Art by Chris Buzelli

You’d be hard-pressed to find a public pension program with the kind of outperformance Matt Clark has achieved at the South Dakota Investment Council (SDIC). Clark has been involved with South Dakota’s pension programs for 34 years, working his way up after starting as an intern just out of business school. Under Clark’s leadership, the pension has ranked in the top 1% of performance over the past 20 years.

The $10.5 billion retirement system is known as an ultra-long-term investor, and Clark has made it his mission to ensure that the pension maintains investment discipline above all else—a mission he says makes him a contrarian among his pension peers (we say innovator).

“I think if you’re focused on long-term investing, by definition you are a contrarian because the market is focused on the short-term,” Clark tells CIO. “You have to be willing to reject concern for the short-term to succeed as a long-term investor.”

Clark and his team manifest their long-term investing vision by managing a large portion of the pension assets in-house. Much of the retirement system’s investments in public markets are handled by an internal investment team that has been with the pension for decades. Over his tenure, Clark has developed a reputation for finding and hiring skilled investment managers that stick with the pension because of the long-term strategy and unique compensation package.

“Our incentive-based compensation has been key to our ability to innovate. We reward people who stick with us and are willing to ride out some pain to succeed over the long term,” Clark says. “That style of compensation isn’t common everywhere, but it’s helped us to grow a strong team in-house.”

SDIC takes an active management approach to the portfolio—making opportunistic investments as market conditions change. SDIC’s long investment horizon puts an embedded value tilt on the portfolio that Clark says has helped with the pension’s outperformance.

When energy prices tanked in 2014, for example, SDIC built up significant positions in distressed high-yield energy debt and held on to it. At one point, distressed energy investments made up as much as 9% of the portfolio, spread across oil, natural gas, and coal debt. Those bets paid off and the pension has been steadily exiting its investments at a profit as energy prices have rebounded over the past year.

While the rally has boosted investment returns for SDIC, a new painful period may be on the way. Frothy valuations are making it hard for Clark and his team to find new value opportunities. Some investors in Clark’s position might be alarmed at having cash on the sidelines, but in many ways, he’s in his element. Clark and his team are on the hunt for their next big idea. He says the pension can ride out these cycles and invest smartly when the time comes—a luxury few pensions have.

“When you look at the pension space broadly, there is a lot of distress,” he says, noting that many pensions are changing plan designs in response to underfunding and other headwinds. “The South Dakota plan has always been focused on discipline in making the right contributions and investing for the long term. I think we are well placed to be a survivor.”