In his role overseeing New York City’s five pension funds, Steven Meier, CIO of the New York City Retirement System, performs a daily balancing act. Managing approximately $264.04 billion in combined fund assets to sustain nearly 800,000 plan beneficiaries and participants means investment decisions are made with a very long time horizon in mind, but at the same time, those allocations require constant attention and weighing day-to-day risks.
Meier spoke recently with CIO about the role rising interest rates may play in the portfolio’s performance, his concerns about evolving geopolitical risks and the strategic opportunities that could develop in the funds’ private equity stakes. Below is an edited transcript of the conversation.
CIO: The funds’ fiscal year 2023 returns surpassed your 7% actuarial target rate with a combined 8% return across all five funds. How are you viewing the current interest rate environment? Are today’s higher rates a concern or an opportunity?
MEIER: It’s both. I worry about the level of U.S. indebtedness, to be candid, and the impact on base rates over time. We continue to run record deficits. Our outstanding public debt is now $34 trillion. Our annual interest expense is 3.2% of U.S. GDP, over $872 billion in interest payments this fiscal year alone. Having said that, I think getting off the zero-interest rate policy that the Fed had put in place—as a necessity following the global financial crisis and then with the pandemic—is a positive thing. Rates that are that artificially compressed lead to excessive debt and suboptimal investment decision-making.
From a portfolio perspective, though, base rates are helping provide ballast and yield for the portfolios. We’re investors in all manner of public and private assets, so higher base rates certainly help in terms of our allocation to fixed-rate bonds. The higher base rates also help in our private credit holdings with higher levels of floating-rate debt, particularly given the current official interest rate policy.
CIO: Your investment experience spans both the public and private sectors. What is different about your current role in focusing on roughly 800,000 members and beneficiaries of New York City’s five pension funds, and how does it affect your day-to-day investment management?
MEIER: I’ve never had a job that I’ve enjoyed more—it’s really a wonderful opportunity. I take the responsibilities within the Bureau of Asset Management very seriously in terms of, as you mentioned, almost 800,000 beneficiaries and participants that we care for as fiduciaries. And we try to do our very, very best to achieve the returns that can make sure that those pension payments are safe and secure.
As a general matter, though, we’re not really tactical. We don’t trade our positions. We’re more strategic, so we don’t necessarily make judgments on a day-to-day basis on terms of changes in, say, allocations. We don’t run high levels of cash that we can put to work tactically. So it really doesn’t impact my day-to-day other than there’s a lot to look at. I have the privilege of supporting and servicing five distinct and unique New York City public pension plans with their own boards, their own risk tolerances, their own preferences, and it really makes the job that much more interesting. I love the engagement. I don’t mean to make this too personal, but just being part of New York City and walking around and seeing firefighters and police officers; I’ve never felt more connected to the city of New York [than] through this role.
CIO: As you say, as an employee yourself and future beneficiary, and knowing that a pension is the bedrock income for many participants’ livelihoods in retirement, how does that influence how you provide downside protection? And where do you see opportunities for doing so in today’s markets?
MEIER: It’s in being strategic and not tactical, being consistent, being thoughtful in terms of how we actually invest in, say, private market deals and our choice of public asset investment managers—outside managers. That all goes into the mix. We need to think on a long, long-term horizon as opposed to worrying about, say, drawdowns in the next six months.
In terms of the strategic asset allocation review, there are a number of things that will ultimately impact the performance for a portfolio in the next 10 years. The drivers of the performance are things like global and domestic GDP growth, the level of inflation, the level of productivity, the level of public spending and the level of private investment and capital flows. We are constantly focused on these critical trends—decarbonization, deglobalization and demographic dynamics. In addition, transformational technologies such as AI, increasing sovereign debt levels and rapidly changing geopolitical challenges will drive the building blocks of the global economy, meaning growth, inflation, productivity, public spending and private investment.
The things that I think will actually impact those are these big mega-trends, decarbonization and climate change—the deglobalization, the onshoring, nearshoring and the impact on global capital flows. Also, demographics—we’ve got an aging population. We look at the impact of demographics on, say, the labor force.
When we look at transformational technology, artificial intelligence is going to be really something to pay attention to. It’s already impacting the way we think and do business, as well as starting to see impact on GDP growth and increases in productivity. We think it’ll be disinflationary at the margin. The other two things that I focus on, and I touched on a little bit, were the level of sovereign indebtedness, as well as geopolitical risks.
You cannot look at your portfolio opportunities in the next 10 years and not be cognizant of the fact that the world is rapidly changing with a new level of geopolitical risk. Recently I had a conversation with a geopolitical strategist who said there are many people in Washington right now in military intelligence that run parallels between what we’re seeing now, in terms of the buildup and dislocations around the world, [and] 1913 and 1939. So while we hope for a soft landing in the economy, we have to be aware of a potential hard landing on the geopolitical front.
CIO: Given these far-ranging risks and your long-term management mandate, what are your strategies for offsetting those risks?
MEIER: It’s through being strategic in terms of our asset allocation, having a mix of assets that are expected to perform well over time. Those assets are not all positively correlated. We have a mix of things that will offset each other again, depending on what’s going on in public and private markets. It’s really trying to be strategic, make good choices in terms of how we allocate cash on a day-to-day week to week basis. But again, being very thoughtful.
CIO: Of the risks you highlighted, what is the one you are watching most closely for having the potential to have the biggest impact on the portfolio?
MEIER: I’m thoughtful about all of them at this point. Geopolitical ones tend to dominate the headlines. We’ve got a ground war in Europe with Russia’s invasion of Ukraine. We’ve got a conflict in the Middle East that now involves 10 countries. We’ve got divisions around the world. China seems to be pulling away from the U.S., and the U.S. is pulling away from China. Russia is increasingly isolated from the west. Those have implications for a lot of things: trade alliances, trade flows, transfer of technology and tariffs. I would refer to today as being a radically uncertain time, but I’ve actually had the privilege of working for 40 years now in the global capital markets and investments in particular. I thought I’d seen it all. And then we saw the pandemic, which was really unexpected. That was one of those ‘unknown unknowns.’
We know climate change is going to be impactful, but we don’t know necessarily specifically how. We have some science-based data around that. But the pandemic really just came up out of the blue and was significant in terms of an impact on the way people think.
If you look back at what we’ve been through with the global financial crisis and the pandemic, it’s kind of a head-scratcher to me that the economy seems to be on a better footing right now. We’ve got almost record highs in stocks prices, bond prices have recovered, yields have moved down. Anyone that really wants a job can get a job now. We’re almost at full employment, and yet people feel really discouraged about the current state of the U.S. economy. So why is that? The uncertainty associated with the pandemic has led people to feel uncertain and uneasy.
CIO: How does this awareness of those known and possibly unknown risks you mention affect your cash strategy—even if it is a small percentage of the portfolio? Are you considering altering that position as interest rates have risen?
MEIER: Obviously with the T-bill rates in the 5.20s to 5.30s, depending upon what day it is, and between pricing in the potential for rate cuts and how far out you’re investing, that’s an attractive yield. But again, for me, having an outside allocation in a cash position would indicate that we’re trying to be tactical and time the market and, as a large institutional investor, not only is it not necessarily smart, it’s really hard to do at our size and scale. We prefer that we focus on time in the market, not market timing. We’d rather be consistent and strategic.
CIO: On the topic of being strategic, what are you seeing regarding the pace of distributions from the funds’ private equity managers? Has it changed in the last year or two? Has there been a slowdown?
MEIER: Distributions have slowed down dramatically. We’re slightly under-allocated in private equity, relative to peers, and looking to put more money to work in that space. Private equity positions tend to mark down more slowly than, say, public markets, which is pretty much immediate.
There’s been a fairly healthy bid-ask spread between where buyers are willing to buy and where sellers want to sell. I actually see some positives associated with where we are today. Stock prices have recovered certainly very nicely since the lows of 2022. Ten-year U.S. Treasury yields are about 4. They’ve been as high as 5% last year and as low as 3.30%. The fact that yields have come down, the bond market is repaired a little bit, high-yield and investment-grade spreads have come in fairly dramatically, as have private credit spreads. As those things happen, the bond market recovers and equity prices rally, that bid-ask spread narrows. And we are starting to hear anecdotally that there’s more M&A deals that are more likely to get done this year.
CIO: Are you considering changing your stake?
MEIER: We really don’t rely on the distributions to make benefit payments. I should be clear on that. We have enough liquidity through our public equity and fixed-income assets. We’ll just be a steady investor. We do think that some of those asset classes are cheapened up. We understand that many of our peers are fully allocated, perhaps over-allocated to those asset classes. So they’re pulling back a little bit, which puts us in a position to better negotiate economic terms and to have better access to the top tier investment managers around the world. It’s been a good time for us to be looking to put more money to work.
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Tags: New York City Employees’ Retirement System Teachers’ Retirement System Board of Education Retirement System, NYC Bureau of Asset Management, NYC Pension Funds