“Quoc is an investment officer on LACERA’s Risk Mitigation and Credit team. His focus is on hedge funds and illiquid credit. Quoc has done an outstanding job helping build these programs that are designed to enhance the LACERA fund’s performance in a variety of market environments.
The hedge fund program has been transformed from a fund-of-funds program to a direct program with a handful of relationships. The program skews positive with very low correlations to both core bonds and equities. For example, despite drawdowns in both equity and bond markets, the LACERA hedge fund program is positive year to date. Quoc has also helped start our emerging manager program in hedge funds. Up to 15% of LACERA’s hedge fund portfolio may be allocated to emerging managers. This program has helped launch several firms and secured LACERA capacity rights and, in some cases, revenue-sharing relationships.
Similar to hedge funds, Quoc has done an outstanding job helping to lead the implementation of LACERA’s illiquid credit program. The program focuses on concentrated exposures with a handful of relationships and an emerging manager program that is being developed (up to 15% of illiquid credit). Rather than constantly having to commit to private-equity-style credit funds and potentially missing market opportunities, Quoc has helped structure evergreen mandates through dedicated managed accounts with novel fee structures. Quoc is a principal negotiator for these structures that enhance LACERA’s transparency for better total fund risk management. The fee structures include hard fee hurdles with a higher level of investor profit retention.
Quoc is also a leader across the LACERA investment division. He speaks loudly through his actions and he seeks input from all. This results in a quiet confidence and universal respect. Quoc helps train new staff. He leads division-wide initiatives such as LACERA’s focus on standardizing operational due diligence practices across asset categories.
As the CIO, I learn from Quoc every day. The real winners are LACERA’s members.”
—Jonathan Grabel, CIO, Los Angeles County Employees Retirement Association
The CIO Editorial Team shared a dozen questions with all of our NextGen nominees and asked them each to pick six to answer. Their answers informed our decision to include them as a NextGen. Below are the answers from Quoc Nguyen.
CIO: How are you dealing with rising inflation and interest rates?
Nguyen: Shaping a well-diversified portfolio with return drivers that respond to varying economic conditions. Our Real Assets and Inflation Hedges portfolio has executed on its role as a diversifier in recent periods in the face of higher-than-expected inflation. Within our Risk Mitigation portfolio, our macro hedge fund strategies have capitalized on the inflationary and rising rate environment while other hedge fund strategies have held up well. Within our Credit portfolio, the flexible mandates that we structured have mitigated the impact of rising rates by shortening their portfolio duration and tilting into floating rate exposure. LACERA’s total fund has been designed as an all-weather portfolio—participating in up markets and protecting capital in challenging periods. Our CIO, Jonathan Grabel, stresses the importance of executing on our strategic asset allocation.
CIO: What is the best way to bring more diversity to the financial industry?
Nguyen: Continue advancing our efforts in bolstering the investment industry’s diversity practices. Recognizing that diverse teams lead to better financial performance, LACERA has been a leader through our T.I.D.E. Initiative (Towards Inclusion, Diversity, and Equity) in weaving diversity assessments into our diligence processes and advocating broadly on this topic across the industry. Despite our efforts and others’, more work can be done. I find that there are nuances to diversity that are harder to assess than others. For example, aspects such as the socioeconomic upbringings, education paths, life experiences and thoughts across individuals at a firm are challenging to capture via a diligence questionnaire. These are components of diversity that I believe further add to the richness of team member contributions, opinions and perspectives. Broadening the scope can extract additional benefits.
Speaking from my own experiences, my parents were fortunate to have immigrated to the United States after escaping their home country of Vietnam by boat after the war ended. They left their families and risked their lives in hopes for a better future. I look back at the sacrifices my parents made and all the people and communities that have helped our family along the way. Much of this is what drives me today, especially in the context of our fiduciary role of protecting the pension trust and paying tomorrow’s promised benefit to the hard-working and retired employees of Los Angeles County.
CIO: How will the pandemic ultimately change the economic/financial world?
Nguyen: One aspect that has staying power and is relevant to the work we do is remote diligence. Given how much more efficient we can set up virtual meetings and with many more individuals at a prospective firm, it has raised the evaluation breadth and quality that institutional investors are able to perform. While this does not eliminate the value of onsite visits, I believe modern remote diligence is an excellent supplement to onsite diligence. Lastly, I believe this opens a wider door for institutional investors to get to know smaller, less well-known managers that do not have established investment relations teams and large budgets for capital raising.
CIO: What are the most important alternative asset classes for institutional investors, and why?
Nguyen: I do not believe one asset class is any more important than another in the context of a total portfolio. Each asset class in a portfolio should exist to perform its critical function given the various economic scenarios that could unfold. I am also of the view that alternative assets are no longer alternative and that they are a primary tool that institutional investors use to meet their risk and return targets. LACERA being a mature pension has annual benefit payments that exceed its annual contributions. The gap to pay future obligations must not only come from investment growth but also preservation of capital. To that end, the sequence of portfolio returns matter, and they matter most when the broader markets are drawing down. Alternative asset classes such as credit, hedge funds and real assets designed with objective-oriented implementation can be excellent diversifiers to help preserve capital during volatile markets so that the total portfolio can be situated in a better place once the environment returns to a period of growth.
CIO: What investing decision have you made for your organization that you’re most proud of?
Nguyen: I work in a small team that oversees our Credit and Risk Mitigating portfolios. Seeing the results that come from our everyday efforts is what makes me the proudest.
Several of LACERA’s strategic initiatives are optimizing our investment model, strengthening influence on fees and cost of capital, and enhancing operational effectiveness. Our team has done a tremendous amount of work over the past three years working toward these initiatives. Our accomplishments include unwinding a hedge fund-of-funds portfolio and building a direct hedge funds program that is meeting its core objective of mitigating risk, reshaping the way investment earnings are split across the limited partner and general partner, and enhancing our operational due diligence practices. A project that I spearheaded that I believe will benefit LACERA’s portfolio over time is establishing a dedicated managed account platform. Having the option to structure our alternative asset investments in a DMA will allow for more mandate customization, increased transparency, improved monitoring capabilities and reduced operational costs.
Which asset manager (exclusive of their firm) has most influenced your growth as an institutional asset manager?
Nguyen: My colleague, Chad Timko. Chad is a leader at LACERA and has done tremendous work to reshape and improve several LACERA portfolios. I marvel at his ability to continue pushing the envelope with respect to how we negotiate with investment managers, ensuring that the right structure, terms and alignment are in place to optimize outcomes for LACERA members. I learn from him every day.
CIO: Is cryptocurrency an institutional asset of lasting value?
Nguyen: It is difficult to know whether cryptocurrencies themselves will evolve to become a lasting asset class worthy of institutional investment. Their use cases are still emerging and heavily debated. The recent pullback of market liquidity has shown how speculative many of these cryptocurrencies really are. However, I do believe that the blockchain technology that underpins the exchange of cryptocurrencies has a permanent future in shaping the way society interacts and does business. Transactional processes for many goods and services still rely on legacy platforms. I expect that blockchain technologies will replace existing middle service providers and disrupt our legacy transactional processes, namely in banking and real estate, given their ability to efficiently verify data in a decentralized way. I am particularly excited for emerging blockchain technologies related to Web 3.0 that use platforms to help content-makers and artists benefit more from their own work.
