Transcript for Video:
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'dlike to go into how he did that during the pandemic just to learn what kind ofinvestments really made sense and how he's been protecting his portfolio. He’sin the top third percentile of his peers: the results for the three, five, ten,and twenty year performance measurements exceed the funds long term actuarialannual return assumption of 7%. And since 2017, the fund has returned 8.4% netof fees, outperforming the policy index by 90 basis points and ranking in thetop seven percentile of the public funds higher than $1 billion.
MarketsGroup will award Bob Jacksha with a Strategy Award during the 8thAnnual Southwest Institutional Forum in Santa Fe, New Mexico on October12.
Markets Group’s Christine Giordano: A 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: Thankyou, Christine, and good to be with you today. First of all, when we look atour strategy, we start with what the conditions are for the fund. There are acouple of things, probably not uncommon for funds, but maybe a little more sofor us than average. For one, we are not fully funded and we have a negativecash flow with more benefit payments than contributions, which is not uncommonfor a public pension plan that's mature like ours. When you put those factorstogether, the math works out such that hitting the highest highs doesn't helpyou as much as avoiding losses.
Our longer term strategy is to protect thefund, to lower volatility, or control that volatility and still try to make adecent 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 lookat our asset allocation, there are a lot of categories in there. And that hashelped us during the years when some of those things that went well wereopportunistic credit, which was somewhere between 15% and 20% of the portfolio.Global tactical asset allocation also did very well, and the private assetcategories 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 302022, like many funds are. During that time period, public markets did not dowell and they were pretty much all negative. The private assets and thealternatives helped us during the year and targeting a lower volatility wasalso helpful.
Giordano:In your strategy to protectthe 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 ofdiversifying the portfolio. You're invested in reinsurance, litigation,finance, drug and music royalties, and water rights. Can you go into detail onsome of the things that you're looking at that are especially promising for thefuture?
Jacksha: Sure. The reason we landed in some of thosethings was to capitalize on our smaller size. In terms of public pension fundswe're a little short of $16 billion, which is a lot of money but one of thesmaller state funds. Over time, what we've tried to do is find more inefficientcorners of the market. As a smaller fund, we make smaller allocations thanother funds might make, but it's still meaningful to our returns. This isgetting more difficult as there is more capital going into out-of-the-way,previously inefficient areas of the market. So knowing what's attractive goingforward is more difficult. But the allocations we've done so far can stillprovide benefits because of diversification. For instance, you mentionedreinsurance, litigation finance and some of the royalties. Those are notcorrelated to the public markets, so they're going to give you a differentreturn profile in different circumstances. Like the consensus that I hear quitea bit from other public funds, we do think that private or opportunistic creditcan offer some attractive opportunities in certain areas going forward.
Giordano: I knowyou 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 youexplain what kind of returns these investments create and why it makes sensefor you to do it?
Jacksha: Firstof all, just a general comment on ESG. I think we're fortunate that we don'thave a mandate, either from the board or the legislator to be pro or con onESG. That can blur your focus on what should be the main duty of what you'redoing, which is to deliver financial returns to the fund. So, we're able tofocus more on that and I'm glad we are.
In terms of mitigation banking, thereare two ways they can create a revenue stream. The first one is by sellingcredits. This comes about if a developer, whether they are state or private, doesa project like a highway, mine, or a building project in retail or housing. Indoing so they might have to cover over some wetlands, and so really they're nolonger wetlands. For instance, a highway has to go where it has to go and itmay have to go through a wetland. There are federal laws through theEnvironmental Protection Act that require they offset that by creating orrestoring the wetland.
Most of the people that build these projects don't havethat expertise, and even if they did, it would probably be a smaller projectthat wouldn't be very environmentally helpful. So, this manager will do alarger project which does help the environment, restore a wetland and will sellcredits, which is more efficient for the developer and gives us that revenuestream. They also do something called fee for service, where they'll be hiredby some governmental entity to help out with a project. For instance, they areworking on one in Florida on Lake Okeechobee to mitigate the damage fromagricultural runoff, which is really hurting the lake. So they'll get a fee forthat rather than selling credits. That's how mitigation banking createsrevenues for us.
On the water rights side, that typically involves buying apiece of land, usually agricultural, and repurposing those water rights,perhaps for a municipality or something, which then creates a long-term stablerevenue stream. If they aren't able to sell the water rights or something goeswrong, they own a piece of agricultural land which can be used for farming, andusually is until they get the water rights deal done. That's something we'velooked at for a long time because living in the southwest, we see that water isgoing to get more and more valuable. And to quote a local truism, "whiskey'sfor drinkin' and water's for fightin'" because of the value of waterrights. We think it's a good investment going forward as it continues to bemore critical.
Giordano: How doyou find those properties? Are they all in the United States or are they allover the world?
Jacksha: Thesetwo are in the United States. The managers would find the properties, so Ican't speak a whole lot to their process. But we rely on them and theirconnections and their expertise. In the case of mitigation banking, some of thepeople that have worked there have connections with the Army Corps ofEngineers, which may be doing similar projects or may have some projects thatneed to be done and they can work that up.
Giordano: Interesting. In that spirit, as far as lookingforward to what people are calling a new economy with a lot of new factors andthe rising rate environment, can you describe your recent asset allocationrevisions?
Jacksha: We havea 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-termbasis, but we did some tweaks. This was our REM asset allocation (as in LosingMy Religion) as we lost faith in certain allocations, so we eliminated riskparity and emerging market debt while reducing emerging market equity. On theother side, we increased private equity just a little bit along with realassets, opportunistic credit, and domestic equity, and those increases were inthe 2% to 3% range. As far as what we eliminated, we've been concerned withrisk parity for some time and the impact of what we thought the Fed was goingto eventually have to do in raising rates, which obviously they've done. We hadbeen reducing that primarily to provide diversification but didn't do a verygood job of it.
As the Fed raised rates, it hurt one leg of the strategy, whichis interest rates and it also hurt equities, which is the second leg of RiskParity. The third leg is essentially commodities like gold and oil and thingslike that. That didn't help as much as it was theoretically supposed to. In anycase, we lost our religion in risk parity, and as of today, we're completelyout of that strategy. Emerging Market (EM) debt never performed all that welland since it was only 2% of the portfolio, was just a distraction. With EMequity, 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, weexpect that there are some opportunities there, so we wanted to put a littlemore capital in there to have it available. We think domestic equity willprobably do better than EM going forward. And the private assets, as wementioned, they've done well for a long time historically, so we're putting alittle bit more in those as well.
Giordano: There are so many different types of creditthat are available, why be opportunistic in this environment?
Jacksha: We havetwo kinds of fixed income categories.One is core bonds, which is investment grade. And the other one we simply callopportunistic credit, which started back in 2008, when that is truly what itwas. But philosophically, we're looking for some of those idiosyncraticpotential returns and looking to take advantage of opportunities. Part of thereason for being there is we think we'll see more stress as interest rates wentup really fast, 500 basis points or so, that will create some opportunitieshere and there. It's hard to say exactly where that's going to be, but we'll belooking at managers who can take advantage of that and we're pretty close to ourtarget right now.
Giordano: Youmentioned starting that opportunistic credit fund in 2008. Are you expectingsimilar opportunities as there were back then?
Jacksha: I hopenot because that was a nearly catastrophic period in the markets and so we'renot expecting it to present that level of opportunity. You could make a lot ofmoney just buying investment grade bonds back then because it looked like theworld was coming to an end in terms of the credit markets. We don't think it'sgoing to get that bad but there will be some stress here and there, that will impactpricing and create opportunities for some of our managers.
Giordano: Any certain niches or areas that interest you?
Jacksha: We'redefinitely going to take a hard look at distressed areas, as we already havesome distress managers, including adding a new one we've already identified, andcapital that can be deployed there. There will probably be some opportunitiesin structured credit, whether that includes CLOs or asset backs and those typesof things. Those are just a couple that come to mind as we continue looking.
Giordano: When Italk to younger allocators, I've asked a few of them which CIOs they like tolearn from you and your name comes up because they find you interesting and easyto learn from. Now, you are fully staffed for the first time in quite a whileand your fund is nearly $16 billion. What's this like? How did you recruit forit considering the salary and talent challenges that are going on all acrossthe United States?
Jacksha: Someone gave their notice at the end of the summer, so we are at 15full time employees. It actually highlights one of our challenges you touchedon. That individual will be leaving to work for a local bank, not a largenational bank, but will still be doubling her salary. I can't compete with thatin terms of the compensation level and that's one of our constant challenges inthat our salaries are too low. In terms of recruiting people, we looknationally. In the latest group of hires, we brought on three people, two of whomwere local and it's always helpful if someone wants to stay in New Mexico when theywant to get into the investment industry. Both of those guys are relatively newin the industry, so it helps for people who have a reason to stay here becausethe investment industry can be tough to get in.
It's certainly an entrée forthem and provides me hope that it's an opportunity to learn things and grow. WhileI say our compensation is low compared to some banks, it's still a decentcompensation for the sector. So, part of the strategy that has to be applied toall 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 shopunless they don't care about compensation. So it's difficult and it's the firsttime in I don't know how many years that we did get up to full staffing. It's toughall over and we're always recruiting.
Giordano: Thelongevity on your team is decent, despite being back in the office full time bygovernor's decree. How do you make it worth it for your team members to stayand what's your management philosophy around it?
Jacksha: Most ofthe senior people on the team have been here a number of years and that isquite helpful. Part of it is that we want people to feel like they have a buyin for what they're doing, that this is their area and they make a lot of thedecisions. I don't pick managers anymore, as we have a process where we have a committeefor approval, but I am not on the road picking this one out or saying go withthat 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'sgoing to help overcome obstacles or do away with them and provide some supportand direction, but not to be an overbearing boss. People appreciate that, andif 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 fall2023. Stay tuned for Investors Forum out west. And Bob, I want to thank you somuch for your time today. It's always a pleasure to learn from you and see whatyou're up to.
Jacksha: You'requite welcome. I always enjoy chatting with you
Giordano: Thank you and take care.
