Exec takes on ‘toughest’ CIO job, successfully revamps procedures and attracts staff

Evans is a former TIAA exec who took on one of the ‘toughest’ CIO jobs in the US, managing 5 pension funds, filling out the staff, revamping compensation structures, and putting due processes in place. He spoke with editor Christine Giordano about how he did it, as well as his allocation plans for the future. 

CIO: After retiring from your role as CIO managing nearly $500 billion at TIAA-CREF, you took one of the hardest CIO jobs in public pensions, managing 5 New York City plans. What made you decide to do it?

Evans:

I knew that this was one of the toughest jobs in the investment management business. And, really, it was after meeting [New York City Comptroller] Scott Stringer that I wanted this job. Scott is a very dedicated elected official who is absolutely determined to make good government work, and if reform of the pension system is what’s needed, Scott is up for it. And I’m very happy how we’ve been able to partner with the boards of trustees on some critical changes over the last few years.

Just an example: for the different plans, we had 5 investment boards that each met monthly. My team had 54 all-day investment committee meetings when I got here. We have 12 different consultants so, this team was simply shuttling consultant reports to the almost-weekly board meetings. We concluded that we needed to simplify the number of meetings to make things more efficient.

So, the Comptroller was able to work with us and the boards of trustees, and we were able to successfully create a common investment meeting, where all the boards meet simultaneously, at least six times a year. So, six is a lot better than 54. And this freed up the team to go out and visit our managers, and have time to conduct more rigorous analysis.

CIO: How else have you changed procedures?

Evans: We didn’t have any consistent due diligence process in 2014. Today, all of our asset class teams follow the same disciplined process. We have an internal investment committee that hears all manager recommendations to add or subtract managers from the portfolio. Importantly, we have the whole investment team participate in the investment committee discussions. Decisions are made by a five person investment committee, which consists of the CIO, the two deputy CIOs, and a rotating pair of asset class heads.

CIO: You also increased salaries a bit to keep pace with Manhattan’s high cost of living?

Evans: Nobody works for a public pension fund for the money. But, we had gotten to the point where we were paying people in the bottom quartile of public pension funds, and requiring our people to live in NYC, with one of the highest living costs in the country.  That was just not a fair deal. And so, the Comptroller was able to change things so that we now pay median compensation vs. other public pension funds. Even though our people can make many times their new salaries at private firms, they now feel like they’re being treated fairly, which makes a big difference.

CIO: Where do you find your best talent?

Evans: Ashby Monk at Stanford wrote that if you’re running a public pension fund, you have to staff your organization with the green, the grey, and the grounded. The green are young people who want to get a start in the business. Working for a large public pension fund is a terrific first job, because you’re able to dig right in, get directly involved in managing a very large pool of capital, and personally interact with some of the best investors in the country. If you’re grey, like me — and Mike Haddad and Alex Doñé, my deputy CIOs who have been on the private side for most of our careers, this is an opportunity to give back to our community and to mentor young people. I don’t think that the three of us are unique. This is an attractive job for a veteran investor who wants to serve the public. Attracting the grounded, or those in mid-career, is tougher. In New York, people have lots of other alternatives. The mid-career folks that we get are true public servants in the best sense of the word — and we should all be very thankful for their decisions to serve New York City.

 

CIO: What perspective do you bring to public pensions as a former TIAA-CREF executive?

Evans: I think it was a real advantage for me, having managed an institutional portfolio with a similar objective, both at TIAA-CREF, and as an external advisor to ABP in the Netherlands for many years. The core objective is the same, which is to create a portfolio that will defease long-lived pension liabilities. And so, I think it’s a value to recognize what’s not unique about the job at hand.

CIO: What’s your advice to others on “kicking the tires” when selecting managers?

Evans: It’s not that different than selecting individual stocks, which was my first job as an industry analyst many years ago. I was always on the look-out for great management teams. Long-term investing is all about partnering with people that you can trust. At NYCRS today, we are looking for managers that we can trust to be good stewards of the money we are investing on behalf of NYC pension beneficiaries. You want to understand what the philosophy of the firm is, you want to watch their practice over time, and you want to watch them react to unanticipated events, and then to be able to understand — not only at the top level of the organization, but down through the organization — how decisions get made, and how the core objectives and the core strategy of the fund are replicated over time.

We’ve worked with a number of our managers for many, many years, and we’ve gotten to know them extremely well, and this long relationship allows us to be true long-term partners to them.

This deep knowledge of our managers’ practices pays off. When a manger runs into a difficult performance patch, and many of their other clients are redeeming, our practice is to get on a plane to go and visit them, to find out more about the source of performance and the reaction of the portfolio team.  When we become convinced that the reasons for them falling out of phase are transitory and not inherent to the long term portfolio strategy, we frequently give them more money. This is almost impossible to do if you lack a deep understanding of the firm’s investment practice.

When you look at managers that we end up having to part company with, they tend to get overwhelmed by the markets that they get in, they lose their bearing, they lose confidence in their own strategy, and they begin to become very unpredictable to themselves and to their clients — having a great deal of difficulty explaining what they’re doing, and they just find themselves at sea. It’s very, very easy for this to happen. Money management is a lot tougher than it looks — even the great ones go through long periods of time when they are out of sync with the markets. It takes a cast iron stomach to be a successful long-term investor.

Right now it’s tough out there: the market has been propelled by unprecedented quantitative easing from central banks, which has led to a massive movement towards indexing, and very little opportunity for active managers to practice their craft. It is understandable that many are starting to question themselves and consider changing their investment approach. It’s hard. You want to evolve your approach, but you don’t want to lose your footing and lose the core of who you are. It’s always a judgment as to which of those is happening when things aren’t working.

CIO: Your US equity, international equity, and fixed income allocations have been doing very well. Will you be changing your asset allocations for the end of the year?

Evans: We do the asset allocations every couple of years or so. We did them in 2016 and we’ve been in the process of implementing the board’s latest asset allocation. In a few years, we’ll take a fresh look at it, so, we don’t plan any radical changes in 2017.

Although each of our five funds has a slightly different asset allocation: about 70% of each of the portfolios is dedicated to assets where we’re trying to earn a risk premium ­– public equity, private equity, alternative credit, opportunistic real estate, high yield securities, etc. And then, the remainder of the portfolio is divided between assets that are selected for principal protection that we hope to do well in the deflationary environments: treasury bonds, high quality corporate credit, etc and assets that we think will do well in inflationary environments, like inflation linked bonds, core real estate, and bank loans.

CIO: What was key to your high returns this year?

Evans: The most important element to the high returns this year was that the market was up. 100% of this portfolio is handled by external managers. We think we’ve done a good and disciplined job of selecting managers, giving them consistent assignments, and being vigilant about rebalancing the monies and keeping the portfolio diversified. When I got here, we did not have a full staff — I’ve now been here three years, and we have filled out the staff, we’ve changed the compensation scheme, we’ve changed the physical layout here, we’ve put in place a lot of foundational processes and procedures that I think will be a core element in making us more consistent over time.

 

CIO: You inherited quite a few tenured employees but were able to ensure that their skills remained relevant. Can you explain how you did it?

Evans: It’s one of the things that I’ve learned the most since coming here. As a public agency, we have a large number of committed public employees who have dedicated their careers to the people of New York — and they have a wealth of knowledge about the City, the Comptroller’s Office, and how things work in government. Before coming to NYC, I worked in the private sector where personnel policy was different — the private firm answer is often to bring in new employees for every new task. There’s fairly high turnover — and that’s the world I was accustomed to.

Here, interestingly, we ran into several situations — mostly on the operations side — where our middle managers really kicked into gear.

For example, we had a terrible record of not paying our invoices with any sort of reasonable frequency. So we brought together a number of employees to create a team of dedicated invoice handlers — and we’re now in pretty great shape in terms of processing our bills. We’ve become much more efficient, and people like that they’re tackling an old problem in a new way. The team’s working collaboratively — they’re excited to take on this challenge.

There’s a different atmosphere here now — and that came really because we were able to pinpoint how we’d been falling behind, identify existing talent, and then tap that existing talent in a different, exciting way. That’s a challenge that we don’t see a lot in our economy anymore. I kind of think it’s a nice challenge — and I’m proud of what we accomplished.