When Thomas Richards joined the University of Missouri System 12 years ago, after 10 years in banking, among the issues he noticed was the impact volatility in the defined benefit pension fund was having on the university’s operating budget.

By 2022, the system had reduced risk, installed a 7% assumed rate of return and created a $100 million budget stabilization fund. The university is also about nine years into utilizing a risk-parity investment strategy that recognizes that occasional investment underperformance is worth trading for minimizing investment drawdown.

As a result, the retirement plan has reported one-, five- and 10-year returns of -1.1%, 8% and 7.9%, through June 30, 2022.

Richards leads a seven-person investment office that oversees a retirement plan with more than $4.2 billion in assets, as of June 30, 2022, plus a $975 million levered alpha portfolio; an endowment pool of $2.15 billion plus $460 million in levered alpha; and a general pool of $2.93 billion. Overall, the office manages about $11 billion, and the investment team has the delegated authority to make the investment decisions.

Richards knows his approach, more focused on limiting the downside than just pursuing the upside on investments, differs from many public pension fund peers, and he emphasizes that it is “all based on the simple math that losing money is much more destructive than most people comprehend.”

In 2022, Richards and his team stuck to their belief—developed before the Federal Reserve started raising interest rates—that inflation was never transitory. As a result of that and the understanding that once rate increases started, interest rates would stay higher for longer, the pension fund significantly overweighted commodities, as high as 14% in fiscal 2022, reduced public equity exposure and went underweight duration by putting the U.S. Treasury portfolio largely in T-bills. In addition, the fund shorted nominal futures against the funds’ TIPS portfolio to neutralize real rate exposure and implemented additional exposure to inflation using CPI swaps.

Last year, when asset classes were challenged and correlated, the Missouri system’s alpha portfolio was up 7.5%. The team gained experience and flexibility since implementing portfolio beta through the use of derivatives, working with partner NISA Investment Advisors. Richards shares that having such flexibility opens other opportunities, such as using swaps to access exposure to small/mid cap onshore Chinese equities, earning an average contractual spread on the swaps of 10%.

These strategies and their protection against drawdown have, over the last two years, “more than made up for” any misses on the upside, Richards says. It has also provided the kind of budgetary stability he wanted.

Richards acknowledges the need for his investment team to be “opportunistic” within their asset allocation ranges, noting that the fund is 10% underweight to their target for public equities and at least 5% higher than the target for commodities, having been as high as 15% above the target.

“We just keep watching for opportunities” to capitalize on the alpha strategy, Richards says.

In addition to his investment positions, Richards is focused on governance and stability in leadership. For his team, many of whom have been with the office for 10 years or more, the stability is there, and with it comes accountability for results.

—Amy Resnick