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Michael Kennedy was one of the industry's top recruiters for chief investment officer recruiters. He also was appointed by former President Obama's to the Federal Retirement Thrift Investment Board in 2010, and a year later, became its chair from 2011 to 2020, even after the presidential shift to the Trump presidency. During this interview with Markets Group's editor, Christine Giordano, Kennedy discusses industry trends, how candidates can best represent themselves, and how the largest pension plan in the United States made investment decisions.

Kennedy retired in late July, and will celebrated with a Lifetime Achievement Award by Markets Group on November 13 in Atlanta, Georgia, at the 11th Annual Southeast Institutional Investment Forum, where he will also give a candid fireside chat, and answer questions from the audience. Allocators are welcome to attend.

Interview transcription, with video link below.

Christine Giordano: 

Michael Kennedy.is known as one of the top recruiters in the field for chief investment officers who would like to find their next placement. Michael, I'm just going to review your bio. After getting your MBA from Harvard Business School, you've spent decades as a recruiter for some of the top pension funds in the United States. You also spent 10 years as the Chair of the largest pension fund in the United States, the Federal Retirement Thrift Investment Board, after being appointed to it by then President Obama. You've owned your own private equity company. You've been Vice President at GE Capital Corporation and held various banking positions.

Now you've announced your retirement. This industry will not be the same without you. Let's use this interview to give allocators some insights from your very unique perspective. Now that you're retiring, I'm sure there are some things that you can talk about now that perhaps you couldn't be so candid about in the past. You've seen a lot over the past three decades of your career. If you don't mind, let's jump right in. What are some of the significant trends that you're seeing taking shape as funds select their chief investment officers for pension funds and for endowments and for foundations? Welcome.

Michael Kennedy: First of all, good morning, Christine. Thanks so much for reaching out to allow me to have the conversation. As you mentioned, I'm just finishing 25 years at Korn Ferry. I've got three weeks left for retirement. Looking forward to this conversation. Regarding your question, I think there are really two things that I would point to in terms of significant trends.

First, I think the governance has changed for not only pension funds and endowments and foundations, but for others. Primarily related to public pension plans, boards have certainly become a lot more complicated. This level of scrutiny has become more significant. There's been more turnover on some of these boards, so there's been a lack of stability. In general, I just think that the boards at primarily public pension plans have just become, I won't say overwhelming or needing for change, but certainly a lot more complicated than they have been earlier in my career.

Then the second trend I would point to is that there is clearly a preference for candidates to have more deep experience in private markets, primarily private equity, but not just limited to that, because I think most of the leading public funds, as well as in endowments and foundations, are more focused on building more robust and sophisticated private markets program. For example, within private equity, they're looking for individuals who have co-investment experience so they can co-invest alongside some of the funds that they've invested in. I think those are two trends that I'm seeing in today's market.

Giordano: As pension funds and endowments and foundations look to do perhaps more co-investing in the future, what do you think their runway is for finding good candidates in that space?

Kennedy: They're looking for individuals who have some experience in co-invest to build out their private equity teams. Going forward, their private equity teams will consist of individuals who work with buyouts, individuals who work with venture capital, and then individuals who will be able to strategically co-invest alongside their various partnerships. That's just another way that they can generate additional and enhance the performance for these funds.

Many of the co-invest individuals they're looking for today probably have at least five years' experience. They're looking to build out a team. It's not just going to be one individual but some of the others, they will be adding people in that space focused in other areas. It could be also be applied to real estate and some other types of asset classes down the road.

Giordano: Michael, in that vein, would you say that as a chief investment officer applies for and perhaps takes that seat, they should also be considering what they would do to build out a team at that firm?

Kennedy: Yes. Management leadership is one of the four pillars that we look for for chief investment officers. Obviously, the first thing we look for is the investment experience and background and performance and track record, individuals who are applying or being interviewed for a chief investment officer role. Probably the second most important experience we look for is management leadership because this individual is going to be managing a team of some pretty senior and sophisticated investors. What they're going to be looking to do is build a collaborative team because collaborative teams typically stick around for a longer period.

You want stability in your program. If there's turnover in the program in the ranks below the CIO, that can impact the overall performance. I would say over the last number of years, CIOs are a lot more attuned to that. As we look for successful candidates for CIOs, not only are we looking for the investment experience, we're looking for their ability to manage a team and lead an organization. That's just one of the other two. Then the final two characteristics, of course, is their ability to work with the board and then they need to have strong communication skills.

Giordano: Regarding pensions, compared to endowments and foundations, what qualities would you say are most demand in either place? Is there a bifurcation there?

Kennedy: I think there is. I think the jobs within the public plans are much different than endowments and foundations. A lot of that has to do with the governance structure at the public pension plans because many of these board members are elected positions. They represent certain memberships or union organizations and they, in some cases, have to run for re-election every couple of years. There could be turnover on that side.

Then the other thing is for many of the public fund boards, many of the other board members are appointed by the governor or the legislature. That's become more problematic as these boards have certainly become more political and more partisan over the years.

That's a different construct than endowments and foundations who are not as partisan and political in nature. They're more focused on the mission of the organization, generating great investment returns and focusing on the spending formulas so they can impact scholarships and faculty and things of that nature and an endowment. Then also to continue to enhance spending for grantmaking on the foundation side.

Giordano: That CIO might also have, as part of his or her job, to actually go out and raise funds, talk to sponsors?

Kennedy: No, that's not going to be too much of their job. What we are seeing specifically on the endowment side, as we recruit chief investment officers for larger endowments and even mid-size endowments, the search committee members and the board members and investment committee members are attuned that it would be great to have a CIO who they can take out with the head of development to close large donors because all of these institutions are in significant capital campaigns and therefore, they're looking for large donors who can commit.

The donors are a lot more attuned to wanting to know how their funds are going to be invested. As a result of that, many institutions are now utilizing the CIO to put in front of the large donors so that the donor has the opportunity to ask about their investment philosophy and their investment strategy and things of that nature and feel comfortable that the significant check they're getting ready to write is going to be managed appropriately.

Giordano: Sounds about right. Which of course begs the question, what characteristics have been key to CIO survival and success over the years?

Kennedy: I think first and foremost is investment. It starts and ends with investment, so they have to be able to build the appropriate investment strategy and asset allocation strategy leading to strong investment returns, and that's across the board. That's almost a given. I would say the second and probably almost as significant as investment is their ability to work with the board.

Boards have become a lot more complicated. As I mentioned on the public fund side, you're dealing with a lot more partisanship and political boards and turnover and different agendas. Some boards actually have politicians serving on the board and they may have a different agenda. Their ability to really build relationship with board members and be able to educate them on various investment topics, things of that nature, is key.

On the endowment and foundation side, it's just in some cases almost opposite because you may have some very seasoned investment professionals serving on the investment committee and in some cases luminaries, people who lead large investment organizations. Therefore, it's going to be the ability for the CIO to be confident and knowledgeable as he or she approaches their investment committee because they're going to, in some cases, have individuals who will have a much deeper experience level than what you find in public funds in general.

Giordano: As CIOs become seasoned, sometimes there's a fierce desire to jump from a public or a corporate pension into an endowment or foundation role. I realize that's a rare thing. It's a rare opportunity that one is perhaps hired for that. From your point of view, how might someone groom their skills in order to make that jump?

Kennedy: Sure. I still think in today's world, there is a bias by endowments and foundations to hiring someone who's coming primarily from a public fund. That individual is really going to need to differentiate themself as an investor at a public fund. The way I look at it, when you look at public pension plans, there are two types of CIOs.

The one type of CIO is someone who does a great job managing an investment program, but you would not characterize them as a peer investor. They're not really as passionate about the markets and focused on the markets and trying to be creative and things of that nature. They rely on their seasoned investment team to come to them with ideas.

The second is someone who is an investor, a creature of the markets and thinking outside the box and talking to their peers and trying to come with ideas. I think those are the two types of CIOs. To get back to your question about how do they make that transition to an endowment or foundation? The best way to do that would be for someone who is viewed as an investor, A, to maybe serve on a board or an investment committee of a local endowment or foundation so they get to gain some knowledge and understanding about how that endowment or foundation work and what the differences are.

Secondly, just to build relationships with the investment committee members who are sitting around the table, because many of these people may sit on other boards and can serve as a reference or in some cases, nominate the individual to move to a local foundation as an example.

The second thing would be to increase their visibility. They need to go to conferences such as Milken where they can interact with people beyond just the public funds world and build a relationship with board members. Many of the board members at endowments and foundations may attend the conference, therefore, you have the opportunity to start to build relationships. They will hear you as you make a presentation at an institute like the Milken. That would be one way to increase your visibility.

The burden is really going to be on the CIO from a public fund to demonstrate that their experience is transferable to an endowment and foundation because they have to be viewed as investor first and foremost. If they're viewed as just managing a pension fund, then many endowments and foundations probably will discount some of their experience.

Giordano: Thank you. Michael, now that you're retiring, what can you tell me that perhaps you would not have been able to talk about in the past?

Kennedy: I would say, Christine, one of two things. First, I have found it very interesting that I've conducted a lot of chief investment officer searches for many public pension plans. When I look at who serves on the boards and the investment committees and the search committees, there may not be anyone on the board with a background in investments. I find that a little bit surprising because some of these boards are overseeing billions of dollars of funds that are used for their retiree benefits, and there's no one at the table with a strong background in investments. The top person sitting around the table could be the State Treasurer.

The State Treasurer certainly may have a finance background and may manage some cash for the State and things of that nature, but I would not characterize them as someone who is more of an investor. That has been shocking to me. It doesn't appear as though that's changing much, particularly as these boards become a lot more partisan and political on the public fund side.

I think that's one of the challenges going forward and one of the things that has been pretty consistent through my career. There have been occasions where I've actually had to conduct part of the interview because even though I provide questions to some of the board members, they don't have the background to ask follow-up questions regarding asset allocation and investment strategies and private markets and things of that nature. That's one of the problems that I've seen that I don't think a lot of people really understand. That would be the first thing that I would point to.

Giordano: How might one navigate the politics of that board?

Kennedy: That's going to be a challenge going forward because, as I mentioned, many of the public fund boards have now reached a point where they're just viewed as being very partisan. I think one of the surprises that I really have seen, particularly over the last two or three years, has been the move toward support and against ESG, just to use that as an example.

The way that's played out is that some of these boards have actually mandated to the CIO that they can no longer utilize specific investment management firms. I think that's very problematic because the reason why some of these firms were engaged by the CIO was because they had very strong investment track records. It's hard to replicate that and bring in a manager whose performance may not necessarily be as strong as the one that the legislature or the governor is mandating that they terminate.

I think some of these boards are more focused on the politics and the partisan side and the visibility of that than they are on the mission. At the end of the day, the mission of these pension funds has been to focus on generating great investment returns so that their retirees will have more money in their pension benefits so they can retire with dignity. You're compromising some of these investment returns for partisan and political reasons. I think that's going to be a significant problem going forward. It's happening on both sides of the aisle. I've worked on blue States and red States, and there's still a little bit of gamesmanship going on with all of that.

Giordano: Of course, you've seen your share of politics having volunteered to chair the United States' largest pension fund, the Federal Thrift, for 10 years. Can you share what the story was behind you being appointed by President Obama?

Kennedy: Sure. In 2008, when President Obama was first elected as the president, I had the opportunity to serve as part of the transition team, and the way that worked was that they reached out to the top four executive search firms and asked for partners, a small number of partners, to work with the transition team in the identification of top talent, primarily from the private sector. The Obama administration was very interested in bringing people with private sector experience into the administration and all of their departments. I worked on the economic cluster, and we were successful in providing the administration with names of top people in Treasury and the SBA and different types of organizations like that.

Through that process, I got to know some of the folks at the White House, and when they reached transition to the presidency, they were looking to fill board positions. The Office of Presidential Personnel looked at this board, the Federal Retirement Thrift Investment Board, and as they thought about candidates, one of the younger people on the team remembered that I had served as a trustee at the State of Georgia Pension Fund. I went on that board in 1998. At that point, I had over 10 years' experience in that role. I chaired the board for a number of years, chaired the investment committee.

I actually had experience at a pension board, and they thought that would be relevant. That's how my name got surfaced as one of the five nominees to go on the Federal Retirement Thrift Investment Board.

Giordano: While there, you saw various improvements while you were giving people choices and more transparency into their investments, giving people calculators to understand their retirements. Can you talk about some of the key challenges that you overcame?

Kennedy: Sure. I think when I went on the board, as I mentioned, there are only five members on the board. Ultimately, of the five, we had four who you would characterize as Democrats. Three were appointed directly by President Obama. One person was appointed by the former Speaker, and one person came from the Senate side. We actually had four Democrats and one Republican.

In our case, all of that was irrelevant because what we were focused on as a team was, what can we do to really enhance the Thrift Savings Plan so that we can maximize the savings for our retired participants and beneficiaries? The Thrift Savings Plan is the largest defined contribution plan in the world. When I left, I think we had over $600 billion in assets. We had significant scale. The way it's set up, each participant has its own 401k. What we were focused on is, what can we do to ensure that people are saving as best they can for their retirement?

Some of the changes that were implemented was that prior to my joining the board, they had just implemented auto enroll. A person, when they join the federal government, they're automatically enrolled into the Thrift Savings Plan. Before, they were given an option. Of course, many young people would opt not to join, and they would miss out on the defined contribution aspect and would work there and not have funds to retire. That was one of the changes that we made.

Second change we made was, we had to work with Congress to change the default. Once you're automatically enrolled, you were originally enrolled into what's called a G Fund, which only yields about a two and two and a half percent annual return. What we found is people would be enrolled in that, and they would never leave it. They would think that they are saving money, but they're really not saving much because the returns were so low.

Then we had to change that default from the G Fund to the age-appropriate target date or lifecycle fund so they would have diversification and have access to equities and fixed income where their actual performance, investment performance, would be much more significant, and they would have the ability to save much more for retirement.

Then other things, we enhanced the website so they actually had the opportunity to play around with their savings and along with Social Security, figure out how much they need to save and things of that nature. Those were just some of the changes, structural changes that we made, hopefully to make things better for the participants and beneficiaries.

Again, our board was focused on the mission. We were not focused on politics. The White House never called us and weighed in on-- at least under the Obama administration, never weighed in on the political side and trying to get us to do certain things from an investment standpoint.

Giordano: In making that change from that return 2% to the target, do you have an average of how much higher the returns have been?

Kennedy: It differs because some people, not everyone was in the 2% G Fund. Many people did change their allocation and put all their money in common stocks. Some people put a lot of their money in maybe small caps. It's a little bit more challenging to come up with a range, but certainly, what we were looking for is to make sure they could make at least a 7% return, which is 5% plus inflation and hopefully beat that. It was all over the board because people did have choices, but that's where we were trying to get them to have more diversification in their portfolios.

Christine: Can you share how that plan makes investment decisions?

Michael: Sure. At the Federal Thrift Savings Plan, all of our funds by and large are indexed. Therefore, when I was there, BlackRock-- when I joined, BlackRock was our investment management firm and they probably managed at least two thirds of the assets. The G Fund is a government security. That's a little bit different and it's not part of that. Therefore, BlackRock pretty much managed most of those assets and just did a great job.

They're the number one index provider in the country, but our board decided pretty early that we were not comfortable utilizing just one firm just from a risk management perspective. We decided that we wanted to see if we could have a second manager added as well, which we did over time. A second manager was added, I think it's State Street and they're doing a great job. We diversified the risk amongst two firms. They manage all of those indexes and the indexes, of course, is what the participants and beneficiaries are using for their investment choices.

Giordano: Michael, you were there until 2020?

Kennedy: Yes.

Giordano: You, over the span of those 10 years, saw a presidential shift. I'm curious to know how things at the Federal Thrift changed with the election.

Kennedy: Sure. Back in 2016, when President Trump was elected president, we really didn't have any changes at the TSP. I would attend meetings with some of his representatives from Homeland Securities and others. Everyone was still very focused on the mission of the TSP. We're focused on participants and beneficiaries.

Keep in mind that members of Congress and members of the White House, they're in the TSP. They saw all of the positive changes that we were making, and they liked those changes. Therefore, we didn't get a lot of pushback. We were not part of the government, the budget. Therefore, we were able to fly below the radar screen because we were just doing good work for our participants and beneficiaries.

Along about 2019, we had decided that we were going to change our international index to the MSCI All World ex-US. What that was, it was going to allow us to change our international index to include emerging markets. Emerging markets would include countries like Canada, Brazil, but there would be a very small allocation to China. As you could imagine, China was starting to become a bit of an issue in the Trump administration. Senator Marco Rubio immediately put together a short list of senators who sent a letter to me demanding that we not change the index to include China. That's when the political aspect started to occur.

What our board decided to do was to take a step back because we made a decision to change the index a year or two earlier. We went back and reviewed the situation to see if anything had changed and not much had changed. The reason why we were comfortable using this index is because the top pension funds in the country, the CalPERS, the CalSTRS, New York City, New York State, mostly all of the large pension plans, all of the top corporate plans and the top 10 defense contractors all utilize this emerging markets index.

We were just changing into an index that had been accepted by institutional investors already in the United States, but because of our scale and the partisan nature, then the administration and certain members in Congress decided to really elevate this for partisan and political reasons. That was the backdrop as to what we were having to deal with as it pertains to China.

At the end of the day, our board made a strategic decision not to push forward in making that change. One of the reasons was that we knew that the Trump administration was trying to replace us. What we did not want to have happen is to change the index and then have some of his appointees who came in the last hour before the election to change it back, because that was going to really hurt our staff and morale and impact the performance for our participants and beneficiaries.

We decided to defer it for the next board to make that decision whether or not they wanted to make the change to the index. We were thinking that that board would be five Trump appointees. Even though the Republicans controlled the US Senate, he was not able to get his board members approved. Then President Biden came in and over time, populated the board with his people.

At the end, the TSP has now changed the index, but MSCI built a new index for emerging markets, excluding China. They've actually, I think, either already switched or in the process of switching to this new index that does not include China. For a good six months, there was a lot of political bickering going back and forth. I was getting called names by some of these politicians, which in some cases was humorous. As I share with the board, our focus is on the participants and beneficiaries, not the White House, not the US Senate.

We're doing what's right for the people who are postal carriers and TSA representatives who get up every day and go to work and are saving for their retirement. We did not want to penalize them because of partisan politics being played by the White House and certain members of Congress.

Giordano: Michael, thank you for your service. It's always fascinating to hear someone who's worn multiple hats. You're not only the recruiter for the industry, but you're also a key player in the industry. As this is your exit interview, do you have any parting observations or key takeaways or last words of advice to people in the finance industry?

Kennedy: I guess my only advice would be, as the governance structure changes and things become more partisan, I would just encourage everyone, board members and staff to continue to focus on the mission of these organizations. If people focus on the mission, they'll be able to determine the best pathway forward and not get sidetracked by a lot of the partisan noise and nonsense that's going on because it seems like every week you pick up one of the publications and you read about another State legislator or governor has come out against ESG or they're mandating that they can no longer utilize BlackRock or some of the other firms.

They're taking over the ownership of investments and they need to be leaving that up to the chief investment officer and his or her team to lead the investment program the way they should be because at the end of the day, this is for the pension retirees, not for people who are in politics in the various States.

Giordano: Thank you. This is Michael Kennedy of Korn Ferry. What's your retirement date?

Kennedy: My retirement date is July 31st, and after I retire, Christine, I'm going to be serving on several boards, corporate and advisory boards. Many of these boards are focused on different types of investing, and then I'm also on the endowment board at my university in Chapel Hill, UNC. I've been on the endowment board there and will continue to serve in that capacity for a while. Other than that, typical of most retirees, travel and kick back and enjoy life, but I'm still going to be somewhat in the game and working with investments and being part of other organizations, so I'm not completely just stepping away from the investment world.

Giordano: Michael, in the spirit of our community, I always ask, would you be open if allocators contacted you, even in retirement, to ask for advice on certain topics?

Kennedy: Sure, for sure, absolutely, and I expect that will happen. I actually am in the process of having, I call it the Coach K Farewell Tour, so I'm having Zoom calls with a large number of people I've gotten to know in the industry, be they candidates or people who work as allocators or board members, just to express my appreciation I have the opportunity to work with them. Those conversations will be going on for the next three weeks.

Giordano: Fantastic. We will find a way and a city to give you a Lifetime Achievement Award, Michael. Looking forward to that celebration.

Kennedy: Thanks so much. I'm really excited about that.

Giordano: Me too. Thanks for your time today.