“Although already well funded—92% as of Dec 31, 2010
and performing strongly over the last three years with a 18.9% return as of Jan
31, 2012— ________ have sought to improve their asset allocation and
diversification, moving meaningfully into private equity and real assets over
the last couple of years.”
You’d be wrong if you thought that the above paragraph
referred to some Satyr-like stepchild of a well-funded corporate fund and an
aggressive endowment. No, this description—an actual nomination received for
the 2011 aiCIO Industry Innovation Awards—is in fact referring to the most
lambasted of capital beasts: a public pension. The Employees’ Retirement Fund
of the City of Dallas, Texas (“Dallas ERF”), to be exact.
That a public plan in 2012 can be nearly 100% funded will
come as a surprise to many—especially those who have long-ago labeled the
public pension model anachronistic, illegitimate, or worse. How they’ve done
it, however, is far from surprising. It starts with a sponsoring entity willing
to fund the plan, of course—but, as always, it also depends on a competent
board and staff, solid investment decisions, and the willingness to step away
from the herd that surrounds it.
“It all starts with our board,” says Cheryl Alston, the
fund’s Executive Director. “It consists of seven individuals. The majority are
investment professionals appointed by the Mayor, plus the City Auditor. The
employees appoint the remaining three, but here’s the key—they are also all
finance professionals.” This stands in stark contrast to some other (unnamed) public
pensions in America. Its composition, if not its more formal governance,
resembles the public pension entities of Canada, the Netherlands, and the
Nordics, all of whom are cited as the best the world has to offer in managing
retirement capital.
Alston, who joined Dallas ERF after an investment-banking
career at Chase and CIGNA Retirement and currently serves as Chair of the
Investment Committee for Christus Health and is a member of the PBGC Advisory
Committee, started her first public position in 2004. “I have been in this
position for eight years now—I can’t believe it, neither can my husband—which
means a whole market cycle. We’ve seen the highs and the lows, and the board
has always been very measured and diligent in reviewing investment performance—and
not overreacting to bad performance, still willing to look at opportunities.
That’s’ really helped.”
Perhaps not surprising for a public plan is the size of
Dallas’ investment staff. If there are two things that are almost universally
true about public pensions in America, they are this: the sponsoring entity
doesn’t pay what it has promised, and there are too few people managing the
assets. Indeed, the Dallas investment staff can sit around a small table with
room to spare. It doesn’t seem to bother the ever-sunny Alston, however. “For the
$3 billion we do have, I lead an investment staff of three people—myself and
two others,” she says. “We do all asset classes, and the knowledge of all asset
classes is extremely helpful in the allocation process. We conduct all of our
manager due diligence, along with Wilshire,”—the fund’s investment consulting
firm—“but in the end it’s the staff kicking the tires ourselves to evaluate
managers. It’s a quality staff accountable for results.”
This combination—a professional board and an accountable
staff—allows the fund to execute on Alston’s overarching philosophy, one that she
credits with the recent success. “Our approach to investments is very
conservative but also contrarian,” she says. “It’s interesting: When I look back
at the downturn of 2008, one of the things that is important to us is
liquidity. We have to pay benefits, but the ability to move around during different
market environments is important. After the downturn, we had liquidity and went
into core real estate funds near the bottom of that market, which has done very
well.” In 2009, the fund continued its contrarian ethos and increased its
holdings of high-yield debt, which has done “tremendously well.” The firm also
invested in a number of secondary private equity funds and was committed to
capital calls when other funds were running for the hills.
“Liquidity and the flexibility to invest when others can’t
is really good,” Alston adds. “We really try to avoid the herd mentality.” The
fund has some ideas it thinks will serve it well going forward as well: Global
equity and international managers are undervalued right now, Alston thinks, and
the general falloff in woman- and minority-owned firms post-2008 presents an
opportunity to be contrarian and re-analyze this sector. “We are toying with
different names for a program (that focused on women-and minority-owned
firms),” she says, “but we want to find investment expertise. We want to find
the new Acadian or Oaktree or Blackrock.”
To find such potential gems, Alston sticks with what has
worked in the past. “If I don’t get it, it’s too complex,” she says. “The
mantra helped during the downturn. We have avoided some of the potholes. If you
avoid losers, winners take care of themselves—that’s what we think.” A simple
mantra, and—along with other methods employed by Dallas– one that more public
funds will surely be following as the alleged public pension funding crisis
continues.
