“David is one of the best investors, leaders and teammates that I have ever had the fortune of working with. He has successfully constructed a public equity portfolio that has outperformed over the last five years. At the same time, he has stepped-up to lead various other projects outside of his asset class to help the plan and his teammates, from asset allocation transitions to software implementations. David is a curious and diligent investor, but he is also passionate about mentoring and developing INPRS’s next-generation leaders. He is always willing to offer feedback and advocate for his teammates, which has paid dividends in developing a strong and supportive culture at INPRS.”
—Scott Davis, CFA, CIO, Indiana Public Retirement System
The CIO Editorial Team shared a dozen questions with all 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 David W. Stelsel III.
CIO: How are you dealing with rising interest rates and economic uncertainty?
Stelsel: Maintaining a diversified portfolio is foundational. However, each part of an economic and interest rate cycle provides the opportunity to be tactical. Not too long, ago much of the world was facing near-zero interest rates. At the time, it was important to understand duration risk. Now, with rates in large economies significantly higher, understanding the equity and credit risk in the portfolio is important.
INPRS’s Defined Benefit portfolio is constructed to have investments that perform well in different economic environments. For example, the portfolio has long had meaningful allocations to both commodities and lowly correlated absolute return strategies. Both were additive in 2022 when interest rates rose and equity and fixed-income indexes declined. In 2021, a dedicated target allocation to gold was added to provide its unique risk profile.
Other areas of focus include building out a dedicated exposure to infrastructure assets, being selective in private credit and designing an absolute return portfolio that can benefit from economic uncertainty. From a macro point of view, interest rate cycles in many developed markets are currently differentiated from emerging markets. Within the defined contribution plan, INPRS offers target-date funds. Each vintage has equity, fixed income and inflation-linked bond exposure.
CIO: What is the best way to bring more diversity to the financial industry?
Stelsel: Think and act with the next generation in mind. I have had the opportunity to teach kindergarten and third grade students basic financial literacy through Junior Achievement’s volunteer program. Spending a day with these children on topics they might not otherwise learn can provide them an early insight into the financial world. At the other end of the educational spectrum, the percentage of women in MBA programs has nearly doubled over the past decade and now stands at more than 40%. Reaching out to professors and getting in the classroom can provide an opportunity for insight into the different corners of the financial industry.
CIO: What asset classes offer the best options for avoiding or mitigating drawdown risk in an institutional portfolio?
Stelsel: Not all drawdowns are created equal, which has been made clear over the past three years. During crashes (e.g., 2008, 2020), fixed income can provide a ballast, but only to a certain degree. Layering in a small amount of highly convex absolute return strategies can provide outsized returns, but those do come with their cost during non-crash years. What the world witnessed in 2022 was the other type of drawdown risk. The steady move lower in both equity and fixed-income markets without a dramatic spike in volatility for the first time in decades was painful for most portfolios. As a result, diversifiers that historically worked during a crash didn’t perform. Two asset classes that did quite well in 2022, commodities and trend following, had seen waning interest during the bull market over the past decade but were important portfolio diversifiers in 2022.
CIO: How can allocators address the growing global tailwinds of aging populations, geopolitical tensions and changing global trade?
Stelsel: Interestingly, there is overlap between aging populations and geopolitical tensions. Tensions between China and the United States—both aging populations with median ages of nearly 40—are benefiting countries that have some of the youngest populations outside of Africa. Companies have begun shifting their supply chains to countries such as India (median age 28), Mexico (29), Vietnam (30), Indonesia (31) and Turkey (32). Geographic diversification will remain important.
Focusing on themes that may benefit from aging societies and embracing innovations might also lead to new opportunities. Areas to consider include housing, healthcare, wealth management and leisure.
CIO: What investing decision have you made for your organization that you’re most proud of?
Stelsel: I’m most proud of my work restructuring the public equity emerging managers program. When I joined my current organization, the program had not been achieving the goals set out for it. We issued a request for proposal and met with numerous firms that specialize in emerging manager fund of funds. At the conclusion of the search, we chose to retain the incumbent fund of fund manager, changed the mandate from U.S. large cap to U.S. all-cap, where we had more conviction, and worked with the manager to identify often overlooked smaller firms. This led to a turnover in underlying investment firms, and the program has been exceeding its return objective over the past four years.
CIO: What new skills do you think allocators need to be leaders in the field in the coming decade?
Stelsel: In the coming decade, allocators will need to improve their technological literacy. Emerging technologies are changing the face of the investment landscape. You already see it when talking with investment managers that have a quantitative bend. Artificial intelligence and machine learning may provide investment tools and solutions for allocators. Couple the vast amount of data most allocators have with new ways to use it, and there exists the possibility to extract new insights. These can be both quantitative metrics and qualitative idea generation. Relying too heavily on any program, however, is not without risk. Importantly, a program might be able to simulate an understanding, but it does not actually understand in the sense that a person does.
