Exclusive: New Mexico ERB CIO Jacksha Is Worried About the Trade War

The $13.3 billion fund’s chief has very large portion of the portfolio in alts, as a buffer against bad times.

New Mexico Educational Retirement Board (ERB) Chief Investment Officer Bob Jacksha may have beaten his peers this fiscal year with 7.29% returns, but that doesn’t mean he’ll sleep any easier in this economic climate.

“In terms of concerns, let me quote the Mad Magazine character, Alfred E. Neuman: ‘What, me worry?’…The answer is ‘yes, I do,’” he told CIO. 

Jacksha is particularly concerned about the ongoing tariffs and trade war between the US and China, which he calls “potentially ruinous.” He cited the almost instantaneous stock market volatility the actions of President Donald Trump and President Xi Jinping have created, not to mention that Trump has threatened allies such as France with trade sanctions.

“While I disagree with the method, I have some sympathy for the general thesis of equalizing trade terms,” said Jacksha. He added that the world may have benefited in the long run from the US being at a disadvantage when it was the dominant economy in a post- World War II era. But, he went on, America “should strive for more equal terms of trade” now that the global economy has caught up.  

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And although there are issues with China that must be addressed, such as intellectual property protection and letting outsiders into their markets, Jacksha’s biggest US policy disagreement is with the Trump administration’s hard-charging approach.

“Instead of engaging with our long-term allies to press China to behave, we are going it alone and using tariffs as the main weapon, while threatening our allies with the same,” he said. “A more conciliatory, participative approach would seem to be more productive, but that is not, unfortunately the modus operandi for our current Washington administration.”

Jacksha is also wary of “broader worries” about China as a rising power “coming into conflict with the established superpower, the United States; i.e. ‘The Thucydides Trap.’”  That’s where the faceoff actually leads to war.

The New Mexico ERB chief is not as concerned with the Federal Reserve making a policy mistake, but instead that its actions will cease to be effective in offsetting potential trade escalations.

“We are doing our best to build a robust portfolio that will do reasonably well in a variety of market environments and to have a plan to take advantage of a recovery in the event of a serious downturn,” Jacksha said of risk prevention. “What we do know is that markets will go down….and they will go up.  Just not how much, when, or in what order.” 

Jacksha’s Secret Weapon

An area that the $13.3 billion fund has shown to mitigate these risks in by diversifying its assets is alternatives. The fund allocates 41.8% to the space, significantly higher than many of its peers, who typically keep around 15% to 25% of portfolios invested in alts (the rest of New Mexico portfolio is 31.3% equities, 25.9% fixed income, and 1% cash).

That high allocation was also the driver behind the retirement board’s benchmark-beating returns, especially in a year where institutions are starting to realize lower or negative returns than recent years. Its top-ranking private real estate program, for example, returned 12.7% for the year ended June 30.

“We have done our best to build a portfolio of diversified risk exposures that will do relatively well in a variety or market outcomes. I say “relatively” because you can’t construct those risk exposures to do really well in up markets and still produce large positive returns in a downturn,” said Jacksha, confirming alternatives as “a main part” of the fund’s anti-downturn strategy. “We feel we are reasonably well-positioned should a downturn take place, but would prefer it doesn’t, of course!”

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UK DB Plans’ Deficit Widens to £90.7 billion in July

Funding level falls to 95% from 97%.

The aggregate deficit of the 5,450 pension plans in the UK’s Pension Protection Fund’s (PPF) PPF 7800 index surged to an estimated £90.7 billion ($109.3 billion) at the end of July, from £51.7 billion at the end of June, sending the funding level down to 95.0% at the end of July from 97.0% at the end of June.

The position of the PPF 7800 has worsened from a year ago, when it reported a deficit nearly half as large at £26.1 billion, and a funding level of 98.4% as of the end of July 2018.

Within the index, plan assets totaled nearly £1.73 trillion at the end of July, a 2.4% increase over the month, and a 6.8% from the same time last year. Meanwhile, total plan liabilities were just over £1.82 trillion at the end of July, a 4.6% increase from the previous month, and a 10.6% increase from the year-ago month.

The aggregate deficit of all plans that were in deficit at the end of July increased to an estimated £218.8 billion from £189.3 billion at the end of June, and from £162.3 billion at the end of July 2018. Meanwhile, the aggregate surplus of the plans in surplus decreased to £128.1 billion from £137.6 billion at the end of June, and from £136.3 billion at the end of July 2018.

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The number of pension plans in deficit at the end of July increased to 3,396, representing 62.3% of the total 5,450 defined benefit plans, from 3,275 at the end of June (60.1%), and 3,196 at the end of July 2018 (58.6%). Meanwhile, the number of plans in surplus decreased to 2,054 at the end of July (37.7% of plans) from 2,175 at the end of June (39.9%), and 2,254 at the end of July 2018 (41.4%).

Equity markets and gilt yields are the main drivers of pension plan funding levels in the UK, according to the PPF. Liabilities are sensitive to the yields available on a range of conventional and index-linked gilts, and are also time-sensitive. The PPF says that even if gilt yields were unchanged, plan liabilities would increase as the point of payment approaches. The value of a plan’s assets is affected by the change in prices of all asset classes, but equities and bonds are the biggest drivers behind changes, said PPF. Bonds have a higher weight in asset allocation, but equities tend to be more volatile.

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