Jonathan Grabel is running his pension fund’s investments with a professionalism usually associated with asset management firms.  Emphasizing a smart asset allocation, he has deftly kept his board aware of the changes he sees as necessary to navigate a possibly rockier investment terrain ahead.

Grabel believes he is fortunate to be CIO at the Los Angeles County Employees Retirement Association (LACERA), a plan that has had good returns over time, including the 9% net gain during the 2017-18 fiscal year.

But Grabel, who joined LACERA in April 2017, suspected that harder times may be coming. So, to have a shot at getting similar performance, he recommended LACERA adhere to its core investment beliefs and reapportion its asset allocation in a more diversified and risk-aware manner.

“Creating a more balanced portfolio must involve less public equity,” among other things, he says. Over the past decade, LACERA’s US public equity portfolio returned about 12%.  Grabel declares that public equity returns may be less lofty in the coming 10 years.  To best serve its 165,000 members, Grabel and the board feel that diversification will pay incremental dividends.

Thus, the new allocation, for instance, would decrease public equity in percentage terms “from around 47 to 35.” The $57 billion fund’s new allocation, he says, would be “better suited in a lower-expected-return environment.”

By the reckoning of Grabel and his staff, the annual return needed to meet pension obligations is 7.25%. But the median expected return in the short-to medium-term, according to a study for LACERA by Meketa Investment Group, based on its old allocation, would be closer to 6.5%.

An asset mix that looks to strategies that emphasize in the aggregate lower volatility and higher-income generation has been one of Grabel’s goals. Minimizing costs, more intentional portfolio construction, and enhancing cash management are key components to improving implementation.

As Grabel explains it, what is needed is both incremental sources of return and enhanced execution. As a result, with the updated asset mix, there’s a new category called “credit” that separates debt instruments between those strategies that are return-seeking and those that offer better downside protection. 

Grabel notes that many of these credit investments were in other asset categories prior to the new asset allocation.  This type of disconnect in a portfolio, he further states, may lead to unintentional outcomes, especially with an increase in market uncertainty.  According to Grabel, the separation of credit and investment-grade fixed income improves total fund management by allowing each mandate to serve a specific role. 

The same focus on incremental returns and more exacting risk management goes for a revamped category called “real assets.” This category also increases LACERA’s expected returns by introducing private natural resources and infrastructure. Incremental diversification at the asset category level helps LACERA, according to Grabel, better perform in multiple economic states by reducing the reliance on public equity. 

At an offsite earlier this year, LACERA discussed making the fund more nimble, capable of deploying capital in times of market dislocations.  While Grabel does not believe anyone can consistently and predictably time markets, he has advocated that LACERA evaluate “springing” mandates from which commitments would be drawn upon predetermined market movements. 

Then there’s minimization of costs, using fewer managers, converting high-fee funds to less costly alternatives, and for private markets, focusing on longer-dated funds and increasing co-investments, among other things.

If all these moves bear fruit, returns could increase by an amount that helps LACERA navigate more challenging capital markets while maintaining a focus on liquidity and risk management, the thinking goes. And while this result is certainly not guaranteed, these new methods are meant to improve the potential for such returns.

At the board offsite, Grabel handed out a questionnaire to best charge staff with the areas that are most important to the board.  He believes the survey helped shape and clarify the implementation plan. 

“We had to figure out what our priorities are,” Grabel says. “Returns are harder to achieve in the short- and medium-terms.” And the new allocation “is better suited” to bring what the fund needs in the long term, he says.  In addition, Grabel contends that the survey provides the optimal roadmap to avoid common implementation pitfalls. 

Grabel has had considerable experience in managing investments for public pension plans. Previously, he served as CIO of the Public Employees Retirement Association of New Mexico. Before that, he was CIO of Montgomery County public schools in Maryland. Prior to working in public pensions, Grabel was a private equity executive in New York.

One thing he knows, being more risk-aware improves the odds of success in an increasingly uncertain environment.

By Larry Light