Mass PRIM CIO, Cliff Asness Talk Career Lessons at Pension Bridge

Cliff Asness and Michael Trotsky at
Pension Bridge conference

A storied hedge fund manager and a large pension program chieftain have some tales from the front for you.

Michael Trotsky has been running the Massachusetts Pension Reserves Investment Management Board for almost a decade, but admitted Tuesday that there was a steep learning curve when he made the transition to the public from the private sector.

In an appearance at the Pension Bridge conference in San Francisco, alongside AQR founder Cliff Asness, the $74 billion fund’s executive director (also its chief investment officer), admitted he was originally lacking in a few areas.

“I had spent most of my time managing equities in some form or fashion, so I needed to broaden my experience set to other asset classes,” he said. “That was number one.”

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He came from Boston-based hedge fund PAR Capital Management to the pension organization, which houses the assets of both the Massachusetts Teachers’ and State Employees’ Retirement Systems as well as 100 participating municipal and county retirement systems. And the transition to the political world was jarring.

“I am not a political person, and I wound up managing a state pension plan with some elected officials who really look over my shoulder, sometimes uncomfortably so,” he said. Trotsky said learning how to negotiate and say “no” to very important people who had some control over his career (and the inevitable pressure he would and does face) was “probably the hardest single job of my life.”

Trotsky said that element of his job is made “a lot easier” with the help of his trustees and a balanced board that “really cares about things,” although he admittedly was “very green on that whole scale.”

“Most of us in this room have really spent our careers on the business side of things,” said Trotsky. “Let me tell you, the political side of things is another world.”

Also new to him as the Mass PRIM chief was managing a large team. “I managed small groups of people but never a large organization,” he said. “I actually needed to learn it…and it’s something I think I’m really good at, and I really enjoy.”

“I do not enjoy managing people, and they do not enjoy being managed by me,” Asness deadpanned. “It goes well.”

Following chuckles, the hedge man then got serious.

“Some of my best learning experiences… is when I’ve been on those investment committees,” he said. “Any money manager who has the chance to do that should, because as a money manager, you’re always like, ’why does the client think this’ or ‘we’ve had six good years and one bad one [and now] they’re yelling at me.’ And then you’re the person doing it, and you feel perfectly reasonable doing it.”

Asness warned that not all experiences will be good ones when it comes to committees, and shared a story about a rough one. At an endowment he was with about a year before the financial crisis, the committee wanted to add more stocks but felt the market was overvalued. The institution then said if a crash came it could “back up the truck,” meaning take a bullish position, according to Asness.

“Can anyone here take a guess what gear the truck was thrown into?” he asked the Pension Bridge crowd.

Asness then said the general committee structure is “very dangerous” as there is a lot of group think, panic, and “realization that they get the downside before they get the upside, so they’re not even being irrational.”

Trotsky jumped in to say a key advantage of his organization over his peers is a reasonable board. The CIO said he has experienced two “great surprises” in his time at the fund. The first is being at an organization that is able to attract great talent regularly. The second, and “greatest” surprise, is that Trotsky has never been forced to hire or fire a person or a firm.

“I’ve been doing this job for eight years,” he said. “I can’t really believe it, but it’s been a ton of fun and I’ve learned so much.”

Cliff Asness’ Hedge Funds 101

Tags: AQR, Cliff Asness, Massachusetts Pension Reserves Investment Management (MassPRIM), Michael Trotsky, Pension, Pension Bridge

Thom Williams, Dick Igram, Dominic Garcia
and Glen Grell at Pension Bridge conference

What do Illinois, New Mexico, and Pennsylvania have in common? Badly funded public employee pension plans.

Speaking at the Pension Bridge conference in San Francisco on Tuesday, officials from these pension plans told a crowd of asset owners and managers how and why it happened. Their stories had similar themes.

“Anybody familiar with the term ‘schadenfreude’ means?” asked Illinois Executive Director of the Teachers’ Retirement System Dick Ingram asked, in reference to the German term for delight in the misery of others, such as the criticism his plan has attracted. The executive director of the Teachers’ Retirement System of the State of Illinois then went on to detail how poor contributions have “systematically underfunded” the Prairie State’s program, which is now at 40% of what it needs to pay its obligations.

In other words, his state government hasn’t contributed enough to the plan. “We have never in our 80-year history, in any one year, received from the state an actuarially determined contribution,” he said, adding that his plan is due for a $4.5 billion contribution this year. But the actuarial contribution should be $7.5 billion, he noted. “That in a nutshell is why we are where we are.”

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The best-off of the bunch, New Mexico, boasts a 71% funded status, but that is far below what it had a couple of decades ago, when it was overfunded.

“We can never fund that unfunded liability ever based on the structural deficiencies we have,” said Dominic Garcia, chief investment officer of the New Mexico Public Employees Retirement Association. “For us in particular, you can point to the 1990s.”

During that decade of gangbuster returns, the PERA was 105% funded, and it rewarded its members too well. “We gave out free benefit enhancements without pre-funding it,” said Garcia. “That was mistake number one.”

Following the 2000-03 dotcom bust and the 2008-09 Great Recession, the payouts eroded the organization’s funded status. Compounding that have been New Mexico’s generous cost of living adjustments given to its retirees.

“We’ve overpaid COLAs so much for the last 30 years,” Garcia said. The fund recently lowered the COLA rate from 3% to 2%, “but when you actually stretch out what we’ve paid, that’s been higher than CPI, and it’s been higher than what we’ve actually earned over the last 30 years in returns when you incorporate the base benefit plus our COLA.”

Like Ingram’s fund, contributions have also been below actuarial necessity, for the past 20 to 25 years. According to Garcia, it has received about 80% of what has been owed in yearly contributions.

Glen Grell, executive director of the Pennsylvania Public School Employees’ Retirement System, said his plan’s plight was similar to that of New Mexico. The legislature changed the benefit accrual rate from 2% to 2.5% and made it retroactive without pre-funding it, inadvertently helping swing the plan’s 123% funded status down to 56%, where it stands at today.

After the tech bubble, Pennsylvania lawmakers “systematically underfunded” the plan by changing its structures over the next 10 years. Grell called this concoction the “triple witching hour.” At least, he went on, the contributions are slightly better more recently: They have been paid in full for the past three years. But overall, that amounted to a fraction of what the system needed, he said.

“If you only make partial payments on your mortgage for 12 or 15 years, if you still have your house and decide, ‘OK, I’m going to start making a full payment,’ that’s great, but you still have to do something to make up for that 12- to 15-year hiatus on full payments, and that’s what our policymakers have just been unable or unwilling to wrestle with in Pennsylvania,” Grell said.

As to what they are going to do about the situation, little was said, but the fund runners are trying. Garcia is taking a page out of his former employer, the fully funded State of Wisconsin Investment Board. He wants to take three principles from it: governance, a flexible plan design, and better mechanisms to attract and retain talent.

The state of New Mexico recently created a task force to help deal with its funding issues. Garcia is a member, and is excited for its first meeting next month. The task force was created by legislature following a credit downgrade from Moody’s, which spooked policymakers.

“There are solutions, it’s just, at the end of the day a lot of it is political will.”

Grell’s Pennsylvania is in the midst of a structural change implemented in 2010, where the employee contribution is tied to the assumed rate of return. After a three, six, and 10-year lookback, employee contributions would go up if the plan did not hit its target.

“We tried to come up with a concept that would make a defined benefit plan work like a defined contribution plan specifically in the area of investment risk,” he said.

Since the plan achieved its benchmark in the three and six-year periods, there has so far been no need to raise contributions.

“A lot of people in Pennsylvania don’t even know about it because it hasn’t been triggered yet,” he said.

David Eager, executive director of the Kentucky Retirement Systems, another poorly funded establishment, was also slated to be on the panel. But he pulled out at the last minute due to an emergency back home regarding state legislature.

Related Stories:

New Mexico PERA Gets a Task Force

Pennsylvania Pension Revamp Starts, Barring New Hires from Legacy Plan

Top Ratings Agency Slams Illinois Gov.’s Budget Proposal

Tags: Illinois Teachers’ Retirement System, New Mexico Public Employees Retirement Association (PERA), Pennsylvania Public School Employees Retirement System (PSERS), Pension, Pension Bridge