Class of 2020 NextGens

Robert Thompson, CFA, CAIA, is a senior portfolio manager at UPS Investments Group, where he’s responsible for allocating public and private credit investments and managing the UPS Credit portfolio for the UPS Group Trust. The UPS Group Trust is a $46 billion portfolio of three Defined Benefit Pension Trusts for the company’s participants. Duties include sourcing, asset allocation, manager due diligence, and performance monitoring.

Thompson first started out at UPS in 2011 supervising the company’s Long Duration exposure, providing oversight over the handling of Treasury strips, long corporate paper, structured credit, and high-yield opportunities. He then made the switch into his current role in 2015 when a few departures led to some reorganization and the firm decided to consolidate public and private credit exposures allocated across different asset classes into the UPS Credit Portfolio. In this role, Thompson primarily focuses on identifying exposures with debt-like characteristics and equity-like returns. Ultimately, he strives to create and maintain strong risk-adjusted returns through extracting liquidity premium, understanding the instances of relative value between asset classes, capital structure positioning, and underwriting.

Prior to his role at UPS, Thompson was a fixed income portfolio manager and specialist at Voya Investment Management, and Trusco Capital, respectively. He also held a position at Invesco Capital Management, where he’s proud to have worked on building the company’s three-year business plan right after the tech-bubble had popped, a significant undertaking that required multiple drafts, buy-ins from senior executives, and analysis on performance, client retention, brand, and expenses.

Thompson earns a ranking in this year’s NextGen series after a career’s worth of working on the frontlines of innovative practices and steadily gaining more responsibility over time, being entrusted with helping to maintain the financial security of the beneficiaries of his plans.

CIO: What did you think you understood before the COVID-19 crisis … and if, during the crisis you were proven wrong, what did you learn from it?

Thompson: The “Best Worst Time” that I had ever had in my investment career was my experience working as a portfolio manager during the Great Financial Crisis of 2008-2009 at an insurance company. There were a lot of lessons learned on tranches / capital structure position, LTV, credit underwriting, covenants, etc. Going through 2008-2009 at least prepared me somewhat for the shock and awe of the current crisis (liquidity, drawdown, etc.), but it definitely wasn’t what I expected.  

Frankly, there weren’t many “global pandemic” stress case scenarios prior to the start of 2020. The idea that certain corporate names and sectors could be effectively shut down for 1-2 quarters with little to no revenues came as a big surprise. Jobless claims were much, much worse during COVID-19 than during the 2008-2009 time period. So, when we look back years from now at 2020, I hope that we see it as a “Black Swan” event. Certain sectors which are seen as “pandemic resilient” (e.g., technology) may continue to trade at a premium relative to other sectors post-pandemic for quite some time. Finally, understanding margin of safety from a cash flow and asset coverage basis is as critical as ever. 

CIO: What took you by surprise? What worked?

Thompson: A few things, first the crisis had many impacts on health, economic, and psychological fronts, and it occurred at a time where the US economy was humming. It’s pretty remarkable that the longest expansion in US history was stopped by an invisible enemy which no one had even heard of six months ago.   

The speed and volatility which hit capital markets in March was painful. The VIX had a six standard deviation move and hit an all-time high of 82! If you look at High Yield, five of the worst 10 trading days ever occurred in March 2020. However, it didn’t get any better when you looked at Investment Grade, as March had SIX of the 10 worst trading days in IG history. There weren’t many places to hide.   

Besides being short, the greatest trade was owning the longest, safest / risk-free instrument possible, which was the 30-Year Treasury. It was historic to see the 30-Year Treasury dip below 1% in March as investors scrambled to the safest, risk-free assets. As of 5/26, the Citi 15+ Strips Index is up roughly 29.07% for the year. Additionally, the monetary and fiscal response coordinated was surprising and a welcome relief. The Federal Reserve and Congress acted swiftly to provide the support which the markets, individuals, and businesses needed to stem a lot of the bleeding. The old adage “Don’t Fight the Fed” seems to be playing out in spite of economic slowdown and a historical drop in employment.   

CIO: How would you build the portfolio differently now that you have gone through this massive accelerated shift in the market? (What changes do you plan to implement? What were the biggest challenges?)

Thompson: I believe that you’re going to see allocators tilt their portfolios with a higher allocation to “pandemic resilient” industries such as technology and health care. This might actually provide some opportunity for distressed investing in the leisure, energy, airlines, etc., sectors.

Personally, I’m focused most right now on capital preservation and margin of safety. I think it’s very possible to make a mid- to high-single-digit return in High Yield and Structured Credit and potentially make a couple hundred basis points more in the private opportunities such as Specialty Finance and Direct Lending opportunities. Additionally, private credit managers should be extracting much stronger loan documents than they were six months ago as preferential terms should shift back to the lender’s side. 

CIO: ESG has been a tidal wave force behind recent innovative investment framework in our industry. How do you see the ESG framework and effort be influenced by the recent event?

Thompson: The growth in ESG investing has been very strong over the last few years. As investors continue to allocate more into the investment style, companies will face a greater level of scrutiny on how they make corporate decisions on human capital, work with their customers and the impact they make on society during and after the COVID-19 pandemic. Additionally, investors seem to be paying attention to which executives take pay cuts along with their workforce as this sends a strong signal on management accountability.  

There was interesting study by Optimy that I read which said that 60% of customers were willing to pay more for products with reputable brands and good values and 71% of millennials said they would choose to work for a company which has demonstrated a strong commitment to the community.  

Companies will be expected to do more in terms of outreach, funding, and community service for the pandemic response. ESG and the broader investment community may reward these efforts. 

CIO: What’s your view on the “perfect storm” that is currently impacting the oil markets, and how will that change how you invest in upstream energy?

Thompson: The OPEC fallout with Saudi Arabia and Russia coupled with the demand destruction for oil caused by coronavirus (estimated to be between 20-25 million barrels a day) was indeed the “perfect storm.” It’s very important to understand the risks that you take on as a debt or equity investor into an upstream asset. The questions that I’m typically asking are:  

• What’s my collateral – is it Proven Developed or Proven Undeveloped reserves?  
• Where am I in the capital structure and how much debt is in front of me or equity is in behind me and who’s invested?  
• How much cushion do I think I have from an underwriting perspective?  
• Which basin am I currently located in and what are my transportation costs?

The rig count has gone from about 1,000 to start the year to now about 350. I think this will continue to be a very challenging environment for upstream energy investing.  

Additionally, it will be interesting to see if there are further geopolitical episodes similar to the Saudi Arabia-Russia story from earlier this year.  

CIO: What’s your view on the fate of the Euro and the EU?

Thompson: I think the Euro and EU will continue to persist post the coronavirus. In general, I think there will be compromise and the areas which have been hardest hit by the coronavirus will get relief. My expectation is that the France-German plan for recovery will ultimately be approved.

CIO: What do you think will be the impact of COVID-19 on developing economies (like Chile or the Philippines)?

Thompson: COVID-19 could be devastating for emerging / developing economies. It appears that Santiago is having hospital shortfalls, there are protests which are defying the government-mandated lockdown. However, they have instituted some interesting protocols that other nations may want to replicate. The Chilean government started implementing immunity cards for anyone who has tested positive and recovered based on antibody tests. The immunity card would allow people to reenter the workforce. Recently, Chile’s largest airline, Latam Airlines, recently filed for bankruptcy protection, and economists believe that the overall economy will contract by -3.0% in 2020.   

Emerging-market investing is extremely difficult in this environment. Investors have sought out safety and the dollar has surged. Additionally, commodity prices have tanked (S&P GSCI Index -30.43% as of May 26). Investors need to make sure that they understand and are compensated for the risks they are taking in this environment.

CIO: What are the new creative/innovative strategies that you are researching right now?

Thompson: Currently, the progress that’s being made on artificial intelligence and pharmaceutical R&D is most exciting to me right now.  

There’s a groundswell of innovation that’s currently taking place post-coronavirus. On artificial intelligence, a company called BlueDot, which was profiled on 60 Minutes. BlueDot utilized an algorithm and spotted “unusual pneumonia” on December 30, 2019, out of Wuhan. They then utilized flight data from airlines and identified 11 cities after Wuhan that would see COVID-19 cases. They were six days ahead of the CDC in identifying COVID-19.  

Additionally, innovations which are occurring in pharmaceuticals to seek out a COVID-19 vaccine are historic. Companies such as Moderna, Sanofi, and Regeneron seem to be making tremendous progress on this endeavor and I think it’s been very effective for governments to help fund the research and costs.   

CIO: With the shakeout of industries currently going on—where do you see the most exciting opportunities over the coming years?

Thompson: There’s a lot of risk and reward in the lower-rated tranches of CLOs. Some people are whipping out the 2008-2009 playbook and purchasing the equity tranches of CLOs at $40–$50 and also B European CLOs at $50–$60 and BB US CLOs at $70–$75. It’s definitely not for the faint of heart, but these structures have sold off significantly and may offer some upside if we get a full recovery in 2020.  

One other strategy which may be attractive is providing liquidity and purchasing secondary private equity interests at a discount. Given the lockup, assets which are in the fund,  and also manager ability to source and structure attractive investments—there may be some bargains and especially if there is more distress.   

CIO: And professionally, where do you see the most exciting areas to specialize further over the coming years?

Thompson: At the beginning of the year, there was a great piece by S&P/Refinitiv I read which said that the EBITDA add-backs for deals in 2015–2016 missed actual EBITDA in the neighborhood of 25–35%. I don’t think the “zero revenue” COVID-19 environment for certain companies made it into very many investment banker pitchbook or scenario analysis.  

So, when I think back about what skills are going to be needed over the next year, workouts and restructurings come top of mind. Rolling up the sleeves and understanding being able to review manager underwriting expectations, and understand the stress case scenarios is now more important than ever from a portfolio management and monitoring perspective. Larger companies should outperform and be able to weather the storm better than the lower-middle market companies which may have customer concentration, lack of PE sponsorship, and lack of access to liquidity / capital.   

CIO: How is the quarantine affecting the way you view teams and working environments, such as work from home, meetings, etc.?

Thompson: At UPS, we are meeting regularly and speaking together as a team. Our team has done an outstanding job of communicating with each other about pipeline, projects, and initiatives. We’re sharing a lot of information across asset classes and speaking to each other as much or more so than ever.  

Additionally, the managers that I work with in Credit have provided outstanding battlefield views on liquidity, trading, and opportunities on the liquid portion of the UPS Credit Portfolio. In Private Credit, we’ve gotten a lot of color on the health of companies in the middle market where most of the Direct Lending managers are typically providing financing to Private Equity sponsors. I greatly appreciate the efforts that managers have taken on calls through the late hours of the night in March.  

CIO: What exercises have you found useful?

Thompson: It’s been great spending more time with my family.  We’ll sometimes go on walks in the morning and getting the perspective from my first- and third-grade daughters. My youngest is very curious about “What will life be like after the coronavirus is over?” and my oldest has become very interested in the news. They’ve been great troopers as I know it hasn’t been fun adjusting to home school.  

Additionally, we’ve hit a few jigsaw puzzles. We’re currently working on one which is 1,000 pieces and is the 13^th hole of Augusta National.   

CIO: Who is the manager you don’t currently work with whose brain you’d most like to pick for an hour?

Thompson: I’d enjoy spending an hour with Jim Simons of Renaissance Technologies to discuss the Medallion Fund, his life in investing, and mathematics. The Medallion Fund is a legendary investment success, as it has averaged a 39% annual net return for over 30 years. I completely understand the secrecy on trading secrets, but I hope it would be a honest conversation about his life and any advice that he could offer on investing.   

CIO: And in a fantasy scenario, if money was no obstacle, where in the world would that meeting take place?

Thompson: It would need to be a place which inspired each of us. I know that Jim Simons has a keen interest in the cosmos and astrophysics, so I chose the Hayden Planetarium at the American Museum of Natural History in New York.

CIO: What asset class or investment troubles you most right now—and why?

Thompson: There are issues in just about every asset class.  

In equity, are investors getting compensated enough for the risks? 12/31/2021 P/E multiples on the S&P 500 are currently 19x, but what if corporate tax rates are rolled back to 28% or 35% especially if there is a change in the White House?  The market begins to look very expensive.  

In Private Credit, the BDCs were punished (WFBDC index -29.6% YTD) and provided an interesting look through on how managers would be pricing their private funds as it looked like most managers were writing their assets down approximately 3–10 points on Senior Secured loans. However, the second quarter could be extremely interesting as there will be a full quarter of information instead of one month in March.  

In Real Estate, will we return to work and will all of us return to the office? What will New York look like in 10 years? Will people want to move to the suburbs or continue to want to live in the cities?  It’s somewhat too early to tell, but I think COVID-19 may provide the greatest change to Real Estate out of all of the asset classes from a long-term perspective. A company might be able to slash expenses and costs by shifting some of the workforce to work from home and requiring less office space or deciding that only 60–80% of furloughed employees actually return.  

CIO: Name your four-member investment dream team for your own family office.

Thompson: In sports, we often talk about dream teams from different eras. Teams like the 1996 Chicago Bulls, 1990 Georgia Tech, 1985 Boston Celtics defined what great teams were. They may have had a superstar (or two or three), but they were defined by their team play, innovation, and determination to win. So, I tried to think about people who were diverse, could add something different to the equation, and we could all benefit from our experiences. Hopefully, there would be synergies and the whole would be greater than the sum of the parts.  

• Kevin Warsh (Macro / Fed Policy)—Kevin is one of the most thoughtful subject matter experts on the global economy. He has an extremely impressive background and is a former member of the Board of Governors of the Federal Reserve System. I’ve heard Kevin speak multiple times in person and it’s always insightful to hear what he has to say.  
• Jenny Lee (Venture Capital at GGV Capital)—I enjoyed reading Jenny’s bio and also appreciated her story as a Singporean venture capitalist and has done investments in Xiaomi and Alibaba. I believe that the G2 (US / China) economies will continue to be dominant over the next 25 years and I think I would benefit from her insight and ability to identify tech start-ups for potential stock exchange listing. Her AsiaPac focus is definitely beneficial.  
• Julian Robertson (Hedge Funds)—He’s a very successful investor and he’s also someone who’s built a culture of success (i.e., The Tiger Cubs). Additionally, I think he’s someone who I’d like to learn from on how to build a very successful culture and long-lasting organization.  
• Warren Buffett (Equity)—It may be cliché, but I still have immense respect for the Oracle of Omaha and his career.  

CIO: Describe the weirdest interaction you’ve had with an asset manager.

Thompson: There was one IR person who was absolutely relentless in marketing his product. After the initial meeting was over, I informed him that the strategy wasn’t a fit and the track record history was too volatile. I appreciated his time and wished him the best.  

A few days later, I got a phone call and was asked if I had any additional thoughts. I thought I had been clear, but he just kept calling. For about two months, it seemed like every three to five days, I would get the voice mail check-in. Eventually, you start recognizing the phone number and think, “He’s calling again?”  

CIO: What should be an investment trend, but isn’t (yet)?

Thompson: As much as possible, I’m in favor of trying to set up a separate accounts or customized mandates in investment strategies. This allows for guideline customization and more alignment with the investment manager on a performance and operational basis.   

Additionally, subscription lines are a hot button for me right now and I’d like to see LPs push back more on GP usage. We can’t pay our beneficiaries in IRR. I support the ILPA Principles released last year, which state that facilities should have a short duration (up to 180 days), limited to a maximum percentage of overall commitments (~20%) and offer LPs the option to opt-out of the credit facility when a fund is set up (my personal favorite). Additionally, ILPA standards also suggest that for carried interest calculations, the preferred return should accrue from the date that the capital is at risk (i.e., the date on which the facility is drawn), rather than the date when the capital is ultimately called from the LPs.  

Given the crisis, LPs may find out that leverage does swing both ways and the IRRs are enhanced to the “downside” rather than the “upside” that they have been accustomed to over the last 10 years.