(August 22, 2013) – Tim Walsh’s departure as head of New Jersey’s $74 billion retirement system opens one of the nation’s most powerful institutional investment positions.
Interested? Bob Grady is collecting resumes. Grady, chairman of the fund’s investment council and a prominent private equity investor, recruited Walsh away from the helm of the Indiana State Teacher Retirement Fund in 2010.
Now, Grady is leading the search for Walsh’s successor.
Grady spoke to Managing Editor Leanna Orr about Walsh’s legacy, the search process, and what he’s looking for in a new investment director. This is the second in a two-part series on New Jersey’s open directorship, following an in-depth interview with Walsh on his decision to depart for the private sector.
aiCIO: What was your reaction when Tim told you he was stepping down?
Grady: I was surprised, but I knew that day was going to come at some point. I understand the normal financial concerns for someone in his position. And the opportunity arose, so it’s hard to get angry with him. Of course, this is mixed with a little bit of worry about finding someone who can fill the role as well as he did.
How would you characterize Tim’s tenure as New Jersey’s investment head?
First and foremost he made good investment decisions. He worked very closely with the board and took strategic positions where appropriate. There’s no point in having an asset allocation on day one of a fiscal year that’s exactly the same as day one of the next fiscal year. Most of Tim’s tactical overweights and underweights played out well. Just the other day, we were looking at the second quarter of 2013. His overweights and underweights earned beneficiaries about $1 billion. That’s in one quarter. That’s a pretty good generation of alpha and pretty good investment skill.
Secondly, he’s a good leader. Tim developed the team very well at New Jersey, and interacted a lot with all elements of the organization. But he was never afraid to be decisive.
Finally, I’d say innovation was a major theme. Tim was creative, particularly in fostering alignment of interest with our various investment partners and managers. It’s not only about reducing fees, but also creating a structure in which our interests are aligned.
With Och-Ziff, for example, we get a lower than market management fee and higher than average hurdle rate, but the benefit to them is that we’re really investing for the long term. Calculating the high water mark over a five-year period avoids the situation hedge fund investors often complain about. You make a lot of money one year and pay out a big carry, but then the next year you lose a lot of money and there’s no recapture of those fees because they’re already paid out.
You are leading the search for the next director. What are you looking for, and how are you positioning yourself to be able to find it?
We are looking for someone with a broad skillset to be successful in the role. That means significant investment experience, whether it’s at a public plan, endowment, foundation, or family office. Also, there needs to be a long enough track record to see an indication of investment success. We want someone mature enough to lead a group of people, flexible enough to manage in the public sector—which is not always easy. We’re looking to maximize multiple things, and some candidates might be more experienced in one thing but not so much in another. We will have to make judgments as the resumes come in.
At the moment, we’re casting a wide net—people at other public plans, our managers, friends, consultants, acquaintances in my own Rolodex, and others in the industry—to try and connect with people who might be interested. We will review those first with the HR department at the New Jersey Department of the Treasury to narrow it down to a manageable list. We’ve established a search committee, and will pick the ‘quarter finalists’—five or ten people we want to bring in for interviews.
We are explicitly considering both internal and external candidates. I already know one strong candidate, Chris Mcdonough, who we recruited to be the deputy director from his position as CIO at the City of Philadelphia.
We want it to be a competitive process.
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Even by the standard of public plans, Tim’s salary as director was low [$185,000]. Is that an area you’re going to address?
At the time Tim resigned, I did say it was time to address that issue. Certainly we’ve been consulting with the Governor and legislature about what flexibility we have and what must be accomplished through legislation.
I personally would favor having some substantial component of the senior staff and certainly the director’s compensation be tied to performance—and I think that’s typical. Many other states have restructured their laws to pay their investment professionals a little more if they succeed on behalf of their beneficiaries. I do think it’s something that deserves addressing, not because of this search but for the long-term. We’ve got a $75 billion dollar fund. We’ve got 800,000 beneficiaries. Our union representatives are highly motivated to have that pension fund be invested well.
Tim is third senior investment staff member to leave New Jersey in the past year-and-a-half. Former alternatives head Christine Pastore stepped down in March of last year, and eight months later Bryan Martin left his role as head of real assets. I know, having spoken to all three, that they loved their jobs. Does New Jersey have a problem holding on to its best people?
The problem is endemic to public plans—they’re just not going to pay as much as certain other opportunities in the investment world. That’s just a fact of life. But even if you can incrementally improve the situation, you can incrementally improve retention.
There is no doubt—and I won’t deny it for one second—that the number one reason why both Christine Pastore and Tim Walsh left was compensation. They’re both still young enough to be in the prime of their careers, and it’s completely understandable. I don’t think it’s a function of culture or operational problems: They were both incredibly skilled at their jobs and we all got along well. I think 100% of the issue is compensation and the opportunity cost of not working in the private sector.
It’s something that deserves addressing, and we’ll raise the issue with the legislature and Governor’s office as appropriate.
What is your timeline for finding a new director, and what advice would you give to anyone interested in applying?
I committed to the Treasurer that I’d try to fill the job by the end of the year.
To anyone interested in pursuing this position, I’d tell them that regardless of compensation—I’m kidding—it’s an incredibly meaningful job. You have a real chance to make a difference; your investments are incredibly important not only to 800,000 beneficiaries but also to taxpayers in one of the largest states in the country. It’s a great way to demonstrate investment and management skill, and also great career opportunity for someone to really make a name for themselves. And send resumes to me, Bob Grady, right now! Inquiries are welcomed and timely if they come now.
I’m aware of the fact that there are some other public plan CIO jobs that are open, are others are conducting searches in this same area. This just underlines the difficulty and important of our challenge.
Will Tim remain a resource for New Jersey? Do you think he will stay in touch?
Yes—I absolutely hope so. We are not only colleagues, but also good friends.
Related content: Tim Walsh on Leaving Public Pensions
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