“Chad Timko has a quiet humility that balances strength of intellect with empowerment of his colleagues. Chad has added tremendous nuance to our hedge fund and illiquid credit mandates. He has crafted novel fee structures and custom portfolio constructs that optimize portfolio needs. Chad deftly combines traditional risk-return metrics with detailed ESG considerations and diversity, equity and inclusion initiatives, all to maximize returns for LACERA’s members. He elevates the team through his willingness to participate in any project, big or small. I learn from him every day.”
—Jonathan Grabel, CIO, Los Angeles County Employees Retirement Association
Chad Timko’s mother was an educator, and he grew up with a healthy respect for gaining knowledge. “I liked numbers,” he said. After graduating from Trinity University in San Antonio, with a joint Bachelor of Science/Bachelor of Arts degree, concentrating in finance, management, and international business, he set out on his investment career, and along the way earned the CFA and CAIA designations.
His first job was at the San Manuel Band of Mission Indians, a sovereign American Indian tribe. On a very small team, he helped build the tribe’s portfolio from scratch and onboarded the first set of external managers. Brian Long, the tribe’s CIO then, “encouraged me to leave my comfort zone,” Timko recalls.
Timko joined the Los Angeles County Employees Retirement Association (LACERA), one of the nation’s largest pension funds, in 2015 and rose to senior investment officer. Among other duties, he tailors portfolios to meet LACERA’s objectives and conducts due diligence on multi-asset strategies, such as hedge funds and credit. At LACERA, he marvels at CIO Jonathan Grabel’s “total portfolio mindset.”
CIO: How would you deal with rising inflation and interest rates?
Timko: From an economics standpoint, I would welcome it. Moderate increases in inflation and interest rates from where we are today would be healthy for markets and economies. From an investment portfolio construction standpoint, I approach rising inflation and interest rates the same way that I approach almost any macro topic—by implementing a portfolio that is broadly diversified across asset categories, each with distinctive characteristics and objectives. A balanced portfolio today should include real assets such as infrastructure and real estate, which can be implemented to benefit from rising inflation and interest rates.
CIO: What is the best way to bring more diversity to the financial industry?
Timko: The world we live in is naturally a diverse place. For that diversity to permeate the financial industry, hiring habits and practices would need to improve. I believe that hiring managers should be relatively less focused on the notoriety of both schools that candidates attended and the organizations where they have worked. Instead, hiring practices should strive to evaluate human characteristics and the future potential of a person. Additionally, investment organizations should be relatively more willing to hire and evaluate people on an introductory or trial basis.
CIO: What are your favorite alts, and why?
Timko: Picking a favorite is never easy. If I have to choose, illiquid credit investments excite me the most. Investments that have a contractual yield and benefit from complexity, private sourcing, and upside optionality are both interesting to evaluate and helpful to risk-adjusted return outcomes. Additionally, private real assets are potentially the most complementary alternative asset category based on their low correlation to traditional equity and bond portfolios. Hedge funds can be implemented in a wide variety of ways. I view low-beta, risk-mitigating hedge funds as beneficial to a portfolio, especially in a low return and low interest rate environment.
CIO: Is cryptocurrency a flash in the pan, or an asset of lasting value?
Timko: Goods and services have been exchanged for thousands of years, both with and without fiat currencies. We are now in a technology age and both decentralized networks and cryptocurrencies are here to stay as demand for their uses is likely to persist. The lasting value in terms of price stability of cryptocurrencies is more uncertain. Cryptocurrencies are likely to continue to see substantial price volatility. However, the commerce use-cases for select cryptocurrencies remains whether their price is either halved or doubled.
CIO: How will the pandemic have changed the economic/financial world?
Timko: Observant investors learned that central bankers and policymakers are prepared to act in a matter of days instead of months or years to mitigate market threats and bolster economies. This and continued pandemic-induced stimulus changed investor risk appetites in 2020 and 2021. The elevated appetite for risk likely continues as investors see both governments and central banks as supporters of global markets.
CIO: What place does blockchain have in tomorrow’s financial scene?
Timko: Distributed ledger technologies such as blockchain are likely to disrupt traditional banking institutions over time. Blockchain enables alternatives for currencies and payments. This is particularly interesting in regions of the world where fiat currency valuation is unstable or bank accounts are either less available or infrequently used by the population. Additionally, smart contracts enabled by blockchain have the potential to change how transactions occur in the future. All technologies need time to develop, be better understood, and potentially gain widespread adoption. Currently, blockchain is in an early stage. Tomorrow’s financial scene is generally unimpacted by blockchain, but 20 years from now it is likely to be evolved compared to today.
CIO: Where do you see the most exciting areas to specialize further over the coming years?
Timko: The first rule of investing is the integral importance of knowing the client and its specific circumstances and objectives. Accordingly, client-tailored mandates will always be the highest value-add area of specialization. Tailored investment partnerships and mandates are a promising area to specialize in. This is especially true for larger investment portfolios, such as LACERA, where allocations are commonly several hundred million dollars in size. Large scale enhances customization options. Specialization and customization opportunities exist across investment mandate scope, account structure, and terms.
CIO: What should be an investment trend, but isn’t (yet)?
Timko: Fee compression is already an investment trend and it is warranted considering how well passive portfolios have performed in the recent decade. Within fee compression, paying performance fees for returns attributable to cash and asset category beta is an area still needing improvement. From my perch where I oversee retirement assets of public employees, performance fees that reward cash-like and beta-driven performance are inappropriate. In the coming decades, I expect performance fee terms to evolve in a manner that compensates true outperformance and not mediocre outcomes. In practice, this takes the form of hard hurdles being applied to performance fees in alternative strategies.
CIO: What investing decision have you made that you’re most proud of?
Timko: I am proud of my willingness to be different and implement objective-oriented portfolios that are tailored and do not necessarily align with other institutions or popular trends. Conventional and consensus investing can be safe and suboptimal at the same time. In LACERA’s risk-mitigating hedge fund portfolio and alongside the team, I have repositioned the portfolio to sacrifice return expectations and instead deliver uncorrelated returns with downside protection characteristics. In our illiquid credit portfolio, I have implemented evergreen and single-investor structures well-suited to our pension fund objectives despite being different from closed-end and commingled funds that remain commonplace. The changes within these portfolios have resulted in relatively more intentional portfolios and improved outcomes.
CIO: Who is the manager you don’t currently work with whose brain you’d most like to pick for an hour?
Timko: I strive to keep an open mind about future discussions with currently unknown candidates so I will not single out an individual investment manager. My favorite part of investing is that the future is unknown and, accordingly, I am open to considering new possibilities. Outside of the investment ecosystem, I would enjoy speaking with Phil Jackson about leading 11 NBA teams to a championship as a coach.
