When Chief Investment Officer Brian O’Neil retired from the Robert Wood Johnson Foundation, investor Ratna Kota heard him on a panel at a Markets Group conference, and approached me with the idea of doing a “lessons learned” interview, through which Kota, as a senior portfolio manager for the public fund of Maryland State Retirement and Pension System, would ask O’Neil questions about subjects that would be applicable across most investment teams at public, private, endowment, foundation or family office funds.
During the interview, the two cover a wide range of subjects, including, preparing a portfolio to hedge inflation, evaluating investments within an entire fund, and giving responsibility to your investment teams while remaining accountable, among other subjects.
O'Neil, recently retired from a distinguished career that spanned more than 40 years, including a stint as CIO of the Equitable, also known as AXA Equitable, where he also spent some time with AXA in Paris. While he was CIO, Equitable demutuaized and went public, making it the largest demutualization to take place in the United States. During O’Neil’s 20 years as CIO of the Robert Wood Johnson Foundation, assets rose from $8 billion to over $13 billion. He holds an MBA from Columbia Graduate School of Business, and a bachelor’s degree from Princeton University. He remains a trustee of the Brooklyn Public Library System.
As a senior portfolio manager of the $64 billion state retirement program at Maryland, our interviewer Kota overseas the internal management of public equity. He has worked with various asset management firms in the U.S. and Asia, and has over 18 years of experience managing teams tasked with investing in public markets. His experience as a researcher and a portfolio manager ranges from multi factor research, portfolio optimization, equities, futures trading, ESG and smart beta strategies. He holds an MBA from The University of Chicago Booth School of Business and an MS in Computer Science from the University of Illinois Chicago.
Ratna Kota:
Can you share how your journey has been in the investment world, and how you started?
Brian O’Neil:
I started in 1980 at Equitable, and within a couple of years, I was managing a very large public bond portfolio there, and that was a fantastic experience because, at that time, there was a tremendous amount of innovation in the fixed-income world. We had an explosion of borrowing by the US government and corporations. We had the first interest rate swap. I remember the first interest rate swap and just one derivative after another. We incorporated options and futures into managing fixed-income portfolios. I learned a lesson that has stayed with me the entire time, and that is that the investment business is about learning. You might almost say that he who learns best will win, and particularly learning and then learning how to apply what you've learned into your portfolio is extremely important and really has always stayed with me as one of the most important things to always keep in mind.
After I’d been there for about a decade, I was promoted to Chief Investment Officer, and I immediately saw a few important things. One is that every portfolio has an optimal portfolio at Equitable, a lot of it was asset liability management driven. You had to really understand the liabilities, translate those into what an investment portfolio would look like, and make that kind of a guideline for investing the portfolio. In the Endowments & Foundations world, where foundations have fewer constraints and more degrees of freedom, you still need to define your optimal portfolio as the first step in figuring out how to make an investment decision. The other thing I learned was the importance of the investment process. When you're managing large sums of money, which is very complicated that extends all over the place, you really need to document and understand your investment process and make sure that the right people are making the right decisions. So, if you're buying bonds, you need to have your credit folks deciding which bond to buy, but you need a completely different group of people deciding what the duration of the portfolio should be and what other quantitative characteristics should be. So, the investment process is extremely important and it's the basis for everything else that you do.
When I came to the Robert Wood Johnson Foundation, it was like, look, no liabilities, do whatever you want. There were fewer regulations at that time. But in a way, it also means that you must be much more thoughtful about those first couple of steps. How are we going to invest the portfolio given that we have a 5% payout rate, and that's the only constraint that we have? It’s interesting that most foundations landed on about 70% equities and 30% fixed-income portfolios to maximize the long-term return with the level of volatility that they can live with.
Kota:
Was it easier to manage a foundation’s assets compared to an insurance firm’s assets especially when the insurance firm’s assets are closely managed against liabilities?
O'Neil:
At Equitable, I was part of a large investment team that I later headed. We had some of the best bond people in the world at what's now called the Alliance Bernstein. It was Alliance Capital then. We had a terrific real estate unit, and we had a daily dialogue with the five or ten firms on Wall Street. The issue was to choose between those ideas instead of coming up with new ideas. So, I went to the Robert Wood Johnson Foundation, which had a $8 billion portfolio. My predecessor had been a one-man show. I had no colleagues except for Operations. I had one analyst and someone who took care of documentation. It was a big shock for me as I was all alone, and that led me to a lot of thinking. We had 8 billion dollars, half of which was invested in Johnson & Johnson stock, but we got a green light to bring that way down. So, I realized I needed to start with the very best people who can manage their portfolios independently. I had two things going for me in recruiting for those roles. The first one was that we were a $8 billion startup. Around half of those $8 billion was about to be sold. The other was that I told them I was looking for someone to run private and public portfolios. I think I was able to convince at least a couple of folks to give it a try. And in the time since, I think it's become more understood that at Robert Wood Johnson Foundation, the investment people have a lot of discretion and flexibility.
Kota:
Have you built your team with people you were associated with, or have you hired folks with the right experience from the street?
O'Neil:
I never hired anyone that I already knew. I've always been looking for people who are the right people for the job, and that's where I wanted to start in the hiring process. Unlike a lot of my peers, I don't think that it’s not necessary to consider people that have only worked at an endowment or foundation. My first head of private equity had worked at JP Morgan and had been an investment banker, and the first head of Public Equities had a hedge fund and fund of funds background. I thought those were great backgrounds for those jobs, and they turned out to do very well. Although, with the hedge fund and fund of funds people, you had to break them of this habit where they wanted to have 50 meetings a week, and they thought that if they're not doing that, they're not doing their job. I proposed that five meetings a week are plenty and that we are just trying to find a few good funds, and eventually, they realized that we were serious and came out of that habit.
Kota:
Can you describe your process of giving your investment team members more responsibilities than are typical?
O'Neil:
When people talk and write about the manager selection process, you'll hear an awful lot about kinds of adversarial conversations. I take an approach where I want the head of public and private teams to feel empowered to hire a manager in the portfolio.
We really emphasize a lot of due diligence, but at the end of the day, I want the public team and the private team to feel like this is their portfolio, they are accountable for the results. So, they should make the decisions on who we hire. So, when I hear about all that internal conflict, it seems very bureaucratic in some ways. I would like our public and private investment teams to get up every morning, go out into the world and meet managers knowing that if they find somebody who's very good, they can invest with that person, they don't have to check back or feel as though some random decision process might say yes and might say no. So, I look at accountability as being the driver of our decision-making process and not some kind of an internal checks and balances process. I think the manager selection process is again part of the big investment process that includes other dimensions.
Who is better suited to pick the managers than the people who are closest to them?
Kota:
How do you maintain accountability with such empowerment? Did you follow a hands-off approach when you empowered individuals, or did you follow an oversight strategy?
O'Neil:
In the beginning, it was just me, the head of the private team, and the head of the public team. So, the three of us worked together very closely, demonstrating to the Investment Committee that we could manage assets. I soon realized that the two folks I had hired were completely capable of doing this work and soon became the people who picked the managers. I took on the role of laying out the parameters for the portfolio as a whole and spent a lot of time interacting with the investment committee and making sure that they were on board with the plan. I think that's the optimal way to run these teams and people never felt that they shouldn't be accountable because I didn't direct them on whom to invest with. People realized that this is the portfolio that they have built, and I think that had a tremendous sense of ownership.
Kota:
Could you also shed some light on your process of evaluating your funds’ investments?
O'Neil:
I think a part of the evaluation of each individual fund is what we are investing with the manager’s fund to get. For long-only equity funds, we want to beat the benchmark. But in many of the things that are less than 100% net long, there may be a very nuanced target for those funds. We try to make sure that we're evaluating each fund according to the reasons that we hired it for and make sure that it's the portfolio as a whole that's delivering the performance. One of the things that we looked at a lot on the public side was how well each manager correlates with other managers. Low correlation is preferred, and you know that's a unique returns stream. We did devote a lot of time to looking at the correlation among our public managers and where it would be expected to be high. If you have three managers managing a fund in a similar fashion, you expect the correlation to be high. We value those funds that are correlated low with our funds.
Kota:
Did you have some sort of a time limit for managers to turn around if they are underperforming? How soon would you get out of underperforming funds and look for new investments?
O'Neil:
We are kind of the opposite. Our favorite story about a manager is that this manager had a couple of years of underperformance. We really drilled down with them and understood how they saw their performance in their portfolio and agreed with them. The best conclusion of that story was that we invested more money with them, and they did well. We do tend to give people a lot of rope if they are sticking to their original investment strategy.
If managers are investing along the lines of the reason that we went with them in the first place, and you know the goal of our portfolio is to do well in the long term. It’s not about having the best performance every day. So, I think the time frame really must align with what's appropriate and consider their performance relative to the kinds of securities that they hold and how those are doing. So, our favorite is that we stayed with the manager, and they turned it around. In another instance, one of our favorite managers was doing well, took in way too much money, and we redeemed before performance went down. We keep records of our redemptions and monitor the fund’s performance post-withdrawal. I will say that the best reason to terminate a manager turns out to be that they got too big. They always suffer in performance.
We suffer when we don't follow our own rules because sometimes, we like a fund so much. But that's a nearly infallible guide to the performance of going the wrong way.
I don't blame managers for wanting to raise more money. They have an organization and employees to take care of. But I remember we were an activist manager, and we invested with them when they were well under a billion dollars, and they did extremely well. As activist managers, instead of investing in a small-cap name, they invested in firms like Microsoft. We realized that it might be time to redeem, and they had gone from 500 million to 13 billion, but that was the peak of their performance.
Kota:
How did you prepare your fund to hedge inflation, and what changes did you make to your investments to navigate the global financial crisis?
O'Neil:
During the global financial crisis, especially from the summer of ‘08 until the spring of ’09, we just held on for dear life. You made sure that you had enough money to pay the bills, and we continued to make payouts to fund grants. So, we had to come up with cash.
We shrank the fund to do it in line with our asset allocation so that we kept risk in the portfolio, but it was really a mind-numbingly negative time, and it's like we really did not do any opportunistic investment at the bottom of the GFC and a lot of people later discovered that even October or November of ‘08 wasn't the market’s bottom.
It was a great lesson from the GFC that you really don't know what's about to happen next. We hung in with our asset allocation, and our investment committee was tremendously supportive. In 2010, we opined that the emergency is over and revisited our asset allocation. Oddly enough, we decided that we were not actually going to change our asset allocation and that we needed to be 70% in equities in order to generate the inflation-adjusted returns that we needed to maintain our purchasing power. However, interest rates have been set so low by the Fed that we set our 70-30 is now 70% equities, 30% things that have a low correlation with equities. We ended up owning very few bonds.
You think with rates that low that would have been an easy strategy to win with, but rates kept going even lower. So, bond returns were decent. And then along came 2022 where bonds were down 15%. The things that we had instead were up and it was like we made all the money back in one. It turned out that patience was rewarded.
I think that the key thing was not to become too defensive because of the GFC. And yes, it turned out equities then had a, you know, a 12, 13 year run. Inflation is a danger to these portfolios and having started in 1980, I remember the inflation of the 70s and into the 80s.
And one of the things that people have a hard time understanding today is that inflation can get away from you in the early 70s we had inflation and there was a big campaign. Gerald Ford and Alan Greenspan, who was his secretary of the Treasury Head to whip inflation. It did appear that inflation slowed down in 75-76. We had a presidential election and Jimmy Carter got in and there was less focus on inflation, and it just came roaring back, around 10% a year. Paul Volcker had to be brought in at the Fed and let interest rates rise to astronomical levels to finally defeat inflation. I think we're at a very difficult moment right now. the Fed wants to beat inflation and was a little late, maybe more than a little late getting started. When interest rates rise, things break. You're never sure what is going to break this time around.
And we're already starting to see some of that, but I think it's important that they stay the course there even though there will be a lot of people who will say enough is enough.
Kota:
Who sets that asset allocation policy? Do you have consultants guiding on that allocation policy?
O'Neil:
In well-functioning foundations and endowments, the Investment Committee and the Investment team work together to set the asset allocation. One should remember that we have a lot of freedom. We just have to make an annual payout of 5%. So, there's not really an asset-liability focus. It's more about long-term returns and the level of volatility that you're willing to tolerate.
You realize you need to have a lot of money in equities to generate long-term returns, and there's some question about how much volatility can we stand because you don't want to be in a position where you had a too high level of equities, the market is down, and you feel as though we've reached a point of no return. We're going to have to de-risk the portfolio. The chair of our investment committee calls it staying at the table, you want to ensure you can always stay at the table.
70% Equity and 30% Fixed-Income portfolio seem to be that kind of the sweet spot where you have a lot of exposure to equities, but you do have some diversifying investments should the market really decline. So, 2022 for us was not a terrible year because our 30% did quite well in that environment.
Kota:
Was your team making all these capital market assumptions, forward-looking estimates for different asset classes and different regions?
O'Neil:
We used to make those assumptions, and then we really questioned the value of that exercise. It's all about diversification because the optimization assumes that you can predict small differences in correlation across asset classes. The fact is that's not very important. What really matters is in a financial crisis, when correlations, as they say, go to one, which you really want to do, is take all the things where the correlations go to one and put them in one basket and consider that as our equity exposure and in normal times, there'll be some lower correlation, but in bad times it's all going to go down. And then the other bucket is things that will not do that because they are not correlated to equities. That's our approach to diversification, when we least need it, correlations will rise to one and so we really have an equity bucket and a non-equity bucket.
Kota:
What role did Governance & Risk Management play in your career?
O'Neil:
Governance is incredibly important to success. If you think of an investment organization as a building that is built to make good investments, then the ground that it stands on is governance. I remember when I was at Equitable, and it got into financial trouble, and I got promoted to CIO in the middle of all that. At my first board meeting. I was thinking that all these guys are going to kill us due to the trouble we were in. However, they were incredibly supportive and wanted us to succeed. They wanted to help us find a way out of the problems and we were able to do that, and it was partly through a very supportive board of directors.
When I came to the Robert Wood Johnson Foundation, I had an expectation that the Investment Committee and the investment team would be partners. They weren't sure how much responsibility to give us. I know Alan Bufford, who was the CIO at MIT in the early 2000s, and he retired around 2005 and I asked Alan to become a member of our investment committee. I was early on in people asking him to do things because he ended up going all over the place board of McKenna, the board of the City of London, and many others. But we got them for us, and he brought tremendous credibility, and not just my voice but someone on the investment committee’s voice saying, here's how we should do things. The investment committee should be an oversight function of the investment team, setting risk parameters, and then letting the investment team do the work. I would say one of the lessons there is if you're the CIO, you should really try to get your organization to give you input into who goes on the investment committee because you really need good Investment Committee members to make it work.
Kota:
What advice would you have for those individuals aspiring to be future leaders in the industry and who are next in line for leadership roles?
O'Neil:
I think there are some things that you can do, and most of us, when we get our first job in the business, are supposed to be good at doing something, and that is true. But it's very important to look around the organization and understand your role in the organization and the organization's overall direction, its goals, and particularly its problem areas.
You know, a lot of people in the investment business don't really like to do that because they love what they do and would be happy spending 30 years picking bank stocks.
If you want to look around and see what the organization is focused on, see what your boss's goals are and try to make a contribution towards that. I think that's the way you become a leader. But it's very important to know that others might view you as a busybody.
It’s key to have other people want to have you work with them and want to hear your ideas. So, being a good colleague and being very clear and open about that is a big key to success. But I think we all understand that when a group of people tackles a problem, more good ideas will come out of that process. I think stepping into your organization’s issues and problems is a very good way to understand these issues. I really recommend that people solve those organizations’ problems.
Kota:
How did you support the career aspirations of your team members?
O'Neil:
I just heard this phrase just last month, and I've never heard it before. It's called being a fan of your colleagues. I've been able to work with incredibly talented individuals, and I really love working with them and hearing their ideas. I think cultivating talent and letting people know that they can go the extra mile and they can do something new, not just stay in the line to do the job that they were hired for, is important.
We used to have once a year of professional development conversations. We would just talk about professional development. Attending seminars, conferences, Harvard symposiums, etc., would make the cut for professional development. However, we learned that everybody was interested in the other team’s activities. So, when we meet managers, we made it a much more open meeting. Everybody can meet with them and hear about them.
I was just talking to someone today who hired someone from the same city where they were, and they said that they broke the informal rule of hiring local talent because the hired person's boss was mad about it. What kind of boss is mad when one of their employees gets a better job? I've been very supportive of our folks. We had a couple of people who become CIOs, and we all love that. I mean, probably once every five years, not all at once, we are very supportive, and I was very happy to say that when I had a retirement dinner, and we had 20-plus people come back, and they're all over the place leading universities and hospitals and funds. I realized that people are going to move on in their careers, and that's fine.
Kota:
What role did DEI play in building and nurturing your team?
O'Neil:
In early 2003, I wanted to make sure that we hired women and minority-run managers. My first couple of years were spent on getting ready, and then just about when we were ready, along came the financial crisis. So that put things on hold. But by 2012, when it was safe to go back in the water now, and coincidentally, it was also the 40th anniversary of the Robert Wood Johnson Foundation. We had a lot of people come back and talk about the benefits that they've gotten from the foundation they got in the scholarship to medical school, nursing school, and research grants. The foundation had been a leader in making the healthcare workforce more diverse. I said we can do that in investments. Beginning of 2012, we began an emerging manager program. We started with an advisor because we really didn't know the space, and we worked with that advisor for five years, and then we felt that we could go on our own. I thought, well, this is just so aligned with the goals of the foundation.
We started it almost as soon as we could. It was a little unexpected to me that many other peer organizations weren't really doing this. In 2020, the Knight Foundation came out with a study of the 40 largest foundations and their commitment to women and minority managers, and of the large foundations, we came in first by a wide margin. It really changed things, and I really give them credit.
I started getting a lot of phone calls asking me how and what I did. I think there's a much stronger understanding of the importance of doing that as a way of aligning the investment activity with the foundation’s wider goals. It's a long-term process because what we want to do is not just earn good investment returns but identify future leaders in the investment business which takes time.
Christine Giordano:
Brian, everyone knows that you're a leader in DEI. What was the challenge that you overcame in forging that path early on?
O'Neil:
It's kind of funny because nobody ever told me to do it, but when I said I wanted to do it, they were fine. The next challenge is to make sure we get good investment results and that, you know, in the beginning, we were worried about that, and the results were fine. They weren't super great, but they were fine. After five years, looking back at our track record, we saw that the difference between our emerging managers’ portfolio and the peer portfolio turned out to be the fee that we were paying the advisor and not that they didn't give us good value. So, we decided that we could do this on our own and since then we have done even better. I think to some extent, people are supportive of these things, but you need to take the initiative yourself to a certain extent.
Kota:
Would you look for some sort of a track record or would you trust or have faith in their investment philosophy, and strategy to invest with emerging managers?
O'Neil:
Well, they've always had investment success somewhere. We're always talking about someone who was good somewhere else and now wants to go out on their own.
I think the hardest thing is that there the business risk here is very hard to underwrite. That's one of the reasons that our advisor wanted to have, like a dozen funds in our portfolio was that if something went wrong, you know, it would have less of an impact. So, we are now running a more concentrated portfolio. We are very careful to make sure that we see the business risk as manageable, and we had good outcomes on that.
When investing with small managers, sooner or later, you're going to encounter one that runs into a business risk issue because they can have a large investor who redeems, or a lot of different things can happen. So, one must be prepared for that.
