In Bob Maynard's mind, things within the current economy are repeating from years ago. This interview will delve into key strategies in turning around two state funds, what was important to get right, why the grass isn't always greener, and what he's watching now.
Transcript for Video Interview below
Christine Giordano – Markets Group
I’m here with Bob Maynard, who recently retired from his position as chief investment officer of Idaho Public Employees Retirement System, dramatically elevated the funded level of the state plan and guided the allocations while fulfilling his mandate to become a reasonably diversified intelligently invested institutional fund. Over the course of his 30-year tenure, he made it happen.
Prior to Idaho, Maynard, also an attorney, entered public service and Alaska, where he served the Supreme Court before joining the Attorney General's office and becoming the assistant attorney general supervising oil and gas among other duties. Now, during his 18 years in Alaska, he helped set up the Alaska Permanent Fund, becoming its counsel and deputy executive director during a time when Alaska was in the midst of the oil rush in the 1970s. That's what transformed the state's economy.
This celebratory interview is actually part of the Hall of Fame induction of Bob Maynard who will be inducted to the CIO Hall of Fame on December 6, in Napa, California, by Markets Group. There we invite CIOs from all across the country to come and celebrate Bob and his career. Because the CIO Hall of Fame recognizes the chief investment officer’s influence on the financial industry, his career accomplishments, and overall contributions and collaborations within the broader allocator community. The honorees are nominated by other CIOs. Over the course of this interview, we'll cover how Bob Maynard helped to shape the Alaska Permanent Fund, as well as the Idaho public employees fund, and lessons learned on fundamentals that can be applied to our current economy. I'm Christine Giordano, from Markets Group. Welcome, Bob.
Bob Maynard – Idaho Public Employees Retirement System
Thanks, Christine. It's a pleasure to be here.
Giordano
Let's start from the top. I find it fascinating that earlier in your career, you were the Assistant Attorney General of Alaska, back when oil was just beginning to transform the state. What was crucial for you to put into place back then?
Maynard
Well, back then, Alaska had been basically, before the oil pipeline opened up, basically a third world country, there was no infrastructure, you couldn't call between villages if you got an appendix eruption, and you were in a native village, unless you were ... and the mail plane was there once a week, you were going to go. So you had a number of things that had to be done for a third world country, and all of a sudden the pipeline opened.
And it was like three bars came across and a slot machine, and the money kind of rushed down. And so, as a result, a lot and Alaska had only been a state when I got there for about 17 or 18 years. I got there in ‘75, so like 18 or 19 on the year on the map is important. So, in any event, there were a lot of balls up in the air, a lot of things that had to be done and there weren't that many people there to do them.
So as a result, a number of us who arrived in the state in the mid-‘70s were handed a lot of issues that were very, that were complicated, that were first time issues for the state of the offices that had been set up. And so, a lot of what was crucial was being able to concentrate on what were the most important things, and to make them down to a size that could be easily addressed and easily understood. And so, a lot of litigation against the oil companies on novel issues had to deal with basic concepts that hadn't been around for a number of years.
I remember when we were fighting over the oil, the transmountain pipeline rates case, a lot of the concepts of was how do you set an oil pipeline rate, which hadn't been done since the ‘30s. And as a result, we had a number of the major capital market theorists, as witnesses trying to figure out how do you set a pipeline rate. So. a lot of it was dealing with novel issues, trying to understand a model a lot of novel issues quickly and going up against some of the best people in the world, when you were dealing with those issues. And it was a good training for getting into the investment area later on.
I can imagine. In regarding some of the top issues of the time. How did you protect the state while negotiating this business?
Well, there was an attitude. And this had to do a lot with the governor at the time, Jay Hammond, and a firm belief by a number of the politicians at the time who were tremendous. A lot of native people were involved in the politics. And the idea was, in the past, they took our goal, they took our furs, we were left basically with that, by gosh, that's not going to happen this time.
We're going to set aside a lot of the money that's coming in, like I said before, when the oil pipeline came on, it was like three bars coming across in the slot machine. And all this money came rushing in to a small state with no resources. And so, they decided to save a lot of the money that was coming in there.
Take care of basic needs but save a lot of money. So, we put in place a constitutional amendment. We, I think there's maybe one part of that amendment that I had some influence on like it was like putting in an Oxford comma. But other than that, I mean, the state made the choice, we were going to save a quarter, at least a quarter of the oil royalty money for future generations. And that and in order to do that, they came up with the concept that we're going to share half of the earnings with a population that make a political constituency to be able to get some political support for building of this fund. And that became so successful that not only did we save a quarter of the oil royalties, we ended up saving a lot of the severance tax, the taxes on the pipeline, about a third of the oil revenue and in this Alaska Permanent fund.
I think we were the third or fourth sovereign wealth fund in the world that after - there was one in Alberta that had gone under. There was one in Kuwait that we did some investments in real estate with. I don't know if Singapore had any of their concepts up at the time. But there's the concept of the southern side of Melbourne was at the time, and we were one of the few. And they made the choice that whatever we do with this fund, we're not going to invest it inside the state, we're not going to double down on EMC, we're not going to use it as an economic meter because the idea was, if you put the money aside, and you invest it out of state, after about seven years, all the money coming in is– it becomes a money pump for bringing in money from outside the state back in that we're giving out half of it, the dividends to Alaskans. So, it was a great concept made by the politicians. And it turned out to be incredibly successful. And in fact, so successful, a number of the other oil-based states used that model, set up their own sovereign wealth funds, we had a lot of communication with people who were starting out trying to do that. So it was very interesting.
Giordano
Which states? Do you remember?
Maynard
There were there were discussions with Saudi Arabia, there were discussions with … remember, we are doing deals with Kuwait. So, we have some contacts with some of the … I talked about states, I’m talking about nations. There are other states that we're looking at in Mexico, or whatever, but we're talking about a number of the other nations that were starting out. So then when Norway and so there area number of conversations with people that we’re having one time, influxes of natural resource that would eventually deplete and just the concept, it works. The interesting thing it worked well in Alaska cause you have a relatively small population that you can gain political support, it doesn't work as well, when you have a huge population where the benefits of saving rather than currently spending are more diverse, or not diverse.
Giordano
Makes sense. So you were allowed to diversify that portfolio by investing out of state. And you reap the benefits as well.
That was amazing. That was a major issue early on in the Permanent fund. It started in the early ‘70s. I was an assistant for oil and gas, so I was more outside the oil companies helping to bring the money in and other things as well. I really became attached to the Perma fund around in terms directly. The person who set it up was a guy named Dave Rose was a major influence in government. I became their attorney around ’73, ‘74. And what had happened was initially Permanent Fund was seen to be super safe and put it in treasuries, basically a bond-oriented fund. It became clear in the early ‘70s, that as inflation became a major issue, that was a more … I'm sorry, I'm sorry, my decade’s off, I came in ’74,’75. Permanent fund was set up around ’78, ‘79. and I became the other attorney around that period of time
a decade or so that's what happened to you're talking about the impact of two years; it became clear that inflation was going to be a problem.
Giordano
That's just kind of start that whole sequence over. So, we can edit that part out. And then you can apologize about that. No, no, no, it's it's all good stuff. I just yeah, when inflation hit in the face, okay. So. So you want to just kind of start there.
Maynard
Okay, I came up to Alaska around 1975, I can serve six. And I went to the AG’s office in 1976 ‘77, just about the time the Alaska Permanent Fund really opened up, and this money came gushing in to Alaska. And so, a lot of the issues was, so they set up the Permanent Fund. And I had some minor involvement in the drafting of the amendment. But I really became involved with the permanent fund in the late ‘70s, early ‘80s, as they became realized that the initial investment in the Alaska Permanent Fund was to be as conservative and safe as possible, which meant initially thought, but then it became clear that inflation was problem. And in order to keep up with inflation, and to be able to continue to give a real benefit to the state of Alaska, they would have to go into equities and diversify out of a strictly bond portfolio. And that was about the time I became involved as the attorney for the permanent fund, still in the AG’s office and got into real estate and the international equities and equities just in the first place. Because that there, institutional investing in the late ‘70s, early ‘80s, there was a lot of skepticism of putting institutional funds into equities at all. It was seen as being risky, it was seen as being, in fact, a lot of state constitutions prevented public funds from being invested in equities, because of blow ups in the late 1800s, early1900s. So, we gradually went in to equities, real estate, international equities. Was the focus in the mid to late ‘80s. there.
Giordano
Yeah, I almost feel sorry to be tangential here. But I just kind of see a similarity here with the current economy with people talking about an impending recession, and you know, the rates you can get, you know, 5%. Isn't that the safe way to play it? And it's, it's almost an echo, or is it? Is there something different about this, this economy.
Maynard
Everything echoes around every eight to 10 years, or 12 years. There is that issue as to, my gosh, interest rates were at 14%. They're now down to eight. It's time to get out of bonds or back into bonds. It's time to go equities, equities or does it have to be a disaster for the next 10 years. In fact, that was the view in the late ‘80s. The whole indexing thing is older, get out of it. So, these sorts of attitudes, the markets viewpoints as to what is the new theme is usually an echo of an old theme. It's more than eight to 10 years old, that negates or the last 40 or 50 years, at least to my diminished memory.
Giordano
So, should I ask the question, are you still bullish on equities in this economy?
Maynard
Yeah, definitely, well, it depends again, on your you've got, you've got to have an idea of what your liabilities are, and what the timeframe provides. I mean, the standard rule of thumb has always been if you need the money, before three years, anything except cash or short duration bonds, is a foolish investment.
If you can last three to five to 10 years, you get increasingly into equities. And if your timeframe is over 15 years before you need your money, like college tuition, or whatever it may be, then a majority or almost all equity portfolio is correct. Now, if you're looking at the current environment, now, there's always big issues that come up.
And one of the big things that I've got kept coming to me this last year, still is there, is the two rules that you always run, you always have to follow is don't fight the Fed, people were still not sure whether they're fighting the Fed. And on the banks. The other one was anybody says we're only paid for losses - to turnaround and run the other way.
So, you still got those issues standing outside. So, if I was worried about five years, but 100% equities now – no. And now I'm74, am I gonna live 30 years? Probably not. So, my asset allocation is a bit more towards bonds and fixed incomes than normally, but that doesn't mean I'm not going to go back into equities once I feel more comfortable. But you got to remember, investing is always like washing your car, as soon as you wash it, it's going to rain. So, you got to make sure that you know, you can take the regrets.
Giordano
And just, what were some of the obstacles that you overcame when you established the Alaska Permanent Fund?
Maynard
The obstacles were: One - getting the constituency behind the diversification effort into equities, into real estate, and getting the legislature behind those sorts of activities. Knowing that you are going to run into rough stops.
For example, being able to handle and have a constituency behind you, when 1987 occurred, when October of ’87 occurred, being able to - everybody reports to somebody, and you've got to be able to explain what you're trying to do in a crisis in five to seven minutes. Even if you have a good reputation. All that means is instead of going out and hanging you immediately, they’ll give you a chance to explain as they bring out the tar and feathers.
And so, you've got to be able to explain what you're doing, why you're doing it in a five to 10 minute period of time, and why it's important not to make a radical change to the program. And so, as a result of pacing into a more diversified portfolio in a manner that allows the constituency, the legislature, the governor, etc., to be behind what we were doing. And I have to admit that Dave Rose was a master of that. And he was the one that is the true hero, and I was along for a lot of the ride. And I was down below maybe shoveling coal.
Giordano
And then you went to the Idaho fund. So, word on the street is you've got quite a lot of credit for cleaning up that Idaho fund. They were below 60%funded in the bottom of the institutional ratings. They weren't quite as diversified as was ideal. Let me hear from you. What was it like?
Maynard
It was seen as a disaster area by most of the people, institutional investors. And it was seen that way by the press and by the politicians.
Well, you don't want to follow this so hard. You want to follow who or whatever it was that followed it so hard because the bones were good. They had good legislation, they just changed. They had a new board that was dedicated to doing the right things. They knew to control their liabilities. Like I said, we were, for example, the board put in a policy saying, look legislature, you can do whatever you want with the benefits but you've got to pay for them. You've got to make sure you're getting the rates up high enough to pay for whatever benefits you're at. And their basic viewpoint was we don't have to hit home runs with the investment portfolio, we just want to have, in fact, that's what the big chair said to me when I came. He said we just want to have good solid median institutional returns. We want to be in the pack because it's a fast pack. And I said, hey, I can do that. I mean, don't do anything fancy and be able to explain to people and so the bones were good, the direction was good. And so, as a result, what happened with this fund was that before I got there in the ‘80s,they had been all with for local bank trust departments who had basically done active management. And they had basically followed trends.
So as a result, when equities crashed in the ‘70s, they went fully into bonds and never got back into equities, or the pickup in the late ‘80s.They basically the way they had the bank trust departments done collectively, was that they had written trends at the wrong time, and changed right when things were working. So as a result, when I got there, if they had been in any asset class, including cash consistently, there would have been $2 or $3 billion better and there were a $2 billion fund. They had gone away from the bank trust departments and on the Frank Russell trust that bundled sort of outside CIO. Back then, there were a lot of sorts of insight fees. There were rumors of undue consideration being given for that and that had blown up in the major headlines. Then they went to an inside CIO model that was standard, still is generally standard.
But the first three that they hired left within a year, I was the fourth CIO in a four-year period. So, with that background, what happens when that sort of turnover happens is everybody adds their own thing and nothing gets taken away. So, the portfolio was a bunch of bets that basically, you looked outside, there was a structure but was like a sand castle at the beaches, and you drop sand, and it looks like a castle, you look up close and go, Man, this doesn't make sense.
So, whenI got there, given that history, given the returns, given their unfundedstatus, I basically took the portfolio and said, Okay, we're going to 70/30equities. And let's look at all the best you have. Here is a small cap techback, do you want it? Nope, we're throwing it out. Here is a Sri Lankan bond,do you want it? No, throw it out. Here's an emerging market best. Do you wantthat? Okay, we'll do that.
And so,we went through the entire portfolio in the first year or two and went throughthe bets and narrowed that down to seven or eight, and then simplify theportfolio to an understandable basis, primarily a heavily indexed half index.And then the rest of the ‘90s was adding a little bit of real estate, addingreal estate is one thing that we were blanketly, getting out of those, and thenrecasting it as REITs and a separate account. And then a little bit of privateequity, we had a board split as to whether or not one armchair was reallywanting to do private equity, a lot of them did, it was working through that.And in setting up a private equity program. It's that sort of spending, wespent the 90s putting the portfolio together, bringing in an outside review,setting it up, got the plane up, leveled off, and the next 20 years wasbasically keeping the plane going on that set up after the late ‘90s..
Giordano
And how much did your long experience help you there with all the persuasion and the diplomacy and then tossing things out that didn't work and covering me the backs of those who needed fiduciary protections?
Maynard
Quite a lot. And not necessarily for the reason people, you may have noticed that there are a lot of people in the investment world that started out being attorneys, and both in the private side, whatever. What law does is it gives you a way of being making sure that every step is covered, and being able to attend. So, you don't and making sure you really understand something and asking questions to make sure that you're not miss communicating and hearing what you want to hear or the person you're talking to, is not hearing what they think you hear. I mean, it's kind of like saying, you talk to someone, and they say, I hear you. What they're not saying is I agree.
So, making sure that you're not getting those types of misimpressions. It actually helps some international communication as well, that sort of background helps a lot. There's other great ways to kind of do investment, but the law is one that helps a lot. As I said before, when I did the trans Alaska pipeline rate case, there was a lot of capital market theory in terms of how do you set rates, because the ICC then accept rates since the 1930s. And all of this new body of academic work with regard to what a capital market return should be, was a major part of that case. And so as a result, I remember the concepts.
Giordano
Okay, I can only imagine your board was used to seeing instant results on returns to stocks, bonds, okay. But private equity, sometimes it's a bit of a lag therebefore you can see what kind of returns you're getting.
So, when you get into private equity, the benefits are 10 to15 years off. Plus, it wasn't all that clear, in the mid-90s, when we were getting into it, that the dynamics that had led to the great venture capital returns would be there for the buyouts, the KKR type of returns, remember barbarians at the gate and all of that.
It was more a matter back then of our chair, and not to be able to find that person board, our chair was really into literally like private equity, he had done that as a part of this business. other board members weren't quite there. So, it was more a matter of getting people involved and setting up the infrastructure. Another reason to get into private equity back then, too, was when you're the biggest fund in the state, and you’re a public fund. the economy of the state at that time may not have been your best buddy, you get a lot of individual proposals brought to the board to invest in private stuff, local industry. We have one of the national labs here - local ideas, and you've got to be able to take them seriously. You got to be able to just not blow them up. You've got them in a small state, small town, you got to do that.
In order to do that, you have to set up a structure with the consultants. And so, what we set up was a structure with maybe we weren't Hamilton experts, who are big private equity consultants. We went through a number of – there were only a few people at the time that did it. And we basically brought them on and said: Look, we want to do private equity, but it's got to be part of the program. And you have to also take into account, and we will send you a number of private people. You can say no, but you better give them a reason. You know, it's got to be silent. And if you do say yes. You've got to be able to say put it on your record. It's got to be a good institutional quality. So as a result, they helped set up our private program where basically if someone came in with an idea, we'd send them to Hamilton Lane, Hamilton lane will give them a full review. And then if they said no, tell them exactly what they were missing.
So if they came back and build what they were missing, we would invest. We would buy more than 50% of the deal. And the deal was, we will not require one penny the investment in Idaho. What we require is that anybody in Idaho comes to you, you do the same thing that Hamilton Lane did to you, you take the proposal with a smile on their face. And if you reject it, tell them why. Be honest with them. And so that that, that was another reason to get into private equity. Getting extra return from my standpoint was not that important. All I wanted was it to get at least public equity returns. Because there was another advantage, by the way, too, is that delayed recognition of gains or losses had a smoothing effect. Now it may be a funny happiness. But the fact of the matter is, that's what the actuaries looked at. That's what the accountants looked at. That's what the legislative looked at. And as a result, that's what drove our rates. And so, if it smooths out the rates, it had a direct impact on Brett on my teacher’s table. So, the point of happiness with delayed response was important to us as well.
Giordano
Yeah. Okay, I probably shouldn't talk about private credit and phony happiness the same way that …
Maynard
We were, I'm not a big fan of private credit. The fact of the matter is we use fixed income and bonds as the Armageddon hedge. It had to be there when equities went down the drain. And the problem is when equities go down the drain, the types of things the private credit, or yield credit, aren't involved in also go down, I don't get the area where I know I can reach in grab the money and replenish equities. So, the private credit side is not something that we were high on.
Giordano
How did you use it?
Maynard
Fixed income and we use bonds, primarily high grade and treasury bonds. We never allowed our managers to go into securities that couldn't be priced daily, that didn't have a liquidity to be priced daily. That was a that was our basic risk control. Liquidity isn't just getting cash. Liquidity also means there's a thousand to a million eyes also looking at investment and giving you an independent view of what the risk is, what the price is. So as a result, it was that discipline. We have no problems during 2017 to 2019. We could be balanced. We could follow track daily. We didn't have to rely on model pricing and it caused our fixed income managers to be a little bit testy sometimes, but no, we had to be able to be profitable.
Giordano
And regarding your real estate investments. Did you learn any hard lessons during the great financial crisis? And when and if you rebalanced? What did you do differently?
Maynard
Well, there's two parts to real estate in the 2007 and 2009. The REITs went down and could be rebalanced. Into that the more difficult issue was the private real estate where you had more than 20% debt. And so, as a result, it was the and the problem is when you go into debt, you have the cramdown provisions of bankruptcy. So, it was working through those issues. And I think the lessons after that, from our standpoint, was that more on the long-term nature of leases. We had too many leases that were too short term that immediately went down. And if people moved out, we were in some properties that the theory going in was well that turnover was actually good. Because if the rates were going up, you capture them immediately. And we were supposedly in a place where if the people moved out, people that were priced out of that market would comeback in. I didn't quite work that out. But it didn't work quite often. So, we had some things that required a rolling up your sleeves and working out. But again, it was wholly owned by us. So we didn't have to go into a room with other institutional investors like myself and try to work out because while all CIOs and public funds sometimes face similar issues, we all face completely different issues as well giving our particular political environment, our history and tradition, our ability to a garner REITS or not. So being able to work ourselves out of problems, a real prospect then.
Giordano
Any tips for this current environment from that one?
Maynard
Right now, if you get a brilliant idea, do what I tend to do which is go into a dark room lay down and wait for the feeling to pass. It's one of those times. Until you can see the Fed clearly turn a corner. You know the saying - anytime the Fed hits the brake, someone flies through the windshield. We've had a couple of people flying through already ready from cryptocurrency or regional banks. I'm not sure that a higher interest rate environment has fully flushed through the system. As you noted, there's a lot of people who have never been in a higher interest rate of rising interest rate environment not to mention a higher interest rate environment. And so, it's unclear to me whether or not the tide has fully gone out on the issues that migrates problems. There is still a lot of liquidity. We just saw the headlines recently that people aren't feeling crisis of I'm running out of money here I got a pullback and huge amounts are both here and worldwide. So, keep sticking to your knitting, sticking to your asset allocation rebalancing as appropriate, but not doing anything prior to being a leading-edge investor. So right now, leaping on artificial intelligence leaping on new hedge funds strategies, you can lose more money by being early and wrong than you can being liked. And I'd rather be late.
Giordano
Sounds like wise advice.
Maynard
Well, actually, you can, you can lose. I said that wrong. You can even lose more being right but early. You can anyway. In other words, there was a lot everybody always said, Michael Lewis book on hedge funds, on Paulson and everybody else making a huge amount of money. I'm betting on though on the credit derivatives. There were a lot of people have that bet a year earlier and couldn’t hold it and when they happen to be right, and luckily, relatively on time. But the people that were right on that whole thing and early last little
Giordano
Okay. So, when you retired in September 2022, your board chair, Jeff Cilek, said, for 30years, Bob has played an instrumental role in transforming PERSI into the strong and stable funding currently is, and Bob's insight into the global economy and steady hand will be missed. So, as a CIO, you've got everything coming at you at once you've got to allocate, you've got to delegate. How did you stay up on the global environment?
Maynard
Well, one was that when I've said before, we'd done a lot of things in the 1990s. To set up, set the portfolio up like a plane on a level course. And once you set it up on a level course, because again, again, we were on the range of philosophies on investment, you have people that are really active, and want do a lot of things.
But we're more in line with the Warren Buffett of shareholder of 2013 ladder David Swensen, an unconventional success, not as pioneering portfolio management, but his unconventional cesspool of Burton Malkiel, which is basically we tried to be simple and tried to be transparent, we tried to focus and we tried to be patient, which means once you set things up, all you really got to do is rebalance and make sure nothing on the dials are doing differently.
Once you set that up, then your major focus is looking at the things you're not doing. We didn't, we didn't do more things than we did. Instead of having 15 to 20type bets, we only had seven or eight, we didn't do high yield debt. We didn't do frontier markets, we didn't do portable alpha, we didn't do leverage strategies, we didn't even do securities lending, because that's a little leveraging going on internally. So basically, a lot of you had a lot more time to sit back and look at what other people were doing. Because one of the advantages, at least in the public fund industry, is all the CIOs are brilliant. And they're all doing lots of stuff. If you look across the environment, there's a lot of stuff people were doing. And one thing that we managed to public once we talk, so you can call up people that are doing things and saying what worked, what didn't? What are you having problems, who's doing a good job at this and find out are the reasons that you're not doing that strategy still appropriate for my buck, and for our fund for most of the 2000s.
And also, in the 2000s. In particular, you started to see a number of international investment funds being set up from Saudi Arabia, Kuwait was already there, Europe had a huge amount. You have Korea, Japan, and we were all talking, we were all going to the same number of organizations where if we knew each other, the whole damn world, the whole world is like high school. In terms of the investment world, I mean, there, there may be people that are talking among each other like this, maybe 1,000 to 2,000 others worldwide at any one time. That's high school, okay, if you don't know someone, you know, someone who knows someone, and you can talk to him. Canada became Canada in the 2000s.
So, you saw the unstarted got them, they just went down a different path. And they got more, they had more resources. So as a result, staying apprised of and another major difference between the 80s and now and the 2000s. Now, it used to be information was at a premium. Now the problem isn't lack of information. It's too much. If you read the Wall Street Journal, you read the trade rags, you read Financial Times, you read Barron's, you read, you listened to Bloomberg Surveillance, everybody, you know, do those. I don't think there's any secret type of investing, you're not going to pick up if you keep on track of what's publicly available.
There's not much out there right now, if you want a good AI, leading edge investment approach. Yeah, that's going to be secret, if you want to try to do, like in five, 10, 20 years, but you want to do that, yeah, there's secret access, but getting into those usually loses more money for the average entrant. And it makes you just saw a number of articles about a number of these AI funds that are more behind benchmarks, are behind active managers. I don't know if that's gonna stay but most of these leading edge things, the average one fails. One of the most amazing, Renaissance. I don't know if you've ever followed Renaissance Technologies, which I think is what was the is the most successful hedge fund leading edge quant thing in the world. They found out that they couldn't - they felt that the sweet spot for taking the cream off the top was only about $10billion. Do you know how large the capital markets are worldwide - $100trillion dollars. If 10 billion is where the trade is, what's the success rate of trying to get into that from the outside, particularly for a public fund, where by the time the information gets to us, you get people together to make a move, that you could be someone who gets that cream? It's a, it's a tricky one, the path itself is moving so fast.
Giordano
Which, of course, makes me curious now that you're retired. What are you watching in your own portfolio? Like, what are the trends that you or do you have thesis that you're investing in?
Maynard
Now I got a fair amount of money. When I came a year ago, I put a third of it into a standard market portfolio, the other interest rolling CDs from my three- to one-year period. And seeing and I think I'm going to do that for a while I've like I said before, two things that I want to see is, I want to see the I want to stop biting the bed, I want to see that to be stopped. And I just got, I still have that view that I want to see interest rates stay at five, around five, maybe go to six for about a one-year period to see if there's any more shadow banking or other glitches in the system can come forward. I've got enough money that don't have to worry about hitting a home run and if I hit a home run, what am I going to spend it on?
Giordano
A trip to Napa.
Maynard
That, exactly. Doing nothing takes more than 24 hours a day. I mean, I have so much backed up on Kindle and binge watching, on just doing stuff that I haven't done for years that I’m perfectly happy.
Giordano
You took care of your employees and PERSI in more than one way. You guided the procedure choice 401(k) plan; you fully funded the unfunded sick leave program for city and school employees. What was important to get right there?
Maynard
Getting good solid diversified institutional returns for almost all major public fund programs is sufficient. You don't have to get more as long as you don't have to react to one-to-three-year trends in the markets. Keeping on that straight forward approach, it is more than sufficient, as long as the liabilities you're trying to fund are no more than around 3% to 5% above inflation. If you have returned needs above that, you've got problems, you either have to go into markets where the odds are against you. Or you can better really try to get hold of your liabilities and make people suffer the pain that goes on. So as a result, the main thing I'm getting the sick leave funded, on getting a 401(k) plan set up, and on the 401(k) plan is don't make it too complicated. Many of them have 20or 30 or 40 different options. No, you have at least five to six and have a standard font they can kind of see.
Make sure you get the relative straightforward approach down. Don't outrun your supply lines, make sure you have the resources to do that program, make sure you can explain it in relatively plain English to a relatively intelligent, non-biased person, and about five to 10 minutes. If you can't get that, then think about doing something. But investing isn't doing all the complicated front running, not front running, leading edge sort of new things where you're getting significantly above market returns. I mean, the problem with investing, particularly oftentimes when you read about it is you always like listening to people that come back to Vegas who always hit it big in blackjack or hit the jackpot. You know, not everybody, you're one of the people it's going to Vegas, are you gonna count on that? You know, those casinos are big and fancy for a reason. At eight because everybody's coming back hitting jackpot. It's the same thing with the investment. There are as many of the failures aren't nearly as publicized as successes.
Giordano
Speaking of successes, how large was the AUM on PERSI when you joined?
Maynard
It was about $2 billion, $2.1 billion. And it was like 22 when I left. And that’s the power of market returns over time. I mean, it wasn't as if and we have few successes. We had a few things that didn't go right. But for the most part, that's a standard 70/30 equity, fixed income portfolio. Turned out, one of the things that was a bit that was taken as a given was an international diversification was a home run over a 30 year period. Well, it turned out that – No - international equities have massively underperformed the Russell 3000. So not everything worked out according to the standard wisdom, but in general, overall, the standard wisdom was right. And I think we'll continue to be right for the next 30 years.
Giordano.
You have a state side bias, right?
Maynard
Yes, for three reasons. One is if you look into the defined benefit program, our liabilities are tied to U.S. because if U.S. inflation is high, salaries will be higher, and we pay out a percentage of the final salaries. So as a result, if we have to have investments that are - will be better if US inflation is higher and can be worse if you let inflation get worse. Again, we're heavily dominated by real returns. It turns out that over 10-to-20-year periods, one of the best hedges against U.S. inflation are U.S. equities, someone's making those profits, someone's driving those and it's mostly U.S. corporations. This was before TIPs came out and TIPs have a real return component and an inflation component people forget about the real return component that was really hurt people but it doesn't have any inflation. So as a result, U.S. equities are a preferred place to be for U.S. pension plans. It's also the case that a lot of our liabilities are in U.S. dollars. So, U.S. dollars are there. And I tend to think that there may be something about the U.S. and Anglo-Saxon financial system - Canada, U.S., U.K. Australia. That is not a fluke that they have outperformed international equities. Besides basic math, we haven't lost a lot of the reasons there you see in Warren Buffett Union, but I do remember the little Buffett portfolio, and it's 2013letters. His portfolio for his widow would be the cash he has left over. There's going to be 90% the S&P 500, and 10% Intermediate U.S. bonds. He had a 100% U.S. bias and he has reasons laid out that I agree with 80%.
Giordano
A healthy 80%...
Maynard
He is among one of the best in the world in asset management. There are some home run investments that are not available. Just hold on to the philosophy sometimes he articulates. Berkshire Hathaway doesn't quite look to the stocks that are in the books where Hathaway portfolio doesn't necessarily do the returns Berkshire Hathaway.
Giordano
The current CIO of Percy is Richelle Sugiyama. When she was your deputy, what were her strengths that brought that she brought to the position that kind of let you know that she'd be the next leader.
Her biggest strength is she doesn't have a weakness. She can get the detail, she can get the bigger picture, she's a heck of a lot better interacting with people and the politics. And if you could throw her into any situation, and she would have an instinct to know what to do. One of the things that both Michelle and I did was do a lot of outside nonprofit work, electrician, electronic engineers, local foundations, university foundations, outside organizations like Pacific Tension Institute,
I mean, a number of those, they know that the state's 401(k) plan and board of education. A lot of local nonprofit investment and some outside the state nonprofit investment organizations. And one of the advantages of those types of serving on those types of boards is they all have separate consultants; they all have different things coming in and you get to see investment problems from different points of view. And she has that ability to see different points of view. Plus, she has contacts in the industry that are unparalleled. And she can bring those people in, we have a board of advisors, that is as good as there is in the work that she has brought in to be advisors to the funds that are from her contacts, oftentimes from these other organizations. So as a result, I didn't see a weakness. In fact, I would not know how a meeting went until I talked to Richelle afterwards, because she wouldn't be able to see how people interact, whether or not people were taking what I thought I was saying the way I thought I said, because they say something that I misinterpreted, say, No, that's not what they meant at all. So, it was she brought all those strengths. And I didn't see a major weakness in the 20 years that we worked together. In fact, the last couple years, I should have retired a year or two earlier. I had been trying to make sure I got my full 30. I should have gotten out of there earlier and handed the reins over.
Giordano
You did to help guide it through the through the pandemic crisis.
Maynard
There's nothing, nothing so big you can't ignore. All the pandemic did was just stick to your knitting and see what happens. rebalance when appropriate. We didn't we haven't? I'm trying to think of it. I don't think we put a new program in this morning, I mean, everything we've looked down from portable Alpha hedge funds, leverage ideas, smart data, all those ideas. None of them survived the 2007-2008crisis, very few of them survived the big downturns, the volatility, Armageddon, etc. I mean, I don't see anything that's come up in the last 10-15years that is time tested, that's crisis tested. Whereas, the old standards had. So, I'm going to be very interested to see, for example, artificial intelligence. I mean, it may be, I mean, at the management of all the list of things you do, we start at the bottom of what impacts the fund.
Butthis, but the practice of active management, not only going through the tradingenvironment that's there now, but with the artificial intelligence, and theability to replicate value, whatever it may be investing, to me has been theinteresting to watch. But leaping on what's going to come out of that now orbetting your fund on it is problematic. I agree with the funds that are doinglittle by having testing portfolios, about no more than 5%. We could never dothat we couldn't get the resources. And that's a big issue with regard to afunding like Idaho's. You don't have the resources to build up a big supplyline. But those that can do it, I'm interested in whether or not they succeed.
Giordano
Hopefully, they'll find their way and teach the rest of us.
Maynard
What in the last 15-20 years has had a new approach that's clearly worked? I can't think of one. I mean, portable alpha, I said Smart beta, heavily leveraged strategies, risk of prosperity. All those approaches have seen really problematic results. And it tends to be the more complicated approaches, they have an inevitable failure. And sometimes people switch to the wrong times. I mean, for every Canadian. every Ontario teachers, there's a bunch of those Canadian funds that they don't do well, that have problems. I mean, by from2007 to 2009, I went into all the Canadian funds and tried to find the returns, it's impossible to find because they hide what their actual return. Now that the average Canadian fund from the 2007 to 2012, period underperformed the median U.S. public equity fund. So, this Canadian model is like - all you're hearing other people coming back from Vegas, who hit the slot machines and the free bars, you're not hearing about the problematic issues on the Canadian funds.
Giordano
So, if they hid them, how did you find them?
Maynard
If they want it, you have to go to the accounting statements, and then back out the actual returns or the overall fund. And then a lot of them by the way, you tell they switch their fiscal year 200 -2010. I mean, so as a result, you got to go down to their basic accounting statements, pull them out from the bowels of their organization, and get them lined up for the years. Then oftentimes to when you look, you look at the returns, their gross returns that are being reported. And that and that's another issue, we look at peer reviews, I think our basis point fee for the total fund we have is 27 basis points. The standard that average for most pension funds is 50 to 60. And many of them have 1% or above, outside CIOs, the average is one and a half percent during the report gross returns, and you look at what takes you from bottom quartile the top, it's oftentimes 30 or 40 basis points. So, this whole reporting, who's doing well, who isn't just a lot, you know, our returns for the last two years, three months and four days as top quartile is that sort of. And by the way, I always, always subscribed to about three or four different peer review databases, I can always pull the one about investing, and send it out. So, I’m not saying that we were perfect in that sort of stuff.
Giordano
Well, it can be so competitive.
Maynard
I'm sure there's two parts to the job. One part is doing well. The other part is having your constituency think you're doing well. And if you have a choice, take the second.
Diplomatic.
Giordano
Alright, looking back on the more than three decades that you served, can you mention some of the things that you've learned that that might apply to this new economy, to the years to come?
Maynard
I guess the main thing I learned is that there are there are 1,000 right ways to investor at least 100,000. And the skill in investing. in the skill that has to be done in institutional investing, is you got to pick the one that is right for your particular circumstances. For Idaho, we had to be on the simpler side, because of the resources, because of the type of people that we reported to, very intelligent people do that there wasn't a free lunch would delegate to you and trust us with the politics and board. But you had to be able to explain it if something was going wrong. So as the result and we were not going to be able to set up an aristocracy of highly paid investment people who only got paid what the Boise State football coaches got. I was on the other side of that debate in Alaska, when I was counsel for the governor and the legislature and seeing the request come in for highly paid investment officers.
And you look at him, and let's take a look. Excuse me, have you ever been out of prison? Alright, let's talk about your job. I mean, do you deserve more than the head of corrections? Or the head of social services who have to? I mean, you know, you look at that having these people out in the castle drinking mead and ale, well, it's just ain't going to happen, and I don't. And so, as a result, that meant that we couldn't put in place a number of investment strategies that were problematic on their face. There are some places that can do that but Canadians, for example, can do that. So, their investment strategies for their particular area are different. We have a different political climate, we can't put in place what analysts are doing in California, or New York, or pension plans.
So you've got to be able to take all the things that are out there and pick the ones that fit your particular environment, because it's consistency over the years.
Are you going to be able to do something that, you know, five to 10 to 15 years from now with a new board and a new staff will generally be put in place? You look at the really successful funds over the years, there are people that have been had their particular investment strategy stay in place for 20 to 30 years. Washington State Investment Board, CalSTRS, for example. There was a group, onetime, there's a group called there that simply didn't exist. It was Nashville National State Investment Officers Association. And we had a database going back 40-50 years, one of the longest databases in the world. And I remember one year, they picked out five of the funds that were hot, and we all did something to them. We all did something to them.
Washington Investment Board had a monster private equity fund, one of the biggest private equity portfolios in the nation. Now there was South Dakota, who has a big in-house value oriented, small cap equity, and they did a lot of merger arbitrage and whatever. Another I mean, some people did hedge funds. The thing is over the longer term, we all made about the same returns just at different times. So, a lot of it was just being consistent. The ones that were really towards the bottom kept switching every five to seven years. That's for switched over, staff switched over, as investment philosophy.
So, whatever you're doing, if you're doing it for a long term period of time, you're looking at what's going to make sure it's something you can stick with that you can explain that you can get by is not only from the current board, the current people you report to, but those that are likely to replace them. And that you don't have to get huge amounts of resources that you aren't able to clearly get to keep it moving. So, going forward, my own personal opinion is the basic five things, what's your equity fix strategy? What's your home country bias? What are your first seven, eight things tied to things you invest in? Because the first four or five types of things you invest in have more impact than the 44th or 45th. But then what's you're balancing strategy? And how do you keep because of that, there's a huge copy of that. Finally, how much you're going to rely on active management. That's usually the lowest return. I mean, those sorts of things to look at, and go down that list and decide given your liabilities, given your situation, given your likely resources. What's your best distraction?
Giordano
What is your favorite right now on your Kindle or your bedstand?
Maynard
Right now, I actually, there’s a couple of good books on the Middle East that I'm reading.
Giordano
Any other big plans for retirement?
Maynard
Like I said before, doing nothing takes up 24 hours a day. It's a full-time job. So no, we've traveled to see. We have some places here and there. We have kids in San Francisco, in Seattle and even the Hawaii trip or the Euro trip every once in a while, but for the most part just hanging out with my spouse is the highlight of my life. It’s better than ever.
Giordano
So wonderful to hear.
Maynard
Such a pleasure to see you and thank you. it was wonderful as always.
