Edwin Denson was elevated to CIO and executive director of the fully funded, $117.6 billion State of Wisconsin Investment Board (SWIB) in 2021. Although he had joined the pension system in 2018, for the new CIO, it was an inauguration by fire: In his first two years at the helm, with the COVID-19 pandemic still going, markets gyrated up to record levels and subsequently returned to the mean.

Denson tells CIO that, since taking the lead role at program, “an area of focus has been capital efficiency,” centered on the asset and risk allocation team. The ARA team constructs a beta profile using a combination of physical securities and derivatives, including exchange-traded funds, futures, swaps and repurchase arrangements.

At the same time, there are internal active management teams, “freed from managing beta components, to focus purely on generating alpha: positive absolute returns after covering the cost of beta implementation,” explains Denson. “This structure allows internal active strategies to run with half of the capital (or less) of a traditional approach, while delivering the same benefits to the plan.”

In 2023, Denson expects to move the pension system’s global equity strategy toward this model, in part because the ARA team was of paramount importance to the pension system’s successful 2022.

“One of the key focuses of the ARA team was researching and recommending top-of-the-house investments in response to shorter term macroeconomic trends that can’t be successfully captured through the annual asset allocation process,” Denson says. “One of these strategies was to go underweight U.S. 10-year Treasury duration, which was highly profitable as inflation surprised on the upside.”

The ARA team “added over $200 million in profit in a year when every public market asset class posted negative returns,” Denson adds.

While public equities and fixed income suffered last year, Denson highlights the success of SWIB’s private markets team. It was one of the first public pension managers to invest in private equity, back in 1985. Much further on, in 2022, the private equity/private debt/venture capital asset class returned approximately 4%, and real estate delivered more than 16%, despite a year of volatile returns.

Being a fully funded pension helps SWIB maintain disciplined long-term asset allocation in the portfolio. “We benefit from a modern and flexible governance approach where our board of trustees has delegated the day-to-day investment decisions to staff, while retaining a strong strategic oversight role,” Denson says.

Such decentralizing has paid off. “Within SWIB, authority for investments has been delegated down to portfolio managers with oversight from me and the Investment Committee,” Denson says. “The result is a structure where our expert staff can be nimble and efficient in identifying and acting on attractive investment opportunities, as well as adapting to changing market conditions.”

This flexible approach guards against SWIB being a forced seller of assets when markets tank, and it also provides the ability to pounce on attractive investments. “This was on display in 2022, as many investors bumped up against hard limits in their private market’s portfolios due to the unusually poor performance in both public equity and public fixed income markets,” the so-called “denominator effect,” Denson says.

Collaboration extends beyond the plan’s walls. SWIB is a member of the Global Peer Financing Association (GPFA), an association of kindred funds (it includes the California Public Employees’ Retirement System and the Ontario Municipal Employees Retirement System) that seeks to encourage peer-to-peer securities financing trading activity. As Denson explains, “members of the GPFA aren’t selling a product to each other, but rather they are looking to share best practices. We are happy to share our lessons learned, but we have also learned a lot from our peers.”

Among the keys to SWIB’s success, Denson says, is his investment services staff’s use of technology and data infrastrsucture. “Technology is becoming more and more sophisticated, and the role of data is ever expanding,” he notes. “You can never become complacent; never allow yourself to feel satisfied that you have reached a stopping point.”

Denson says he strives to avoid tunnel vision in investment strategy and micromanaging. Instead, he hopes to turn the organizational values of “excellence, innovation, integrity, collaboration and people” into a collaborative culture.

“My leadership style is to be less directing, other than reinforcing our mission, vision and values and articulating the agreed-upon objectives that help us get there,” he says. “We need everybody to contribute, to be set up to win, and to be able to work together for us to achieve those objectives.”

—Dusty Hagedorn