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Exclusive: Meet CIO Dr. Ben Cotton, applying a scholarly approach to deglobalization, interest rates and governance

How PSERS' new chief investment officer Dr. Cotton is applying his knowledge of M&A best practices, working with the board, and changing a portfolio that was designed for a low interest rate environment.


By Christine Giordano

When new chief investment officers take their respective helms, there are always a few years of ‘watch-and-wait.’ Employees under their management have to prove themselves all over again. Board members must learn to trust the new investors, learn their strengths and try to anticipate their weaknesses. Communication can make or break success. And a CIO’s true assessment is known to be made after five years in the role.  In many ways, it’s similar to a merger and acquisition process.

Interestingly, when Dr. Benjamin Cotton took the CIO seat at (what is now) the $76 billion fund for PennPSERS in January, 2023, he was already a scholar of mergers and acquisition processes.

In 2019, he had enrolled in a program through Vanderbilt’s Peabody Education College to earn his doctorate. His studies led him to a greater understanding of what helps M&A relationships succeed over time.

Explained Cotton, “We took a little bit of a different approach. We focused on the investment banker’s role as an intermediary before the merger and acquisition occurs. We [explored] the elements associated with their processes, and whether it was productive for preparing the participants for what they were going to encounter after the mergers and acquisition.”


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His research codified what one might intuit: it found that trust, and companies that already had an understanding of each other from having worked together in the past, are significant factors for success, albeit within limits. 

Specific to the intermediary's role, there were certain tensions associated with the M&A process that could either hinder or help facilitate that development of trust.

But sometimes, oversharing information can pose a risk. 

“To a point, there's also this tension— if you overshare and/or provide information to too many people, it creates misinformation opportunities and/or certain issues that can interfere with the successful completion of the mergers and acquisitions.”

To tame that tension, transparency and time constraints need to be managed in the merger and acquisition process, “to help facilitate the development of trust for the later aspects of the transaction,” he explained.

Yet within M&As, workers often fear layoffs from redundancies. Which begs the question, how much transparency is effective if layoffs are imminent?

Said Dr. Cotton, “One of the [research] participants we interviewed indicated that his job was to position all the employees … with the skills and capabilities so that, as they move forward in their careers, they can do well, with the understanding that there may be changes, but not always”

Why is this important? Because as a new CIO, Dr. Cotton stepped in to fill the rather large shoes left by the outgoing CIO James Grossman Jr. (whose tenure began at the fund in 1997) and Executive Director Glen Grell, who both retired during a time when PSERS' general investment consultant AON made a calculation error that, once resolved, resulted in higher contributions from some public school employee's and sparked investigations by the SEC, the Department of Justice, and PSERS. Grossman, Grell and the fund were subsequently cleared of any wrongdoing, the fund terminated its contract with Aon, and filed a lawsuit against the firm that has since been settled in consideration of a payment to PSERS for $7 million.

Starting in the CIO role on the heels of that drama-filled year, meant that the board’s choice in the new chief investor had to be right. It had to find not only a sharp investor who understood pensions and the politics behind them, but also a person fastidious to details and a sharp leader who could take the ship and lead it in a positive direction through the stormy seas of the post-pandemic markets, geopolitics and changing interest rates. With a goal to be fully funded about two decades by year 2043, and with a funded rate of 61.6%, there wasn’t time for error or waste.

Applied Knowledge

 Cotton had been a mid-career with quite a bit of stateside and international experience as an investor by the time he had gone back to school for his Ph.D. After serving the U.S. Marine Corps as a corporal, stationed primarily in Okinawa, Japan, he did a 4-year stint in investment management and investment banking, underwriting private assets in Southern California. He then joined the Ford Motor Company in 2000 to be a part of its pension team, with a rotation through other elements of Ford’s treasury, which included overseeing elements of an $86 billion securitization book. He had also managed a derivatives trading desk that traded well over $100 billion in annual flows for foreign exchange, interest rate derivatives, and other elements “that are important not only to an automotive company but to the credit business that goes along with an automotive company,” Cotton explained during a phone interview.

“I also went over to London and led the team that was responsible for auditing Ford's credit throughout Europe and Asia Pacific,” he reflected during a phone interview.  Then from there, he was asked to work with Mazda, (then affiliated with Ford) in Hiroshima to help “organize efforts to improve internal controls over reporting for financial matters” in response to Japan’s version of Sarbanes-Oxley compliance, a.k.a,  JSOX, before he returned to Ford and continued to work in treasury and investment related matters.

In 2009, he was asked to join a team where he became senior managing director of the $58.6 billion United Auto Workers Retiree Medical Benefits Trust, ultimately spending almost 10 years in this roll.

By 2019, he was ready to go back to school. This time, he studied a bank’s best practices within mergers and acquisitions, and came to conclusions that would help him in his future role as CIO of PSERS.   

When Dr. Cotton took the investment office helm at PennPSERS, his philosophy, similarly to that of a merger, was not to make massive changes, but to capitalize on core elements that were working well, and to establish a foundation of trust with the board, external stakeholders, and the investment team in order to move objectives forward. (“You can't take the trust that you've developed over time for granted. You can write a book over many years. It only takes one moment to burn it,” he says.)

Although some changes have been necessary. The fund’s core compass, its long-term direction, was established during a time when interest rates were relatively low. Striving for significant returns had meant taking on leverage. But times have obviously changed.

“We have slightly increased our growth equity risk today and reduced leverage,” said Cotton. “Rates are much higher, so there's some benefit to be had from having more exposure to investment-grade credit."

Portfolio changes for the changing economy

In 2023, Cotton’s first year, the fund and the board made several changes to allocations, cutting the 4% target allocation to absolute return and changing a 7.5% target to net leverage to zero; lowering the targets to inflation-protected fixed income to 9% from 11%; dropping allocations to international equities to 12% from 15% and public real estate to 2.5% from 4%; trimming commodities to 5% from 7.5%, and lowering credit-related fixed income to 4.5% from 6%, according to reports.

PSERS raised target investment-grade fixed income to 14% from 10%; increasing the targets to domestic equities to 18% from 15%.

Targets that stayed steadfast were the 5% allocation to public infrastructure, and the 30% target to private assets that now includes 12% private equity, 6% private real estate, 7% private credit and 5% private infrastructure.

PSERS returned 3.54% for the 2023 fiscal year, which was 33 basis points above the policy benchmark.

“I suspect we'll continue to do well from our private markets allocation over the long run … However, I think it's important for investment professionals, particularly allocators, to approach that market with skepticism in general,” keeping an eye out for good returns, holding partners accountable, and “trying to drive efficiencies in the way that they deliver that value,” Cotton told Markets Group.

At a board meeting in August of 2024, the PSERS investment team pitched investments around digital infrastructure and cellphone towers, healthcare and technology from firms such as LLR, Peppertree and Blackstone.

In 2024, PSERS reported returns of 8.14% that beat the benchmark by 107 bps against a fund record of 4.61% for 3 years; 7.60% for 5 years; 6.82% for 10 years; 8.54% for 15 years; and 7.05% for 20 years.

The fund is now on a three-year path of re-evaluating its asset allocation targets. Once they are set, the fund plans to stay the course.

In October 2024, the board approved more asset allocation changes, increasing the fund’s public equity target by two percentage points to 32% and decreased the public commodities and private real estate allocations by one percentage point each, to 4% and 6%, respectively. The fund’s tail risk mitigation strategy was eliminated. All changes can remain in effect for up to three years.

“The PSERS Board of Trustees takes its fiduciary obligations to periodically review and update the asset allocation very seriously,” said Investment Committee Chairman Jason Davis in a press release. “These changes are a step toward aligning the fund’s investment posture with our most recent market assumptions, liquidity profile, and risk appetite.

A Scholarly Approach to Deglobalization

Dr. Cotton spoke to key investment themes, one of which is the fact that globalization is not what it once was.

Having spent most of his investment career evaluating and anticipating the results of globalization, Dr. Cotton believes the path has now paused, if not reversed itself. The discussion is about polarizations and whether there are different geographical regions of influence. 

Cotton, who was also a college instructor during his career, spoke deliberately, carefully choosing his words. 

The shift actually changes the nature of due diligence. Investors need to pay even more attention to the political relationships across global regions.

“That's important because you have to actually go a lot deeper into the sustainability of the trade relationships that are underlying the businesses that you're underwriting, as well as the different, national-level policies that make it more productive and/or economically feasible for that business to continue on,” he explained.

In doing research, you must look much deeper than the typical approach.

 “Now it becomes much more important to understand the risk associated with doing businesses in different regions because it's no longer a move towards a rising tide lifting all ships. There are actually very different seas that you need to navigate in different regions, and you need to understand those well.”

Interest Rates

Interest rates are another theme. Since rates began rising, they have controlled much of the investment universe as well as its conversations. It’s another theme within the PSERS portfolio. The aforementioned risk that portfolios needed to take on in order to meet return expectations is not what it was. “That's turned on its head today. We've got cash rates now that are just under 5%. Yes, they could come down, but they're still very high relative to where they were,” reflected Cotton in the autumn of 2024.

“You had a whole class of assets that were becoming very difficult to defend in the asset allocation that are extremely attractive right now and provide a very good risk-adjusted rate of return,” he said.

Yet, Cotton is expecting some follow-on effects. 

“The higher rate environment means that those who bought assets in a lower rate environment hold them at valuations and expectations on exit multiples that are going to be difficult  because the buyers now have a higher cost of capital that they need to meet in order to buy those assets.

“As a consequence, we've seen less activity in the private markets, less assets changing hands and/or transactions occurring in private markets because there is that disconnect a What will happen is, over time, the economic activity for those businesses and the valuations will reach a clearing point where markets can transact and things will move back to normal after that occurs. It'll take some time for that to occur,” said Dr. Cotton.

Board Environment

Some wondered if the board would be extra cautious with the new CIO, but Cotton has observed the environment to be positive. “There seems to be a really strong desire for collaboration amongst all our board members and between the board members and staff.”

There’s a synergy between the new CIO and the executive director Terrill (Terri) J. Sanchez who returned to PSERS where she had served 26 years, after spending almost 4 years as executive director of Pennsylvania State Employees’ Retirement System. This January, Chair Richard Vague, managing director of Gabriel Investments, book author of The Paradox of Debt, and former Pennsylvania Secretary of Banking and Securities, was re-elected to chairman following his first term as a governor appointee.

“We have great executives on board now with Terrill (Terri) J. Sanchez, PSERS Executive Director,  and the supporting executives on our teams. And, we are well aligned. We're making sure that we keep a positive relationship with our board but also translating that into what would be great outcomes for our plan, which means then great outcomes for the beneficiary of our plans, the teachers, and public school employees throughout the Commonwealth,” said Cotton.

Plumber and Poet

Cotton leaves the interview citing one last adage, from the late James March, a researcher out of Stanford University, who spoke of leadership as a combination of poetry and plumbing and that a solid leader is someone who can balance both. If you're all poetry, you're going to lose it in the plumbing. If you're all plumbing, you can never get to the poetry.

“In investments, I think of the poetry as the investment strategy and the big ideas we have as far as moving a portfolio forward. The plumbing is all the operational and control aspects associated with doing that in a controlled way. One of our main objectives, not just for me, but for PSERS overall, initially focused on the plumbing, making sure we have a sound base from which we're operating so that as we're not distracted with issues of internal control and/or control lapses that could detract from the trust it takes to execute on the strategic expectations and directions as set by the board,” said Cotton.