is decent, despite being back in the office full time by
governor's decree. How do you make it worth it for your team members to stay
and what's your management philosophy around it?
Jacksha: Most of
the senior people on the team have been here a number of years and that is
quite helpful. Part of it is that we want people to feel like they have a buy
in for what they're doing, that this is their area and they make a lot of the
decisions. I don't pick managers anymore, as we have a process where we have a committee
for approval, but I am not on the road picking this one out or saying go with
that one. I do rely on my staff to have more expertise in their particular area.
We want them to have a good deal of freedom to run their part of the portfolio,
to make decisions, and come to me with ideas. I prefer to be someone who's
going to help overcome obstacles or do away with them and provide some support
and direction, but not to be an overbearing boss. People appreciate that, and
if you treat them like adults they will act like adults and that is helpful.
Giordano: Readers, we will be honored to be giving Bob Jacksha a strategy award this coming fall
2023. Stay tuned for Investors Forum out west. And Bob, I want to thank you so
much for your time today. It's always a pleasure to learn from you and see what
you're up to.
Jacksha: You're
quite welcome. I always enjoy chatting with you
Giordano: Thank you and take care.
