NEWS

By David G. Barry

Shoaib Khan in May was named director and chief investment officer of the New Jersey Division of Investment, which manages the investments for the $85.5 billion New Jersey Pension Fund. Khan served as the division’s acting director and CIO for nearly a year, having taken over after Corey Amon left to become CIO of the National Rural Electric Cooperative Association. He had joined the division in early 2021 after being a senior portfolio manager at the Florida State Board of Administration.

An accountant by trade, he previously held roles with Axlewood Asset Management, Union Bancaire Privee in Geneva, Switzerland, J.P. Morgan and the City of Miami General Employees' & Sanitation Employees' Retirement Trust. Khan becomes the fourth person to head New Jersey’s Division of Investment over the past decade. In a wide-ranging interview with Markets Group, he spoke about his career path, the appeal of the New Jersey CIO job, and what he will attempt to do in the 2022-23 fiscal year.

Markets Group: Shoaib, it appears as if you’ve had an interesting journey to becoming New Jersey’s CIO, having gone from being an accountant to roles with Miami’s pension fund, a boutique investment firm, J.P. Morgan, a stop in Geneva, involvement with a family office and time with the Florida State Board of Administration.

Shoaib Khan: None of us plan to be in a certain role or in a certain place or anything like that. We just kind of go where our passion takes us and where opportunities lie. And sometimes it means being in the right place at the right time. All of those things I think can come together and bring you to where you are at different points in your career and different points in your life. And I would say it’s a combination of all those things: passion, opportunities, challenges and being, you know, in the right place. All of those I think have played a role in my career.

MG: How did your first job with the Miami General Employees’ & Sanitation Employees’ Retirement Trust impact your career?

SK: That was my first sort of endeavor within the public pension plan. I actually stayed there for five years. I started out as a staff accountant and then became an analyst. There wasn't a separate investment team. It was either administration, which handled benefits, pensions and calculations and so forth, or finance, which handled investing, and I was part of that. Well, the controller left, and I was asked to step into the controller role and then a year after that, I got my CPA license and was asked to step into the CFO role. All of these things sort of allowed me to learn more about investments. And then I guess you could say I didn't really have a choice. I became responsible for it, but it was something that I discovered that I had a great interest in and a strong passion for.

MG: The economic situation is obviously not great right now. But you are no stranger to investing in uncertain conditions – correct?

SK: I joined J.P. Morgan in 2002 as a strategy head and until 2007 put together the team that worked on various distressed and credit opportunities. If you think back to 2002, you had [the collapse of] WorldCom and a number of events that led initially to some crises and then, of course, great opportunities. There were a number of defaults and so forth so credit, long and short distressed securities, that was what we focused on. … Then came the LBO wave with increased M&A activity and we followed that cycle and obviously equities became opportunistic and so we shifted, and it was again a great opportunity.

MG: You then joined Union Bancaire Privee in Geneva in 2007, ultimately becoming global head of portfolio management. But 2007 was just prior to the Great Financial Crisis. What did you focus on during that period?

SK: I spent a fair amount of time in Europe as well as Asia and Middle East and in the U.S., travelling all over the place and really gaining a lot of experience and exposure and trying to solve our clients’ problems in terms of liquidity, portfolio management and capturing opportunities. Of course, while you're doing all of that, there's a great opportunity to learn as well. 

MG: It appears as if your career then featured a stint with a family office and then a role with the Florida State Board of Administration. How did you ultimately end up at New Jersey Division of Investment?

SK: I joined Florida SBA in 2017 and it was a great opportunity to work with a team that was very involved in a lot of different strategies and with [now-former CIO] Ash Williams, whom I had met some years earlier while we were both in the private sector. It was a great organization, still is and will continue to be. But then, of course, COVID came around. I had been based in Scarsdale, N.Y., and was traveling back and forth to Tallahassee, Fla., when the New Jersey opportunity [deputy director and CIO] came up. And after discussing the opportunity initially with the recruiter and then ultimately [then-CIO] Corey Amon, it really highlighted the possibility to be impactful and make a difference. That’s what effectively attracted me to New Jersey and led me to where I am today.

MG: Many, it seems, move from public pension funds to the private sector. You, however, have gone the other direction. What is it about public pension funds that you find attractive?

SK: There are pros and cons to both the private and the public sector. Within the private sector, you have a lot of runway to execute and I think that's a great opportunity. But, at the same time, there is this pressure when you think about long-term investing for short-term results because you have clients – and yes – a lot of those clients are institutions, but nonetheless there is this watching of monthly performance or quarterly performance and so forth. So many times, you're not able to execute on the long-term asset allocation or the performance or the results that you're trying to extract from a long-term perspective, and you have to manage the short term and intermediate term as well as the long term which, of course, applies to public sector as well.

But, when you talk about public pension plans, you have one client, which are the beneficiaries. Now, of course within that, they are obviously various subsets. We manage several different pension plans and as well as a cash management fund. But generally speaking, you're not talking about a number of clients that have different objectives or different time horizons. You generally have long-term views and you have long-term assets and long- term liabilities. That's where the opportunity comes in with respect to public where you have the ability to step back, think about where the world is, where are the opportunities, where are the challenges and the risks and put together a long-term plan which you can execute on over time and get the results that are appropriate for the risk-adjusted return or the risk and the return objective you are targeting. To me, that is very attractive and that’s what attracted me back to the public sector and public pension plans. 

MG: You joined New Jersey and then served as acting director and CIO for essentially a year. What did you learn during that time and why did the job of being permanent CIO appeal to you?

SK: During my career, I’ve never targeted a position or anything like that. It’s all about is the role interesting? Does it attract my attention and is it something that I could come to on a daily basis and be excited about? That’s the first question I ask myself because if I can’t do that then what are we doing, right? You’re just sort of coming in and then it's not interesting. So, I think that's the first question that I ask and if I can check off that box. The next one is ‘can I add value, and can I make a difference? Can I be impactful in that role?’ If I can check that box off, then that's what gets me very interested. And I was able to do that coming in as deputy director and as a deputy CIO. And then, [Amon] left six months after I joined, and so I was asked to step in as interim director and CIO and in that role, I obviously assumed greater responsibilities. My conviction level rose with respect to having the ability to be impactful and to make a difference and to continue making improvements that my predecessors have embarked on. I think when I took on those additional responsibilities and, in conjunction with the rest of the team, figure out what the objectives are along with what the challenges are that it became even more interesting. So, when the State Investment Council and the Treasurer’s Office embarked on a search [for a permanent director and CIO], I decided to throw my name in the hat because it was interesting. It was impactful and I could see that I could make a difference. And I think that interim year, if you will, led to my higher conviction in the role. And I think that allowed me basically a free trial to see if I’d be right in role and if it’s something that I’d be interested in. When I went through the interviewing process, I tried to put my best foot forward because I was so passionate about it. And I think that it helped me to gain a higher level of conviction in the role.

MG: Your appointment as permanent director and CIO comes as the economy is heading the wrong direction. You’ve obviously had experience in dealing with downturns and financial crises, but describe what it’s like to take over in this environment and what you are hoping or looking to do with the program?

SK: Look, I think we there a lot of things that we have some control over in our lives and in our careers. And then there are far more things that we do not have control over. And certainly, the markets are definitely one of those in the latter category. But this is not the first time, and this probably won't be the last time as much as we would like it to be. So, I think it is part of the landscape and I think we recognize that when we've done it for a number of years that there are cycles and with those cycles come challenges, which can lead to different sets of opportunities. And so, I I think we have to keep that in mind. Certainly, the [Great Financial Crisis] was one and I think what I've taken away from the various crises that have come up in the past is that it's extremely challenging while you're in the midst of the crisis and we certainly are in the midst of the current one. But they’re all different. So, you learn from your previous experiences, and I think by having that experience it helps you to remain calm and be rational about these things.

MG: Does your time spent during the Great Financial Crisis help with the current situation?

SK: When I reflect back on the GFC, the learning came from being there. It’s just priceless right? You can’t pick up a book and read about it. It's not the same thing as being in the midst, when Lehman is in trouble and Bear Stearns is in trouble and there is a lack of liquidity and all of those things going on and you're trying to manage portfolios not just for today but for many years into the future. So, I think all of that plays into the role and this is no different, right? We are in a different scenario. We don't have the housing crisis. Some would argue that the housing crisis is probably on the other side, on the other spectrum, right, where prices are overdone at this point. So, different scenario. But of course, we have inflation, and we have high valuations and some of those valuations have now obviously come down and so forth. But going back to my previous point, being a long-term investor is definitely helpful. Certainly, the critical thing to monitor in these environments is the liquidity because what you don't want to be is a forced seller. You want to have sufficient liquidity to manage through that crisis and then ultimately be able to deploy some of that dry powder to capitalize on the opportunities going forward. So, it's a combination of saying, ‘OK, how do we get through the period that we are in the downturn, if you will, and then how do we position ourselves so that we can capture the upside’ because that's really our role to step back and see how we can do that. And so, liquidity management is critical.

MG: Has the Division taken steps to have that liquidity management?

SK: In the beginning of the year, we looked at it again. We didn’t know that inflation was going to approach 9%. Very few people probably did and certainly we did not know that the Russian and Ukraine crisis would be where we are today but clearly, we were looking at an environment with potential headwinds. So, what we did was reduce some of our exposures and we raised our cash positioning. And I think that provides us a fair amount of liquidity going forward and it has so far. And in addition to that, we have liquid allocations as well. Liquidity is something that we continue to monitor in this environment. At the same time, we continue to watch the equity exposure as well as the fixed income because again there are times when the equity markets are impacted and there is a flight to safety within bonds. Well, this time that isn't the case. And so, we continue to manage both parts of that in addition to our private market, which is also very diverse.

MG: You’ve mentioned the opportunities that can come out of crisis. How are you thinking about that this time?

SK: We are currently look at where the next opportunities will be and where do we allocate to within private credit. There are certain sectors we continue to watch the default rates. Certainly, we don't think that we are in a period of the GFC credit crisis where default rates are going to be extremely high but nonetheless, we do expect some different defaults to occur, and we do expect those to increase. So those are certainly opportunities. We think that because of valuation compressions, there will be opportunities across the board. So that means various industries and sectors, but also geographically.

We also continue to look externally outside the U.S. where we have a fair amount of exposure be it in developed markets as well as emerging markets and where there are valuation compressions. When there are opportunities to extract from, then we will start to allocate that dry powder when we see a bit of stabilization. Obviously, the Federal Reserve as well as other central banks have already embarked on a relatively active sort of process that will take its course and we will start to see stabilization, inflation numbers come down and I think that's where that's long term added sort of approach comes in where we can deploy capital. 

MG: Does it concern you at all that some of the managers that are deploying capital did not go through the GFC and have not had experience investing in a crisis? Will that play into your selection process?

SK: Each crisis is different. The dotcom crash was very different from the GFC crisis. And those were different from the Asia crisis. So, each one is different and, as the saying goes, what doesn’t kill you only makes you stronger. And I think if you've gone through several of these, I think you're better, able to understand it and remain calm and then be able to extract opportunity. So, whether we're in a crisis or not, when we look at managers, we always look at their track record and the experience that they bring and to the extent they've gone through crisis and how they've managed through it. It’s all part of the due diligence process, so I wouldn't say that it has changed today because it's always been part and parcel of the lens that we look through. So, we’ve looked at the Russia crisis, the Asian crisis, the GFC, the dotcom [bust] and now we’ve got another data point going forward that is going to be valuable in that process.

MG: Are there specific sectors that you and your team are watching in the current environment?

SK: From a tactical perspective, we will look at sectors, depending on how and fast or slow the world is able to get a handle on the inflation. I think there will be different opportunities as the issues related to the global supply chains diminish and as hopefully the Russia and Ukraine crisis sort of comes to an end and we get control on inflation. If you looked at semiconductor production, previously you focused on a certain part of the world. Well, that's shifted today. So, I think going forward you're going to have to look at it from a broader lens. There is a shifting that's going on and so we'll look at the newer emerging opportunities that result from that shifting. Additionally, we are seeing shifts in in terms of just the labor market. We are seeing a shift from things that China was potentially involved in previously and that have now shifted to other parts of Southeast Asia, for example. And so, as that happens, there is a shifting of opportunities along with challenges, of course. And just because there's an opportunity doesn't mean that we will invest because we'll look at the other side of that and what are the challenges and see if it makes sense. But I think that's how we will approach it.

MG: Can you be a bit more specific on investment opportunities that might be of interest?

SK: We will look for newer opportunities that are in the early stages, yet growing, such as renewable energy. These are industries with a long path and will see increasing investments as newer innovation and developments take place. Where it makes sense for the Division of Investment to be involved in order to capture these investment opportunities, we will look to do that.

MG: What about areas to avoid or be cautious of?

SK: We are continuing to look at the underlying leverage levels in our investments so as to monitor risk and ensure that leverage levels do not reach high levels. We remain cautious of investments which require high levels of leverage to deliver returns. We will also be careful to minimize investments in sectors or parts of the landscape where there may be longer-term structural changes occurring that may adversely impact our investments.

MG: What are you hoping to accomplish in the upcoming 2022-2023 fiscal year, which will start July 1?

SK: Obviously, we don't control markets. We haven’t changed in what we are targeting with our objectives. Certainly, we continue to focus more on the volatility today but nonetheless our long-term objectives, and I would even say our medium-term objectives, remain intact. And so, from an investment perspective, from a portfolio perspective, we have certain targets. We will continue to move towards those targets. There are obviously challenges at this point and I think sometimes not doing anything or not allocating is the right decision. And I think we're in that period right now, where having a pause isn't the worst thing to happen. And by the way, keep in mind the private markets that we have committed to over the past year. I think it’s been great timing because we made those commitments and now those dollars and that capital is now ready to be deployed as the investment managers find opportunity. So sometimes timing works in your favor.

MG: Are there any investment sectors that you will put greater emphasis on in the fiscal year?

SK: As we look across our investment portfolios, we realize that we are underweighted to investment managers and funds that are smaller or at an early part of a fund’s lifecycle. In response to this, we have recently launched the Emerging Managers Platform which will seek to identify smaller funds at an earlier stage in the lifecycle within the private market space. There are areas of the market which can be accessed quiet effectively and efficiently by smaller funds and it would be in the pension fund’s interest to capture these opportunities – the emerging managers program goes towards capturing these opportunities. Additionally, the program will also enable the Division to access more diverse and women-owned investment firms which also enables the pension fund to benefit through greater investment access to underweight areas.

MG: What about the administrative side?

SK: We will focus on building the team and strengthening the processes that we have and strengthening our team members. We will continue with training, education, and rotating investment analysts and investment team members as well as other team members within the different areas so that they can develop professionally and contribute more as well as develop professionally. Obviously, we always focus on performance, but also focus on the processes. So, our processes are very institutional and nonetheless that's not to say that there isn't room for improvement. There is always room for improvements. New technologies are available [and]we are in the process of implementing some of those. And so those are I think some of the things that are going to keep us busy bringing technology to a higher level, implementing on those, looking at our processes, finding improvements and then executing on that.