PERSI’s Maynard: How Complexity Is Failing Investors

67_Profile_Bob Maynard_CB.jpg Bob Maynard, CIO, PERSI (Art by Chris Buzelli)If it’s too difficult to understand by just looking at, your portfolio is probably too complex. So says the latest paper by Bob Maynard, CIO of the Public Employee Retirement System of Idaho (PERSI) and 300 Club member.

Maynard, who looks after $14.2 billion in public sector retirement assets, warns peers that developments in financial and risk modelling did not make investing any safer—or more likely to give better returns. Instead, they should think about returning to a traditional, simpler way of allocating capital.

“It has almost become an accepted truth that to be a ‘sophisticated’ institutional investor in a complex, interactive, tightly coupled, and adaptive world, one has to adopt a complex, interactive, tightly coupled, and opportunistic investment model (and organization),” says Maynard.

This new approach—embodied in some part by the endowment model, according to Maynard—emphasizes non-transparent and illiquid vehicles and relies on quantitative, detailed models of portfolio characteristics as their primary risk control devices.

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“The more that detailed quantitative models of portfolio characteristics are needed to describe a portfolio and its behavior, the greater risk it will incur,” Bob Maynard, CIO, PERSI.However, a complex investment world does not require a complex response, either in the nature of the investment organization or the particular investment strategies chosen, the CIO—and three-time Power 100 member—says.

“The cockroach lives in a highly complex environment with one of the best long-term success rates of any creature,” the paper says. “Yet it has only one defense mechanism—running in the opposite direction from a puff of air. The equivalent for the investment world is, at the core, a very simple structure founded upon public market diversification with one basic defense mechanism: see a volatile movement, react in the opposite direction (i.e. rebalance into it).”

A simple structure and strategy, if adhered to, has one of the best chances of surviving for many decades, Maynard declares.

Transparency, daily public and independent pricing of public-market securities (with the attendant liquidity), managers with clear styles or concentrated portfolios, and a reasonable number of active manager relationships that can be easily followed and understood are what is needed, Maynard says.

PERSI employs 16 managers to run nine strategies over 20 mandates. There are no explicit allocations to “alternative” asset classes, according to its October investment update. Over the past 20 years, it has made a 8.4% return, the update states.

“The best risk control lies in knowing what you have, what it is worth, and how it is behaving,” Maynard concludes. “The more that detailed quantitative models of portfolio characteristics are needed to describe a portfolio and its behavior, the greater risk it will incur.”

The paper is available for download.

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The last of Detroit’s major pension debt holders settled their objections to the city’s solvency plan in the eleventh hour, as the city made its final arguments to end bankruptcy.

“The end really is in sight,” said Bruce Bennett, Detroit’s lead attorney. “This plan is very broadly consensual at this point and the city has settled with all the objectors and all the major economic players in the city of Detroit.”

Investors including hedge fund managers Aurelius Capital Management and bond insurer Financial Guaranty Insurance Company were owed $1 billion by the retirement system. If the city’s plan is passed, the investors will be given $141 million in new notes.

Debt holders had previously argued against Detroit’s pensioners receiving a higher payment.

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According to the city’s updated plan filed in April, current retirees would see their pensions cut by 4.5% and future pensioners could see as much as a 20% reduction. Cost of living adjustments would also be trimmed from benefit calculations.

In his closing arguments, Bennett argued for Detroit’s plan to carve $7 billion from its $18 billion in liabilities and reinvest $1.7 billion over 10 years for city services. He also highlighted the number of brokered deals since filing its Chapter 9 bankruptcy on July 18, 2013.

“It’s hard to overstate the significance of the fact that that’s only 15 months and eight days ago,” Bennett said. “We had litigation with everybody about something.”

The plan also includes a “grand bargain” intended to protect the city’s art collection from being sold to pay off debt holders and reduce pension cuts using $816 million from private foundations and Michigan taxpayers.

“It is a reasonable decision for the city to want to keep a world-class art museum in the city as a potential contributor to its future,” Bennett said.

US Bankruptcy Judge Steven Rhodes said he would decide whether the plan is feasible and fair to creditors next week.