When Jonathan Glidden joined Delta Air Lines in October 2011, the pension fund’s assets were $7 billion, and its funded status was a bit below 40%.  Today assets are over $19 billion and funded status is just above 90%.

The reason for this transformation is Delta’s thoughtful and disciplined contribution strategy combined with Glidden’s bold and clever financial footwork that saw the company’s pension fund survive and flourish, despite the travails that the coronavirus dropped on the airline industry. Other CIOs say Glidden is always one of the smartest people in the room, thinking outside of the box on portfolio construction and aided by the small but extremely powerful team he has built.

At the outset of 2020, Delta was prepared for hard times. “While we didn’t know a pandemic was on the horizon, or that the sponsor’s revenue would (or even could) drop 97%, we knew that there could be an economic environment where it would be challenging for the sponsor to make a contribution to the plans,” he said. “You can’t achieve a growth orientation without a healthy equity and credit bias, and we had one.” 

Starting in 2014, under Glidden, the plan adopted three tenets that proved crucial to its success. First, he determined higher risk-adjusted returns were possible by applying leverage using derivatives to a more balanced, less equity-centric portfolio. A derivative-based beta overlay creates a lot of flexibility, he figured. This involved futures, options, and swaptions. And these strategies, he said, allowed the fund to “better shape our risk away from downside pain.” 

Second, he sought to target less-efficient pockets of the market, taking on risk via actively managed strategies, largely using portable alpha—pairing beta from the derivatives market with the active risk of uncorrelated strategies to generate above-market returns. “The thought is that the more active risk, and productive active risk, we have, the less equity (and thus equity downside) we need to hit our return target,” he figured. So Delta has a well-diversified basket of what Glidden calls “market-neutral-ish hedge funds.” These hedge funds “have fewer constraints which, we believe, will lead to a higher net-of-fee information ratio through time.” The expectation is that portable alpha will add between 1% and 2% to the fund’s return each year. Private assets are the other significant source of the fund’s active risk, with a 20% allocation split among equity, credit, and real assets

Third, Delta gets some downside protection by, among other things, owning put spreads for much of the past seven years in the run up to 2020 when volatility was cheap and skewed. The fund also has owned call options on portions of the Treasury bond curve. “The world is typically convinced that rates are going to go up more than they actually do,” Glidden explained.  The strategy performs well if rates fall by a lot. Also, Delta makes use of “trend strategies,” focused on the momentum of particular assets. This approach is a means of reducing beta in down markets and scoring positive results over the long term. “We also expect trend to mostly retain its value in shock markets,” he said. Trend “was high up on our liquidity waterfall to satisfy margin calls in a bad environment,” Glidden recalled. Tail hedging is dynamic by its nature. Delta continually scans the equity, fixed income, commodity, and foreign exchange option markets for cheap convexity.  

Glidden’s father was a career Navy man who served aboard a nuclear submarine. His father opened stock accounts for him and brother when they were kids, and although he studied mechanical engineering at Georgia Tech, Glidden was most fascinated by a finance class he took. After his own service as a naval officer, where his fascination with investing deepened, he got an MBA from Emory and a master’s degree in financial mathematics at the University of Chicago. He first worked as director of investment analysis at Emory’s endowment, then as director of portfolio construction and manager research at Wilmington Trust. “I got hooked on investing,” he said.

After an executive searcher connected him with Delta, whose pension fund then was at a low ebb, he had an interview where he felt his daring ideas to turn things around were too unorthodox for the carrier. Instead, he related, the corporate treasurer told him, “You’ve got a vision,” and hired him.

That was a very wise choice.

—Larry Light