September 30, 2019

Exclusive: Exit Interview as Paul Ballard Says Goodbye to Texas Treasury Safekeeping Trust

His innovative approach to risk management leaves its mark: on his last day at the office before retiring, Ballard reflects on lessons learned at the $80 billion plan since 2003.

Reported by Terry Wooten

Art by John Jay Cabuay

There is a somber tone today at the Texas Treasury Safekeeping Trust Company in Austin, but it won’t last long. Paul Ballard will see to that. The sadness is because Ballard, TTSTC’s long-time CEO and CIO, is retiring.

Despite the occasion Ballard’s spirits will be high as usual. What sadness his leaving generates will soon dissipate as his friends and colleagues give a Texas-sized sendoff to a man who has provided results equal to the Lone Star State’s high expectations. Ballard has also left behind a legacy at Texas Treasury Safekeeping Trust, one of innovation, of assembling creative, competent teams that can link to his strategies and foster their own. His presence will linger.

Ballard took over the sovereign wealth fund in 2003, and its $70 billion in assets have risen to $80 billion because of his innovative approach to investing. He has been responsible for the operation of the Trust Company, which manages more than $60 billion in investment assets, including the State Treasury Pool. He also directs short-term investments for several state agencies, two local government investment pools, and 13 long-term endowment portfolios worth about $3.6 billion. There is also the $2 billion State Water Implementation Fund for Texas, or SWIFT.

In an interview with CIO, Ballard reminisced as past approaches and accomplishments cycled through his mind. It’s not surprising that even with retirement nigh, he was still thinking about what lies ahead for his industry and for the company he has shepherded the past few years.

What is the future for the investment sector and what were some of the key rudiments that helped him accomplish his goals? He thinks unconventionally and likes people working with him to follow that path as well. He wants to find as many different, uncorrelated, and independent sources he can. His goal has been to lower the overall portfolio risk, but not at the expense of return. He believes in having the necessary information, molding it together and putting the finished product to work quickly.

CIO recently sat down with Ballard for his parting interview. Some of his thoughts:

CIO: What has been the most significant development during your time as an investment officer?

Ballard: The movement to alternative investments. I think that moniker, alternative, is going away soon because it is just investments. Back in the day, it was much easier. You invested in long-only stocks and bonds and diversified. You tried to find managers who could outperform the indices, which has become increasingly difficult. Another change is the movement to passive investments. Some see that as the next big risk. Everything was long only, and you just re-balanced and called it a day. Then the alternatives came into play. The big change was that people moved to private investments, private real estate, and private credit. The hedge fund strategies could be complex. We began alternatives in 2005 with a “walk before run” approach. We hired funds of funds for everything private. We included the transfer knowledge proviso in the contracts because at some point we knew we would be doing it ourselves.

CIO: What effect has digital technology and other technical advances had on the investment sector?

Ballard: Technology has made a lot more information available, and it is almost too much data there to keep track of. That has given rise to the quant shops, the so-called algorithmic trading systems. Their high-speed trading has a big impact on the markets because they tend to be trend following. They can domino if they go the wrong way. Technology has had a big impact in terms of more information but also in terms of analytics. The focus has turned to risk management. We can call ourselves investment managers, but we really are risk managers, too. You look for interesting opportunities. They all come with risk. You look to the algorithmic systems, which have a big impact on the markets.

Technology has helped us be more analytic. We are in the risk management business and are looking for interesting opportunities. All have risk. We are looking for the mitigators. Risk management systems are moving us from X-Rays to MRIs. We’ve done a lot of that. You can dissect a manager’s returns and go back in time and see where those returns come from—large caps, mid-caps, small caps. Have they migrated away from what they have done in the past, and into something else? One of the great risks for managers is that they do well and then everyone wants to invest with them. They don’t limit their capacity, and it turns out the strategy that was running should have been constrained to a certain size. We look for where the performance is coming from. It provides us with diagnostics.

CIO: What investment trends do you see in the next 10 years?

Ballard: The last 10 years all you had to do was to drop everything in the S&P 500 and you would win. But that is all domestic. We still believe in diversification because you never know which way things are going to turn. We also look at value—at what is cheap and what is rich.

We are overweight in the non-US for the last several years, to our detriment in some ways. But that is why this is a long-term business: You need patience, which is one of the most difficult human properties to possess.

I think the biggest opportunities are in the emerging markets. I can see Asia becoming more important in those portfolios. You will have to have a presence in those areas. Or relate to a presence in those areas. You need access to the better opportunities. Texas Teachers opened an office in London several years ago and it has paid for itself many times over. That’s because there is flow. When an opportunity comes along, the manager gets it done in London. They are not going to shop that opportunity in Austin.

Texas Teachers is considering an office in Singapore, which makes total sense to me. You need to be on the ground, and you need to understand the different cultures and market drivers. I think the emerging markets will become increasingly important and that is where the outsize returns will be possible in the future.

It’s important to keep up with everything that is happening in the world. Look at the changes that are taking place in India—tax reform, real estate reform. You must keep up with that. We have geopolitical services looking at these changes. They go to China, to India, and other places and tell us which sectors are promising, where the greatest development opportunities are.

CIO: What are some other areas you are watching?

Ballard: There is a trend moving away from carbon and towards non-carbon-based forms of energy. That technology is going to get better, better and better. We are starting to see questions of valuation in some of these higher-growth, zero-revenue and negative cash flow businesses. How long will people put up with that? There could be a reckoning coming in the venture capital business near term. We will see. Everything runs in cycles.