Exclusive: Election Years, Recessions, and Preparing Portfolios for Opportunities

A discussion with “bond guy” Chief Investment Officer Michael Shackelford of New Mexico PERA

By Christine Giordano

By self-definition, Michael Shackelford is a bond guy. In regards to the economy, it means the chief investment officer is less of an optimist.

“We're glass half empty guys, right? Equity guys, stock guys, see the glass as half-full, we see it as half-empty, so we're worried more about what can go wrong than what will go right. When I look at the economy, I look at all the things that can go wrong with it, and I remember,” he said.

Shackelford, chief investment officer of Public Employees Retirement Association of New Mexico (a.k.a. New Mexico PERA) is preparing his portfolio for a possible recession, and positioning the $16.6 billion fund to act quickly when there are opportunities to come.

Back in August, Shackelford was noting headlines and shaking his head.

“I read The Journal, I read all these papers and articles, and everyone talks about how great the economy is because labor is still strong, consumers are still spending, wages are up. All I think about is credit is tight, so banks aren't lending… Fed policy acts with a lag. That lag is usually between 18 and 24 months. It's been longer than 24 months. There have been times where it was 30, almost 36 months…”

He said six months ago, “Yes, I think there's going to be a recession. I think it's going to be a credit driven recession. There are going to be opportunities out there and I think we should be prepared to take advantage of them.”

Now, there is a 62.94% probability that the United States will fall into another economic recession by December, according to a forecast by Statistica Research Department, filed on January 26, 2024.

Shackelford, who holds a bachelor’s and masters degree in Economics, reasons that higher interest rates can be predictive. When credit rates increase, people spend less. Instead of buying the new car and taking on a higher loan payment, they stay with the old one, or downsize to a smaller vehicle. That affects production, and the gross domestic products, which in turn, can show up as a recession. It’s something many economists track, and whether it applies to the current economic regime remains to be seen.

But how does that play out during a presidential election year, when an incumbent doesn’t want the black smear of a recession on his record? Some one once asked at a Markets Group Institutional Investment Forum, “Have you ever seen a recession during an election year?”

Said Shackelford, “'08 right? That was an election year…the 2000 recession…or the early '90s recession, ended in early '92, but the effects of it were still going on.

“Famously, George H. W. Bush said, “Well, the recession's over.” He was saying that because, the government statistician said it was over. But people thought he was out of touch because they were still feeling the effects of that recession. A lot of people think that it was one of the main reasons why he didn't win the reelection.”

During his 30-year career, Shackelford worked for 15 years at Aegon, Invesco, Credit Suisse, and as a bond trader and mortgage trader where he was known as a great “closer,” while working with allocators. From there, he went on to build his own fund, IKM Capital, specializing in distressed real estate debt, for six years. It made its first investments during the era of the Great Financial Crisis in 2009. Along with knowledge of trading bonds, mortgages and mortgage backed securities, it gave him experience speaking with people from all walks of life, which is an invaluable skill when discussing finance with board members. He became director of investments at the $7 billion fund for North Dakota’s Board o University and School Lands for three years before being poached for the CIO seat at New Mexico’s PERA.

“Michael will be the perfect fit for PERA,” said Greg Trujillo, PERA’s Executive Director when the CIO accepted the role. “Michael’s extensive investment background and portfolio management skills will help PERA strengthen its Trust Fund, develop strategic alliances and expand our portfolio risk management skills.”

There had been some major shifts at the fund during the pandemic. In June 2021, the fund’s deputy chief investment officer, Kristin Varela, had stepped up as interim CIO to manage it after her chief investment officer took a job elsewhere. (After Varela handed the reigns to Shackelford, she went on to become CIO of Hawaii following the departure of Elizabeth Burton, who had grown the fund by 30% before leaving and taking a role at Goldman Sachs.)

Changes He’s Making, What He’s Seeding

When Shackelford took the helm in August 2022, the portfolio was 70% funded. He immediately raised the fund’s exposure to private markets by 7%, making them about 40% of the $16.6 billion fund. NM PERA’s return target is a comparatively high 7.25%, while most public funds now have a goal that falls below 7%, but he’s cash flow light, with more money sent to beneficiaries than taken in.

“We have to get a 4% return just break even every year,” he said.

In fact, according to the 2023 Annual Report, the fund made 4.23% through the fiscal year ending June 30, 2022, placing it  in the top third of its peer performance in a ranking by InvestmentMetric, yet expectations needed to be managed. It was allocated 38.9% to Global Equity; 16.7% to Risk Reduction; 18.6% to Credit (.4% shy of its target allocation); 17.7% to Real Assets (.3% shy of target); and 8.3% to Multi-Risk.

To Shackelford, the private equity portfolio was already well-diversified with a stateside bias but also some exposure to Europe and Asia. Its core was buyout, with some venture capital and co-investments. He just needed more of it.

The fund has some flexibility and is not as constrained by the denominator effect as others. Shackelford ran models with the consultant firm Wilshire, (his former general consultant), whose conclusion was that the fund could take on more risk.

He has been specifically seeking funds that specialize in distressed assets, and is even willing to seed them in order to be ready for times ahead. He has been working closely with his credit portfolio manager, knowing there’s more cushion there than in equities.

“If there’s a structure there that exists that I want, then great, we'll just invest in it. If there's not, then we’ll seed it. I just want a good manager who has good processes and a good track record, and then I want a vehicle that fits our needs. If it doesn’t exist, we'll seed you, because my view is I can't be the only one who wants this structure.”

He allocated to two all weather funds he was well familiar with from his time as North Dakota: the Pathfinder Core Fund at Ares, and seeded Apollo’s Defined Return Fund, since both funds have mandates that allow them to seek distressed assets. “In good times they'll be in performing credit and in bad times they can dip down into distress,” he said.

But he has also been vetting funds specifically created for distressed opportunities.

If he’s changing allocations it’s because he’s not a fan of risk parity or portable alpha, or closed-end funds that, to him, seem to stem the cash flows at their start and finish. He and his team are researching what to replace them with: considering infrastructure, more private equity, or commercial real estate, although he believes commercial real estate, like office, could take years to work through and get resolved. That’s where his new consultant, Verus Investments, is doing some heavy lifting and going through multiple iterations of possible portfolios.

In December 2023 PERA’s Board approved a new asset allocation. The new asset allocation increased global equity exposure from 38% to 46%, which included a two-percentage point increase to private equity, from 17% to 19%. Illiquid credit (private credit) increased from 8% to 9%, while illiquid real assets (private real assets) increased from 8% to 11%. Both risk parity and portable alpha were removed from the asset allocation, however the hedge funds that were part of portable alpha were kept and moved to a new category called absolute return at a 6% allocation.

He diffuses the “vulture investor” notion, having heard it before. “After I left Credit Suisse and started my own fund, they said, ‘Oh, are you a vulture investor taking advantage of people’s hardship?' I said, ''No, I'm here to help clear things out.'' You have a capitalist society, recessions are common. They don't happen often, but they do happen every 7 to 10 years. When they happen, it's basically trying to clear out malinvestments, bad investments so that people can make good investments.”

To Shackelford, you’re correcting things: helping someone keep their house by offering them better terms. Or offering an endowment good cash liquidity for a solid investment that gives you a little excess return because it was bought for 90 cents on the dollar. Or restructuring a loan so that someone can make their payments. “You have to be cautious not to catch a falling knife by rushing in too soon,” but he emphasized, “whenever there’s a recession, there’s opportunity.”


Shackelford’s tip for other CIOs who are taking on a new role at a larger office? “Get to know the people, get to know your staff, get to know your board, get to know your consultants and your investment managers, but definitely your staff.” Your job may shift from fathering investments from beginning to end, to improving them with your years of experience. To do that job, you need to know what each investment staff member is capable of. “You really have to be able to trust that your people are good at what they do and give them the resources to do what they need to,” Shackelford said.


What he’ll discuss with other allocators: Michael Shackleford is open to chatting with other CIOs about anything involved with being an allocator, from private assets to compensation for employees.