(January 6, 2014) – Ron Barin has led investments at two of America’s hallmark companies—Alcoa and Pfizer—and emerged on the vanguard of corporate risk-factor investing.
Risk management has been at the core of Barin’s investment approach since well before it became the raison d'être of the typical corporate CIO position.
In 1993, following stints in Estee Lauder and Unilever’s treasury departments, he joined Emcor Risk Management Consulting's treasury group (later folded into Ernst & Young) for a technical education in running a portfolio. Add in a bachelor’s degree in finance and MBA from New York University, and Barin was well equipped to head Pfizer’s financial risk management operations when he joined in 1995. The long-time New Yorker rose to senior director of pension investments for the pharmaceutical firm during his 13-year tenure.
The financial crisis brought Barin two major opportunities: the chance to serve as CIO of Alcoa, and an opening to pioneer the risk-factor model in a massive corporate portfolio.
Both moves proved successful. He recently added ‘vice president’ to his job title at Alcoa, and is responsible for retirement and Alcoa Foundation assets totaling $15 billion.
Managing Editor Leanna Orr had the opportunity to ask Barin about how he reached the forefront of corporate pension risk management, and find out his stance on some of the issues dividing CIOs today.
aiCIO: I've often heard you mentioned as one of the most risk-attuned CIOs around. What led you to this perspective, and how do you personally define risk?
Barin: Risk management is in my DNA. I started my career managing currency, interest rate, and credit risk for large multinational corporations. I moved to the pension world in 2000 where my insights on risk management have been very beneficial, especially during my tenure at Alcoa. Risk is complex and has many dimensions. Defining risk as volatility can be misleading—uncertainty is a more complete measure of risk. Unlike volatility, uncertainty is difficult to quantify. As we’re focused on limiting our exposure to large losses, maximum drawdown is a key risk metric that I rely on.
I joined Alcoa as chief investment officer in 2008. As the financial crisis hit later that year, I used that situation as a springboard to start looking beyond the traditional investment paradigm and beyond the limits of portfolio theory. One of my guiding principles was, in the words of Rahm Emanuel, mayor of Chicago and former White House chief of staff, “Don’t let a serious crisis go to waste.”
Where do you stand on the asset class-versus-risk factor model debate?
We have evolved to a risk factor approach since 2009 and have reallocated almost our entire strategic asset allocation. We now live in two worlds: the traditional asset class world and the risk-factor world. We have found that approaching strategic asset allocation from a holistic risk factor perspective has been a great way to gain additional insights into our true risk exposures, sources of return generation, and areas where more diversification would be beneficial. We map our asset classes to a series of qualitative risk factors, using a combination of macroeconomic and investment risk factors.
Our risk factor framework allows us to better identify and diversify our reliance on the equity risk premium which we expect will allow us to compound capital more smoothly over the long term by avoiding large losses. History clearly shows that the equity risk premium is time-varying, unstable and subject to large frequent drawdowns and the future equity risk premium is dependent on starting valuations.
How do Alcoa's exposures as a corporation—to commodity prices, for example—impact the way you and your team manage its pension portfolio?
The risk factor approach has enhanced our ability to achieve our long-term objectives—generate a return in excess of our liabilities, mitigate our downside pension risk in the short term, and make our pension risk less pro-cyclical relative to our plan sponsor. We divide our assets into two buckets: Liability-driven investment assets and return-seeking assets. The mix is a function of our risk tolerance, macro tail risk environment, and market conditions.
We also manage our pension risk in an enterprise risk management context. We focus on balancing the tension between the long-term nature of our liabilities, investing our assets for the long-term and the short-term nature of the regulatory funding and accounting requirements. This approach enhances the security of the retirement benefits promised to our participants.
Who among your peers do you think is doing top-notch work?
My investment beliefs and strategy truly stand on the shoulders of some of the giants in the investment and academic finance community. I have incorporated wisdom from some of the great thought leaders: Ben Graham, Warren Buffett, Peter Bernstein, Robert Shiller, Rob Arnott, Jeremy Grantham, Michael Peskin, Howard Marks, Andrew Lo, and Andrew Ang to name just a few.
What is your take on major pension-risk transfers, such as the deals we saw with Prudential in 2012? Is annuitization a logical endgame for corporate pension de-risking?
I believe that a risk factor approach will help us achieve our strategic objective of generating an asset return in excess of our liabilities over the long term. In general, a pension-risk transfer seems to be an expensive undertaking in the current low rate environment.
Tell me about your hobbies outside of work. What’s on your reading list?
I’m a big fan of time travel books—I’m currently reading Stephen King’s 11/22/63.
I’ve been playing basketball since elementary school and have developed a decent jump shot. Given their current struggles, if the Knicks call looking for a shooting guard, I’m their man.