The Pensions Vet
Tom Tull, chief investment officer of the $29 billion Texas Employees Retirement System, has spent a lifetime investing. Whether he’s on the corporate side or the public side, the Austin chief runs a tight and collaborative ship, where he draws from his experience in the Vietnam War. It taught him the importance of communication and leading a team towards a goal. Here, Tull describes the lessons learned from that time and the culture at the pension plan, gives his take on passive vs. active, and reveals the secret of longevity in the CIO world.
CIO: So how did you get started with pension investing?
Tom Tull: Actually I started on the corporate side where I spent most of my life. I came out of college, got involved with a mutual fund, worked at a bank as a trust officer then went to the corporate side. From the corporate side I got involved with ERISA money and defined benefit plans. This was in the late ‘70s, early ‘80s. I really enjoyed the corporate environment and got involved doing corporate acquisitions as well as managing a defined benefit plan. From there a reverse acquisition attempt landed me in Dallas.
From there I set up a money management business involved with international investing. My partners and I were fortunate in developing a viable money management business with over a billion dollars in assets under management that was eventually sold to a West German bank. From there I retired a few times after doing some gold mining investments in Brazil, consulting, board relationships and such. With a desire to get back into the institutional money management market I became actively involved with the Employees Retirement System of Texas where I was on the investment advisory committee. After joining ERS on staff with responsibility for strategic planning in investments, I became CIO.
CIO: And you served in the war, correct?
TT: Yes, I was in Vietnam in 1969.
CIO: Has that influenced on how you steer your ship so to speak?
TT: It does. Things that I learned from that experience were you earn respect, you don’t just get respect; and how to work with teams as I did with my platoon. It also helped me to work with people while learning the importance of communication, listening and learning how to leave one’s ego at the door kind of thing. That was reinforced even more so as I got more actively involved in investing and working through a lot of different investment cycles over the process.
CIO: What’s the culture like over at ERS?
TT: It’s very much a team approach thanks to a very proactive and engaged Board. We try to run the organization on the second floor not so much as a public fund but as a fund that is let’s call it more of a business type organization where we constantly watch costs, returns and risk. Just because things have always been done a certain way doesn’t mean that they can’t be done differently in the future. We are always looking for ways to invest money more tactically, timely and more opportunistically. For that reason I’ve always been one to try and manage as much money internally if you have the capabilities. We manage over 60 percent of our assets internally which is a nice savings. We can do it for about 11 basis points versus having it managed externally for over 40 basis points. The importance of a tremendous team is crucial in this process.
In addition to managing equities and fixed-income internally we are also able to add tremendous value on our alternative investments. For example, we co-invest on the private equity, private real estate and infrastructure areas with different teams. With different capabilities we can do quick turnarounds in evaluating opportunities. We do a lot of travel to kick tires and make sure we’re getting what we think we’re getting in terms of investment due diligence and operational due diligence. We are also able to think outside the box in terms of doing things that a lot of other public funds really haven’t gotten around to or may do at some future point. For example, we’re doing more seeding and the funding of ETFs. We just recently introduced the PAAMCO deal where we’re working with PAAMCO on a platform where we will be seeding new managers in the hedge fund space.
It’s neat, especially because we get a revenue share plus it gives us involvement and access to emerging managers. If we were to do manager by manager in the emerging manager space it would be more cumbersome. By doing it through a hedge fund platform we can cover a broader universe, have a greater selection, and get some great economics in the process.
CIO: I know you want to increase your alternatives allocations. What’s that plan and how is that coming along?
TT: It’s going well. We’re going from 26 percent to 37 percent in alternatives over the next few years. Also, we are fortunate to have tactical bands around all of our asset classes for tactical flexibility. So when we have periods like what we’ve had in the market over the last 30 days we can be more responsive to change and not
be forced to sell when we really don’t want to sell. At the same time we’re managing all of our asset classes for flexibility. If markets get giddy and we have an opportunity to monetize into the secondary market, we’ll do it. We’ve done that with real estate, we’ve done that with private equity. Infrastructure is still too early. But these are all ways by which we manage the asset classes rather than just buy and hold.
CIO: And what are you doing to mitigate a potential downturn in the next year or so?
TT: Well, we’ve been taking risk off. In January of this year when the market was up over 7 percent; in the equity markets, we took half of our gains off the table which really helped. We raised about 400 million dollars of 800 million in gains. We thought it was prudent to do what we did.
Since then we have been taking risk off on a regular basis each month until recently. In other words, selling equities and putting the money into rates which is very short-term treasury type securities. In the month of October, because the markets have gotten hit so hard, we have actually paired back on that program and will likely put more money from rates back into the equity markets.
We are believers that we will have another good year or two to go before we face the next downturn so we view this latest adjustment as more of a correction in a bull market which is more the norm.
Now that can change if trade issues really get bad or there’s a geopolitical event or something over and above the normal political noise that we’re getting thanks to midterm elections and a variety of other things. If there’s a negative policy change or there’s an event that precipitates a difference in opinion then we’ll respond accordingly. But otherwise we’re believers that the cycle is still in process, it’s good to have normal corrections around 10 percent or so every once in a while, and we’re investing accordingly.
CIO: And what’s really the indicator for you as to see why it might be another couple of years instead some folks who are saying it’s going to be the next year or six months or whatever the case may be? What gives you a cooler head to prevail and why do you think that what’s going to go a little longer than what’s being determined?
TT: One, experience and humility having done this through a lot of different cycles, you never know what the primary cause is going to be at the end of the day. A lot of it is the policy response and a lot of it is usually overreaction. The economic fundamentals for us are still good and inflation is still under control. We are not seeing the signs of excess, and excess is defined as rapid inflation, inventory issues, margin pressures, etc. It’s a litany of different factors that translate into slower economic growth, and then you have an overreaction from the policy standpoint where the Fed raises rates too high which distorts and stems some of the growth.
We’re seeing the forecast for 2019 of earnings growth on the order of around 10, 11 percent. That gets us to around $170 in earnings per share. Commodity prices haven’t really picked up that dramatically. Yes, we’ve seen more volatility but commodity prices have been fairly well behaved. We’re not in an environment where we have a profits recession or a growth recession yet. The earnings pressure in another year might produce more difficult comparisons and that will produce more volatility and more concern, but from an evaluation standpoint the market is just not that expensive yet.
CIO: What’s your take on passive vs. active?
TT: I think it’s good to use both. If you can generate active performance and alpha then the bottom line is to go more active? If you don’t have that capability then I think you need to give more attention to the passive approach. The extenuating circumstance that’s out there today is that ETFs represent an increasing share of the public markets. That means there’s less names to pick and choose from than there were historically. So it gets to the point where with the universe getting smaller, you really have to be very selective. We have some passive but most of our assets are managed on an active basis.
CIO: What’s the secret to longevity in your field?
TT: That’s a great question, a variety of things – engage mind before ego because when markets go up you think you are smart but in reality it’s when markets go down that you are really being tested at the end of the day as to what you’re going to be successful at. Never take yourself too seriously.
There’s a great saying, “If you don’t know who you are the stock market is an expensive place to find out.” I guess the other would be that the more time spent in working through different cycles the better you can survive because you really get a very good perspective as to what’s fundamental and what’s psychological and if you’re not careful you can get wrapped up in the sound bites and the psychological biases that can affect your judgment. So it’s crucial that you really force yourself to either walk away from your Bloomberg machines when there’s too much volatility as you’ll get wrapped up in the psychology of the day, or listen to all the pundits and all the talking heads as to what they think and why the world is coming to an end or why it’s going straight up and so forth.
I mean, everybody has a book to sell and you just need to be able to filter a lot of the information. It’s even worse today than it was 10, 20, 30 years ago because there’s more social media, there’s constant information, and it’s instantaneous and there’s fake news but yet there’s also fake data and you’ve got to be able to distill the differences.