CIO Profile: Alcoa’s Ron Barin on Risk Factors, PRT, and his ‘Decent’ Jump Shot

In a rare interview, Barin explains why volatility is a poor measure of risk and a bulk annuity purchase isn’t in the cards now for the aluminum giant.

(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'êtreof 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.

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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.

(January 6, 2014) — London’s local authorities have effectively dumped pension merger plans and asked industry professionals to assist in shaping the future of London’s Local Government Pension funds.

London Councils set noon today as the deadline for interested parties to apply to help create the business case for a Common Investment Vehicle (CIV) that would be available to the capital’s borough pension funds. At a meeting on December 10, London Councils’ Leaders’ Committee said they were only interested in looking at the details of implementing a CIV, effectively dismissing a merger of the 33 borough schemes.

This started the ball rolling, and quickly.

“I am pulling together a project team and it certainly feels like the necessary legal structures and frameworks are in place,” Hugh Grover, director of fair funding, performance, and procurement at London Councils, told aiCIO.

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Grover has set out a short timetable by the end of which the CIV could be up and running assets.

“Our target of nine months is ambitious—it is difficult to tell yet whether we can do it that quickly—this plan assumes all members are happy with the business case,” Grover said. The writing of a business case has been agreed—and funded with at least £25,000 per member—by more than 21 of the 33 London boroughs.

There had been four potential models presented by PWC to the boroughs. Now there remains just the CIV option that they were the happiest to explore.

Last year, Berkshire, Buckinghamshire, and Oxfordshire council pension funds announced plans to explore a similar CIV structure. Several Welsh plans have also taken part in a comparable vehicle launched by the Gwynedd County Council Pension Fund.

“There is no fixed commitment to the model at this stage,” Grover said. “Leaders cannot sign off a firmer decision as a lot is dependent on an ongoing government ministers’ evidence gathering exercise that could see them also pursuing a CIV.” Should the government choose this option to pursue as well, the London boroughs’ work would be duplicated.

London Councils has written to the ministers and departments involved to inform them of its progress.

Grover explained how the CIV could work: “At the outset, the CIV would implement less exotic investment options by swiftly moving into passive strategies, which most pensions already use. After establishing these, we would develop others.”

The government’s new Authorised Contractual Scheme (ACS) has been chosen as the preferred vehicle in which to host the CIV. As aiCIO reported last year, the set-up would allow institutional investors a way to keep their assets onshore, but with greater tax efficiency than has been previously available.

The model, which was suggested to Grover by an industry expert, continues the basic thesis behind greater collaboration across the capital’s pension funds.

“The main benefits of the CIV are to cut down on costs,” said Grover. “If there are 33 pensions all paying to procure and be managed in passive funds separately, using a collective fund automatically makes a saving.”

Also, some boroughs might achieve better returns through a CIV, Grover said, “and it would allow smaller scale investors to access some larger direct investments, including infrastructure, where the costs often preclude investment from anyone but the biggest funds.”

Grover and the appointed experts will not examine whether the CIV could take on additional services for the pensions, such as fund administration. “We are keeping the discussion very simple at the moment and concentrating on collaboration across funds,” he said. “We have also not looked at the detail about who would manage the funds—whether it would be done internally or externally—we are keeping to the basic discussion on the CIV itself for the moment.”

London Councils cannot create and run the CIV. The organisation would put together the legal framework within which the fund would operate but it would be contained in an independent limited company.